ITEM 1. Business
Overview
We are a company whose focus is on acquiring minority interests in the future income of professional athletes and assisting such individuals in growing these income streams. We focus our business on three core areas:
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targeting, evaluating, and assessing athletes with the potential to generate significant income (“brand income”);
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acquiring minority interests in such brand income; and
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assisting athletes who have entered contracts with us (Fantex athletes) to increase the potential value of their future brand income, primarily through mentoring and network/audience development.
Fantex was incorporated on September 14, 2012 in Delaware and is headquartered in San Francisco, California. To date, our operations have consisted of evaluating, targeting and accessing brands and negotiating the acquisition of minority interests in those brands that meet our criteria. We currently have brand contracts in effect with each of the following contract parties:
(1)
The security linked to the brand contract has not been created as of the filing of this Form 10-K. The brand contract is contingent upon obtaining financing to fund the acquisition of our interest in the brand income under such brand contract. See Note 10, “Subsequent Events” in the Notes to Financial Statements for discussion of the registered offering under which the tracking stocks would be created.
(2)
On February 12, 2016, we consummated the Andrew Heaney brand contract. The security linked to the brand contract has not been created as of the filing of this Form 10-K. See Note 10, “Subsequent Events” in the Notes to Financial Statements for further discussion of the purchase of this brand contract.
(3)
The security linked to the brand contract has not been created as of the filing of this Form 10-K.
We intend to enter into additional brand contracts in the future and we are actively pursuing these brand contracts. Any brand contracts that we enter into in the future with other parties, who we refer to as contract parties, are also expected to be contingent upon obtaining financing to fund the acquisition of the interest in the brand income of the respective brands. We intend to finance the acquisition of additional brand income through the issuance of additional tracking stocks linked to the value of such brand income.
We operate under a management agreement with our parent company, Fantex Holdings, who provides us with management and administrative services, including providing and compensating our executive management and other personnel as well as services relating to information technology support, brand management and other support, operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. We will begin to assume management and administrative tasks at such time in the future as the actual cost of these services is less than our service fee to Fantex Holdings, which we do not anticipate will occur until we begin to generate significant cash flows from multiple brand contracts. However, if Fantex Holdings is unable to perform any of the services that it is required to perform under the management agreement, due to financial difficulty or otherwise, then we may be forced to assume management and administrative tasks, and incur additional expenses, sooner than we anticipate. Until such time, we will continue to rely on Fantex Holdings to conduct our operations in accordance with the management agreement.
Brand Evaluation
Prior to entering into a brand contract, we conduct a detailed evaluation of the contract party and the brand to determine whether, in our opinion, they would be a suitable brand with the potential to generate significant brand income based on the criteria discussed below. We consider brand to be a distillation of a complex set of associations people make with respect to an individual, including performance, appearance, history and personal story, products or services they are associated with, public statements or positions on matters of public concern, how an individual acts or the image they project to the world. We seek brands that convey images and associations that we believe will be recognized and valued in the market place. Our evaluation activities include, but are not limited to:
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Assessing whether the contract party has the following characteristics:
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the contract party is 18 years of age or older;
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based on our estimate, that the contract party will have a career length of at least 3 years, within the contract party’s primary sport or occupation, following the execution of the brand agreement;
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based on our estimate that the contract party has the ability to earn at least $5,000,000 of brand income, from his primary sport or occupation, following the execution of the brand agreement; and
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based on our estimate that the contract party has the ability to earn at least $200,000 of brand income, from endorsements or other activities related to his primary sport or occupation, following the execution of the brand agreement;
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Reviewing mainstream and social media to understand the individual’s relative standing in their field and how they are viewed by leading commentators and journalists as well as the public at large;
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Collecting and analyzing widely followed performance metrics as well as recognized honors or awards received by the individual, including for example batting average for an athlete in the MLB, yards per carry for an athlete in the NFL, box office receipts, book sales, selection to All-Pro or All-Star teams, Grammy, Academy or Booker Awards, etc.;
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Reviewing all existing contracts underlying the brand contract to verify current and future income streams, including sources of guaranteed income, and income that are based on achievement of performance or other milestones and that may or may not be achieved based on continued performance in the field;
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Evaluating the character and reputation of the individual through our independent assessments, industry references and detailed background checks conducted by third parties;
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Collecting financial and other information from each contract party to evaluate financial suitability and brand sustainability, focusing in particular on review of assets, liabilities, existing commitments, tax returns and credit reports; and
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Assessing potential future cash receipts based on our estimate of the value of future contracts that could be included in brand income, considering factors such as:
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the age of the individual and the average length of a career in the individual’s primary occupation, such as a professional athlete;
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length of existing contracts and the potential for renewal or replacement of such contracts;
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potential for incremental endorsement and other cash flow generating activity, including a comparison against the value of comparable brands;
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the individual’s aspirations and goals beyond a career in the individual’s primary occupation; and
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our judgment regarding the individual’s ongoing appeal and ability to develop as a media talent based upon a variety of intangibles including onscreen presence and ability to connect and communicate with consumers and the public.
As part of our brand evaluation, we review the brand’s reputation and relative standing in its principal field, such as a professional athlete in the National Football League (the “NFL”), Major League Baseball (“MLB”) or in the Professional Golfers Association (the “PGA”), collect and analyze widely followed statistics, review existing contracts and potential for future contracts, assess the character and reputation of the contract party, assess potential future cash flow expected to be generated by the contract party as well as examine the brand’s current positioning and marketing footprint (such as, for example, if they are on social media, the reach (number of followers), engagement level (participation level of followers), and potential for growth). This evaluation provides a framework to develop further marketing strategies to aid us in our efforts to enhance the value of the brand.
Brand Acquisition
We believe we have extensive industry contacts among the board of directors, employees, consultants and advisors of our company and our affiliates, our parent company and FBS, which we utilize to access individuals and brands that meet our criteria. Through our contacts we seek to establish working relationships with these brands and their key advisors to begin the process of educating them about our business and the benefits of a brand contract and a continuing relationship. We enter into an arm’s-length negotiation primarily to finalize a purchase price, our percentage of the contract party’s ABI, and the scope of the ABI, including whether or not there would be any specific exclusions. We do, however, have limited experience in evaluating and entering into similar contracts with athletes and other high-profile individuals because we are pioneering a new business model.
Determining the Brand Contract Purchase Price
We believe that an athlete’s long-term (such as a full season or a number of seasons) on-field production data over extended periods of time, such as yards from scrimmage or strikeouts per inning over an entire season, correlate to the future brand income that will be earned by an athlete. To determine what we believe is an acceptable price to pay for each brand contract, we undertake a rigorous statistical analysis to estimate a contract party’s future brand income and the timing of the receipt of such brand income. Such analysis consists principally of determining a set of comparable players to the contract party, based on on-field production data, and then determining the amount and timing of receipt of the brand income earned by those comparable players during their playing careers. We then adjust the brand income earned by the comparable players for inflation and apply various discount rates to the inflation-adjusted brand income to estimate the brand income we believe the contract party will earn, which we refer to herein as the “Base Case”. We then run a sensitivity analysis against the set of comparable players so we can understand the range of outcomes (based on the range in the amount of brand income expected to be earned) we could experience from our investment in the contract party’s brand income, both above and below the Base Case.
The Base Case and range of outcomes guide us in our arm’s-length negotiation of the final purchase price with each contract party. We also run a Monte Carlo simulation across our portfolio of brands to determine the expected return from our brand portfolio.
Enhancing Brand Value
Increasing Brand Reach and Consumer Engagement
We intend to build a portfolio of brands and enhance the value of our acquired brands via technology and data applications, as well as leveraging our marketing, advertising and strategic partnering expertise in collaboration with the contract parties. We believe that developing a diverse portfolio of global brands will enable us to increase brand reach across our portfolio and allow us to provide unique insights that contract parties may employ to increase consumer awareness of their brands and our brands more generally. We expect to leverage our data and expertise to assist and supplement our contract parties’ efforts to extend the reach of their brands across multiple marketing mediums, including broadcast, print, digital, live events, and social. We believe that, as a result of our combined efforts, there is an opportunity to increase consumer engagement with the acquired brands by optimizing message delivery, including driving engagement through the use of content developed by us or third parties.
Typically a contract party’s current marketing services focus primarily on endorsement transactions with sponsors that reinforce his brand as a professional athlete. Although this brings in short term cash flow, we do not believe these sponsorships aid in building a brand that can be sustained beyond a playing career. We intend to assist more broadly on brand building and brand marketing. Our focus will primarily be on leveraging the platform of being a professional athlete to create a brand that is perceived as more than simply as a sportsman, with the goal of having the contract party’s brand thrive beyond his playing career.
Brand development is a long-term strategy of ours intended to create greater longevity in the marketplace for our brands. We seek to aid our brands in fostering positive brand associations in order to create a unique position in the marketplace that is not based solely on their primary occupation, such as a professional athlete in the NFL or MLB. We believe this will drive greater engagement with a connected audience and lead to greater longevity of the brands.
We also believe that investors in a tracking stock linked to a brand are more likely to be consumer advocates for that brand because they would have an economic interest in the growth of the associated brand. As a result, they may be more likely to follow and share brand information and be more active promoters of the associated brand than other fans or social network followers of the athlete. Aligning such incentives to help enhance the brand, we believe, will motivate additional sponsors to enter into agreements with the contract party in part because such additional sponsors would have a potentially more active group of followers that in turn make the athlete more valuable to potential endorsement partners. However, we have no history to demonstrate and we can make no assurances that our business model will be successful, or that any of our investors will act as consumer advocates or will be able to positively impact the endorsement potential of our contract parties.
Our Brand Platform
We intend to create a brand platform that will leverage social media data and in turn allow our contract parties to grow and develop their audiences. Through social data and platform analytics, we believe we can better understand the contract parties’ audiences, as well as cultivate engagement that supports the contract parties’ multi-dimensional interests and post-career aspirations.
The brand attributes of our contract parties when viewed solely as professional athletes are:
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professional sport;
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position played within that sport;
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performance achieved within that sport; and
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association with team(s) played for within that sport.
However, we intend to create brands with attributes beyond those of a professional athlete. Our contract parties have interests, opinions, skills, and passions and use certain products and engage in activities outside of professional sports. These brand attributes might include:
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an interest in a certain type of music;
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opinions on relevant social issues;
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artistic abilities such as painting, singing or acting;
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wearing a certain style of clothing or jewelry;
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use of certain household products or services;
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an interest in travel; and
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work with a particular charity.
Through our brand platform we intend to connect our contract parties via social media to mass, engaged audiences that are interested in our contract party not necessarily because he is a professional athlete, but because he has other brand attributes that are relevant to that target audience. We believe that our brand platform will be uniquely positioned to identify the specific attributes, demographics, and psychographics of target audiences that were previously unaffiliated with our contract parties. We believe we can utilize this information to drive more engagement within these existing mass audiences, as well as large undiscovered audiences. Our brand platform will allow our contract party to place very targeted messaging within his social media feeds to connect with these audiences. We believe the ability to serve such directed content to a specific target audience would be viewed as valuable by fans, investors in a tracking stock, existing sponsors, and potential advertisers. Further, the engagement of our contract parties with these mass audiences will support our long-term strategy to create longevity for our contract party brands beyond their playing careers.
Our focus includes:
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assisting our brands in creating and developing a vision for their brand identity and attributes;
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identify opportunities for re-positioning and/or differentiation;
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monitoring the brand and brand activities to identify “brand moments” or events or circumstances that we believe present an opportunity to establish or reinforce elements of the brand;
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providing marketing strategies to accelerate brand growth and influence of the brand based on a “cross-pollination” technology to identify consumers that would potentially be interested in the brand;
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identifying content developed by us or third parties that could be used to increase awareness of the brand;
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identifying topics and vocabulary that would allow the contract party to increase consumer engagement;
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identifying trends in consumers’ interest in the brand and optimizing messaging consistent with these trends and brand identity;
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identifying and understanding, and where possible, influencing key social media thought-leaders;
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monitoring trends in similar brands that a contract party could leverage to increase the value of its brand;
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providing advice on workflow and scheduling of messages to better optimize staging and consumer exposure; and
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advising on search engine optimization for each brand to better enable discovery, searching, filtering and following by consumers and media outlets.
We measure the effectiveness of our strategies to enhance brand value where possible, and use those measurements to assess whether our efforts are successful. For example, we measure changes in the social media reach of our brands by measuring the change in the number of followers our brands may have on Twitter and Facebook and other social media sites, as well as measure the demographics of those followers compared to the demographics that our brand vision may target. We also measure the engagement level of these followers to determine brand enthusiasm. Ultimately our success will be measured by brand income, particularly from new sources, including income from sponsors unrelated to sports, and/or increased brand income from existing sources. As with other forms of marketing and advertising, however, our ability to precisely measure the impact of our efforts on brand value may be difficult to determine objectively.
Monetization of the Brand
In addition to our brand platform services, we provide advice to contract parties based both on our experience and through data analysis that would aid them in obtaining more attractive terms in their negotiations with future sponsors. We believe that building critical mass with a portfolio of brands will enable us to generate meaningful data based on our brands and our continual monitoring of the marketplace, including best practices with respect to consumer engagement and other critical drivers of brand value, as well as data on demographic metrics and other data relative to brands and their performance. In conjunction with the brand platform, we provide an accessible report, in customizable and graphical format with data filter capabilities, highlighting the demographic metrics, reach, consumer engagement, strength and other critical drivers of brand value for sponsors based on our proprietary internal data. We are in the process of developing proprietary brand platform software to be used to produce such reports at such time as there would be meaningful data. We believe that this information and our marketing insights will assist our contract parties to more accurately evaluate their brand value in the marketplace and potentially increase future endorsement payments and brand longevity post career as a professional athlete.
Our Tracking Stocks
Each of our tracking stocks are intended to track and reflect the economic performance of the related brand contract(s) with associated athletes.
Our tracking stocks are not separate legal entities and cannot issue securities. Holders of our tracking stocks will not have an ownership interest in any of the underlying brands, or any of our affiliated entities. Rather, investors in our tracking stocks will be our common stockholders. The issuance of our tracking stocks will not result in the actual transfer of our assets or the creation of a separate legal entity. Our contract parties and their affiliated persons are, and we expect they will continue to be, individuals and legal entities that are separate and independent from us, with separate ownership, management and operations.
Income (and assets) will generally be attributed to our tracking stocks based on the income of the underlying brand contracts. However, if we do not receive cash from one or more of our brand contracts to which we otherwise would have been entitled because of debtor relief laws, then the attributed income for the corresponding tracking stock will nonetheless be credited with the amount that we would otherwise have been entitled to receive. In such a case, the difference between such attributed amount and the actual income we receive from such brand contract will be attributed as a general expense of Fantex. As a result, each of our tracking stocks will share on a pro rata basis (calculated based on attributable income) the burden of any non-performing brand contracts, whether or not included in the assets attributed to such tracking stock, and the economic performance of our tracking stocks will be dependent, in part, upon the aggregate financial performance of Fantex. Furthermore, we
intend to acquire additional minority interests in other brands in the future, so our operating performance will depend upon the soundness of our business plan and our ability to execute on that plan, including entering into additional brand contracts in the future.
Given that the economic performance of each of our tracking stocks is dependent, in part, upon the aggregate financial performance of Fantex, our tracking stocks could be affected by any of our current brand contracts or any additional brand contracts we may enter into. The risk profile of any of our tracking stocks could likewise be materially and adversely impacted by the performance of any of our other tracking stocks, including any additional brand contracts entered into or tracking stocks created in the future.
For a more detailed description of our tracking stocks, see “Management and Attribution Policies,” below.
Management and Attribution Policies
We have established policies for purposes of managing and attributing our assets and liabilities between and among our platform common stock and other tracking stocks that we have established or intend to establish from time to time. We initially adopted our management and attribution policies on October 31, 2013, and we amended and restated them effective as of July 24, 2015 and November 18, 2015. Set forth below are these management and attribution policies effective as of November 18, 2015.
As a general principle, we expect that all material matters in which holders of any series of our common stock may have divergent interests (including our platform common stock and any tracking stocks that we may issue from time to time) will be generally resolved in a manner that is in the best interests of our company and all of our stockholders after giving fair consideration to the interests of the holders of each series of our common stock, as well as such other or different factors considered relevant by our board of directors (or any committee of our board of directors authorized for this purpose, including the conflicts committee of our board of directors).
Changes or Exceptions to our Policy
We will not materially modify, change, rescind or create exceptions to these policies, or adopt any material additional policies, unless we first obtain both the consent of our board of directors and a majority of the then outstanding shares of our common stock. In addition, we will not modify or change any restriction on reattributing underlying assets of a tracking stock, as described below under “-Restriction on Reattributing Underlying Assets of a Tracking Stock,” without also obtaining the consent of a majority of the then outstanding shares of the applicable tracking stock.
We will notify our stockholders in advance of any such proposed changes or exceptions to these policies through an information statement filed with the SEC, and if such changes or exceptions are approved then we will notify our stockholders of such changes or exceptions through the filing of a Current Report on Form 8-K within four business days after such changes or exceptions are approved by our stockholders. Upon any such approval any such changes or exceptions will be binding and conclusive on all holders of our common stock.
However, we will not notify our stockholders of any modification, change, exception, rescission or addition to these policies if we determine that it is not material to the holders of any series of our common stock, in each case with such holders of such series taken together as a whole.
Tracking Stocks
We intend to enter into brand contracts on an ongoing basis. In some cases we may create a tracking stock associated with a specific brand contract and in other cases we may create a tracking stock composed of a number of brand contracts. We refer to each of these in general as a tracking stock, though each tracking stock will also be given a specific name at the time we create a new tracking stock. In general, a new tracking stock will be established from time to time concurrently with the initial public offering of that tracking stock.
Attribution
We attribute assets and liabilities to each tracking stock in accordance with these policies. By attributing assets and liabilities to a tracking stock we mean that we will designate such assets and liabilities for the account of that tracking stock on our internal financial accounts, and prepare our unaudited attributed financial information in accordance with such attributions.
We attribute the following assets and liabilities to each of our tracking stocks:
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a fixed percentage of our ABI from each brand contract associated with a tracking stock. We will determine the exact percentage of ABI to be attributed to any tracking stock at the time such tracking stock is established. We expect generally (though not necessarily) that the ABI to be attributed for each new tracking stock will be 95% of the income from the related brand contract(s). We sometimes refer to this percentage of ABI as the “underlying asset” for a tracking stock;
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any and all of our liabilities, costs and expenses that are directly attributable to such tracking stock, such as our direct costs arising out of our promotion of the brand(s) linked to such tracking stock or arising out of or related to the maintenance and enforcement of the related brand contract(s), provided, however, that unless disclosed in the registration statement for a particular tracking stock, we will not attribute any of the expenses or costs related to any of our offerings of our tracking stocks (other than underwriting commissions as applicable for any offering) or incurred by us or our parent in connection with any brand development activities prior to the consummation of the offering of any tracking stock. Instead these expenses will be attributed to our platform common stock;
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a pro rata share of our general liabilities, costs and expenses not directly attributable to any specific tracking stock (calculated based on attributable income), but excluding any non-cash expenses that are allocated from our parent to us. Attributable expenses would include, for example, a pro rata portion of the service fee we pay to our parent pursuant to the management agreement (5% of our cash receipts). Expenses that would not be attributed would include expenses incurred by our parent, including any expenses incurred in providing services to us under the management agreement, to the extent in excess of our service fee to them;
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as income, any covered amounts, as described below, for the brand contract associated with such tracking stock; and
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as an expense, the pro rata share of any covered amounts, as described below, relating to any tracking stock (including the pro rata share of any covered amounts for such tracking stock).
We also attribute the following additional assets and liabilities to a tracking stock:
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all net income or net losses from the assets and liabilities that are included in such tracking stock and all net proceeds from any disposition of any such assets, in each case, after deductions to reflect any dividends paid to holders of such tracking stock; and
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any acquisitions or investments made from assets that are included in such tracking stock.
Restriction on Reattributing Underlying Assets of a Tracking Stock
Once we create a tracking stock and designate the “underlying assets” for that tracking stock we will not reallocate or reattribute such underlying assets to any other tracking stock, except in the limited circumstances and to the extent described below under “-Covered Amounts” or to our platform common stock, provided that the foregoing shall not be deemed to restrict any conversion of a tracking stock to platform common stock upon the
terms set forth in our certificate of incorporation. We refer to the restrictions in the immediately preceding sentence as the “restriction on reattributing underlying assets of a tracking stock.”
Platform Common Stock
Our platform common stock will initially have attributed to it all of our assets and liabilities that are not specifically attributed to our tracking stocks, whether currently existing or that we may establish from time to time. The assets attributed to the platform common stock will thus include, for example, any portion of the ABI for any brand contract that is not specifically attributed to the associated tracking stock. For example, we will attribute the 5% of our ABI under our initial brand contracts to the platform common stock, and expect to attribute a similar amount for each of our future brand contracts. In addition, to the extent not attributed to a particular tracking stock, our platform common stock will have attributed to it any of the direct liabilities, costs and expenses related to any of our offerings of our tracking stocks (other than underwriting commissions as applicable for any offering) or incurred by us or our parent in connection with any brand development activities prior to the consummation of the offering of any tracking stock.
Covered Amounts
As described above, income (and assets) and liabilities will generally be attributed to a tracking stock based on the income and liabilities of that tracking stock. However, if as a result of any debtor relief laws we do not receive any portion of our ABI from a brand contract then we will nonetheless attribute income during any period to the corresponding tracking stock in an amount equal to the difference between any amounts we actually receive under that brand contract and the amounts to which we would otherwise have been entitled to receive but for the debtor relief law. We refer to such difference as a covered amount.
In such a case, the covered amount will also be attributed as a general expense of Fantex, and we will attribute the pro rata share of any covered amounts to each tracking stock as an expense, as discussed above.
For purposes of this policy, “debtor relief laws” means the U.S. Bankruptcy Code, as now and hereafter in effect, or any successor statute to the U.S. Bankruptcy Code, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief statute, law, ordinance, rule or regulation of the United States, any state thereof or the District of Columbia, or other applicable jurisdictions from time to time in effect.
Fiduciary and Management Responsibilities, Conflicts Committee
Because each of our platform common stock and tracking stock will be part of a single company, our directors and officers will have the same fiduciary duties to stockholders of our company as a whole (and not to the holders of any specific series of our common stock). Under Delaware law, a director or officer may be deemed to have satisfied his or her fiduciary duties to our company and its stockholders if that person is independent and disinterested with respect to the action taken, is adequately informed with respect to the action taken and acts in good faith taking into account the interests of all of our stockholders as a whole. Our board of directors and officers, in establishing and applying policies with regard to intra-company matters such as attribution of assets, liabilities, debt, corporate overhead, taxes, interest, corporate opportunities and other matters, will consider various factors and information that could benefit or cause relative detriment to the stockholders of any individual series of our common stock and will seek to make determinations that are in our company’s best interests and the best interests of our stockholders as a whole. If and when there are conflicting interests between any holders of any series of our common stock, our directors will use good faith business judgment to resolve such conflicts, including if applicable in the judgment of our board of directors, through our conflicts committee.
Our board of directors has established a conflicts committee that is responsible for reviewing all of our related party transactions in which our parent company, Fantex Holdings, is a party with an interest adverse to our interests or any outstanding tracking stock, including any decision to convert any of our outstanding tracking stock into our platform common stock following the two-year anniversary of the filing of a certificate of designation creating such tracking stock. As of the date of this policy, Fantex Holdings is the sole holder of shares of our platform common stock. Our board of directors has also determined that each member of the conflicts committee must (a) satisfy the audit committee independence requirements under the rules and regulations of the SEC that
would be applicable to Fantex if our shares were listed on a national securities exchange such as the New York Stock Exchange, (b) not have been an employee or director of our parent company at any time in the three years prior to his or her appointment to the conflicts committee and (c) not have any material interest in Fantex or Fantex Holdings.
Dividend Policy
Our board of directors is permitted, but not required, to declare and pay dividends on our platform common stock or any of our tracking stocks in an amount up to the “available dividend amount” for the applicable series, to the extent permitted by the Delaware General Corporation Law.
The available dividend amount for any tracking stock is as of any date an amount equal to the lesser of (a) total assets of our company legally available for the payment of dividends under Delaware law and (b) an amount equal to:
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the excess of the total assets attributed to the tracking stock over the total liabilities attributed to the tracking stock, less the par value of the outstanding shares of such tracking stock; or
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if there is no such excess, the attributable income of the tracking stock for the fiscal year in which the dividend is being declared and/or the preceding fiscal year.
The available dividend amount for our platform common stock is as of any date an amount equal to the amount of our total assets legally available for the payment of dividends under Delaware law, less the aggregate amount of the “available dividend amount” for all of our then outstanding tracking stocks.
We intend to pay a majority of the available dividend amount for each tracking stock, if outstanding, as a cash dividend at least once every 12 months, provided such dividend is not expected to have a material adverse impact on our liquidity or capital resources. Our board of directors has discretion to declare a dividend on any series of common stock without declaring a dividend on any other series of our common stock. In general, our board of directors does not expect to declare dividends on any series of common stock in an amount greater than the attributed cash on hand for such series.
Our board of directors may change its dividend policy at any time and from time to time, and we may retain some or all available funds and future income to support our operations and finance the growth and development of our business. However, our board of directors will not in any event change the definition of “available dividend amount” for any series of our common stock or declare dividends on any series of our common stock in excess of the “available dividend amount” for that series.
Financing Activities
We may from time to time invest a tracking stock’s surplus cash for the benefit of the tracking stock, and repurchase any outstanding tracking stocks.
We will reflect all financial effects of issuances and repurchases of shares relating to any single tracking stock in our own financial information. We will reflect financial effects of dividends or other distributions on, and purchases of, shares relating to each tracking stock in the unaudited attributed financial information.
Inter-Series Contracts
The terms of all current and future material transactions, relationships and other matters between and among our platform common stock and any series of tracking stock, including those as to which the holders of any tracking stock may have potentially divergent interests, will be determined in a manner considered by our board of directors to be in our company’s best interests and the best interests of our stockholders as a whole. In certain circumstances, decisions of our board of directors may also be subject to the approval of our conflicts committee.
Review of Corporate Opportunities
In cases where a material corporate opportunity may appropriately be viewed as one that could be pursued by holders of more than one tracking stock, our board of directors may, independently or at the request of management, review the attribution of that corporate opportunity to one of, or between, such tracking stocks. In accordance with Delaware law, our board of directors will make its determination with regard to the attribution of any such opportunity and the benefit of such opportunity in accordance with their good faith business judgment of our company’s best interests and the best interests of our stockholders as a whole. In certain circumstances, decisions of our board of directors may also be subject to the approval of our conflicts committee. Among the factors that our board of directors may consider in making this attribution is:
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whether a particular corporate opportunity is principally related or complementary to the business focus or strategy of any particular tracking stock;
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whether one tracking stock will be better positioned to undertake the corporate opportunity than another tracking stock;
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existing contractual agreements and restrictions; and
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the financial resources and capital structure of each tracking stock.
Financial Statements and Other Financial Information
We present financial statements in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”), consistently applied. We also provide unaudited attributed financial information as an exhibit to our periodic reports that we file pursuant to the Exchange Act. The unaudited attributed financial information shows the attribution of our assets, liabilities, income (loss) from brand contracts, expenses and cash flows to each of the tracking stocks and our platform common stock, in accordance with the attribution policies set forth above. Unaudited attributed financial information also includes, if applicable, attributed portions of our debt, interest and taxes, in accordance with the attribution policies set forth above. We make these attributions for the purpose of preparing such information; however, holders of our tracking stocks and our platform common stock will continue to be subject to all of the risks associated with an investment in our company and all of our company’s businesses, assets and liabilities.
Taxes
General Policies
Taxes and tax benefits, payments that are required to be made by, or are entitled to be received by, us and certain tax-related losses are attributed among the various series of our common stock in accordance with the following tax sharing policies.
These tax sharing policies may differ from the manner in which taxes and tax benefits of each series of our common stock are reflected in our financial statements. For financial statement purposes, taxes and tax benefits attributable to each series of our common stock generally are accounted for in a manner similar to a stand-alone company basis in accordance with GAAP. Any differences between the tax sharing policies described below and the taxes and tax benefits of each of our business units reported in the financial statements are reflected in the attributed net assets of the various series of our common stock for financial statement purposes.
In general, for purposes of these tax sharing policies, any tax item (including any tax item arising from a disposition) attributable to an asset, liability or other interest of series of our common stock is attributed to that series. Tax items that are attributable to any series of our common stock that are carried forward or back and used as a tax benefit in another tax year are attributed to that series.
Income Taxes
To the extent that federal, state, local or foreign income taxes are determined on a basis that includes the assets, liabilities or other tax items of more than one series of our common stock then income taxes and income tax benefits are shared among our series of common stock based principally on the taxable income (or loss), tax credits and other tax items directly related to each series of our common stock. Such attributions will reflect each series’ contribution, whether positive or negative, to our taxable income (or loss), income tax liabilities and tax credit position. Consistent with the general policies described above, income tax benefits that cannot be used by the series of our common stock generating such benefits, but can be used to reduce the taxable income of another the series of our common stock, are credited to the series that generated such benefits, and a corresponding amount is charged to the series utilizing such benefits. As a result, under this tax sharing policy, the amount of income taxes attributed to a series of our common stock or the amount credited to a series of our common stock for income tax benefits may not necessarily be the same as that which would have been payable or received by the series had that series filed separate income tax returns.
Non-Income Taxes and Non-Income Tax Benefits
In any taxable period, if any non-income taxes or non-income tax benefits are determined on a basis that includes the assets, liabilities or other tax items of more than one series of our common stock, then any such non-income taxes or non-income tax benefits are attributed to each series of our common stock based upon its contribution to our non-income tax liability (or benefit). Non-income tax benefits that cannot be used by the series of our common stock generating such benefits, but can be used to reduce taxes of another series, are credited to the series that generated such benefits, and a corresponding amount is charged to the series utilizing such benefit.
Any income or non-income taxes or tax benefits that are determined on a basis that includes only the assets, liabilities or other tax items of one series are attributed to that series.
Our Brand Contracts
To date, we have entered into brand contracts with a number of professional athletes (including in some cases their affiliated entities), and we intend to enter into additional brand contracts on an ongoing basis. The brand contracts entitle us to receive a specified percentage of the contract party’s brand income from and after the effective date of the brand contract. We refer to this percentage of brand income that we are entitled to under the brand contracts as our ABI. Brand income generally means gross monies or other consideration that the contract party receives generally as a result of the contract party’s skills and brand, including salary and wages from being an professional athlete and activities generally related to the contract party’s particular professional sport, and consists of other compensation from the contract party’s assignment of rights in his persona, including use of his name, voice, likeness, image, signature, talents, live or taped performances, in connection with motion pictures, television and Internet programming, radio, music, literary, talent engagements, personal appearances, public appearances, records and recording, or publications; any use of his persona for purposes of advertising, merchandising, or trade, including sponsorships, endorsements and appearances, and any other assignment of rights in his persona, to generate income; and any other personal services performed by the contract party which are of the type typically performed by individuals in the particular professional sport because of their status as a professional athlete in that sport (including, without limitation, sports casting, coaching, participating in sports camps, acting as spokesperson).
Brand income does not include:
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any cash receipts resulting from the contract party’s investments in stocks or other equity, bonds, commodities, derivatives, debt or real estate, so long as (a) such stocks or other equity, bonds, commodities, derivatives, debt investments and real estate are not received by him as compensation or consideration for activities (including licensing of rights) in the “field” as defined in his brand contract, (b) the contract party is not obligated to provide any services related to the “field” in connection with such investment and (c) the business or commercial venture related to such investment does not use the contract party’s persona in its legal name or “dba,” or in connection with its marketing, advertising or promotion;
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any income received from employment, services rendered or other activities not related to the contract party’s professional sport and related fields or their persona;
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any reasonable reimbursement of incidental expenses actually incurred by the contract party, including without limitation, travel, lodging, per diem and other incidental expenses, or the value of any such items paid by a third party on the contract party’s behalf;
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for our contract parties that are athletes in the NFL, certain future pension and benefit payments under the CBA, except that income deferred pursuant to Article 26, Section 6 of such CBA shall not be deemed to be future pension payments and as such, shall be included in brand income;
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for our contract parties that are athletes in MLB, certain future pension and benefit payments under The Major League Baseball Players Benefit Plan;
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merchandise, services or service plans or merchandise, service or service plan credit up to certain specified limits during any applicable calendar year and as otherwise agreed by Fantex in its discretion; and
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any otherwise specifically excluded income under each brand contract.
Each contract party will retain the remainder of his brand income (total brand income less the ABI), subject to other encumbrances that he may have with respect to such income (such as commissions payable to agents and other parties). However, pursuant to the brand contracts, each contract party has agreed that he will not encumber more than an additional 10% of his brand income from his professional sports contract and 30% of his other brand income in any given year.
As consideration for the ABI under the brand contract, we will pay the contract party a one-time cash amount of the purchase price negotiated under each brand contract (less 5% of the purchase price to be held in escrow until six months of consecutive payments due under the brand contract have been timely delivered to us) contingent upon our ability to obtain financing for the purchase price. However, we have the option to pay the purchase price without obtaining financing. Our ABI under each brand contract is contingent upon our payment of this purchase price. We will have no further financial obligation to the contract parties under a brand contract once this payment has been made, other than the indemnities described below.
In addition to the escrow holdback (which will be released after six consecutive months of timely payments of the ABI to us after the closing of the respective offerings), the brand contracts provide for certain express remedies (without limiting any other rights or remedies that we may have) in the event of late payments, including payment of interest at the then current prime rate plus 3% per year, compounded monthly, and public disclosure of such late payments (subject to notice and an opportunity to cure with respect to the first or second such late payment in any 12 month period).
The brand contracts are intended to remain in effect indefinitely and, except as set forth below, may be terminated only upon mutual agreement of the contract party and us. If the contract party resigns from professional sports within a specified period of time, depending on the sport, of the date of the closing of the offering of the tracking stock related to the brand contract for any reason other than a “good reason,” we may elect in our sole discretion to terminate the brand contract and the contract party will be required to pay us the amounts set forth below under the description of the applicable brand contract (net of any amounts previously paid to us by him pursuant to the respective brand contract).
“Good reason” means resignation from professional sports for any of the following reasons:
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contract party suffers or sustains any injury, illness or medical condition that renders him incapable of performing in the professional sports organization in which he competes; or
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contract party suffers or sustains a major injury and a qualified medical physician (depending on the nature of the major illness) advises him that as a result he would be putting his physical health at substantial risk (i.e., a risk that is substantially greater than simply by virtue of his participation in his professional sport) by continuing to engage in his professional sport.
Each of the contract parties has made certain other covenants to us in the brand contract, including providing us with certain information and audit rights, and copies of all new material agreements, amendments or terminations. They have further agreed to comply with applicable laws and rules and standards or requirements of the league or other association or governing body, to which he is a member in connection with being a professional athlete.
Following the consummation of a brand contract, the contract party will provide irrevocable instructions to each payor of brand income (requiring them to pay the amounts owed to us directly) and such other documents as we reasonably request. To the extent that it is not commercially practical, without unreasonable burden to the contract party, for ABI to be delivered directly to us, or to the extent that any assignment of the ABI (or any portion thereof) is deemed invalid or not enforceable, then the contract party is required to make such payments to us as promptly as practical after receipt thereof (but not later than 15 days after receipt) including via automatic payments of installments from his bank accounts. We will not know whether there will be any challenges that could affect whether payments will be made directly by each payor or from the contract party as described in this paragraph until after the payors respond to the irrevocable payment instructions to be delivered by the contract party to such payors after the consummation of the respective offerings. To the extent that any assignment of such amounts (including wages) is effective under the relevant state law, we may seek to enforce our rights to receive such amounts directly from the payor.
Each of the contract parties has agreed to indemnify us against damages that may result in connection with his breach of any covenants, representations or warranties in the brand contract with such contract party. We agreed to indemnify each contract party (and his heirs and assigns) against any third-party lawsuit arising from the contract party being a party to a brand contract with us, including claims relating to (a) any breach of our representations and warranties in the brand contract, (b) any violation of law by us and (c) our registration statement with respect to the related offering of tracking stock associated with such contract party, other than, in each case, those arising out of or relating to any breach of the brand contract by the contract party.
Brand Income
Brand income, as defined above, from each of our contract parties is generally derived from such contract party’s professional sports contracts or golf earnings, as the case may be, and other included contracts described in further detail below. Due to the fact that payments for professional athletes, and some of the other included contracts, are usually made over the course of sports playing season, we expect that our tracking stock will be subject to seasonal fluctuations in attributed income.
NFL Player Contracts
The NFL player contracts for each of the contract parties generally provide, except as otherwise indicated below, that payments are made in installments over the course of the applicable regular season period. Each of these payments would be considered brand income when received by the contract parties, and thus we would be entitled to our ABI from these amounts, when paid. To the extent any of our contract parties elects to defer receipt of his compensation under the NFL player contract, pursuant to Article 26, Section 6 of the CBA, for purposes of the brand contract, such deferred compensation will be deemed to have been received by such contract party on the due date provided in his NFL player contract, prior to any such deferral, and we will be entitled to our ABI from these amounts as of such due date.
The NFL player contracts further provide that if the contract party is injured or dies in the performance of his services under the player contract then the contract party will receive necessary medical and hospital care during
the term of the player contract and will continue to receive his yearly salary during the season of injury or death only (including any guaranteed amounts).
Unless otherwise stated in the player contract, the NFL teams may generally terminate the player contract at any time, in the sole judgment of the team, if the contract party’s skill or performance has been unsatisfactory as compared with that of other players competing for positions on the team’s roster, or if the contract party has engaged in personal conduct reasonably judged by the team to adversely affect or reflect on the team, the NFL or professional football. The NFL has promulgated a number of rules and standards of personal conduct which, if violated, could lead to fines and/or the contract party’s suspension or permanent ban from the NFL. While we are not aware of, or privy to, all of the circumstances which might lead to the contract party’s suspension or permanent ban from the NFL, personal conduct that could result in the termination of the player contract includes, but is not limited to: criminal offenses (including domestic violence); the use or provision of steroids or other prohibited substances; certain violent, threatening or inherently dangerous conduct; gambling, bribery, game-fixing or the failure to report bribery or game-fixing in connection with NFL games; and any other conduct that undermines or puts at risk the integrity and reputation of the NFL, NFL teams, or NFL players.
In addition, during the period any salary cap is legally in effect, the NFL player contract may be terminated if, in the team’s opinion, the contract party is anticipated to make less of a contribution to the team’s ability to compete on the playing field than another player or players whom the team intends to sign or attempts to sign, or another player or players who is or are already on the team’s roster, and for whom the team needs room. The team may also terminate the player contract if the contract party fails to establish or maintain his excellent physical condition to the satisfaction of the team’s physician, or make the required full and complete disclosure and good faith responses to the team’s physician of any physical or mental condition known to him which might impair his performance under this contract and to respond fully and in good faith when questioned by the team’s physician about such condition.
In addition, the contract party’s endorsement agreements and other included contracts may be terminated in the event of breach of contract by the contract party or if the contract party fails to play in the NFL, is charged with criminal behavior or engages in conduct that adversely reflects on the sponsor. For example, as a result of Vernon Davis tweeting about a competing product, a coconut water company terminated its contract with him as a spokesperson. In addition, certain endorsement contracts may be terminated due to changes to NFL rules preventing reasonable use of the endorsement product.
MLB Player Contracts
MLB player contracts for each of the contract parties generally provide that payments are made in installments over the course of the applicable regular season period. Each of these payments would be considered brand income when received by the contract parties, and thus we would be entitled to our ABI from these amounts, when paid.
Unless otherwise stated in the player contract, the MLB clubs may generally terminate the player contract (upon requesting and obtaining waivers from all other MLB clubs) if the contract party, refuses or neglects to conform his personal conduct to the standards of good citizenship and good sportsmanship or to keep himself in first class physical condition or to obey the clubs training rules, fail in the opinion of the club management to exhibit sufficient skill or competitive ability to qualify or continue as a member of the club, fail refuse or neglect to render services under the player contract or in any other manner breach the contract. MLB has promulgated a number of rules and standards of personal conduct which, if violated, could lead to fines and/or the contract party’s suspension or permanent ban from MLB. While we are not aware of, or privy to, all of the circumstances which might lead to the contract party’s suspension or permanent ban from MLB, personal conduct that could result in the suspension or permanent ban could include, but is not limited to: conduct that is materially detrimental to Baseball; the use or provision of steroids or other prohibited substances; violation of federal, state or local laws; gambling on baseball games, game-fixing or the failure to report game-fixing in connection with MLB games.
Professional Golf Tournament Earnings
In the United States, professional golfers compete on various golf tours and circuits. We believe the professional golf tours in the United States that offer opportunities to earn the most money on and off the golf course, garner sponsorships and partnerships, and are most often televised and covered by various other forms of media outlets are: the PGA TOUR, the Web.com Tour, and the Champions Tour.
Professional golf tour tournaments are most often played on a weekly or bi-weekly basis. Golfers in these tournaments compete for prize money. Professional golfers will generally be required to meet a certain performance threshold (cut) relative to the other players in order to advance to the final round(s) of competition in a professional golf tour tournament. Golfers that do not make the cut of a tournament will often not be eligible to receive any of the prize money that will be distributed as compensation for that particular tournament, primarily due to their unsatisfactory performance in relation to the other players. The winner of a professional golf tournament will earn prize money that far exceeds the prize money earned by the last golfer to make the cut. The tournament prize money varies from tournament to tournament and from tour to tour.
The PGA TOUR is a membership-based professional golf circuit, in which players generally strive to achieve a certain level of performance in order to earn prize money and secure their status as a member of the PGA TOUR (tour card), by performing to the best of their ability. The PGA TOUR is the most prestigious professional golf tour in the United States. Tournaments on the PGA TOUR are most often played on a weekly basis. Each year only the top 125 money winners maintain their tour card and automatically get the right to compete on the PGA TOUR the following year. Failure to maintain a tour card will significantly impact a golfer’s ability to earn prize money the following season.
Professional golfers are in general responsible for all the expenses incurred in connection with playing in a golf tournament such as travel and lodging. In addition, most golfers employ caddies whom they typically pay a salary and a percentage of all tournament winnings.
Endorsement Contracts
The endorsement contracts for each of our contract parties generally provide that payments are made in installments over the term of the applicable contract as consideration for the contract party providing certain promotional services. These services typically include personal appearances, autograph signings, appearance in advertisements and wearing or using the endorsement company’s products. Each of these payments would be considered brand income when received by the contract parties, and thus we would be entitled to our ABI from these amounts, when paid. The contract party’s endorsement agreements may be terminated in the event of breach of contract by the contract party or if the contract party fails to play in his professional sport, is charged with criminal behavior or engages in conduct that adversely reflects on the sponsor.
If a contract party does not comply with the terms of an included contract, we believe we have the right to seek damages for the breach of that contract to the extent that such breach adversely affects brand income. Whether we elect to pursue damages for any alleged breach of the terms of the brand contract or any included contract will be based on management’s business judgment as to the best interests of the company and its stockholders at the time of such breach.
Brand Income from Consummated Brand Contracts as of December 31, 2015
Vernon Davis Brand Income
Vernon Davis has completed the NFL regular season of the final year of a six-year player contract signed with the San Francisco 49ers. Vernon Davis was traded to the Denver Broncos in November 2015. The following table presents (i) contracted amounts under his expired NFL player contract, (ii) the portion of his compensation that represented available brand income as of October 30, 2013, the date of his brand contract, (iii) the brand income
earned under his expired NFL player contract and (iv) the brand income earned under his other included contracts (amounts in thousands and unaudited):
EJ Manuel Brand Income
EJ Manuel has completed the third year of a four-year player contract with the Buffalo Bills. The following table presents (i) contracted amounts under his NFL player contract, (ii) the portion of his compensation that represented available brand income as of February 14, 2014, the date of his brand contract, (iii) the brand income earned under his NFL player contract and (iv) the brand income earned under his other included contracts (amounts in thousands and unaudited):
Mohamed Sanu Brand Income
Mohamed Sanu has completed the NFL regular season of the final year of a four-year player contract signed with the Cincinnati Bengals. The following table presents (i) contracted amounts under his expired NFL player contract, (ii) the portion of his compensation that represented available brand income as of May 14, 2014, the date of his brand contract, (iii) the brand income earned under his expired NFL player contract and (iv) the brand income earned under his other included contracts (amounts in thousands and unaudited):
(1)
The NFL Player Salary in the 2015 Playing Season for Mohamed Sanu was $1,542,000, an increase from his contracted minimum per the NFL CBA Article 7 “Proven Performance Escalator”. Accordingly, this adjusted the Brand Income under the NFL Player Contract for Mohamed Sanu for the 2015 Playing Season.
Alshon Jeffery Brand Income
Alshon Jeffery has completed the NFL regular season of the final year of a four-year player contract signed with the Chicago Bears. The following table presents (i) contracted amounts under his expired NFL player contract, (ii) the portion of his compensation that represented available brand income as of September 18, 2014, the date of his brand contract, (iii) the brand income earned under his expired NFL player contract and (iv) the brand income earned under his other included contracts (amounts in thousands and unaudited):
Michael Brockers Brand Income
Michael Brockers has completed the NFL regular season of the final year of a four-year player contract signed with the Rams. The following table presents (i) contracted amounts under his expired NFL player contract, (ii) the portion of his compensation that represented available brand income as of October 15, 2014, the date we were entitled to receive brand income under his brand contract, (iii) the brand income earned under his expired NFL player contract and (iv) the brand income earned under his other included contracts (amounts in thousands and unaudited):
Jack Mewhort Brand Income
Jack Mewhort has completed the second year of a four-year player contract with the Indianapolis Colts. The following table presents (i) contracted amounts under his NFL player contract, (ii) the portion of his compensation that represented available brand income as of February 15, 2015, the date we were entitled to receive brand income under his brand contract, (iii) the brand income earned under his NFL player contract and (iv) the brand income earned under his other included contracts (amounts in thousands and unaudited):
Brand Income from Unconsummated Brand Contracts as of December 31, 2015
Kendall Wright Brand Income
Kendall Wright has completed the NFL season of the final year of a four-year player contract signed with the Tennessee Titans. The following table presents (i) contracted amounts under his expired NFL player contract and (ii) the portion of his compensation that represented available brand income as of December 1, 2014, the date we are entitled to receive brand income under his brand contract (amounts in thousands and unaudited):
Andrew Heaney Brand Income
On February 12, 2016, we paid $3,340,000 (less $167,000 held in escrow until six consecutive months of payment of brand amounts have been timely delivered to us) as consideration for future payments as defined under the Andrew Heaney Brand Contract. See Note 10 to Financial Statements, Subsequent Events. Andrew Heaney had a one-year player contract with the Los Angeles Angels for the 2015 MLB season. The following table presents (i) contracted amounts under his expired MLB player contract and (ii) the portion of his compensation that represented available brand income as of January 1, 2015, the date we were entitled to receive brand income under his brand contract (amounts in thousands and unaudited):
Terrance Williams Brand Income
Terrance Williams has completed the third year of a four-year player contract with the Dallas Cowboys. The following table presents (i) contracted amounts under his NFL player contract and (ii) the portion of his compensation that represented available brand income as of February 1, 2015, the date we are entitled to receive brand income under his brand contract (amounts in thousands and unaudited):
Ryan Shazier Brand Income
Ryan Shazier has completed the second year of a four-year player contract with the Pittsburgh Steelers. The following table presents (i) contracted amounts under his NFL player contract and (ii) the portion of his compensation that represents available brand income as of September 1, 2015, the date we are entitled to receive brand income under his brand contract (amounts in thousands and unaudited):
Scott Langley Brand Income
Scott Langley is a professional golfer. The following table presents (i) his earnings on the PGA Tour and (ii) the portion of his compensation that represents available brand income as of October 25, 2015, the date we are entitled to receive brand income under his brand contract (amounts in thousands and unaudited):
(1)
Represents earnings for the 2015-2016 playing season beginning October 15, 2015 through December 31, 2015.
Restrictions on the Purchase or Beneficial Ownership of Baseball-Related Tracking Stocks
We have entered into an agreement with MLB that requires us to, among other things, take steps designed to prohibit certain investors from purchasing or owning any Fantex security linked to the brand contract of a baseball player, including the incorporation of such ownership restrictions into the certificate of designations for the applicable security. These prohibited investors (“Prohibited Investors”) include persons who are (i) owners, officers, directors or employees of any MLB club or MLB related entity, or any family member or agent of the foregoing, and (ii) individuals who have been arrested in connection with, charged with, indicted for, or convicted or participating in (whether directly or indirectly) any illegal gambling activity or any illegal activity in connection with certain gaming enterprises (including any governmental body that exercises certain types of control over such individuals, and other affiliated persons and entities). Pursuant to the restrictions set forth in the applicable certificate of designation, any person who is a Prohibited Investor will be prohibited from purchasing or beneficially owning (whether directly or indirectly) such security.
Government Regulation
Because we have offered, and in the future we intend to offer, our tracking stocks to the general public via an initial public offering, we must register our tracking stocks with the SEC and various state securities regulators. The process of offering our tracking stocks is subject to extensive regulation and supervision under both federal and state securities laws, and we require approval from the SEC and state securities regulators in order to offer our tracking stocks in a particular jurisdiction.
Changes in federal or state government policy, legislation or regulatory or judicial interpretations could hinder or prevent our ability to conduct our business operations, including by hindering or preventing our ability to enforce our brand contracts or conduct offerings of tracking stocks. In addition, our brand contracts are intended to be effective in perpetuity and may be terminated only upon mutual agreement of the contract party and us. In some jurisdictions perpetual contracts have been found to be against public policy and therefore terminable in some circumstances. Our brand contracts are governed by California law, and California legal decisions do not disfavor
express contractual terms for indefinite duration. However, we can provide no assurances that a California court may not rule differently in the future, or that a court of another jurisdiction might attempt to apply a different choice of law to our brand contracts. If this occurs, then we may become involved in expensive and time consuming litigation, or may be unable in certain cases to enforce our brand contracts. Any other changes in or interpretations of current laws and regulations could also require us to increase our compliance expenditures, inhibit our ability to enter into new brand contracts or cause us to significantly alter or to discontinue offerings of additional tracking stocks. Altering the terms of our brand contracts or tracking stocks to comply with changes in or interpretations of applicable laws and regulations could require significant legal expenditures, increase the cost of managing or acquiring our brand contracts or make offerings of our tracking stocks less attractive to investors. In addition, our failure to comply with applicable laws and regulations could lead to significant penalties, fines or other sanctions. If we are unable to effectively respond to any such changes or comply with existing and future laws and regulations, our competitive position, results of operations, financial condition and cash flows could be materially adversely impacted.
Competition
Our business is unique and we are not aware of anyone at this time who is attempting to engage in our business model or who is directly competitive to us. We may, if successful, face competition from sports management agencies and sports marketing agencies with respect to our marketing activities. We believe that if we did face competition from these types of agencies it would be based in part on the strength of the relationships they have with professional athletes and other high-profile individuals. In this regard these companies are more established and may have more extensive industry contacts and direct relationships with these brands than we do. However, we also believe that if there were competition from these types of agencies it would be based on the effectiveness of the marketing efforts and the relative cost to the brand of these services, and we believe that we would be competitively differentiated from these agencies in each of these areas.
With respect to the effectiveness of the marketing efforts, although we are an early stage start-up company and have engaged in limited marketing activities to date, we believe we have assembled, through Fantex Holdings, a unique team with crossover talent in sports, sports marketing and digital marketing and technology, which we believe will allow us to be effective at implementing marketing strategies, including with respect to digital marketing as discussed under the section entitled “Business-Enhancing Brand Value-Increasing Brand Reach and Consumer Engagement” in general to help enhance brand value. We are not aware of any of the major sports management or marketing agencies who currently are attempting to engage in these types of marketing activities, and we do not believe they would be willing to shift their focus to these activities in the future. We believe the sports marketing agencies in effect act closer to the capacity as sales agencies. In large part they sell a product (the brand) to the buyer (an endorsement partner). We intend to make the product (the brand) better, which we believe will ease their ability to sell that product to the buyers (the endorsement partners). We believe this will enhance our relationship with these agencies and there would be incentives for us to work collaboratively with our brands and their management and marketing agencies to achieve the best results for our mutual brands.
With respect to the cost to the athlete of the marketing efforts, our business model provides that we make an upfront investment to purchase a minority interest in the future value of our brands, so the overall cost to a brand will correlate to the longer-term success and sustainability of their brand. Although we currently have limited resources to employ in the enhancement of the value of the brand contract and have fewer industry relationships than sports management agencies and sports marketing agencies, we believe that building a portfolio of brands will enable us to achieve economies of scale and increase brand reach across our portfolio more efficiently. We do not believe that sports management agencies or sports marketing agencies would be willing to duplicate our model.
Employees
As of December 31, 2015, we had no employees. We are being supported by personnel employed by our parent. As of December 31, 2015, our parent had 38 full-time employees. Of these full-time employees, three were engaged in support administration for our operations, including legal and finance, and ten were engaged in other activities related to our business, seven of whom were engaged in our business full-time. None of these employees are represented by labor unions or covered by collective bargaining agreements. Our parent considers employee relationships to be good.
Corporate Information and Websites
We view our operations and measure our business as one reportable segment operating primarily in the United States. See Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. Additional information required by this item is incorporated herein by reference to Part II, Item 6, “Selected Consolidated Financial Data.”
The Company’s website is www.fantexbrands.com. This Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website, https://fantexbrands.com/about-fantex-inc/investor-relations/sec-filings/default.aspx as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (the "SEC"). Our Corporate Governance Guidelines, board of directors' committee charters (including the charters of the Audit Committee, Compensation Committee, Conflicts Committee, and Nominating and Corporate Governance Committee) and Code of Business Conduct and Ethics are available on our website at https://fantexbrands.com/about-fantex-inc/investor-relations/governance/default.aspx. Information on our website does not constitute a part of, and is not incorporated by reference into, this Form 10-K.
The public may read and copy any materials filed by us 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, our references to the URLs for these websites are intended to be inactive textual references only.
ITEM 1A.
ITEM 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described below, which could adversely affect our business, financial condition, results of operations, cash flows, and the trading price of our common and capital stock.
Risks Relating to Our Limited Operating History, Financial Position and Capital Needs
We have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future.
We incorporated in Delaware in September 2012 as a wholly-owned subsidiary of Fantex Holdings. We are currently in a start-up phase and to date have relied on our parent to conduct our operations. We therefore have a very limited operating history. Investment in our company is highly speculative because it entails significant risk that we may never become commercially viable. Our parent has incurred significant expenses on our behalf. Our parent is not obligated to continue to incur expenses on our behalf except as required under our management agreement with them, and we expect that we will incur significant expenses related to our ongoing operations. For the years ended December 31, 2015 and 2014, we reported a net loss of approximately $6.0 million and $6.3 million, respectively, and had accumulated losses since inception of approximately $17.5 million.
We expect to continue to incur losses for the foreseeable future as we continue evaluating, targeting and accessing brands, negotiating the acquisition of minority interests in those brands that meet our criteria, and developing the infrastructure necessary to support our ongoing operations. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect our business. The size of our future net losses will depend, in part, on the rate of future growth of our expenses, the rate at which we are able to acquire brands that meet our criteria and the ability of our acquired brands to generate income and cash flow. Even if our brands generate cash flows they may not produce payments quickly enough to cover our expenses. If any individuals with whom we have or may contract in the future, fail to make payments in amounts we expect, or at all, we may never become profitable. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our expected future losses will have an adverse effect on our stockholders’ equity and working capital.
We have a very limited operating history, which may make it difficult for investors to evaluate the success of our business to date and to assess our future viability. Our business model also requires us to make substantial upfront payments to our contract parties in exchange for rights to future payments.
Our operations to date have been limited to organizing and staffing our company, evaluating, targeting and accessing brands that meet our criteria, negotiating the acquisition of minority interests in those brands, engaging in the registration process for the offering of shares of tracking stocks relating to our existing brand contracts and managing our brand contracts.
We have entered into 11 brand contracts. We intend to enter into additional brand contracts in the future with other contract parties and are actively pursuing these brand contracts. Each of our brand contracts requires us to make an upfront cash payment, and we expect that any other brand contracts that we enter into in the future with other contract parties will also require us to make upfront payments, in return for the right to future payments based on our ABI.
Therefore, our business model requires us to make substantial upfront payments to our contract parties in exchange for rights to future payments. We will be at risk if for any reason we do not receive those future payments, or if they are less than we would need to be profitable or to offset our expenses. We have no history to demonstrate, and we can make no assurances, that our business model will be successful, or whether any of our brand contracts will be profitable. Consequently, it will be difficult for anyone to predict our future success, performance or viability, and more difficult than it would be if we had a longer operating history and/or successful brand contracts to judge the viability of our business model. Any such predictions may not be accurate or reliable.
We may not receive the cash amounts that we expect, or any at all, from our brand contracts with our contract parties or from any future brand contracts and we may never generate sufficient income to become profitable.
Our ability to generate income from the brand contracts and become profitable will depend, among other things, upon our ability to successfully evaluate, target and access brands that have the potential to generate significant brand income, acquire a minority interest in the brand income from these brands for an appropriate purchase price, aid our acquired brands in enhancing their value in amounts sufficient to provide a return on our investment, and enforce the brand contracts and collect our ABI with respect to these brands. Even if we are able to successfully do these and other things that are within our control there are numerous other factors, some of which are not within our control, that might impact our ability to generate income or cash flows or be profitable, including those discussed in these risk factors.
In addition, there are numerous risks and uncertainties associated with the brands in which we invest, including that the success of our brand contracts will depend upon the contributions, success and longevity of an individual in their primary occupation as a professional athlete. Therefore, we are unable to predict the timing or amount of future cash receipts, or when or if we will be able to achieve or maintain profitability. Even if we are able to acquire, manage and develop brands as described above, we anticipate incurring significant costs associated with our efforts to achieve or maintain profitability. Further, we may not receive the cash amounts that we expect, or any at all, from any of our brand contracts.
Our business strategy depends in large part on our ability to build a robust platform of brands by entering into additional brand contracts. We may not be able to enter into additional brand contracts in the future, or enter into the number of additional brand contracts that we anticipate would be necessary to support our business model.
Our strategy of enhancing brand reach and brand value for our acquired brands depends in part on our ability to build a robust platform of brands and benefit from economies of scale and an ability to cross-pollinate and share best practices across our acquired brands. For example, any direct investment of resources that we make in any promotional activities relative to one brand contract must exceed a return that is at least approximately eight to ten times our investment in order to increase the value of such tracking stock. Thus, unless we achieve significant economies of scale in our ability to deliver brand enhancing value at a low cost across all our tracking stocks (by, for example, utilizing fixed, in-house personnel rather than incurring out-of-pocket third party costs), then we will not likely be able to make investments at a cost that would allow for a positive return on our investment. Accordingly, we are actively pursuing additional brand contracts that we intend to enter into in the future.
We do not know if future potential contract parties will agree to enter into additional brand contracts and we may not be able to attract sufficient additional brand contracts. For example, future potential contract parties may not view the brand contract as an attractive value proposition to them due to any number of factors, including differing expectations of an appropriate purchase price that reflects the agreed upon ABI, which may be based on any number of factors, such as:
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we and future potential contract parties may not agree on the assumptions and estimates used to determine the estimated future earnings of potential contract parties;
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potential contract parties may not want to incur legal, tax and other burdens associated with entering into a brand contract, including, for example, ongoing information and disclosure requirements, as well as the potential risk, due to the lack of any currently binding or authoritative guidance from the IRS, that the ABI we are purchasing from the contract party could be reportable income for the contract party, and, as a result, that it may not be fully deductible for U.S. federal income tax purposes;
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any negative perception by the media, fans, leagues, clubs or others of our business model;
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any negative perception by the media, fans, leagues, clubs or others of any of our current contract parties or other future contract parties, as a result of their decision to enter into a brand contract with us, or otherwise; and
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the performance of our brand contracts or other brand contracts that we may enter into in the future,
and/or the performance of the related tracking stock, which may be worse than anticipated.
As a result, we may be forced to revise our business model to attract additional brand contracts. For example, we are not currently contractually obligated to expend capital on enhancing the brand value of our contract parties. Contract parties may require us to contractually agree to provide certain minimum levels of marketing services in order to enter into brand contracts, which we may not be able to provide or which may not give us sufficient return on capital to make the brand contract profitable. Even if potential contract parties are willing to agree to enter into additional brand contracts with us, the leagues, team owners, players associations, endorsement partners, elected officials or others may take actions that could restrict our ability or make it more costly for us to enter into future brand contracts. And even if we are successful in entering into additional brand contracts with additional contract parties, we may not be successful in conducting offerings to finance the purchase price under these brand contracts.
We will need to obtain additional funding to continue operations and brand contract acquisition at current levels. If we fail to obtain the necessary financing, or fail to become profitable or are unable to sustain profitability on a continuing basis, then we will need to significantly delay, scale back or discontinue the current levels of our brand contract acquisition and operations.
We will require additional capital to fund our operations, and if we fail to obtain necessary financing, our business plan may not be successful.
Any brand contracts that we enter into in the future with other contract parties will require us to make substantial upfront payments to acquire the ABI under such brand contracts. We do not, and we do not expect to have, the necessary funds that we would need to make all of these upfront payments under future brand contracts. Therefore, we expect that our future brand contracts for the foreseeable future will be contingent upon obtaining financing to fund the acquisition of the ABI in the respective brands, and we intend to finance these acquisitions through the issuance of additional tracking stocks linked to the value of such brands. Such financing may be expensive and time consuming to obtain, and we may not have investor interest that would enable us to obtain such financing. Our parent has purchased approximately $11.2 million in the company’s tracking series as a stand-by purchaser in the public offerings we have consummated to date so that the offerings could be completed and we do not expect our parent will continue to purchase similar amounts in the future. On February 12, 2016 we borrowed $3.3 million from our parent under a promissory note bearing interest at 8% per annum to consummate the Andrew Heaney brand contract. We will repay this promissory note upon the earlier of five days following the successful initial public offering of a security linked to the Andrew Heaney brand contract or August 12, 2016.
In addition, our operations (excluding upfront payments under future brand contracts) have consumed substantial amounts of cash since inception, and we expect they will continue to consume substantial amounts of cash as we aggressively build our platform of brands and our internal marketing, compliance and other administrative functions. To date, these operations have been financed primarily by equity contributions from our parent. We are dependent on the continued support of our parent; at this time our parent intends to continue to fund operations for at least the next 12 months. Our parent has no obligation to continue to finance our operations except as required under our management agreement with them. Although we believe future funding from our parent together with existing cash and cash equivalents, and interest thereon will be sufficient to fund our projected operating expenses for the next 12 months, as noted above, we will require additional capital to finance the acquisition of future brands, and we may also need to raise additional funds sooner if our operating and other expenses are higher than we expect or our cash received from brand contracts is lower than we expect.
Until we can generate a sufficient amount of cash from our brand contracts, if ever, we expect to finance future cash needs through public or private equity or debt offerings. Additional capital may not be available on reasonable terms, if at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us we may not be able to continue to acquire additional ABI in other brands and we may have to significantly delay, scale back or discontinue our operations. Our board of directors has adopted resolutions limiting our ability to incur indebtedness for borrowed money or issue debt securities without the prior approval of our independent directors or a committee comprised of independent directors. If we raise additional funds through the issuance of additional debt
or equity securities it could result in dilution to our existing stockholders, and/or fixed payment obligations that could reduce our ability to pay dividends or otherwise fund our other operations. Furthermore, these securities may have rights senior to those of our common stock and could contain covenants that would restrict our operations and potentially impair our competitiveness, such as limitations on our ability to incur additional debt, limitations on our ability to acquire, sell or license brands without consent and other operating restrictions that could adversely impact our ability to conduct our business. Any of these events could significantly harm our business, financial condition and prospects.
Our forecast of the period of time through which our financial resources will be adequate to support our operations (excluding upfront payments under future brand contracts) is a forward-looking statement and involves risks and uncertainties, and actual results could vary as a result of a number of factors, including the factors discussed elsewhere in this “Risk Factors” section. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
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the rate at which we begin to realize income under our existing brand contracts, as well as under any additional brand contracts that we may enter into in the future;
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the cost of our efforts to evaluate, target and access the brands that meet our criteria, as well as the cost and expense of negotiating any new brand contracts;
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our ability to enter into additional brand contracts, and if so the amount of the upfront purchase price that we would have to pay to acquire rights under any such brand contracts;
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the level of participation required by our parent as a standby purchaser to conclude any future initial public offerings;
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the number and characteristics of any new brand contracts that we may enter into;
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the cost and expenses of any equity or debt financings that would be necessary to pay the purchase price under any additional brand contracts, and any regulatory or other delays in any of these offering processes;
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the effect of competing technological and market developments;
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the cost of establishing and building our sales, marketing and compliance capabilities; and
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the rate at which we invest in marketing and other costs to assist our acquired brands in building and enhancing the value of their brands.
If a lack of available capital means that we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results of operations could be materially adversely affected.
Risks Relating to Our Brand Contracts and Our Business
Our principal source of cash flows for the foreseeable future will be derived from our brand contracts.
Our principal source of cash flows for the foreseeable future will be derived from our brand contracts. There are a number of risks relating to brand contracts. If any of these risks occur it could have a material and adverse impact on our business, financial condition and results of operations.
We have very limited experience managing brand contracts and we have very limited historical performance data about our brand contracts.
We entered into our first brand contract in February 2013. Due to our limited experience with brand contracts, we have limited historical performance data regarding our ability to generate cash receipts from the management of brand contracts and the likelihood of long-term performance of the contract party, or our ability to aid our brands in enhancing their brand reach and brand value. As a result, the brand contracts that we enter into
may generate lower ABI than we anticipate, or none at all. We may therefore pay a purchase price for ABI that is too high. As we gain more experience with our brand contracts, we may change how we estimate the brand value of future brand contracts, and investors who invest early may not benefit from the experience that we gain from our early brand contracts.
Our cash received under our brand contracts will depend upon the continued satisfactory performance of the related contract party, and we do not have any rights to require the contract party to take any actions to attract or maintain or otherwise generate brand income.
Some or all of the brand income that a contract party is expected to generate is contingent on continued satisfactory performance and is not guaranteed. Although we structure our brand contracts so that the contract party maintains the substantial majority of future brand income to help ensure that the contract party will maintain incentives to continue to generate brand income, we can provide no assurances that the contract party will do so. The contract party may retire from such contract party’s primary occupation, such as a professional athlete, at any time and for any reason, subject only to a requirement to repay us the amount of the purchase price we paid such contract party, plus certain expenses and net of any amounts already paid to us, if the contract party retires within a specified period of time, depending on the sport. In addition, if the contract party voluntarily retires during such period, such contract party may have other obligations under other contracts to pay back upfront payments, such as a signing bonus, and the contract party may not have the funds to meet all of its obligations at that time. The contract party has no obligation to take any actions to generate brand income, and may choose not to do anything to generate brand income. In addition, even if the contract party chooses to engage in additional brand income generating activities, their ability to do so may be restricted under their existing or future contracts. Moreover, brand income under our brand contracts generally only includes income that the contract party may receive in the future in such contract party’s primary occupation at the time, such as a professional athlete, and related fields, such as broadcasting and coaching. Our brand contract contains no restriction on the ability of the contract party to change professions or earn money in unrelated fields, and such income may not be brand income. In any of these events, we may lose some or all of the brand income in the future under a brand contract, in which case our cash receipts would decline.
The contract party is neither our affiliate, nor a director, officer or employee of our company and owes no fiduciary duties to us or any of our stockholders. The contract party has no obligation to enhance the value of their brand or disclose information to our stockholders.
Events in the contract party’s personal life, including relationships with spouse, family, friends, etc. could have a significant impact on the contract party’s performance on the field. The contract party’s obligations to disclose such personal events is limited to the obligations under the brand contract and the contract party is under no obligation to disclose any personal matters to the holders of shares of our securities. Furthermore, although the contract party is contractually obligated to disclose all material facts to us, we cannot guarantee that the contract party will comply with such disclosure requirements or that we can independently verify or uncover material events in the contract party’s personal life. In addition, the contract party has no obligation to enhance the value of their brand. For example, a contract party in the NFL may agree to a salary reduction to assist their team in staying within the league salary cap, to be on a more competitive team, or to stay with a specific team, all of which may have the effect of reducing potential brand income and conflict with stockholders’ interests in maximizing brand income. Since the contract party’s obligations under the brand contract are solely limited to obligations owed to us, the holders of shares of our securities have no contractual right to enforce such obligations against the contract party. Furthermore, since the contract party is neither a director nor an officer of our company, such contract party owes no fiduciary obligations to the holders of shares of our securities. As a result, our stockholders will have no recourse directly against the contract party, either under the brand contract or under the securities laws.
Profitability of our brand contracts may also depend upon the contract party’s ability to attract and maintain endorsements and attract and maintain other brand income generating activities.
The purchase price that we expect to pay for future ABI under our brand contracts is based on our assumption that the contract party will generate brand income in excess of that which may be predictable under the included contracts. Therefore, we expect that the contract party will need to be able to maintain existing included contracts as well as attract and maintain additional endorsements and other brand income generating activities. As noted above, the contract party has no obligation to take any actions to generate brand income, or to take any actions
to increase the amount of brand income that the contract party currently generates. However, even if the contract party desires to and attempts to attract and maintain additional endorsements and other brand income generating activities there can be no assurances that such contract party will be able to do so.
Competition for endorsements and other brand income opportunities is intense. These opportunities may depend on a variety of factors, including the primary occupation, and perceived value of such profession to marketing executives, and on-field factors in the primary occupation, such as quality of the contract party’s performance, whether or not the contract party plays for a winning team, plays in post-season games, wins major golf tournaments, or wins individual awards or is named to the Pro Bowl or All-Pro Team, the market in which the contract party performs, skill of the contract party at such contract party’s position, the style of play and potential to perform in the future, as well as intangible traits off the field such as personality, personal drive and ambition, “likability,” authenticity and consistency. Thus, future endorsements and other brand income opportunities may be difficult to attract and maintain, and they may not generate as much brand income as we expect or that they have historically. A downturn in the performance of the contract party or even the team on which the contract party plays, whether the current team or a different team, could adversely affect such contract party’s ability to attract and maintain endorsements. Even if the contract party enters into multi-year agreements that are capable of generating significant brand income, such agreements may have termination clauses relating to performance, character or other reasons, or such agreements may become the subject of disputes. We will have no rights under our brand contracts to require the contract party to pursue any remedies or engage in any disputes with any third parties.
Brand income may decrease due to factors outside the control of the contract party, such as an injury, illness, medical condition or death of the contract party, or due to other factors such as public scandal or other reputational harm to the contract party. In any such event, we do not maintain any insurance against such an event, and it is likely that the brand income with respect to such brand contract will not return to its prior levels or may cease completely.
Our focus for the foreseeable future is to enter into brand contracts with high-profile athletes who play professional sports. There is a high risk of injury in many professional sports, and in particular in the NFL. Nevertheless, we do not maintain any insurance against the loss of any brand income as a result of injury, illness, medical condition or death of the contract party. Therefore, if a contract party becomes injured or sustains a serious illness or other adverse medical condition in the course of their professional career or otherwise, or dies, the brand income, and thus our ABI, would likely be dramatically less than we anticipate, and it is likely that such brand income would not return to its prior levels or may cease completely.
In some cases, we may also expect to receive material amounts of brand income from existing and future endorsement agreements entered into by the contract party, as well as other public activities related to the primary occupation of the contract party, such as television broadcasting. We believe that the contract party’s ability to attract and maintain any such endorsement agreements as well as other sources of brand income could depend on the contract party’s reputation and ability to be viewed favorably by the public. Prior to entering into a brand contract, we assess the character and reputation of the contract party and the brand through our independent assessments, industry references and background checks conducted by third parties. However, there can be no assurance that our review process uncovers all facts and characteristics that could adversely affect the reputation of a contract party or the value of the brand contract, or that our assessment of reputational risk based on our due diligence is accurate. Even if our review process provides us with an accurate assessment of the character and integrity of a contract party as of the date of our review, there can be no assurance that circumstances in the future will not change, or that a contract party may not suffer reputational damage in the future, whether as a result of future behavior or otherwise.
Any harm to the public reputation of a contract party, or association of the contract party’s name with a public scandal, may reduce the contract party’s ability to enter into and maintain future endorsements and other sources of brand income and as a result, brand income would likely decrease or may cease completely.
The contract party or other third parties may refuse or fail to make payments to us under the brand contracts.
Our cash flows depend on contract parties and other third parties making payments of ABI to us. A contract party or other third party may dispute amounts to which we believe we are entitled, or may be unwilling or unable to make payments to which we are entitled, including for reasons discussed elsewhere in these risk factors.
In either event, we may become involved in a dispute with the contract party or other third party regarding the payment of such amounts, including possible litigation. Disputes of this nature could harm the relationship between us and the contract party or other third party, and could be costly and time-consuming for us to pursue.
Failure of the contract party or other third party to make payments of our ABI to us for any reason would adversely affect our business and in particular the value of a tracking stock if the failure to pay relates to the brand contract associated with any tracking stocks.
In addition, if the contract party or other third party who may be obligated to make payments to us were to become the subject of a proceeding under the United States Bankruptcy Code or a similar proceeding or arrangement under another state, federal or foreign law, our rights and interests under the brand contract or otherwise may be prejudiced or impaired, perhaps significantly so. In such circumstances, we may be precluded, stayed or otherwise limited in enforcing some or all of our rights under the brand contract or otherwise and realizing the economic and other benefits contemplated therein. To the extent we do not receive payments under a brand contract to which we would otherwise be entitled as a result of any such debtor relief laws, then the amount of such payments we do not receive will nonetheless be attributable to the respective tracking stock. In such an event, such shortfall in income will be treated as a general expense of Fantex and be shared pro rata (calculated based on attributable income) among all of our then outstanding tracking stocks. As a result, the market value of a tracking stock could decline if another brand contract that is not related to a tracking stock is unenforceable as a result of debtor relief laws.
Our brand contracts are not secured by any collateral or guaranteed or insured by any third party and an investor must rely on Fantex to pursue remedies against the contract party in the event of any default.
The payments under a brand contract will be unsecured obligations of the contract party and will not be secured by any collateral, nor guaranteed or insured by any third party or governmental authority. Therefore, we will be limited in our ability to collect any payments that may be owed to us under a brand contract if those amounts are not paid. Generally, we would have to pursue remedies against the contract party or other third parties to whom our ABI was assigned by the contract party.
If the contract party defaults under the brand contract, there can be no assurances that the contract party will have adequate resources, if any, to satisfy any obligations to us under the brand contract. In addition, our brand contracts will require that our ABI be directly assigned to us by the contract party where commercially practicable. It may be necessary, therefore, for us to also pursue remedies against counterparties to included contracts. These counterparties may assert that the assignment of brand income by the contract party did not create an obligation on their part to pay any brand income to us.
If a contract party does not comply with the terms of an included contract, our management, at its discretion, could decide not to pursue damages for the contract party’s breach, which could adversely affect the amount of brand income that we receive under a contract.
Moreover, payment of the ABI is an obligation of the contract party to us, not obligations to our stockholders. Our stockholders will have no recourse directly against the contract party.
The brand contract does not restrict the contract party from incurring unsecured or secured debt, nor does it impose any other financial restrictions on the contract party.
If the contract party incurs additional secured or unsecured debt after entering into a brand contract with us, or if the contract party incurs excessive expenses, the contract party may be impaired in its ability to make payments to us under the brand contract. In addition, additional debt or expenses may adversely affect the contract party’s creditworthiness generally, and could result in the financial distress, insolvency, or bankruptcy of the contract party. To the extent that the contract party has or incurs other indebtedness and expenses and cannot pay all of its indebtedness or expenses, the contract party may choose to make payments to other creditors rather than us.
To the extent a contract party incurs other indebtedness that is secured, such as mortgage, home equity, or auto loans, the ability of secured creditors to exercise remedies against the assets of the contract party may impair the contract party’s ability to make payments to us under the brand contract. The contract party may also choose to repay obligations under secured indebtedness before making required payments on the brand contract because the contract party has no collateral at risk in the case of the brand contract.
The financial and other information that we obtain from the contract party or other third parties may be inaccurate and may not accurately reflect the true financial position of the contract party, and the risk of default on the brand contract may be significant and may be higher than we anticipate.
Prior to entering into a brand contract, we conduct a review of the contract party that includes collecting financial and other information from the contract party to evaluate financial suitability of the contract party, including a review of assets, liabilities, existing commitments, tax returns and credit scores. We also conduct an initial background check to help us assess the ability of the contract party to meet their financial obligations. However, we do not verify this information and it may be inaccurate or incomplete. If information that is supplied to us by the contract party or other third parties is inaccurate or incomplete, the risk of default on the brand contract may be significant and may be higher than we anticipate.
Our due diligence procedures may not reveal all relevant information regarding a targeted brand acquisition and may result in an inaccurate assessment of the projected value of an acquired brand.
Prior to entering into a brand contract with an athlete or other high profile individual, we conduct due diligence and review the included contracts of such contract party and other documents to support our estimate of such contract party’s projected brand income. As part of this due diligence process and assessment, we will rely in part on the contract party to fully address our questions by disclosing all relevant information and, in some cases, on information provided by third parties. However, our due diligence processes may not uncover all relevant facts, and our brand acquisitions may not be profitable. Although our brand contracts with our contract parties obligates them to, and we intend to require future contract parties, if any, to contractually agree to, disclose all material facts to us, we cannot guarantee that our current contract parties or any future contract party will comply with such disclosure requirements or that we can independently verify or uncover material events about our current contract parties or any such future contract parties.
The valuation of our brand contracts and expected ABI requires us to make material assumptions that may ultimately prove to be incorrect. In such an event, we could suffer significant losses that could materially and adversely affect our results of operations.
Our principal assets are expected to be derived from our brand contracts with athletes and other high-profile individuals. Those assets are considered “Level 3” assets under Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, as there is currently no active market where we are able to observe quoted prices for identical assets. As a result, our valuation of those assets incorporates significant inputs that are not observable. Fair value of future expected brand income is determined by measuring expected returns on player contracts, anticipated lengths of player careers and related contracts, anticipated future endorsements and anticipated renewals of existing contracts based on comparable individuals in the same industry. However, valuation of the expected brand income is highly speculative due to the heavily subjective nature of identifying comparable athletes and is inherently difficult due to the uniqueness of each professional athlete and the limited number of available comparable athletes.
The fair value measurement of Level 3 assets is inherently uncertain and creates additional volatility in our financial statements that are not necessarily related to the performance of the underlying assets. To determine the amount of our purchase price and the fair values of our brand contracts with our contract parties, we applied discount rates subjectively determined in our analysis based on assumptions that have not been reviewed by any independent financial advisor. If we determine in the future that the discount rates we used were too low, then our estimate of the fair value of any of our brand contracts may be too high. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a further discussion of fair value measurements.
Failure of a contract party to adequately protect their intellectual property could injure the value of the contract party’s brand.
We invest in high-profile brands through our brand contracts. Therefore, the success of our brand contracts is dependent on the contract party protecting their brand from intellectual property infringement (such as counterfeiting and other unauthorized uses of their intellectual property rights). Although contract parties may seek to protect the intellectual property rights associated with their brand by ensuring that they own and control certain intellectual property rights in and to those assets and, where appropriate, by enforcing those intellectual property rights, it may not be possible to detect all instances of brand infringement. Additionally, where instances of brand infringement are detected, we cannot guarantee that such instances will be prevented as there may be legal or factual circumstances that give rise to uncertainty as to the validity, scope and enforceability of a contract party’s intellectual property rights. We will have no rights under the brand contract to enforce any intellectual property rights of the contract party or the brand. Infringement of their trademark, copyright and other intellectual property rights by others could have an adverse effect on the brand income, and thus the ABI that we receive under the brand contract. If any contract party were to fail or be unable to secure, protect, maintain and/or enforce the intellectual property rights that vest in their brand, then we could lose a portion of our cash stream that would have been received from such brand assets.
Our cash received under brand contracts may fluctuate due to seasonality.
The cash receipts under our brand contracts may be subject to seasonal variation, limiting the overall comparability of interim financial periods. For example, the salary under NFL player contracts is usually paid out in even installments during the course of the NFL season, or as a signing bonus according to varying schedules. The NFL season occurs primarily in the third and fourth quarters of each calendar year. As a result, our interim results and any quarterly financial information may not be indicative of the financial performance for the whole year.
An economic downturn and adverse economic conditions may harm a contract party’s earning potential.
Economic downturns and adverse economic conditions may negatively affect the earnings of a contract party. For example, the NFL market salary cap is dependent upon the revenues the NFL receives and an economic downturn could result in a stagnant or declining salary cap. In addition, endorsements may depend in part on the actual or perceived personal disposable income of consumers and marketing budgets of endorsement partners. These commercial contract payments are contingent upon the expenditures of businesses across a wide range of industries, which industries may cut costs in response to any economic downturn.
Our ability to increase the value of any of our brands may be limited and our investments in the promotion of any of our brands may cause the market value of our stock to decline.
Our management and board of directors will have complete discretion in determining the scope and execution of our brand promotion efforts, if any, with respect to our brands. Any investment we may make to promote our acquired brands will be for long- or medium-term results and would not be expected to increase brand income in the near-term, if at all. Any expenditures that we may make on promotional activities that are attributable to a single brand will be an attributable expense to the associated tracking stock. To the extent that our promotional activities increase the attributable income of a tracking stock by an amount less than the attributable expenses for the promotion, the attributed retained earnings of that tracking stock would decline. There can be no assurances that our management will promote any of our brands in a manner that creates value for the associated tracking stock or any of our other stockholders.
Confidentiality agreements with employees and others may not adequately prevent disclosures of our proprietary information and confidential information of the contract party.
We have taken measures to protect our proprietary information and confidential information of the contract parties, but these measures may not be effective. We require new employees and consultants to execute confidentiality agreements upon the commencement of an employment or consulting arrangement with us. These agreements generally require that all confidential information developed by the individual or made known to the
individual by us during the course of the individual’s relationship with us, including for example, information we acquire about the contract parties, be kept confidential and not disclosed to third parties. These agreements also generally provide that inventions conceived by the individual in the course of rendering services to us shall be our exclusive property. Nevertheless, employees, collaborators or consultants may still disclose or misuse our confidential information, and we may not be able to meaningfully protect our proprietary information and confidential information of the contract parties. In addition, others may independently develop substantially equivalent information or techniques or otherwise lawfully gain access to our proprietary information and confidential information of the contract parties, and thereafter communicate this information to others without maintaining its confidentiality. If this occurs, it may negatively impact our business and relationships with our current or future contract parties, and may damage our reputation and limit our ability to enter into new brand contracts. In addition, costly and time-consuming litigation could be necessary to enforce our proprietary rights or limit the prohibited disclosure of confidential information, and failure to obtain or maintain protection of our proprietary information or the confidential information of the contract parties could adversely affect our competitive business position.
Changes in government policy, legislation or regulatory or judicial interpretations could hinder or prevent our ability to conduct our business operations, including by hindering or preventing our ability to enforce our brand contracts or conduct offerings of securities.
Changes in government policy, legislation or regulatory or judicial interpretations could hinder or prevent our ability to conduct our business operations, including by hindering or preventing our ability to enforce our brand contracts or conduct offerings of securities. Most of our brand contracts are intended to be effective in perpetuity and may be terminated only upon mutual agreement of the contract party and us. In some jurisdictions, perpetual contracts have been found to be against public policy and therefore terminable in some circumstances. Our brand contracts are governed by California law, and California legal decisions do not disfavor express contractual terms for indefinite duration. However, we can provide no assurances that a California court may not rule differently in the future, or that a court of another jurisdiction might attempt to apply a different choice of law to our brand contracts. If this occurs then we may become involved in expensive and time consuming litigation, or may be unable in certain cases to enforce our brand contracts. Any other changes in or interpretations of current laws and regulations could also require us to increase our compliance expenditures, inhibit our ability to enter into new brand contracts or cause us to significantly alter or to discontinue offerings of additional tracking stocks. Altering the terms of our brand contracts or tracking stocks to comply with changes in or interpretations of applicable laws and regulations could require significant legal expenditures, increase the cost of managing or acquiring our brand contracts or make offerings of our tracking stocks less attractive to investors. In addition, our failure to comply with applicable laws and regulations could lead to significant penalties, fines or other sanctions. If we are unable to effectively respond to any such changes or comply with existing and future laws and regulations, our competitive position, results of operations, financial condition and cash flows could be materially adversely impacted.
The leagues, team owners, players associations, endorsement partners, elected officials or others may take actions that could restrict our ability or make it more costly for us to enter into future brand contracts.
Our business model depends on the cooperation of various third parties. Because the brand contracts and offerings of tracking stocks linked to the income of professional athletes and other high profile individuals is a novel business model, there may be influential parties with interests that are adverse or perceived to be adverse to our business, such as sports leagues, sports teams, fantasy sports networks or gambling institutions. These parties may seek to change the rules, policies, laws, regulations or legal interpretations in ways to prohibit, or limit the success of, our business. For example, in 2010 the Cantor Futures Exchange received approval from the Commodities Futures Trading Commission to launch the Hollywood Stock Exchange as a contract market for the trading of box office futures; however, the Motion Picture Association of America successfully lobbied members of the U.S. congress to pass legislation making trading in box office futures illegal. In a similar manner, influential parties that perceive our business model to be a threat to their business or detrimental to professional sports may attempt to lobby leagues, team owners, players associations, endorsement partners and elected officials to adopt rules, policies, laws, regulations or legal interpretations that inhibit us from conducting our business. Any such changes may adversely affect the ability of our contract parties to perform their obligations under brand contracts, or inhibit our ability to enter into new brand contracts with other contract parties. These changes could cover various requirements of the brand contract, such as prohibiting the sale or assignment of a portion of personal income, limiting the ability
to enter into contracts with an indefinite term or limiting the ability of the contract party to disclose information about included contracts to us. Any such changes prohibiting, or limiting the enforceability of, any terms in the brand contract could prevent or inhibit our collection of the ABI to which we are entitled under the brand contract. Any limitations on the ability of the contract party to disclose information about included contracts to us, or the SEC if we deemed it necessary, could limit the ability of a contract party to enter into such agreements subsequent to entering into a brand contract with us. Any increase in the expenses associated with our management of the brand contract or decrease in the expected ABI that we will collect could materially and adversely affect the value of shares of our tracking stocks.
We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner, or at all.
Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Cornell “Buck” French, our Chief Executive Officer, David Mullin, our Chief Financial Officer, and David Beirne, Chairman of our board of directors. Neither we nor Fantex Holdings have employment agreements with any of our executive officers or key employees, other than Messrs. French and Mullin. The material terms of the agreements with Messrs. French and Mullin are described under “Executive Compensation-Executive Compensation Arrangements.” Our executive officers or key employees could terminate their employment with Fantex Holdings or us at any time without penalty. In addition, we do not maintain key person life insurance policies on any of our employees or any of our contract parties. The loss of one or more of these executive officers or key employees could seriously harm our business and may prevent us from implementing our business plan in a timely manner, or at all.
Risks Relating to Our Contract Parties in the NFL and MLB
The profitability of our brand contract with a contract party in the NFL or MLB is substantially dependent upon the contract party’s ability to play out his existing player contract and enter into additional high-value player contracts. If a contract party in the NFL or MLB does enter into additional high-value player contracts, there is no guarantee that any portion of such contracts will consist of guaranteed money.
We anticipate that we will receive the majority of payments due under our brand contract with a contract party in the NFL and MLB during the period of his professional sports playing career. These contract parties’ current player contracts represent the source of substantially all of the brand income under our brand contracts with them, and we expect that these contract parties’ annual incomes will continue to be more heavily weighted toward their player contracts than on other brand income-generating activities.
The length of the professional sports playing career of a contract party in the NFL or MLB is uncertain. These contract parties may not continue to perform well as players and therefore, their future earnings may be substantially less than those under their current player contracts. In addition, if such a contract party is unable to sign a new player contract or the terms of a new player contract are materially worse than his current player contract, the cash receipts from the related brand contract will decline, which in turn may cause the market value of our securities to decline.
In addition, in valuing the potential lifetime brand income of our contract parties in the NFL or MLB, we generally estimated that the brand income these contract parties may earn as a result of endorsements will be in excess of their historical earnings from endorsements. However, we do not know if these contract parties’ endorsement income will grow in the future, and we do not know if their reputations and brands will be enhanced as a result of their being one of our contract parties. In fact, a contract party’s reputation and brand may be negatively affected by his willingness to enter into a brand contract and trade potential future earnings for present income.
If future endorsement partners or professional sports teams suspect that a contract party has hidden motives behind accepting an upfront cash payment in exchange for a portion of his future earnings, future endorsement partners may be less willing to enter into contracts with a contract party and may not find his promises of future performance under such contracts reliable. In addition, the endorsement contracts that a contract party in the NFL or MLB may enter into during his playing career may be terminated if he ceases to play his professional sport. Furthermore, a contract party’s ability to successfully attract and retain endorsements is dependent on such party’s
complying with the contractual requirements of those endorsements and there is no guarantee that a contract party will do so. For the aforementioned reasons, our contract parties may not be able to enter into new endorsement deals. In addition, the ability of each of our contract parties to generate other brand income after his playing career, such as through coaching or broadcasting, is unproven. A contract party’s failure to attract and maintain key endorsements or generate other brand income after his playing career could have a negative impact on our cash received under the brand contract.
The opportunity to receive a return of capital or any profit from an investment in any Fantex security linked to the brand income of an NFL or MLB player will depend in large part upon the ability of our contract parties to generate significant future brand income from professional sports and in some cases enter into and maintain endorsement contracts that are significantly in excess of those they have had historically. If a contract party does enter into additional high-value player contracts, there is no guarantee that any portion of such contracts will consist of guaranteed money. For a more detailed description of the valuation of the each of our brand contracts, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 60.
A contract party’s NFL or MLB player contract is a significant portion of the current cash we would receive under their brand contract.
We expect that each contract party’s NFL or MLB player contract will generate a significant portion of the current cash we expect to receive under their brand contract. In many cases, the amount of ABI under a playing contract is not guaranteed. We cannot guarantee that a contract party will be able to enter into a new NFL or MLB player contract when the existing contract expires.
A contract party could cease playing in the NFL or MLB at any time due to illness, injury or death, if they are dropped from the team and unable to secure a new contract, if they incur negative publicity or if they are suspended or banned from the NFL or MLB.
We expect that a significant portion of the brand income we expect to receive from a contract party will come from current and future NFL or MLB playing contracts. However, a contract party could cease playing football in the NFL or MLB at any time due to illness, injury or death, if they are dropped from the team and unable to secure a new contract, if they incurs negative publicity or if they are suspended or banned from the NFL or MLB. If any of these were to occur, a contract party would not receive amounts under their existing player contract and may not be able to secure future playing contracts.
Risks Relating to Our Contract Parties on the PGA Tour
The profitability of our brand contract with a contract party on the PGA TOUR is substantially dependent upon the contract party’s ability to remain on the PGA TOUR. If a contract party does not remain on the PGA TOUR it is likely the contract party’s golf earnings will be substantially lower than our estimates.
We anticipate that we will receive the majority of payments due under our brand contract with a contract party in the NFL and MLB during the period of his professional sports playing career. These contract parties’ current player contracts represent the source of substantially all of the brand income under our brand contracts with them, and we expect that these contract parties’ annual incomes will continue to be more heavily weighted toward their player contracts than on other brand income-generating activities.
The length of the professional sports playing career of a professional golfer is uncertain. These contract parties may not continue to perform well as players and therefore, their future earnings may be substantially less than previous earnings. In addition, if such a contract party is unable to maintain his PGA TOUR card the cash receipts from the related brand contract will decline, which in turn may cause the market value of our securities to decline.
In addition, in valuing the potential lifetime brand income of our professional golfer contract parties, we generally estimated that the brand income these contract parties may earn as a result of endorsements will be in excess of their historical earnings from endorsements. However, we do not know if these contract parties’
endorsement income will grow in the future, and we do not know if their reputations and brands will be enhanced as a result of their being one of our contract parties. In fact, a contract party’s reputation and brand may be negatively affected by his willingness to enter into a brand contract and trade potential future earnings for present income.
If future endorsement partners suspect that a contract party has hidden motives behind accepting an upfront cash payment in exchange for a portion of his future earnings, future endorsement partners may be less willing to enter into contracts with a contract party and may not find his promises of future performance under such contracts reliable. In addition, the endorsement contracts that a professional golfer may enter into during his playing career may be terminated if he ceases to play his professional sport or remain on the PGA TOUR. Furthermore, a contract party’s ability to successfully attract and retain endorsements is dependent on such party’s complying with the contractual requirements of those endorsements and there is no guarantee that a contract party will do so. For the aforementioned reasons, our contract parties may not be able to enter into new endorsement deals. In addition, the ability of each of our contract parties to generate other brand income after his playing career, such as through coaching or broadcasting, is unproven. A contract party’s failure to attract and maintain key endorsements or generate other brand income after his playing career could have a negative impact on our cash received under the brand contract.
The opportunity to receive a return of capital or any profit from an investment in any Fantex security linked to a professional golfers brand income will depend in large part upon the ability of our contract parties to generate significant future brand income from professional sports and in some cases enter into and maintain endorsement contracts that are significantly in excess of those they have had historically. For a more detailed description of the valuation of the each of our brand contracts, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 60.
A contract party could cease playing professional golf at any time due to illness, injury or death and if they are suspended or banned from professional golf tours.
We expect that a significant portion of the brand income we expect to receive from a professional golfer contract party will come from earnings on the PGA TOUR. However, a contract party could cease playing professional golf any time due to illness, injury or death or if they are suspended or banned from professional golf tours, especially the PGA TOUR. If any of these were to occur, a contract party earnings from playing professional golf would be severely impacted.
Risks Relating to Each of Our Contract Parties
Our ability to increase the value of our brands may be limited and our investments in the promotion of such brands may cause the market value of our stock to decline.
The endorsement potential of each of our contract parties may be limited and we may be unable to increase the value of the associated brand despite our efforts. To the extent that our promotional activities are unsuccessful, the market value of shares of our tracking stocks may decline. Furthermore, even if our promotion activities increase the endorsement income to our contract parties, the promotional activities may nonetheless have a negative impact on the market value of shares of our tracking stock because we will only receive a portion of any increased brand income. For example, because the ABI under our typical brand contract is 10% of brand income, our promotion efforts must produce brand income equal to at least ten times our costs for such promotion efforts in order to return our investment. There can be no assurances that our management will promote any of our brands in a manner that creates value for holders of shares of our tracking stocks.
The value of our brands is dependent upon the performance of, and to a lesser extent, the popularity of our contract parties.
Our cash receipts under each of our brand contracts are driven by the performance of, and to a lesser extent, the popularity of our contract parties. The contract party’s performance in their primary career directly affects, and a deterioration of their performance could adversely affect, the ABI under our brand contract. Poor or mediocre performance could cause the contract party’s playing contract to be terminated and may result in sponsors cancelling
their endorsements, or result in the contract party failing to qualify for additional incentive payments under existing or future endorsement contracts. We cannot ensure that any of our contract parties will continue to be successful in their playing careers.
Contract parties could be negatively affected by a work stoppage.
If the NFL or MLB or PGA Tour experiences a work stoppage, then the earnings of a contract party in such professional sports organization will be adversely affected. For example, in 1974 and 1982 the NFL experienced player strikes and in 2011 the NFL owners staged a “lockout” of the players. If either a strike or a lockout occurs during an NFL or MLB season, a players pay may be suspended. If a work stoppage occurs on the PGA Tour a contract party would not have the opportunity to earn tournament prize money. Each of our contract party’s earnings are heavily dependent on their professional football salary and would be negatively affected by any such work stoppage. This would have a negative impact on the payments we receive under the brand contract. We can give no assurances that such work stoppages will not occur.
Contract parties could be negatively affected by current and future rules of the professional sports organization in which they participate, including rules and standards of personal conduct which, if violated, could lead to fines and/or suspension or a permanent ban from competition.
Current professional conduct rules that permit the suspension of players or termination of player contracts for certain violations of rules may adversely affect the earnings of each our contract parties. The NFL, MLB and PGA Tour have promulgated a number of rules and standards of personal conduct which, if violated, could lead to fines and/or the contract party’s suspension or permanent ban from the applicable professional sports organization. While we are not aware of, or privy to, all of the circumstances which might lead to a contract party’s suspension or permanent ban from competition, personal conduct that could result in the termination of the player contract, permanent ban from competition or suspension includes, but is not limited to: criminal offenses (including domestic violence); the use or provision of steroids or other prohibited substances; certain violent, threatening or inherently dangerous conduct; gambling, bribery, game-fixing or the failure to report bribery or game-fixing in connection with NFL or MLB games; and any other conduct that undermines or puts at risk the integrity and reputation of the professional sports organization, its clubs, teams, affiliates or players. For example, on September 8, 2014, the Baltimore Ravens terminated the contract of, and the NFL indefinitely suspended, Baltimore Ravens player Ray Rice for domestic violence. The suspension or ban from competition or termination of a contract party’s NFL or MLB player contract could have a negative impact on such contract party’s brand income and therefore would impact the ABI we receive under the respective brand contract.
Future changes to the NFL, MLB or PGA Tour rules or other regulations may also adversely affect the earnings of each of our contract parties. These regulations could cover various aspects of their participation, such as changes to the rules of the game resulting in a devaluation of their respective skill sets, changes governing player eligibility and fines, and changes to the league’s CBA or association’s rules. Changes in the format of the game and league in which the contract party plays could have a negative impact on their brand income and therefore, will impact the ABI we receive under the respective brand contract.
There could be a decline in the popularity of the professional sports organization in which the contract party plays, or a decline in the contract party’s popularity.
There can be no assurance that the NFL, MLB or PGA Tour will retain its popularity as a sport, together with the associated levels of media coverage. A substantial decline in the popularity of the professional sports organization in which a contract party competes, whether as a result of the increase in the popularity of other professional sports or the emergence of new spectator sports, could impact the amount a contract party earns on and off the field. In addition, the contract party could suffer a decline in popularity, including as a result of poor performance or behavior by the contract party, particularly if such performance or behavior tarnishes the contract party’s brand image. Any one of these events or a combination of such events could have a material adverse effect on the trading volume of our securities and on the cash received under the brand contract associated with such contract party.
The profitability of a contract party’s brand contract is substantially dependent upon the contract party to enter into additional high-value NFL or MLB player contracts, and on their ability to successfully attract and retain endorsements during their playing career and thereafter significantly in excess of the amounts they have attracted historically and/or generate other brand income after their playing career. If a contract party does enter into additional high-value NFL or MLB player contracts, there is no guarantee that any portion of such contracts will consist of guaranteed money.
We anticipate that we will receive the majority of payments due under our brand contract with a contract party during the period of their NFL or MLB playing career. A contract party’s current NFL or MLB player contract represents the source of a significant portion of all brand income, and we expect that a contract party’s annual income will continue to be more heavily weighted toward their NFL or MLB player contract than on other brand income generating activities.
The length of a contract party’s NFL or MLB playing career is uncertain. Following the expiration of a contract party’s current playing contract, NFL or MLB teams may be unwilling to enter into an NFL or MLB player contract with a contract party. In addition, a contract party may not continue to perform well as an NFL or MLB player and therefore, future earnings may be substantially less than those under their current NFL or MLB player contract. If a contract party is unable to sign a new NFL or MLB player contract or the terms of such new contract are materially worse than their current NFL or MLB player contract, the cash receipts from the contract party will decline, which in turn may cause the market value of shares of the tracking stock linked to the brand agreement with a contract party to decline.
In addition, in valuing a contract party’s potential lifetime brand income, we estimated the brand income a contract party may earn as a result of their endorsements to be significantly in excess of their historical earnings from endorsements. However, we do not know if their endorsement income will grow in the future, and we do not know if their reputation and brand will be enhanced as a result of their being one of our contract parties. In fact, their reputation and brand may be negatively affected by their willingness to enter into a brand contract and trade potential future earnings for present income.
If future endorsement partners or NFL or MLB teams do not like that a contract party accepted an upfront cash payment in exchange for a portion of their future earnings, future endorsement partners may be less willing to enter into contracts with a contract party. In addition, a contract party’s endorsement contracts that they may enter into during their NFL or MLB playing career may be terminated if a contract party does not play for an NFL or MLB team. Furthermore, a contract party’s ability to successfully attract and retain endorsements is dependent on a contract party complying with the contractual requirements of those endorsements and there is no guarantee that a contract party will do so. Moreover, future endorsement partners may be less willing to enter into contracts with a contract party as a result of their entering into the brand contract with us in order to avoid public disclosure of their arrangements with a contract party. For the aforementioned reasons, a contract party may not be able to enter into new endorsement deals. In addition, their ability to generate other brand income after their playing career, such as through coaching or broadcasting, is unproven. Failure to attract and maintain key endorsements or generate other brand income after their playing career could have a negative impact on our cash received under the brand contract.
The opportunity to receive a return of capital or any profit from an investment in our tracking stocks will depend in large part upon a contract party’s ability to enter into additional high-value, multi-year NFL or MLB player contracts and on their ability over the same period and beyond to enter into and maintain endorsement contracts that are significantly in excess of those they have had historically. If a contract party does enter into additional high-value, multi-year NFL or MLB player contracts, there is no guarantee that any portion of such contracts will consist of guaranteed money.
In general we have limited historical data upon which to base our valuation and projections of a contract party’s future earnings potential.
Most of our contract parties have played less than five seasons in their respective sport. As a result, we have limited historical data upon which to build our analysis and valuation of the future professional sports earnings, future endorsements and other post-career contracts for a contract party.
A contract party may suffer from an injury, illness or medical condition; any injuries, illnesses or medical conditions of a contract party may affect the cash received by us under the brand contract.
Any injury, illness or medical condition of a contract party could cause you to lose a substantial portion or all of your investment in a tracking stock linked to that contract party’s brand agreement. Even if not career-ending, an injury, illness or medical condition could have a negative effect upon a contract party’s performance and may result in a loss of brand income that would otherwise have resulted from the contract party competing in his professional sport. A reduction in brand income will reduce our ABI and our ability to make dividend payments, if any, and will have a negative impact on the value of shares of the associated tracking stock. Any of these outcomes could also affect our ability to enter into additional brand contracts or to finance the acquisition of additional brands, which would have an adverse impact on our ability to execute on our business strategy.
All of our contract parties in the NFL and MLB have experienced injuries which, in certain cases, have caused that contract party to miss games. In addition each contract party has experienced other instances of normal wear and tear as an amateur and professional athlete and we expect that each contract party will continue to experience such wear and tear. Any worsening of these conditions, or re-injury or new injury, could materially and adversely affect a contract party’s playing performance and the value of the contract party’s brand.
A substantial portion of our anticipated income under the brand contract is attributable to a contract party’s expected earnings from his professional sport. To the extent that the value of your investment is dependent on the competitive success of a contract party, the likelihood of achieving such success is substantially reduced by serious or untimely injuries to a contract party. If a contract party is unable to play as a result of any injury, illness or medical condition they may be unable to enter into any future NFL or MLB player contracts or earn PGA Tour prize money, as the case may be. Additionally, certain endorsement contracts are made subject to an athlete’s continued participation in his professional sport and if they cease to be a professional athlete for any reason, including injury, illness or medical condition, their ability to maintain sponsors and their ability to attract new sponsors may be severely diminished.
It is difficult to estimate with precision the projected future earnings of a contract party because such estimation is necessarily based on future events that may or may not occur and that could change based on a number of factors that are hard to control. As a result, it is difficult to predict an accurate return on investment or rate of return for an investment in our tracking stocks.
Because the length of a contract party’s playing career is uncertain, we made certain estimates to predict a contract party’s career length. Due to the inherent uncertainty in predicting the future, it is difficult to estimate with precision the projected future earnings of a contract party in his professional sport and other brand income activities. These estimations are based on future events that may or may not occur. Additionally, future events change based on a number of factors that are difficult or impossible to control. As a result, it is difficult to predict an accurate return on investment or rate of return of an investment in our tracking stocks.
Future negative publicity could harm a contract party’s reputation and impair the value of his brand.
The return on your investment in our securities depends on the value and strength of the brand and reputation of our contract parties as well as the financial success of Fantex as a whole. Each of our contract parties has in the past received, and we expect will continue to receive in the future, media coverage. Unfavorable publicity regarding a contract party’s professional performance or his behavior off the field could negatively affect his brand and reputation. Any negative publicity regarding a contract party’s on-field or on-course performance or off-the-field behavior or otherwise could damage his reputation and impair the value of his brand. Moreover, future endorsement agreements may contain “morality” clauses which would permit counterparties to endorsement agreements to terminate those agreements with the contract party in certain circumstances (such as if he were charged with a felony or other crime involving fraud, dishonesty, violence, physical harm to another person, possession or use of illegal drugs or moral turpitude), further reducing our potential ABI.
Risks Relating to our Tracking Stock Structure
There are numerous risks investors should be aware of with respect to how we intend to structure our business and our proposed tracking stock structure.
Our amended and restated certificate of incorporation authorizes us to establish and issue from time to time one or more series of common stock and to determine the terms and rights of each such series. We intend to enter into additional brand contracts in the future, and we intend to establish and issue an additional series of common stock, which we refer to as our tracking stocks, with each new brand contract. Each tracking stock would be intended to track and reflect the separate economic performance of the assets and expenses associated with the associated brand contract. As a result, we expect to issue multiple tracking stocks in the future, and there are numerous risks associated with our proposed tracking stock structure.
A specified portion of the ABI associated with each of our brand contracts will be attributed to our platform common stock rather than the associated tracking stock. Therefore each of our tracking stocks will only partially reflect the economic performance of the associated brand contract.
Our tracking stocks are intended to track the performance of our brand contracts. However, we are attributing to our brands only 95% of the ABI under each brand contract. The remaining 5% of ABI under the brand contracts will be attributed to our platform common stock. Similarly, in the future when we issue additional tracking stocks we intend to attribute a portion of the ABI under the associated brand contracts to the platform common stock. Therefore, each of our tracking stocks will only partially reflect the economic performance of the associated brand contract and other assets and expenses of the associated tracking stock, even though we may use the proceeds of our tracking stock offerings to fund the full purchase price of the associated brand contract.
In addition, an investment in any of our tracking stocks would not represent an ownership interest in any related brand contract or assets associated with any particular tracking stock. Rather, an investment in any of our tracking stocks would represent an ownership interest in one consolidated company, Fantex.
As a series of our common stock, each of our tracking stocks will be exposed to additional risks associated with our company as a whole, including any individual tracking stock that exists at the time of any investment or that we may establish and issue in the future.
Investors in any of our tracking stocks are our common stockholders and an investment in a tracking stock will represent an ownership interest in our company as a whole, which exposes holders to additional risks associated with any individual tracking stock that exists at the time of any investment or that we may establish and issue in the future, even if an investor only owns shares of one series of our common stock. Holders of one tracking stock will be exposed to the risks associated with our other current tracking stocks and any tracking stock we may establish and issue in the future. We will attribute, for financial reporting purposes, assets, liabilities, income, expenses and cash flows to tracking stocks that we establish for brands we acquire in the future, and we will include unaudited attributed financial information as part of our financial reporting for each tracked stocks we establish. However, holders of any of our tracking stocks will not have any legal rights related to specific assets attributed to the associated tracked stocks. Rather, Fantex will retain legal title to all of its assets, including assets attributed to any of our current tracking stocks or any other tracking stock we establish in the future, and, in any liquidation, holders of our tracking stocks and holders of any other tracking stocks we may establish in the future, together with holders of our platform common stock, will be entitled to receive a proportionate share of our available net assets available for distribution to stockholders after we satisfy our creditors, including creditors of any tracking stock other than a tracking stock in which investors may invest.
We could be required to use assets attributed to one tracking stock to pay liabilities attributed to another tracking stock.
The assets attributed to one tracking stock are potentially subject to the liabilities attributed to another tracking stock, even if those liabilities arise from lawsuits, contracts or indebtedness that are attributed to such other tracking stock. No provision of our amended and restated certificate of incorporation prevents us from satisfying liabilities of one tracking stock with assets of another tracking stock, and our creditors will not in any way be limited
by our capital structure from proceeding against any assets they could have proceeded against if we did not have any tracking stocks. As a result, although we intend for the tracking stocks to track the performance of a particular brand contract, we cannot provide any guarantee that the tracking stock will in fact track the performance of such brand contract and that a particular tracking stock will not be subject to a disproportionate share of the burden of any non-performing brand contracts, whether or not included in the assets attributed to such tracking stock, and will not be attributed a disproportionate amount of our general liabilities, costs and expenses.
The market price of our tracking stocks may not reflect the intrinsic value or performance of the associated brand contract or contract party.
The market price of our tracking stocks may not reflect the performance of the associated brand contract. Holders of our tracking stock will be common stockholders of Fantex as a whole and, as such, will be subject to all risks associated with an investment in Fantex and all of our tracking stocks, assets and liabilities. As a result, the market price of our tracking stocks may reflect the performance of Fantex as a whole or may more independently reflect the performance of some or all of the assets attributed to the associated brand. We value each of our brand contracts using the fair value option under ASC 825. Our fair value determination may be different from the implied value of a brand contract based on the market price for a tracking stock. In addition, investors may discount the value of any of our tracking stocks because it is part of a common enterprise rather than a stand-alone entity.
The market price of our tracking stocks could be affected by the on-field performance of our contract parties to the extent that such on-field performance has a long-term impact on the brand income received by such contract parties.
Because our tracking stocks are intended to track and reflect the economic performance of the underlying brand contracts, and not the on-field performance of the associated contract parties, we do not believe that the trading price of our tracking stocks will necessarily bear any relationship to the short-term on-field performance of any of our contract parties. However, the trading prices and overall economic performance of our tracking stocks would be affected by the on-field performance of our contract parties to the extent that such on-field performance has a long-term impact on such contract party’s brand income. If a contract party’s on-field performance results in a reduction in brand income, then the ABI we receive from that contract party pursuant to the underlying brand contract will be less than we have estimated. Any reduction in the ABI that we receive under our brand contracts may constrain our ability to make dividend payments to investors in the related tracking stock, and could have a negative impact on the value of shares of such tracking stock. As a result, the economic performance of our tracking stocks may be indirectly affected by the on-field performance of our contract parties.
The market price of our tracking stocks may be more volatile than other publicly traded common stock because of our unique capital structure.
The market price of our tracking stocks may be volatile, could fluctuate substantially and could be affected by factors that do not affect other publicly-traded common stock. Our capital structure and business model is unique and we do not know how the market will react. In addition, to the extent the market prices of any of our tracking stocks reflect the performance of more focused brand contracts, assets and liabilities than traditional common stock, the market prices of our tracking stocks may be more volatile than the market price of traditional common stock because they may be more sensitive to events or circumstances that could impact the associated tracking stocks. The market prices of any of our tracking stocks may be materially affected by, among other things:
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actual or anticipated fluctuations in brand income or expected brand income attributed to the associated tracking stock, or in other operating results related to the associated tracking stock;
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potential acquisition activity by Fantex, including in brands we acquire or that we publicly announce that we intend to acquire or that people anticipate we may acquire;
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changes in estimates of brand income by analysts or commentators;
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the complex nature and the potential difficulties investors may have in understanding the terms of our tracking stocks, the terms of our platform common stock or our business model, as well as concerns regarding the possible effect of certain of those terms on an investment in our stock;
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actual or anticipated liabilities or expenses attributed to the associated tracking stock or any other tracking stock or Fantex as a whole; and
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general market conditions.
Our capital structure may create conflicts of interest for our board of directors and management, which could have a material adverse effect on the market value of any of our tracking stocks.
Our tracking stock capital structure could create conflicts of interest, and our board of directors may make decisions that could adversely affect only some holders of our common stock. Our tracking stock capital structure could give rise to occasions when the interests of holders of one tracking stock might diverge or appear to diverge from the interests of holders of another tracking stock. In addition, there may be inherent conflicts of interests between any of our tracking stocks and the platform common stock. Our tracking stocks do not represent investments in separate entities and thus holders of our tracking stocks, platform common stock and any future tracking stocks will not have the right to elect separate boards of directors. As a result, our officers and directors owe fiduciary duties to Fantex as a whole and all of our stockholders as opposed only to holders of a particular tracking stock. Decisions deemed to be in the best interest of Fantex and all of our stockholders may not be in the best interest of a particular tracking stock when considered independently. Examples include decisions relating to:
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the terms of any business relationships that may be created between and among any of our tracking stocks and the platform common stock or the terms of any attributions of assets between any of our tracking stocks and the platform common stock;
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the timing of a merger or other change of control transaction involving Fantex and its impact on the allocation of consideration among the holders of our current tracking stocks, any future tracking stocks and platform common stock;
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the allocation of corporate opportunities between any of our tracking stocks, especially where the opportunities might meet the strategic business objectives of more than one tracking stock;
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operational and financial matters that could be considered detrimental to one tracking stock but beneficial to another tracking stock;
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the conversion of shares of any of our tracking stocks into shares of platform common stock;
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the creation of any new tracking stocks;
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the making of, and, if made, the subsequent increase or decrease of any inter-series equity investments that one tracking stock may make in another tracking stock;
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the internal or external financing or assets attributable to any of our tracking stocks;
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the dispositions of assets of any of our tracking stocks; and
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the payment of any dividends on any of our tracking stocks or our platform common stock.
Our parent and certain directors of our parent, as holders of our platform common stock and other series of our common stock, will have control over key decision making as a result of their control over a majority of our voting stock.
Our parent and certain directors of our parent are able to exercise voting rights with respect to approximately 98.6% of our outstanding stock and as such, a majority of the voting power of our outstanding capital stock. Our platform common stock and each of our tracking stocks are each entitled to one vote per share. As a result, our parent will hold substantially all of the voting power of our outstanding capital stock and has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. As a stockholder, even a controlling stockholder, our parent is entitled to vote its shares in its own interests, which may not always be in the interests of our stockholders generally. Our parent will continue to control a majority of the combined voting power of our common stock and therefore be able to control all matters submitted to our stockholders for approval so long as the
shares of our platform common stock represent a majority of all outstanding shares of our common stock. This concentrated control will limit the ability of other stockholders to influence corporate matters for the foreseeable future.
Ownership of our platform common stock by our parent company and any of our officers or directors, may create, or appear to create, conflicts of interest with holders of our tracking stocks.
Ownership of platform common stock by our parent company and any of our officers or directors, may create or appear to create conflicts of interest. Our parent company and our directors or officers directly or indirectly own an interest in our platform common stock, which interest constitutes substantially all of the voting power in our company. Nevertheless, ownership of platform common stock by Fantex Holdings or any of our officers or directors could create or appear to create conflicts of interest when our parent company or any of our officers or directors are faced with decisions that could have different implications for the holders of shares of our tracking stocks and holders of platform common stock.
Our officers and directors may have a conflict of interest or appear to have a conflict since almost all of our officers are also officers of Fantex Holdings.
Our Chief Executive Officer is a member of our parent’s board and some of our officers are also officers of our parent company. Because our parent holds all of our platform common stock, its interests are expected to conflict in certain respects with the interests of holders of our current or future additional tracking stocks. Furthermore, since our parent is also required to provide services to us under the management agreement as long as such agreement is in effect, certain of its interests pursuant to that agreement are directly adverse to the interests of Fantex. These differing interests could create or appear to create conflicts of interest when our officers or directors are faced with decisions that could have different implications for Fantex Holdings and Fantex.
Other than pursuant to our management and attribution policies we have not adopted any specific procedures for consideration of matters involving a divergence of interests among holders of shares of our tracking stocks and our platform common stock, or among holders of different tracking stocks. Rather than develop additional specific procedures in advance, our board of directors intends to delegate decisions to our independent conflicts committee, which will exercise its judgment from time to time, depending on the circumstances, as to how best to:
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obtain information regarding the divergence (or potential divergence) of interests;
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determine under what circumstances to seek the assistance of outside advisers;
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determine whether a special committee of our board of directors should be appointed to address a specific matter and the appropriate members of that committee;
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in certain circumstances, authorize the incurrence of indebtedness for borrowed money or issuance of debt securities; and
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assess what is in our best interests and the best interests of all of our stockholders.
Investors in a tracking stock may not have any remedies under Delaware law if the actions of our directors or officers adversely affect the market value of any of our tracking stocks.
Holders of a particular tracking stock may not have any remedies if any action by our directors or officers has an adverse effect on only that tracking stock. Principles of Delaware law and the provisions of our amended and restated certificate of incorporation may protect decisions of our board of directors that have a disparate impact upon holders of any tracking stock. Under Delaware law, the board of directors has a duty to act with due care and in the best interests of all of our stockholders, regardless of the stock, or series, they hold. Principles of Delaware law established in cases involving differing treatment of multiple classes or series of stock provide that, subject to any applicable provisions of the certificate of incorporation, a board of directors generally owes an equal duty to all stockholders and does not have separate or additional duties to any subset of stockholders. Judicial opinions in Delaware involving tracking stocks have established that decisions by directors or officers involving differing
treatment of holders of tracking stocks may be judged under the business judgment rule. In some circumstances, our directors or officers may be required to make a decision that is viewed as adverse to the holders of a particular tracking stock. Under the principles of Delaware law and the business judgment rule referred to above, investors may not be able to successfully challenge decisions that they believe have a disparate impact upon the stockholders of one of our tracking stocks if a majority of our board of directors, or an authorized committee thereof, is disinterested and independent with respect to the action taken, is adequately informed with respect to the action taken and acts in good faith and in the honest belief that the board is acting in the best interest of our stockholders collectively.
We may dispose of assets of a tracking stock without stockholder approval.
Delaware law requires stockholder approval only for a sale or other disposition of all or substantially all of the assets of Fantex taken as a whole, and our amended and restated certificate of incorporation does not require a separate class vote in the case of a sale of a significant amount of assets associated with any of our tracking stocks. As long as the assets attributed to a tracking stock or the platform common stock proposed to be disposed of represent less than substantially all of our assets, we may approve sales and other dispositions of any amount of the assets of such tracking stock without any stockholder approval.
Holders of any of our tracking stocks may not be adequately compensated if we sell all or substantially all of the assets of the associated tracking stock.
If we dispose of all or substantially all of the assets attributed to any tracking stock, we would be required, if the disposition is not an exempt disposition under the terms of our amended and restated certificate of incorporation, to choose one or more of the following alternatives:
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pay a dividend to holders of the associated tracking stock out of the available net proceeds of such disposition; or
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if there are legally sufficient assets and the available dividend amount for the associated tracking stock would have been sufficient to pay a dividend, then: (i) if the disposition involves all of the properties and assets of the associated tracking stock, redeem all outstanding shares of the associated tracking stock in exchange for cash and/or securities or other assets with a fair value equal to the available net proceeds of such disposition, or (ii) if the disposition involves substantially all (but not all) of the properties and assets of the associated tracking stock, redeem a portion of the outstanding shares of our associated tracking stock in exchange for cash and/or securities or other assets with a fair value equal to the available net proceeds of such disposition; or
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following the two-year anniversary of the filing of a certificate of designations creating any tracking stock, convert each outstanding share of the associated tracking stock into our platform common stock at the applicable conversion ratio; or
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combine a conversion of a portion of the outstanding shares of the associated tracking stock into a number of shares of our platform common stock at the applicable conversion ratio with either the payment of a dividend on or a redemption of shares of the associated tracking stock.
In this type of a transaction, holders of the disposing tracking stock may receive less value than the value that a third-party buyer might pay for all or substantially all of the assets of the tracking stock.
Our board of directors will decide, in its sole discretion, how to proceed and is not required to select the option that would result in the highest value to holders of any particular tracking stock.
Holders of any of our tracking stocks may receive less consideration upon a sale of the assets attributed to the associated tracking stock than if that tracking stock were a separate company.
If any of our tracking stocks were a separate, independent companies and its shares were acquired by another person, certain costs of that sale, including corporate level taxes, might not be payable in connection with that acquisition. As a result, stockholders of a separate, independent company with the same assets might receive a
greater amount of proceeds than the holders of shares of our tracking stocks would receive upon a sale of all or substantially all of the assets of the associated brand. In addition, we cannot assure investors in a tracking stock that in the event of such a sale the per share consideration to be paid to holders of shares of our tracking stocks will be equal to or more than the per share value of that share of stock prior to or after the announcement of a sale of all or substantially all of the assets of the associated brand. Further, there is no requirement that the consideration paid be tax-free to the holders of the shares of our tracking stocks. Accordingly, if we sell all or substantially all of the assets attributed to one of our brands, our stockholders could suffer a loss in the value of their investment in Fantex.
In the event of a liquidation of Fantex, holders of any of our tracking stocks will not have a priority with respect to the assets attributed to the associated tracking stock remaining for distribution to stockholders.
Under the amended and restated certificate of incorporation, upon liquidation, dissolution or winding up of Fantex as a whole, holders of our tracking stocks will be entitled to receive, subject to the prior payment in full of creditors, a proportionate interest in the assets of Fantex remaining for distribution to holders of common stock in an amount per share equal to the fair value of such share of common stock; however, if the assets of Fantex legally available for distribution to the holders of common stock are insufficient to permit the payment to shares of all of our outstanding tracking stocks the full amount to which they would otherwise be entitled, then the assets available for distribution to the holders of common stock shall be distributed to all holders of each tracking stock ratably in proportion to the full amounts to which they would otherwise have been entitled to receive. As a result, the proportionate share of Fantex’s assets that any holder of our tracking stocks would be entitled to receive upon any liquidation may be less than the assets of the associated tracking stock, and less than the amount that an investor would have received if the associated tracking stock were a separate company.
Our board of directors may, in its sole discretion, elect to convert any of our tracking stocks into our platform common stock following the two-year anniversary of the filing of a certificate of designations creating such tracking stock, thereby changing the nature of any investment in a tracking stock and possibly diluting an investor’s economic interest in Fantex or creating market uncertainty regarding the nature of an investor’s investment, any of which could result in a loss in value to holders of our tracking stocks.
Our amended and restated certificate of incorporation and the certificate of designations for each of our tracking stocks will permit our board of directors, in its sole discretion, to convert all of the outstanding shares of any tracking stock into shares of our platform common stock, following the two-year anniversary of the filing of a certificate of designations creating such tracking stock, at an exchange rate based on the relative fair value of a share of the impacted tracking stock and the fair value of a share our platform common stock at the time. Our amended and restated certificate of incorporation and the certificate of designations for future tracking stocks are expected to permit our board of directors, in its sole discretion, to convert all of the outstanding shares of any future tracking stocks into shares of platform common stock, following the two-year anniversary of the filing of a certificate of designations creating such tracking stock, at an exchange rate based on the relative fair value of the that tracking stock and the platform common stock at the time.
Although we do not anticipate converting an actively traded tracking stock into platform common stock that is not also actively traded, there may be circumstances that exist in the future where our board of directors and, where applicable, the conflicts committee of our board of directors may consider it to be in the best interests of its stockholders to do so. For example, we anticipate converting a tracking stock into platform common stock in the following circumstances:
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if the tracking stock is no longer an actively traded stock, such as, for example, if the contract party for the brand contract underlying that tracking stock suffers an injury, illness, medical condition or dies, and their brand income diminishes as a result and there is little if any expectation that their brand income will materially increase in the future. In this case our board of directors may convert the shares of that tracking stock into platform common stock as a means of retiring the tracking stock, and our board of directors may do so in this circumstance even if the platform common stock is not an actively traded stock. As a result, the value received at the time of conversion of our tracking stock to platform common stock may be limited because such conversion is likely to occur at a time when the value of a tracking stock has little or no value. Furthermore, the conversion could result in an investor holding shares of our platform common stock that are not actively traded as determined in good faith by our board of directors or a committee of our board of directors.
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other special or extraordinary circumstances exist, such as a potential restructuring, reorganization or change of control of Fantex. We would not expect our board of directors to approve a conversion in this circumstance unless there is an active trading market for the platform common stock at the time of such conversion. Our board of directors may effect such a conversion at a time when the market value of either our platform common stock or the relevant tracking stock could cause, or be perceived to cause, the stockholders of either of such series to be disadvantaged.
Any conversion of a tracking stock into platform common stock, whether or not the platform common stock is at the time an actively traded stock as determined in good faith by our board of directors or a committee of our board of directors, would preclude the holders of that tracking stock from retaining their investment in a security that is intended to reflect separately the performance of the relevant brand contract. This uncertainty may also impact the market value of a tracking stock even if we do not ever convert a tracking stock. We cannot predict the impact on the market value of our stock because our board of directors’ ability to effect any such conversion or the exercise of this conversion right by Fantex.
Our capital structure may inhibit beneficial acquisition offers.
Our capital structure, as well as the fact that our brand contracts are not independent companies may inhibit or prevent acquisition bids for one of our brand contracts and may make it difficult for a third party to acquire us, even if doing so may be beneficial to our stockholders. If our brands were separate independent companies, any person interested in acquiring the brand without negotiating with management could seek control of that tracking stock by obtaining control of its outstanding voting stock, by means of a tender offer, or by means of a proxy contest. Although we intend our tracking stocks to reflect the separate economic performance of the associated brand contract, it is not a separate entity and a person interested in acquiring a tracking stock without negotiation with our management could obtain control of that tracking stock only by obtaining control of a majority in voting power of the platform common stock. The existence of shares of common stock, and different series of shares, relating to different brand contracts could present complexities and in certain circumstances pose obstacles, financial and otherwise, to an acquiring person that are not present in companies that do not have capital structures similar to ours.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in control of Fantex that a stockholder may consider favorable.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in control of Fantex that a stockholder may consider favorable. These provisions include:
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authorizing other tracking stocks;
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classifying our board of directors with staggered three-year terms, which may lengthen the time required to gain control of our board of directors;
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from and after such time as our parent company no longer holds a majority of the voting rights of our common stock, a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
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advance notice and other requirements that stockholders, other than our parent company for so long as it holds a majority of the voting rights of our common stock, must comply with in order to nominate candidates to our board of directors and propose matters to be brought before an annual meeting of our stockholders, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of Fantex; and
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from and after such time as our parent company holds less than a majority of the voting rights of our common stock, a 75% stockholder vote is required for removal of a director with or without cause, and for the amendment, repeal or modification of certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws.
In addition, after our parent company ceases to own 15% of our voting stock, we will be subject to Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its voting stock unless the holder has held the stock for three years or, among other things, the board of directors approved the transaction prior to such holder acquiring its 15% stake.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of us, (ii) any action asserting a claim of breach of a fiduciary duty owed by, or other wrongdoing by, any of our directors or officers to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law or our amended and restated certificate of incorporation or amended and restated bylaws, (iv) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or the amended and restated bylaws or (v) any action asserting a claim against us governed by the internal affairs doctrine. We believe this provision benefits us by providing increased consistency in the application of Delaware law by judges particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. Any person or entity purchasing or otherwise acquiring any interest in shares of our tracking stocks shall be deemed to have notice of and to have consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
Risks Relating to Additional Tracking Stocks
Investors in any of our tracking stocks will be our common stockholders and an investment in a tracking stock will represent an ownership interest in our company as a whole, which will expose holders to additional risks associated with any individual tracking stocks that exist at the time of any investment or that we may establish and issue in the future.
Our tracking stocks may be adversely impacted by any non-performing brand contracts.
We have entered into a brand contract with each of our contract parties, and we intend to enter into additional brand contracts on an ongoing basis. In addition, we intend to create additional tracking stocks in connection with one or more brand contracts we may enter in the future. Income (and assets) will generally be attributed to any of our tracking stocks based on the income from the associated brand contract. However, the assets attributed to one tracking stock are potentially subject to the liabilities attributed to another tracking stock, even if those liabilities arise from lawsuits, contracts or indebtedness that are attributed to such other tracking stock. No provision of our amended and restated certificate of incorporation prevents any creditor from requiring us to satisfy liabilities of one tracking stock with assets of another tracking stock, and our creditors will not in any way be limited by our capital structure from proceeding against any assets they could have proceeded against if we did not have any tracking stocks.
In addition, if the contract party or other third party who may be obligated to make payments to us were to become the subject of a proceeding under the United States Bankruptcy Code or a similar proceeding or arrangement under another state, federal or foreign law, our rights and interests under the brand contract or otherwise may be significantly prejudiced or impaired. In such circumstances, we may be precluded, stayed or otherwise limited in enforcing some or all of our rights under the brand contract or otherwise and realizing the
economic and other benefits contemplated therein. To the extent we do not receive payments under a brand contract to which we would otherwise be entitled as a result of any such debtor relief laws, then the amount of such payments we do not receive will nonetheless be attributable to the respective tracking stock. In such an event, such shortfall in income will be treated as a general expense of Fantex and be shared pro rata (calculated based on attributable income) among all of our then outstanding tracking stocks. As a result, the market value of a tracking stock could decline if another brand contract that is not related to a tracking stock is unenforceable as a result of debtor relief laws. Therefore, the creditworthiness of another contract party may be relevant to an investment in a tracking stock.
We intend to issue additional tracking stocks, which would reduce then-existing investors’ percentage of ownership in Fantex and may dilute our share value.
Our amended and restated certificate of incorporation authorizes the issuance of up to 1,500,000,000 shares of common stock. Accordingly, our board of directors will be empowered, without further stockholder approval, to issue additional shares of capital stock up to the authorized amount, which could adversely affect the rights of the holders of the existing series of our common stock. We may value any stock issued in the future on an arbitrary basis and the future issuance of capital stock may result in substantial dilution in the percentage of our common stock or common stock-equivalents held by our then existing stockholders. The issuance of capital stock for future services or other corporate actions may have the effect of diluting the value of the shares held by our then-existing stockholders, and might have an adverse effect on any trading market for our tracking stocks.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of our common stock may be volatile, and in the past companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make shares of our tracking stocks less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002.
We cannot predict if investors will find our tracking stocks less attractive because we will rely on these exemptions. If some investors find our tracking stocks less attractive as a result, there may be a less active trading market for our tracking stocks and our stock price may be more volatile.
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Our compliance burdens and costs will be significant as a result of operating as a public company, particularly as a result of our tracking stock structure. Our management will be required to devote substantial time to compliance matters.
As a public company in the United States, we incur significant legal, accounting and other expenses. Our business model depends on the ongoing issuance of tracking stocks intended to track the performance of each new brand contract.
We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and other applicable securities rules and regulations. Compliance with these rules and regulations increases our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly as a result of our tracking stock structure and to a greater extent after we are no longer an “emerging growth company.” The Exchange Act requires that we file annual and current reports with respect to our business, financial condition and results of operations. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Furthermore, the need to establish the corporate infrastructure demanded of a public company, particularly one with a tracking stock structure such as ours that contemplates numerous tracking stocks being issued on an ongoing basis, may divert management’s attention from implementing our growth strategy, which could prevent us from improving our business, financial condition and results of operations. We will need to continue to implement significant enhancements to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company with multiple tracking stocks. However, the measures we take may not be sufficient to satisfy our obligations as a public company. In addition, these rules and regulations increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. These obligations could have a material adverse effect on our business, financial condition, results of operations and cash flow.
In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business, financial condition, results of operations and cash flow could be adversely affected.
For as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We may take advantage of this provision until December 31, 2019, or such earlier time when we are no longer an emerging growth company. Furthermore, after the date we are no longer an emerging growth company, our independent registered public accounting firm will only be required to attest to the effectiveness of our internal control over financial reporting depending on our market capitalization. Even if our management concludes that our internal control over financial reporting are effective, our independent registered public accounting firm may still decline to attest to the effectiveness of our internal controls or may issue a report that is qualified if it is not satisfied with our controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, in connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. Failure to comply with Section 404 could subject us to regulatory scrutiny and sanctions, impair our ability to raise revenue, cause investors to lose confidence in the accuracy and completeness of our financial reports and negatively affect our stock price.
Noncompliance with laws and regulations may impair our ability to arrange or service the brand contracts.
Generally, failure to comply with the laws and regulatory requirements applicable to our business may, among other things, limit our ability to collect all or part of the payments under the brand contracts and, in addition, could subject us to damages, class action lawsuits, administrative enforcement actions, and civil and criminal liability, which may harm our business and ability to maintain the Fantex platform and may result in contract parties
attempting to rescind their brand contracts. For example, if we were deemed to be an investment company under the Investment Company Act, we would be required to institute burdensome compliance requirements and our activities may be restricted, which would materially adversely affect our business, financial condition and results of operations.
If any of our tracking stocks are not treated as a class of common stock of Fantex, adverse federal income tax consequences will result.
If any of our tracking stocks are considered property other than common stock of Fantex, for federal income tax purposes (i) Fantex would generally be taxed on a portion of the appreciation of the assets, if any, attributable to the tracking stocks upon the issuance of such stock, (ii) the exchange of our tracking stocks for shares of our platform common stock would not qualify as a tax-free recapitalization, and (iii) income, gain, losses and deductions attributable to one tracking stock would not be offset against income, gain, losses and deductions attributable to another tracking stock. There are no court decisions or other authorities directly bearing on the tax effects of the issuance and classification of stock with the features of our tracking stocks. In addition, the Internal Revenue Service has announced that it will not issue advance rulings on the classification of an instrument with characteristics similar to those of tracking stocks. As a result, there can be no assurance that our tracking stocks will be treated as stock of Fantex for U.S. federal income tax purposes.
The current trading market for our securities is limited and if a trading market for our securities does not develop, purchasers of our securities may not be able to sell, or may have difficulty selling, their security.
Because we are an affiliate of FBS, FBS will deliver a current “market-maker” prospectus and otherwise comply with the registration requirements of the Securities Act in connection with any secondary market sale of the Units to FBS customers, which may affect FBS customers’ ability to engage in secondary sales. We have agreed to make a “market-maker” prospectus generally available to FBS. If we do not have a current “market-maker” prospectus available at any time, or if we have limited or no market-makers at any time, the liquidity of the secondary market for our Units may be materially adversely affected.
In addition, we cannot predict the extent to which investor interest in our securities will lead to the development of an active trading market for the securities or how liquid any trading market might become. If an active trading market does not develop, you may be unable to sell, or have difficulty selling, any shares of our tracking stocks that you purchase, and the value of such shares may not reflect their fundamental value. The estimates of value of our tracking stocks were originally based on estimates of the business potential and earnings prospects of our contract parties and our estimates may not be indicative of prices that will prevail in the open market. Consequently, you may not be able to sell shares of our securities, if at all, at a price equal to or greater than the price you paid to purchase the shares of our securities.
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
A smaller reporting company is not required to provide the information required by this Item.
ITEM 2.
ITEM 2. Properties
We share our principal executive offices with our parent’s 4,953 square foot real estate facility located at 330 Townsend Street, Suite 234, San Francisco, California 94107. We use this space primarily for our corporate operations. Our parent’s lease for this space expires in November 2018. We believe that this facility is sufficient for our needs for the foreseeable future. We have no contractual rights to share this real estate facility. We believe our existing facility, is in good condition and suitable for the conduct of our business.
ITEM 3.
ITEM 3. Legal Proceedings
We are not currently a party to any material legal proceedings.
ITEM 4.
ITEM 4. Mine Safety Disclosure
Not applicable.
PART II
ITEM 5.
ITEM 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our outstanding tracking stocks are traded on the FBS ATS under the following symbols:
On March 7, 2016, the closing price and number of shares of our tracking stocks, as reported on the FBS ATS, and the number of stockholders of such tracking stocks were as follows:
There is no established public trading market for shares of our platform common stock. The following table sets forth the high and low sale bid for our tracking stocks for the period indicated as reported on the FBS ATS and such quotations are without retail mark-up, mark-down or commission and may not necessarily represent an actual transaction:
(1)
Fantex Series Vernon Davis Convertible Tracking Stock started trading on the FBS ATS on April 28, 2014, which is the first date available for bid information.
(2)
Fantex Series EJ Manuel Convertible Tracking Stock started trading on the FBS ATS on July 21, 2014, which is the first date available for bid information.
(3)
Fantex Series Mohamed Sanu Convertible Tracking Stock started trading on the FBS ATS on November 3, 2014, which is the first date available for bid information.
(4)
Fantex Series Alshon Jeffery Convertible Tracking Stock started trading on the FBS ATS on March 19, 2015, which is the first date available for bid information.
(5)
Fantex Series Michael Brockers Convertible Tracking Stock started trading on the FBS ATS on May 29, 2015, which is the first date available for bid information.
(6)
Fantex Series Jack Mewhort Convertible Tracking Stock started trading on the FBS ATS on July 14, 2015, which is the first date available for bid information.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On April 28, 2014, we completed our initial public offering of 421,100 share of our Fantex Series Vernon Davis. Our parent purchased 102,454 shares of Fantex Series Vernon Davis in the offering at $10.00 per share, which was the initial offering price to the public, for an aggregate purchase price of $1.02 million.
On July 21, 2014, we completed our initial public offering of 523,700 shares of our Fantex Series EJ Manuel. Our parent purchased 250,000 shares of Fantex Series EJ Manuel in the offering at $10.00 per share, which was the initial offering price to the public, for an aggregate purchase price of $2.50 million. In addition, certain directors of our parent purchased an aggregate of 27,934 shares of Fantex Series EJ Manuel in the offering at $10.00 per share for an aggregate purchase price of $279,340.
On November 3, 2014, we completed our initial public offering of 164,300 shares of our Fantex Series Mohamed Sanu. Our parent purchased 78,000 shares of Fantex Series Mohamed Sanu in the offering at $10.00 per share, which was the initial offering price to the public, for an aggregate purchase price of $0.78 million. In addition, certain directors of our parent purchased an aggregate of 10,365 shares of Fantex Series Mohamed Sanu in the offering at the offering price of $10.00 per share for an aggregate purchase price of $103,650.
On March 19, 2015, we completed our initial public offering of 835,800 shares of our Fantex Series Alshon Jeffery. Our parent purchased 400,000 shares of Fantex Series Alshon Jeffery in the offering at $10.00 per share, which was the initial offering price to the public, for an aggregate purchase price of $4.00 million. In addition, certain directors of our parent purchased an aggregate of 203,994 shares of Fantex Series Alshon Jeffery in the offering at the offering price of $10.00 per share for an aggregate purchase price of $2,039,940.
On May 29, 2015, we completed our initial public offering of 362,200 shares of our Fantex Series Michael Brockers. Our parent purchased 162,993 shares of Fantex Series Michael Brockers in the offering at $10.00 per share, which was the initial offering price to the public, for an aggregate purchase price of $1.63 million. In addition, certain directors of our parent purchased an aggregate of 92,900 shares of Fantex Series Michael Brockers in the offering at the offering price of $10.00 per share for an aggregate purchase price of $929,000.
On July 14, 2015, we completed our initial public offering of 268,100 shares of our Fantex Series Jack Mewhort. Our parent purchased 124,014 shares of Fantex Series Jack Mewhort in the offering at $10.00 per share, which was the initial offering price to the public, for an aggregate purchase price of $1.2 million. In addition, certain directors of our parent purchased an aggregate of 69,520 shares of Fantex Series Jack Mewhort in the offering at the offering price of $10.00 per share for an aggregate purchase price of $695,200.
There were no issuer repurchases of shares of our platform common stock or our tracking stocks.
Dividend Policy
Our board of directors is permitted, but not required, to declare and pay dividends on our platform common stock or any of our tracking stocks in an amount up to the “available dividend amount” for the applicable series, to the extent permitted by the Delaware General Corporation Law.
The amount and timing of distributions to our common stockholders is determined by our board of directors and is based upon a review of various factors including current market conditions, our liquidity needs, legal and contractual restrictions on the payment of distributions. To the extent permitted by the General Corporation Law of the State of Delaware, and provided that such dividends are not expected to have a material adverse impact on our liquidity or capital resources, we intend to pay a majority of available cash for each tracking stock as a cash dividend at least once every 12 months. The available dividend amount for any tracking stock is, as of any particular date, an amount equal to the lesser of (a) total assets of our company legally available for the payment of dividends under Delaware law and (b) an amount equal to (i) the excess of the total assets attributed to the applicable tracking stock over the total liabilities attributed to such tracking stock, less the par value of the outstanding shares of such tracking stock; or (ii) if there is no such excess, the attributable income of the tracking stock for the fiscal year in which the dividend is being declared and/or the preceding fiscal year. The available dividend amount for our platform common
stock is as of any date an amount equal to the amount of our total assets legally available for the payment of dividends under Delaware law, less the aggregate amount of the “available dividend amount” for all of our then outstanding tracking stocks.
Our board of directors may change its dividend policy at any time and from time to time, and we may retain some or all available funds and future income to support our operations and finance the growth and development of our business as well as, in some circumstances, invest some of the available funds attributed to a series to further enhance that series’ associated brand, exercise a co-investment right pursuant to our brand contract with the brand, or acquire additional ABI in the associated brand if we believe that those would be more productive uses of some or all of the available funds. However, our board of directors will not in any event change the definition of “available dividend amount” for any series of our common stock or declare dividends on any series of our common stock in excess of the “available dividend amount” for that series. Our board of directors has discretion to declare a dividend on any series of common stock without declaring a dividend on any other series of our common stock. In general, our board of directors does not expect to declare dividends on any series of common stock in an amount greater than the attributed cash on hand for such series.
The following table shows the cash dividends declared on a per share basis of Fantex Series Vernon Davis through December 31, 2015:
The following table shows the cash dividends declared on a per share basis of Fantex Series Mohamed Sanu through December 31, 2015:
Other than as set forth above, we did not declare or pay cash dividends on any other shares of our capital stock in the years ended December 31, 2015 or December 31, 2014 or any subsequent interim periods. We do not intend to declare dividends on our platform common stock for the foreseeable future.
If we sell all or substantially all of the assets of a tracking stock (but not in connection with a sale of our company), our board of directors will pay a dividend to holders of the related tracking stock, redeem shares of the related tracking stock, convert the outstanding shares of the related tracking stock into our platform common stock following the two-year anniversary of the filing of a certificate of designation creating such tracking stock or some combination of the foregoing.
Recent Sale of Unregistered Securities and Use of Proceeds
Recent Sale of Unregistered Securities
None.
Use of Proceeds
On April 22, 2014, our registration statement on Form S-1 (File No. 333-192476) was declared effective by the Securities and Exchange Commission (the “SEC”) for our initial public offering of 421,100 shares of Fantex Series Vernon Davis at a price to the public of $10.00 per share. The underwriters of the offering were FBS and Stifel, Nicolaus & Company, Incorporated (“Stifel”). The net proceeds to the Company from the offering were approximately $4.0 million reflecting gross proceeds to the Company of approximately $4.2 million, net of underwriting fees of
approximately $0.2 million. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on April 29, 2014 pursuant to Rule 424(b).
On July 15, 2014, our registration statement on Form S-1 (File No. 333-194256) was declared effective by the SEC for our initial public offering of 523,700 shares of Fantex Series EJ Manuel at a price to the public of $10.00 per share. The underwriters of the offering were FBS and Stifel. The net proceeds to the Company from the offering were approximately $5.0 million reflecting gross proceeds to the Company of approximately $5.2 million, net of underwriting fees of approximately $0.2 million. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on July 22, 2014 pursuant to Rule 424(b).
On October 27, 2014, our registration statement on Form S-1 (File No. 333-196437) was declared effective by the SEC for our initial public offering of 164,300 shares of Fantex Series Mohamed Sanu Convertible Tracking Stock at a price to the public of $10.00 per share. The underwriters of the offering were FBS and Stifel. The net proceeds to the Company from the offering were approximately $1.5 million reflecting gross proceeds to the Company of approximately $1.6 million, net of underwriting fees of approximately $0.1 million. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on November 4, 2014 pursuant to Rule 424(b).
On February 17, 2015, our registration statement on Form S-1 (File No. 333-198986) was declared effective by the SEC for our initial public offering of 835,800 shares of Fantex Series Alshon Jeffery Convertible Tracking Stock at a price to the public of $10.00 per share. The underwriters of the offering were FBS and Stifel. The net proceeds to the Company from the offering were approximately $7.94 million reflecting gross proceeds to the Company of $8.36 million, net of underwriting fees of approximately $0.42 million. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on March 18, 2015 pursuant to Rule 424(b).
On May 22, 2015, our registration statement on Form S-1 (File No. 333-201677) was declared effective by the SEC for our initial public offering of 362,200 shares of Fantex Series Michael Brockers Convertible Tracking Stock at a price to the public of $10.00 per share. The underwriters of the offering were FBS and Merriman Capital, Inc. (“Merriman”). The net proceeds to the Company from the offering were approximately $3.44 million reflecting gross proceeds to the Company of $3.62 million, net of underwriting fees of approximately $0.18 million. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on May 29, 2015 pursuant to Rule 424(b).
On June 22, 2015, our registration statement on Form S-1 (File No. 333-203457) was declared effective by the SEC for our initial public offering of 268,100 shares of Fantex Series Jack Mewhort Convertible Tracking Stock at a price to the public of $10.00 per share. The underwriters of the offering were FBS and Merriman. The net proceeds to the Company from the offering were approximately $2.52 million reflecting gross proceeds to the Company of $2.68 million, net of underwriting fees of approximately $0.16 million. There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on July 15, 2015 pursuant to Rule 424(b).
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12 of Part III of this Form 10-K regarding information about securities authorized for issuance under our equity compensation plans.
ITEM 6.
ITEM 6. Selected Financial Data
A smaller reporting company is not required to provide the information required by this Item.
ITEM 7.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and related notes for the years ended December 31, 2015 and 2014 included in this Form 10-K. This discussion contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the use of words such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or other words that convey uncertainty of future events or outcomes. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. The forward-looking statements in this Annual Report on Form 10-K represent our views as of the date of this Annual Report on Form 10-K. We anticipate that subsequent events and developments will cause our views to change. Factors that could cause or contribute to such subsequent events and developments include, but are not limited to, those identified below and those discussed in the “Item 1A - Risk Factors.” However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Annual Report on Form 10-K.
Overview
We are a company whose focus is on acquiring minority interests in the future income of professional athletes and assisting such individuals in growing these income streams. We focus our business on three core areas:
·
targeting, evaluating, and assessing athletes with the potential to generate significant income (“brand income”);
·
acquiring minority interests in such brand income (“acquired brand income” or “ABI”); and
·
assisting athletes who have signed agreements with us (Fantex athletes) to increase the potential value of their future brand income, primarily through mentoring and network/audience development.
We acquire the minority interest by negotiating a significant upfront payment in exchange for the future income streams of the counter party and entering into a contract (which we refer to as a “brand contract”). We finance the purchase price of each brand contract through an initial public offering of a tracking stock linked to the value of such brand.
We were incorporated on September 14, 2012 in Delaware as a wholly-owned subsidiary of Fantex Holdings, our parent. Fantex Holdings was incorporated in Delaware on April 9, 2012 and is headquartered in San Francisco, California. We are currently an early stage start up and have to date relied on our parent to conduct our operations through its employees. To date, our operations have consisted of evaluating, targeting and accessing brands and negotiating the acquisition of minority interests in those brands that meet our criteria.
As of December 31, 2015, we had brand contracts with each of the following contract parties:
(1)
The security linked to the brand contract has not been consummated as of the filing of this Form 10-K. The brand contract is contingent upon obtaining financing to fund the acquisition of our interest in the brand income under such brand contract. See Note 10, “Subsequent Events” in the Notes to Financial Statements for discussion of the registered offering under which the tracking stocks would be created.
(2)
On February 12, 2016, we consummated the Andrew Heaney brand contract. The security linked to the brand contract has not been created as of the filing of this Form 10-K. See Note 10, “Subsequent Events” in the Notes to Financial Statements for further discussion of the purchase of this brand contract.
(3)
The security linked to the brand contract has not been created as of the filing of this Form 10-K.
We intend to enter into additional brand contracts in the future and we are actively pursuing these brand contracts. Any brand contracts that we enter into in the future with other parties, who we refer to as contract parties, are also expected to be contingent upon obtaining financing to fund the acquisition of the interest in the brand income of the respective brands. We intend to finance the acquisition of additional brand income through the issuance of additional tracking stocks linked to the value of such brand income.
We operate under a management agreement with our Parent, who provides us with management and administrative services, including providing and compensating our executive management and other personnel as well as services relating to information technology support, brand management and other support, operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. We will begin to assume management and administrative tasks at such time in the future as the actual cost of these services is less than our service fee to Fantex Holdings, which we do not anticipate will occur until we begin to generate significant cash flows from multiple brand contracts. However, if our Parent is unable to perform any of the services that it is required to perform under the management agreement, due to financial difficulty or otherwise, then we may be forced to assume management and administrative tasks, and incur additional expenses, sooner than we anticipate. Until such time, we will continue to rely on our Parent to conduct our operations in accordance with the management agreement.
Brand Contract and Tracking Stock Initial Public Offering Activity During the Years Ended December 31, 2015 and 2014
(1)
See Note 3, “Tracking Stocks” in the Notes to Financial Statements, for a discussion of the brand contracts signed during the years ended December 31, 2015 and 2014.
(2)
See Note 8, “Stockholders’ Equity” in the Notes to Financial Statements, for a discussion of the completed initial public offerings during the years ended December 31, 2015 and 2014. For additional discussion of this activity, see “Liquidity and Capital Resources” beginning on page 66.
Results of Operations
Years ended December 31, 2015 and 2014
Income (Loss) from Brand Contracts
We first began to generate income in the quarter ended June 30, 2014. The income generated from our brand contracts is based primarily on the change in fair market value of these contracts subsequent to their purchase. We account for our brand contracts at estimated fair market value, as more fully described in the Note 5, “Investment in Brand Contracts, at Fair Value” in the Notes to Financial Statements.
During the years ended December 31, 2015 and 2014, the change in fair value of our brand contract portfolio resulted in a loss of $1,920,491 and $2,203,500, respectively. The change in fair value of our brand contract portfolio reflects realized and unrealized losses on our total portfolio of brand contracts partially offset by the increase in present value of the brand contracts as the cash flows are brought closer to the present, and to a lesser extent from net gains resulting from the receipt of cash payments due to us under those contracts. During 2015, we made significant reductions to our estimates of and/or the timing of certain cash flows under our brand contracts with Vernon Davis, EJ Manuel, Alshon Jeffery and Michael Brockers. During 2014, we made significant reductions to our estimates of certain cash flows under our brand contract with EJ Manuel. These changes were a result of our valuation process and the updating of the observable and unobservable inputs into our valuation models to determine fair value. As more fully discussed below, these changes resulted in realized and unrealized losses for each of the aforementioned brand contracts.
The change in the fair value of our brand contracts for the year ended December 31, 2015 is summarized as follows:
(1)
During the year ended December 31, 2015, payments on brand contracts included $113,492 related to the period from the contract inception date of September 7, 2014 through December 31, 2014. For the period January 1, 2015 through December 31, 2015, payments on brand contracts were $62,187.
(2)
During the year ended December 31, 2015, payments on brand contracts included $81,247 related to the period from the contract inception date of October 15, 2014 through December 31, 2014. For the period January 1, 2015 through December 31, 2015, payments on brand contracts were $144,021.
The change in the fair value of our brand contracts for the year ended December 31, 2014 is summarized as follows:
(1)
During the year ended December 31, 2014, payments on brand contracts included $386,219 related to the period from the contract inception date of October 30, 2013 through December 31, 2013. For the period January 1, 2014 through December 31, 2014, payments on brand contracts were $538,249.
As described more fully below in “Critical Accounting Policies-Fair Value of Financial Instruments,” the valuation process we perform on our Level 3 brand contract assets relies significantly on the on-field statistical performance of the player. We perform this analysis when a complete year of statistical data for the player is available, which for the NFL was after week 17 of the 2015 and 2014 seasons which was January 3, 2016 and December 28, 2014, respectively. Although we believe this process fairly computes the value of our brand contracts, like with all Level 3 type assets, the results can be highly volatile leading to significant changes in fair value from one period to the next period based on the under or over performance of the player against their comparable player group. The statistical on-field performance of the player will influence two of the observable inputs in our fair value model: career length and the comparable contracts. If the player has below average statistics compared to their comparable player group, the result will be a decrease in the particular observable input and result in losses in contract value. If a player’s statistics exceed their comparable player group, the result will generally be an increase in the observable inputs used to generate the fair value of the contract. We also assess the short and longer term endorsement earnings potential of the player both during and after the player’s career.
For additional information on how we estimated fair values of our brand contracts, see Note 5, “Investment in Brand Contracts, at Fair Value” in the Notes to Financial Statements.
The following table summarizes the changes in the various inputs to our valuation models and gain or loss from brand contracts for the year ended December 31, 2015, based upon the full 2015 NFL season statistics:
(1)
For the Vernon Davis Brand Contract, EJ Manuel Brand Contract and Mohamed Sanu Brand Contract, the “previous” column represents the status of the brand contract as of December 31, 2014 as their brand contract was consummated during 2014. For the Alshon Jeffery Brand Contract, Michael Brockers Brand Contract and Jack Mewhort Brand Contract, the “previous” column represents the status of their respective brand contract as of the contract effective date as their brand contract was not consummated until 2015.
The reduction in our estimate of Vernon Davis’ career length and estimated future contract value was due to worse than expected on-field statistical performance in the 2015 NFL season.
The reduction in our estimate of EJ Manuel’s career length and estimated future contract value was due to worse than expected on-field statistical performance in the 2015 NFL season and not obtaining the starting quarterback position of the Buffalo Bills as previously projected.
The reduction in our estimate of Alshon Jeffery’s estimated future contract value reflects changes in our estimates of the timing and amounts of the cash flows from his future NFL contracts including the timing and amount of his estimated signing bonuses. We originally believed he would renegotiate his contract prior to the beginning of the 2015 NFL season and now believe he will sign his new NFL contract before the beginning of the 2016 NFL season. The consequent revaluation resulted in an unrealized loss of approximately $1.8 million recorded in the second quarter of 2015. On February 26, 2016, the Chicago Bears placed a non-exclusive franchise player tag on Alshon Jeffery which prevents him from becoming an unrestricted free agent for the 2016 NFL season and will pay him a guaranteed salary for the 2016 NFL season of $14.6 million. Alshon Jeffery may still negotiate a long-term contract until July 15, 2016.
The reduction in our estimate of Michael Brockers’ career length and estimated future contract value was due to worse than expected on-field statistical performance in the 2015 NFL season.
The following table summarizes the impact on brand income for the changes in the various inputs to our valuation model for the year ended December 31, 2014:
(1)
The “previous” column represents the status of the brand contract as of the respective brand contract effective date.
(2)
The other gain (loss) represents a combination of an increase in Mohamed Sanu’s 4th year salary from his contracted minimum per the NFL CBA Article 7 “Proven Performance Escalator” and changes in the timing of receipts of NFL payments.
The reduction in our estimate of EJ Manuel’s career length and future contract value was due primarily to EJ Manuel losing his starting quarterback position during the 2014 NFL season and the corresponding worse than expected statistical on-field performance.
For a more detailed breakdown of the fair value of our brand contract portfolio by tracking stock, see Exhibit 99.1, “Attributed Financial Information for Our Platform Common Stock and Tracking Stocks.”
Income from Other Investments
During the year ended December 31, 2015, we recorded income of $16,400 from our 10% ownership interest in Jamba Juice franchises in connection with our brand contract with Vernon Davis.
Operating Expenses
The operating expenses for the years ended December 31, 2015 and 2014 reflect costs incurred to develop and operate our business. All such costs to date except those under our management agreement with our Parent, have been allocated to us from our Parent. Expenses such as personnel and facility costs were primarily allocated based on the estimated number of full time equivalent (FTE) employees working on activities associated with us. All personnel costs were allocated based on an estimated percentage of time spent on our activities. Facility costs were allocated based on the FTE employees associated with us as a percentage of all employees of our Parent. All other costs were specifically identified and charged to us as determined by management. All estimates are deemed to be reasonable and reflect, in the best judgment of our management, the costs associated with our activities.
Comparison of Operating Expenses for years ended December 31, 2015 and 2014
We currently have no employees, but are being supported by personnel employed by our Parent. The increase in personnel costs during the year ended December 31, 2015 reflects an additional 1.7 FTE employees
being allocated to us by our Parent in 2015. Our FTE employees are involved in activities related to brand contract acquisitions, valuations and compliance with public company reporting requirements.
Professional services consist primarily of legal, audit and marketing services. The decrease in professional services during the year ended December 31, 2015, as compared to December 31, 2014, was the result of lower brand marketing costs, audit and other professional services. During the year ended December 31, 2014, these costs were higher as we built our brand marketing capabilities and accounting infrastructure. During the year ended December 31, 2014, we completed our first three initial public offerings for our tracking stocks and signed an additional brand contract which triggered the transition from a start-up to an operational phase. We believe that our overall professional services-related spending will increase over time as we grow our athlete brand pipeline and continue to build our regulatory compliance function, brand contract administration and accounting infrastructure.
General and administrative expenses, exclusive of personnel costs, consist primarily of the allocation of facility, insurance and travel-related costs. The increase in general and administrative expenses during the year ended December 31, 2015, as compared to the year ended December 31, 2014, is primarily due to higher insurance and travel-related costs in the year ended December 31, 2015, as compared to 2014. We believe that as we expand our operations these costs will continue to increase.
As our operations mature, we expect to continue to incur expenses of the type and nature described above. In addition, we expect to incur additional management fees pursuant to our management agreement with our Parent. For the years ended December 31, 2015 and 2014, we incurred fees from our Parent of $63,214 and $52,492, respectively, representing 5% of the cash receipts from our brand contracts. Future fees from our parent will be dependent upon the cash received from our brand contracts.
Liquidity and Capital Resources
To date, we have relied significantly on our Parent for liquidity and capital resources.
During the year ended December 31, 2015 we completed three initial public offerings to consummate the Alshon Jeffery, Michael Brockers and Jack Mewhort brand contracts and collected ABI from those contract parties. In total during 2015, we raised approximately $13.9 million net of underwriting discounts and expenses. Substantially all of the net proceeds were paid to the contract counterparty to consummate their respective brand contracts.
During the year ended December 31, 2014 we completed three initial public offerings to consummate the Vernon Davis, EJ Manuel and Mohamed Sanu brand contracts. In total during 2014, we raised approximately $10.5 million net of underwriting discounts and expenses. Substantially all of the net proceeds were paid to the contract counterparty to consummate their respective brand contracts.
On February 12, 2016 we borrowed $3,300,000 from our Parent under a promissory note bearing interest at 8% per annum to consummate the Andrew Heaney brand contract. We will repay this promissory note upon the earlier of five days following the successful initial public offering of a security linked to the Andrew Heaney brand contract or August 12, 2016. On February 12, 2016, we used the proceeds from the note and paid the $3,340,000 (less $167,000 held in escrow until six months of payment of brand amounts have been timely delivered to us) purchase price to consummate the Andrew Heaney the brand contract. See Note 10, “Subsequent Events” in the Notes to Financial Statements, for further discussion of the purchase of this brand contract.
On November 24, 2015, we filed a Form S-1 Registration Statement to offer a minimum of 1,984,000 Fantex Sports Portfolio 1 Units and a maximum of 2,182,400 Units, if the Underwriters’ option to purchase additional Units is exercised in full. On January 13, 2016, we filed Amendment No. 1 to this Form S-1. This Form S-1 is not effective as of the date of filing of this Form 10-K.
We expect the initial public offering price of the Units to be between $12.00 and $14.00 per Unit. The total proceeds from the aggregate offering price of the Units would be $25.8 million, or $28.4 million if the Underwriters’ option to purchase additional Units is exercised in full. The Units consist of 93,140 shares of Fantex Series Vernon
Davis, 252,667 shares of Fantex Series EJ Manuel, 80,331 shares of Fantex Series Mohamed Sanu, 549,085 shares of Fantex Series Alshon Jeffery, 232,630 shares of Fantex Series Michael Brockers and 175,940 shares of Fantex Series Jack Mewhort. The Units also consist of Fantex Series Professional Sports which consists of the brand contracts of Kendall Wright, Andrew Heaney, Terrance Williams and Ryan Shazier. If the Underwriters’ option to purchase additional Units is exercised in full, the Units would consist of 102,454 shares of Fantex Series Vernon Davis, 277,934 shares of Fantex Series EJ Manuel, 88,365 shares of Fantex Series Mohamed Sanu, 603,994 shares of Fantex Series Alshon Jeffery, 255,893 shares of Fantex Series Michael Brockers and 193,534 shares of Fantex Series Jack Mewhort.
If this initial public offering becomes effective, we expect to use the proceeds from this offering for the payment of share repurchase price to our Parent and certain directors and related persons of our Parent, payment of the brand contract purchase price to Kendall Wright, Terrance Williams and Ryan Shazier (net of a $100,000 advance to each against such purchase price made in February 2016), repayment to our Parent of the promissory note dated February 12, 2016 described above, payment of underwriting discounts and commissions and for general working capital for our operations.
During the years ended December 31, 2015 and 2014, we collected $1,247,887 and $1,049,831, respectively, from our brand contracts representing our interest in brand income generated by the contracts.
Cash received under our brand contracts will be subject to seasonal variation. For example, the salary under NFL player contracts is usually paid out in even installments during the course of the NFL season, or as a signing bonus according to varying schedules. The NFL season occurs primarily in the third and fourth quarters of each calendar year with lower or no payments coming from NFL contracts in the first and second quarters of the calendar year. The salary under MLB player contracts is usually paid out in even installments during the course of the regular MLB season, or as a signing bonus according to varying schedules. The MLB regular season occurs primarily in the second and third quarters of each calendar year with lower or no payments coming from MLB contracts in the first and fourth quarters of the calendar year.
During the year ended December 31, 2015, we exercised our co-investment right under the terms of the brand contract with Vernon Davis in connection with Vernon Davis’s purchase of Jamba Juice franchises. Mr. Davis was offered this opportunity in connection with an expanded endorsement relationship. We paid $110,800 for a 10% ownership interest in the franchises and per our attribution policy, will attribute 95% of the cash flows from this investment to Fantex Series Vernon Davis. During the year ended December 31, 2015, we recorded income of $16,400 from this investment.
On April 20, 2015, our Board of Directors declared a cash dividend of $0.50 per share to be paid to the holders of record of Fantex Series Vernon Davis as of the close of business on April 24, 2015, for an aggregate payment of $210,550. The dividend was paid on April 28, 2015. The foregoing dividend payment did not have a material impact on our liquidity or capital resources.
On May 31, 2015 our Board of Directors declared a cash dividend of $0.20 per share to be paid to the holders of record of Fantex Series Mohamed Sanu as of the close of business on June 30, 2015, for an aggregate payment of $32,860. The dividend was paid on July 30, 2015. The foregoing dividend payment did not have a material impact on our liquidity or capital resources.
For the years ended December 31, 2015 and 2014, our Parent contributed capital of $3.98 million and $3.55 million, respectively. The contributed capital includes expenses paid by our Parent on our behalf and allocated to us as expenses. Our Parent will continue to fund our liquidity and capital resource needs either through direct cash contributions, non-cash contributed capital for direct and indirect expenses, or a combination of both.
We are not committed to any future capital expenditures and certain agreements, such as rental commitments, are the responsibility of our Parent. We expect, however, that our operations (excluding upfront payments under future brand contracts) will continue to consume substantial amounts of cash as we continue to build our platform of brands and our internal marketing, compliance and other administrative functions.
Since April 28, 2014, we have been operating under a management agreement with our Parent, pursuant to which our Parent provides us with certain management and administrative services, including providing and compensating our executive management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. We incurred management fees of $63,214 and $52,492 for the years ended December 31, 2015 and 2014, respectively. The management fee represents a fee equal to 5% of the amount of gross cash received by us from our brand contracts and will vary based on the timing of cash collected from the contract party. The expense allocation from our Parent was reduced by the amount of the management fee for the years ended December 31, 2015 and 2014.
We will begin to assume management and administrative tasks at such time in the future as the actual cost of these services is less than our service fee to Fantex Holdings, which we do not anticipate would occur until we begin to generate significant cash flows from multiple brand contracts. However, if our Parent is unable to perform any of the services that they are required to perform under the management agreement, due to financial difficulty or otherwise, then we may be forced to assume management and administrative tasks, and incur additional expenses, sooner than we anticipate. Until such time, we will continue to rely on our Parent to conduct our operations in accordance with the management agreement. We are dependent on the continued support of our Parent; at this time our Parent intends to continue to fund operations for at least the next 12 months. Our Parent has no obligation to continue to finance our operations except as required under our management agreement with them. See “Contractual Obligations-Management Agreement” on page 75.
We believe the net proceeds from our offerings together with existing cash and cash equivalents and our Parent’s capital contributions will be sufficient to fund our projected capital needs and operating expenses for the next 12 months. However, if our operating and other expenses are higher than we expect or our cash receipts from brand contracts are lower than we expect then we may require higher than expected contributions from our Parent. In addition, if there is insufficient investor demand for any of our future offerings our Parent may have to expend additional funds to act as a standby purchaser for such offering or else we may not be able to consummate such offering. In any such event, our Parent may need to raise additional capital sooner than expected.
Any brand contracts that we enter into in the future with other contract parties may require us to make substantial upfront payments to acquire the ABI under such brand contracts. We do not, in the absence of a related financing, expect to have the necessary funds that we would need to make any of these upfront payments under future brand contracts. Therefore, we expect that our future brand contracts will be contingent upon obtaining financing to fund the acquisition of the ABI in the respective brands, and we intend to finance these acquisitions through the issuance of additional tracking stock linked to the value of such brands. Until such time as our operations generate sufficient cash to meet the liquidity needs of our business, if ever, we expect to finance future cash needs through existing cash balances and reliance on our Parent.
Critical Accounting Policies
Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements. On an ongoing basis, management will evaluate these estimates, including those related to accounts receivable, fair values of financial instruments, income taxes, and contingent liabilities, among others. Estimates will be based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from these estimates. The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our financial statements are described below.
Fair Value Option
The brand contracts represent a right to receive certain cash flows from the contract parties, and therefore, the brand contracts meet the definition of a financial asset under GAAP. As financial assets, the brand contracts are precluded from being accounted for as intangible assets. We have elected to account for the brand contracts using the fair value option, with changes in fair value recognized in income (loss) from brand contracts in the statements of operations. We believe measurement of the brand contracts at fair value provides the most meaningful information to users of our financial statements, because the value of the brand contracts may increase or decrease over time based on future events. We believe that recognizing the change in fair value through net income or loss provides a better indicator of the performance of the brand contracts for a given period, enhances transparency, and is more in line with how we manage the risks of the brand contracts.
Fair Value of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models may involve a significant level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:
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Level 1-Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets generally included in this category are mutual funds.
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Level 2-Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.
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Level 3-Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The types of assets and liabilities generally included in this category are our brand contracts.
A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by our management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which our management recognizes at the end of the reporting period.
Depending on the relative liquidity in the markets for certain assets, our management may classify assets as Level 3 if they determine that observable quoted prices, obtained directly or indirectly, are not available. Management has determined that all of our contracts should be classified as Level 3. The valuation models used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.
Valuation Process
The valuation process for our Level 3 measurements for assets and liabilities will be completed on no less than a quarterly basis, provided that we do not intend to update the on-field statistical performance data used in our valuation models, including those that we used to estimate career longevity and potential future playing contracts, more frequently than on an annual basis based on a full season of on-field statistical performance data, or at such time as there is a material event that we believe would have a long-term material impact on these estimates and the potential brand income resulting from these estimates. The valuation process is designed to subject the valuation of Level 3 investments, including our brand contracts, to an appropriate level of consistency, oversight and review.
Our internal valuation professionals are responsible for estimating fair value based on various factors including:
·
current playing contract including: amounts, duration, incentive provisions, guaranteed portions, if any, termination and other important terms;
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current endorsement contracts, if any, including amounts, duration and contract terms;
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age and health (including injuries) of the individual associated with the brand, duration of career to date and prospects for additional future contracts, both playing and endorsement;
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potential future playing and endorsement contracts, including duration and value;
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position and data specific to that position focused on estimating longevity of career;
·
reported contract value increases or decreases for other comparable players (by position and status they hold among their peers (e.g. All Pro, Most Valuable Player, franchise player and the like)) in order to estimate future contract values;
·
professional sports league imposed salary caps if appropriate; and
·
risk free cost of capital.
In addition, we consider a number of qualitative factors to develop estimates used in our models, including:
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the stated aspirations and goals of the contract party;
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certain intangibles of the contract party, including media relationships, communication ability, “likeability,” demand as a product endorser, personal drive and ambition;
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social footprint (for example, number of Twitter followers);
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the market in which the contract party performs and how that may impact the number and amount of endorsement opportunities;
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the reach of the brand of the contract party;
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value of TV contracts and the rate of growth in those contracts; and
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attendance trends in the contract party’s primary field of performance.
We consider all of these factors to estimate brand income for use in a discounted cash flow model. These estimates include amounts based on existing contracts as well as our estimates of amounts to be received for anticipated future contracts. With respect to existing contracts we consider that certain amounts are reasonably assured of realization, but that most earnings from existing contracts depend on continued satisfactory performance.
To determine the amount of the purchase price of a brand contract and a current fair value we apply discount rates to our estimates of earnings.
In general, we apply lower discount rates to amounts associated with existing contracts, particularly portions of those contracts that have a higher degree of certainty of payment, and higher discount rates to amounts associated with future potential earnings under existing contracts and to potential earnings under anticipated future contracts. Further, discount rates rise over time to reflect that uncertainty increases over time.
Our internal valuation professionals document their considerations of this data that is then reviewed by management, including our Chief Executive Officer and Chief Financial Officer. The approved valuation is used to determine the fair value of the brand contract. This valuation process is followed on no less than a quarterly basis to estimate the fair value of the brand contracts that are then in effect.
If the estimates of brand income prove to be too high and/or the discount rates used in the calculation prove to be too low then the valuation of a brand contract may be too high which will result in the recording of a loss on the brand contract.
Brand Contracts, at Estimated Fair Value
The negotiated value of our brand contracts, including those brand contracts discussed below and brand contracts with any future contract parties, have been and will continue to be based on a discounted cash flow model using the procedures described above.
In our analysis we generally consider three categories of potential brand income:
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Category A-Potential brand income related to the portions of existing contracts that have a higher degree of certainty of payment, such as brand income that is very near-term or that is guaranteed under existing included contracts.
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Category B-Potential brand income related to the portions of existing contracts that have a lesser degree of certainty of payment, such as brand income that is payable pursuant to existing included contracts but that depends on longer-term continued satisfactory performance of the contract party.
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Category C-Potential brand income related to anticipated future contracts, such as future endorsements, playing contracts and/or additional brand income generated from coaching, broadcasting or the like.
Brand Contract Values
In estimating the value of the brand contracts with all of our contract parties, we review (i) the existing playing contracts of our contract parties, (ii) the playing contracts for other players, retired or active who we believe are of similar caliber to the contract party and who have entered into contracts in a similar era, and are or were at similar stages in their career at which the contract party is expected to enter into additional player contracts. The values of such comparable playing contracts are adjusted for inflation to better predict the contract values of future playing contracts for our contract parties. In addition we also review the existing endorsement contracts of our contract parties and make certain estimates with respect to future endorsement contracts that our contract parties may receive.
The following table shows the change in fair value of our brand contract portfolio by Category A, Category B and Category C from the inception date of all of our completed brand contracts through December 31, 2015.
See “Results of Operations - Years ended December 31, 2015 and 2014” above for discussion of changes in the estimates of certain cash flows and changes in realized and unrealized gains and losses under our brand contracts.
For a detailed discussion of the change in fair value of our brand contract portfolio by tracking stock, see Exhibit 99.1, “Attributed Financial Information for Our Platform Common Stock and Tracking Stocks.”
For additional information on how we estimated the fair values of our brand contracts, see Note 5, “Investment in Brand Contracts, at Fair Value” in the Notes to Financial Statements.
Income (Loss) From Brand Contracts
We recognize income or loss based on the change in fair value of the brand contracts from period to period and receipts of payments or other consideration from the brand contracts. Other consideration received by the contract party may include stock, automobiles, or other items of value. In the event other consideration are received by the contract party, we will recognize income from brand contracts equal to our proportionate share of the estimated fair value of the other consideration received, and will receive payment in either cash or such other consideration based on the contractual arrangement. Amounts due to us under the brand contract are either remitted directly from the source of such income or through payment by the contract party. The brand contract stipulates that income once we earn it is not subject to recapture by the contract party.
For purposes of our financial statements and the notes thereto, cash received under the brand contract will either be recognized as a reduction of our carrying value (i.e., a reduction in the brand contract asset) or income (loss) from brand contracts. Whether cash receipts will be recognized as a reduction in carrying value or income (loss) from brand contracts will depend on the timing of such cash receipt.
Additionally, the timing of changes in our estimates of future cash flows will impact whether cash receipts are recognized as a reduction of our carrying value or as income (loss) from brand contracts. If, for example, we increase the estimate of cash flows which are not received until a future period, this increase will be recognized as income from brand contracts. If, on the other hand, the cash flows are received in the current period and had not been estimated, the entire cash flow will be recognized as income from brand contracts.
Expected cash flows will be based on the included contracts the contract party has in place and the expectations of future contracts. As it becomes more likely that the contract party will collect contracted amounts the expected discount rate will decrease. A decrease in the discount rate will result in the receipt of cash primarily being allocated to reduction of carrying value. The discount rates are determined at the purchase date and are revised each period based on the performance of the brand and the likelihood of collection of future contracted amounts.
Income (loss) from brand contracts is based on an estimate of expected cash flows and the associated expected discount rates. Changes in fair value resulting from changes in the expected performance of the brand or market factors are included in income (loss) from brand contracts in the statements of operations.
We are entitled to certain information and audit rights pursuant to the brand contracts that enable us to adequately calculate and collect the ABI under the brand contract. In addition to such annual audit rights, we intend to create a contract administration and surveillance division to proactively monitor and administer our rights under the brand contracts. Following the execution of a brand contract, the contract administration and surveillance division shall prepare a schedule charting the timing and amounts of expected future payments associated with that certain counterparty’s existing contracts that are subject to our brand contract, along with the term and the expected timing each contract would be expected to be renegotiated or renewed. The division will also be tasked with ensuring that all directives to pay Fantex directly have been executed and accepted by the parties making such payments. We will contact the contract party at renewal terms to determine whether the contracts will be renewed and take necessary steps to ensure that any new agreements are covered under the brand contract.
The division will also be tasked with reviewing each brand contract quarterly and to contact each of our contract parties to determine if the parties entered into additional agreements or renegotiated existing agreements that may impact our ABI. To supplement these direct inquiries, this division will also monitor social and mainstream media on at least a weekly basis for information relevant to our brand contract or relationship with each of our contract parties, including trade rumors, reports of new endorsements or other agreements that may be subject to our brand contract with such contract parties, reports of renegotiation of existing agreements and reports of personal behavior that may be beneficial or detrimental to the brand contract in general.
In addition to the above, in the event that expected payments are not received on a timely basis (generally within five days of receipt of income by the contract party), we will attempt to contact the contract party and resolve any issues of nonpayment amicably. If our efforts are unsuccessful, any issues with contract payments will initially be escalated to senior management for resolution. Depending on the nature and materiality of the contract party’s nonperformance, we may initiate legal action to recover any unpaid amounts under the brand contract. Significant or continuous nonpayment may be material and may trigger additional disclosure under the Securities Act as well as impair the fair value of the asset on our books.
Income Taxes
Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements 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 effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The current and deferred tax expense is presented under the separate return method. Under the separate return method, Fantex calculates its tax provision as if it were filing a separate tax return.
Deferred tax assets are recorded to the extent management believes these assets will more likely than not be realized. In making such a determination, all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations is considered. In the event it is determined that we would be able to realize deferred tax assets in the future, an adjustment to the deferred tax asset valuation allowance would be made, which would reduce the provision for income taxes.
Uncertain tax positions are recorded on the basis of a two-step process whereby (1) it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority would be recognized.
Contractual Obligations
Our principal contractual obligations are limited to our obligations under our management agreement with our Parent and our brand contracts. We are not committed to any future capital expenditures and certain agreements, such as rental commitments, are the responsibility of our Parent.
We have no financial obligations under our consummated brand contracts other than certain indemnity obligations. We have evaluated the impact of these indemnity obligations on our financial statements and determined that they are not material individually or in the aggregate.
Kendall Wright Brand Contract
We must pay $3.125 million to Kendall Wright contingent upon our ability to obtain financing for the purchase price through the Fantex Series Professional Tracking Stock offering or another financing. We will have no further financial obligation to Kendall Wright under his brand contract once this payment has been made, other than certain indemnity obligations. We have evaluated the impact of these indemnity obligations on our financial statements and determined that they are not material. In February 2016, the Company and Kendall Wright mutually agreed to extend to May 1, 2016, the date by which either party could terminate the brand contract. As consideration for such extension, the Company paid Kendall Wright a non-refundable $100,000 advance. If the Company pays Kendall Wright the $3.125 million purchase price, the Company may apply the $100,000 advance against such purchase price.
Terrance Williams Brand Contract
We must pay $3.06 million to Terrance Williams contingent upon our ability to obtain financing for the purchase price through the Fantex Series Professional Tracking Stock offering or another financing. We will have no further financial obligation to Terrance Williams under his brand contract once this payment has been made, other than certain indemnity obligations. We have evaluated the impact of these indemnity obligations on our financial statements and determined that they are not material. In February 2016, the Company and Terrance Williams mutually agreed to extend to May 1, 2016, the date by which either party could terminate the brand contract. As consideration for such extension, the Company paid Terrance Williams a non-refundable $100,000 advance. If the Company pays Terrance Williams the $3.06 million purchase price, the Company may apply the $100,000 advance against such purchase price.
Ryan Shazier Brand Contract
We must pay $3.11 million to Ryan Shazier contingent upon our ability to obtain financing for the purchase price through the Fantex Series Professional Tracking Stock offering or another financing. We will have no further financial obligation to Ryan Shazier under his brand contract once this payment has been made, other than certain indemnity obligations. We have evaluated the impact of these indemnity obligations on our financial statements and determined that they are not material. In February 2016, the Company and Ryan Shazier mutually agreed to extend to May 1, 2016, the date by which either party could terminate the brand contract. As consideration for such extension, the Company paid Ryan Shazier a non-refundable $100,000 advance. If the Company pays Ryan Shazier the $3.11 million purchase price, the Company may apply the $100,000 advance against such purchase price.
Scott Langley Brand Contract
We must pay $3.06 million to Scott Langley contingent upon our ability to obtain financing for the purchase price through the Fantex Series Professional Tracking Stock offering or another financing. We will have no further financial obligation to Scott Langley under his brand contract once this payment has been made, other than certain indemnity obligations. We have evaluated the impact of these indemnity obligations on our financial statements and determined that they are not material.
Andrew Heaney Brand Contract
As of December 31, 2015, we had a contractual obligation to pay $3.34 million to Andrew Heaney contingent upon our ability to obtain financing for the purchase price through the Fantex Series Professional Tracking Stock offering or another financing. We have no further financial obligation to Andrew Heaney under his brand contract once this payment has been made, other than certain indemnity obligations. We have evaluated the impact of these indemnity obligations on our financial statements as of December 31, 2015 and determined that they are not material. On February 12, 2016, we consummated the Andrew Heaney brand contract. See Note 10, “Subsequent Events” in the Notes to Financial Statements, for further discussion of the purchase of this brand contract.
Management Agreement
We have entered into a management agreement with our Parent, pursuant to which our Parent provides us with management and administrative services, including providing and compensating our executive management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. We have agreed to pay our Parent 5% of the amount of the gross cash received by us, if any, pursuant to our brand contracts during any quarterly period as remuneration for the services provided. The amount of gross cash received used to calculate this 5% fee will include any portion allocated to a reduction of the carrying value on our financial statements but shall not take into account the changes in fair value of the brand contracts. As such, the service fee under the management agreement will be determined based on the total amount of cash received under the brand contracts in a given quarterly period prior to any adjustments for fair value and without regard to the expected cash receipts in such quarter as reflected in the financial statements for that quarter. To the extent we receive no cash for any period then we would not owe any fee for any services provided during that period. We may evaluate the service fee from time to time to assess the continued appropriateness of the percentage of our cash receipts upon which the service fee is calculated, in light of the services being provided by our Parent at the time and the cost of those services.
The agreement had an initial term through December 31, 2014, and was automatically renewed for one-year terms through December 31, 2016. It will continue to automatically renew for successive one-year terms each December 31 unless either party provides written notice of its intent not to renew at least three months prior to such renewal. We may also terminate any specific service and/or the agreement, without penalty, with 30 days prior written notice to Fantex Holdings. Fantex Holdings may terminate any specific service and/or the agreement with 180 days prior written notice to us, but if we, using our commercially reasonable efforts, are unable to either perform the services ourselves or enter into a reasonable arrangement with a third party to perform the services that we are unable perform ourselves, then Fantex Holdings will continue to perform such services for an additional period of 180 days.
The agreement contains certain provisions requiring us to indemnify our Parent with respect to all losses or damages arising from acts not constituting bad faith, willful misconduct, or gross negligence. We have evaluated the impact of these indemnity obligations on our financial statements and determined that they are remote. The management agreement became effective upon the consummation of our first initial public offering on April 28, 2014.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information required by this Item.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
Fantex, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Fantex, Inc.
We have audited the accompanying balance sheets of Fantex, Inc. (the "Company") as of December 31, 2015 and 2014, and the related statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the financial statements, certain expenses were paid by Fantex Holdings, Inc. (the “Parent”) and allocated to the Company based on the expenses incurred by the Company in its operations.
/s/ Deloitte & Touche LLP
San Francisco, California
March 10, 2016
FANTEX, INC.
Balance Sheets
See Accompanying Notes to Financial Statements.
FANTEX, INC.
Statements of Operations
See Accompanying Notes to Financial Statements.
			 		
FANTEX, INC.
Statements of Stockholders’ Equity
See Accompanying Notes to Financial Statements.
			 		
FANTEX, INC.
Statements of Cash Flows
See Accompanying Notes to Financial Statements.
			 		
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS
Nature of Operations-Fantex, Inc. (the “Company” or “Fantex”) was incorporated in Delaware in September 2012 and is a subsidiary of Fantex Holdings, Inc. (the “Parent”). Fantex has substantially relied on the Parent to date to conduct its operations.
Fantex is a brand acquisition, marketing and brand development company whose focus is on acquiring minority interests in the income associated with the brands of professional athletes (together with affiliated entities, the “Contract Party,” and collectively, the “Contract Parties”) and assisting such individuals in enhancing the reach and value of the brands the Company acquires. The business operates in a single segment and focuses on three core areas:
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evaluating, targeting and accessing individuals and brands with the potential to generate significant income associated with these brands (which is referred to as “brand income”);
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acquiring minority interests in such brand income (which is referred to as “Acquired Brand Income” or “ABI”); and
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assisting the acquired brands in increasing their value via technology and through leveraging Fantex’s marketing, advertising and strategic partnering expertise for endorsement and post career opportunities.
The Company currently relies on the Parent for management and operational capabilities while it continues to scale its operations. The Company will continue to rely on the Parent to conduct its operations until such time as the Company’s income and cash flows are sufficient to finance operations.
The Company operates under a management agreement with the Parent, pursuant to which Parent provides Fantex with management and administrative services, including providing and compensating the Company’s executive management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. The Company will begin to assume direct management and administrative responsibilities at such time in the future as the actual cost of these services is less than the service fee to the Parent.
All expenses except for the management fee incurred for the years ended December 31, 2015 and 2014 were paid by the Parent and allocated to Fantex based on the expenses incurred by Fantex in its operations. The allocations were based on the time spent by employees of the Parent on activities of Fantex and direct expenses incurred for the operations of Fantex. The expense allocations have been determined on the basis that Fantex and the Parent considered to be reasonable reflections of the utilization of services provided or the benefit received by Fantex. Management believes that the expenses allocated to Fantex are representative of the operating expenses it would have incurred had Fantex been operating on a stand-alone basis.
Certain Significant Risks and Uncertainties- The Company is an early stage start-up and as such has not yet been able to demonstrate the long term viability of its business model. The Company can be affected by a variety of factors. Management of the Company believes that the following areas represent some of the more significant risks that could have a significant negative effect on the Company in terms of its future financial position, results of operations or cash flows:
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The Company has incurred significant losses since its inception and anticipates that it will continue to incur losses in the foreseeable future.
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The Company has a limited operating history which may make it difficult for investors to evaluate the success of its business to date and to assess its future viability.
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The Company will need to obtain additional funding to acquire additional brands and the Company may also need additional funding to continue operations. There is no certainty the Company will be able to raise such additional funding.
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The Company’s principal source of cash flows for the foreseeable future will be derived from brand contracts, and with respect to brand contracts:
o
the Company has limited experience managing brand contracts and limited historical performance data about its brand contracts;
o
the Company does not have any rights to require the Contract Party to take any actions to attract, maintain or otherwise generate brand income;
o
brand income may decrease due to factors outside the control of the Contract Party, such as a decline in relative performance, injury, illness, medical condition or death of the Contract Party, or due to other factors such as public scandal or other reputational harm to the Contract Party;
o
the valuation of the Company’s brand contracts and expected ABI requires the Company to make material assumptions that may ultimately prove to be incorrect;
o
changes in government policy, legislation or regulatory interpretations could cause our business operations or offerings of tracking stocks to become subject to additional regulatory or legal requirements that may adversely affect our business operations and ability to offer additional tracking stocks; and
o
the leagues, team owners, players associations, endorsement partners, elected officials or others may take actions that could restrict the Company’s ability or make it more costly for the Company to enter into future brand contracts.
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The Company is dependent on the continued ability of the Parent to support operations until such time as the Company is capable of supporting its own operations.
Recent Accounting Pronouncements- In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires management of the Company to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of ASU 2014-15 on the financial statements The Company does not expect this standard to have an impact on the Company’s financial statements upon adoption.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09) “Revenue from Contracts with Customers.” ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In July 2015, the FASB deferred implementation of ASU 2014-09 by one year. Early adoption is not permitted. The Company is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on the financial statements but do not anticipate it to have a material effect on the Company’s financial position, results of operations or cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation-The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for all fiscal years presented and with the instructions to Form 10-K and Articles 8 of Regulation S-X.
Use of Estimates-The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported and disclosed in the financial
statements and the accompanying notes. On an ongoing basis, management will evaluate these estimates, including those related to accounts receivable, fair values of brand contracts, income taxes, and contingent liabilities, among others. Estimates will be based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from these estimates.
Cash and Cash Equivalents-Cash and cash equivalents include cash on hand, cash held in banks and highly liquid investments with original maturities at purchase of three months or less.
Income Taxes-Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements 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 effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The current and deferred tax expense is presented under the separate return method. Under the separate return method, Fantex calculates its tax provision as if it were filing a separate tax return.
Deferred tax assets are recorded to the extent management believes these assets will more likely than not be realized. In making such a determination, all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations is considered. In the event it is determined that the Company would be able to realize deferred tax assets in the future, an adjustment to the deferred tax asset valuation allowance would be made, which would reduce the provision for income taxes.
Uncertain tax positions are recorded on the basis of a two-step process whereby (1) it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority would be recognized.
Comprehensive Income-Total comprehensive income (loss) consists of net loss and other comprehensive income (loss). For the periods presented herein no adjustments were necessary to reconcile net loss to comprehensive income (loss).
Fair Value Option-The brand contracts represent a right to receive certain cash flows from the Contract Parties, and therefore, the brand contracts meet the definition of a financial asset under GAAP. As financial assets, the brand contracts are precluded from being accounted for as intangible assets. The Company has elected to adopt the fair value option to account for the brand contracts at fair value, with changes in fair value recognized in income (loss) from brand contracts in the statements of operations and presented as a separate line item. The Company believes that measurement of the brand contracts at fair value provides the most meaningful information to users of the financial statements, because the value of the brand contracts may increase or decrease over time based on future events. The Company believes that recognizing the change in fair value through net income or loss provides a better indicator of the performance of the brand contracts for a given period, enhances transparency, and is more in line with how the Company manages the risks of the brand contracts.
Fair Value of Financial Instruments-Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models may involve a significant level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:
·
Level 1-Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets generally included in this category are mutual funds.
·
Level 2-Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.
·
Level 3-Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The types of assets and liabilities generally included in this category are brand contracts.
A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.
The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company’s management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which the Company recognizes at the end of the reporting period.
Depending on the relative liquidity in the markets for certain assets, the Company may classify assets as Level 3 if it determines that observable quoted prices, obtained directly or indirectly, are not available. The Company has determined that all of its contracts should be classified as Level 3. The valuation models used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.
Investment in Brand Contracts, at Fair Value- Brand contracts, at estimated fair value, are initially valued at the transaction price and are subsequently valued using observable market prices, if available, or internally developed models in the absence of readily observable market prices. Valuation models are generally based on a discounted cash flow approach, in which various internal and external factors are considered. Factors include key financial inputs and recent transactions for comparable brands. The Company utilizes several unobservable pricing inputs and assumptions in determining the fair value of its Level 3 investments. Some of these assumptions include the risk free cost of capital, length of playing career, length of post-career, future rates of inflation in salaries and endorsement contracts, and amounts that can be potentially realized in the future such as unsigned playing and endorsement contracts. These unobservable pricing inputs and assumptions may differ by brand contract and in the application of the Company’s valuation methodologies. The reported fair value estimates could vary materially if the Company had chosen to incorporate different unobservable pricing inputs or other assumptions for applicable investments.
Valuation Process-The valuation process for the Company’s Level 3 measurements for assets and liabilities will be completed on no less than a quarterly basis, provided that the Company does not intend to update the on-field statistical performance data used in its valuation models, including those that are used to estimate career longevity and potential future playing contracts, more frequently than on an annual basis based on a full season of on-field statistical performance data, or at such time as there is a material event that the Company believes would have a long-term material impact on these estimates and the potential brand income resulting from these estimates. The valuation process is designed to subject the valuation of Level 3 investments, including the Company’s brand
contracts, to an appropriate level of consistency, oversight and review. The Company’s internal valuation professionals are responsible for estimating fair value based on various factors including:
·
current playing contract including: amounts, duration, incentive provisions, guaranteed portions, if any, termination and other important terms;
·
current endorsement contracts, if any, including amounts, duration, and contract terms;
·
age and health (including injuries) of the individual associated with the brand, duration of career to date and prospects for additional future contracts, both playing and endorsement;
·
potential future playing and endorsement contracts, including duration and value;
·
position and data specific to that position focused on estimating longevity of career;
·
reported contract value increases or decreases for other comparable players (by position and status they hold among their peers (e.g., All Pro, Most Valuable Player, franchise player and the like)) in order to estimate future contract values;
·
professional sports league imposed salary caps if appropriate; and
·
risk free cost of capital.
In addition, the Company considers a number of qualitative factors to develop estimates used in its models including:
·
the stated aspirations and goals of the Contract Party;
·
certain intangibles of the Contract Party, including media relationships, communication ability, “likeability,” demand as a product endorser, personal drive and ambition;
·
social footprint (for example, number of Twitter followers);
·
the market in which the Contract Party performs and how that may impact the number and amount of endorsement opportunities;
·
the reach of the brand of the Contract Party;
·
value of TV contracts and the rate of growth in those contracts; and
·
attendance trends in the Contract Party’s primary field of performance.
The Company considers all of these factors to estimate brand income for use in a discounted cash flow model. These estimates include amounts based on existing contracts as well as the Company’s estimates of amounts to be received for anticipated future contracts. With respect to existing contracts, the Company considers that certain amounts are reasonably assured of realization, but that most earnings from existing contracts depend on continued satisfactory performance. To determine the amount of the purchase price of a brand contract and a current fair value the Company applies discount rates to the estimates of earnings.
In general, the Company applies lower discount rates to amounts associated with existing contracts, particularly portions of those contracts that have a higher degree of certainty of payment, and higher discount rates to amounts associated with future potential earnings under existing contracts and to potential earnings under anticipated future contracts. Further, discount rates rise over time to reflect that uncertainty increases over time.
The Company’s internal valuation professionals document their considerations of this data that is then reviewed by management, including the Chief Executive Officer and Chief Financial Officer. The approved valuation is used to estimate the fair value of the brand contract. This valuation process is followed on no less than a quarterly basis to estimate the fair value of the brand contracts that are then in effect.
If the estimates of brand income prove to be too high and/or the discount rates used in the calculation prove to be too low, then the valuation of a brand contract may be too high which will result in the recording of a loss on the brand contract.
Income (Loss) From Brand Contracts- Income or loss is recognized based on the change in fair value of the brand contracts from period to period and receipts of payments or other consideration from the brand contracts. Other consideration received by the Contract Parties may include stock, automobiles, or other items of value. In the event other consideration are received by the Contract Party, the Company recognizes income from brand contracts equal to its proportionate share of the estimated fair value of the other consideration received, and will receive payment in either cash or such other consideration based on the contractual arrangement. Amounts due to the Company under the brand contract are either remitted directly from the source of such income or through payment by the Contract Party. The brand contract stipulates that income once we earn it is not subject to recapture by the Contract Party.
Cash received under the brand contracts will either be recognized as a reduction in carrying value (i.e., a reduction in the brand contract asset) or income (loss) from brand contracts. Whether cash receipts will be recognized as a reduction of carrying value or income (loss) from brand contracts will depend on the timing of such cash receipt.
Additionally, the timing of changes in the Company’s estimates of future cash flows will impact whether cash receipts are recognized as a reduction of carrying value or as income (loss) from brand contracts. If, for example, the Company increases the estimate of cash flows which are not received until a future period, this increase will be recognized as income from brand contracts. If, on the other hand, the cash flows are received in the current period and had not been estimated, the entire cash flow will be recognized as income from brand contracts.
Expected cash flows will be based on the included contracts the Contract Party has in place and the expectations of future contracts. As it becomes more likely that the Contract Party will collect contracted amounts the expected discount rate will decrease. A decrease in the discount rate will result in the receipt of cash primarily being allocated to reduction in carrying value. The discount rates are determined at the purchase date and are revised each period based on the performance of the brand and the likelihood of collection of future contracted amounts.
Income (loss) from brand contracts is based on an estimate of expected cash flows and the associated expected discount rates. Changes in fair value resulting from changes in the expected performance of the brand or market factors are included in income (loss) from brand contracts in the statements of operations.
3. TRACKING STOCKS
As of December 31, 2015, the Company had brand contracts in effect with each of the following contract parties and had created or intended to create a tracking stock related to these brand contracts:
(1)
The initial public offerings for these tracking stocks were completed prior to the date this Annual Report on Form 10-K was filed.
(2)
On December 3, 2015, the Company withdrew its previously filed registration statement for the tracking stock related to the brand contract of Fantex Series Kendall Wright.
(3)
The tracking stock related to the brand contract has not been created as of December 31, 2015. See Note 10, Subsequent Events for discussion of the registered offering under which the tracking stock related to the brand contract would be created.
(4)
On February 12, 2016, the Company consummated the brand contract with Andrew Heaney. The tracking stock related to the brand contract has not been created as of the date this Annual Report on Form 10-K was filed. See Note 10, Subsequent Events for further discussion of the purchase of this brand contract.
(5)
The tracking stock related to the brand contract has not been created as of December 31, 2015.
A tracking stock is a type of common stock that the issuing company intends to reflect or “track” the economic performance of a particular business or “group”, and in the Company’s case, the economic performance of the related brand contract, rather than the economic performance of the company as a whole. While the tracking stocks have separate collections of assets and liabilities attributed to them, no brand contract is a separate legal entity and therefore no brand contract can own assets, issue securities or enter into legally binding agreements.
Holders of tracking stocks have no direct claim to the attributed net assets of the tracking stock and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of Fantex, with a single board of directors and subject to all of the risks and liabilities of Fantex.
See Exhibit 99.1 to this Annual Report on Form 10-K for unaudited attributed financial information for Fantex’s tracking stocks that were publicly traded during the reporting period.
4. RELATED PARTY TRANSACTIONS
The Company will continue to rely on the Parent to conduct its operations until such time as the Company’s cash flows are sufficient to finance its operations. The Company operates under a management agreement with the Parent, pursuant to which the Parent provides Fantex with management and administrative services, including providing and compensating the Company’s executive management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. The Company will begin to assume direct management and administrative responsibilities at such time in the future as the actual cost of these
services is less than the service fee to the Parent, which is not anticipated to occur until the Company begins to generate significant cash flows from multiple brand contracts.
Under the terms of the management agreement, the Company has agreed to pay the Parent 5% of the amount of the gross cash received by the Company, if any, pursuant to the brand contracts during any quarterly period as remuneration for the services provided. The amount of gross cash received used to calculate this 5% fee will include any portion allocated to a reduction of the carrying value on the financial statements but shall not take into account the changes in fair value of the brand contracts. As such, the service fee under the management agreement will be determined based on the total amount of actual cash received under the brand contracts in a given quarterly period prior to any adjustments for fair value and without regard to the expected cash receipts in such quarter as reflected in the financial statements for that quarter. To the extent the Company receives no cash for any period then the Company would not owe any fee for any services provided during that period. The Company may evaluate the service fee from time to time to assess the continued appropriateness of the percentage of its cash receipts upon which the service fee is calculated, in light of the services being provided by the Parent at the time and the cost of those services.
The Company incurred management fee expenses pursuant to the management agreement of $63,214 and $52,492 for the years ended December 31, 2015 and 2014, respectively. The management fee is included in the total expenses of $4,098,843 and $4,051,221 for the years ended December 31, 2015 and 2014, respectively. The management fee represents a cash payment in lieu of an allocation from the Parent for the expenses to operate the Company.
All expenses (except the management fee expense incurred for the years ended December 31, 2015 and 2014) were paid by the Parent and allocated to Fantex based on the time spent by employees of the Parent on activities of Fantex, the number of full time equivalent employees performing Fantex activities and direct expenses incurred for the operations of Fantex. The expense allocations have been determined on the basis that Fantex and the Parent considered to be reasonable reflections of the utilization of services provided or the benefit received by Fantex and the methodology and assumptions made in the allocations have been consistently applied and are comparable in the periods presented. Management believes that the expenses allocated from the Parent to Fantex, together with the management fee payable by the Company to the Parent under the management agreement, are representative of the operating expenses Fantex would have incurred had it been operated on a stand-alone basis.
During the years ended December 31, 2015 and 2014, the Parent incurred and allocated to the Company $3,978,770 and $3,545,712, respectively, of expenses directly related to the operations of Fantex. The Company converted to capital all of the amounts that were allocated by the Parent to the Company for the years ended December 31, 2015 and 2014.
In 2013, the five independent directors of the Company were granted an aggregate of 100,000 non-qualified options under the Fantex Holdings, Inc. 2012 Equity Incentive Plan. These options were granted with an exercise price equal to the fair market value of the Parent’s common stock at the date of grant and have a 10-year contractual term. The stock options vest ratably over a four-year period. The fair market value of stock options is estimated using the Black-Scholes valuation model and the Company used the following methods to determine its underlying assumptions: expected volatilities are based on the historical volatilities of the daily closing price of the public common stock of companies believed comparable to the Parent; the expected term of options granted is based on the simplified method of using the mid-point between the vesting term and the original contractual term and/or average time outstanding method; the risk-free interest rate is based on the U.S. Treasury daily yield curve on the date of grant; and the expected dividend yield is based on the current dividend trend. Forfeitures are estimated at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company was allocated from the Parent $24,395 and $24,767 of stock compensation for the years ended December 31, 2015 and 2014, respectively. The key assumptions used by the Parent in the valuation model to value the stock option grants were:
The fair value of the options as computed under the Black-Scholes valuation model was calculated to be $0.967 per share. As of December 31, 2015 there are 38,809 shares and $37,701 of compensation expense to be expensed over the remaining 1.5-year vesting period.
Certain offering expenses have been paid by the Parent relating to securities offerings, and those costs will remain the liability of the Parent. The Parent will not seek to recapture these expenses from the Company. The following table summarizes the related party transactions involving the initial public offerings completed since January 1, 2014 until December 31, 2015 which were underwritten by the Company’s affiliated broker-dealer, Fantex Brokerage Services, LLC.
(1)
Paid as compensation to Fantex Brokerage Services, LLC, an affiliated broker-dealer.
(2)
As of December 31, 2015, the Parent and the Parent’s directors hold the indicated positions in the tracking stocks. The Parent and the Parent’s directors are precluded from selling their positions in the tracking stocks within 180 days of effectiveness of the offering and unless it is done through a registered public offering.
(3)
Includes 34,414 shares of Fantex Series Alshon Jeffery, 18,000 shares of Fantex Series Michael Brockers and 13,400 shares of Fantex Series Jack Mewhort owned by Lily Beirne, the spouse of David Beirne, the Chairman of our Parent’s Board of Directors.
On February 12, 2016 the Company borrowed $3,300,000 from its Parent under a promissory note bearing interest at 8% per annum to consummate the Andrew Heaney brand contract. The Company will repay this promissory note upon the earlier of five days following the successful initial public offering of a security linked to the Andrew Heaney brand contract or August 12, 2016. See Note 10, Subsequent Events for further discussion of the purchase of this brand contract.
5. INVESTMENT IN BRAND CONTRACT, AT FAIR VALUE
Brand contracts, at fair value, are initially valued at the transaction price. As of December 31, 2015, the Company’s brand contracts are considered Level 3 investments because there are no reliable observable market prices for these investments. The Company employs discounted cash flow valuation models that depend on several observable and unobservable pricing inputs and assumptions in determining fair value for Level 3 investments, including: the risk free cost of capital, length of playing career, length of post career, future rates of inflation in salaries and endorsement contracts, and projections of amounts that may be realized through future playing and endorsement contracts. These unobservable pricing inputs and assumptions may differ by brand contract and in the application of the Company’s valuation methodologies. The reported fair value estimates could vary materially if the
Company had chosen to incorporate different unobservable pricing inputs or other assumptions for applicable investments.
The Company generally considers three categories of potential brand income:
·
Category A-Potential brand income related to the portions of existing contracts that have a higher degree of certainty of payment, such as brand income that is very near-term or that is guaranteed under existing included contracts.
·
Category B-Potential brand income related to the portions of existing contracts that have a lesser degree of certainty of payment, such as brand income that is payable pursuant to existing included contracts but that depends on longer-term continued satisfactory performance of the contract party.
·
Category C-Potential brand income related to anticipated future contracts, such as future endorsements, playing contracts and/or additional brand income generated from coaching, broadcasting or the like.
As of December 31, 2015 the Company had six brand contracts that are generating income and subject to fair value measurement. The following describes the valuation methodology and significant unobservable inputs used for these brand contracts that is categorized within Level 3 of the fair value hierarchy at December 31, 2015 and 2014.
Discount Rates
In determining the fair value of the Company’s brand contracts as of December 31, 2015 and 2014, the Company used discount rates ranging from 4.5% to 20.0%, which the Company believes adequately address the uncertainty inherent in its estimates.
Career Length
To determine a Contract Party’s expected career length for the brand contracts, the Company’s valuation professionals used proprietary valuation models. Using statistical analysis, the Company’s valuation professionals determined a set of players that were comparable in caliber to the Contract Party and, based on the career lengths of the players in the data set, arrived at an estimated career length for the Contract Party.
Player Contract Values
In estimating the value of the future player contracts for Contract Parties, the Company reviewed the contracts for players in the professional sport, retired or active, who are of similar caliber to the applicable Contract Party, who have entered into contracts in a similar era, and who are or were at similar ages and stages in their careers at which the applicable Contract Party is expected to enter into additional player contracts. The values of such contracts are adjusted for inflation to better predict the contract values of any future player contracts.
Level 3 Assets
The Investments in Brand Contracts at fair value was determined to be $17,758,372 and $7,221,182 as of December 31, 2015 and 2014, respectively.
The following tables present additional data about our Level 3 assets measured at fair value. Brand contracts which represent a significant asset concentration as of December 31, 2015 are separately presented. Both observable and unobservable inputs may be used to determine the fair value of the contract within the Level 3 category. As a result, unrealized gains and losses for assets and liabilities within the Level 3 category may include changes in the fair value that were attributable to both observable and unobservable inputs. Changes in Level 3 assets measured at fair value for the year ended December 31, 2015 were as follows:
(1)
In February 2016, Alshon Jeffery received a franchise player tag. See Note 10, Subsequent Events for further discussion.
The Company’s measurements of changes to the fair value of brand contracts began in the quarter ended June 30, 2014. Changes in Level 3 assets measured at fair value for the year ended December 31, 2014 were as follows:
Following are the circumstances under which gains and losses are recognized:
·
Realized gains result from the collection of cash in the current period.
·
Realized losses result from cash that was previously expected to be received that is no longer expected to be received.
·
Unrealized gains are primarily a result of the passage of time bringing future cash flows closer to the present, which increases the present value of those cash flows.
·
Unrealized losses are primarily a result of changes in the timing of estimated cash flows from one period to a subsequent period or decreases in the estimated amounts of future cash flows.
Balances in the “Receivable from Contract Party” column represent amounts paid to the Contract Party but have not yet been remitted to the Company under the brand contract. Amounts are shown on the Balance Sheets as “Receivable from Contract Parties”. Once collected by the Company, these amounts are shown in the “Payments on Brand Contracts” column in the tables above.
On May 2, 2014, the Company paid $4,000,000 as consideration for future payments under the Vernon Davis Brand Contract.
On July 25, 2014, the Company paid $4,975,000 as consideration for future payments under the EJ Manuel Brand Contract.
On November 3, 2014, the Company paid $1,560,000 as consideration for future payments under the Mohamed Sanu Brand Contract.
On March 19, 2015, the Company paid $7,940,000 as consideration for future payments as defined under the Alshon Jeffery Brand Contract.
On June 2, 2015, the Company paid $3,440,000 as consideration for future payments as defined under the Michael Brockers Brand Contract.
On July 15, 2015, the Company paid $2,520,000 as consideration for future payments as defined under the Jack Mewhort Brand Contract.
The significant unobservable inputs used in the fair value measurement of the Company’s brand contracts are discount rates, career length, and comparable NFL contract values. The following table summarizes the general effects of changes in these inputs on the fair value of the brand contact and the range and weighted average of the inputs:
6. INCOME TAXES
For the years ended December 31, 2015 and 2014, no income tax expense or benefit was recognized.
Deferred tax assets consisted of the following:
Because of the Company’s limited operating history and cumulative loss, management believes it is more likely than not that the remaining deferred tax asset will not be realized. Therefore, the Company provided a full valuation allowance of $6,998,000 and 4,465,000 against the deferred tax asset as of December 31, 2015 and December 31, 2014, respectively. The federal statutory income tax rate of 35% is offset by the valuation allowance to reconcile to the effective income tax rate of 0%.
As of December 31, 2015 the Company has federal and state income tax net operating loss carryforwards of $5,142,000 and 1,178,000 respectively, which will expire at various dates from 2032 through 2035. Such net operating loss carryforwards will expire as follows:
The Company adopted a policy to classify accrued interest and penalties as part of the accrued liability for uncertain tax positions, if any, in the provision for income taxes. No accrued interest or penalties were recorded as of December 31, 2015 or December 31, 2014. The Company does not anticipate any significant changes to the unrecognized tax benefits within 12 months of this reporting date.
The Company files income tax returns in federal and state jurisdictions. At December 31, 2015 and December 31, 2014, all tax years were open and may be subject to potential examination in one or more jurisdictions. There are no ongoing examinations by taxing authorities at this time.
7. EARNINGS PER SHARE
Income (Loss) per share-The Company computes net income (loss) per share of its platform common stock and tracking stocks using the two-class method in the financial statements. Basic income (loss) per share (“Basic EPS”) excludes dilution and is computed by dividing net loss by the weighted average number of shares outstanding for the period. The Company has no potentially dilutive common share options or unvested restricted common shares.
As of December 31, 2015, the Company's capital structure consists of seven series of common stocks as listed on the Company’s Balance Sheets in this Annual Report on Form 10-K. In accordance with the Company's management and attribution policies, the Company attributes assets, liabilities, income and expenses to its tracking stocks to reflect or "track" the economic performance of the associated brand contract, as defined below. Accordingly, the Company attributed 95% of the ABI from the brand contracts to the associated tracking stock and expenses directly attributable to those tracking stocks, such as promotional and marketing-related expenses. The Company also assigns a share of its general liabilities and expenses, such as the management fee from our Parent, to the tracking stocks. See Note 3 for additional discussion of tracking stocks.
The following table shows the calculation of net income (loss) for the platform common stock and the six tracking stocks for the year ended December 31, 2015:
The following table show the calculation of net income (loss) for the platform common stock and the three tracking stocks for the year ended December 31, 2014. The Company’s tracking stock attribution started in the quarter ended June 30, 2014. Prior to this, all costs were attributed solely to the Platform Common Stock.
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
						
(1)
In accordance with the Company's management and attribution policies, 5% of the income from a brand contract is attributed to the Platform Common Stock with the remaining 95% attributed to the associated tracking stock.
(2)
Pursuant to the management agreement with its Parent, the management fee is calculated as 5% of the cash receipts from the brand contracts during the relevant periods.
(3)
Attributed income also includes income from other investments.
During the years ended December 31, 2015 and 2014, the Company collected cash and attributed the management fee per the tables below. There were no management fees charged to the Company from its Parent prior to April 28, 2014.
The total management fee is included in the direct expenses of the Platform Common Stock.
8. STOCKHOLDERS’ EQUITY
On April 28, 2014, the Company completed the initial public offering of 421,100 shares of Fantex Series Vernon Davis, raising gross proceeds of $4,211,000.
On July 21, 2014, the Company completed the initial public offering of 523,700 shares of Fantex Series EJ Manuel, raising gross proceeds of $5,237,000.
On August 18, 2014, the Company paid a previously declared cash dividend of $0.70 per share to the holders of record of Fantex Series Vernon Davis as of the close of business on August 15, 2014.
On November 3, 2014, the Company completed the initial public offering of 164,300 shares of Fantex Series Mohamed Sanu, raising gross proceeds of $1,643,000.
On November 26, 2014, the Company paid a previously declared cash dividend of $0.30 per share to the holders of record of Fantex Series Vernon Davis as of the close of business on November 25, 2014.
On March 19, 2015, the Company completed the initial public offering of 835,800 shares of Fantex Series Alshon Jeffery, raising gross proceeds of $8,358,000.
On April 28, 2015, the Company paid a previously declared cash dividend of $0.50 per share to the holders of record of Fantex Series Vernon Davis as of the close of business on April 24, 2015.
On May 29, 2015, the Company completed the initial public offering of 362,200 shares of Fantex Series Michael Brockers, raising gross proceeds of $3,622,000.
On July 14, 2015, the Company completed the initial public offering of 268,100 shares of Fantex Series Jack Mewhort, raising gross proceeds of $2,681,000.
On July 30, 2015 the Company paid a previously declared cash dividend of $0.20 per share to the holders of record of Fantex Series Mohamed Sanu as of the close of business on June 30, 2015.
The holders of the Company’s Platform Common Stock and each series of the Company’s common stock are entitled to one vote per share. Each series of common stock will vote together as a single class with all other series of common stock, unless otherwise required by law. Delaware law would require holders of a series of stock to vote separately as a single class if the Company were to seek to amend its certificate of incorporation so as to alter or change the powers, preferences or special rights of one or more series of a class of stock in a manner that adversely affects the holders of such series of stock, but does not so affect the entire class. In such a case, the holders of the affected series would be required to vote separately to approve the proposed amendment.
At any time following the two-year anniversary of the filing of a certificate of designations creating a new tracking stock, the Company’s Board of Directors may resolve to convert such tracking stock into fully paid and non-assessable shares of the Platform Common Stock at a conversion ratio to be determined by dividing the fair value of a share of such tracking stock by the fair value of a share of the Company’s Platform Common Stock.
The Company’s Board of Directors is permitted, but not required, to declare and pay dividends on the Company’s Platform Common Stock or any of the Company’s tracking stocks in an amount up to the “available dividend amount” for the applicable series, to the extent permitted by the Delaware General Corporation Law. If the Company’s board of directors pays dividends on its Platform Common Stock or any series of the Company’s common stock, holders of Units will receive payments in an amount equal to their proportionate interest in shares of such series of the Company’s common stock or Platform Common Stock.
The amount and timing of distributions to the Company’s common stockholders is determined by the Company’s board of directors and is based upon a review of various factors including current market conditions, the Company’s liquidity needs, legal and contractual restrictions on the payment of distributions. To the extent permitted by the General Corporation Law of the State of Delaware, and provided that such dividends are not expected to have a material adverse impact on the Company’s liquidity or capital resources. The available dividend amount for any tracking stock is, as of any particular date, an amount equal to the lesser of (a) total assets of the Company legally available for the payment of dividends under Delaware law and (b) an amount equal to (i) the excess of the total assets attributed to the applicable tracking stock over the total liabilities attributed to such tracking stock, less the par value of the outstanding shares of such tracking stock; or (ii) if there is no such excess, the attributable income of the tracking stock for the fiscal year in which the dividend is being declared and/or the preceding fiscal year. The available dividend amount for the Company’s Platform Common Stock is as of any date an amount equal to the amount of the Company’s total assets legally available for the payment of dividends under Delaware law, less the aggregate amount of the “available dividend amount” for all of the Company’s then outstanding tracking stocks.
The Company’s Board of Directors may change its dividend policy at any time and from time to time, and the Company may retain some or all available funds and future income to support its operations and finance the growth and development of its business as well as, in some circumstances, invest some of the available funds
attributed to a series to further enhance that series’ associated brand, exercise a co-investment right pursuant to the Company’s brand contract with the brand, or acquire additional ABI in the associated brand if the Company believes that those would be more productive uses of some or all of the available funds. However, the Company’s Board of Directors will not in any event change the definition of “available dividend amount” for any series of the Company’s common stock or declare dividends on any series of its common stock in excess of the “available dividend amount” for that series. The Company’s Board of Directors has discretion to declare a dividend on any series of common stock without declaring a dividend on any other series of our common stock. In general, the Company’s Board of Directors does not expect to declare dividends on any series of common stock in an amount greater than the attributed cash on hand for such series.
9. COMMITMENTS AND CONTINGENCIES
On March 26, 2015, Fantex entered into a brand contract with Kendall Wright (the “Kendall Wright Brand Contract”), a professional football player in the NFL. This brand contract entitles Fantex to receive 10% of Kendall Wright’s brand income after December 1, 2014. As consideration for the ABI under the brand contract, Fantex will pay Kendall Wright a one-time cash amount of $3.125 million contingent upon the Company’s ability to obtain financing for the purchase price. Fantex will have no further financial obligations to Kendall Wright under the brand contract once this payment is made, if at all, other than certain obligations to indemnify Kendall Wright. According to the terms of the Kendall Wright Brand Contract, Kendall Wright is not obligated to make payments to Fantex until the upfront payment is made by Fantex to him. As such, as of December 31, 2015, there was no required payment due to Fantex by Kendall Wright. The Company’s ABI under the brand contract is contingent upon the Company’s payment of the purchase price. In February 2016, the Company and Kendall Wright mutually agreed to extend to May 1, 2016, the date by which either party could terminate the brand contract. As consideration for such extension, the Company paid Kendall Wright a non-refundable $100,000 advance. If the Company pays Kendall Wright the $3.125 million purchase price, the Company may apply the $100,000 advance against such purchase price.
On September 10, 2015, Fantex entered into a brand contract with Andrew Heaney (the “Andrew Heaney Brand Contract”), a professional baseball player in Major League Baseball. This brand contract entitles Fantex to receive 10% of Andrew Heaney’s brand income after January 1, 2015. As consideration for the ABI under the brand contract, Fantex will pay Andrew Heaney a one-time cash amount of $3.34 million contingent upon the Company’s ability to obtain financing for the purchase price. Fantex will have no further financial obligations to Andrew Heaney under the brand contract once this payment is made, if at all, other than certain obligations to indemnify Andrew Heaney. According to the terms of the Andrew Heaney Brand Contract, Andrew Heaney is not obligated to make payments to Fantex until the upfront payment is made by Fantex to him. As such, as of December 31, 2015, there was no required payment due to Fantex by Andrew Heaney. The Company’s ABI under the brand contract is contingent upon the Company’s payment of the purchase price. On February 12, 2016, the Company consummated the Andrew Heaney brand contract. See Note 10, Subsequent Events for further discussion of the purchase of this brand contract.
On September 17, 2015, Fantex entered into a brand contract with Terrance Williams (the “Terrance Williams Brand Contract”), a professional football player in the NFL. This brand contract entitles Fantex to receive 10% of Terrance Williams brand income after February 1, 2015. As consideration for the ABI under the brand contract, Fantex will pay Terrance Williams a one-time cash amount of $3.06 million contingent upon the Company’s ability to obtain financing for the purchase price. Fantex will have no further financial obligations to Terrance Williams under the brand contract once this payment is made, if at all, other than certain obligations to indemnify Terrance Williams. According to the terms of the Terrance Williams Brand Contract, Terrance Williams is not obligated to make payments to Fantex until the upfront payment is made by Fantex to him. As such, as of December 31, 2015, there was no required payment due to Fantex by Terrance Williams. The Company’s ABI under the brand contract is contingent upon the Company’s payment of the purchase price. In February 2016, the Company and Terrance Williams mutually agreed to extend to May 1, 2016, the date by which either party could terminate the brand contract. As consideration for such extension, the Company paid Terrance Williams a non-refundable $100,000 advance. If the Company pays Terrance Williams the $3.06 million purchase price, the Company may apply the $100,000 advance against such purchase price.
On September 23, 2015, Fantex entered into a brand contract with Ryan Shazier (the “Ryan Shazier Brand Contract”), a professional football player in the NFL. This brand contract entitles Fantex to receive 10% of Ryan Shazier’s brand income after September 1, 2015. As consideration for the ABI under the brand contract, Fantex will pay Ryan Shazier a one-time cash amount of $3.11 million contingent upon the Company’s ability to obtain financing for the purchase price. Fantex will have no further financial obligations to Ryan Shazier under the brand contract once this payment is made, if at all, other than certain obligations to indemnify Ryan Shazier. According to the terms of the Ryan Shazier Brand Contract, Ryan Shazier is not obligated to make payments to Fantex until the upfront payment is made by Fantex to him. As such, as of December 31, 2015, there no required payment due to Fantex by Ryan Shazier. The Company’s ABI under the brand contract is contingent upon the Company’s payment of the purchase price. In February 2016, the Company and Ryan Shazier mutually agreed to extend to May 1, 2016, the date by which either party could terminate the brand contract. As consideration for such extension, the Company paid Ryan Shazier a non-refundable $100,000 advance. If the Company pays Ryan Shazier the $3.11 million purchase price, the Company may apply the $100,000 advance against such purchase price.
On December 23, 2015, Fantex entered into a brand contract with Scott Langley (the “Scott Langley Brand Contract”), a professional golfer. This brand contract entitles Fantex to receive 15% of Scott Langley’s brand income after October 25, 2015. As consideration for the ABI under the brand contract, Fantex will pay Scott Langley a one-time cash amount of $3.06 million contingent upon the Company’s ability to obtain financing for the purchase price. Fantex will have no further financial obligations to Scott Langley under the brand contract once this payment is made, if at all, other than certain obligations to indemnify Scott Langley. According to the terms of the Scott Langley Brand Contract, Scott Langley is not obligated to make payments to Fantex until the upfront payment is made by Fantex to him. Therefore there is no amount due from Scott Langley as of December 31, 2015. The Company’s ABI under the brand contract is contingent upon the Company’s payment of the purchase price.
10. SUBSEQUENT EVENTS
Financing and Consummation of the Andrew Heaney Brand Contract
On February 12, 2016 the Company borrowed $3,300,000 from its Parent under a promissory note bearing interest at 8% per annum to consummate the Andrew Heaney brand contract. The Company will repay this promissory note upon the earlier of five days following the successful initial public offering of a security linked to the Andrew Heaney brand contract or August 12, 2016.
On February 12, 2016, the Company used the proceeds from the promissory note and paid $3,340,000 (less $167,000 held in escrow until six consecutive months of payment of brand amounts have been timely delivered to the Company) purchase price to consummate the Andrew Heaney brand contract. Andrew Heaney paid to the Company $33,459 due under the terms of the Andrew Heaney brand contract for the period from January 1, 2015 through February 12, 2016. The security linked to the Andrew Heaney brand contract has not been created.
Registered Offering
On November 24, 2015, the Company filed a Form S-1 Registration Statement to offer a minimum of 1,984,000 Fantex Sports Portfolio 1 Units and a maximum of 2,182,400 Fantex Sports Portfolio 1 Units, if the Underwriters’ option to purchase additional Units is exercised in full. On January 13, 2016, the Company filed Amendment No. 1 to this Form S-1. This Form S-1 is not effective as of the date this Annual Report on Form 10-K was filed.
The Company expects the initial public offering price of the Units to be between $12.00 and $14.00 per Unit. The total proceeds from the aggregate offering price of the Units would be $25.8 million, or $28.4 million if the Underwriters’ option to purchase additional Units is exercised in full. The Units consist of 93,140 shares of Fantex Series Vernon Davis, 252,667 shares of Fantex Series EJ Manuel, 80,331 shares of Fantex Series Mohamed Sanu, 549,085 shares of Fantex Series Alshon Jeffery, 232,630 shares of Fantex Series Michael Brockers and 175,940 shares of Fantex Series Jack Mewhort. The Units also consist of Fantex Series Professional Sports which consists of the brand contracts of Kendall Wright, Andrew Heaney, Terrance Williams and Ryan Shazier. If the Underwriters’ option to purchase additional Units is exercised in full, the Units would consist of 102,454 shares of
Fantex Series Vernon Davis, 277,934 shares of Fantex Series EJ Manuel, 88,365 shares of Fantex Series Mohamed Sanu, 603,994 shares of Fantex Series Alshon Jeffery, 255,893 shares of Fantex Series Michael Brockers and 193,534 shares of Fantex Series Jack Mewhort.
Franchise Player Tag on Alshon Jeffery
On February 26, 2016, the Chicago Bears placed a non-exclusive franchise player tag on Alshon Jeffery which prevents him from becoming an unrestricted free agent for the 2016 NFL season and will pay him a guaranteed salary for the 2016 NFL season of $14.6 million. Alshon Jeffery may still negotiate a long-term contract until July 15, 2016.
Statements of Cash Receipts from Included Contracts Subject to the Brand Agreement between Fantex, Inc. and Alshon Jeffery and his affiliate Ben and Jeffery, Inc. dated September 18, 2014
The accompanying Statements of Cash Receipts from Included Contracts Subject to the Brand Agreement between Fantex, Inc. ("Fantex") and Alshon Jeffery and his affiliate Ben and Jeffery, Inc. (together, the "Contract Party") dated September 18, 2014 (the "Brand Contract"), present the cash or other consideration received by the Contract Party from included contracts subject to the Brand Contract for the years ended December 31, 2015 and 2014.
These Statements of Cash Receipts from Included Contracts reflect the historical cash receipts of the Contract Party that would have been subject to the Brand Contract with Fantex had the Brand Contract been in place beginning January 1, 2014. The Statements of Cash Receipts from Included Contracts reflect the gross amount received by the Contract Party subject to the Brand Contract. Had the Brand Contract been in place beginning January 1, 2014, and subject to the following consideration regarding expired contracts, Fantex would have been entitled to receive 13% of the gross amount received by the Contract Party. The Statements of Cash Receipts from Included Contracts do not reflect earnings of the Contract Party under contracts that had expired and not been renewed as of the signing date of the Brand Contract, as it is not possible to determine if the Contract Party would have excluded these contracts from the Brand Contract. The amounts reflected in the Statements of Cash Receipts from Included Contracts are not necessarily indicative of future cash receipts that will be subject to the Brand Contract.
Investors in the Fantex Series Alshon Jeffery Convertible Tracking Stock, par value of $0.0001 (the “Fantex Series Alshon Jeffery”) are investing in Fantex and not in the Alshon Jeffery Brand Contract or Alshon Jeffery. However, Fantex Series Alshon Jeffery is intended to track and reflect the separate economic performance of the assets to be attributed to the Alshon Jeffery Brand. Only Fantex will have rights under the Brand Contract and recourse against Alshon Jeffery.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Fantex, Inc.:
We have audited the accompanying Statements of Cash Receipts from Included Contracts Subject to the Brand Agreement between Fantex, Inc. (“Fantex”) and Alshon Jeffery and his affiliate Ben and Jeffery, Inc. (together “the Contract Party”) dated September 18, 2014 (the “Brand Contract”), for the years ended December 31, 2015 and 2014 (“Statements of Cash Receipts from Included Contracts”). These Statements of Cash Receipts from Included Contracts are the responsibility of Fantex’s management. Our responsibility is to express an opinion on these Statements of Cash Receipts from Included Contracts based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Statements of Cash Receipts from Included Contracts are free of material misstatement. Fantex is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as it relates to the Statements of Cash Receipts from Included Contracts. Our audits included consideration of internal control over financial reporting as it relates to the Statements of Cash Receipts from Included Contracts as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Fantex’s internal control over financial reporting as it relates to the Statements of Cash Receipts from Included Contracts. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the Statements of Cash Receipts from Included Contracts, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the Statements of Cash Receipts from Included Contracts. We believe that our audits provide a reasonable basis for our opinion.
The accompanying Statements of Cash Receipts from Included Contracts were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission. As discussed in Note 1 to the Statements of Cash Receipts from Included Contracts, the statements are not intended to be a complete presentation of the Contract Party’s cash receipts. Further, Fantex’s interest in the Contract Party cash receipts from included contracts, as defined in Note 2 to the Statements of Cash Receipts from Included Contracts, commenced on the effective date of the Brand Contract, March 19, 2015.
In our opinion, the Statements of Cash Receipts from Included Contracts referred to above present fairly, in all material respects, the cash receipts from included contracts subject to the Brand Contract for the years ended December 31, 2015 and 2014, in accordance with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
San Francisco, California
March 10, 2016
Statements of Cash Receipts from Included Contracts Subject to the Brand Agreement between Fantex, Inc. and Alshon Jeffery and his affiliate Ben and Jeffery, Inc. dated September 18, 2014
(Amounts in thousands)
The notes are an integral part of these statements
Notes to Statements of Cash Receipts from Included Contracts Subject to the Brand Agreement between Fantex, Inc. and Alshon Jeffery and his affiliate Ben and Jeffery, Inc. dated September 18, 2014
Note 1. Basis of Presentation
The accompanying Statements of Cash Receipts from Included Contracts Subject to the Brand Agreement between Fantex, Inc. (“Fantex”) and Alshon Jeffery and his affiliate Ben and Jeffery, Inc. (together the “Contract Party”) dated September 18, 2014 (the “Brand Contract”), present the cash or other consideration received by the Contract Party from included contracts (see Note 2) subject to the Brand Contract for the years ended December 31, 2015 and 2014 (the “Statements of Cash Receipts from Included Contracts”).
The Brand Contract entitles Fantex to 13% of the Contract Party’s cash or other considerations received from included contracts from the effective date of the Brand Contract and cash or other consideration received from future contracts resulting from certain activities of the Contract Party (“acquired brand income” or “ABI”). These certain activities, defined under the terms of the Brand Contract as the “Field,” include activities in or substantially related to being a football player, broadcasting, coaching, motion pictures, television, radio, music, literary, talent engagements, personal appearances, public appearances in places of amusement and entertainment, records and recording, publications, and the use or license of Contract Party’s name, voice, likeness, biography or talents for purposes of advertising and trade, including without limitation sponsorships, endorsements and appearances, and any other activities in which Contract Party uses or licenses its name, likeness or reputation to generate cash or other consideration received, unless such activities are specifically excluded by the Brand Contract. In the event that there is any ambiguity as to whether an activity is in the Field, Fantex and the Contract Party shall discuss in good faith to consider whether such activity is of the type typically performed by the Contract Party in the principal business (such activities may include sports casting, coaching, acting as spokesperson, etc.). If a resolution is not reached within 30 days from the initial discussions Fantex or the Contract Party may remit the matter to arbitration.
These Statements of Cash Receipts from Included Contracts reflect the historical cash receipts of the Contract Party that would have been subject to the Brand Contract with Fantex had the Brand Contract been in place beginning January 1, 2014. The Statements of Cash Receipts from Included Contracts reflect the gross amount received by the Contract Party subject to the Brand Contract. Had the Brand Contract been in place beginning January 1, 2014, and subject to the following consideration regarding expired contracts, Fantex would have been entitled to receive 13% of the gross amount received by the Contract Party. The Statements of Cash Receipts from Included Contracts do not reflect earnings of the Contract Party under contracts that had expired and not been renewed as of the signing date of the Brand Contract, as it is not possible to determine if the Contract Party would have excluded these contracts from the Brand Contract.
The Brand Contract became effective March 19, 2015 with the successful acquisition of financing, which Fantex acquired by conducting a registered public offering (“Offering”) of tracking stock intended to track and reflect the separate economic performance of the assets to be attributed to the Alshon Jeffery Brand. On March 19, 2015 as consideration for future ABI under the Alshon Jeffery Brand Contract, Fantex paid Alshon Jeffery $7.94 million (less $397,000 which was held in escrow until six months of consecutive payments of brand amounts were timely delivered to Fantex) less ABI due to the Company under the Alshon Jeffery Brand Contract for the period between September 18, 2014 and March 19, 2015.
These Statements of Cash Receipts from Included Contracts were prepared from the historical records of the Contract Party and are not intended to be a complete presentation of the Contract Party’s cash receipts. Cash receipts are only earned by Fantex under the Brand Contract subsequent to the effective date of the Brand Contract. In the event the Contract Party does not receive cash or other consideration, no amounts are due to Fantex. The Statements of Cash Receipts from Included Contracts are presented in accordance with accounting principles generally accepted in the United States of America.
Note 2. Summary of Significant Accounting Policies
Contractual National Football League (NFL) player receipts-These receipts are recorded based on the cash received by the Contract Party for being on the roster for NFL games, paid on a weekly or bi-weekly basis throughout the season.
Contractual NFL signing bonus receipts-These receipts are recorded based on the cash received for the signing of the Contract Party's NFL player contract, paid on multiple dates as set forth in the NFL contract.
Contractual NFL post regular season receipts-These receipts are recorded based on the cash received for participation in post season games and awards (e.g. Pro Bowl).
Contractual NFL player performance incentives receipts-These receipts are recorded based on the cash received from the Contract Party’s NFL contract and the player performance bonus under Article 28 of the CBA. The player performance bonus is calculated annually and varies every year based on a comparison of playing time to salary.
Receipts from other included contracts-These receipts are recorded based on the cash, or other consideration received from the Contract Party's other contracts subject to the Brand Contract, such as endorsements and cash received from NFL Players, Inc. for licensing the image and likeness of the Contract Party.
Included Contracts-Included contracts are those that are effective upon the date that the Brand Contract was executed by Fantex and the Contract Party and that are included in the Brand Contract. For contracts that existed at the signing on September 18, 2014 of the Brand Contract that are renewals of previous contracts with the same counterparty, those prior contracts, which relate to periods prior to the signing of the Brand Contract, have been considered included contracts.
Note 3. Subsequent Events
Fantex has evaluated activity after December 31, 2015. Fantex is not aware of any events that have occurred subsequent to December 31, 2015 that would require adjustments to or disclosures in the Statements of Cash Receipts from Included Contracts
ITEM 9.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
ITEM 9A.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our chief executive officer and chief financial officer concluded that, as of December 31, 2015, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2015 using the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") (2013 framework). Based on our evaluation, management has concluded that we maintained effective control over financial reporting as of December 31, 2015 based on the COSO criteria.
Attestation Report on Internal Control over Financial Reporting
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to the deferral allowed under the JOBS Act for emerging growth companies.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. Other Information
We have elected to include the following information in this Form 10-K in lieu of reporting it in a separately filed Form 8-K. This information would otherwise have been reported in a Form 8-K under the heading “Item 1.01 Entry into a Material Definitive Agreement.”
Promissory Note with Fantex Holdings, Inc.
On February 12, 2016, the Company issued a promissory note (the “Promissory Note”) in favor of Fantex Holdings, Inc. (the “Parent”) in the principal amount of $3,300,000. This Promissory Note was issued in connection with the consummation of the Andrew Heaney Brand Contract. The Promissory Note bears interest at 8% per annum. The maturity date of the Promissory Note is the earlier of five days following the successful initial public offering of the tracking stock, which is linked to the Andrew Heaney brand contract, or August 12, 2016. The foregoing summary of the promissory note does not purport to be complete and is qualified in its entirety by reference to the actual promissory note, a copy of which is filed as Exhibit 10.30 hereto and is incorporated by reference herein.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
(a)
Board of Directors
(1)
The term on the board of directors will continue in office until the annual meeting of stockholders in the year indicated.
Board of Directors Biographical Information
Cornell “Buck” French has served as a member of our board of directors and Chief Executive Officer since our founding in September 2012. Mr. French has also served as the Chief Executive Officer and a director of our parent, Fantex Holdings, since its inception in September 2012. From 2009 to December 2011, Mr. French was Chief Executive Officer of Promethyan Labs, a privately-held incubator for entrepreneurs, which he also co-founded. Mr. French served as the President, CEO and Chairman of Securify, Inc., a privately-held security monitoring and internal control solution provider, from 2004 to 2008, through its sale to Secure Computing Corporation (subsequently acquired by McAfee in 2008). Mr. French also co-founded OnLink Technologies, Inc., a privately-held e-commerce sales and marketing software application developer, which was later sold to Siebel Systems, Inc. (“Siebel”) in 2000. Mr. French previously served as a partner at JPMorgan Partners, LLC, a technology venture capital firm, and held the role of Vice President and General Manager of the Interactive Selling Group at Siebel, a software company (acquired by Oracle Corp. in 2006). He is a former Director of Zilliant, Inc., WebCollage, Inc., Axentis, Inc. and several other private companies. Mr. French received an M.B.A. from Harvard University in 1996 and a B.S. in Economics and General Engineering from the U.S. Military Academy at West Point in 1989. Mr. French brings to the Board extensive management, business development, financial and strategic planning experience.
David Beirne has served as the Chairman of our board of directors since March 2013. Mr. Beirne also serves as the Chairman of the board of directors of Fantex Holdings since its inception in September 2012. Mr. Beirne was a general partner at Benchmark Capital, LLC from 1997 until his retirement from the firm in 2007. Mr. Beirne served as an advisor and limited partner to Benchmark until 2012. Mr. Beirne served on the boards of Blazent Corporation, Vontu, Inc., Securify, Inc., 1(800) Flowers, Kana Corp. and several other private companies. Prior to joining Benchmark, Mr. Beirne was co-founder of Ramsey/Beirne Associates, Inc., an executive search firm, where he served as CEO from 1987 to 1997. Mr. Beirne also serves on the boards of directors of several nonprofit organizations. Mr. Beirne received a B.S. in Business Administration and Management from Bryant University in 1985. Mr. Beirne has developed a nationwide reputation for recruiting high-profile executives and brings to the Board extensive recruiting, management and operational experience.
John H. Costello has served on our board of directors since July 2013. Mr. Costello has been the President, Global Marketing & Innovation, at Dunkin Brands Group, Inc. since March 2013 and has previously served as its Chief Global Marketing & Innovation Officer. He also serves on the board of directors of the Yellowstone Park Foundation, Mobile Marketing Association and xAd, Inc. Prior to joining Dunkin Brands in 2009, Mr. Costello served as the Chief Executive Officer and director of Zounds, Inc. from 2007 through 2009. From 2006 to 2007, he served as President of Consumer and Retail for Solidus Networks, Inc. (d/b/a Pay By Touch). Mr. Costello has also previously served on the boards of directors of the Association of National Advertisers Inc., The Quaker Oats Company, The Bombay Company, Aspen Marketing Services, Inc., Ace Hardware Corporation and various other
public and private companies, as well as serving on the Board of Trustees of the American Film Institute. In addition, Mr. Costello has held leadership roles at several companies, including serving as President of Nielsen Marketing Research U.S., Chief Executive Officer of MVP.com, Inc., Executive Vice President of Merchandising and Marketing at The Home Depot, Senior Executive Vice President of Sears, Senior Vice President of Marketing and Sales at Pepsi-Cola, USA and Chief Global Marketing Officer of Yahoo!. Mr. Costello received a B.S. in Industrial Management from the University of Akron in 1968 and an MBA from Michigan State University in 1970. Mr. Costello brings to our board of directors extensive operational and marketing experience.
C. William Hosler has served on our board of directors since August 2013. Mr. Hosler also currently serves as Chief Financial Officer and a director of Catellus Acquisition Company, LLC (“Catellus”), a company engaged in commercial real estate property ownership, management and development. Prior to assuming his current role at Catellus in March 2011, Mr. Hosler provided consulting services to Rockwood Capital LLC and TPG Capital, L.P., two private investment firms, from 2008 to 2011. Mr. Hosler served as Chief Financial Officer of Marcus & Millichap Holding Companies, a privately-held investment and real estate services company, from January 2008 to November 2008. Prior to that, from June 2007 through December 2007 and July 2006 until June 2007 Mr. Hosler was a consultant to and Chief Financial Officer of Mirion Technologies, Inc., a privately-held radiation detection, measuring and monitoring company. Mr. Hosler served as Chief Financial Officer of Catellus Development Corporation, a publicly traded real estate company, from 1999 to 2005, and, prior to such, he was Chief Financial Officer of the Morgan Stanley Real Estate Funds where he served on the Investment Committee. Mr. Hosler currently serves as a director of PacWest Bancorp and as a member of its audit committee and corporate governance and compensation committee. In addition, Mr. Hosler serves on the board of directors, audit committee and corporate governance and nominating committee of Parkway Properties, Inc., a public, self-administered real estate investment trust. Mr. Hosler received a B.S. in Chemical Engineering from the University of Notre Dame and an M.B.A. from the University of Virginia. Mr. Hosler brings to the board significant experience in investment and finance, as well as his experience as a Chief Financial Officer of a publicly traded company.
Ronald Machtley has served on our board of directors since June 2013. Mr. Machtley has served as president of Bryant University since 1996 and was previously a Republican member of the United States House of Representatives from Rhode Island from 1989 to 1995. Mr. Machtley also currently serves on the boards of directors of five separate affiliate entities of Amica Insurance, including Amica Mutual Insurance Company, where he also served as a member of its Finance, Nominating, Executive Compensation, and Audit Committees. He also currently serves on the board of directors of Cranston Print Works, Inc., Rhode Island Foundation and Preservation Society of Newport, among other organizations. From 1994 until 1995, Mr. Machtley served as a Partner at Wilkinson, Barker, Knauer & Quinn, a law firm in Washington D.C. Mr. Machtley has also previously served as a director of Covansys Corp. Mr. Machtley received a B.S. from the United States Naval Academy in 1970 and a J.D. from Suffolk University Law School in 1978. Mr. Machtley brings to our board of directors extensive management experience.
Shahan Soghikian has served on our board of directors since June 2013. Mr. Soghikian is a co-founder and Managing Director of Panorama Capital, a venture capital firm which invests in early to mid-stage technology and life sciences companies. Mr. Soghikian began his investment career when he joined JPMorgan Partners, LLC in 1990, where he most recently served as head of its venture capital program until the formation of Panorama in 2006. Between 1994 and 1998, he was responsible for developing and managing J.P. Morgan Partners’ European investment team and was based in London. Mr. Soghikian was previously a member of the mergers and acquisitions group at both Bankers Trust, Inc. and Prudential-Bache Securities, Inc. (currently known as Prudential Equity Group, LLC). Mr. Soghikian currently serves on the board of directors of Beyond The Rack, Inc. and WGT.com. Prior to this, he served as a director of SquareTrade, Inc., Tidal Software, Inc., Yipes Communications, Inc., Validity Sensors, Inc. and AECOM, Inc., among other board memberships, including as a member of the audit committee on the board of directors of Digital Island, Inc. and Petco Animal Supplies, Inc. In addition, Mr. Soghikian is currently a trustee of Pitzer College where he serves as Chair of the Board of Trustees, serves as Vice Chair of the Board of UCSF Benioff Children’s Hospitals, where he also chairs the Quality and Safety Committee. Mr. Soghikian received a B.A. in Biology from Pitzer College in 1980 and an M.B.A. from the UCLA Anderson School of Management. Mr. Soghikian is a longtime investor of over two decades and brings to our board of directors extensive investment and valuation experience.
Terdema Ussery has served on the board of directors of Fantex, Inc. since June 2013. Mr. Ussery was President of Global Sports Categories at Under Armour, Inc. from September 2015 to November 2015. He served as the President and Chief Executive Officer of the Dallas Mavericks from 1997 to September 2015. While with the Mavericks, he also served as an Alternate Governor for the Mavericks on the NBA Board of Governors. Mr. Ussery served as Chief Executive Officer of HDNet LLC from 2001 until June 2012. He has served as Lead Independent Director of Treehouse Foods Inc. since 2005 and as a member on its Governance & Nominating, Audit and Compensation Committees. Mr. Ussery previously served as Director of Timberland Co. from 2005 until September 2011, where he also served as Timberland’s Lead Independent Director and as a member of its Audit, Compensation, Governance & Nominating and Corporate & Social Responsibility committees. He also served as a director of Entrust, Inc., from 2006 to 2009, and as a member of its Audit Committee from 2007 to 2009. In addition, Mr. Ussery served as the President of Nike Sports Management from 1993 to 1996 and was the Commissioner of the Continental Basketball Association from 1991 to 1993, and Deputy Commissioner and General Counsel of the CBA from 1990 to 1991. Mr. Ussery received a B.A. from Princeton’s Woodrow Wilson School of Public and International Affairs in 1981, an M.P.A. from John F. Kennedy School of Government at Harvard University and a J.D. from the University of California, Berkeley in 1987. Mr. Ussery has extensive experience working with athletes and other high-profile individuals as well as with sports associations and brings to our board of directors extensive industry knowledge and management experience.
(b)
Executive Officers
Executive Officer Biographical Information
The following biographical information is furnished with regard to Fantex, Inc.’s executive officers (except for Mr. French, whose biographical information appears above under the section “Board of Directors”) as of March 10, 2016.
David Mullin has served as our Chief Financial Officer since our founding. Mr. Mullin has also served as the Chief Financial Officer of our parent, Fantex Holdings since its inception in September 2012. Prior to joining Fantex, Mr. Mullin most recently served as a Chief Financial Officer of Become, Inc., privately-held cloud-based performance marketing and SaaS solutions company, from 2010 to August 2011. From 2005 to 2008, Mr. Mullin served as the Chief Operating Officer and Chief Financial Officer of Securify, Inc., a privately-held security monitoring and internal control solution provider. Mr. Mullin served as the Executive Vice President and Chief Financial Officer of NPTest, Inc., publically-traded semiconductor-test equipment manufacturer, from 2003 to 2004, and Terawave Communications, Inc., a privately-held telecommunications systems manufacturer, from 2000 to 2003. Mr. Mullin was Chief Financial Officer of Borland International, Inc., a publically-traded software company, from 1995 to 1996, SMART Modular Technologies, Inc., a publically-traded electronic subsystems manufacturer and supplier, from 1996 to 2000 and Vice President of Finance and Administration and Chief Financial Officer of OnLink Technologies, Inc., a privately-held e-commerce sales and marketing software application developer, from 2000 to 2001. Mr. Mullin also held several senior finance executive positions, including at Sun Microsystems, Inc., Conner Peripherals, Inc., PriceWaterhouse Coopers L.L.P., and Arthur Anderson L.L.P. Mr. Mullin is a California Certified Public Accountant and received a B.A. in Business Administration from San Francisco State University in 1977.
William Garvey has served as our Chief Legal Officer and Secretary since April 2014 and as the Chief Legal Officer and Secretary of our parent, Fantex Holdings, since July 2013. From 2009 to July 2013, Mr. Garvey was the Vice President, General Counsel and Secretary of iPass, Inc., a publicly-traded enterprise mobility services company. From 2008 to 2009, Mr. Garvey was Vice President, General Counsel and Secretary of ShoreTel, Inc., a publicly-traded provider of Internet Protocol unified communications systems for enterprises. From 2005 to 2007, Mr. Garvey served as General Counsel, Vice President of Corporate Development, and Secretary of Rackable
Systems, Inc. (now Silicon Graphics International Corp.), a publicly-traded computer server manufacturer. From 1997 to 2004, Mr. Garvey served as General Counsel, Vice President of Corporate Development and Secretary of Actuate Corporation, a publicly-traded software company, and assisted Actuate in completing its initial public offering. Mr. Garvey holds a B.S. in Applied Sciences and Engineering from the United States Military Academy and a J.D. from Stanford Law School.
Corporate Governance
Leadership Structure and Independence of the Board of Directors
Under our bylaws, the Board appoints our officers, including the Chief Executive Officer. The Board does not have a policy on whether the roles of the Chairman and Chief Executive Officer should be separate and, if they are to be separate, whether the Chairman should be selected from the non-employee directors or be an employee and if they are to be combined, whether a lead independent director should be selected. However, the Board is committed to good corporate governance practices and values independent board oversight as an essential component of strong corporate performance. Fantex, Inc. currently separates the roles of Chairman and Chief Executive Officer in recognition of the differences between the two roles. The Chief Executive Officer is responsible for setting the strategic direction for, and the day-to-day leadership and performance of, Fantex, while the Chairman provides guidance to the Chief Executive Officer and management, sets the agenda for Board meetings and presides over meetings of the full Board. The Board believes that the current board leadership structure is best for Fantex and its stockholders at this time.
Our Board is currently chaired by Mr. Beirne. Our Board believes that Mr. Beirne’s service as our Chairman is in the best interests of our Company and our stockholders because Mr. Beirne was a founder of our parent company Fantex Holdings, Inc., possesses detailed and in-depth knowledge of the issues, opportunities and challenges we face, and because he is the person best positioned to develop agendas that ensure that our Board’s time and attention is focused on the most critical matters. Our Board believes that his role as Chairman enables decisive leadership, ensures clear accountability and enhances our ability to communicate our message and strategy clearly and consistently to stockholders, employees and the athletes with whom we work.
Because our common stock is not listed on a national securities exchange, we are not required to maintain a board consisting of a majority of independent directors nor to maintain an audit committee, nominating committee or compensation committee consisting solely of independent directors. Nevertheless, our board of directors has determined to generally comply with the listing requirements of the national securities exchanges. The independence definitions of the national securities exchanges generally include a series of objective tests, such as that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his family members has engaged in various types of business dealings with us. In addition, the rules of the national securities exchanges would require our board of directors to make a subjective determination as to each independent director that no relationships exist, which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
Our board of directors currently consists of seven members. In February 2016, the Board undertook a review of the independence of each director and considered whether any director has a material relationship with Fantex, Inc. that could compromise his ability to exercise independent judgment in carrying out his responsibilities. As a result of this review, the Board determined that five of our current directors would qualify as “independent” directors in accordance with the general listing requirements of the national securities exchanges. Mr. French is not considered independent because he is an officer of Fantex and an employee and director of our parent company, Fantex Holdings. Mr. Beirne is not considered independent because he is a director and significant stockholder of our parent company, Fantex Holdings. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management. Each of Messrs. Costello, Hosler, Machtley, Soghikian and Ussery qualify as independent directors under the corporate governance standards of the NYSE MKT.
There are no family relationships among any of our directors or officers other than Mr. Matthew Beirne, our Vice President of Business Development, who is the son of Mr. David Beirne, Chairman of our Board.
Role of the Board in Risk Oversight
One of the key functions of our Board is informed oversight of our risk management process. Our Board administers this oversight function directly, with support from its four standing committees, the Audit Committee, the Nominating and Corporate Governance Committee, the Compensation Committee and the Conflicts Committee, each of which addresses risks specific to their respective areas of oversight. In particular, our Audit Committee has the responsibility to consider and discuss our major financial risk exposures and the steps our management has taken to monitor and control these exposures. The Audit Committee also monitors compliance with legal and regulatory requirements, in addition to oversight of the performance of our internal audit function. Our Nominating and Corporate Governance Committee monitors the effectiveness of our Corporate Governance Guidelines. Our Compensation Committee assesses and monitors whether any of our compensation policies and programs has the potential to encourage excessive risk-taking. Our Conflicts Committee reviews any transaction with our parent company and its subsidiaries. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire Board is regularly informed through committee reports about such risks.
Board Meetings
Our directors stay informed about our business by attending meetings of our Board and its committees and through supplemental reports and communications. The Board held nine regularly scheduled and special meetings and acted by Unanimous Written Consent in 2015 to review significant developments, engage in strategic planning, and act on matters requiring Board approval. Other than Mr. Ussery, each incumbent director attended an aggregate of at least 75 percent of the Board meetings, and the meetings of committees on which he served, during the period that he served in 2015.
Executive Sessions of Non-Management Directors
Our non-management, independent directors intend to periodically meet without management present each time the full Board or a Board committee convenes in person for a regularly scheduled meeting. If the Board convenes for a special meeting, the non-management, independent directors will meet in executive session if circumstances warrant. Currently Mr. Soghikian serves as our lead independent director. Our independent directors did not meet without management present during 2015.
The Board welcomes communications from stockholders. For information on how to communicate with our independent directors, please refer to the information set forth under the heading “-Communications with the Board.”
Board Attendance at Annual Meeting of Stockholders
While the Board understands that there may be situations that prevent a director from attending an annual meeting of stockholders, the Board encourages all directors to attend our annual meetings of stockholders. No directors attended the 2015 Annual Meeting of Stockholders.
Board Committees
Our Board has established four standing committees: an Audit Committee, a Compensation Committee, a Nominating and Corporate Governance Committee and a Conflicts Committee. The principal functions of each committee are briefly described below. We comply with the listing requirements and other rules and regulations of the NYSE MKT, as may be amended or modified from time to time, with respect to each of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. All four of our standing committees are comprised exclusively of independent directors within the meaning of the NYSE MKT listing standards. Additionally, our Board may from time to time establish other committees to facilitate the management of our company.
Audit Committee
We have adopted a written Audit Committee charter, which details the principal functions of the Audit Committee, including oversight related to:
·
our accounting and financial reporting processes;
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the integrity of our financial statements and financial reporting process;
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our disclosure controls and procedures and internal control over financial reporting;
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our compliance with financial, legal and regulatory requirements;
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the evaluation of the qualifications, independence and performance of our independent registered public accounting firm; and
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our overall risk profile.
Our Audit Committee charter satisfies the applicable standards of the SEC and the NYSE MKT. It is available on the Governance page of the Investor Relations section on our website at www.fantexbrands.com.
The Audit Committee is also responsible for engaging an independent registered public accounting firm, reviewing with the independent registered public accounting firm the plans and results of the audit engagement, approving professional services provided by the independent registered public accounting firm, including all audit and non-audit services, reviewing the independence of the independent registered public accounting firm, considering the range of audit and non-audit fees and reviewing the adequacy of our internal accounting controls. The Audit Committee is responsible for the Audit Committee report included in this Annual Report.
Mr. Hosler is Chairman of the Audit Committee and Messrs. Soghikian and Ussery are members of the committee. During 2015, our Audit Committee met four times.
Our Board has determined that Mr. Hosler qualifies as an audit committee financial expert as that term is defined by applicable SEC regulations and NYSE MKT corporate governance listing standards. Our Board has determined that each of Messrs. Hosler, Soghikian and Ussery meet the requirements for financial literacy in accordance with applicable rules and regulations of the SEC and the NYSE MKT Our Board has also determined that each of Messrs. Hosler, Soghikian and Ussery are independent under the applicable rules of the SEC and the NYSE MKT.
Compensation Committee
We have adopted a written Compensation Committee charter, which details the principal functions of the Compensation Committee, including:
·
reviewing and approving, at least annually, the performance goals and objectives relevant to our Chief Executive Officer’s compensation, evaluating our Chief Executive Officer’s performance in light of such goals and objectives and determining and approving the remuneration of our Chief Executive Officer based on such evaluation;
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reviewing and approving the compensation of all of our other executive officers;
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reviewing our executive compensation policies and plans;
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assisting management in complying with our Proxy Statement and annual report disclosure requirements;
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producing a report on executive compensation to be included in our annual Proxy Statement (if required); and
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reviewing, evaluating and recommending changes, if appropriate, to the remuneration for directors.
Our Compensation Committee charter satisfies the applicable standards of the SEC and the NYSE MKT. It is available on the Governance page of the Investor Relations section on our website at www.fantexbrands.com.
The Compensation Committee may delegate its responsibilities to a subcommittee of the Compensation Committee, provided that such responsibilities are consistent with our certificate of incorporation, bylaws, Section 162(m) of the Internal Revenue Code of 1986, as amended, applicable NYSE MKT rules and other applicable law.
Mr. Costello is Chairman of the Compensation Committee and Messrs. Machtley and Ussery are members of the committee. Our Board has determined that each of Messrs. Costello, Machtley and Ussery are independent under the applicable rules of the NYSE MKT, is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act and is an “outside director” as defined in Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended. During 2015, the Compensation Committee did not meet formally.
Nominating and Corporate Governance Committee
Our Nominating and Corporate Governance Committee, or Governance Committee, consists of three of our independent directors. We adopted a written Nominating and Corporate Governance Committee charter, which details the principal functions of the Nominating and Corporate Governance Committee, including:
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identifying and recommending to the full Board qualified candidates for election as directors to fill vacancies on the Board or at any annual meeting of stockholders;
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developing and recommending to the Board corporate governance guidelines and implementing and monitoring such guidelines;
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reviewing and making recommendations on matters involving the general operation of the Board, including Board size and composition, and committee composition and structure;
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recommending to the Board nominees for each committee of the Board of Directors;
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annually facilitating the assessment of the Board’s performance as a whole and of the individual directors, as required by applicable law, regulations and corporate governance listing standards; and
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overseeing the Board’s evaluation of the performance of management.
Our Nominating and Corporate Governance Committee charter is available on the Governance page of the Investor Relations section on our website at www.fantexbrands.com.
Mr. Machtley is Chairman of the Nominating and Corporate Governance Committee and Messrs. Costello and Soghikian are members of the committee. Our Board has also determined that each of Messrs. Machtley, Costello and Soghikian are independent under the applicable rules of the SEC and the NYSE MKT. During 2015, our Nominating and Corporate Governance Committee met once.
Conflicts Committee
We adopted a written Conflicts Committee charter, which details the principal functions of the Conflicts Committee, including:
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review and evaluate the terms and conditions of, and to determine the advisability of any transaction with our parent company or its subsidiaries;
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negotiate the terms and conditions of any transaction with our parent company or its subsidiaries and, if the Conflicts Committee deems appropriate, but subject to the limitations of applicable law, approve or disapprove the execution and delivery of contracts and other documents in connection with any transaction with our parent company or its subsidiaries on behalf of the Company;
·
determine whether a transaction with our parent company or its subsidiaries is fair to, and in our and our stockholders’, other than our parent company’s, best interests; and
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recommend to the full Board what action, if any, should be taken by the Board with respect to any transaction with our parent or its subsidiaries.
Our Conflicts Committee charter is available on the Governance page of the Investor Relations section on our website at www.fantexbrands.com.
Mr. Soghikian is Chairman and Messrs. Ussery and Hosler are members of the Conflicts Committee. Our Board has determined that each of Messrs. Soghikian, Ussery and Hosler are independent under the applicable rules of the SEC and the NYSE MKT. During 2015, our Conflicts Committee met four times.
Compensation Committee Interlocks and Insider Participation
Since the date of the initial public offering of our first tracking stock, there have been no insider participations or compensation committee interlocks of the Compensation Committee. At all times since the completion of the initial public offering of our first tracking stock, the Compensation Committee has been comprised solely of independent, non-employee directors. None of our executive officers currently serves, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers on our Board or compensation committee.
Nomination Process for Director Candidates
The Nominating and Corporate Governance Committee is, among other things, responsible for identifying and evaluating potential candidates and recommending candidates to the Board for nomination. The Nominating and Corporate Governance Committee is governed by a written charter, a copy of which is available on the Governance page of the Investor Relations section on our website at www.fantexbrands.com.
The Nominating and Corporate Governance Committee regularly reviews the composition of the Board and whether the addition of directors with particular experiences, skills, or characteristics would make the Board more effective. When a need arises to fill a vacancy, or it is determined that a director possessing particular experiences, skills, or characteristics would make the Board more effective, the Nominating and Corporate Governance Committee initiates a search. As a part of the search process, the Nominating and Corporate Governance Committee may consult with other directors and members of senior management, and may hire a search firm to assist in identifying and evaluating potential candidates.
When considering a candidate, the Nominating and Corporate Governance Committee reviews the candidate’s experiences, skills, and characteristics. The Nominating and Corporate Governance Committee also considers whether a potential candidate would otherwise qualify for membership on the Board, and whether the potential candidate would likely satisfy the independence requirements of NYSE MKT as described below.
Candidates are selected on the basis of, among other factors as the Nominating and Corporate Governance Committee may deem appropriate; personal and professional integrity, ethics and values, experience in corporate management, experience relevant to the Company’s industry and with relevant social policy concerns, experience as a board member or executive officer of another publicly held company, relevant academic expertise, practical and mature business judgment, and the ability to make independent analytical inquiries. Other factors include having members with various and relevant career experience and skills, and having a Board that is, as a whole, diverse. Where appropriate, we will conduct a criminal and background check on the candidate. In addition, at least one member of the Board and Audit Committee should have the qualifications and skills necessary to be considered an “audit committee financial expert” as defined by the rules of the SEC and at least a majority of the Board must be independent as determined by the Board under the applicable rules and regulations of the SEC and the NYSE MKT.
All potential candidates are interviewed by the Chairman of the Board, the Nominating and Corporate Governance Committee Chairman, and, to the extent practicable, the other members of the Nominating and Corporate Governance Committee, and may be interviewed by other directors and members of senior management
as desired and as schedules permit. In addition, the Chief Legal Officer conducts a review of the director questionnaire submitted by the candidate and, as appropriate, a background and reference check is conducted. The Nominating and Corporate Governance Committee then meets to consider and approve the final candidates, and either makes its recommendation to the Board to fill a vacancy, or add an additional member, or recommends a slate of candidates to the Board for nomination for election to the Board. The selection process for candidates is intended to be flexible, and the Nominating and Corporate Governance Committee, in the exercise of its discretion, may deviate from the selection process when particular circumstances warrant a different approach.
Stockholders may nominate candidates to our Board. The stockholder must submit a detailed resume of the candidate and an explanation of the reasons why the stockholder believes the candidate is qualified for service on our Board of Directors and how the candidate satisfies the Board’s criteria. The stockholder must also provide such other information about the candidate as is set forth in our bylaws and as would be required by the SEC rules to be included in a Proxy Statement. In addition, the stockholder must include the consent of the candidate and describe any arrangements or undertakings between the stockholder and the candidate regarding the nomination. The stockholder must submit proof of the stockholder’s holding of Fantex, Inc. tracking stock. All communications are to be directed to the Chairman of the Nominating and Corporate Governance Committee, c/o Fantex, Inc., 330 Townsend St., Suite 234, San Francisco, California 94107, Attention: Chief Legal Officer. Subject to the exceptions set forth below under the heading “Stockholder Proposals-2017 Annual Meeting Proposals,” for any annual meeting, recommendations received less than 90 days or more than 120 days prior to the anniversary of the date of the prior year’s annual meeting will not be considered timely for consideration by the Nominating and Corporate Governance Committee for that annual meeting.
Code of Business Conduct and Ethics
Our Board formally approved a Code of Business Conduct and Ethics that applies to our officers, directors and employees. Among other matters, our Code of Business Conduct and Ethics is designed to deter wrongdoing and to promote:
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honest and ethical conduct, including the ethical handling of actual or potential conflicts of interest between personal and professional relationships;
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full, fair, accurate, timely and understandable disclosure in our SEC reports and other public communications;
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compliance with applicable governmental laws, rules and regulations;
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prompt internal reporting of violations of the code to appropriate persons identified in the code; and
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accountability for adherence to the code.
Any waiver of the Code of Business Conduct and Ethics for our directors, executive officers and other principal financial officers must be approved by the Board or the appropriate committee thereof, and any such waiver shall be promptly disclosed as required by law or any stock exchange upon which our common stock is traded.
Our Code Business Conduct and Ethics is available on the Governance page of the Investor Relations section on our website at www.fantexbrands.com.
Communications with the Board
Stockholders and other interested parties may write to the entire Board or any of its members at Fantex, Inc., c/o William Garvey, Chief Legal Officer and Secretary, 330 Townsend St, Suite 234, San Francisco, California 94107. Stockholders and other interested parties also may e-mail the Chairman, the entire Board or any of its members c/o William Garvey, Chief Legal Officer and Secretary, at bill.garvey@fantex.com. The Board may not be able to respond to all stockholder inquiries directly. Therefore, the Board has developed a process to assist it with managing inquiries.
The Chief Legal Officer will perform a legal review in the normal discharge of his duties to ensure that communications forwarded to the Chairman, the Board or any of its members preserve the integrity of the process. While the Board oversees management, it does not participate in day-to-day management functions or business operations, and is not normally in the best position to respond to inquiries with respect to those matters. For example, items that are unrelated to the duties and responsibilities of the Board such as spam, junk mail and mass mailings, ordinary course disputes over fees or services, personal employee complaints, business inquiries, new product or service suggestions, resumes and other forms of job inquiries, surveys, business solicitations or advertisements will not be forwarded to the Chairman or any other director. In addition, material that is unduly hostile, threatening, illegal or similarly unsuitable will not be forwarded to the Chairman or any other director and will not be retained. Such material may be forwarded to local or federal law enforcement authorities.
Any communication that is relevant to the conduct of our business and is not forwarded will be retained for one year and made available to the Chairman and any other independent director on request. The independent directors grant the Chief Legal Officer discretion to decide what correspondence will be shared with our management and any personal employee communications may be shared with our human resources department if deemed appropriate. If a response on behalf of the Board is appropriate, we gather any information and documentation necessary for answering the inquiry and provide the information and documentation, as well as a proposed response, to the appropriate director(s). We also may attempt to communicate with the stockholder for any necessary clarification. Our Chief Legal Officer (or his designee) reviews and approves responses on behalf of the Board in consultation with the applicable director(s), as appropriate.
Certain circumstances may require that the Board depart from the procedures described above, such as the receipt of threatening letters or e-mails or voluminous inquiries with respect to the same subject matter. Nevertheless, the Board considers stockholder questions and comments important, and endeavors to respond promptly and appropriately.
Item 11.
Item 11. Executive Compensation
This section discusses the material components of the executive compensation program for our executive officers who are named in the "Summary Compensation Table" below. In 2015, our "named executive officers" and their positions were as follows:
·
Cornell "Buck" French, Chief Executive Officer;
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David Mullin, Chief Financial Officer; and
·
William Garvey, Chief Legal Officer and Secretary.
Currently, our employees, including our named executive officers, are employed by our parent, Fantex Holdings, and provide services to both Fantex and Fantex Holdings. Except as the context otherwise requires or as otherwise noted, references in this section to "Fantex Holdings," "company," "we," "us" and "our" refer to both Fantex Holdings and Fantex.
Summary Compensation Table
The following table sets forth information concerning the compensation of our named executive officers for the years ended December 31, 2015 and 2014.
Narrative to Summary Compensation Table
Salaries
Messrs. French and Mullin are parties to employment agreements with our parent, Fantex Holdings, Inc., which initially provided for annual base salaries of $200,000 for each of Messrs. French and Mullin. Pursuant to the terms of their employment agreements, in connection with the sale by us of 421,100 shares of our Fantex Series Vernon Davis in an initial public offering on April 28, 2014, each of Messrs. French and Mullin became entitled to receive an annual base salary of $250,000. However, Messrs. French and Mullin voluntarily delayed the increase in their respective annual base salaries and each continued to receive an annual base salary of $200,000 through December 31, 2015. Effective January 1, 2016, Messrs. French and Mullin began to collect the annual base salary of $250,000. There was no provision to make the increase to the annual base salary of $250,000 retroactive.
Mr. Garvey's annual base salary for 2015 was $200,000.
Bonuses
We did not grant bonuses to our named executive officers with respect to services performed in 2015.
Equity Compensation
We maintain the 2013 Equity Incentive Award Plan, referred to below as the 2013 Plan, in order to facilitate the grant of cash and equity incentives to directors, employees (including our named executive officers) and consultants of our company and certain of its affiliates and to enable our company and certain of its affiliates to obtain and retain services of these individuals, which is essential to our long-term success. The 2013 Plan became effective as of April 28, 2014. No equity grants were made to our officers in 2015.
Other Elements of Compensation
Retirement Plans
We have established a 401(k) retirement savings plan for our employees, including our named executive officers, who satisfy certain eligibility requirements. Our named executive officers are eligible to participate in the 401(k) plan on the same terms as other full-time employees. The Internal Revenue Code of 1986, as amended, or the Code, allows eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) plan. Currently, we do not anticipate matching any portion of the contributions that might be made by participants in our 401(k) plan. We believe that providing a vehicle for tax-deferred retirement savings though a 401(k) plan will add to the overall desirability of our executive compensation package and further incentivize our employees, including our named executive officers, in accordance with our compensation policies.
Employee Benefits and Perquisites
All of our full-time employees, including our named executive officers, are eligible to participate in our medical, dental and vision benefit plans. In the future, we may also implement additional benefit and other perquisite programs as our compensation committee determines appropriate, though we do not expect any such additional benefits and perquisites to constitute a material component of our named executive officers' compensation package.
No Tax Gross-Ups
We do not make gross-up payments to cover our named executive officers' personal income taxes that may pertain to any of the compensation or perquisites paid or provided by our company.
Additional Compensation Components
As we formulate and implement our compensation program, we may provide different and/or additional compensation components, benefits and/or perquisites to our named executive officers, to ensure that we provide a balanced and comprehensive compensation structure. We believe that it is important to maintain flexibility to adapt our compensation structure at this time to properly attract, motivate and retain the top executive talent for which we compete.
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the number of shares of Fantex Holdings' common stock underlying outstanding equity incentive plan awards for Mr. Garvey as of December 31, 2015. Neither Messrs. French nor Mullin held any equity incentive plan awards as of December 31, 2015.
(1)
The option vested as to 1/48th of the shares subject to the option beginning on November 1, 2015 and will continue to vest as to 1/48th of the shares subject to the option each month thereafter, subject to Mr. Garvey remaining a service provider through each applicable vesting date.
(2)
The option vested as to 25% of the shares subject to the option on July 15, 2014 and will continue to vest as to 1/48th of the shares subject to the option each month thereafter, subject to Mr. Garvey remaining a service provider through each applicable vesting date.
Executive Compensation Arrangements
Messrs. French and Mullin
Our parent, Fantex Holdings, has entered into employment agreements with Messrs. French and Mullin. The following is a summary of the material terms of the agreements.
Under the agreements, Mr. French serves as the Chief Executive Officer and Mr. Mullin serves as the Chief Financial Officer of Fantex Holdings, reporting directly to the board of directors of Fantex Holdings and Chief Executive Officer, respectively. Mr. French also serves as a member of our board of directors. The term of the agreements will continue until the executive's employment with Fantex Holdings is terminated.
Pursuant to the terms of the agreements, Messrs. French and Mullin were each to initially receive annual base salaries in the amount of $200,000. In connection with the sale by us of 421,100 shares of our Fantex Series Vernon Davis in an initial public offering on April 28, 2014, each of Messrs. French and Mullin became entitled to
receive an annual base salary of $250,000, which amount may be increased from time to time in the discretion of Fantex Holdings' board of directors or the compensation committee. However, Messrs. French and Mullin voluntarily delayed the increase in their respective annual base salaries and each continued to receive an annual base salary of $200,000 through December 31, 2015. Effective January 1, 2016, Messrs. French and Mullin began to collect the annual base salary of $250,000. Messrs. French and Mullin are also eligible to receive an annual discretionary cash performance bonus. The actual amount of any such bonuses will be based on the attainment of specified performance objectives established by the board of directors of Fantex Holdings. In addition, each executive is entitled to participate in customary employee and executive benefit plans and programs as Fantex Holdings may from time to time offer.
In the event that Mr. French's or Mr. Mullin's employment is terminated without "cause" or by the executive for "good reason" (each, as defined in the applicable employment agreement), then in addition to any accrued amounts, the executive will be entitled to receive the following:
·
a lump-sum payment in the amount of one times the executive's annual base salary;
·
a lump-sum payment in the amount equal to the pro rata portion of the executive's annual bonus for the partial fiscal year in which the termination occurs;
·
company-paid premiums for healthcare coverage continuation for up to 12 months after the date of termination; and
·
with respect to each then-outstanding Fantex Holdings equity award or Company equity award, accelerated vesting of the number of shares subject to such award that would have vested during the 12-month period following the termination date.
In the event that Mr. French's or Mr. Mullin's employment is terminated without "cause" or by the executive for "good reason" on or within the 30 days preceding, or during the one-year period following, a "change in control" (as defined in the Fantex Holdings, Inc. 2012 Equity Incentive Plan), each executive will be entitled to the severance benefits and payments described above, except that he will be entitled to a lump-sum payment in the amount of two times, rather than one times, his annual base salary.
The executive's right to receive the severance payments and benefits described above is subject to his delivery and non-revocation of an effective general release of claims in favor of Fantex Holdings.
Furthermore, in the event of a change in control of Fantex Holdings, the executive will be entitled to accelerated vesting of all outstanding Fantex Holdings equity awards and Company equity awards then held, and in the event of a "change in control" (as defined in the Fantex, Inc. 2013 Equity Incentive Award Plan) of the Company, the executive will be entitled to accelerated vesting of all outstanding Company equity awards then held. In addition, to the extent that any payment or benefit would be subject to an excise tax imposed in connection with Section 4999 of the Code, such payments and/or benefits may be subject to a "best pay cap" reduction to the extent necessary so that the executive receives the greater of (i) the net amount of the payments and benefits reduced such that such payments and benefits will not be subject to the excise tax and (ii) the net amount of the payments and benefits without such reduction.
Mr. Garvey
Our parent, Fantex Holdings, entered into change in control severance agreement with Mr. Garvey on August 19, 2014. The following is a summary of the material terms of the agreement.
In the event of a "change in control" (as defined in the Fantex Holdings 2012 Equity Incentive Plan) of Fantex Holdings, Mr. Garvey will be entitled to accelerated vesting of 50% all outstanding unvested Fantex Holdings option and equity awards then held.
In the event that Mr. Garvey's employment is terminated without "cause" or by Mr. Garvey for "good reason" (each, as defined in his change in control severance agreement) on or within the 30 days preceding, or during the one-year period following, a "change in control," then in addition to any accrued amounts, Mr. Garvey will be entitled to receive the following:
·
a lump-sum payment in the amount of 50% of his annual base salary;
·
company-paid premiums for healthcare coverage continuation for up to 6 months after the date of termination; and
·
with respect to each then-outstanding Fantex Holdings option and equity award, full accelerated vesting of all shares subject to the award.
Mr. Garvey's right to receive the severance payments and benefits described above is subject to his delivery and non-revocation of an effective general release of claims in favor of Fantex Holdings.
Director Compensation
The following table sets forth information regarding the compensation earned by our non-employee directors for the year ended December 31, 2015. Other than as described below, none of our directors received any compensation for service as a member of our board of directors in 2015. We intend to review director compensation from time to time. Mr. French, who served as our Chief Executive Officer during the year ended December 31, 2015, and continues to serve in that capacity, does not receive additional compensation for his service as a director, and therefore is not included in the Director Compensation table below. All compensation paid to Mr. French is reported in the Summary Compensation Table included under “Executive Compensation.”
(1)
As of December 31, 2015, each of our non-employee directors held a stock option to purchase 20,000 shares of common stock in our parent, Fantex Holdings. No non-employee director held any other equity awards as of December 31, 2015.
(2)
Represents health and welfare plan premium costs in excess of company-paid health and welfare premiums paid on behalf of other participants.
Risk Associated With Compensation Plans
For 2015, the Board has determined that the company’s compensation policies and practices for our employees are not reasonably likely to cause employees to take risks that would have a material adverse effect on the company.
Equity Compensation Plan Information
In August 2013, our board of directors adopted our 2013 Equity Incentive Award Plan, or the 2013 Plan, under which we may grant cash and equity incentive awards to eligible service providers in order to attract, motivate and retain the talent for which we compete. The 2013 Plan was subsequently approved by our stockholders in September 2013. The 2013 Plan provides for the grant of stock options, including incentive stock options, or ISOs, and nonqualified stock options, or NSOs, restricted stock, dividend equivalents, stock payments, restricted stock units, or RSUs, performance shares, deferred stock, other incentive awards, stock appreciation rights, or SARs, and cash awards. An aggregate of 7,500,000 shares of our platform common stock is available for issuance under awards granted pursuant to the 2013 Plan, which shares may be authorized but unissued shares, treasury shares or shares purchased in the open market. No equity grants were made in 2015.
The following table provides information as of December 31, 2015 regarding compensation plans under which our equity securities are authorized for issuance.
(1)
Consists of the 2013 Equity Incentive Award Plan, which was adopted by our Board in connection with the closing of our first tracking stock public offering in April 2014, and provides for awards of options, stock appreciation rights, restricted stock, dividend equivalents, restricted stock units, performance awards, performance share awards, deferred stock awards, stock payment awards and other incentive awards to be available for employees and consultants of our company and our affiliates and for our directors.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial ownership of the common stock of Fantex as of March 10, 2016, by:
·
each of our directors;
·
each of our named executive officers;
·
each person, or group of affiliated persons, who is known by us to beneficially own more than 5% of our common stock; and
·
all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include shares of our common stock issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days after March 10, 2016. Except as otherwise indicated in the footnotes to the table below, all of the shares reflected in the table are shares of Fantex common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.
Percentage ownership calculations are based on 102,575,200 shares of Fantex common stock outstanding as of March 10, 2016.
Beneficial ownership representing less than 1% is denoted with an asterisk (*). Except as otherwise indicated in the footnotes to the table below, addresses of named beneficial owners are in care of Fantex, 330 Townsend Street, Suite 234, San Francisco, CA 94107.
(1)
Each of our officers and directors beneficially owns shares of Fantex Holdings capital stock. Cornell “Buck” French and David Beirne, two of our directors, beneficially own 19.5% and 24.1% of Fantex Holdings capital stock, respectively, and David Mullin, our Chief Financial Officer, beneficially owns 4.1% of Fantex Holdings capital stock. The other officers and directors beneficially own less than 1% of Fantex Holdings capital stock in the aggregate. In computing beneficial ownership of Fantex Holdings capital stock, we attributed securities to persons who possess sole or shared voting power or investment power with respect to those securities and included shares of Fantex Holdings capital stock issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days after March 10, 2016.
(2)
Cornell “Buck” French, David Beirne, John Elway, Joshua Levine, Bruce Dunlevie and Duncan Niederauer are each members of the board of directors of Fantex Holdings and as such, in effect, share voting power over substantially all of the total voting power of Fantex common stock as of March 10, 2016. Each disclaims beneficial ownership of the shares held by Fantex Holdings.
(3)
Fantex Holdings owns 100% of our issued and outstanding platform common stock, which provides it with sole voting power over our common stock. Each share of platform common stock is entitled to one vote per share, giving Fantex Holdings substantially all of the voting power over the Fantex common stock as of March 10, 2016.
(4)
Shares beneficially owned by each series of our tracking stocks are as follow:
(5)
Consists of: (i) 149,942 shares directly owned by Mr. Beirne and (ii) 65,814 shares owned by Lily Beirne, which Ms. Beirne purchased pursuant to standby purchase agreements entered into in connection with our Fantex Series Alshon Jeffery offering completed on March 19, 2015, our Fantex Series Michael Brockers offering completed on May 29, 2015 and our Fantex Series Jack Mewhort offering completed on July 14, 2015.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our executive officers, directors and persons who own more than 10% of our common stock to file reports of ownership and changes in ownership with the SEC. SEC regulations require us to identify anyone who failed to file a required report or filed a late report during the most recent fiscal year. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons that no Forms 5 were required for such persons, we believe that, during the fiscal year ended December 31, 2015, our executive officers, directors and 10% stockholders complied with all Section 16(a) filing requirements applicable to them.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
The following is a description of transactions since January 1, 2014, to which we have been a party, in which the amount involved exceeds the lesser of $120,000 or one percent of the Fantex, Inc.’s total assets at year end for the last two completed fiscal years, and in which any of our directors, executive officers or holders of more than 5% of our capital stock, or an affiliate or immediate family member thereof, had or will have a direct or indirect material interest, other than compensation, termination and change in control agreements, which are described under “Executive Compensation.” We believe that all of the transactions described below were made on terms no less favorable to us than could have been obtained from unaffiliated third parties.
Parent Company
Our parent company, Fantex Holdings, owns 98.58 % of our outstanding voting securities.
Equity Contributions
To date, we have relied primarily on our parent, Fantex Holdings, for liquidity and capital resources. Our parent contributed capital of $4.0 million and $3.5 million for the years ended December 31, 2015 and 2014, respectively. The contributed capital includes expenses paid by our parent on our behalf to finance our operating expenses. We expect our parent to continue to contribute capital at least through 2016.
Participation in the Offering of Fantex Series Vernon Davis
On April 28, 2014, Fantex Holdings purchased from FBS, at the initial public offering price of $10 per share, 102,454 shares of Fantex Series Vernon Davis in the initial public offering of our Fantex Series Vernon Davis.
Participation in the Offering of Fantex Series EJ Manuel
On July 21, 2014, Fantex Holdings and Cornell “Buck” French, Dave Beirne, Bruce Dunlevie and Joshua Levine, directors of Fantex Holdings, purchased from FBS at the initial public offering price of $10 per share, 250,000 shares, 164 shares, 1,704 shares, 26,000 shares and 66 shares, respectively, of our Fantex Series EJ Manuel.
Participation in the Offering of Fantex Series Mohamed Sanu
Fantex Holdings and Cornell “Buck” French, Dave Beirne and Bruce Dunlevie, directors of Fantex Holdings, purchased from FBS, at the initial public offering price of $10 per share, 78,000 shares, 502 shares, 1,648 shares and 8,215 shares, respectively, of Fantex Series Mohamed Sanu.
Participation in the Offering of Fantex Series Alshon Jeffery
Fantex Holdings and Cornell “Buck” French, Dave Beirne and Bruce Dunlevie, directors of Fantex Holdings, purchased from FBS, at the initial public offering price of $10 per share, 400,000 shares, 2,500 shares,
83,580 shares and 83,500 shares, respectively, of Fantex Series Alshon Jeffery. In addition, Lily Beirne, Mr. Beirne’s spouse, purchased 34,414 shares of Fantex Series Alshon Jeffery.
Participation in the Offering of Fantex Series Michael Brockers
Fantex Holdings and Cornell “Buck” French, David Beirne and Bruce Dunlevie, directors of Fantex Holdings, purchased from FBS, at the initial public offering price of $10.00 per share, 162,993 shares, 2,500 shares, 36,200 shares and 36,200 shares, respectively, of Fantex Series Michael Brockers. In addition, Lily Beirne, Mr. Beirne’s spouse, purchased 18,000 shares of Fantex Series Michael Brockers.
Participation in the Offering of Fantex Series Jack Mewhort
Fantex Holdings and Cornell “Buck” French, David Beirne and Bruce Dunlevie, directors of Fantex Holdings, purchased from FBS, at the initial public offering price of $10.00 per share, 124,014 shares, 2,500 shares, 26,810 shares and 26,810 shares, respectively, of Fantex Series Jack Mewhort. In addition, Lily Beirne, Mr. Beirne’s spouse, purchased 13,400 shares of Fantex Series Jack Mewhort.
Participation in future Offerings of Fantex Convertible Tracking Series Stocks
We expect that Fantex Holdings and directors and officers of Fantex Holdings may purchase shares in future offerings of our tracking stocks pursuant to standby purchase agreements.
Management Agreement
We have entered into a management agreement with our parent, pursuant to which our parent provides us with management and administrative services, including providing and compensating our executive management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. We have agreed to pay our parent 5% of the amount of the gross cash received by us, if any, pursuant to our brand contracts during any quarterly period as remuneration for the services provided. The amount of gross cash received used to calculate this 5% fee will include any portion allocated to a reduction of the carrying value on our financial statements but shall not take into account the changes in fair value of the brand contracts. As such, the service fee under the management agreement will be determined based on the total amount of cash received under the brand contracts in a given quarterly period prior to any adjustments for fair value and without regard to the expected cash receipts in such quarter as reflected in the financial statements for that quarter. To the extent we receive no cash for any period then we would not owe any fee for any services provided during that period. We may evaluate the service fee from time to time to assess the continued appropriateness of the percentage of our cash receipts upon which the service fee is calculated, in light of the services being provided by our parent at the time and the cost of those services.
The agreement had an initial term through December 31, 2014, and was automatically renewed for a one-year term through December 31, 2015. It will continue to automatically renew for successive one-year terms each December 31 unless either party provides written notice of its intent not to renew at least three months prior to such renewal. We may also terminate any specific service and/or the agreement, without penalty, with 30 days prior written notice to Fantex Holdings. Fantex Holdings may terminate any specific service and/or the agreement with 180 days prior written notice to us, but if we, using our commercially reasonable efforts, are unable to either perform the services ourselves or enter into a reasonable arrangement with a third party to perform the services that we are unable perform ourselves, then Fantex Holdings will continue to perform such services for an additional period of 180 days.
The agreement contains certain provisions requiring us to indemnify our parent with respect to all losses or damages arising from acts not constituting bad faith, willful misconduct, or gross negligence. We have evaluated the impact of these indemnities on our financial statements and determined that they are remote. The management agreement became effective upon the consummation of our first initial public offering on April 28, 2014.
For further discussion of our management agreement with our parent, see Note 4, “Related Party Transactions” in the Notes to Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2015.
Indemnity Agreements with Contract Parties
Our parent, Fantex Holdings, has agreed to indemnify each of our current contract parties under certain circumstances if the ABI that we are purchasing from them under their respective brand contracts is reportable income to them and not deductible for United States federal income tax purposes. We are not a party to these indemnity agreements, and would have no direct or indirect obligation to the contract parties or our parent under these agreements. However, because our parent is a party to these agreements, we may be deemed to benefit from these agreements. In addition, to the extent such obligation of our parent to the contract parties impacts its financial stability and its continued ability to provide services under the management agreement, as discussed below, an adverse tax ruling may indirectly impact Fantex as a whole.
Indemnification Agreements with Directors and Officers
Our amended and restated certificate of incorporation provides that we will indemnify and advance expenses to our directors and officers to the fullest extent permitted under the Delaware General Corporation Law. In addition, we have entered into separate indemnification agreements with each of our directors and executive officers.
Policies and Procedures for Related Party Transactions
Our board of directors has adopted a written related person transaction policy setting forth the policies and procedures for the review and approval or ratification of related person transactions. This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which we were or are to be a participant, where the amount involved exceeds $120,000 and a related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person. All of the transactions described in this section and subject to this policy occurred or were ratified following the adoption of this policy.
All future material affiliated transactions and loans will be made or entered into on terms that are no less favorable to us than those that can be obtained from unaffiliated third parties. In addition, all future material affiliated transactions and loans, and any forgiveness of loans, must be approved by a majority of our independent directors who do not have an interest in the transactions and who have had access, at our expense, to our independent legal counsel.
As provided by our Audit Committee charter, our audit committee is responsible for reviewing and approving in advance any related party transaction, other than matters relating to our parent company. Our Conflicts Committee is responsible for reviewing all of our related party transactions in which our parent company, its subsidiaries or affiliates is a party with an interest adverse to our interests. As such, the Conflicts Committee has reviewed and approved all purchases of our tracking stocks by our parent company and its affiliates as described in this section.
Review and Approval of Transactions with Related Persons
We have operated under our Code of Business Conduct and Ethics policy since the initial public offering of our first tracking stock in April 2014. As part of our Code of Business Conduct and Ethics, our officers, directors and employees are expected to engage in honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships.
We have adopted a written policy regarding the review, approval and ratification of any related party transaction. Under this policy, our Audit Committee and/or Conflicts Committee will review the relevant facts and circumstances of each related party transaction, including if the transaction is on terms comparable to those that could be obtained in arm’s-length dealings with an unrelated third party before approving such transaction. Any
related party transaction shall be consummated and shall continue only if the Audit Committee or Conflicts Committee or our board of directors has approved or ratified the transaction in accordance with the guidelines set forth in the policy. For purposes of our policy, a “Related Party Transaction” is a (i) a transaction, arrangement or relationship, including any indebtedness or guarantee of indebtedness, (or any series of similar transactions, arrangements or relationships) in which we (including any of our subsidiaries) was, is or will be a participant, and in which any Related Party (as defined below) had, has or will have a direct or indirect interest or (b) any amendment or modification to such a transaction, arrangement or relationship, regardless of whether such transaction, arrangement or relationship has previously been approved in accordance with our policy. For purposes of this policy, a “Related Party” is:
·
any person who is, or at any time since the beginning of our last fiscal year was, a director or executive officer of ours or a nominee to become a director of ours;
·
any person who is (or was) the beneficial owner of more than 5% of any class of our voting securities when the Related Party Transaction in question is expected to occur or exist (or when it occurred or existed);
·
any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of such director, executive officer, nominee or more than 5% beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee or more than 5% beneficial owner; and
·
any firm, corporation or other entity in which any of the foregoing persons is employed or is a director, officer, general partner or principal or serves in a similar position or in which such person has a 5% or greater beneficial ownership interest.
Independence of the Board
The NYSE MKT prescribes independence standards for listed companies. These standards require a majority of the Board to be independent. They also require every member of the audit committee and, subject to limited exception, every member of the compensation committee and nominating and corporate governance committee of the Board to be independent. No director qualifies as independent unless the Board determines that the director has no direct or indirect material relationship with us. On an annual basis, each director and executive officer is obligated to complete a director and officer questionnaire that requires disclosure of any transactions with us in which the director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. We also review our relationship with any entity employing a director or on which the director currently serves as a member of the board.
After review of all relevant transactions or relationships between each director, or any of his immediate family members, and Fantex, its senior management and its independent registered public accounting firm, the Board has affirmatively determined that all of our current directors are independent directors within the meaning of the applicable NYSE MKT standards, except for Mr. French, our Chief Executive Officer, and Mr. Beirne, our Chairman of the Board. All of the committees of our Board are comprised entirely of directors determined by the Board to be independent within the meaning of the NYSE MKT standards.
Item 14.
Item 14. Principal Accountant Fees and Services
Deloitte & Touche LLP’s fees for the fiscal years ended December 31, 2015 and 2014 were as follows:
A description of the types of services provided in each category is as follows:
Audit Fees-Includes fees for professional services provided in connection with our annual audit, review of our quarterly financial statements, and services in connection with our SEC registration statements and securities offerings.
Tax Fees-Includes tax return preparation and other tax planning services incurred.
Audit Committee Pre-Approval Policy
The Audit Committee’s policy is to pre-approve all significant audit and permissible non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Our independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.
All of the services performed by Deloitte & Touche LLP subsequent to the initial public offering of the Company’s first tracking stock in April 2014 were pre-approved by the Audit Committee, and the Audit Committee was provided with regular updates as to the nature of such services and fees paid for such services.
PART IV
Item 15.
Item 15. Exhibits and Financial Statements Schedules
(a) The following documents are filed as part of this report:
						
(1) Financial Statements
						
(2) Financial Statement Schedules
						
Statements of Cash Receipts from Included Contracts Subject to the Brand Agreement between Fantex, Inc. and Alshon Jeffery and his affiliate Ben and Jeffery, Inc. dated September 18, 2014
EXHIBIT INDEX
+ Indicates a management contract or compensatory plan.
* The certifications attached as Exhibits 32.1 that accompany this Annual Report on Form 10-K is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Fantex, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Cornell “Buck” French and David Mullin, jointly and severally, his attorney-in-fact, with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/s/ Cornell “Buck” French
						
Chief Executive Officer and Director (Principal Executive Officer)
						
March 10, 2016
Cornell “Buck” French
						
/s/ David Mullin
						
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
						
March 10, 2016
David Mullin
						
/s/ David Beirne
						
Director
						
March 10, 2016
David Beirne
						
/s/ John Costello
						
Director
						
March 10, 2016
John Costello
						
/s/ C. William Hosler
						
Director
						
March 10, 2016
C. William Hosler
						
/s/ Ronald Machtley
						
Director
						
March 10, 2016
Ronald Machtley
						
/s/ Shahan Soghikian
						
Director
						
March 10, 2016
Shahan Soghikian
						
/s/ Terdema Ussery
						
Director
						
March 10, 2016
Terdema Ussery