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Investment Materials

November 2013

Click to edit Master title styleExecutive Summary

SPT Networks (“SPT”) has an opportunity to acquire up to a 40% equity interests in The f@ctory (“f@ctory” or the “Company”), a YouTube based media and entertainment company dedicated to pop culture

• f@ctory plans to produce and distribute, primarily through YouTube, short-form (2:00 to 5:00 minute) original video content orientated toward the culture/lifestyle genre, targeted for the millennial generation (approximately 15 to 30 years old)

• f@ctory is a joint venture started by Atom Factory, an entertainment management company, and @radical.media, a developer, producer, and distributor of branded media (“Founders”)

Investment supports SPT’s strategy to expand its digital business, increasing our presence in a high growth industry

• f@ctory’s business model provides user cross-promotion and cross-content opportunities with SPT’s Crackle business

• Generate SME, S/ATV, and SCEA synergies across distribution and industry/artist relationships, reinforcing ONE Sony initiative

SPT analyzed the financial impact if SPT makes a total investment of $2.5MM for 20% total equity ownership in the Company in Q4 FYE14

• SPT’s equity investment at transaction close1 of $2.5MM to be used to purchase 20% of f@ctory

• SPT to fund any necessary additional capital calls for the Company’s operations (none projected under SPT Case)

• SPT to engage in conversations with f@ctory regarding acquiring a call option for an additional 31% equity interest from existing shareholders for a total SPT ownership of 51%

Under the SPT Case, the $2.5MM investment is expected to provide an NPV of $0.0MM, DWM of ($2.5MM), IRR of 30.8%, and payback in Year 6

• Projected FYE14 EBIT and cash flow to SPE of ($0.3MM) and ($2.5MM), respectively

• Investment at a pre-money valuation of $7.5MM and a post-money valuation of $12.5MM (expected equity investment of $2.5MM from SPT and $2.5MM from a third party investor)

• Investment is the first round of financing for a venture that has not yet been launched. SPT is looking to enter at this early stage and receive an equity share at a relatively small investment, with a potential path to control

2(1) Assumes transaction close date of December 31, 2013.

Click to edit Master title styleCompany Overview and Deal Terms

3

f@ctory Overview

• Description: A next generation media and entertainment company, creating and distributing pop culture orientated video content targeted for the millennial demographic

• Revenue Model: YouTube advertising, content licensing, marketing placements, f@ctory live events, YouTube paid subscriptions, merchandising, and creative services

• Distribution: YouTube, f@ctory website, domestic/international licensing, and f@ctory sponsored live events

• Content Category: Short-form (2:00 to 5:00 minute) original video content orientated toward the culture/lifestyle genre, targeted for the millennial generation (approximately 15 to 30 years old)

• Joint Venture: Atom Factory and @radical.media

• Estimated Launch Date: January 1, 2014

Source: Company management.(1) Atom Factory and @radical.media would each hold a post-money valuation of 30% equity interest in f@ctory for a total of 60% equity interest.

Deal Terms

• Pre-money valuation: $7.5MM, as requested by the Founders

• Investment Type: Common stock or series A convertible preferred stock (security and terms to be determined, SPT’s preference is for series A financing that has seniority over the Founders’ common stock)

• Total Round: Up to $5.0MM for 40% minority equity interest; SPT to invest $2.5MM for 20%1

– SPT will attempt to negotiate a call option to purchase an additional 31% equity interest for a total ownership of 51%. Call option and terms to be discussed with the Founders

– SPT to invest under the same or more favorable terms and valuation as compared to other investor(s) in this round

– SPT to receive anti-dilution rights, as well as approval and blocking rights to protect against more senior or dilutive investments

• Post-Money Valuation: $12.5MM

Click to edit Master title styleProgramming Franchises

4 Source: Company management.

• A Punk’d meets Unplugged live music event

• Musicians pop up in unexpected places to play their hits, surprising audiences in an intimate, authentic open microphone session

• The youngest, most gifted musical prodigies in the world blow us away as they tell their stories and perform in f@ctory’s live streams

• From the youngest DJ, up-and-coming MC, or violinist, GIFTD profiles and gives a live stage to the next generation of global musical talent

• A frank and witty series on love, relationships and sex, hosted by one of the globe’s most original and insightful voices on relationships and sexuality, Dr. Ruth

• Engaging hot young people who are seeking to find the perfect balance between a happy relationship and the thrilling uncertainty of sexual attraction

• Two creative greats from two different fields are brought together to collaborate on a one-of-a-kind product, from art to fashion to gadgets, that our community can buy

• Watch the creative process unfold as egos and perspectives clash on the path to making something unexpected and beautiful available for purchase

Click to edit Master title styleProgramming Franchises (Cont’d)

5 Source: Company management.

• Young CEOs are this generation’s rock stars. Addressing what drives, inspires and consumes these entrepreneurial stars

• Explore their companies and their philosophies, seeing how they’re using their hard-earned expertise to address the issues they’re passionate about, from clean water to urban renewal and global poverty

• Closer than the front row, more intimate than backstage, NOMAD is part travel guide and part video log - true connoisseurs explore the best in global culture with our community

• A groundbreaking travel series sharing private moments with touring music artists as they visit their favorite spots - or discover new ones - around the world

• Giving audiences their weekly dose of cutting edge pop culture content featuring breaking tech, new global fashion, rising musical icons, quirky and addictive video horoscopes, and food and wellness

• Correspondents contribute from around the globe, viewers participate and interact, celebrities and artists drop in with cross-collaboration within the YouTube community

• Enter the world of Grammy-nominated producers, Da Internz, as they create their next mammoth hit and make their way to the top of the charts

• These two rising stars will grant us access to their lives and lifestyles, from the studio to the boardroom, as f@ctory chronicles their rise within the music business

Click to edit Master title styleAtom Factory and @radical.media Overview

Source: Company website and Capital IQ.6

• Description: Music artist, producers, and entertainment management company

• Operates AF Square, an angel fund with a portfolio including Spotify, Warby Parker, Songza, Uber, Dropbox, and Lyft

• Operates a record label, a joint venture between Capitol Records and Atom Factory to sign and develop new artists

• Founded: 2010

• Description: Develops, produces, and distributes programming and branded content for TV, digital, films, music, commercials, and entertainment

• Operates a Film & TV division, focusing on development, production, and distribution of programming and branded content for television, film, digital, and on-site platforms

• FreemantleMedia, a subsidiary of RTL Group, acquired a 60% stake in @radical.media in October 2010

• Estimated Revenue: $140MM

• Founded: 1993

Company Business Overview Clients / Projects

Lady Gaga John Legend

Bon Jovi Jay-Z


• October 10, 2013: AMC Networks led a $4MM round of funding for DanceOn, a dance entertainment MCN

• Launched in 2011, DanceOn had more >187MM views and 263K subscribers at the time of the investment

• June 17, 2013: Comcast Ventures invested in a round of funding rumored to be at ~$30MM for Fullscreen, an entertainment MCN

• Launched in 2011, Fullscreen had 2.5BN monthly views, >10K channels, >150MM subscribers, and ~160 employees at the time of the investment

• “As the video ecosystem evolves rapidly, Fullscreen is fusing technology and services to simplify operations and maximize opportunity for brand marketers and creators.” – Sam Landman, Principal at Comcast Ventures

• May 1, 2013: DreamWorks Animation acquired AwesomenessTV, a teen-focused MCN, for $33MM (with potential additional contingent cash payments up to $117MM if certain earnings targets are met in 2014 and 2015)

• Launched in 2012, AwesomenessTV had >55K channels, >14MM subscribers, and 800MM views at the time of the investment

• "AwesomenessTV is one of the fastest growing content channels on the internet today and our acquisition of this groundbreaking venture will bring incredible momentum to our digital strategy," – Jeffrey Katzenberg, DreamWorks CEO

• December 20, 2012: Time Warner Investments led a $36MM round of funding for Maker Studios, an entertainment MCN

• At the time of the investment, Maker Studios had raised a total of $44MM at a valuation of greater than $200MM

Industry Landscape

7

• With >1BN unique monthly users, YouTube is growing into a larger digital advertising opportunity with MCN’s expanding in number, size, and breadth of original content offering

• As MCN’s represent 3 out YouTube’s top 5 partner channels1, traditional TV networks and media companies continue to invest and make acquisitions in MCN’s to grow their digital footprint and gain access to additional video content

Recent MCN News

Source: eMarketer and Engauge.(1) MCN’s Fullscreen, Maker Studios, and ZEFR are ranked #2, #3, and #5, respectively, by domestic unique viewers among YouTube partner channels.

Click to edit Master title styleStrategic Investment Rationale

Investment supports SPT’s strategy to expand its digital business, increasing our presence in a high growth industry

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SPT Digital Strategy

• Increase exposure to YouTube and MCN’s

• Market SPT content across YouTube platforms, including mobile, desktop, and OTT devices

Crackle Business

• Add pop culture orientated content to expand Crackle’s audience across the millennial demographic

• Cross-merchandize long-form video content and establish additional production and content relationships

• Cross-promote users between businesses and platforms

• Leverage f@ctory infrastructure to expand scale

Distribution• Diversify SPT revenue through additional revenue streams, including YouTube, content licensing,

marketing placements, live events, merchandising, and creative services

• Expand the scale of existing SPT digital distribution on YouTube

ONE Sony• Generate SME, S/ATV, and SCEA synergies across distribution and industry/artist relationships,

reinforcing ONE Sony initiative


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Preliminary Valuation($ in MM)

• The Founders are requesting a pre-money valuation of $7.5MM (post-money valuation of $12.5MM) for f@ctory

– Founders have each invested $132K (total investment of $263K) to date, funding primarily programming pilots

– Our understanding is that SPT is competing with other investors currently evaluating the venture but is viewed by the Founders as a preferred strategic partner

• SPT estimates a preliminary enterprise value range of $6.5MM to $17.5MM. However, as this is a Series A round in a new venture, there is a high degree of uncertainty (also reflected in the broad valuation range)

• Our investment recommendation is predicated on:

– Our confidence in the Founders’ existing industry relationships and production capabilities

– Synergistic opportunities with Crackle and strategic benefits to SPT and Sony (as discussed in this deck)

– Given the early stage, SPT can acquire a considerable equity ownership at a relatively low investment


• Revenue CAGR of 51.5% from FYE15–FYE19

– Total annual views of 37MM growing to 1BN from FYE14–FYE19

– YouTube Display CPMs growing from $10.00 to $20.00 with average views per episode growing from 100K to 600K from CYE14–CYE19

– Direct sell-through of 37MM annual impressions growing to 360MM (25.0% sell-through rate)

– Annual revenue per Brand Integration contract of $300K growing to $500K from CYE14–CYE19 (assumes 3 six-year contracts and 3 one-year contracts for new content)

– Domestic / international annual licensing revenue of $100K each ($200K world-wide) and replay annual licensing revenue of $10K each ($20K world-wide)

– f@ctory Live Integration net revenue of $300K per contract (assumes 4 contracts in CYE14 growing to 8 in CYE19)

• Expense CAGR of 14.1% from FYE15–FYE19

– Production budget of $4MM growing to $6MM from CYE14–CYE19 (1.5K annual episodes growing to 2.4K)

– Total employees of 3 growing to 11 from CYE14–CYE19

• The Company projects positive EBIT and cumulative EBIT by FYE1610

Summary f@ctory FinancialsDiscussion

Business Plan – Company Case ($ in MM, except CPM figures)

Source: Company management.


11

Business Plan – SPT Case ($ in MM, except CPM figures)

Summary SPT FinancialsDiscussion

• In order to construct the SPT case, the following assumptions were made to the Company Case:

– Total annual views of 25MM growing to 173MM from FYE14–FYE19

– Non-YouTube Display revenue to begin in FYE15

– YouTube Display CPMs flat at $15.00 with average views per episode growing from 100K to 125K from CYE14–CYE19

– Direct sell-through of 30MM annual impressions growing to 50MM1

– Non-direct inventory to be sold through YouTube AdSense at $2.00 gross CPM

– Annual revenue per Brand Integration contract of $200K each growing to $500K from CYE14–CYE19 (assumes 3 one-year contracts, 1 two-year contracts, and 2 three-year contract for new content)

– Domestic/international annual licensing revenue of $5K each ($10K world-wide) with no replay revenue

– Production budget of $3MM growing to $4MM from CYE14–CYE19 (1.0K annual episodes growing to 1.5K)

– Additional YouTube Display ad sales commission expense to third party of 30.0%(1) Assumes sell-through rate of 30.0% decreasing to 27.0% as YouTube Display total views grow from CYE14 to CYE19.


12

YouTube Display Revenue – SPT Case ($ in thousands, except CPM and episode figures)

• SPT discussed YouTube Display revenue with Crackle’s Ad Solutions team

– SPT Case assumes total annual views of 1MM growing to 188MM from CYE14–CYE19 and CPMs at $15.00

– Company Case assumes total annual views of 146MM growing to 1.4BN and CPMs growing from $10.00 to $20.00 from CYE14–CYE19

– SPT Case assumes direct sell-through of 30MM annual impressions growing to 50MM1

– Company Case assumes direct sell-through of 37MM annual impressions growing to 360MM (25.0% sell-through rate)

– SPT Case assumes non-direct inventory to be sold through YouTube AdSense at a $2.00 gross CPM

• Crackle’s Ad Solutions team highlighted that CPMs see low growth over time, with a $15.00 gross CPM being achievable

• Crackle’s Ad Solutions team indicated expected current sell-through of ~30MM-40MM ad impressions could be achievable with its current business

Discussion Revenue Build – SPT Case

(1) Assumes sell-through rate of 30.0% decreasing to 27.0% as YouTube Display total views grow from CYE14 to CYE19.


13

Brand Integration Revenue – SPT Case($ in thousands)

• SPT discussed brand integrations with Crackle’s Ad Solutions team

– SPT Case assumes annual revenue per Brand Integration contract of $200K growing to $500K from CYE14–CYE19 (assumes 3 one-year contracts, 1 two-year contracts, and 2 three-year contract for new content)

– Company Case assumes annual revenue per Brand Integration contract of $300K growing to $500K from CYE14–CYE19 (assumes 3 six-year contracts and 3 one-year contracts for new content)

• Crackle’s Ad Solutions team highlighted that most brand integration engagements operate on short term contracts, with most contracts lasting 1 year terms and 3 year renewal terms being rare

• Crackle’s Ad Solutions team highlighted that premium brand integration contracts currently reach $500K for premium content and strong brands



14

Show Exits Revenue– SPT Case($ in thousands)

• SPT discussed licensing revenue with SPT Finance and TV Programming teams

– SPT Case assumes domestic and international annual licensing revenue of $5K each ($10K world-wide) with no replay revenue

– Company Case assumes domestic and international annual licensing revenue of $100K each ($200K world-wide) with replay annual revenue of $10K each ($20K world-wide)

• TV Programming group highlighted that there is lower market demand for non-premium programming and f@ctory programming may not sell well internationally

• TV Programming group noted it may be a challenge to sell f@ctory inventory at the SPT Case revenue assumptions above and that they can see a scenario where no licensing revenue is received



• The table below assumes equity accounting in FYE14–FYE19 based on a 20% equity ownership

• SPT may be able to invest in series A convertible preferred equity and do cost accounting as opposed to equity accounting in FYE14 to FYE19 (security and terms to be determined)

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Financial Impact to SPT($ in MM)

Note: Assumes post-money valuation of $12.5MM in FYE14.(1) Assumes 30% of post-money valuation attributed to PPA with 40%, 30%, 15%, 8%, and 8% amortized in YR1, YR2, YR3, YR4, and YR5, respectively.(2) Assumes 30% of YouTube Display net revenue paid to Crackle (SPE); net commissions assume 40% tax rate.(3) Assumes full distribution of cumulative operating cash flows at the time of exit.(4) Assumes capital call payments based on percent ownership. No capital calls are expected per SPT and Company Case.(5) Assumes 10% growth rate of net cash flows in FYE20 and FYE21.

5


16

Returns Analysis to SPT($ in MM)

• Based off SPT case projected cash flow, investment expected to generate NPV of $0.1MM and IRR of 30.8%

Note: Assumes post-money valuation of $12.5MM in FYE14.(1) Assumes full distribution of cumulative operating cash flows at the time of exit.(2) Based on 20% ownership. Terminal value determined by the average of 15.0x FYE19 EBITDA and 4.0x FYE19 revenue.(3) Assumes capital call payments based on percent ownership. No capital calls are expected per SPT and Company Case.(4) Assumes 30% of YouTube Display net revenue paid to Crackle (SPE) net of 40% tax rate.

Click to edit Master title styleKey Risk Factors

17

Capital Requirements

• If the Company deviates from plan, the additional capital to support the business model or to prevent dilution from additional equity holders may reduce SPT returns

• Model assumes YouTube business only. However, if the Company decides to expand to other distribution channels, more capital will likely be required

Ad Sales• New direct ad sales team may not achieve premium CPM targets or sell-through rates to meet

YouTube display and MCN revenue projections

• Ad networks and resellers have a limited presence in the YouTube environment

Additional Revenue

• Additional sources of revenue (e.g. brand integrations, f@ctory live integrations) contribute a large percentage of total projected revenue and depend heavily on the success of its YouTube business

• Ability of Company to compete on YouTube and create premium content

YouTube

• YouTube revenue share of 55% may be subject to change and is often driven by short term contracts

• Undeveloped infrastructure and lack of technology may limit monetization on YouTube

• YouTube is a competitive market

• The emergence of other digital channels (e.g. smart TV’s, OTT platforms) increase competition for advertising spend toward YouTube

Content

• Ability of the music driven, pop culture content to successfully compete with other similar content on YouTube

• Content may not appeal to the target millennial demographic and drive view counts necessary to support the business model

Click to edit Master title styleNext Steps

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• Confirm interest with SPT executives

• SPT to begin additional due diligence

• SPT to provide preliminary indication of interest to f@ctory

• Obtain approval by SPT executives

• Negotiate final closing documents


Appendix

19


20

Business Plan – Case Comparison($ in MM)

Source: Company Case provided by Company management.


21

f@ctory Operating Free Cash Flows – SPT Case($ in MM)

Click to edit Master title styleDiscounted Cash Flow Analysis($ in MM)

22 Note: Assumes transaction close date of December 31, 2013.(1) Assumes as 35% tax rate.(2) Assumes WACC of 30.0%.

Click to edit Master title stylePreliminary YR1 Programming – Company Case

23

• $3.6MM Year 1 Budget

• Rolling delivery December 2013 through November 2014 (Production Begins October 1, 2013)

• 6 Preliminary Programs to be Produced:

Pop-Spot• 600 x 5:00 (episodes x minutes)

• 250 x 2:00 (episodes x minutes)

• 17 episodes per week

• Double Camera, Studio Based

• Live-to-tape; Lighting and Audio; Set Design and Construction

Da Internz• 80 x 4:00-5:00 (episodes x

minutes)


• 4 shoot windows, 20 episodes per window

• Location Based

• Single Camera Documentary/Verite

Nomad• 90 x 4:00 (episodes x minutes)


• 15 artists, 8-9 episodes per artist

• 1 Trip per Artist, Location Based

• Single Camera Doc/Verite

The Inter Course• 72 x 4:00 (episodes x minutes)


• 12 subjects, 9 episodes per subject

• Location Based


Mogul• 72 x 4:00 (episodes x minutes)



• Location Based


Giftd• 72 x 4:00 (episodes x minutes)



• Location Based

• Single Camera Doc/Verite

Click to edit Master title styleMultichannel Network Precedent Transactions

24 (1) Evolution Media Capital (subsidiary of CAA) made an investment in Base79 on July 4, 2013. Financial terms of the transaction were not disclosed. (2) Mean and median figures exclude Revision 3.

Documents

Click to edit Master title style - wikileaks.org Factory... · Programming Franchises (Cont’d)Click to edit Master title style 5 Source: Company management. • Young CEOs are this