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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(X)                              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

(  )                                  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to         

Commission file number: 001-36119

SFX ENTERTAINMENT, INC.

(Exact name of Registrant as specified in its charter)

430 Park Ave., Sixth Floor
New York, NY 10022

(Address of principal executive offices)

(646)-561-6400

(Registrant’s telephone number, including area code)

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

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

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

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

As of November 21, 2013, the registrant had outstanding 87,246,818 shares of common stock, $0.001 par value.

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INDEX

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SFX Entertainment, Inc.

Consolidated Balance Sheets

(in thousands except share data)

Unaudited

See accompanying notes to the consolidated financial statements

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SFX Entertainment, Inc.

Consolidated Statements of Operations

(in thousands except share data)

Unaudited

See accompanying notes to the consolidated financial statements

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SFX Entertainment, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands except share data)

Unaudited

See accompanying notes to the consolidated financial statements

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SFX Entertainment, Inc.

Consolidated Statements of Cash Flows

(in thousands)

Unaudited

See accompanying notes to the consolidated financial statements

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SFX Entertainment, Inc.

Notes to Consolidated Financial Statements

(in thousands except share data)

(Unaudited)

1.   DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business

SFX Entertainment, Inc. (“SFX” or the “Company”), a Delaware corporation, was formed on June 5, 2012, under the name SFX Holding Corporation. On February 13, 2013, the name was changed to SFX Entertainment, Inc. The operations of SFX began on July 7, 2011, under an entity now named SFX EDM Holdings Corporation (a wholly owned subsidiary of SFX). SFX was formed with the intent of acquiring and operating companies within the live music industry, specifically those engaged in the promotion and production of live music events and festivals in the United States and abroad. Through the Company’s recent acquisitions, it is actively engaged in the production and promotion of live electronic music culture (EMC) festivals and events, production of music tours, merchandising and related services. SFX produces and promotes a growing portfolio of live events that includes leading brands such as Tomorrowland, TomorrowWorld, Mysteryland, Sensation, Stereosonic, Electric Zoo, Nature One, Ruhr-in-Love, Disco Donnie Presents and Life in Color. SFX also operates Beatport, the principal online resource for EMC DJs and a trusted destination for the growing EMC community to discover and stream music, follow DJs and keep abreast of news, information and events. In addition, it also manages large, event-driven nightclubs that serve as venues for key electronic music talent.

For the nine months ended September 30, 2013, SFX successfully completed the acquisition of certain assets and liabilities of two companies:

·                        The operations of a joint venture with ID&T Holding B.V. (“ID&T”) in North America, ID&T/SFX North America, LLC. (“ID&T N.A.”), acquiring a 51% controlling interest on January 1, 2013; and

·                        BEATPORT, LLC (“Beatport”) on March 15, 2013.

The consolidated financial statements of SFX include the activities for the two acquired companies from the dates of their respective acquisition by SFX (See Note 9 - Business Combination). In addition, the operations and assets of SFX consist of additional companies that SFX acquired during 2012, including: the acquisition on July 31, 2012 of Dayglow LLC and its affiliates, now operating as SFX-LIC Operating LLC (“Life in Color” or “LIC”); the acquisition on June 19, 2012, of Disco Productions, Inc., now operating as SFX-Disco Operating LLC (“DDP” or “Disco”); and the acquisition on December 31, 2012, of an 80% ownership interest in MMG Nightlife LLC (“MMG”). Such acquisitions are accounted for in the SFX consolidated financial statements from the dates of their respective acquisition by SFX.

On October 15, 2013, SFX completed its initial public offering in which SFX sold an aggregate of 20,000,000 shares of common stock at a public offering price of $13.00 per share. SFX received aggregate net proceeds of $234,400, after deducting underwriting commissions and certain offering expenses. The Company’s shares are listed on The NASDAQ Global Select Market under the ticker symbol of SFXE.

Basis of presentation and principles of consolidation

The unaudited interim Consolidated Financial Statements are presented in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information. Certain information and disclosures normally included in consolidated financial statements prepared in accordance with US GAAP have been condensed or omitted. Accordingly, these unaudited interim Consolidated Financial Statements and accompanying footnotes should be read in conjunction with the Company’s Annual Consolidated Financial Statements for the year ended December 31, 2012, included in the Prospectus that forms a part of the Company’s Registration Statement on Form S-1 (File No. 333-189564), which was filed with the Securities and Exchange Commission pursuant to Rule 424 of the Securities Act of 1933, as amended, on October 8, 2013. In the opinion of management, these financial statements reflect all adjustments that are necessary for a fair presentation of the results of operations and financial condition for the interim periods shown including normal recurring accruals and other items.

The Company consolidates all of its majority owned subsidiaries including its 51% ownership in ID&T N.A., a variable interest entity (See Note 9 - Business Combination).

The Company’s unaudited pro forma balance sheet as of September 30, 2013 gives effect to the conversion of 5,000,000 shares ($29,380) of the Company’s common stock from temporary equity to stockholders’ equity resulting from the termination of certain repurchase rights upon the Company’s effective initial public offering. Of the 17,340,000 shares of the Company’s common stock with put rights classified in temporary equity, these 5,000,000 shares ($29,380) are related to ID&T N.A., the option to acquire the business of ID&T and the share issuance in the Company’s acquisition of Disco, which no longer have a put right upon the completion of the initial public offering. The remaining 12,340,000 shares ($54,650) of the Company’s common stock with put rights will terminate when such shares are registered for resale.

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Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include allowance for doubtful accounts, purchase accounting allocations, recoverability and useful lives of property, plant and equipment, identifiable intangible assets, goodwill, the valuation allowance of deferred tax assets, contingencies and equity compensation. Some of these estimates are based on the work of third party valuation specialists, however not all of the valuations have been completed as of September 30, 2013. Actual results could differ materially from those estimates.

Direct costs

The Company incurs direct costs associated with both the cost of services and the costs of goods sold. Costs of services include artist performance fees and travel expenses, venue fees, show-specific marketing and advertising expenses, show-related production expenses and other costs related to producing the events. These costs are primarily variable in nature. The cost of goods sold include costs associated with music sales primarily for royalties paid to collecting societies and record labels and direct costs of order fulfillment, including transaction and foreign exchange fees from external payment processors. In addition, we have costs of sales related to merchandise sold through various outlets.

Cash and cash equivalents

The Company considers cash deposits in all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company’s cash deposits are held at multiple high credit quality financial institutions. The Company’s cash deposits at the institutions often exceed the federally insured limit. At September 30, 2013, the Company had $14,638 reserved for the use of SFX Intermediate Holdco II LLC for capital and general operating purposes, pursuant to the covenants of the First Lien Term Loan Facility (See Note 6 - Notes Payable - Credit Facility).

Marketing and public relations expense

The Company expenses non-show-specific marketing and public relations costs when incurred. These costs are recorded on the income statement as selling, general, and administrative expenses. Marketing and public relations expenses for the three months ended September 30, 2013, and September 30, 2012, were $1,441 and $0, respectively, and for the nine months ended September 30, 2013, and September 30, 2012, were $2,421 and $0, respectively.

Label and royalty payables

Direct Costs include the cost of royalties to record labels and collecting societies. These payments due to the record labels and collecting societies have been accrued and are reflected in the consolidated balance sheet in Label and royalty payables. In order to satisfy the obligations to the collecting societies, the Company withholds a portion of royalty payments due to record labels. The amounts withheld are subject to estimation, and any excess amount withheld for royalty obligations to collecting societies will be remitted back to the record labels upon reconciliation with the various collecting societies to whom the Company remits royalty payments. As a result, the Company has recorded $13,126 in Label and royalty payable within current liabilities and $6,753 in other long term liabilities as of September 30, 2013.

Income tax withholding

Income tax withholdings are amounts owed to federal taxing authorities for tax withholdings required on payments made for services, predominantly for foreign artists. These withholdings are withheld from the artist, accrued, and paid to the federal taxing authority. At September 30, 2013, and December 31, 2012, $327 and $1,971, respectively, are recorded in other current liabilities on the balance sheet.

2. CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, accounts receivable and balances due from promoters. Exposure to losses on account receivables is minimal as the promoters with whom the Company partners for ticket sales and collection of event revenues typically remit

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proceeds to the Company in a timely manner. On a periodic basis, management evaluates balances due from promoters and determines whether to provide an allowance or if any balances should be written down and charged to expense as bad debt. The evaluation is based on a past history of collections, current credit conditions, the length of time the balance is past due, and a past history of write-downs.

The credit risk in amounts due from promoters is generally not diversified due to the limited number of promoters that the Company works with. The following table represents a breakdown of concentrations at September 30, 2013, and December 31, 2012:

3. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

Depreciation expense for the three months ended September 30, 2013, and September 30, 2012, was $1,049 and $43, respectively, and for the nine months ended September 30, 2013, and September 30, 2012, was $1,547 and $43, respectively. Certain production equipment is depreciated upon the occurrence of each show/event, rather than ratably over the year, with the assumption that there will be one show/event each year for the next five years.

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4. INTANGIBLE ASSETS

The following table presents the gross carrying amount and accumulated amortization for each major class of intangible assets as of September 30, 2013:

Amortization expense for the three months ended September 30, 2013, and 2012, was $4,019 and $420, respectively, and for the nine months ended September 30, 2013, and 2012, was $10,805 and $447, respectively.

The following table presents future amortization expense for the period from October 1, 2013, through December 31, 2018 and thereafter, excluding $1,334 of in-process intangible assets, that have not been placed into service as of September 30, 2013.

5. GOODWILL

The following table presents the changes in the carrying amount of goodwill for the nine months ended September 30, 2013:

During the nine months ended September 30, 2013, the Company adjusted the purchase price related to the DDP acquisition based on the terms set out in the purchase agreement by $(768), resulting in a decrease to goodwill by the same amount. The decrease in goodwill was due to assumed liabilities exceeding the $1,500 agreed to in the DDP asset purchase agreement.

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6. NOTES PAYABLE

Credit Facility

The credit facility consists of SFX’s senior secured first lien term loan (“First Lien Term Loan Facility”) at September 30, 2013:

On March 15, 2013, certain of the Company’s subsidiaries entered into a $49,500 First Lien Term Loan Facility with Barclays Bank PLC as administrative agent and Barclays Bank PLC, UBS Loan Finance LLC, and Jefferies Group LLC as lenders. The Company received $48,510 in cash, net of $990 original issue discount. The borrower under the First Lien Term Loan Facility is the Company’s indirect, wholly-owned subsidiary SFX Intermediate Holdco II LLC (the “Borrower). The First Lien Term Loan Facility is guaranteed by SFX Intermediate Holdco I LLC, the immediate parent company of the Borrower (“Holdings”), the Borrower, SFX-LIC Operating LLC, Pita I LLC, Beatport, LLC, Beatport Japan, LLC, SFX-Nightlife Operating LLC, SFX-IDT N.A. Holding LLC, ID&T N.A., ID&T/SFX Q-Dance LLC, ID&T/SFX Sensation LLC, ID&T/SFX Mysteryland LLC, ID&T/SFX TomorrowWorld LLC, SFX International, Inc. and all of Holdings’ future subsidiaries (the “Guarantors”), and by Mr. Sillerman as further described below. The First Lien Term Loan Facility is secured by a first-priority security interest in all the existing and future assets of the Borrower and the Guarantors.

Mr. Sillerman entered into a guarantee agreement (the “Sillerman Guarantee”) with Barclays Bank PLC, as collateral agent for the benefit of the secured parties under the First Lien Term Loan Facility, in which he personally guaranteed all of the Company’s obligations under the facility. See Note 10 —Related Parties for further details on the Sillerman Guarantee.

On May 22, 2013, the First Lien Term Loan Facility was amended to permit under the restricted payments covenant for any loan party to make a payment to SFX or any affiliate thereof to enable such person to make a payment of up to the U.S. Dollar equivalent of AUD $5,000 in connection with the acquisition pursuant to the Asset Contribution Agreement dated as of May 15, 2013, by and among SFX, SFX-Totem Operating Pty Ltd, and the transferor parties defined therein.

On June 5, 2013, the First Lien Term Loan Facility was further amended to increase the facility amount by $15,000, to a total of $64,500. The Guarantors reaffirmed their guarantees of the First Lien Term Facility and Mr. Sillerman entered into an amendment to the Sillerman Guarantee to reaffirm his guarantee. The Company received $14,700 in cash, net of $300 in original issue discount.

On August 20, 2013, the First Lien Term Loan Facility (as previously amended) was further amended again to increase the facility amount by $10,500, to a total of $75,000. The Guarantors reaffirmed their guarantees of the First Lien Term Loan Facility, and Mr. Sillerman entered into an amendment to the Sillerman Guarantee to reaffirm his guarantee. The Company received $10,290 in cash, net of $210 in original issue discount.

On August 23, 2013, SFX International, Inc. became a guarantor and security provider to the First Lien Term Loan Facility.

Borrowings under the First Lien Term Loan Facility bear interest, at the Borrower’s option, at a rate per annum equal to either (a) (i) a rate per annum equal to the highest of (1) the rate of interest per annum publicly announced from time to time by the Administrative Agent under the First Lien Term Loan Facility as its prime rate in effect on such day at its principal office in New York City, (2) (x) the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published by the Federal Reserve Bank of New York on the business day next succeeding such day plus (y) 0.50%, (3) (x) a rate per annum equal to (I) the offered rate which appears on the page of the Reuters Screen which displays an average British Bankers Association Interest Settlement Rate (such page currently being LIBOR01 page) for deposits in U.S. dollars being delivered in the London interbank market for a one-month term, determined by the Administrative Agent under the First Lien Term Loan Facility as of approximately 11:00 a.m. (London, England time) two Business Days prior to the applicable borrowing or conversion date divided by (II) one minus the applicable reserve percentage (with a rate floor of 1.25% per annum) plus (y) 1.00% and (4) 2.25% per annum, plus (ii) 6.50% per annum or (b) (i) a rate per annum equal to (1) for each one, two, three or six month (or if agreed to by all the lenders under the First Lien Term Loan Facility, nine or twelve months) interest period as selected by the Borrower, the offered rate which appears on the page of the Reuters Screen which displays an average British Bankers Association

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Interest Settlement Rate (such page currently being LIBOR01 page) for deposits (for delivery on the first day of such interest period) with a term equivalent to such interest period in U.S. dollars, determined by the Administrative Agent under the First Lien Term Loan Facility as of approximately 11:00 a.m. (London, England time), two Business Days prior to the commencement of such interest period divided by (2) one minus the applicable reserve percentage (with a rate floor of 1.25% per annum) plus (ii) 7.50% per annum. Upon the occurrence and during the continuance of any Event of Default under the First Lien Term Loan Facility, all outstanding borrowings thereunder will automatically bear interest at a rate per annum equal to the applicable interest rate plus 2.00% per annum.

The First Lien Term Loan Facility matures on September 15, 2014. The maturity date will be extended to March 13, 2015 if the Company contributes to the Borrower at least $50,000 of proceeds from the Company’s initial public offering (so long as the Company raises net proceeds of at least $100,000) and the Borrower uses such proceeds to make a prepayment equal to at least 50.0% of the borrowings then outstanding under the First Lien Term Loan Facility. On October 15, 2013, the Company completed its initial public offering (See Note 19 - Subsequent Events), and as of November 22, 2013, the Company has not made a payment of 50% of the borrowings outstanding under the First Lien Term Loan Facility.

The Borrower may prepay the First Lien Term Loan Facility at any time without penalty, subject to breakage costs. The Borrower is also required to make prepayments (subject to certain basket amounts and exceptions) (collectively, the “Mandatory Prepayments”) equal to:

·                        75.0% of the annual excess cash flow of Holdings and its subsidiaries for the year-ended December 31, 2013;

·                        100% of the net proceeds from certain asset sales, casualty events, and debt issuances by Holdings and its subsidiaries; and

·                        30.0% of the outstanding borrowings within 60 days of the date Mr. Sillerman either announces he will not serve as SFX’s chairman, president, chief executive officer, or equivalent officer, ceases serving as SFX’s chairman, president, chief executive officer, or equivalent officer, or is incapable of serving as SFX’s chairman, president, chief executive officer, or equivalent officer.

The First Lien Term Loan Facility includes customary affirmative covenants, subject to certain materiality thresholds and exceptions, including covenants to deliver certain information and notices; preservation of existence; compliance with laws; payment of obligations; maintenance of properties; maintenance of insurance; keeping of books and records; access to books and property; limitations on use of proceeds under the First Lien Term Loan Facility; and requirements to join future subsidiaries of Holdings as guarantors and to provide additional collateral. The First Lien Term Loan Facility includes customary restrictive covenants, subject to certain materiality thresholds and exceptions, including covenants limiting the Borrower’s and the loan parties’ ability to

·                        incur certain types of indebtedness and liens;

·                        merge with, make an investment in or acquire property or assets of another company;

·                        make capital expenditures;

·                        pay dividends (with exceptions for, among other things, (i) certain dividends or distributions by any of the subsidiaries of Holdings to Holdings or any of its subsidiaries that execute documents guaranteeing or securing the First Lien Term Loan Facility; (ii) certain dividends or distributions payable in equity interests to Holdings or any of its subsidiaries; (iii) certain cash dividends or distributions paid to the equity holders of a non-wholly-owned subsidiary of the Borrower; and (iv) certain dividends or distributions to the Company to finance certain acquisitions and pay certain transaction costs); and (v) certain dividends or distributions by ID&T N.A. to ID&T pursuant to the ID&T N.A. agreement by and among the Company, ID&T and Mr. Sillerman, dated as of October 2012, as amended March 14, 2013.

·                        repurchase shares of SFX’s outstanding stock;

·                        a negative pledge;

·                        modifying certain documents;

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·                       make loans;

·                       dispose of assets;

·                       prepay the principal on other indebtedness;

·                       liquidate, wind up or dissolve; or

·                       enter into certain transactions with affiliates.

The First Lien Term Loan Facility does not include any financial covenants.

The First Lien Term Loan Facility includes customary events of default, subject to certain materiality thresholds and cure periods, including: the Sillerman Guarantee ceasing to be in full force and effect or Mr. Sillerman breaching any material term of the Sillerman Guarantee; or a change in control occurring. A change in control is defined in the First Lien Term Loan Facility to include the occurrence of any of the following: (i) Holdings ceases to be wholly-owned directly or indirectly, by the Company or Borrower ceases be directly wholly-owned by Holdings; (ii) at any time prior to the Company’s initial public offering (so long as the Company raises net proceeds of at least $100,000) and for any reason whatsoever, Mr. Sillerman and certain affiliates and senior management cease to own, directly or indirectly, at least 40% of the Company’s outstanding voting equity or any “person” or “group” own a greater percentage of the Company’s voting equity than beneficially owned by Mr. Sillerman and certain affiliates and senior management; (iii) at any time after the Company’s initial public offering (so long as the Company raises net proceeds of at least $100,000) and for any reason whatsoever, Mr. Sillerman and certain affiliates cease to own, directly or indirectly, at least 30% of the Company’s outstanding voting equity or any “person” or “group” other than Mr. Sillerman and certain affiliates and senior management beneficially own a greater percentage of the Company’s voting equity than beneficially owned by Mr. Sillerman and certain affiliates and senior management; or (iv) the majority of the seats (other than vacant seats) on the Company’s board of directors cease to be occupied by persons who either were members of SFX’s board of directors on March 15, 2013, or were nominated for election by a majority of the Company’s board of directors who were directors at the time of the closing of the First Lien Term Loan Facility or whose election or nomination for election was previously approved by a majority of such directors. On October 15, 2013, the Company completed it’s initial public offering (See Note 19 - Subsequent Events), therefore provision (ii) would no longer be effective.

Secured promissory note—Nightlife Holdings, LLC

On December 31, 2012, the Company issued a secured promissory note (“note”) in the principal amount of $8,491 as part of the acquisition of certain assets and liabilities of MMG from Nightlife Holding, LLC. Such amount is included as Notes payable, current on the balance sheet at December 31, 2012. On March 15, 2013, a payment to the note of $3,000 was made to Nightlife Holdings, LLC and the note was amended and restated to provide that the remaining amount of $5,491 plus interest will be payable on May 15, 2013. This note was amended and restated to bear interest at the rate of 0.22% per annum. On May 15, 2013, the note was paid in full.

7. OTHER CURRENT LIABILITIES—EVENTBRITE, INC.

In connection with the acquisition of Disco, the Company assumed a liability of $700 to Eventbrite, Inc. (“Eventbrite”) which will be repaid principally from a portion of future ticket sales. At September 30, 2013, the balance due to Eventbrite with respect to this liability was $361. The Company is responsible for the payment of any amounts not recouped by Eventbrite through ticket sales, and ultimately has the right to recover such shortfalls if any from the former owner of Disco.

8. COMMON STOCK AND COMMON STOCK WARRANTS

For the nine months ended September 30, 2013, in connection with services provided by Mr. Sillerman, including his guarantee of the First Lien Term Loan Facility made by Mr. Sillerman to the lenders, the board of directors granted warrants to purchase 5,500,000 shares at $5.00 per share, warrants to purchase 750,000 shares at $7.50 per share, warrants to purchase 1,000,000 shares at $10.00 per share and 1,000,000 shares of the Company’s common

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stock to the Company’s chief executive officer and chairman, Mr. Sillerman. The Company has estimated the fair value of these warrants and common stock at $25,430 and accounted for them as deferred financing fees related to the First Lien Term Loan Facility.

On April 23, 2013, the Company exchanged 9,350,000 of warrants previously issued to Mr. Sillerman for stock options on substantially identical terms. The replacement equity awards all provide for three year cliff vesting based on the date of the original issuance date of the warrants and shares of common stock. In addition, 100,000 warrants with an exercise price of $.01 per share and 1,000,000 shares of common stock issued to Mr. Sillerman were exchanged for 1,100,000 shares of restricted stock with three year cliff vesting. All of these options and restricted shares were issued under the Company’s 2013 Supplemental Equity Compensation Plan. See Note 11—Stock Based Compensation—for greater detail on the exchange of these warrants for stock options and shares of restricted stock.

The guarantee of the First Lien Term Loan Facility by Mr. Sillerman is considered a deferred financing cost and will continue to be recognized as interest expense through the maturity date of the credit facility. The cost associated with the warrants issued to Mr. Sillerman in 2012, with respect to the $7,000 promissory note, have been fully expensed as of September 30, 2013.

As part of the ID&T N.A. acquisition, the Company issued warrants to purchase 500,000 shares of the Company’s common stock at $2.50 per share to ID&T (subsequently assumed by ID&T’s successor, One of Us B.V.). The Company has estimated the fair value of these warrants issued to ID&T at $1,820. All of these warrants were valued using the Black-Scholes option pricing model.

The following assumptions were used to calculate the fair value of the Company’s warrants on the date of grant:

As there was no publicly traded market for the Company’s common stock at the time these warrants were issued, the expected volatility of historical closing stock prices is based on comparable companies over the expected term of the warrants. The risk free interest rate for the periods within the contractual life of the warrants is based on the 7 year U.S. Treasury bond rate. The expected term of warrants is based on the maximum term of the warrants issued.

9.         BUSINESS COMBINATIONS

During the nine months ended September 30, 2013, the Company completed two acquisitions which further enhanced its presence in the EMC space, as follows:

On March 15, 2013, the Company acquired 100% of the membership interests of Beatport for $58,550 in cash and equity. The purchase price was comprised of $33,900 in cash and $24,650 in common stock (4,930,000 shares of common stock valued at $5.00 per share as determined by sales of the Company’s common stock at $5.00 per share, with unrelated third parties). Beatport is primarily engaged in the business of selling EMC related digital music. Goodwill is expected to be deductible for tax purposes and is attributable to expected synergies and assembled workforce. Transaction related expense of $526 was expensed as incurred and is included within selling, general and administrative expenses in the consolidated statements of operations for the nine months ended September 30, 2013. Beatport is consolidated into the Company’s results from the date of acquisition.

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On January 1, 2013, the Company acquired 51% of ID&T N.A., which has an exclusive license to use and promote, or rights to economic benefits from ID&T’s brands in North America. The purchase price was $24,320, comprised of $12,500 in cash, $10,000 in common stock (2,000,000 shares of common stock valued at $5.00 per share as determined by sales of the Company’s common stock at $5.00 per share, with unrelated third parties), and $1,820 in warrants to buy 500,000 shares of common stock at $2.50 per share. In addition, for a period of five years beginning in the year ended December 31, 2013, ID&T will be entitled to receive 100,000 warrants to purchase shares of the Company’s common stock each year if ID&T N.A. has achieved an EBITDA of $7,000 or more in the prior fiscal year. The warrant exercise price will equal the fair market value as determined in good faith by the Company’s board of directors, but after the Company’s initial public offering, based on the Company’s stock’s 30-day weighted average closing price. At the time of the acquisition, the Company did not forecast ID&T N.A. to achieve $7,000 or more in EBITDA in 2013, and could not determine that such a threshold level of EBITDA was probable in 2014 and after. Accordingly, no value was assigned to these warrants that may be issuable in the future. The Company continues to believe that it was not determinable whether the required thresholds were achievable at September 30, 2013. The Company will continue to assess the fair value of this contingency at each reporting date and should the fair value of the warrants increase, the Company will include a charge in earnings at that time. Goodwill is not expected to be deductible for tax purposes and is attributable to expected synergies between the joint venture and the Company’s businesses. Transaction-related expense of $159 was incurred in connection with this acquisition. ID&T N.A. is consolidated into the Company’s results from the date of acquisition.

In connection with the acquisition of ID&T N.A., the Company recorded an amount representing the non-controlling interest of ID&T N.A. of $23,366 which represents a 49% interest in ID&T N.A. The acquisition-date fair value of the non-controlling interest in ID&T N.A. was measured using an income approach. The equity interests of ID&T N.A. are not traded and as such could not be determined based on active market prices. The fair value was determined by calculating the fair value of ID&T N.A. as a whole and subtracting the consideration the Company paid for the 51% controlling interest. In determining the fair value of ID&T N.A., the acquisition-date fair value contemplated synergies that are expected to be created through the acquisition and determined that the synergies created from the acquisition will benefit ID&T N.A. as a whole, including the non-controlling interest, resulting in the Company’s ownership and the non-controlling interest having proportionate economic interest to the respective ownership interests. See Note 19 - Subsequent Events, for the discussion on the Company’s purchase of the remaining non-controlling interest in ID&T N.A.

The Company considers ID&T N.A. to be a variable interest entity (“VIE”) and considers the Company, based on the guidance in ASC 810, to be the primary beneficiary. An enterprise must consolidate a VIE if it is determined to be the primary beneficiary of the VIE. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly impacts the entity’s economic performance, and (b) the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company is solely required to fund and to absorb any losses of ID&T N.A. and is responsible for management decisions that have a significant impact on the economic performance of ID&T N.A. In accordance with the agreement governing ID&T N.A., the Company is required to fund the operations of ID&T N.A. and provide certain management expertise which is material to the operation of ID&T N.A. The Company is solely responsible for funding the ID&T N.A. operations and is entitled to repayment of a portion of loans to ID&T N.A., including commercially reasonable interest or a commercially reasonable preferred return to the extent that ID&T N.A. operations are funded by equity contributions, prior to ID&T N.A. making distributions of surplus cash to the members, and that distributions of surplus cash are made in proportion to the members’ equity interests so that a majority of surplus cash will be distributed to the Company. As the primary beneficiary, the Company consolidates the results of ID&T N.A.

The value of the Company’s common stock used in connection with the Beatport and ID&T N.A. acquisitions was $5.00 per share. This value was based on sales of the Company’s equity to third-parties during that period and a valuation of the Company’s common stock as of December 31, 2012, prepared by an independent third party.

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The Company has made a preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the purchase date for its acquisitions. The Company expects to finalize the purchase price within the first year of the acquisitions, and therefore adjustments to goodwill and identifiable assets may occur. The allocation of the aggregate purchase price, based on the Company’s initial valuation of the assets and liabilities are as follows:

The Company has not completed the valuation studies necessary to finalize the acquisition-date fair values of the assets acquired and liabilities assumed and the related allocation of purchase price for ID&T N.A. and Beatport. Accordingly, the type, value, and useful lives of these intangibles assets set forth here are preliminary. Once the valuation process is finalized for both of these acquisitions there may be changes to the reported values of the assets acquired and liabilities assumed, including goodwill and intangible assets, and those changes could differ materially from what is presented here.

The preliminary estimates of intangible asset type/category that the Company has recognized from these acquisitions are based on the nature of the businesses, preliminary assessments in conjunction with third-party valuations, and estimates based on the Company’s experiences from prior acquisitions. The Company preliminarily determined the fair value of Beatport’s intangible assets using the income approach. The preliminarily significant assumptions used in certain of the valuations include a discount rate of 19% and royalty rate of 3%. The Company’s preliminary estimate of ID&T N.A.’s intangible asset is based on management’s initial estimate of the tradename’s value as a proportion of the overall consideration, which was based on management’s expectations of the business and experience with recent acquisitions of similar businesses. The estimated useful lives of the intangible assets are based on the useful lives that the Company has used for similar intangible assets acquired in prior acquisitions.

The overall weighted average useful lives of the identified intangible assets acquired are 8.5 years. These identified intangible assets will be amortized on a straight line basis over their useful lives.

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For the three months ended September 30, 2013, Net revenues and Net loss included in the Company’s Consolidated Statements of Operations were $12,113 and $(1,121), respectively, and for the nine months ended September 30, 2013, $26,340 and $(2,661), respectively, related to Beatport. For the three months ended September 30, 2013, Net revenues and Net loss included in the Company’s Consolidated Statements of Operations was $21,826 and $(4,454), respectively, and for the nine months ended September 30, 2013, $23,542 and $(5,706), respectively, related to ID&T N.A.

Supplemental pro forma information

The following table represents unaudited consolidated pro forma financial information as if the closing of the Company’s acquisition of Beatport and ID&T N.A. had occurred on January 1, 2012. For comparability purposes, the acquisitions that occurred during the year ended December 31, 2012 have been presented in the pro forma financial information as if they had occurred on January 1, 2012.

Fiscal 2012 acquisitions included in the unaudited consolidated pro forma financial information:

·                        Acquisition of LIC on July 31, 2012;

·                        Acquisition of Disco on June 19, 2012; and

·                        Acquisition of an 80% interest in MMG on December 31, 2012.

The unaudited consolidated pro forma financial information has been adjusted to give effect to the pro forma events that are (1) directly attributable to the acquisitions, (2) factually supportable, and (3) expected to have a continuing impact on the combined results of SFX and its acquired entities.

The unaudited pro forma results have been adjusted with respect to certain aspects of the Company’s acquisitions to reflect:

·                        The consummation of the acquisitions;

·                        The elimination of related party transactions; and

·                        Changes in assets and liabilities to record their acquisition date fair value and changes in certain expenses resulting therefrom.

The unaudited consolidated pro forma results do not reflect future events that either have occurred or may occur after the acquisitions, including but not limited to, the anticipated realization of ongoing savings from operating synergies in subsequent periods.

Rescinded transactions

On December 31, 2012, the Company signed asset contribution acquisition agreements with two entities. For one of these entities, the sellers of the entity were required to deliver certain rights to the Company in order for the transaction to be consummated. It was determined that the sellers could not deliver the required rights and the transaction was rescinded by the parties thereto. With respect to the second entity, Huka, certain conditions were required to be met prior to the transfer of the consideration to the sellers of the entity. It was determined that the sellers could not or would not be able to deliver the required materials and thus this transaction was rescinded by the parties thereto. Both rescissions occurred in April 2013 as agreed to by both the Company and the sellers, in each case. The Company did not control either entity as of December 31, 2012 or any date thereafter. In connection with one of these entities and the rescission, the Company advanced a $1,800 loan to the principals of the entity which is to be repaid from a portion of future operating revenues of the entity. As of September 30, 2013 the $1,800 loan remains outstanding. The Company believes this loan to be recoverable and will review the collectability of this amount periodically.

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10. RELATED PARTIES

Robert F.X. Sillerman, Chief Executive Officer and Chairman

The Company’s chief executive officer and chairman, Mr. Sillerman, beneficially owns shares, in the aggregate, representing approximately 58.3% of the Company’s outstanding capital stock as of September 30, 2013. As a result, he controls all matters submitted to the Company’s stockholders for approval, as well as the Company’s management and affairs.

In February 2012, SFX EDM Holdings Corporation issued and sold an aggregate of 36,000,000 shares of its common stock at par value to the Company’s founder, chief executive officer and chairman, Mr. Sillerman, and funds controlled by him. SFX subsequently acquired SFX EDM Holdings Corporation when the stockholders of SFX EDM Holdings Corporation exchanged all of their shares for a like amount of shares of the Company’s common stock under share exchange agreements between and among SFX, SFX EDM Holdings Corporation and the stockholders of SFX EDM Holdings Corporation.

Pursuant to nominee agreements, multiple record holders of the Company’s common stock, including certain members of SFX management and funds controlled by Mr. Sillerman, assigned all of their title and interest in an aggregate of 19,124,000 shares to Mr. Sillerman, as their nominee.

On October 29, 2012, the Company issued and sold 2,500,000 shares of common stock at a price per share of $4.00 to Mr. Sillerman for an aggregate purchase price of $10,000. The Company used the proceeds to pay the initial acquisition costs in the joint venture arrangement with ID&T. At the time of the issuance of these shares, the board of directors agreed that Mr. Sillerman may sell these shares to unaffiliated third persons during the capital raising process. Mr. Sillerman subsequently transferred these shares to unaffiliated third-parties.

On December 31, 2012, the Company issued in a financing transaction a promissory note to Mr. Sillerman in the principal amount of $7,000 (“promissory note”), together with warrants to purchase up to an aggregate amount of 2,100,000 shares of the Company’s common stock. In connection with this transaction, Mr. Sillerman entered into a back-stop agreement pursuant to which he agreed to fund the entire amount of the notes offered but not subscribed for by third parties approached to purchase the notes. As consideration for the back-stop agreement, Mr. Sillerman received 100,000 warrants at an exercise price of $.01 per share. In connection with the funding of the note, Mr. Sillerman was issued 700,000 warrants to purchase stock at $5.00 per share; 700,000 warrants to purchase stock $7.50 per share; and 700,000 warrants to purchase stock at $10.00 per share. Under the terms of the promissory note, the Company was required to repay the outstanding principal and interest by (i) one-third of the amounts raised in completed equity offerings and (ii) 100% of the amounts raised in debt financings over $15,000 after December 31, 2012. As of April 3, 2013, the entire principal amount was repaid.

In accordance with the guidance under ASC 815, the fair value of both the promissory note and the warrants was determined and the proceeds of the promissory note were allocated between the promissory note and the warrants based on the pro rata individual values to the aggregate combined value of the promissory note and the warrants. As a result $3,190 was recorded as additional paid in capital with respect to the allocated value of the warrants and $3,810 was allocated to the promissory note. The difference between the face value of the promissory note and the recorded value represents a discount associated with the issuance of the promissory note and was amortized as interest expense during the nine months ended September 30, 2013.

On March 15, 2013, Mr. Sillerman entered into the Sillerman Guarantee with Barclays Bank PLC, as collateral agent, for the benefit of the other lender parties, in which he personally guaranteed all of the Company’s obligations under the First Lien Term Loan Facility. On June 5, 2013 the First Lien Term Loan Facility was amended to increase the facility amount by $15,000 to a total of $64,500. Mr. Sillerman entered into an amendment to the Sillerman Guarantee to reaffirm his guarantee thereunder in connection with the amendment. As consideration for personally guaranteeing the obligations under the First Lien Term Loan Facility, the Board of Directors granted Mr. Sillerman the following: (i) warrants to purchase 5,500,000 shares of the Company’s common stock at $5.00 per share, (ii) warrants to purchase 750,000 shares of the Company’s common stock at $7.50 per share, (iii) warrants to

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purchase 1,000,000 shares of the Company’s common stock at $10.00 per share, and (iv) 1,000,000 shares of the Company’s common stock. On August 20, 2013, the Company entered into an amendment to the First Lien Term Loan Facility, which increased the amount outstanding by $10,500, for a total of $75,000 outstanding. Mr. Sillerman entered into a second amendment to the Sillerman Guarantee, to reaffirm his guarantee thereunder in connection with this amendment.

In April 2013, the warrants and common stock issued to Mr. Sillerman were exchanged for (i) 9,350,000 stock options and (ii)1,100,000 shares of restricted stock. See Note 11—Stock-Based Compensation—for greater detail on the exchange of these warrants for stock options and shares of restricted stock.

MJX, LLC

In 2013 and 2012, MJX, LLC (“MJX”), a company owned 100% by Mr. Sillerman, funded certain travel and entertainment expenses incurred by the Company’s consultants and employees who were assisting in meeting with potential acquisition targets. Total expenses incurred by MJX for the three months ended September 30, 2013, and 2012, were $2 and $59, respectively, and for the nine months ended September 30, 2013, and 2012, were $67 and $436, respectively. During the three and nine months ended September 30, 2013, the Company made payments to MJX in the amount of $0 and $573 ($507 relates to 2012 outstanding balance due to MJX), respectively. During the three and nine months ended September 30, 2013, services provided by the Company to MJX were $25 and $35, respectively. As of September 30, 2013, no payment was collected from MJX. As of September 30, 2013, the Company has a balance due from MJX of $33, net of $2 payable to MJX.

Viggle, Inc.

The Company has a shared service agreement with Viggle, Inc. (“Viggle”), a company whose chief executive officer and primary shareholder is Mr. Sillerman. The shared services agreement is for taxation, financial processing services to the Company. During the three and nine months ended September 30, 2013, the Company made payments of $104 and $372, respectively, to Viggle for expenses incurred in 2013. Costs incurred for the three months ended September 30, 2013, and 2012, totaled $145 and $0, respectively, and for the nine months ended September 30, 2013, and 2012, totaled $447 and $43, respectively. As of September 30, 2013, the Company owed $87 to Viggle. Three of the Company’s directors currently serve on the board of directors of Viggle, as does Mr. Sillerman.

Circle Entertainment, Inc.

The Company has a shared service agreement with Circle Entertainment Inc. (“Circle Entertainment”), a company partially owned by Mr. Sillerman. The shared services agreement covers expenses for office space, legal services, secretarial services, IT services and office supplies for SFX. During the three and nine months ended September 30, 2013, the Company made payments of $0 and $181, respectively, to Circle Entertainment for the outstanding payable at December 31, 2012, of $181. The Company incurred no expenses for services provided by Circle Entertainment for the nine months ended September 30, 2013, and 2012, and has no amount due to Circle Entertainment at September 30, 2013. One of the Company’s directors currently serves on the board of directors of Circle, as does Mr. Sillerman.

Donnie Estopinal

The Company is indebted to the former owner of Disco, Donnie Estopinal, in the amount of $18 as of September 30, 2013, and December 31, 2012, respectively, for certain reimbursable business related expenses.

ID&T

As of September 30, 2013, the Company had a payable of $2,253 to ID&T (as of September 30, 2013, ID&T holds a 49% interest in ID&T N.A, for business development and acquisition related costs, event costs, employee allowances and other office related expenses which ID&T paid on behalf of ID&T N.A. and the Company. In addition, the Company had a receivable from ID&T for sponsorship revenue collected on its behalf by ID&T of $1,140, as of September 30, 2013.

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MMG Nightlife, LLC

MMG Nightlife, LLC is the 20% non-controlling interest shareholder of MMG, a 80% controlled and consolidated entity of the Company. As of September 30, 2013, the Company had a current balance that was due to related parties balance of $252 and a long term balance due to related parties of $464, related to MMG Nightlife, LLC.

Other

Pursuant to subscription agreements with three separate investors entered into in June 2012 with respect to an aggregate of 5,750,000 shares, Mr. Sillerman granted certain tag-along rights to the three investors that would permit them to participate in any transfer to an unaffiliated third-party by Mr. Sillerman and/or his affiliates of their shares. These tag-along rights will expire immediately prior to the pricing of the Company’s initial public offering.

The Company’s General Counsel, Howard Tytel, serves as a legal consultant and is not an employee of the Company. Mr. Tytel is paid $44 per month under an oral agreement that is subject to change at any time. Mr. Tytel is also of Counsel in the law firm Reed Smith LLP, which has acted as legal counsel to the Company since its inception. In March 2012, the Company granted to Mr. Tytel options to purchase 650,000 shares with an exercise price of $2.00 per share. These options have been granted pursuant to the 2013 Equity Compensation Plan and expense is recognized over the vesting period beginning in 2013. See Note 11—Stock-Based Compensation & Restricted Shares—for more information on stock based compensation.

On November 1, 2012, the Company entered into a master services agreement with Sports & Entertainment Physicians, PC, (“S & E Physicians”), for the provision of advice and consultation regarding various medical issues and services designed to further the Company’s goal of hosting safe festivals and events. Andrew N. Bazos, the principal and founder of S & E Physicians, is also a director of the Company and serves as Chairman of the Company’s Medical Procedure & Safety Committee. Pursuant to the terms of the master services agreement, the Company has agreed to pay S & E Physicians on terms to be determined provided the charges must not exceed the amounts charged by S & E Physicians to its most favored clients. The services the Company may request include advice on health, safety and medical training and staffing; consultation on contracts related to medical services; creation of plans, policies and programs to improve the provision of medical services and ensure compliance with applicable laws, regulations, and rules; work with state and local regulatory authorities; and other tasks intended to advance the Company’s objective of hosting safe festivals and events. The term of the agreement is from November 1, 2012, the effective date, until November 1, 2013, unless earlier terminated. The parties have orally agreed to extend this agreement and are currently entering into an agreement to extend this agreement by one year on the same terms. Either party may terminate the agreement at any time, with or without cause, by providing 60 days’ written notice to the other party. The agreement also provides that the Company must pay any incremental cost in S & E Physicians’ medical malpractice insurance caused solely by execution of the agreement directly to S & E Physicians’ insurance company. For the three and nine months ended September 30, 2013 the Company incurred expenses of $49 ($15 for fees and $34 for reimbursable expenses) and $147 ($92 for fees and $55 for reimbursable expenses), respectively, related to services provided by S & E Physicians. As of September 30, 2013, the Company had an outstanding payable balance to S & E Physicians of $31.

On December 6, 2012, the Company closed a financing with White Oak Securities LLC in which the Company issued 300,000 shares of common stock at a price per share of $5.00 for an aggregate purchase price of $1,500. Such purchase price was paid in the form of a $1,500 principal amount promissory note having a maturity date of December 6, 2015. White Oak Securities LLC is controlled by its managing member, Timothy J. Crowhurst, who was subsequently hired as the Company’s President in June 2013. The promissory note was secured by the 300,000 shares issued to White Oak Securities LLC, and Mr. Crowhurst personally guaranteed the repayment of $375 of the promissory note. In connection with his hiring as the Company’s President, Mr. Crowhurst surrendered the 300,000 shares, the Company cancelled the promissory note, and Mr. Crowhurst was released from the personal guarantee.

The Company in 2013 and 2012 had an investment banking relationship with Tangent Capital Partners LLC (“Tangent”). The Company’s President, Timothy J. Crowhurst, is a registered representative of Tangent. Under the arrangement with Tangent, Tangent agreed to be paid up to $1,500 in cash upon the closing of certain financings, including the Company’s initial public offering, plus fees for other services to be mutually agreed to between Tangent and the Company. On July 17, 2013, the Company entered into a letter agreement with Tangent to amend the terms of its compensation to provide that after giving effect to the payment of the fees paid and payable as of July 17, 2013, Tangent will receive the balance of its fees no later than September 30, 2013, payable upon receipt of an invoice for the amount owed, and must relinquish its right to any additional fees. As of September 30, 2013, the Company incurred expenses of $225 and capitalized expenses of $1,125 related to the First Lien Term Loan Facility and $150 related to the Company’s initial public offering.

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11. STOCK-BASED COMPENSATION & RESTRICTED SHARES

The Company adopted the SFX Entertainment, Inc. 2013 Equity Compensation Plan (“Equity Plan”) on February 25, 2013. The Equity Plan authorizes the Company to grant incentive stock options, nonqualified stock options, restricted stock units and stock awards. Prior to the formation and adoption of the Equity Plan, the Company granted options to purchase its common stock to employees, directors and consultants of the Company and its affiliates at prices ranging from $2.00 to $10.00 per share, which in the view of management and, after it was formed, by the Company’s compensation committee, represented the fair market value of the Company’s common stock at the time of issuance. The options were granted for a term not exceeding ten years and the nonvested options are generally forfeited in the event the employee, director, or consultant terminates his or her employment or relationship with the Company or one of its affiliates. Any options that have vested at the time of termination are forfeited to the extent they are not exercised within the 90 day applicable post-employment exercise period, unless otherwise provided in their option agreements. The options generally vest in various periods up to five years. The resulting cost is recognized for the awards expected to vest over the period during which an employee is required to provide service in exchange for the award, usually the vesting period.

The Company also adopted in April 2013, the SFX Entertainment, Inc. 2013 Supplemental Equity Compensation Plan (the “Supplemental Equity Plan”). The Supplemental Equity Plan authorizes the Company to grant incentive stock options, nonqualified stock options, restricted stock units and stock awards. All awards issued under the Supplemental Equity Plan to date have been made to Mr. Sillerman, who has been granted 9,350,000 options and 1,100,000 shares of restricted stock under the Supplemental Equity Plan. The options have been granted at prices ranging from $5.00 to $10.00 per share and each of the option grants and the restricted stock grants have service-based vesting components and, in general, vest on the third anniversary of each grant or upon a change in control, subject to Mr. Sillerman’s continued employment with the Company through such date. Such options were originally issued as warrants in 2012 or 2013 representing the same number of underlying shares at the same exercise price per share. On August 31, 2013, an independent committee of the Company’s board of directors recommended that Mr. Sillerman receive 233,000 shares of restricted stock in connection with services provided with respect to the August amendment to the First Lien Term Loan Facility, including extending his personal guarantee of an additional $10,500 under the Company’s credit facility. On September 6, 2013, the board of directors approved the grant of these shares of restricted stock under the Supplemental Equity Plan and also adopted an amendment to this plan to increase the number of authorized shares by 233,000. These shares of restricted stock were issued on October 15, 2013.

In some cases, contemporaneous documentation of these grants could not be provided. While some of these grants were documented during 2012, some were not fully documented until 2013. As a result of the issues with respect to contemporaneous documentation of the Company’s option grants, the Company recorded compensation expense with respect to option grants at the time it was believed that the documentation of such grants met all key criteria under ASC 718 and could be evidenced (referred to as the measurement date). In some cases this was 2013 and accordingly, 2012 contains no expense related to those stock option awards. Options issued in 2012 but not fully documented until 2013 amounted to 5,220,500 options at exercise prices ranging from $2 to $4 per share. The approximate fair value of such options was $2.81 to $3.87 and the compensation expense (measured from the date such option grants were originally made) recognized in 2013 with respect to these options was $4,693. The fair value of common stock on the measurement date has been used solely to record compensation expenses in the Company’s consolidated financial statements.

The Company records stock-based compensation expense as part of selling, general and administrative expenses. The Company recorded $8,688 and $22,687 in stock-based compensation expense for the three months and nine months ended September 30, 2013, respectively. There was no stock-based compensation expense recorded for the nine months ended September 30, 2012.

The Company accounts for stock options issued to nonemployees on a fair value-based method as well; however, the fair value of the options granted to nonemployees is remeasured each reporting period until the service is complete, and the resulting increase or decrease in value, if any, is recognized as expense during the period the related services are rendered. Nonemployee options issued as of September 30, 2013, were 1,550,000 for which $1,045 and $2,896 of expense was recognized for the three and nine months ended September 30, 2013, respectively. As of September 30, 2013, there was $8,940 of total unrecognized compensation cost related to nonemployee stock options granted. As of December 31, 2012, there was no nonemployee stock options expense recognized.

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The fair value of the stock options issued to employees and nonemployees was estimated at each grant date using the Black-Scholes option pricing model. One of the inputs to this model is the estimate of the fair value of the underlying common stock on the date of grant. The other inputs include an estimate of the expected volatility of the stock price, an option’s expected term, the risk-free interest rate over the option’s expected term, the option’s exercise price, and the Company’s expectations regarding dividends.

There were 5,266,500 shares available for future grants under the Equity Plan and the Supplemental Equity Plan at September 30, 2013. Vesting dates on the stock options range from October 2012 to October 2017 and expiration dates range from March 2022 to August 2023 at exercise prices and average contractual lives as follows:

Stock options—Employees and Directors

The following assumptions were used to calculate the fair value of the Company’s options on the date of grant:

The following table presents a summary of the Company’s stock options outstanding at, and stock option activity during, the nine months ended September 30, 2013 (“Price” reflects the weighted average exercise price per share):