SWWI Simon Worldwide Inc (CE)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of the financial condition and results of operations of the Company for the three and six months ended June 30, 2014, as compared to the same periods in the previous year. This discussion should be read in conjunction with the condensed consolidated financial statements of the Company and related Notes included elsewhere in this Form 10-Q.

Forward-Looking Statements and Associated Risks

From time to time, the Company may provide forward-looking information such as forecasts of expected future performance or statements about the Company’s plans and objectives, including certain information provided below. These forward-looking statements are based largely on the Company’s expectations and are subject to a number of risks and uncertainties, certain of which are beyond the Company’s control. The Company wishes to caution readers that actual results may differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company including, without limitation, as a result of factors described in Item 1A. Risk Factors included in the 2013 10-K for purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995.

General

Prior to August 2001, the Company was a multi-national, full service promotional marketing company. In August 2001, McDonald’s Corporation (“McDonald’s”), the Company’s principal customer, terminated its 25-year relationship with the Company as a result of the embezzlement by a former Company employee of winning game pieces from McDonald’s promotional games administered by the Company. Other customers also terminated their relationships with the Company.

Since August 2001, the Company has concentrated its efforts on reducing its costs and settling numerous claims, contractual obligations, and pending litigation related to its prior business operations. By April 2002, the Company had effectively eliminated a majority of its ongoing promotions business operations and was in the process of disposing of its assets and settling its liabilities related to the promotions business and defending and pursuing litigation with respect thereto. In essence, the Company discontinued its promotions business and changed the nature of its operation to focus on its pending litigation and winding down its contracted obligations. As a result of these efforts, the Company has been able to resolve a significant number of outstanding liabilities that existed in August 2001 or arose subsequent to that date.

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The Board of Directors has considered various alternative courses of action for the Company, including possibly acquiring or combining with one or more operating businesses. The Board of Directors has reviewed and analyzed a number of proposed transactions. On March 22, 2013, the Company announced in a current report on Form 8-K, as amended by Amendment No. 1 thereto filed by the Company on July 15, 2013, by Amendment No. 2 thereto filed by the Company on August 7, 2013, and by Amendment No. 3 thereto filed by the Company on August 23, 2013 (the “TLE 8-K”), that it, together with Richard Beckman, Joel Katz and OA3 had entered into the LLC Agreement of Three Lions. As described in more detail in the TLE 8-K, pursuant to the LLC Agreement, the Company made an initial capital contribution of $3.15 million to acquire 600,000 investor membership units, or investor units, representing 60% of the voting power of Three Lions, subject to certain major decisions that require the unanimous approval of either the members of Three Lions or its Executive Board. The other two initial members of Three Lions, Richard Beckman and Joel Katz, were granted a total of 35,294 investor units in respect of their combined initial capital contributions of $185,294, and a total of 364,706 common units in respect of their establishment of and contributions of property to Three Lions, which investor units and common units represent 40% of the voting power of Three Lions, subject to such unanimous approval provisions.

The 600,000 investor units the Company acquired in respect of its initial capital contribution currently represent a 60% interest in the economic returns of Three Lions, including the right to receive along with the other holders of investor units, in preference over holders of common units, certain priority distributions of 100% of available proceeds of any sale or liquidation transactions and not less than 75% of available cash from operations, in each case as determined by the Executive Board, until such time as the respective capital contributions made by the Company and the other members holding investor units have been recouped in full, at which time the holders of common units would be entitled to receive certain catch-up distributions thereafter until aggregate distributions made match the respective pro rata 63.5%/36.5% percentage interest split between the investor units and the common units. An employee incentive equity pool of non-voting units representing approximately 10% of the fully diluted economic interests of Three Lions has also been established in the LLC Agreement. Any issuance of such incentive units or other economic participation rights to Three Lions employees could result in a proportionate dilutive reduction in the Company’s 60% interest in the economic returns of Three Lions of up to 6% in the aggregate, after the return of the Company’s aggregate capital contributions to Three Lions. As of June 30, 2014, none of the employee incentive units in the pool had been issued, however, Three Lions has granted to certain of its executive employees pursuant to their respective employment agreements certain economic participation rights in the event of (a) a sale or disposition of all or substantially all of the assets and business operations of Three Lions or of all of the equity ownership interests in Three Lions, or (b) a liquidation of Three Lions that is not the result of the transactions described in the preceding clause (a) (any such transaction described in clause (a) or (b), a “Covered Transaction”). These contractual economic participation rights entitle these executive employees, subject to the conditions set forth in the next sentence, to an aggregate total of nine percent (9%) of the excess net proceeds received by Three Lions and its members from a Covered Transaction above the sum of (A) all loans, debts and similar liabilities owed by Three Lions to its creditors (including members), (B) all capital contributions made to Three Lions by its members (less any non-tax related distributions received by such members), (C) all costs and expenses incurred by Three Lions and its members in connection with the Covered Transaction and (D) any amounts paid in exchange for services, non-competition agreements or other services, assets or items of value required to be performed or provided by Three Lions or its members in connection with the Covered Transaction. These participation rights are subject to vesting in three equal annual installments beginning on the first anniversary date of the commencement of the recipient’s employment with Three Lions (which first anniversary dates currently range from March 19, 2014 through May 2, 2014), subject to (i) the recipient’s continued employment with Three Lions and (ii) possible acceleration of such vesting by one year in the event of the occurrence of, or Three Lions enters into a binding obligation to engage in, a Covered Transaction prior to the next vesting date.

Pursuant to the LLC Agreement, the Company made a second capital contribution to Three Lions in the amount of $1,850,000, and Messrs. Beckman and Katz made additional capital contributions to Three Lions totaling $108,824, in April 2013. The Company made a third and final capital contribution to Three Lions of $3.5 million on October 2, 2013, and Messrs. Beckman and Katz made final capital contributions to Three Lions totaling $205,882. The Company made this $3.5 million capital contribution to Three Lions following the closing of its rights offering. OA3, an affiliate of the Company’s controlling shareholder, is obligated under the LLC Agreement (as amended by the First Amendment) to make available to Three Lions, the OA3 Loan Facility for the purpose set forth in the First Amendment filed on Form 8-K by the company with the Securities and Exchange Commission on May 13, 2014.

The LLC Agreement provides that for so long as the Company holds at least 51% of the voting membership units in Three Lions (or 510,000 investor units), the Company will control at least 51% of the voting power of the members of Three Lions, subject to certain major decisions that require the unanimous approval of either the members of Three Lions or its Executive

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Board which effectively requires the Company to obtain the approval of Messrs. Beckman and Katz in these cases since both are members of Three Lions and of its Executive Board. Additionally, the LLC Agreement provides that the Company has the right to appoint three of the five members of the Executive Board of Three Lions. For so long as the Company holds not less than 75% of the membership units that it held as of October 4, 2013, the Company shall continue to be entitled to appoint and remove three of the five members of the Executive Board of Three Lions, which governs the business and operations of Three Lions. The Executive Board governs under simple majority vote, subject to certain significant decisions that require Special Approval as described in more detail in the TLE 8-K.

In addition, in April 2012, the Company began providing limited accounting and administrative services to a company controlled by an affiliate of the Company’s largest shareholder. The Company also began providing accounting services to Three Lions in May 2013. The arrangements entail providing these services through an undetermined end date, including payments totaling approximately $74,000 expected for the third quarter. The Company does not consider these arrangements to be part of its recurring operations.

As of both June 30, 2014 and December 31, 2013, the Company had 4 employees. The Company is currently managed by the Chief Executive Officer, Greg Mays, and Chief Financial Officer, Anthony Espiritu, together with an acting general counsel.

Outlook

The lack of any operating revenue has had and, notwithstanding the Company’s active involvement in Three Lions, will continue to have a substantial adverse impact on the Company’s cash position. The Company incurred losses within its continuing operations in 2013 and continues to incur losses in 2014 for the general and administrative expenses incurred to manage the affairs of the Company. In the near term, the primary source of current and future working capital is expected to be cash on hand and proceeds from the sale of its remaining long-term investment. Management believes it has sufficient capital resources and liquidity to operate the Company for at least one year.

Considering our current cash position of $1.3 million at June 30, 2014, and our average spending to support continuing operations, management believes it has sufficient capital resources and liquidity to operate the Company for at least one year.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2014, Compared to Three Months Ended June 30, 2013

The Company generated no revenue or gross profits during the three months ended June 30, 2014 and 2013.

General and administrative expenses totaled $.3 million during the three months ended June 30, 2014, which is consistent with the $.3 million during the three months ended June 30, 2013.

Due to both the founders and the Company sharing the power to direct the significant activities that impact the economic performance of Three Lions, the Company currently does not consolidate Three Lions. If consolidated by the Company, Three Lions will significantly increase the Company’s losses from operations as Three Lions is not expected to generate revenues until the second half of 2014.

Six Months Ended June 30, 2014, Compared to Six Months Ended June 30, 2013

The Company generated no revenue or gross profits during the six months ended June 30, 2014 and 2013.

General and administrative expenses totaled $.6 million during the six months ended June 30, 2014, which is consistent with the $.6 million during the six months ended June 30, 2013.

Due to both the founders and the Company sharing the power to direct the significant activities that impact the economic performance of Three Lions, the Company currently does not consolidate Three Lions. If consolidated by the Company, Three Lions will significantly increase the Company’s losses from operations as Three Lions is not expected to generate revenues until the second half of 2014.

LIQUIDITY AND CAPITAL RESOURCES

Working capital was $1.5 million and $1.9 million at June 30, 2014, and December 31, 2013, respectively.

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Net cash used in operating activities during the six months ended June 30, 2014 totaled $.4 million primarily due to a net loss of $2.1 million partially offset by equity in the losses of Three Lions of $1.7 million. Net cash used in operating activities during the six months ended June 30, 2013, totaled $.7 million primarily due to a loss from operations of $1.4 million and an increase in restricted cash of $.2 million partially offset by the Company’s investment loss in Three Lions of $.9 million and a net change in working capital items.

There were no investing activities during the six months ended June 30, 2014. Net cash used in investing activities during the six months ended June 30, 2013, totaled $5.0 million due to the Company’s payments for acquiring membership units in Three Lions.

There were no financing activities during the six months ended June 30, 2014. Net cash used in financing activities during the six months ended June 30, 2013, totaled $.1 million primarily due to an increase in equity issuance costs.

At June 30, 2014, the Company has letters of credit totaling approximately $236,000 and are considered restricted. Of this amount, $36,000 supports the Company’s periodic payroll obligations and $.2 million guarantees payments on an office lease obtained by the Company’s Three Lions subsidiary.

The Company’s contributions to Three Lions total $8.5 million. The contributions from noncontrolling interest holders total $.5 million. In addition, Three Lions has available a revolving credit facility in a principal amount not to exceed $8.0 million. If these amounts are insufficient to meet Three Lions’ start-up, operating and production expenses, Three Lions may need or choose to obtain additional financing by selling securities or by entering into additional credit agreements.