NovelStem International Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, 2012 2011 (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,359,481 $ 3,717,599 Receivables, net 300,753 229,365 Prepaid expenses 490,585 594,370 Other receivables 25,227 24,848 Related party receivable 518,734 521,497 Current portion of deferred compensation 430,000 430,000 Total current assets 5,124,780 5,517,679 PROPERTY AND EQUIPMENT, net 288,264 307,390 INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED INVESTEES 1,514,438 1,573,325 INTANGIBLE ASSETS, net 15,008 17,116 GOODWILL 9,800,000 9,800,000 OTHER ASSETS 58,428 58,628 DEFERRED COMPENSATION, less current portion 841,151 948,651 TOTAL ASSETS $ 17,642,069 $ 18,222,789 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable $ 461,515 $ 403,743 Accrued expenses and other 785,981 890,881 Deferred revenue 620,623 706,432 Customer deposits 428,523 427,331 Current portion of capital lease obligations 19,506 21,829 Total current liabilities 2,316,148 2,450,216 CAPITAL LEASE OBLIGATIONS, less current portion 14,282 16,203 OTHER DEFERRED LIABILITY 37,058 42,514 DEFERRED REVENUE 21,622 48,358 DERIVATIVE LIABILITIES 1,090,000 1,090,000 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS’ EQUITY: Preferred stock, $.01 par value, 1,000,000 shares authorized; none outstanding - - Common stock, $.01 par value, 100,000,000 shares authorized;23,179,066 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively 231,791 231,791 Additional paid-in capital 293,616,319 293,616,319 Accumulated deficit (279,685,151 ) (279,272,612 ) Total shareholders’ equity 14,162,959 14,575,498 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 17,642,069 $ 18,222,789 The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated balance sheets. [ 3 ] HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended March 31, 2012 2011 NET REVENUES $ 709,875 $ 970,873 OPERATING COSTS AND EXPENSES Editorial, production, development and technology 448,821 626,416 Selling, general and administrative 642,892 1,300,870 Payroll and benefits 551,147 1,016,991 Depreciation and amortization 42,637 74,806 Total operating costs and expenses 1,685,497 3,019,083 Loss from operations (975,622 ) (2,048,210 ) EARNINGS OF UNCONSOLIDATED INVESTEES 71,797 64,101 OTHER INCOME Interest, net 253,037 269,101 Other, net 40,732 1,709 Loss from continuing operations (610,056 ) (1,713,299 ) Income from discontinued operations 197,517 109,442 Net loss (412,539 ) (1,603,857 ) NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST - (7,071 ) Net loss attributable to Hollywood Media Corp. $ (412,539 ) $ (1,610,928 ) Basic and diluted income (loss) per common share Continuing operations $ (0.03 ) $ (0.06 ) Discontinued operations 0.01 0.00 Total basic and diluted net loss per share $ (0.02 ) $ (0.06 ) Weighted average common and common equivalent shares outstanding – basic and diluted 23,179,066 28,067,957 The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statements of operations. [ 4 ] HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31, 2012 2011 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (412,539 ) $ (1,603,857 ) Adjustments to reconcile net loss to net cash used in operating activities: Income from discontinued operations (197,517 ) (109,442 ) Depreciation and amortization 42,637 74,806 Amortization of deferred compensation costs - officers 107,500 18,849 Equity in (earnings) of unconsolidated investees, net of distributions or dividends (2,228 ) (63,125 ) Recovery (provision) for bad debts 33,766 (42,003 ) Changes in assets and liabilities: Receivables (105,154 ) 115,584 Prepaid expenses 103,785 257,271 Other receivables (379 ) (109,567 ) Related party receivable 105,884 52,584 Other assets 200 1,480 Accounts payable 57,772 98,253 Accrued expenses and other (106,904 ) (363,425 ) Deferred revenue (112,545 ) (49,326 ) Customer deposits 1,192 (152,884 ) Other deferred liability (5,456 ) (10,308 ) Net cash used in operating activities (489,986 ) (1,885,110 ) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (16,890 ) (29,011 ) Acquisition of intangible assets - (25,300 ) Net proceeds (expenditures) from sale of assets and businesses 155,511 (5,454,522 ) Net cash provided by (used in) investing activities 138,621 (5,508,833 ) CASH FLOWS FROM FINANCING ACTIVITIES: Repayments under capital lease obligations (6,753 ) (17,500 ) Repayments of notes payable - (1,138 ) Purchase of tendered common stock - (16,400,000 ) Net cash used in financing activities (6,753 ) (16,418,638 ) NET DECREASE IN CASH AND CASH EQUIVALENTS (358,118 ) (23,812,581 ) CASH AND CASH EQUIVALENTS, beginning of period $ 3,717,599 $ 29,406,063 CASH AND CASH EQUIVALENTS, end of period $ 3,359,481 $ 5,593,482 SUPPLEMENTAL SCHEDULE OF CASH RELATED ACTIVITIES: Interest paid $ 2,154 $ 3,684 Income taxes paid $ 38,000 $ 73,025 The accompanying notes to condensed consolidated financial statements are an integral part of these condensed consolidated statements of cash flows. [ 5 ] HOLLYWOOD MEDIA CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION AND CONSOLIDATION: In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared by Hollywood Media Corp. (“Hollywood Media”, “our” or “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to applicable rules and regulations. However, management believes that the disclosures contained herein are adequate to make the information presented not misleading. The accompanying financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to present fairly Hollywood Media’s condensed consolidated financial position, results of operations and cash flows. The results of operations for the three months ended March 31, 2012 and the cash flows for the three months ended March 31, 2012 are not necessarily indicative of the results of operations or cash flows for the remainder of 2012. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Hollywood Media’s Annual Report on Form 10-K for the year ended December 31, 2011, as amended, as filed with the Securities and Exchange Commission. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation Hollywood Media’s consolidated financial statements include the accounts of Hollywood Media and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Hollywood Media’s 50%, 26.2% and 21.74% ownership interests in NetCo Partners, MovieTickets.com and Project Hollywood LLC, respectively, are accounted for under the equity method of accounting. Loss per Common Share Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic No. 260, “Earnings Per Share” (ASC 260), requires companies to present basic and diluted earnings per share (“EPS”). Loss per common share is computed by dividing net loss attributable to Hollywood Media Corp. (the numerator) by the weighted average number of common shares outstanding (the denominator) for the period presented. The weighted average number of common shares issuable upon conversion of convertible securities and upon exercise of outstanding options and warrants totaled 75,000 shares for the three months ended March 31, 2012 and such shares were excluded from the calculation of basic and diluted loss per share for the three months ended March 31, 2012, because their impact was anti-dilutive to the loss per share from continuing operations. Unvested shares are not included in the basic calculation until vesting occurs and are not included in the diluted calculation because they are anti-dilutive. There were no unvested shares as of March 31, 2012 and 2011, respectively. [ 6 ] For the Three Months Ended March 31, 2012 2011 Basic weighted average shares outstanding 23,179,066 28,067,957 Effect of dilutive unvested restricted stock - - Dilutive weighted average shares outstanding 23,179,066 28,067,957 Options to purchase shares of Common Stock and other stock-based awards outstanding which are not included in the calculation of diluted income (loss) per share because their impact is anti-dilutive 75,000 85,435 Receivables Receivables consist of unsecured amounts due from customers who have advertised on plasma TV displays, posters, brochures and websites in the Company’s UK business and amounts due from publishers relating to signed contracts in connection with the Company’s Intellectual Property business, to the extent that the earnings process is complete and amounts are realizable. Allowance for Doubtful Accounts Hollywood Media maintains an allowance for doubtful accounts for estimated losses (“Allowance”) resulting from the inability of its customers to make required payments. The Company’s accounting for doubtful accounts contains uncertainty because management must use judgment to assess the estimated collectability of these accounts. When preparing these estimates, management considers a number of factors, including the aging of customers’ accounts, past transactions with customers, creditworthiness of specific customers, historical trends and other information. The Allowance was $236,561 and $240,048 at March 31, 2012 and December 31, 2011, respectively. The Allowance is primarily attributable to receivables due from customers of the United Kingdom based companies CinemasOnline Limited, UK Theatres Online Limited, WWW.CO.UK Limited and Spring Leisure Limited (collectively known as “CinemasOnline”). Although the Company believes its Allowance is sufficient, if the financial condition of the Company’s customers were to unexpectedly deteriorate, additional Allowances may be required and the additional Allowances could materially impact the Company’s condensed consolidated financial statements. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many different geographical regions within the U.K. Segment Information ASC Topic No. 280, “Segment Reporting” , establishes standards for reporting of selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. ASC Topic No. 280 has been applied to the information appearing in Note 6. Derivative Instruments The Company records derivative instruments at fair value in our accompanying consolidated balance sheet with changes in the fair values of those instruments reported in earnings in our consolidated results of operations. The Company does not hold any derivative instruments that reduce risk associated with hedging exposure, accordingly the Company has not designated any of its derivatives liability financial instruments as hedge instruments. [ 7 ] Recent Accounting Pronouncements In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-4, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS . This ASU represents the converged guidance of the FASB and the IASB ("the Boards") on fair value measurement. The collective efforts of the Boards and their staffs have resulted in common requirements, including a consistent meaning of the term "fair value." The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRS. The ASU is effective during interim and annual periods beginning after December 15, 2011 and its adoption did not have a material effect on the Company’s consolidated financial statements. (3) DISCONTINUED OPERATIONS: Sale of Broadway Ticketing Division to Key Brand Entertainment, Inc. On December 15, 2010, Hollywood Media Corp. (“Hollywood Media”) completed the sale of its Broadway Ticketing Division (“the Broadway Sale”) through the sale of all of the outstanding capital stock of Theatre Direct NY, Inc. (“Theatre Direct”) to Key Brand Entertainment Inc. (“Key Brand”), as contemplated by the Stock Purchase Agreement, dated as of December 22, 2009, entered into between Hollywood Media and Key Brand (“the Purchase Agreement”). There are no material relationships among Hollywood Media and Key Brand or any of their respective affiliates other than in respect of the Purchase Agreement and the related ancillary agreements. Pursuant to the Purchase Agreement, at the closing of the Broadway Sale, (a) Hollywood Media received (i) $20,530,102 in cash (including $530,102 pursuant to the estimated working capital adjustment described in the Purchase Agreement), (ii) a $8,500,000 note (“the Loan”) from Key Brand pursuant to a Second Lien, Security and Pledge Agreement, dated as of December 15, 2010 (the “Credit Agreement”), pursuant to which Key Brand is obligated to pay Hollywood Media interest at a rate of 12% per annum, with the loan maturing on December 15, 2015, which Loan is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries, and (iii) a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct as of the closing date on a fully diluted basis at an exercise price of $.01 per share (the “Warrant”), and (b) Key Brand assumed $1,600,000 of liabilities associated with employment agreements with certain employees of Theatre Direct. In addition, Hollywood Media is entitled to receive earn-out payments (“the Earn-out”) of up to $14,000,000 contingent upon Theatre Direct and its subsidiaries achieving certain revenue targets during the period from the closing date through the end of the 10 th full fiscal year following the closing date as set forth in the Purchase Agreement. On April 22, 2012, the Company entered into Amendment No. 4 (the "Amendment") to the Broadway Sale Purchase Agreement which entitled the Company to receive an earn-out payment of $7,000,000 on or before October 1, 2012 (regardless of the actual revenues of Theatre Direct and its subsidiaries) and up to an additional $7,000,000 of earn-out payments contingent upon Theatre Direct and its subsidiaries achieving $123 million in revenue (excluding revenue from "group sales") during any annual period from July 1, 2011 through June 30, 2021 (provided that if such earn-out payment is earned based on revenues of Theatre Direct and its subsidiaries for the period from July 1, 2011 to June 30, 2012, then such earn-out payment will (i) be added to the principal amount of the $8.5 million loan due the Company under the Credit Agreement, (ii) accrue and be paid interest in accordance with the Credit Agreement, and (iii) be paid over the then remaining term of the Credit Agreement in equal quarterly installments). See Note 10 for revisions to the earn-out payments. Hollywood Media will record a gain on the loan and earn-out upon collection of consideration. The Warrant will be marked to market each reporting period to reflect changes in fair value. Hollywood Media received a payment of $257,833 and $255,000 of interest from Key Brand during the three months ended March 31, 2012 and 2011, respectively, in accordance with the terms of the Loan which was included in “Interest, net” in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2012. [ 8 ] After the closing date of the sale of Theatre Direct pursuant to the Purchase Agreement, Hollywood Media delivered on March 14, 2011 to Key Brand a closing statement setting forth Hollywood Media’s calculation of Theatre Direct’s working capital as of the closing date determined in the manner described in the Purchase Agreement. Pursuant to the closing statement, Hollywood Media accrued $3,702,620 as a working capital adjustment as of December 31, 2010 under the agreement which included $530,102 related to the estimated working capital delivered at closing by Key Brand. The working capital adjustment of $3,734,106 was paid on March 22, 2011 and included $31,486 of interest which is included in “Gain on sale of discontinued operations, net of income taxes” in the accompanying condensed consolidated statements of operations for the three months ending March 31, 2011. In connection with the transactions contemplated by the Purchase Agreement, Hollywood Media incurred (i) $440,000 plus payroll taxes in aggregate change of control payments to two executives in Hollywood Media’s legal department which were included in “Gain (loss) on sale of discontinued operations, net of income taxes” in the December 31, 2010 accompanying consolidated statements of operations which was paid as follows: $240,000 less payroll taxes was paid to one executive prior to December 31, 2010 and $200,000 less payroll taxes was paid to the other executive in January 2011. As of December 31, 2010, the $200,000 unpaid amount was included in “Accrued expenses and other” in the accompanying December 31, 2010 consolidated balance sheet; (ii) approximately $400,000 in severance payments payable by Hollywood Media to 14 employees after a brief transition period; (iii) approximately $250,000 in fees to a valuation firm for providing the fairness opinion to Hollywood Media’s board of directors in connection with evaluating and approving the Purchase Agreement and the transactions contemplated thereby; (iv) $1,361,632 in legal fees in connection with preparing and negotiating the Purchase Agreement and the related documents and preparing and filing the proxy statement relating to the transactions contemplated by the Purchase Agreement; and (v) $170,000 in investment banking fees for providing professional services to the Company. Hollywood.com Business On August 21, 2008, Hollywood Media entered into a purchase agreement with R&S Investments, LLC (“R&S Investments”) for the sale of Hollywood Media’s subsidiaries Hollywood.com, Inc. and Totally Hollywood TV, LLC (collectively, the “Hollywood.com Business”). R&S Investments is owned by Mitchell Rubenstein, Hollywood Media’s Chief Executive Officer and Chairperson of the Board, and Laurie S. Silvers, Hollywood Media’s President and Vice-Chairperson of the Board. Pursuant to the purchase agreement, Hollywood Media sold the Hollywood.com Business to R&S Investments for a potential purchase price of $10,000,000 cash, which includes $1,000,000 that was paid to Hollywood Media at closing and potential earn-out payments totaling $9,000,000, of which $1,892,692 has been paid as of March 31, 2012. Hollywood Media recognized $197,517 and $151,956 in earn-out gain during the three months ended March 31, 2012 and 2011, respectively, which is included in “Income from discontinued operations” in our accompanying condensed consolidated statements of operations. Hollywood Media does not have a significant continuing involvement in the Hollywood.com Business operations. [ 9 ] The earn-out payments equal the greater of 10 percent of gross collected revenue and 90 percent of EBITDA (as defined in the purchase agreement) for the Hollywood.com Business until the earn-out is fully paid. The Company considers the remaining potential earn-out payments to be contingent consideration and non-recourse. Thus, the Company will not record a receivable and any corresponding gain until the contingencies have been met. The Company will estimate an appropriate reserve for at-risk amounts, if necessary, at the time that any accounts receivable are recorded. As of March 31, 2012, there remains $7,107,308 in potential earn-out payments. Hollywood Media has received the earn-out monies in accordance with the payment terms. If a subsequent change of control of the Hollywood.com Business, or a portion thereof, occurs before the earn-out is fully paid, the remaining portion of the earn-out would be paid to the Company immediately upon such an event, up to the amount of the consideration received less related expenses. If the aggregate proceeds received by the Company in such a change of control are less than the remaining balance of the earn-out, then the surviving entity which owns the Hollywood.com Business will be obligated to pay the difference in accordance with the same earn-out terms. (4) PURCHASE OF COMMON STOCK TENDERED: On February 25, 2011, Hollywood Media announced the final results of a tender offer to purchase up to 8,000,000 shares of its common stock at a price of $2.05 per share (less any applicable withholding taxes and without interest) which tender offer expired on February 18, 2011. Hollywood Media accepted 8,000,000 shares for purchase for a total cost of approximately $16,400,000. The number of shares properly tendered was 24,157,429. Accordingly, payment was made for approximately 33% of the tendered shares, and the rest of the tendered shares were withdrawn from the tender offer. Immediately following the purchase of the tendered shares, Hollywood Media had 23,179,066 shares of common stock outstanding. During the three months ended March 31, 2012, Hollywood Media did not repurchase shares of its common stock. (5) FAIR VALUE MEASUREMENTS: The carrying amounts of cash and cash equivalents, receivables and accounts payable, approximate their fair values due to the short-term maturities of these instruments. The carrying value of notes payable approximates fair value because the interest rates approximate the market rates. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company’s cash management and investment policies restrict investments to low risk, highly-liquid securities, and the Company performs periodic evaluations of the credit standing of the financial institutions with which it deals. The Company generally does not require collateral when granting credit. The Company performs ongoing credit evaluations and maintains an allowance for doubtful accounts for accounts which management believes may have become impaired and, to date, losses have not been significant. See Note 2 for a further discussion on allowance for doubtful accounts. Fair value is the price that would be received to sell an asset or paid to transfer a liability in the Company’s principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date, essentially the exit price. In accordance with ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), the Company determines fair value using a fair value hierarchy that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the Company and the Company’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. [ 10 ] The levels of fair value hierarchy are: Level 1: Quoted prices in active markets for identical assets and liabilities at the measurement date. Level 2: Observable inputs other than quoted prices included in Level 1, such as (i) quoted prices for similar assets and liabilities in active markets, (ii) quoted prices for identical or similar assets and liabilities in markets that are not active, and (iii) other inputs that are observable or can be corroborated by observable market data. Level 3: Unobservable inputs for which there is little or no market data available. Within this level of the hierarchy, fair value is based upon the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by the Company. The Company considers observable data to be market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. In contrast, the Company considers unobservable data to be data that reflects the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Compensation Liabilities On December 29, 2009, t he Company and Mitchell Rubenstein and Laurie S. Silvers entered into amended and restated employment agreements which include a compensation arrangement that includes the right for each to receive 5% of all of the distributions that the Company receives from its interest in MovieTickets.com which includes 5% to each of all proceeds received by the Company from either dividends or from the sale of all or any portion of MovieTickets.com . The fair value of this liability, which was initially measured on March 15, 2011, the date that the compensation arrangement was effective, is recorded in “Derivative Liabilities”, with any changes in the fair value recorded in “Other, net” in the accompanying consolidated statement of operations. At March 31, 2012, the fair value of the derivative liability was $1,090,000. Warrant In conjunction with the Broadway Sale, the Company received a warrant (initially valued at zero) to purchase 5% of the outstanding shares of common stock of Theatre Direct, which can only be exercised upon a Conversion Event, as defined, and which also contains a put option that allows the Company, after the seventh anniversary of the issue date, to put the warrant to Key Brand for the greater of fair market value of the shares or $1.0 million. The warrant is revalued on a recurring basis. After estimating future cash flows adjusted for risk factors it was determined that the fair value was zero at March 31, 2012. Certain assets such as long-lived assets and goodwill are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstance such as impairment review. In those circumstances, fair value measurements are principally based upon unobservable inputs (Level 3 of the fair value hierarchy) using the Company’s own assumptions in determining fair value. [ 11 ] The following table presents the Company’s derivative liabilities and warrant on a recurring basis and the Company’s goodwill on a non-recurring basis within the fair value hierarchy utilized to measure fair value as of March 31, 2012: Level 1 Level 2 Level 3 Derivative liabilities – March 31, 2012 -0- -0- $ 1,090,000 Warrant – March 31, 2012 -0- -0- -0- Goodwill – March 31, 2012 -0- -0- $ 9,800,000 There were no transfers between the levels of the fair value hierarchy during the quarter ended March 31, 2012. The following table presents a reconciliation of the compensation derivative liabilities measured at fair value on a recurring basis using significant unobservable input (Level 3) from December 31, 2011 to March 31, 2012: Compensation derivative liabilities Balance at December 31, 2011 $ 1,090,000 Payment to officers - Change in fair value included in earnings - Balance at March 31, 2012 $ 1,090,000 (6) SEGMENT REPORTING: Hollywood Media’s reportable segments are Ad Sales, Intellectual Properties, and Other. The Ad Sales segment sells advertising on plasma TV displays throughout the U.K. and Ireland, on lobby display posters, movie brochure booklets and ticket wallets distributed in cinemas, live theater and other entertainment venues in the U.K and Ireland. This segment also includes Hollywood Media’s investment in MovieTickets.com. The Intellectual Properties segment owns or controls the exclusive rights to certain intellectual properties created by best-selling authors and media celebrities, which it licenses across all media. This segment also includes Tekno Books, a book development business. The Other segment is comprised of payroll and benefits for corporate and administrative personnel as well as other corporate-wide expenses such as legal fees, audit fees, proxy costs, insurance, centralized information technology, and includes consulting fees and other fees and costs relating to compliance with the provisions of the Sarbanes-Oxley Act of 2002 that require Hollywood Media to make an assessment of and report on internal control over financial reporting. This segment also includes Hollywood Media’s investment in Project Hollywood. There are no intersegment sales or transfers. [ 12 ] The following table illustrates the financial information regarding Hollywood Media’s reportable segments. Three months ended March 31, 2012 2011 (unaudited) (unaudited) Net Revenues: Ad Sales $ 533,041 $ 742,225 Intellectual Properties 176,834 228,648 Other - - $ 709,875 $ 970,873 Operating Income (Loss): Ad Sales $ (86,191 ) $ 8,786 Intellectual Properties 18,905 14,237 Other (908,336 ) (2,071,233 ) $ (975,622 ) $ (2,048,210 ) Capital Expenditures: Ad Sales $ - $ - Intellectual Properties - - Other 16,890 29,011 $ 16,890 $ 29,011 Depreciation and Amortization Expense: Ad Sales $ 5,043 $ 17,157 Intellectual Properties 1,112 164 Other 36,482 57,485 $ 42,637 $ 74,806 March 31, December 31, 2012 2011 (unaudited) Segment Assets: Ad Sales $ 10,704,398 $ 10,607,682 Intellectual Properties 1,106,322 1,201,695 Other 5,831,349 6,413,412 $ 17,642,069 $ 18,222,789 (7) CERTAIN COMMITMENTS AND CONTINGENCIES: Litigation On October 27, 2011, the Company, together with National Amusements Inc. and the MovieTickets.com Joint Venture, filed a lawsuit against AMC Entertainment Inc. (“AMC”) and MovieTickets.com Inc. (as nominal defendant) (Case No. 50 2011 CA 016684) in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida relating to MovieTickets.com. On February 8, 2012, MovieTickets.com, Inc. joined the lawsuit against AMC and an amended complaint was filed. MovieTickets.com is an online movie ticketing service in which Hollywood Media, National Amusements, Inc. and AMC each own a 26.2% equity interest. [ 13 ] The amended complaint alleges that AMC has breached and continues to breach the MovieTickets.com Joint Venture Agreement, which obligates AMC to exclusively provide its ticket inventory to MovieTickets.com, and has breached its contractual and common law duties of good faith, fair dealing, and loyalty with respect to MovieTickets.com and its joint venturers, Hollywood Media and National Amusements, Inc., as a result of various actions by AMC. The amended complaint contends that when AMC’s demands for greater control and a larger share of MovieTickets.com were not met, AMC breached and continues to breach the MovieTickets.com Joint Venture Agreement, which obligates AMC to exclusively provide its ticket inventory to MovieTickets.com. The amended complaint further specifies breaches by AMC of its contractual and common law duties of good faith, fair dealing, and loyalty and violations of Florida’s Deceptive and Unfair Trade Practices Act. Among other things, the plaintiffs allege in the amended complaint that AMC used its inside position with MovieTickets.com and access to MovieTickets.com’s proprietary information in order to advance AMC’s own goals in contravention of its duty of loyalty to the joint venture and to the detriment of MovieTickets.com. Hollywood Media and the other plaintiffs have asked for a jury trial and are seeking unspecified consequential damages and have reserved the right to seek punitive damages. Hollywood Media and the other plaintiffs also are seeking a declaratory judgment that AMC is obligated to make available on MovieTickets.com’s website AMC’s ticket inventory for sale on an exclusive basis and to honor its’ contractual and common law fiduciary duties of good faith and loyalty. Discovery is proceeding. Hollywood Media is from time to time party to various legal proceedings, including matters arising in the ordinary course of business. Currently, the Company is unaware of any actual or threatened litigation against it. (8) MOVIETICKETS.COM: Hollywood Media owns 26.2% of the equity in MovieTickets.com, Inc. as of March 31, 2012 and shares in 26.2% of the income or losses generated by the joint venture. This investment is recorded under the equity method of accounting, recognizing 26.2% of ownership of MovieTickets.com income or loss as “Equity in Earnings of Unconsolidated Investees” in the accompanying consolidated balance sheets. Hollywood Media recorded its 26.2% share of net income or $48,919 and $63,458 under “Earnings of unconsolidated investees” in the accompanying unaudited condensed consolidated statement of operations for the three months ended March 31, 2012 and 2011, respectively. On July 18, 2011 MovieTickets.com declared a dividend of $4,000,000. Hollywood Media received its 26.2% pro rata share of such dividend, amounting to $1,048,875 on July 19, 2011, which reduced the Company’s investment in MovieTickets.com as the dividend did not exceed the amount of the Company’s investment. Hollywood Media distributed on July 19, 2011 $52,444 of such dividend distribution, representing 5% of Hollywood Media’s share of the dividends, to each of Mr. Rubenstein and Ms. Silvers in accordance with their amended and restated employment agreements dated December 23, 2009. Other than the July 18, 2011 dividend discussed above, there were no dividends declared or received during the three months ended March 31, 2012 or during the year ended December 31, 2011. For a description of the amended and restated employment agreements to Mr. Rubenstein and Ms. Silvers, see Note 9, “Related Party Transactions” to these unaudited condensed consolidated financial statements. [ 14 ] (9) RELATED PARTY TRANSACTIONS: On October 27, 2011, following Project Hollywood LLC’s acquisition of all of the membership interests of Baseline LLC, Hollywood Media acquired a 21.74% ownership interest in Project Hollywood LLC for $1.25 million, which was contributed to Project Hollywood LLC and which was based on the same per membership unit price paid by Baseline Holdings for its 78.26% ownership interest in Project Hollywood LLC. The funds contributed were used for working capital and other capital needs of the Baseline StudioSystems business. Project Hollywood entered into two agreements with the two former senior executives of Baseline StudioSystems to manage the business on a day-to-day basis, as of December 1, 2011. Under those agreements, the managers will each receive 7.5% of Project Hollywood LLC’s membership units subject to a three year vesting schedule (at a rate of 2.5% per annum) and the obtaining of certain performance-based EBITDA hurdles each year. Under that vesting schedule (and if vesting occurs), Hollywood Media’s ownership in Project Hollywood will be reduced to 20.65% at June 30, 2012, 19.57% at June 30, 2013 and 18.48% at June 30, 2014. Distributions of $176,866 and $130,683 from Project Hollywood to Hollywood Media reduced Hollywood Media’s investment in Project Hollywood during the year ended December 31, 2011 and quarter ended March 31, 2012, respectively. Hollywood Media recorded $197,517 in earn-out gain from R&S Investments, LLC during the three months ending March 31, 2012 which is included in “Income from discontinued operations” recorded in the accompanying condensed consolidated statement of operations. As of March 31, 2012, the Company has $518,734 included in “Related party receivable” in our accompanying consolidated balance sheet which consisted of $413,359 in earn-out receivable, $61,115 in distributions receivable from Project Hollywood, $40,779 in expense reimbursements from R&S Investments and $3,481 for an expense reimbursement receivable from MovieTickets.com. Subsequent to March 31, 2012, Hollywood Media received such earn-out amounts and expense reimbursements in accordance with the payment terms. Hollywood Media recorded $151,956 in earn-out gain from R&S Investments, LLC during the three months ending March 31, 2011 which is included in “Income from discontinued operations” recorded in the accompanying condensed consolidated statement of operations. As of December 31, 2011, the Company has $521,497 included in “Related party receivable” in our accompanying consolidated balance sheet which consisted of $371,353 in earn-out receivable, $105,561 in distributions receivable from Project Hollywood, $36,106 in expense reimbursements from R&S Investments, $5,904 for an expense reimbursement receivable from MovieTickets.com and $2,576 for a combined receivable from Mr. Rubenstein and Ms. Silvers. R&S Investments, LLC Indemnification On November 5, 2010, Hollywood.com, LLC, a former subsidiary of the Company, was sued for copyright infringement for the alleged display of unlicensed celebrity photographs on the hollywood.com website, which is owned by Hollywood.com, LLC. Certain of the celebrity photographs at issue were posted during the time that Hollywood Media Corp. owned Hollywood.com. Because Hollywood Media owned Hollywood.com during part of the time that the alleged display of unlicensed celebrity photographs on the hollywood.com website occurred, the possibility exists that Hollywood Media could be subject to claims relating to this matter and other similar claims. To address the potential risks to Hollywood Media associated with any such claims, in February 2011, Hollywood Media entered into an indemnification agreement with R&S Investments, LLC, whereby R&S Investments, LLC agrees to indemnify and hold Hollywood Media harmless from any and all potential liabilities and claims against Hollywood Media arising from any such claims in exchange for a one-time cash payment by Hollywood Media to R&S Investments, LLC of $350,000. The indemnification agreement was approved on behalf of the Company by an Independent Committee of the Board of Directors. [ 15 ] Amended and Restated Employment Agreements of Mr. Rubenstein and Ms. Silvers On December 23, 2009, (i) Hollywood Media and Mitchell Rubenstein entered into an amendment to his amended and restated employment agreement and (ii) Hollywood Media and Laurie S. Silvers entered into an amendment to her amended and restated employment agreement (hereafter, collectively referred to as “Amendments to Employment Agreements). The Amendments to Employment Agreements provide for, among other things, the following: • For a period of ninety days after the closing of the sale of Theatre Direct, Mr. Rubenstein’s and Ms. Silvers’ compensation continues in accordance with then existing terms. • After this ninety-day period, Mr. Rubenstein and Ms. Silvers base salaries are each reduced to a nominal amount of $1 per year plus each is entitled to five percent (5%) of the sum of (i) any distributions and other proceeds Hollywood Media receives after such ninety-day period in connection with its ownership interest in MovieTickets.com, Inc. and (ii) certain other amounts that may be received by Hollywood Media from MovieTickets.com, Inc. ((i) and (ii) are referred to herein as the “5% Distribution”). Upon a sale of Hollywood Media’s interest in MovieTickets.com, Inc., Mr. Rubenstein and Ms. Silvers would each also receive 5% of the proceeds received by Hollywood Media in such sale. Should the employment agreements be terminated by Hollywood Media without “cause”, by death or by Mr. Rubenstein and/or Ms. Silvers, as applicable, for “good reason” the 5% Distributions and 5% of proceeds upon sale are due to Mr. Rubenstein and Ms. Silvers or their heirs regardless of whether or not Mr. Rubenstein and/or Ms. Silvers continue in the employment of the Company. • A deferment by Mr. Rubenstein and Ms. Silvers of $812,501 and $332,189, respectively otherwise due to them as change of control payments upon the consummation of the sale of Theatre Direct (Deferred Change in Control Payments). The Amendments to Employment Agreements also provide that if Mr. Rubenstein and/or Ms. Silvers, continue to be employed by Hollywood Media on the first anniversary (Sale Anniversary) of the sale of Theatre Direct (or if such employment is terminated on or before the Sale Anniversary by Hollywood Media without “cause” or by Mr. Rubenstein and/or Ms. Silvers, as applicable, for “good reason”), and Hollywood Media receives payments from the buyer of Theatre Direct under either i) the Promissory Note or ii) an earn-out provision (Earn-out), they may be entitled to their Deferred Change in Control Payments. Specifically, up to one-half of the Deferred Change in Control Payments would be due upon collections under the Promissory Note, on a pro-rata basis, and up to one-half of the Deferred Change in Control Payments would be due upon certain collections of the Earn-out, on a pro-rata basis. These amounts will be due to Mr. Rubenstein, Ms. Silvers and/or their heirs regardless of whether or not Mr. Rubenstein and/or Ms. Silvers continue in the employment of Hollywood Media after the Sale Anniversary. The Deferred Change in Control Payments would be due according to the following schedule: • Mr. Rubenstein will be entitled to: • 4.76% of all payments of principal and interest received by Hollywood Media on account of the Promissory Note (for a maximum amount of $407,201, of which a total of $63,657 has been paid to Mr. Rubenstein), and • 5.79% of the first $7 million of Earn-out payments received by Hollywood Media (for a maximum amount of $405,300). [ 16 ] • Ms. Silvers will be entitled to: • 1.94% of all payments of principal and interest received by Hollywood Media on account of the Promissory Note (for a maximum amount of $166,989 of which a total of $25,944 has been paid to Ms. Silvers), and • 2.36% of the first $7 million of Earn-out payments received by Hollywood Media (for a maximum amount of $165,200). From time to time the Company’s Compensation Committee may award discretionary bonuses to Mr. Rubenstein and Ms. Silvers based on their service or performance to the Company. (10) SUBSEQUENT EVENTS: Amendment to the Broadway Sale Purchase Agreement On April 22, 2012, the Company entered into the Amendment to the Broadway Sale Purchase Agreement. Pursuant to the Amendment, the Company consented to the contribution of the “ group sales ” business (but not the Broadway.com consumer ticketing business) owned by Key Brand to a newly formed joint venture (the “Group Sales JV”; such contribution, the “Group Sales Contribution”). The balance of the business sold to Key Brand under the terms of the Purchase Agreement, which includes Broadway.com, remains at Key Brand and Theatre Direct. As part of the Amendment, Key Brand agreed to pay the first $7 million earn-out amount to the Company on or before October 1, 2012 regardless of the actual revenues of Theatre Direct and its subsidiaries for the fiscal year of Key Brand ending June 30, 2012. The $7 million earn-out amount agreed to by Key Brand will be recorded upon collection of the amount. In addition, the revenue calculation for the second $7 million earn-out amount (the “Second Earn-out”) was modified to exclude “ group sales ” (and the revenues of the new joint venture conducting such business) and the target for such second earn-out was reduced from $150 million to $123 million accordingly. Lastly, if the Second Earn-out amount is earned in Key Brand’s fiscal year ending June 30, 2012, then such amount would be added to the principal amount of the $8.5 million loan due the Company under the Credit Agreement, would accrue and be paid interest in accordance with such loan, and be paid over the then remaining term of the Credit Agreement in equal quarterly installments, in each case as further described below. If the Second Earn-out amount is earned in any subsequent fiscal year, then such amount would be paid pursuant to the terms of the Purchase Agreement. The Company also consented to certain amendments to the Credit Agreement, including consent to the Group Sales Contribution and to provide for additional reporting requirements. The Company also agreed to amend the Subordination and Intercreditor Agreement, dated December 15, 2010 (the “Intercreditor Agreement”), among the Company, Key Brand and JPMorgan Chase Bank, N.A., as administrative agent for the senior secured lenders of Key Brand, to provide that, subject to Key Brand’s compliance with the terms and conditions of its senior secured credit agreement, Key Brand would be permitted to make scheduled quarterly installment payments of the Second Earn-out amounts prior to the maturity of the Credit Agreement, notwithstanding that the obligations under the Credit Agreement are subordinated to Key Brand’s obligations under the senior secured credit agreement. [ 17 ] Sale of Cinemasource UK Limited - Share Purchase Agreement On May 1, 2012, the Company entered into a share purchase agreement (the “Share Purchase Agreement”) with Orchard Advertising Limited (“Buyer”), pursuant to which the Company sold, and Buyer purchased, the entire issued share capital of Cinemasource UK Limited (the “Purchased Shares”) which business was part of the Company’s Ad Sales division and included UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and WWW.Co.UK Limited. Cinemasource UK Limited accounted for approximately 75% and 76% of net revenues for the three months ended March 31, 2012 and 2011, respectively and approximately $(12,000) and $28,000 in net income (loss) for the same periods. Additionally, Cinemasource UK Limited accounted for approximately $600,000 of total consolidated assets as of March 31, 2012 and substantially all the deferred revenue as of March 31, 2012. Jeffrey Spector, a director of Buyer, is also (i) a director of all four subsidiaries of Cinemasource UK Limited (UK Theatres Online Limited, Spring Leisure Limited, Cinemasonline Limited and WWW. Co.UK Limited) and (ii) an employee of one of the subsidiaries of Cinemasource UK Limited (UK Theatres Online). Janette Erskine, a director of Buyer, is also (i) a director of three subsidiaries of Cinemasource UK Limited (UK Theatres Online Limited, Spring Leisure Limited and Cinemasonline Limited) and (ii) an employee of one of the subsidiaries of Cinemasource UK Limited (UK Theatres Online). None of Buyer's directors, officers or shareholders are (or were ever) directors or officers of Hollywood Media. Pursuant to the Share Purchase Agreement, the purchase price for the Purchased Shares is U.S. $250,000, payable in cash in twenty equal quarter-annual installments of $12,500 each over a period of five years. Subject to the terms and conditions of the Share Purchase Agreement, the first installment of the purchase price is due on July 31, 2012 and subsequent installments of the purchase price are due every three calendar months thereafter. The purchase price for the Purchased Shares is collateralized by a lien on the Purchased Shares (and certain dividends, payments or other derivative assets received in respect of the Purchased Shares) pursuant to the terms of the share charge deed, dated as of May 1, 2012, between the Company and Buyer (the “Share Charge Deed”). Except as permitted by the Share Purchase Agreement, the Share Charge Deed also restricts Buyer from (i) permitting any other lien to exist against the Purchased Shares (and certain dividends, payments or other derivative assets received in respect of the Purchased Shares), (ii) selling or transferring the Purchased Shares (and certain dividends, payments or other derivative assets received in respect of the Purchased Shares), and (iii) disposing of the equity of redemption in respect of the Purchased Shares (and certain dividends, payments or other derivative assets received in respect of the Purchased Shares). In the event of (i) a transaction whereby any persons or group of persons acting in concert purchase at least 80% of the Purchased Shares or at least 80% of the issued share capital of each of the subsidiaries of Cinemasource UK Limited or Buyer or (ii) a transaction whereby any person or group of persons acting in concert purchase the whole or substantially the whole of the business and assets of Cinemasource UK Limited and its subsidiaries (each, an “Exit Event”), then (A) if the proposed purchaser in such Exit Event is a “connected person” to Buyer (as set forth in the Share Purchase Agreement) or if the aggregate consideration payable to Buyer, Cinemasource UK Limited and its subsidiaries, and/or the shareholders of Buyer in respect of an Exit Event (the “Subsequent Sale Proceeds”) exceeds the balance of the purchase price remaining to be paid by Buyer to the Company under the Share Purchase Agreement (the “Balance”), then the Balance shall become immediately payable to the Company or (B) if the proposed purchaser is not a “connected person” to Buyer and the Subsequent Sale Proceeds are less than the Balance, then Buyer will pay to The Company the amount of the Subsequent Sale Proceeds in lieu of the Balance, unless the Company requests that the Purchased Shares are transferred back to the Company (and Buyer transfers the Purchased Shares back to the Company) in satisfaction of the Balance. [ 18 ] ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Note Regarding Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q or that are otherwise made by us or on our behalf about our financial condition, results of operations and business constitute “forward-looking statements,” within the meaning of federal securities laws. Hollywood Media Corp. (“Hollywood Media”, “our”, or “Company”) cautions readers that certain important factors may affect Hollywood Media’s actual results, levels of activity, performance or achievements and could cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements anticipated, expressed or implied by any forward-looking statements that may be deemed to have been made in this Quarterly Report on Form 10-Q or that are otherwise made by or on behalf of Hollywood Media. Without limiting the generality of the foregoing, “forward-looking statements” are typically phrased using words such as “may,” “will,” “should,” “expect,” “plans,” “believe,” “anticipate,” “intend,” “could,” “estimate,” “pro forma” or “continue” or the negative variations thereof or similar expressions or comparable terminology. Factors that may affect Hollywood Media’s results and the market price of our common stock include, but are not limited to: · our continuing operating losses; · negative cash flows and accumulated deficit; · our ability to develop and maintain strategic relationships; · MovieTickets.com Inc.’s ability to compete with the other online movie ticketing service and other competitors, and the outcome of, and potential impact of matters relating to, the lawsuit filed by Hollywood Media, National Amusements Inc. and MovieTickets.com, Inc. against AMC Entertainment Inc. relating to MovieTickets.com (for more information about such lawsuit, see Part II, Item 1 (Legal Proceedings) of this Quarterly Report on Form 10-Q and Note 7 “Certain Commitments and Contingencies” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q); · our ability to maintain and obtain sufficient capital to finance our operations; · our ability to realize anticipated cost efficiencies; · government regulation; · adverse economic factors such as recession, war, terrorism, international incidents or labor strikes and disputes; · our ability to design, implement and maintain effective internal controls; · dependence on our founders; · the unpredictability of our stock price; · the possibility of our common stock being delisted from the NASDAQ Global Market and not qualifying for trading on another exchange or market (such as the NASDAQ Capital Market, the NYSE Amex (formerly the American Stock Exchange) or the over-the-counter market); · the possibility of not receiving payments from Key Brand Entertainment Inc. in connection with the sale of our Broadway Ticketing business pursuant to that certain Second Lien Credit Security Pledge Agreement dated as of December 15, 2010, entered into by Theatre Direct NY, Inc., Key Brand Entertainment Inc., and Hollywood Media (the “Credit Agreement”) or payment due under Amendment No. 4 (the “Amendment”) to the Broadway Sale Purchase Agreement or pursuant to the potential earn-out under that certain Stock Purchase Agreement, dated as of December 22, 2009, entered into between Hollywood Media and Key Brand Entertainment Inc. (as amended, the “Purchase Agreement”); [ 19 ] · the impact of the death of Tekno Books’ former Chief Executive Partner, Dr. Martin Greenberg, on the ability of Tekno Books to maintain relationships it has with certain authors and publishers; · the timing and amount of the payments we receive pursuant to the Credit Agreement and the potential earn-out under the Purchase Agreement; and · our ability to exercise or put our warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct NY, Inc. issued to us by Theatre Direct NY, Inc. pursuant to the Purchase Agreement. Hollywood Media is also subject to other risks detailed herein, or detailed in our Annual Report on Form 10-K for the year ended December 31, 2011, as amended, and in other filings made by Hollywood Media with the Securities and Exchange Commission. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors, including unknown or unpredictable ones, also could have material adverse effects on our future results. Because these forward-looking statements are subject to risks and uncertainties, we caution you not to place undue reliance on these statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any responsibility to review or confirm analysts’ expectations or estimates or to release publicly any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this Quarterly Report on Form 10-Q, except as required by law. As a result of the foregoing and other factors, no assurance can be given as to the future results, levels of activity or achievements and neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Overview Until December 15, 2010, Hollywood Media was comprised of various businesses focusing primarily on online ticket sales, deriving revenue primarily from Broadway, Off-Broadway and London’s West End ticket sales to individuals and groups, as well as advertising and book development license fees and royalties. Our Broadway Ticketing business was comprised of Broadway.com, 1-800-BROADWAY, Theatre Direct and Theatre.com. On December 15, 2010, we completed the sale of our Broadway Ticketing Business through the sale of all of the outstanding capital stock of Theatre Direct to Key Brand, as contemplated by the Purchase Agreement. Following this sale, our business segments for our continuing operations are as follows: · Ad Sales – includes UK Theatres Online (formerly CinemasOnline), which sells advertising on plasma TV displays throughout the U.K. and Ireland, on lobby display posters, movie brochure booklets and ticket wallets distributed in cinemas, live theater and other entertainment venues in the U.K. and Ireland. This segment also includes Hollywood Media’s 26.2% equity interest in MovieTickets.com. See Note 10 “Subsequent Events” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for information on the Company’s sale of UK Theatres Online on May 1, 2012. [ 20 ] · Intellectual Properties – owns or controls the exclusive rights to certain intellectual properties created by best-selling authors and media celebrities, which it licenses for book and other media. This segment includes our wholly-owned subsidiary, Tekno Books, and a book development business, and this segment does not include our 50% interest in NetCo Partners, for purposes of this discussion and analysis. · Other – is comprised of payroll and benefits for corporate and administrative personnel as well as other corporate-wide expenses, such as legal fees, audit fees, proxy costs, insurance, centralized information technology, and includes consulting and other fees and costs relating to compliance with the provisions of the Sarbanes-Oxley Act of 2002 that require Hollywood Media to assess and report on internal control over financial reporting, and related development of controls. This segment also includes Hollywood Media’s 21.74% equity interest in Project Hollywood, which in turn owns Baseline. Results of Operations The following discussion and analysis should be read in conjunction with Hollywood Media’s Unaudited Condensed Consolidated Financial Statements and the notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q. The following table summarizes Hollywood Media’s revenues, operating expenses and operating income (loss) from continuing operations by reportable segment for the three months ended March 31, 2012 (“Q1-12”) and 2011 (“Q1-11”), respectively: Intellectual Ad Sales Properties Other Total Q1-12 (unaudited) Net Revenues $ 533,041 $ 176,834 $ - $ 709,875 Operating Expenses 619,232 157,929 908,336 1,685,497 Operating Income (Loss) $ (86,191 ) $ 18,905 $ (908,336 ) $ (975,622 ) % of Total Net Revenue 75 % 25 % - 100 % Q1-11 (unaudited) Net Revenues $ 742,225 $ 228,648 $ - $ 970,873 Operating Expenses 733,439 214,411 2,071,233 3,019,083 Operating Income (Loss) $ 8,786 $ 14,237 $ (2,071,233 ) $ (2,048,210 ) % of Total Net Revenue 76 % 24 % - 100 % Results of Discontinued Operations Sale of Broadway Ticketing Division to Key Brand Entertainment, Inc. On December 15, 2010, Hollywood Media Corp. (“Hollywood Media”) completed the sale of its Broadway Ticketing Division (“the Broadway Sale”) through the sale of all of the outstanding capital stock of Theatre Direct NY, Inc. (“Theatre Direct”) to Key Brand Entertainment Inc. (“Key Brand”), as contemplated by the Stock Purchase Agreement, dated as of December 22, 2009, entered into between Hollywood Media and Key Brand (“the Purchase Agreement”). There are no material relationships among Hollywood Media and Key Brand or any of their respective affiliates other than in respect of the Purchase Agreement and the related ancillary agreements. [ 21 ] Pursuant to the Purchase Agreement, at the closing of the Broadway Sale, (a) Hollywood Media received (i) $20,530,102 in cash (including $530,102 pursuant to the estimated working capital adjustment described in the Purchase Agreement), (ii) a $8,500,000 note (“the Loan”) from Key Brand pursuant to a Second Lien, Security and Pledge Agreement, dated as of December 15, 2010 (the “Credit Agreement”), pursuant to which Key Brand is obligated to pay Hollywood Media interest at a rate of 12% per annum, with the loan maturing on December 15, 2015, which Loan is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries, and (iii) a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct as of the closing date on a fully diluted basis at an exercise price of $.01 per share (the “Warrant”), and (b) Key Brand assumed $1,600,000 of liabilities associated with employment agreements with certain employees of Theatre Direct. In addition, Hollywood Media is entitled to receive earn-out payments (“the Earn-out”) of up to $14,000,000 contingent upon Theatre Direct and its subsidiaries achieving certain revenue targets during the period from the closing date through the end of the 10 th full fiscal year following the closing date as set forth in the Purchase Agreement. On April 22, 2012, the Company entered into Amendment No. 4 (the "Amendment") to the Broadway Sale Purchase Agreement which entitled the Company to receive an earn-out payment of $7,000,000 on or before October 1, 2012 (regardless of the actual revenues of Theatre Direct and its subsidiaries) and up to an additional $7,000,000 of earn-out payments contingent upon Theatre Direct and its subsidiaries achieving $123 million in revenue (excluding revenue from "group sales") during any annual period from July 1, 2011 through June 30, 2021 (provided that if such earn-out payment is earned based on revenues of Theatre Direct and its subsidiaries for the period from July 1, 2011 to June 30, 2012, then such earn-out payment will (i) be added to the principal amount of the $8.5 million loan due the Company under the Credit Agreement, (ii) accrue and be paid interest in accordance with the Credit Agreement, and (iii) be paid over the then remaining term of the Credit Agreement in equal quarterly installments). See Note 10 “Subsequent Events” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for revisions to the earn-out payments. Hollywood Media will record a gain on the loan and earn-out upon collection of consideration. The Warrant will be marked to market each reporting period to reflect the changes in fair value. After the closing date of the sale of Theatre Direct pursuant to the Purchase Agreement, Hollywood Media delivered on March 14, 2011 to Key Brand a closing statement setting forth Hollywood Media’s calculation of Theatre Direct’s working capital as of the closing date determined in the manner described in the Purchase Agreement. Pursuant to the closing statement, Hollywood Media accrued $3,702,620 as a working capital adjustment as of December 31, 2010 under the agreement which included $530,102 related to the estimated working capital delivered at closing by Key Brand. This working capital adjustment of $3,734,106 was paid on March 22, 2011 and included $31,486 of interest which is included in “Gain on sale of discontinued operations, net of income taxes” in the accompanying condensed consolidated statements of operations for the three months ending March 31, 2011. For additional information about this transaction, see Note 3 “Discontinued Operations” and Note 10 “Subsequent Events” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q. [ 22 ] Sale of Hollywood.com Business Unit to R&S Investments, LLC On August 21, 2008, Hollywood Media entered into a purchase agreement (the “R&S Purchase Agreement”) with R&S Investments, LLC (“Purchaser”) for the sale of the Hollywood.com Business. The Purchaser is owned by Mitchell Rubenstein, Hollywood Media’s Chief Executive Officer and Chairperson of the Board, and Laurie S. Silvers, Hollywood Media’s President and Vice-Chairperson of the Board. Pursuant to the R&S Purchase Agreement, Hollywood Media sold the Hollywood.com Business to Purchaser for a potential purchase price of $10.0 million, which includes $1.0 million in cash which was paid to Hollywood Media at closing and potential earn-out payments totaling $9.0 million. During the three months ending March 31, 2012 and 2011, Hollywood Media recorded $197,517 and $151,956 respectively, in earn-out income under the R&S Purchase Agreement. As of the filing of this Quarterly Report on Form 10-Q, the earn-out receivable was collected in full in accordance with the payment terms. As of March 31, 2012, there remains $7,107,308 in potential earn-out payments pursuant to the R&S Purchase Agreement. The Hollywood.com Business included the Hollywood.com website and related URLs and celebrity fan websites and Hollywood.com Television, a free video on demand service distributed pursuant to annual affiliation agreements with certain cable operators. For additional information about this transaction, see Note 3 “Discontinued Operations” on the Notes to the Condensed Consolidated Financial Statements included in Item I, Part I of this Quarterly Report on Form 10-Q. NET REVENUES Total net revenues were $709,875 for Q1-12 as compared to $970,873 for Q1-11, a decrease of $260,998 or 27%. The decrease in net revenue in Q1-12 as compared to Q1-11 is primarily the result of a $209,184 decrease in Ad Sales revenue and a $51,814 decrease in Intellectual Property revenue. Ad Sales division net revenues were $533,041 for Q1-12 as compared to $742,225 for Q1-11, a decrease of $209,184 or 28%. The decrease in Ad Sales net revenues in Q1-12 as compared to Q1-11 is attributable to a decrease in UK advertising sales of $209,184, which includes: a decrease in plasma advertising revenue of $131,089 along with a decrease of $78,095 in brochure and web advertising. The decrease is primarily attributable to the adverse economic conditions in the UK. Net revenues from our Intellectual Properties division were $176,834 for Q1-12 as compared to $228,648 for Q1-11, a decrease of 23% or $51,814. The decrease in Intellectual Properties net revenues in Q1-12 as compared to Q1-11 was attributable to the timing of the delivery of manuscripts. The Intellectual Properties division generates revenues from several different activities including intellectual property licensing and book development. Revenues vary quarter to quarter depending on the timing of delivery of manuscripts to the publishers. Revenues are recognized when the earnings process is complete and the ultimate collection of such revenues is no longer subject to contingencies. This division does not include NetCo Partners, which is reported separately; see “Earnings (Losses) of Unconsolidated Investees” below. EARNINGS (LOSSES) OF UNCONSOLIDATED INVESTEES Earnings (losses) of unconsolidated investees consisted of the following: Three Months Ended March 31, (unaudited) 2012 2011 NetCo Partners (a) $ (241 ) $ 643 MovieTickets.com (b) 48,919 63,458 Project Hollywood (c) 23,119 - $ 71,797 $ 64,101 [ 23 ] (a) NetCo Partners Hollywood Media owns 50% of NetCo Partners as of March 31, 2012 and accounts for its investment under the equity method. NetCo Partners owns NetForce and is primarily engaged in the development and licensing of NetForce . NetCo Partners recognizes revenues when the earnings process has been completed based on the terms of the various agreements, generally upon the delivery of the manuscript to the publisher and at the point where ultimate collection is substantially assured. When advances are received prior to completion of the earnings process, NetCo Partners defers recognition of revenue until the earnings process has been completed. Hollywood Media’s 50% share of income of NetCo Partners was essentially $0 for Q1-12 and Q1-11. (b) MovieTickets.com Hollywood Media owns 26.2% of the equity in MovieTickets.com, Inc. as of March 31, 2012 and shares in 26.2% of the income or losses generated by the joint venture. This investment is recorded under the equity method of accounting, recognizing 26.2% of ownership of MovieTickets.com income or loss as “Equity in Earnings of Unconsolidated Investees” in the accompanying condensed consolidated statements of operations. Under applicable accounting principles, Hollywood Media recorded $48,919 in income from its investment in MovieTickets.com for Q1-12. Hollywood Media recorded $63,458 in income from its investment in MovieTickets.com for Q1-11. The MovieTickets.com web site generates revenues primarily from service fees charged to users for the purchase of movie tickets online, the sale of advertising and research fees. There were no dividends declared or received during Q1-12 or Q1-11. (c) Project Hollywood LLC Hollywood Media owns 21.74% of the total equity in Project Hollywood LLC (“Project Hollywood”) as of March 31, 2012 (Hollywood Media did not own any equity in Project Hollywood as of March 31, 2011). Hollywood Media records its investment in Project Hollywood under the equity method of accounting, recognizing its percentage interest in Project Hollywood’s income or loss as earnings of unconsolidated investees. Under applicable accounting principles, Hollywood Media recorded $23,119 in income from its investment in Project Hollywood for Q1-12. There were $130,683 of distributions during Q1-12. OPERATING EXPENSES Editorial, Production, Development and Technology. Editorial, production, development and technology costs include commissions, royalties, media buying, production services and internet access for CinemasOnline and fees and royalties paid to authors and co-editors for the Intellectual Properties segment. Editorial, production, development and technology costs were $448,821 for Q1-12 as compared to $626,416 for Q1-11, a decrease of $177,595 or 28%. As a percentage of revenues from our Ad Sales and Intellectual Properties segments, these costs were 63% and 65% for Q1-12 and Q1-11, respectively. The Q1-12 decrease compared to Q1-11 was due primarily from a $139,312 decrease in the Ad Sales segment, which is primarily attributable to the aforementioned decline in revenues. In addition, there was a $38,283 decrease in the Intellectual Properties segment operating expenses due to a decrease in payments to writers and co-editors. [ 24 ] Selling, General and Administrative. Selling, general and administrative (SG&A) expenses consist of occupancy costs, professional and consulting service fees, telecommunications costs, provision for doubtful accounts receivable, general insurance costs and selling and marketing costs (such as advertising, marketing, promotional, business development, public relations, and commissions due to advertising agencies, advertising representative firms and other parties). SG&A expenses for Q1-12 were $642,892 compared to $1,300,870 for Q1-11, a decrease of $657,978 or 51%. As a percentage of net revenue, SG&A expenses were 91% in Q1-12 compared to 134% in Q1-11. The decrease in SG&A expense in Q1-12 as compared to Q1-11 was due to the following: legal expense decreased by $402,000 primarily due to a $350,000 indemnification payment in Q1-11 and no such payment in Q1-12, a $32,000 decrease in contributions and sponsorships, and a $51,000 decrease in shareholder relations expense associated with the purchase of common stock tendered. For additional information see Note 9 – Related Party Transactions in the Notes to Condensed Consolidated Financial Statements included Part I, Item I of this Quarterly Report on Form 10-Q. Payroll and Benefits. Payroll and benefits expenses include payroll and benefits and other types of compensation expense as well as human resources and administrative functions. Payroll and benefits expenses for Q1-12 were $551,147 compared to $1,016,991 for Q1-11, a decrease of $465,844 or 46%. As a percentage of net revenues, payroll and benefits expenses were approximately 78% for Q1-12 and 105% for Q1-11. The decrease in payroll and benefits expense in Q1-12 as compared to Q1-11 was primarily due to a decrease in executive payroll of approximately $303,000 and a decrease in the information technology payroll of approximately $91,000. The decrease in executive payroll is primarily due to reductions in compensation expense for Mitchell Rubenstein, the Chairman and Chief Executive Officer of the Company and Laurie Silvers, the Vice-Chairman, President and Secretary of the Company. Depreciation and amortization. Depreciation and amortization expense consists of depreciation of property and equipment, furniture and fixtures, leasehold improvements, and equipment under capital leases and amortization of intangible assets. Depreciation and amortization expense was $42,637 for Q1-12 and $74,806 for Q1-11. The decrease in depreciation and amortization expense of $32,169 or 43% in Q1-12 from Q1-11 was primarily due to a $18,256 decrease due to reduced furniture and fixtures depreciation due to fixed assets becoming fully depreciated during or prior to Q1-11. Interest, net. Interest, net was $253,037 of income for Q1-12 as compared to $269,101 of income for Q1-11. Interest, net primarily relates to the Loan to the purchaser of the Broadway Ticketing Division (Key Brand Entertainment, Inc.). The Loan has an interest rate of 12% per annum and matures on December 15, 2015. For additional information, see Note 3 – “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. [ 25 ] LIQUIDITY AND CAPITAL RESOURCES Hollywood Media’s cash and cash equivalents were $3,359,481 at March 31, 2012 as compared to $3,717,599 at December 31, 2011. Our net working capital (defined as current assets less current liabilities) was $2,808,632 at March 31, 2012 as compared to $3,067,463 at December 31, 2011. Net cash used in operating activities from continuing operations during Q1-12 was $489,986, which was primarily attributable to losses from continuing operations. By comparison, net cash used in continuing operations during Q1-11 was $1,885,110. Net cash provided by investing activities from continuing operations during Q1-12 was $138,621 primarily attributable to the Hollywood.com earn-out payments to the Company. By comparison, net cash used in continuing investing activities during Q1-11 was $5,508,833 primarily used to pay Key Brand a working capital adjustment of $3,734,106 in connection with the sale of the Broadway Ticketing business and for payments of $1,740,040 in payroll related bonuses due to the Broadway Sale in Q4-10. Net cash used in financing activities from continuing operations during Q1-12 was $6,753, which cash was for repayments under capital lease obligations. By comparison, net cash used in continuing financing activities during Q1-11 was $16,418,638, which cash usage was primarily for the purchase of common stock tendered. See Note 4 – Purchase of Common Stock Tendered for additional information. Sale of Broadway Ticketing Division to Key Brand Entertainment, Inc. On December 15, 2010, as contemplated by the Stock Purchase Agreement, dated as of December 22, 2009, entered into between Hollywood Media and Key Brand Entertainment Inc. (as amended, the “Purchase Agreement”), Hollywood Media completed the sale of Hollywood Media’s Broadway Ticketing Division (the “Broadway Sale”), through the sale of all of the outstanding capital stock of Theatre Direct NY, Inc. (“Theatre Direct”) to Key Brand Entertainment Inc. (“Key Brand”). Pursuant to the Purchase Agreement, at the closing of the Broadway Sale: · Hollywood Media received $20.5 million in cash (including $0.5 million pursuant to the estimated working capital adjustment described in the Purchase Agreement); · Hollywood Media, Theatre Direct and Key Brand entered into that certain Second Lien Credit, Security and Pledge Agreement, dated as of December 15, 2010 (the “Credit Agreement”) pursuant to which Key Brand is obligated to pay to the Company $8.5 million at an interest rate of 12% per annum, which obligation matures on December 15, 2015 and is secured on a second lien basis by all stock and assets of Theatre Direct and its subsidiaries; · Theatre Direct issued the Company a warrant to purchase 5% of the outstanding shares of common stock of Theatre Direct as of the closing date on a fully diluted basis at an exercise price of $.01 per share (the “Warrant”); · Key Brand assumed $1.6 million of liabilities associated with employment agreements with certain employees of Theatre Direct; and · Hollywood Media is entitled to receive earn-out payments of up to $14.0 million contingent upon Theatre Direct and its subsidiaries achieving certain revenue targets during the period from the closing date through the end of the tenth full fiscal year of Theatre Direct following the closing date as set forth in the Purchase Agreement. On April 22, 2012, the Company entered into Amendment No. 4 (the "Amendment") to the Broadway Sale Purchase Agreement which entitled the Company to receive an earn-out payment of $7,000,000 on or before October 1, 2012 (regardless of the actual revenues of Theatre Direct and its subsidiaries) and up to an additional $7,000,000 of earn-out payments contingent upon Theatre Direct and its subsidiaries achieving $123 million in revenue (excluding revenue from "group sales") during any annual period from July 1, 2011 through June 30, 2021 (provided that if such earn-out payment is earned based on revenues of Theatre Direct and its subsidiaries for the period from July 1, 2011 to June 30, 2012, then such earn-out payment will (i) be added to the principal amount of the $8.5 million loan due the Company under the Credit Agreement, (ii) accrue and be paid interest in accordance with the Credit Agreement, and (iii) be paid over the then remaining term of the Credit Agreement in equal quarterly installments). See Note 10 “Subsequent Events” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for revisions to the earn-out payments. [ 26 ] In connection with the Credit Agreement, Hollywood Media and Key Brand entered into the Intercreditor Agreement with JP Morgan Chase Bank, N.A., as administrative agent for the senior lenders of Key Brand, which defines the rights and obligations of the senior secured lenders and Hollywood Media as subordinated lender, including, without limitation, the rights of payment and the subordination of the security interests of Hollywood Media. Sale of Hollywood.com Business Unit to R&S Investments, LLC On August 21, 2008, Hollywood Media entered into and simultaneously closed on a definitive purchase agreement with R&S Investments, LLC, pursuant to which R&S Investments acquired the Hollywood.com Business for a potential purchase price of $10.0 million, which included $1.0 million in cash that was paid to Hollywood Media at closing and potential earn-out payments of up to $9.0 million. Since August 21, 2008, $1,892,692 in earn-out payments were paid to Hollywood Media through March 31, 2012 and, therefore, there remains, as of March 31, 2012, $7,107,308 in potential earn-out payments. Commencing October 1, 2009, R&S Investments is contractually obligated to make periodic earn-out payments equal to the greater of (i) 10 percent of collected gross revenue and (ii) 90 percent of EBITDA (as defined in the purchase agreement) for the Hollywood.com Business until the full earn-out is paid. If a change of control of Hollywood.com occurs before the earn-out is fully paid, the remaining portion of the earn-out would be payable immediately upon such a change of control, up to the amount of consideration received by R&S Investments less related expenses. If the consideration in such a change of control is less than the remaining balance of the earn-out, then the surviving entity which owns the Hollywood.com Business will be obligated to pay the difference in accordance with the same earn-out terms. Subsequent to March 31, 2012, Hollywood Media has received the earn-out and expense reimbursement amounts in accordance with the payment terms. For additional information about the sale of the Broadway Ticketing Business and the Hollywood.com business transactions, see Note 3 “Discontinued Operations” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I, of this Quarterly Report on Form 10-Q. Purchase of Common Stock Tendered On February 25, 2011, Hollywood Media announced the final result of a tender offer to purchase up to 8,000,000 shares of its common stock at a price of $2.05 per share (less any applicable withholding taxes and without interest) which expired on February 18, 2011. Hollywood Media accepted 8,000,000 shares for purchase for a total cost of approximately $16.4 million. The number of shares properly tendered and not withdrawn was 24,157,429. Accordingly, payment was made for approximately 33% of the tendered shares, and the rest of the tendered shares were withdrawn from the tender offer. Immediately following the purchase of the tendered shares, Hollywood Media had approximately 23,179,066 shares outstanding. For additional information see Note 4 – Purchase of Common Stock Tendered in the Notes to Condensed Consolidated Financial Statements included Part I, Item 1 of this Quarterly Report on Form 10-Q. [ 27 ] Capital Expenditures Hollywood Media’s capital expenditures during the three months ended March 31, 2012 were $16,890. We currently anticipate that additional capital expenditures during 2012 will total approximately $83,000 including various system and equipment upgrades. Authorization of Stock Repurchase Program Hollywood Media previously reported in its current report on Form 8-K filed with the SEC on October 4, 2007, that its Board of Directors authorized a stock repurchase program (the “Repurchase Program”) under which Hollywood Media may use up to $10.0 million of its cash to repurchase shares of its outstanding common stock. During the first quarter of 2012, no shares of Hollywood Media’s common stock were repurchased under the Repurchase Program. Pursuant to the Repurchase Program, Hollywood Media is authorized to purchase shares of its common stock from time to time on the open market or in negotiated transactions. The purchases are to be funded from available cash and cash equivalents, and the timing and amount of any shares repurchased will be determined by Hollywood Media’s management based on its evaluation of financial and market conditions, legal requirements and other factors. The Repurchase Program has no time limit and may be suspended for periods or discontinued at any time, and there is no guarantee as to the number of shares or the amount of cash to be utilized for repurchases. Shares repurchased under the Repurchase Program will become authorized but unissued shares of Hollywood Media’s common stock. For additional information regarding the Repurchase Program, see Part II, Item 2 of this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements At March 31, 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes of the sort contemplated by paragraph (a) (4) of Item 303 of SEC Regulation S-K. As such, management believes that we currently do not have any disclosures to make of the sort contemplated by paragraph (a) (4) of Item 303 of Sec Regulation S-K regarding “off-balance sheet arrangements.” Critical Accounting Estimates In response to the SEC’s Release Number 33-8040 “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” and SEC Release Number 33-8056, “Commission Statement about Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to asset impairment, accruals for compensation and related benefits, revenue recognition, allowance for doubtful accounts, and contingencies and litigation. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions. [ 28 ] Derivative Instruments The Company records derivative instruments at fair value in our accompanying consolidated balance sheet with changes in the fair values of those instruments reported in earnings in our consolidated results of operations. The Company does not hold any derivative instruments that reduce risk associated with hedging exposure, accordingly the Company has not designated any of its derivatives liability financial instruments as hedge instruments. For additional information about our significant accounting policies, including the critical accounting policies discussed below, see Note 2 – Summary of Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, and Note 2 to the Consolidated Financial Statements included in Part II, Item 8 in our Annual Report on Form 10-K for the year ended December 31, 2011, as amended. Allowance Hollywood Media maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers or debtors to make required payments. The Company’s accounting for doubtful accounts and reserve on notes receivable contains uncertainty because management must use judgment to assess the collectability of these accounts. When preparing these estimates, management considers a number of factors, including the aging of a customer’s account, past transactions with customers and debtors, creditworthiness of specific customers and debtors, historical trends and other information. The allowance for doubtful accounts was $236,561 and $240,048 at March 31, 2012 and December 31, 2011, respectively. The allowance is primarily attributable to receivables due from customers of CinemasOnline. Although the Company believes its allowance is sufficient, if the financial condition of the Company’s customers were to unexpectedly deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required that could materially impact the Company’s consolidated financial statements. Concentrations of credit risk with respect to accounts receivable are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many different geographic regions. See Note 10 “Subsequent Events” in the Notes to the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for information on the Company’s sale of CinemasOnline on May 1, 2012. Impairment of Goodwill Under FASB Accounting Standard Codification Topic No. 350, “Intangibles – Goodwill and Other” (ASC 350), beginning January 1, 2002, goodwill and certain intangibles are no longer amortized; however, they are subject to evaluation for impairment at least annually using a fair value based test. The fair value based test is a two-step test. The first step involves comparing the fair value of each of our reporting units to the carrying value of those reporting units. If the carrying value of a reporting unit exceeds the fair value of the reporting unit, we are required to proceed to the second step. In the second step, the fair value of the reporting unit would be allocated to the assets (including unrecognized intangibles) and liabilities of the reporting unit, with any residual representing the implied fair value of goodwill. An impairment loss would be recognized if and to the extent that the carrying value of goodwill exceeds the implied value. [ 29 ] In September 2011, the FASB issued ASU No. 2011-08, “Testing for Goodwill Impairment (Topic 350),” (“ASU 2011-08”). ASU 2011-08 allows entities to first assess qualitatively whether it is necessary to perform the two-step goodwill impairment test. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting period is less than its carrying amount, the quantitative two-step goodwill impairment test is required. An entity has the unconditional option to bypass the qualitative assessment and proceed directly to performing the first step of the goodwill impairment test. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011 and its early adoption by the Company during the quarter ended September 30, 2011 did not have a material effect on the Company’s consolidated financial statements. The Company believes that the disparity between the book value of its assets as compared to the market capitalization of its business is in large part a consequence of market conditions, including perceived risks in the debt markets, the Company’s industry and the broader economy. While the Company believes that some of these risks are unique to specific companies, some represent global industry risks. The Company believes that there is no fundamental change in our underlying business model or prospects for our Company. The Company has evaluated the impairment of its goodwill, giving consideration to these risks, and their impact upon the respective reporting units’ fair values, and has reported impairments where it deems appropriate. The Company believes that the fair value of its remaining reporting unit that contains goodwill at March 31, 2012 and December 31, 2011 exceeded the book value of those units. Inflation and Seasonality Although we cannot accurately determine the precise effects of inflation, we do not believe inflation has a material effect on revenue or results of operations. We consider our business to be somewhat seasonal and expect net revenues to be generally higher during the second and fourth quarters of each fiscal year for our Tekno Books book licensing business as a result of the general publishing industry practice of paying royalties semi-annually. In addition, although not seasonal, our Intellectual Properties division and NetCo Partners both experience fluctuations in their respective revenue streams, earnings and cash flow as a result of the amount of time that is expended in the creation and development of the intellectual properties and their respective licensing agreements. The recognition of licensing revenue is typically triggered by specific contractual events which occur at different points in time rather than on a regular periodic basis. [ 30 ] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not required.