Fantex, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EX-32.1 - Fantex, Inc.	fntx-20160331ex321bb7b56.htm
EX-31.1 - EX-31.1 - Fantex, Inc.	fntx-20160331ex31108e312.htm
EX-31.2 - EX-31.2 - Fantex, Inc.	fntx-20160331ex312e53f34.htm
EX-99.1 - EX-99.1 - Fantex, Inc.	fntx-20160331ex991332a42.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2016

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

Commission File Number 000-55204

FANTEX, INC.

(Exact name of registrant as specified in its charter)

Delaware

80-0884134

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

330 Townsend Street, Suite 234

San Francisco, CA 94107

(Address of principal executive offices) (Zip Code)

(415) 592-5950

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 ☒ 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 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 smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☐ (do not check if a smaller reporting company)	Smaller reporting company	☒

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Shares Outstanding at May 16, 2016
Common stock — Platform Common, $0.0001 par value		100,000,000
Common stock — Fantex Series Vernon Davis Convertible Tracking Stock, $0.0001 par value		421,100
Common stock — Fantex Series EJ Manuel Convertible Tracking Stock, $0.0001 par value		523,700
Common stock — Fantex Series Mohamed Sanu Convertible Tracking Stock, $0.0001 par value		164,300
Common stock — Fantex Series Alshon Jeffery Convertible Tracking Stock, $0.0001 par value		835,800
Common stock — Fantex Series Michael Brockers Convertible Tracking Stock, $0.0001 par value		362,200
Common stock — Fantex Series Jack Mewhort Convertible Tracking Stock, $0.0001 par value		268,100

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TABLE OF CONTENTS



PART I — FINANCIAL INFORMATION

ITEM 1.	Financial Statements
	Condensed Balance Sheets as of March 31, 2016 and December 31, 2015 (Unaudited)	3
	Condensed Statements of Operations for the three months ended March 31, 2016 and 2015 (Unaudited)	4
	Condensed Statements of Stockholders’ Equity for the period from December 31, 2014 to March 31, 2016 (Unaudited)	5
	Condensed Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (Unaudited)	6
	Notes to Condensed Financial Statements (Unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	20
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	33
ITEM 4.	Controls and Procedures	33

PART II — OTHER INFORMATION

ITEM 1.	Legal Proceedings	35
ITEM 1A.	Risk Factors	35
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
ITEM 3.	Defaults Upon Senior Securities	35
ITEM 4.	Mine Safety Disclosure	35
ITEM 5.	Other Information	35
ITEM 6.	Exhibits	36

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PART I — FINANCIAL INFORMATION

ITEM 1: Financial Statements

FANTEX, INC.

CONDENSED BALANCE SHEETS

(Unaudited)


	As of
	March 31, 2016		December 31, 2015
ASSETS
Cash and Cash Equivalents	$	1,745,058	$	1,741,678
Receivable from Contract Parties		560,649		254,919
Prepaid Assets		315,000		—
Total Current Assets		2,620,707		1,996,597
Investment in Brand Contracts, at Fair Value		21,382,076		17,758,372
Other Investments, at Cost		110,800		110,800
Total Assets	$	24,113,583	$	19,865,769
LIABILITIES AND STOCKHOLDERS’ EQUITY
Promissory Note Due to Parent	$	3,300,000	$	—
Accrued Interest on Promissory Note Due to Parent		35,200		—
Management Fee Due to Parent		20,625		52,988
Total Current and Total Liabilities		3,355,825		52,988
Commitments and Contingencies
Contributed Capital
Platform Common Stock, $0.0001 par value (authorized 1,500,000,000 shares, 100,000,000 issued and outstanding)		10,000		10,000
Fantex Series Vernon Davis Convertible Tracking Stock, $0.0001 par value (authorized 421,100 shares, 421,100 issued and outstanding)		42		42
Fantex Series EJ Manuel Convertible Tracking Stock, $0.0001 par value (authorized 523,700 shares, 523,700 issued and outstanding)		52		52
Fantex Series Mohamed Sanu Convertible Tracking Stock, $0.0001 par value (authorized 164,300 shares, 164,300 issued and outstanding)		16		16
Fantex Series Alshon Jeffery Convertible Tracking Stock, $0.0001 par value (authorized 835,800 shares, 835,800 issued and outstanding)		84		84
Fantex Series Michael Brockers Convertible Tracking Stock, $0.0001 par value (authorized 362,200 shares, 362,200 issued and outstanding)		36		36
Fantex Series Jack Mewhort Convertible Tracking Stock, $0.0001 par value (authorized 268,100 shares, 268,100 issued and outstanding)		27		27
Additional Paid-in-Capital		38,840,992		37,350,007
Accumulated Deficit		(18,093,491)		(17,547,483)
Total Stockholders' Equity		20,757,758		19,812,781
Total Liabilities and Stockholders' Equity	$	24,113,583	$	19,865,769

See notes to condensed financial statements.

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FANTEX, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31,
	2016		2015
Income from Brand Contracts	$	1,001,940	$	1,537,275
Operating Expenses:
Personnel Costs		418,549		357,612
Professional Services		810,246		660,543
General and Administrative, Exclusive of Personnel Costs		283,953		205,492
Total Operating Expenses		1,512,748		1,223,647
Interest Expense		35,200		—
Net Income (Loss) Before Income Taxes		(546,008)		313,628
Income Taxes		—		—
Net Income (Loss)	$	(546,008)	$	313,628

Net Income (Loss) Attributable to:
Platform Common stock	$	(1,385,215)	$	(1,125,422)
Fantex Series Vernon Davis Convertible Tracking Stock		(108,729)		121,475
Fantex Series EJ Manuel Convertible Tracking Stock		22,423		68,717
Fantex Series Mohamed Sanu Convertible Tracking Stock		430,702		87,092
Fantex Series Alshon Jeffery Convertible Tracking Stock		264,778		1,161,766
Fantex Series Michael Brockers Convertible Tracking Stock		105,066		—
Fantex Series Jack Mewhort Convertible Tracking Stock		124,967		—
Net Income (Loss)	$	(546,008)	$	313,628

Net Income (Loss) Per Share Attributable to:
Platform Common Stock:
Basic and Diluted (weighted average shares — 100,000,000)	$	(0.01)	$	(0.01)
Fantex Series Vernon Davis Convertible Tracking Stock
Basic and Diluted (weighted average shares — 421,100)	$	(0.26)	$	0.29
Fantex Series EJ Manuel Convertible Tracking Stock
Basic and Diluted (weighted average shares — 523,700)	$	0.04	$	0.13
Fantex Series Mohamed Sanu Convertible Tracking Stock
Basic and Diluted (weighted average shares — 164,300)	$	2.62	$	0.53
Fantex Series Alshon Jeffery Convertible Tracking Stock
Basic and Diluted (weighted average shares — 835,800)	$	0.32	$	1.39
Fantex Series Michael Brockers Convertible Tracking Stock
Basic and Diluted (weighted average shares — 362,200)	$	0.29	$	—
Fantex Series Jack Mewhort Convertible Tracking Stock
Basic and Diluted (weighted average shares — 268,100)	$	0.47	$	—

See notes to condensed financial statements.

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FANTEX, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Platform Common			Tracking			Additional				Total
	Stock			Stocks			Paid-in-		Accumulated		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Deficit		Equity
Balance at December 31, 2014	100,000,000	$	10,000	1,109,100	$	110	$	19,470,244	$	(11,301,139)	$	8,179,215
Contributions from Parent	—		—	—		—		1,167,491		—		1,167,491
Proceeds from offering of Fantex Series Alshon Jeffery Convertible Tracking Stock	—		—	835,800		84		7,940,016		—		7,940,100
Net Income	—		—	—		—		—		313,628		313,628
Balance at March 31, 2015	100,000,000	$	10,000	1,944,900	$	194	$	28,577,751	$	(10,987,511)	$	17,600,434
Contributions from Parent	—		—	—		—		2,811,279		—		2,811,279
Proceeds from offering of Fantex Series Michael Brockers Convertible Tracking Stock	—		—	362,200		36		3,440,864		—		3,440,900
Proceeds from offering of Fantex Series Jack Mewhort Convertible Tracking Stock	—		—	268,100		27		2,520,113		—		2,520,140
Dividend paid, Fantex Series Vernon Davis Convertible Tracking Stock	—		—	—		—		—		(210,550)		(210,550)
Dividend paid, Fantex Series Mohamed Sanu Convertible Tracking Stock	—		—	—		—		—		(32,860)		(32,860)
Net Loss	—		—	—		—		—		(6,316,562)		(6,316,562)
Balance at December 31, 2015	100,000,000	$	10,000	2,575,200	$	257	$	37,350,007	$	(17,547,483)	$	19,812,781
Contributions from Parent	—		—	—		—		1,490,985		—		1,490,985
Net Loss	—		—	—		—		—		(546,008)		(546,008)
Balance at March 31, 2016	100,000,000	$	10,000	2,575,200	$	257	$	38,840,992	$	(18,093,491)	$	20,757,758

See notes to condensed financial statements.

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FANTEX, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2016		2015
Operating Activities:
Net Income (Loss)	$	(546,008)	$	313,628
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Income from Brand Contracts		(1,001,940)		(1,537,275)
Expenses Contributed From Parent		1,490,985		1,167,491
Interest Expense on Promissory Note Due to Parent		35,200		—
Changes in:
Prepaid Assets		(315,000)		44,278
Management Fee Due to Parent		(32,363)		26,031
Purchase of Brand Contracts		(3,340,000)		(7,940,000)
Cash Receipts from Brand Contracts		412,506		204,516
Net cash used in operating activities	$	(3,296,620)	$	(7,721,331)
Investing Activities:
Purchase of Other Investments		—		(110,800)
Net cash used in investing activities	$	—	$	(110,800)
Financing Activities:
Proceeds From Promissory Note Due to Parent		3,300,000		—
Proceeds from Fantex Series Alshon Jeffery Convertible Tracking Stock Offering (net of $417,900 underwriting fees)		—		7,940,100
Net cash provided from financing activities	$	3,300,000	$	7,940,100
Net Cash Increase for Period		3,380		107,969
Cash and Cash Equivalents at Beginning of Period		1,741,678		929,440
Cash and Cash Equivalents at End of Period	$	1,745,058	$	1,037,409
Cash Paid for Interest	$	—	$	—
Cash Paid for Taxes	$	—	$	—
Non-Cash Financing Activities:
Contributions from Parent	$	1,490,985	$	1,167,491

See notes to condensed financial statements.

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NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. BUSINESS

Nature of Operations—Fantex, Inc. (the “Company” or “Fantex”) was incorporated in Delaware in September 2012 and is a subsidiary of Fantex Holdings, Inc. (the “Parent”). Fantex has substantially relied on the Parent to date to conduct its operations.

Fantex is a company whose focus is on acquiring minority interests in the future income of professional athletes (together with affiliated entities, the “Contract Party,” and collectively, the “Contract Parties”) and assisting such individuals in growing these income streams. The business operates in a single segment and focuses its business on three core areas:

targeting, evaluating and accessing athletes with the potential to generate significant income (which is referred to as “brand income”);

acquiring minority interests in such brand income (which is referred to as “Acquired Brand Income” or “ABI”); and

assisting athletes who have entered into brand contracts with the Company to increase the potential value of their future brand income, primarily through mentoring and network/audience development.

The Company currently relies on the Parent for management and operational capabilities while it continues to scale its operations. The Company will continue to rely on the Parent to conduct its operations until such time as the Company’s income and cash flows are sufficient to finance operations.

The Company operates under a management agreement with the Parent, pursuant to which Parent provides Fantex with management and administrative services, including providing and compensating the Company’s executive management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. The Company will begin to assume direct management and administrative responsibilities at such time in the future as the actual cost of these services is less than the service fee to the Parent.

All expenses except for the management fee incurred for the three months ended March 31, 2016 and 2015 were paid by the Parent and allocated to Fantex based on the expenses incurred by Fantex in its operations. The allocations were based on the time spent by employees of the Parent on activities of Fantex and direct expenses incurred for the operations of Fantex. The expense allocations have been determined on the basis that Fantex and the Parent considered to be reasonable reflections of the utilization of services provided or the benefit received by Fantex. Management believes that the expenses allocated to Fantex are representative of the operating expenses it would have incurred had Fantex been operating on a stand-alone basis.

Certain Significant Risks and Uncertainties— The Company is an early stage start-up and as such has not yet been able to demonstrate the long term viability of its business model. The Company can be affected by a variety of factors. Management of the Company believes that the following areas represent some of the more significant risks that could have a significant negative effect on the Company in terms of its future financial position, results of operations or cash flows:

The Company has incurred significant losses since its inception and anticipates that it will continue to incur losses in the foreseeable future.

The Company has a limited operating history which may make it difficult for investors to evaluate the success of its business to date and to assess its future viability.

The Company will need to obtain additional funding to acquire additional brands and the Company may also need additional funding to continue operations. There is no certainty the Company will be able to raise such additional funding.

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The Company’s principal source of cash flows for the foreseeable future will be derived from brand contracts, and with respect to brand contracts:

the Company has limited experience managing brand contracts and limited historical performance data about its brand contracts;

the Company does not have any rights to require the Contract Party to take any actions to attract, maintain or otherwise generate brand income;

brand income may decrease due to factors outside the control of the Contract Party, such as a decline in relative performance, injury, illness, medical condition or death of the Contract Party, or due to other factors such as public scandal or other reputational harm to the Contract Party;

the valuation of the Company’s brand contracts and expected ABI requires the Company to make material assumptions that may ultimately prove to be incorrect;

changes in government policy, legislation or regulatory interpretations could cause our business operations or offerings of tracking stocks to become subject to additional regulatory or legal requirements that may adversely affect our business operations and ability to offer additional tracking stocks; and

the leagues, team owners, players associations, endorsement partners, elected officials or others may take actions that could restrict the Company’s ability or make it more costly for the Company to enter into future brand contracts.

The Company has two promissory notes from its Parent as more fully described in Note 7, Promissory Note Due to Parent and in Note 10, Subsequent Events. As of May 16, 2016, these notes total $12,300,000. The promissory note matures on the earlier of five days following the successful offering of a security linked to the Andrew Heaney brand contract or August 12, 2016 and the Secured Note matures July 27, 2016. These notes are secured solely by the Andrew Heaney, Ryan Shazier, Terrance Williams and Kendall Wright brand contracts, and the Company has the ability to satisfy the notes without paying any cash by assigning its rights to those four brand contracts. The Company currently intends to repay these notes from the proceeds of a securities offering that is linked, in part, to these four brand contracts or renegotiate the terms of the notes. If the Company is unsuccessful in those efforts, the Company intends to assign the four brand contracts to its Parent prior to the notes' maturity dates to satisfy the Company's obligations under the notes.

The Company's ability to continue to enter into future brand contracts depends, to a significant degree, on the Company's ability to successfully complete a securities offering, the proceeds of which are sufficient to repay the two promissory notes discussed above and to pay the purchase price of the Company's existing unconsummated brand contracts. There can be no assurance that this financing will be available on terms acceptable to the Company, or at all. The Company is working with its advisers on the most appropriate way to structure and undertake a securities offering to achieve these results. If the Company is unsuccessful in completing such a securities offering, the Company may have to limit the scope of its operations. In such case, the Company’s operations would be limited to the servicing and maintenance of its current portfolio of brand contracts. Management has evaluated the ability of the Company to continue as a going concern under these conditions by analyzing cash inflow from brand contracts and expense projections. The Company believes it can continue as a going concern for at least the next 12 months based on those projections.

The Company is dependent on the continued ability of the Parent to support operations until such time as the Company is capable of supporting its own operations.

Recent Accounting Pronouncements— In August 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update 2014-15, “Presentation of Financial Statements - Going Concern

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(Subtopic 205-40); Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. This update requires management of the Company to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern. This update is effective for the annual period ending after December 15, 2016, and for the annual and interim periods thereafter. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption of ASU 2014-15 on the financial statements. Upon adoption, this standard may affect disclosures but does not affect the Company’s balance sheet, statement of operations, or statement of cash flows.

Basis of Presentation— The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the entire year. In the opinion of management, all adjustments necessary for a fair presentation of Fantex’s condensed financial statements have been included and are of a normal recurring nature.

Use of Estimates— The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. On an ongoing basis, management will evaluate these estimates, including those related to fair values of brand contracts, income taxes, and contingent liabilities, among others. Estimates will be based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from these estimates.

2. TRACKING STOCKS

As of March 31, 2016, the Company had the following tracking stocks outstanding:


Contract Party	Effective Date of Brand Contract	Tracking Stock Related to the Brand Contract
Vernon Davis	October 30, 2013	Fantex Series Vernon Davis
EJ Manuel	February 14, 2014	Fantex Series EJ Manuel
Mohamed Sanu	May 14, 2014	Fantex Series Mohamed Sanu
Alshon Jeffery	September 18, 2014	Fantex Series Alshon Jeffery
Michael Brockers	January 9, 2015	Fantex Series Michael Brockers
Jack Mewhort	March 26, 2015	Fantex Series Jack Mewhort

A tracking stock is a type of common stock that the issuing company intends to reflect or “track” the economic performance of a particular business or “group”, and in the Company’s case, the economic performance of the related brand contract, rather than the economic performance of the company as a whole. While the tracking stocks have separate collections of assets and liabilities attributed to them, no brand contract is a separate legal entity and therefore no brand contract can own assets, issue securities or enter into legally binding agreements.

Holders of tracking stocks have no direct claim to the attributed net assets of the tracking stock and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of Fantex, with a single board of directors and subject to all of the risks and liabilities of Fantex.

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See Exhibit 99.1 to this Quarterly Report on Form 10-Q for unaudited attributed financial information for Fantex’s tracking stocks that were publicly traded during the reporting period.

3. RELATED PARTY TRANSACTIONS

The Company will continue to rely on the Parent to conduct its operations until such time as the Company’s cash flows are sufficient to finance its operations. The Company operates under a management agreement with the Parent, pursuant to which the Parent provides Fantex with management and administrative services, including providing and compensating the Company’s executive management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. The Company will begin to assume direct management and administrative responsibilities at such time in the future as the actual cost of these services is less than the service fee to the Parent, which is not anticipated to occur until the Company begins to generate significant cash flows from multiple brand contracts.

Under the terms of the management agreement, the Company has agreed to pay the Parent 5% of the amount of the gross cash received by the Company, if any, pursuant to the brand contracts during any quarterly period as remuneration for the services provided. The amount of gross cash received used to calculate this 5% fee will include any portion allocated to a reduction of the carrying value on the financial statements but shall not take into account the changes in fair value of the brand contracts. As such, the service fee under the management agreement will be determined based on the total amount of actual cash received under the brand contracts in a given quarterly period prior to any adjustments for fair value and without regard to the expected cash receipts in such quarter as reflected in the financial statements for that quarter. To the extent the Company receives no cash for any period then the Company would not owe any fee for any services provided during that period. The Company may evaluate the service fee from time to time to assess the continued appropriateness of the percentage of its cash receipts upon which the service fee is calculated, in light of the services being provided by the Parent at the time and the cost of those services.

The Company incurred management fee expenses pursuant to the management agreement of $20,625 and $10,225 for the three months ended March 31, 2016 and 2015, respectively. The management fee is included in the total expenses of $1,547,948 and $1,223,647 for the three months ended March 31, 2016 and 2015, respectively. The management fee represents a cash payment in lieu of an allocation from the Parent for the expenses to operate the Company.

All expenses (except the management fee expense incurred for the three months ended March 31, 2016 and 2015) were paid by the Parent and allocated to Fantex based on the time spent by employees of the Parent on activities of Fantex, the number of full time equivalent employees performing Fantex activities and direct expenses incurred for the operations of Fantex. The expense allocations have been determined on the basis that Fantex and the Parent considered to be reasonable reflections of the utilization of services provided or the benefit received by Fantex and the methodology and assumptions made in the allocations have been consistently applied and are comparable in the periods presented. Management believes that the expenses allocated from the Parent to Fantex, together with the management fee payable by the Company to the Parent under the management agreement, are representative of the operating expenses Fantex would have incurred had it been operated on a stand-alone basis.

During the three months ended March 31, 2016 and 2015, the Parent incurred and allocated to the Company $1,490,985 and $1,167,491, respectively, of expenses directly related to the operations of Fantex. The Company converted to capital all of the amounts that were allocated by the Parent to the Company for the three months ended March 31, 2016 and 2015.

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In 2013, the five independent directors of the Company were granted an aggregate of 100,000 non-qualified options under the Fantex Holdings, Inc. 2012 Equity Incentive Plan. These options were granted with an exercise price equal to the fair market value of the Parent’s common stock at the date of grant and have a 10-year contractual term. The stock options vest ratably over a four-year period. The fair market value of stock options is estimated using the Black-Scholes valuation model and the Company used the following methods to determine its underlying assumptions: expected volatilities are based on the historical volatilities of the daily closing price of the public common stock of companies believed comparable to the Parent; the expected term of options granted is based on the simplified method of using the mid-point between the vesting term and the original contractual term and/or average time outstanding method; the risk-free interest rate is based on the U.S. Treasury daily yield curve on the date of grant; and the expected dividend yield is based on the current dividend trend. Forfeitures are estimated at the time of grant and adjusted, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company was allocated from the Parent $6,026 and $6,203 of stock compensation for the three months ended March 31, 2016 and 2015, respectively. The key assumptions used by the Parent in the valuation model to value the stock option grants were:


	Three Months Ended March 31,
	2016		2015
Expected Term:	6.02	years	6.02	years
Risk Free Rate:	1.75	%	1.75	%
Weighted Average Volatility:	65.50	%	65.50	%
Expected Forfeiture Rate:	15.00	%	35.00	%
Expected Dividend Rate:	0	%	0	%

The fair value of the options as computed under the Black-Scholes valuation model was calculated to be $0.967 per share. As of March 31, 2016 there are 32,580 shares and $31,675 of compensation expense to be expensed over the remaining 1.3-year vesting period.

Certain offering expenses have been paid by the Parent relating to securities offerings, and those costs will remain the liability of the Parent. The Parent will not seek to recapture these expenses from the Company. The following table summarizes the related party transactions involving the initial public offerings completed since January 1, 2014 until March 31, 2016 which were underwritten by the Company’s affiliated broker-dealer, Fantex Brokerage Services, LLC.


		Parent's Purchase			Directors' Purchase
Tracking Stock	Shares	Shares	Amount		Shares(1)	Amount
Fantex Series Vernon Davis	421,100	102,454	$	1,024,540	—	$	—
Fantex Series EJ Manuel	523,700	250,000	$	2,500,000	27,934	$	279,340
Fantex Series Mohamed Sanu	164,300	78,000	$	780,000	10,365	$	103,650
Fantex Series Alshon Jeffery	835,800	400,000	$	4,000,000	203,994	$	2,039,940
Fantex Series Michael Brockers	362,200	162,993	$	1,629,930	92,900	$	929,000
Fantex Series Jack Mewhort	268,100	124,014	$	1,240,140	69,520	$	695,200

(1)

Includes 34,414 shares of Fantex Series Alshon Jeffery, 18,000 shares of Fantex Series Michael Brockers and 13,400 shares of Fantex Series Jack Mewhort owned by Lily Beirne, the spouse of David Beirne, the Chairman of our Parent’s Board of Directors.

4. INVESTMENT IN BRAND CONTRACTS, AT FAIR VALUE

Brand contracts, at fair value, are initially valued at the transaction price. As of March 31, 2016, the Company’s brand contracts are considered Level 3 investments because there are no reliable observable market prices for these investments. The Company employs discounted cash flow valuation models that depend on several observable and unobservable pricing inputs and assumptions in determining fair value for Level 3 investments, including: the risk free cost of capital, length of playing career, length of post career, future rates of inflation in salaries and endorsement contracts, and projections of amounts that may be realized through future playing and endorsement contracts. These unobservable pricing inputs and assumptions may differ by brand contract and in the application of the Company’s valuation methodologies. The reported fair value estimates could vary materially if the

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Company had chosen to incorporate different unobservable pricing inputs or other assumptions for applicable investments.

The Company generally considers three categories of potential brand income:

Category A—Potential brand income related to the portions of existing contracts that have a higher degree of certainty of payment, such as brand income that is very near-term or that is guaranteed under existing included contracts.

Category B—Potential brand income related to the portions of existing contracts that have a lesser degree of certainty of payment, such as brand income that is payable pursuant to existing included contracts but that depends on longer-term continued satisfactory performance of the Contract Party.

Category C—Potential brand income related to anticipated future contracts, such as future endorsements, playing contracts and/or additional brand income generated from coaching, broadcasting or the like.

As of March 31, 2016 the Company had seven brand contracts that are generating income and subject to fair value measurement. The following describes the valuation methodology and significant unobservable inputs used for these brand contracts that is categorized within Level 3 of the fair value hierarchy at March 31, 2016 and 2015.

Discount Rates

In determining the fair value of the Company’s brand contracts as of March 31, 2016 and 2015, the Company used discount rates ranging from 4.5% to 20.0%, which the Company believes adequately address the uncertainty inherent in its estimates.

Career Length

To determine a Contract Party’s expected career length for the brand contracts, the Company’s valuation professionals used proprietary valuation models. Using statistical analysis, the Company’s valuation professionals determined a set of players that were comparable in caliber to the Contract Party and, based on the career lengths of the players in the data set, arrived at an estimated career length for the Contract Party.

Player Contract Values

In estimating the value of the future player contracts for Contract Parties, the Company reviewed the contracts for players in the professional sport, retired or active, who are of similar caliber to the applicable Contract Party, who have entered into contracts in a similar era, and who are or were at similar ages and stages in their careers at which the applicable Contract Party is expected to enter into additional player contracts. The values of such contracts are adjusted for inflation to better predict the contract values of any future player contracts.

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Level 3 Assets

The Investments in Brand Contracts at fair value was determined to be $21,382,076 as of March 31, 2016.

The following tables present additional data about our Level 3 assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of the contract within the Level 3 category. As a result, unrealized gains and losses for assets and liabilities within the Level 3 category may include changes in the fair value that were attributable to both observable and unobservable inputs. Changes in Level 3 assets measured at fair value for the three months ended March 31, 2016 and 2015 were as follows:


	Three Months Ended March 31, 2016
Brand Contract	Balance December 31, 2015		Purchases		Payments on Brand Contracts		Realized Gain (Loss)		Unrealized Gain (Loss)		Receivable from Contract Party		Balance March 31, 2016
Vernon Davis Brand Contract	$	1,036,757	$	—	$	(85,884)	$	24,414	$	(123,097)	$	(11,701)	$	840,489
EJ Manuel Brand Contract		950,303		—		(7,134)		(1,370)		29,682		(1,199)		970,282
Mohamed Sanu Brand Contract		1,750,146		—		(11,371)		509,559		(52,931)		(508,155)		1,687,248
Alshon Jeffery Brand Contract		7,789,801		—		(7,342)		(3,998)		296,214		(11,445)		8,063,230
Michael Brockers Brand Contract		3,138,539		—		(9,032)		5,780		107,998		(7,654)		3,235,631
Jack Mewhort Brand Contract		3,092,826		—		(3,426)		19,264		113,556		(20,434)		3,201,786
Andrew Heaney Brand Contract		—		3,340,000		(33,459)		5,167		71,702		—		3,383,410
Total Brand Contracts	$	17,758,372	$	3,340,000	$	(157,648)	$	558,816	$	443,124	$	(560,588)	$	21,382,076


	Three Months Ended March 31, 2015
Brand Contract	Balance December 31, 2014		Purchases		Payments on Brand Contracts		Realized Gain (Loss)		Unrealized Gain		Receivable from Contract Party		Balance March 31, 2015
Vernon Davis Brand Contract	$	2,626,332	$	—	$	(16,609)	$	58,987	$	74,024	$	(57,029)	$	2,685,705
EJ Manuel Brand Contract		2,582,389		—		(2,628)		(2,202)		75,871		—		2,653,430
Mohamed Sanu Brand Contract		2,012,461		—		(2,365)		23,146		71,071		(21,992)		2,082,321
Alshon Jeffery Brand Contract		—		7,940,000		(122,427)		2,905		1,233,473		(14,505)		9,039,446
Total Brand Contracts	$	7,221,182	$	7,940,000	$	(144,029)	$	82,836	$	1,454,439	$	(93,526)	$	16,460,902

The Company recognizes gains and losses under the following circumstances:

Realized gains result from the collection of cash in the current period.

Realized losses result from cash that was previously expected to be received that is no longer expected to be received.

Unrealized gains are primarily a result of the passage of time bringing future cash flows closer to the present or a result of increases in the estimated amount of future cash flows.

Unrealized losses are primarily a result of changes in the timing of estimated cash flows from one period to a subsequent period or decreases in the estimated amounts of future cash flows.

Balances in the “Receivable from Contract Party” column represent amounts paid to the Contract Party but which have not yet been remitted to the Company under the applicable brand contract. Such amounts are shown on the Condensed Balance Sheets and in the table above as “Receivable from Contract Parties”. Once collected by the Company, these amounts are shown in the “Payments on Brand Contracts” column in the tables above.

On February 12, 2016, the Company paid $3,340,000 (less $167,000 held in escrow until six consecutive months of payment of brand amounts have been timely delivered to the Company) as consideration for brand income as defined under the Andrew Heaney Brand Contract. Andrew Heaney paid to the Company $33,459 due under the terms of the Andrew Heaney Brand Contract for the period from January 1, 2015 through February 12, 2016.

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On March 19, 2015, the Company paid $7,940,000 as consideration for brand income as defined under the Alshon Jeffery Brand Contract.

The significant unobservable inputs used in the fair value measurement of the Company’s brand contracts are discount rates, career length, and comparable NFL and MLB contract values. The following table summarizes the general effects of changes in these inputs on the fair value of the brand contact and the range and weighted average of the inputs:

Increase In:

Effect on Brand Contract Fair Value

Decrease In:

Effect on Brand Contract Fair Value

Range of Inputs

Weighted Average of Inputs

Discount Rate

Decrease

Discount Rate

Increase

4.5% - 20%

14.4

Career Length

Increase

Career Length

Decrease

4 - 19 years

9.9

years

Comparable Player Contracts

Increase

Comparable Player Contracts

Decrease

$0.4 million - $97.6 million

14.1

million

5. INCOME TAXES

For the three months ended March 31, 2016 and 2015, no income tax expense or benefit was recognized.

Deferred tax assets consisted of the following:


	March 31, 2016		December 31, 2015
Deferred tax assets:
Net unrealized loss on investment in brand contracts	$	427,000		678,000
Net operating loss carryforward		6,810,000	$	6,320,000
Valuation allowance		(7,237,000)		(6,998,000)
Total deferred tax assets	$	—	$	—

Because of the Company’s limited operating history and cumulative loss, management believes it is more likely than not that the remaining deferred tax asset will not be realized. Therefore, the Company provided a full valuation allowance of $7,237,000 and $6,998,000 against the deferred tax asset as of March 31, 2016 and December 31, 2015, respectively. The federal statutory income tax rate of 35% is offset by the valuation allowance to reconcile to the effective income tax rate of 0%.

As of March 31, 2016 the Company has federal and state income tax net operating loss carryforwards of $5,535,000 and $1,275,000, respectively, which will expire at various dates from 2032 through 2036. Such net operating loss carryforwards will expire as follows:


2032	$	460,000
2033		1,182,000
2034		1,767,000
2035		2,911,000
2036		490,000
Total	$	6,810,000

The Company adopted a policy to classify accrued interest and penalties as part of the accrued liability for uncertain tax positions, if any, in the provision for income taxes. No accrued interest or penalties were recorded as of March 31, 2016 or December 31, 2015. The Company does not anticipate any significant changes to the unrecognized tax benefits within 12 months of this reporting date.

The Company files income tax returns in federal and state jurisdictions. At March 31, 2016 and December 31, 2015, all tax years were open and may be subject to potential examination in one or more jurisdictions. There are no ongoing examinations by taxing authorities at this time.

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6. EARNINGS PER SHARE

Income (Loss) per share—The Company computes net income (loss) per share of its platform common stock and tracking stocks using the two-class method in the financial statements. Basic income (loss) per share (“Basic EPS”) excludes dilution and is computed by dividing net loss by the weighted average number of shares outstanding for the period. The Company has no potentially dilutive common share options or unvested restricted common shares.

As of March 31, 2016, the Company's capital structure consists of seven series of common stocks as listed on the Company’s Condensed Balance Sheets in this Quarterly Report on Form 10-Q. In accordance with the Company's management and attribution policies, the Company attributes assets, liabilities, income and expenses to its tracking stocks to reflect or "track" the economic performance of the associated brand contract, as defined below. Accordingly, the Company attributed 95% of the ABI from the brand contracts to the associated tracking stock and expenses directly attributable to those tracking stocks, such as promotional and marketing-related expenses. The Company also assigns a share of its general liabilities and expenses, such as the management fee from our Parent, to the tracking stocks. See Note 2 for additional discussion of tracking stocks.

The following tables show the calculation of net income (loss) for the platform common stock and the six tracking stocks for the three months ended March 31, 2016 and 2015:


	For the Three Months Ended March 31, 2016
				Attributed Operating Expenses
		Attributed Income (Loss) from Brand Contracts(1)		Direct Expenses		Management Fees(2)		Total Attributed Operating Expenses		Attributed Net Income (Loss)
Platform Common Stock	$	123,122		1,526,342		(18,005)	$	1,508,337	$	(1,385,215)
Fantex Series Vernon Davis Convertible Tracking Stock		(93,748)		8,171		6,810		14,981		(108,729)
Fantex Series EJ Manuel Convertible Tracking Stock		26,896		2,440		2,033		4,473		22,423
Fantex Series Mohamed Sanu Convertible Tracking Stock		433,796		1,687		1,407		3,094		430,702
Fantex Series Alshon Jeffery Convertible Tracking Stock		277,605		6,997		5,830		12,827		264,778
Fantex Series Michael Brockers Convertible Tracking Stock		108,089		1,649		1,374		3,023		105,066
Fantex Series Jack Mewhort Convertible Tracking Stock		126,180		662		551		1,213		124,967
Total	$	1,001,940	$	1,547,948	$	—	$	1,547,948	$	(546,008)


	For the Three Months Ended March 31, 2015
				Attributed Operating Expenses
		Attributed Income from Brand Contracts(1)		Direct Expenses		Management Fees(2)		Total Attributed Operating Expenses		Attributed Net Income (Loss)
Platform Common Stock	$	76,863	$	1,211,999	$	(9,714)	$	1,202,285	$	(1,125,422)
Fantex Series Vernon Davis Convertible Tracking Stock		126,361		2,665		2,221		4,886		121,475
Fantex Series EJ Manuel Convertible Tracking Stock		69,986		692		577		1,269		68,717
Fantex Series Mohamed Sanu Convertible Tracking Stock		89,506		1,313		1,101		2,414		87,092
Fantex Series Alshon Jeffery Convertible Tracking Stock		1,174,559		6,978		5,815		12,793		1,161,766
Total	$	1,537,275	$	1,223,647	$	—	$	1,223,647	$	313,628

(1)

In accordance with the Company's management and attribution policies, 5% of the income from each brand contract is attributed to the Platform Common Stock with the remaining 95% attributed to the associated tracking stock.

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(2)

Pursuant to the Company’s management agreement with its Parent, the management fee is calculated as 5% of the cash receipts from the brand contracts during the relevant periods.

During the three months ended March 31, 2016 and 2015, the Company collected cash pursuant to the brand contracts and attributed the management fee as follows:


			Management Fee (5%)
Brand Contract	Cash Receipt		Tracking Stock (95%)		Platform Common (5%)		Total
Vernon Davis Brand Contract	$	143,353	$	6,810	$	358	$	7,168
EJ Manuel Brand Contract		42,803		2,033		107		2,140
Mohamed Sanu Brand Contract		29,612		1,407		74		1,481
Alshon Jeffery Brand Contract		122,748		5,830		307		6,137
Michael Brockers Brand Contract		28,926		1,374		72		1,446
Jack Mewhort Brand Contract		11,605		551		29		580
Andrew Heaney Brand Contract		33,459		—		1,673		1,673
Three Months Ended March 31, 2016	$	412,506	$	18,005	$	2,620	$	20,625


			Management Fee (5%)
Brand Contract	Cash Receipt		Tracking Stock (95%)		Platform Common (5%)		Total
Vernon Davis Brand Contract	$	46,755	$	2,221	$	117	$	2,338
EJ Manuel Brand Contract		12,145		577		30		607
Mohamed Sanu Brand Contract		23,189		1,101		58		1,159
Alshon Jeffery Brand Contract		122,427		5,815		306		6,121
Three Months Ended March 31, 2015	$	204,516	$	9,714	$	511	$	10,225

The total management fee is included in the direct expenses of the Platform Common Stock.

7. PROMISSORY NOTE DUE TO PARENT

On February 12, 2016, the Company borrowed $3,300,000 from its Parent under a promissory note bearing interest at 8% per annum. The Company used the proceeds of this note to consummate the Andrew Heaney brand contract. On April 28, 2016, the Company and the Parent amended the promissory note to clarify that the only recourse under the promissory note is to the Andrew Heaney brand contract. This note matures on the earlier of five days following the successful offering of a security linked to the Andrew Heaney brand contract or August 12, 2016. The accrued interest of $35,200 for the three months ended March 31, 2016 pursuant to this note is included as Accrued Interest on Promissory Note Due to Parent on the Condensed Balance Sheets and as Interest Expense on the Condensed Statements of Operations.

8. STOCKHOLDERS’ EQUITY

On March 19, 2015, the Company completed the initial public offering of 835,800 shares of Fantex Series Alshon Jeffery, raising gross proceeds of $8,358,000.

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On April 28, 2015, the Company paid a previously declared cash dividend of $0.50 per share to the holders of record of Fantex Series Vernon Davis as of the close of business on April 24, 2015.

On May 29, 2015, the Company completed the initial public offering of 362,200 shares of Fantex Series Michael Brockers, raising gross proceeds of $3,622,000.

On July 14, 2015, the Company completed the initial public offering of 268,100 shares of Fantex Series Jack Mewhort, raising gross proceeds of $2,681,000.

On July 30, 2015 the Company paid a previously declared cash dividend of $0.20 per share to the holders of record of Fantex Series Mohamed Sanu as of the close of business on June 30, 2015.

The holders of the Company’s Platform Common Stock and each series of the Company’s common stock are entitled to one vote per share. Each series of common stock will vote together as a single class with all other series of common stock, unless otherwise required by law. Delaware law would require holders of a series of stock to vote separately as a single class if the Company were to seek to amend its certificate of incorporation so as to alter or change the powers, preferences or special rights of one or more series of a class of stock in a manner that adversely affects the holders of such series of stock, but does not so affect the entire class. In such a case, the holders of the affected series would be required to vote separately to approve the proposed amendment.

At any time following the two-year anniversary of the filing of a certificate of designations creating a new tracking stock, the Company’s Board of Directors may resolve to convert such tracking stock into fully paid and non-assessable shares of the Platform Common Stock at a conversion ratio to be determined by dividing the fair value of a share of such tracking stock by the fair value of a share of the Company’s Platform Common Stock.

9. COMMITMENTS AND CONTINGENCIES

The Company entered into brand contracts with the Contract Parties listed in the table below. As of March 31, 2016, these brand contracts were unconsummated. As consideration for the ABI under each of the below brand contracts, Fantex will pay the Contract Party the purchase price of the brand contract contingent upon the Company’s ability to obtain financing for the purchase price. Fantex will have no further financial obligations to the Contract Party under the brand contract once this payment is made, if at all, other than certain obligations to indemnify the Contract Party. The Company has evaluated the impact of these indemnity obligations on its financial statements and determined that they are not material. According to the terms of each such Contract Party’s brand contract, the Contract Party is not obligated to make payments to Fantex until the upfront payment is made by Fantex to the Contract Party. Therefore, as of March 31, 2016, there is no amount due from any of the Contract Parties listed in the table below. The Company’s right to ABI under each brand contract listed in the table below is contingent upon the Company’s payment of the purchase price with respect to such brand contract.


Contract Party	Primary Career	Brand Contract Effective Date	ABI Effective Date	Brand Income % Payable to Company		Purchase Price for the Brand Contract (in millions)
Kendall Wright(1)	Professional Football Player	March 26, 2015	December 1, 2014	10	%	$	3.13
Terrance Williams(1)	Professional Football Player	September 17, 2015	February 1, 2015	10	%	$	3.06
Ryan Shazier(1)	Professional Football Player	September 23, 2015	September 1, 2015	10	%	$	3.11
Scott Langley(2)	Professional Golfer	December 23, 2015	October 25, 2015	15	%	$	3.06
Tyler Duffey(2)	Professional Baseball Player	March 14, 2016	February 1, 2016	10	%	$	2.23

(1)

In February 2016, the Company and the Contract Party mutually agreed to extend to May 1, 2016, the date by which either party could terminate the brand contract. As consideration for such extension, the Company paid the Contract Party a non-refundable $100,000 advance which is included in Prepaid Assets on the Condensed Balance Sheets as of March 31, 2016. If the Company pays the Contract Party the purchase price of the brand contract, the Company may apply the $100,000 advance against such purchase price. See Note 10, Subsequent Events for discussion of the consummation of the Contract Party’s brand contract.

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(2)

In April 2016, the Company paid the Contract Party 5% of the purchase price of the Contract Party’s brand contract to consummate 5% of the brand contract. Under the brand contract, the Company will be entitled to 5% of the Contract Party’s ABI, but the Company will not collect payments from the Contract Party until the Company pays the remaining 95% of the purchase price or the Company fails to pay the remaining purchase price by the closing date.

10. SUBSEQUENT EVENTS

Withdrawal of Registered Offering

On April 27, 2016, the Company withdrew its Registration Statement on Form S-1 (File No. 333-208184) which was initially filed with the Securities and Exchange Commission on November 24, 2015.

Promissory Note Due to Parent

On April 28, 2016, the Company borrowed $9,000,000 from its Parent under a secured non-recourse promissory note (the “Secured Note”) bearing interest at 10% per annum. The Company used the proceeds of the Secured Note to consummate the Company’s brand contracts with Kendall Wright, Terrance Williams and Ryan Shazier. Under the terms of the Secured Note and the related security agreement, the Secured Note is secured solely by the Company’s right, title and interest in and to the Company’s brand contracts with Kendall Wright, Terrance Williams and Ryan Shazier. The Secured Note matures on July 27, 2016.

Consummation of Brand Contracts

On April 29, 2016, the Company consummated the brand contracts listed in the table below. The Company paid the purchase price of such brand contracts (less, in each case, a $100,000 advance previously paid and less 5% of the purchase price held in escrow until six consecutive months of payment of brand amounts have been timely delivered to the Company) as consideration for brand income as defined under the Contract Party’s brand contract. The Contract Parties paid to the Company the amounts shown in the following table due under the terms of the Contract Parties’ brand contracts for the period from the ABI effective date through March 31, 2016.


Contract Party	Purchase Price of the Brand Contract		ABI Effective Date	ABI Paid to the Company
Kendall Wright	$	3,125,000	December 1, 2014	$	177,002
Terrance Williams	$	3,060,000	February 1, 2015	$	84,079
Ryan Shazier	$	3,110,000	September 1, 2015	$	97,782

New Brand Contracts

In April 2016, the Company signed brand contracts with each Contract Party listed in the table below. Except as otherwise indicated in the table, the Company paid each such Contract Party 5% of the purchase price of that Contract Party’s brand contract to consummate 5% of the brand contract. Under the brand contract with each such Contract Party, the Company will be entitled to 5% of the Contract Party’s ABI, but the Company will not collect payments from the Contract Party until the Company pays the remaining 95% of the purchase price or the Company fails to pay the remaining purchase price by the closing date. The Company funded those advance payments through cash contributions to capital from the Parent.


Contract Party	Primary Career	Brand Contract Effective Date	ABI Effective Date	Brand Income % Payable to the Company		Purchase Price for the Brand Contract (in millions)
Collin McHugh	Professional Baseball Player	April 1, 2016	April 1, 2016	10	%	$	3.96
Jonathan Schoop	Professional Baseball Player	April 1, 2016	January 1, 2016	10	%	$	4.91
Kelly Kraft	Professional Golfer	April 1, 2016	March 1, 2016	15	%	$	2.28
Yangervis Solarte	Professional Baseball Player	April 18, 2016	April 1, 2016	11	%	$	3.15
Jack Maguire(1)	Professional Golfer	April 18, 2016	March 1, 2016	11	%	$	2.07
Kyle Reifers(1)	Professional Golfer	April 18, 2016	April 1, 2016	15	%	$	1.74
Maikel Franco	Professional Baseball Player	April 19, 2016	April 1, 2016	10	%	$	4.35
Allen Robinson	Professional Football Player	April 20, 2016	February 15, 2016	12	%	$	4.60

(1)

5% of the purchase price was not paid to the Contract Party.

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Related Party Transaction

In April 2016, the Parent agreed to contribute capital of up to $2,000,000 to be used for paying 5% of the purchase prices of the brand contracts described above under “New Brand Contracts” upon the signing of such agreements. The Company has paid $1,427,166 to the Contract Parties as of the date of the filing of this Quarterly Report on Form 10-Q and the Company has $572,834 remaining under the funding commitment from the Parent for such future payments.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited financial statements and notes hereto presented in this Quarterly Report on Form 10-Q as well as our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015. This discussion contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements are often identified by the use of words such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately” or other words that convey uncertainty of future events or outcomes. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments will cause our views to change. Factors that could cause or contribute to such subsequent events and developments include, but are not limited to, those identified below and those discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A—Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2015, as incorporated herein. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

We are a company whose focus is on acquiring minority interests in the future income of professional athletes and assisting such individuals in growing these income streams. We focus our business on three core areas:

targeting, evaluating and accessing athletes with the potential to generate significant income (“brand income”);

acquiring minority interests in such brand income (“acquired brand income” or “ABI”); and

assisting athletes who have entered into brand contracts with us to increase the potential value of their future brand income, primarily through mentoring and network/audience development.

We were incorporated on September 14, 2012 in Delaware as a wholly-owned subsidiary of Fantex Holdings, our parent. Fantex Holdings was incorporated in Delaware on April 9, 2012 and is headquartered in San Francisco, California. We are currently an early stage start up and have to date relied on our parent to conduct our operations through its employees. To date, our operations have consisted of targeting, evaluating and accessing brands and negotiating the acquisition of minority interests in those brands that meet our criteria.

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As of March 31, 2016, we had brand contracts in effect with each of the following contract parties:


Contract Party	Primary Career	ABI Effective Date	Brand Income % Payable to Us		Purchase Price for the Brand Contract (in millions)
Brand Contracts Consummated as of March 31, 2016
Vernon Davis	Professional Football Player - Tight End	October 30, 2013	10	%	$	4.00
EJ Manuel	Professional Football Player - Quarterback	February 14, 2014	10	%	$	4.98
Mohamed Sanu	Professional Football Player - Wide Receiver	May 14, 2014	10	%	$	1.56
Alshon Jeffery	Professional Football Player - Wide Receiver	September 7, 2014	13	%	$	7.94
Michael Brockers	Professional Football Player - Defensive Tackle	October 15, 2014	10	%	$	3.44
Jack Mewhort	Professional Football Player - Offensive Tackle	February 15, 2015	10	%	$	2.52
Andrew Heaney	Professional Baseball Player - Pitcher	January 1, 2015	10	%	$	3.34	(1)
Brand Contracts Unconsummated as of March 31, 2016
Kendall Wright	Professional Football Player - Wide Receiver	December 1, 2014	10	%	$	3.13
Terrance Williams	Professional Football Player - Wide Receiver	February 1, 2015	10	%	$	3.06
Ryan Shazier	Professional Football Player - Linebacker	September 1, 2015	10	%	$	3.11
Scott Langley	Professional Golfer	October 25, 2015	15	%	$	3.06
Tyler Duffey	Professional Baseball Player - Pitcher	February 1, 2016	10	%	$	2.23

(1)

On February 12, 2016, we used the proceeds from the promissory note discussed at Note 7, “Promissory Note Due to Parent” in the Notes to Condensed Financial Statements, to consummate the brand contract with Andrew Heaney.

We intend to enter into additional brand contracts in the future and we are actively pursuing these brand contracts. Any brand contracts that we enter into in the future with other parties, whom we refer to as contract parties, are also expected to be contingent upon obtaining financing to fund the acquisition of the interest in the brand income of the respective brands. Our ability to continue to enter into future brand contracts depends to a significant degree on our successful financing of the current unconsummated contracts.

We operate under a management agreement with our Parent, who provides us with management and administrative services, including providing and compensating our executive management and other personnel as well as services relating to information technology support, brand management and other support, operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. We will begin to assume management and administrative tasks at such time in the future as the actual cost of these services is less than our service fee to Fantex Holdings, which we do not anticipate will occur until we begin to generate significant cash flows from multiple brand contracts. However, if our Parent is unable to perform any of the services that it is required to perform under the management agreement, due to financial difficulty or otherwise, then we may be forced to assume management and administrative tasks, and incur additional expenses, sooner than we anticipate. Until such time, we will continue to rely on our Parent to conduct our operations in accordance with the management agreement.

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Brand Contracts Signed and Consummated During the Three Months Ended March 31, 2016 and 2015


	Three Months Ended March 31,
	2016	2015
Brand Contracts signed(1)	1	3
Brand Contracts consummated(2)	1	1

(1)

See Note 2, “Tracking Stocks” in the Notes to Condensed Financial Statements, for a discussion of the brand contracts signed during the three months ended March 31, 2016 and 2015.

(2)

For discussion of the consummation of the Andrew Heaney brand contract during the three months ended March 31, 2016, see “Liquidity and Capital Resources” beginning on page 24. For a discussion of the completed initial public offering during the three months ended March 31, 2015, see Note 8, “Stockholders’ Equity” in the Notes to Condensed Financial Statements.

Results of Operations

Three months ended March 31, 2016 and 2015

Income (Loss) from Brand Contracts

The income generated from our brand contracts is based primarily on the change in fair market value of these contracts subsequent to their purchase. We account for our brand contracts at estimated fair market value, as more fully described in Note 4, “Investment In Brand Contracts, at Fair Value” in the Notes to Condensed Financial Statements.

During the three months ended March 31, 2016 and 2015, the change in fair value of our brand contract portfolio resulted in income of $1,001,940 and $1,537,275, respectively. This reflects an increase in the present value of the brand contracts as the cash flows are brought closer to the present, and to a lesser extent from net gains resulting from the receipt of cash payments due to us under those contracts.

The change in the fair value of our brand contracts for the three months ended March 31, 2016 is summarized as follows:


	Three Months Ended March 31, 2016
Brand Contract	Balance December 31, 2015		Purchases		Payments on Brand Contracts		Realized Gain (Loss)		Unrealized Gain (Loss)		Receivable from Contract Party		Balance March 31, 2016
Vernon Davis Brand Contract	$	1,036,757	$	—	$	(85,884)	$	24,414	$	(123,097)	$	(11,701)	$	840,489
EJ Manuel Brand Contract		950,303		—		(7,134)		(1,370)		29,682		(1,199)		970,282
Mohamed Sanu Brand Contract		1,750,146		—		(11,371)		509,559		(52,931)		(508,155)		1,687,248
Alshon Jeffery Brand Contract		7,789,801		—		(7,342)		(3,998)		296,214		(11,445)		8,063,230
Michael Brockers Brand Contract		3,138,539		—		(9,032)		5,780		107,998		(7,654)		3,235,631
Jack Mewhort Brand Contract		3,092,826		—		(3,426)		19,264		113,556		(20,434)		3,201,786
Andrew Heaney Brand Contract		—		3,340,000		(33,459)		5,167		71,702		—		3,383,410
Total Brand Contracts	$	17,758,372	$	3,340,000	$	(157,648)	$	558,816	$	443,124	$	(560,588)	$	21,382,076

Each of our contracts performed generally as anticipated in the three months ended March 31, 2016.

On March 10, 2016, as a free agent, Mohamed Sanu signed a new, five-year NFL player contract with the Atlanta Falcons. During the three months ended March 31, 2016, the decrease in fair value of Mohamed Sanu's brand contract from the new player contract was approximately $0.1 million after recording the effects of the receivable and gain from the ABI associated with the $5.0 million portion of the $7.0 million signing bonus. The receivable from the $5.0 million signing bonus is recorded as a Receivable from Contract Parties on the Condensed Balance Sheets as of March 31, 2016.

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On March 31, 2016, as a free agent, Vernon Davis signed a new, one-year NFL player contract with the Washington Redskins. The effect of this new contract was to decrease the fair value of the Vernon Davis brand contract by approximately $0.1 million.

On February 26, 2016, the Chicago Bears placed a non-exclusive franchise player tag on Alshon Jeffery which prevents him from becoming an unrestricted free agent for the 2016 NFL season and will pay him a guaranteed salary for the 2016 NFL season of $14.6 million. Alshon Jeffery may still negotiate a long-term contract until July 15, 2016. In our fair value assessment as of March 31, 2016, we assumed that Alshon Jeffery will negotiate a long-term contract before July 15, 2016. As a result, the franchise player tag did not result in a material change to the fair value of the Alshon Jeffery brand contract.

The change in the fair value of our brand contracts for the three months ended March 31, 2015 is summarized as follows:


	Three Months Ended March 31, 2015
Brand Contract	Balance December 31, 2014		Purchases		Payments on Brand Contracts		Realized Gain (Loss)		Unrealized Gain		Receivable from Contract Party		Balance March 31, 2015
Vernon Davis Brand Contract	$	2,626,332	$	—	$	(16,609)	$	58,987	$	74,024	$	(57,029)	$	2,685,705
EJ Manuel Brand Contract		2,582,389		—		(2,628)		(2,202)		75,871		—		2,653,430
Mohamed Sanu Brand Contract		2,012,461		—		(2,365)		23,146		71,071		(21,992)		2,082,321
Alshon Jeffery Brand Contract		—		7,940,000		(122,427)		2,905		1,233,473		(14,505)		9,039,446
Total Brand Contracts	$	7,221,182	$	7,940,000	$	(144,029)	$	82,836	$	1,454,439	$	(93,526)	$	16,460,902

All of our contracts performed generally as anticipated in the three months ended March 31, 2015.

For additional information on how we estimated fair values of our brand contracts, see Note 4, “Investment in Brand Contracts, at Fair Value” in the Notes to Condensed Financial Statements.

For a more detailed breakdown of the fair value of our brand contract portfolio by tracking stock, see Exhibit 99.1, “Attributed Financial Information for Our Platform Common Stock and Tracking Stocks.”

Operating Expenses

The operating expenses for the three months ended March 31, 2016 and 2015 reflect costs incurred to develop and operate our business. All such costs to date except those under our management agreement with our Parent, have been allocated to us from our Parent. Expenses such as personnel and facility costs were primarily allocated based on the estimated number of full time equivalent (FTE) employees working on activities associated with us. All personnel costs were allocated based on an estimated percentage of time spent on our activities. Facility costs were allocated based on the FTE employees associated with us as a percentage of all employees of our Parent. All other costs were specifically identified and charged to us as determined by management. All estimates are deemed to be reasonable and reflect, in the best judgment of our management, the costs associated with our activities.

Comparison of Operating Expenses for three months ended March 31, 2016 and 2015


	Three Months Ended March 31,				Increase (Decrease)
	2016		2015		$		%
Personnel Costs		418,549		357,612		60,937	17.0
Professional Services		810,246		660,543		149,703	22.7
General and administrative, exclusive of personnel costs		283,953		205,492		78,461	38.2

We currently have no employees, but are being supported by personnel employed by our Parent. The increase in personnel costs during the three months ended March 31, 2016 reflects an additional 1.0 FTE employee

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being allocated to us by our Parent and an increase in the salary of our Chief Executive Officer and Chief Financial Officer pursuant to their employment agreements with our Parent in the three months ended March 31, 2016 compared to the same period of 2015. Our FTE employees are involved in activities related to brand contract acquisitions, valuations and compliance with public company reporting requirements.

Professional services consist primarily of legal, audit and marketing services. The increase in professional services during the three months ended March 31, 2016, as compared to the three months ended March 31, 2015, was the result of increased audit, legal, consulting and printing costs partially offset by lower brand marketing costs. We believe that our overall professional services-related spending will increase over time as we grow our athlete brand pipeline and continue to build our regulatory compliance function, brand contract administration and accounting infrastructure.

General and administrative expenses, exclusive of personnel costs, consist primarily of the allocation of facility, insurance and travel-related costs. The increase in general and administrative expenses during the three months ended March 31, 2016, as compared to the three months ended March 31, 2015, is primarily due to higher facilities, insurance and travel-related costs. We believe that as we expand our operations these costs will continue to increase.

As our operations mature, we expect to continue to incur expenses of the type and nature described above. In addition, we expect to incur additional management fees pursuant to our management agreement with our Parent. For the three months ended March 31, 2016 and 2015, we incurred fees from our Parent of $20,625 and $10,225, respectively, representing 5% of the cash receipts from our brand contracts. Future fees from our Parent will be dependent upon the cash received from our brand contracts.

Interest Expense

On February 12, 2016, we borrowed $3,300,000 from our Parent under a promissory note bearing interest at 8% per annum, the proceeds of which were used to consummate the Andrew Heaney brand contract. On April 28, 2016, the note was amended to be a secured non-recourse promissory note. This amended note matures on August 12, 2016. The accrued interest was $35,200 for the three months ended March 31, 2016.

Liquidity and Capital Resources

To date, we have relied significantly on our Parent for liquidity and capital resources.

On February 12, 2016, we borrowed $3,300,000 from our Parent under a promissory note bearing interest at 8% per annum. We used the proceeds of this note to consummate the Andrew Heaney brand contract. On April 28, 2016, we and our Parent amended the promissory note to clarify that the only recourse under the promissory note is to the Andrew Heaney Brand Contract. This note matures on the earlier of five days following the successful offering of a security linked to the Andrew Heaney brand contract or August 12, 2016. On February 12, 2016, we paid the $3,340,000 purchase price (less $167,000 held in escrow until six months of payment of brand amounts have been timely delivered to us) as consideration for brand income as defined under the Andrew Heaney Brand Contract. Andrew Heaney paid to us $33,459 due under the terms of the Andrew Heaney Brand Contract for the period from January 1, 2015 through February 12, 2016.

On April 28, 2016, we borrowed $9,000,000 from our Parent under a secured non-recourse promissory note (the “Secured Note”) bearing interest at 10% per annum. We used the proceeds of the Secured Note to consummate our brand contracts with Kendall Wright, Terrance Williams and Ryan Shazier. Under the terms of the Secured Note and the related security agreement, the Secured Note is secured solely by our right, title and interest in and to our brand contracts with Kendall Wright, Terrance Williams and Ryan Shazier. The Secured Note matures on July 27, 2016.

If we are unable to obtain sufficient financing through the proceeds of a securities offering that is linked, in part, to the Andrew Heaney, Ryan Shazier, Terrance Williams and Kendall Wright brand contracts or renegotiate the terms of the notes, we intend to assign the four brand contracts to our Parent prior to the

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notes’ maturity dates to satisfy our obligations under the notes. This would curtail our ability to grow the existing brand contract portfolio beyond the current levels and limit our operations to maintenance and servicing of the current portfolio.

On April 29, 2016, we consummated the brand contracts listed in the table below. We paid the purchase price of such brand contracts (less, in each case, a $100,000 advance previously paid and less 5% of the purchase price held in escrow until six consecutive months of payment of brand amounts have been timely delivered to us) as consideration for brand income as defined under the Contract Party’s brand contract. The Contract Parties paid to us the amounts shown in the following table due under the terms of the Contract Parties’ brand contracts for the period from the ABI effective date through March 31, 2016.


Contract Party	Purchase Price of the Brand Contract		ABI Effective Date	ABI Paid to Us
Kendall Wright	$	3,125,000	December 1, 2014	$	177,002
Terrance Williams	$	3,060,000	February 1, 2015	$	84,079
Ryan Shazier	$	3,110,000	September 1, 2015	$	97,782

In April 2016, we signed brand contracts with each Contract Party listed in the table below. Except as otherwise indicated in the table, we paid each such Contract Party, as well as unconsummated brand contracts as of March 31, 2016 for Scott Langley and Tyler Duffey, 5% of the purchase price of that Contract Party’s brand contract to consummate 5% of the brand contract. Under the brand contract with each such Contract Party, we will be entitled to 5% of the Contract Party’s ABI, but we will not collect payments from the Contract Party until we pay the remaining 95% of the purchase price or we fail to pay the remaining purchase price by the closing date. We funded those advance payments through cash contributions to capital from the Parent.


Contract Party	Primary Career	Brand Contract Effective Date	ABI Effective Date	Brand Income % Payable to Us		Purchase Price for the Brand Contract (in millions)
Collin McHugh	Professional Baseball Player	April 1, 2016	April 1, 2016	10	%	$	3.96
Jonathan Schoop	Professional Baseball Player	April 1, 2016	January 1, 2016	10	%	$	4.91
Kelly Kraft	Professional Golfer	April 1, 2016	March 1, 2016	15	%	$	2.28
Yangervis Solarte	Professional Baseball Player	April 18, 2016	April 1, 2016	11	%	$	3.15
Jack Maguire(1)	Professional Golfer	April 18, 2016	March 1, 2016	11	%	$	2.07
Kyle Reifers(1)	Professional Golfer	April 18, 2016	April 1, 2016	15	%	$	1.74
Maikel Franco	Professional Baseball Player	April 19, 2016	April 1, 2016	10	%	$	4.35
Allen Robinson	Professional Football Player	April 20, 2016	February 15, 2016	12	%	$	4.60

(1)

5% of the purchase price was not paid to the Contract Party.

During the three months ended March 31, 2015, we completed the initial public offering to consummate the Alshon Jeffery brand contract and collected ABI from Alshon Jeffery and our other consummated brand contracts. We raised $7.94 million net of underwriting discounts and expenses, and substantially all of the net proceeds were paid to Alshon Jeffery to consummate the Alshon Jeffery brand contract.

During the three months ended March 31, 2016 and 2015, we collected $412,506 and $204,516, respectively, from our brand contracts representing our interest in brand income generated by the contracts.

Cash received under our brand contracts will be subject to seasonal variation. For example, the salary under NFL player contracts is usually paid out in even installments during the course of the NFL season, or as a signing bonus according to varying schedules. The NFL season occurs primarily in the third and fourth quarters of each calendar year with lower or no payments coming from NFL contracts in the first and second quarters of the calendar year. The salary under MLB player contracts is usually paid out in even installments during the course of the regular MLB season, or as a signing bonus according to varying schedules. The MLB regular season occurs primarily in the second and third quarters of each calendar year with lower or no payments coming from MLB contracts in the first and fourth quarters of the calendar year.

During the three months ended March 31, 2015, we exercised our co-investment right under the terms of the brand contract with Vernon Davis in connection with Vernon Davis’s purchase of Jamba Juice franchises. Mr.

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Davis was offered this opportunity in connection with an expanded endorsement relationship. We paid $110,800 for a 10% ownership interest in the franchises and per our attribution policy, will attribute 95% of the cash flows from this investment to Fantex Series Vernon Davis. There was no income recorded from this investment during the three months ended March 31, 2016 and 2015.

For the three months ended March 31, 2016 and 2015, our Parent contributed capital of $1,490,985 and $1,167,491, respectively. The contributed capital includes expenses paid by our Parent on our behalf and allocated to us as expenses. Our Parent will continue to fund our liquidity and capital resource needs either through direct cash contributions, non-cash contributed capital for direct and indirect expenses, or a combination of both.

In April 2016, our Parent agreed to contribute capital of up to $2,000,000 to be used for paying 5% of the purchase price of the brand contracts, as described above, upon the signing of such agreements. We have paid $1,427,166 to the Contract Parties as of the date of the filing of this Quarterly Report on Form 10-Q and we have $572,834 remaining under the funding commitment from the Parent for such future payments.

We are not committed to any future capital expenditures and certain agreements, such as rental commitments, are the responsibility of our Parent. We expect, however, that our operations (excluding upfront payments under future brand contracts) will continue to consume substantial amounts of cash as we continue to build our platform of brands and our internal marketing, compliance and other administrative functions.

We are operating under a management agreement with our Parent, pursuant to which our Parent provides us with certain management and administrative services, including providing and compensating our executive management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. We incurred management fees of $20,625 and $10,225 for the three months ended March 31, 2016 and 2015, respectively. The management fee represents a fee equal to 5% of the amount of gross cash received by us from our brand contracts and will vary based on the timing of cash collected from the contract party. The expense allocation from our Parent was reduced by the amount of the management fee for the three months ended March 31, 2016 and 2015.

We will begin to assume management and administrative tasks at such time in the future as the actual cost of these services is less than our service fee to Fantex Holdings, which we do not anticipate would occur until we begin to generate significant cash flows from multiple brand contracts. However, if our Parent is unable to perform any of the services that they are required to perform under the management agreement, due to financial difficulty or otherwise, then we may be forced to assume management and administrative tasks, and incur additional expenses, sooner than we anticipate. Until such time, we will continue to rely on our Parent to conduct our operations in accordance with the management agreement. We are dependent on the continued support of our Parent; at this time our Parent intends to continue to fund operations for at least the next 12 months. Our Parent has no obligation to continue to finance our operations except as required under our management agreement with them.

We believe the net proceeds from our offerings together with existing cash and cash equivalents and our Parent’s capital contributions will be sufficient to fund our projected capital needs and operating expenses for the next 12 months. However, if our operating and other expenses are higher than we expect or our cash receipts from brand contracts are lower than we expect then we may require higher than expected contributions from our Parent. In addition, if there is insufficient investor demand for any of our future offerings our Parent may have to expend additional funds to act as a standby purchaser for such offering or else we may not be able to consummate such offering. In any such event, our Parent may need to raise additional capital sooner than expected.

Our ability to continue to enter into future brand contracts depends, to a significant degree, on our ability to successfully complete a securities offering, the proceeds of which are sufficient enough to repay the two promissory notes (discussed at Note 7, “Promissory Note Due to Parent” and Note 10, “Subsequent Events” in the Notes to Condensed Financial Statements) and to pay the purchase price of the Company's existing unconsummated brand contracts. There can be no assurance that this financing will be available on terms acceptable to us, or at all. We are working with our advisers on the most appropriate way to structure and undertake a securities offering to achieve these results. If we are unsuccessful in completing such a securities offering, we may have to limit the scope of our operations. In such case, our operations would be limited to the servicing and maintenance of our current portfolio

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of brand contracts. Management has evaluated our ability to continue as a going concern under these conditions by analyzing cash inflow from brand contracts and expense projections. We believe we can continue as a going concern for at least the next 12 months based on those projections.

Any brand contracts that we enter into in the future with other contract parties may require us to make substantial upfront payments to acquire the ABI under such brand contracts. We do not, in the absence of a related financing, expect to have the necessary funds that we would need to make any of these upfront payments under future brand contracts. Therefore, we expect that our future brand contracts will be contingent upon obtaining financing to fund the acquisition of the ABI in the respective brands. Until such time as our operations generate sufficient cash to meet the liquidity needs of our business, if ever, we expect to finance future cash needs through existing cash balances and reliance on our Parent.

Critical Accounting Policies

Our financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements. On an ongoing basis, management will evaluate these estimates, including those related to accounts receivable, fair values of financial instruments, income taxes, and contingent liabilities, among others. Estimates will be based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ materially from these estimates. The critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our financial statements are described below.

Fair Value Option

The brand contracts represent a right to receive certain cash flows from the contract parties, and therefore, the brand contracts meet the definition of a financial asset under GAAP. As financial assets, the brand contracts are precluded from being accounted for as intangible assets. We have elected to account for the brand contracts using the fair value option, with changes in fair value recognized in income (loss) from brand contracts in the statements of operations. We believe measurement of the brand contracts at fair value provides the most meaningful information to users of our financial statements, because the value of the brand contracts may increase or decrease over time based on future events. We believe that recognizing the change in fair value through net income or loss provides a better indicator of the performance of the brand contracts for a given period, enhances transparency, and is more in line with how we manage the risks of the brand contracts.

Fair Value of Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models may involve a significant level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity for disclosure purposes. Assets and liabilities in the balance sheet are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels, as defined under GAAP, are directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and are as follows:

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. The types of assets generally included in this category are mutual funds.

Level 2—Inputs are other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability.

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Level 3—Inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The types of assets and liabilities generally included in this category are our brand contracts.

A significant decrease in the volume and level of activity for the asset or liability is an indication that transactions or quoted prices may not be representative of fair value because in such market conditions there may be increased instances of transactions that are not orderly. In those circumstances, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value.

The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors, including, for example, the type of product, whether the product is new, whether the product is traded on an active exchange or in the secondary market, and the current market conditions. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by our management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Our management’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and consideration of factors specific to the asset. The variability of the observable inputs affected by the factors described above may cause transfers between Levels 1, 2, and/or 3, which our management recognizes at the end of the reporting period.

Depending on the relative liquidity in the markets for certain assets, our management may classify assets as Level 3 if they determine that observable quoted prices, obtained directly or indirectly, are not available. Management has determined that all of our contracts should be classified as Level 3. The valuation models used for the assets and liabilities that are valued using Level 3 of the fair value hierarchy are described below.

Valuation Process

The valuation process for our Level 3 measurements for assets and liabilities will be completed on no less than a quarterly basis, provided that we do not intend to update the on-field statistical performance data used in our valuation models, including those that we used to estimate career longevity and potential future playing contracts, more frequently than on an annual basis based on a full season of on-field statistical performance data, or at such time as there is a material event that we believe would have a long-term material impact on these estimates and the potential brand income resulting from these estimates. The valuation process is designed to subject the valuation of Level 3 investments, including our brand contracts, to an appropriate level of consistency, oversight and review.

Our internal valuation professionals are responsible for estimating fair value based on various factors including:

current playing contract including: amounts, duration, incentive provisions, guaranteed portions, if any, termination and other important terms;

current endorsement contracts, if any, including amounts, duration and contract terms;

age and health (including injuries) of the individual associated with the brand, duration of career to date and prospects for additional future contracts, both playing and endorsement;

potential future playing and endorsement contracts, including duration and value;

position and data specific to that position focused on estimating longevity of career;

reported contract value increases or decreases for other comparable players (by position and status they hold among their peers (e.g. All Pro, Most Valuable Player, franchise player and the like)) in order to estimate future contract values;

professional sports league imposed salary caps if appropriate; and

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risk free cost of capital.

In addition, we consider a number of qualitative factors to develop estimates used in our models, including:

the stated aspirations and goals of the contract party;

certain intangibles of the contract party, including media relationships, communication ability, “likeability,” demand as a product endorser, personal drive and ambition;

social footprint (for example, number of Twitter followers);

the market in which the contract party performs and how that may impact the number and amount of endorsement opportunities;

the reach of the brand of the contract party;

value of TV contracts and the rate of growth in those contracts; and

attendance trends in the contract party’s primary field of performance.

We consider all of these factors to estimate brand income for use in a discounted cash flow model. These estimates include amounts based on existing contracts as well as our estimates of amounts to be received for anticipated future contracts. With respect to existing contracts, we consider that certain amounts are reasonably assured of realization, but that most earnings from existing contracts depend on continued satisfactory performance. To determine the amount of the purchase price of a brand contract and a current fair value, we apply discount rates to our estimates of earnings.

In general, we apply lower discount rates to amounts associated with existing contracts, particularly portions of those contracts that have a higher degree of certainty of payment, and higher discount rates to amounts associated with future potential earnings under existing contracts and to potential earnings under anticipated future contracts. Further, discount rates rise over time to reflect that uncertainty increases over time.

Our internal valuation professionals document their considerations of this data that is then reviewed by management, including our Chief Executive Officer and Chief Financial Officer. The approved valuation is used to determine the fair value of the brand contract.

If the estimates of brand income prove to be too high and/or the discount rates used in the calculation prove to be too low, then the valuation of a brand contract may be too high which will result in the recording of a loss on the brand contract.

Brand Contracts, at Estimated Fair Value

The negotiated value of our brand contracts, including those brand contracts discussed below and brand contracts with any future contract parties, have been and will continue to be based on a discounted cash flow model using the procedures described above.

In our analysis we generally consider three categories of potential brand income:

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Brand Contract Values

In estimating the value of the brand contracts with all of our contract parties, we review (i) the existing playing contracts of our contract parties, (ii) the playing contracts for other players, retired or active who we believe are of similar caliber to the contract party and who have entered into contracts in a similar era, and are or were at similar stages in their career at which the contract party is expected to enter into additional player contracts. The values of such comparable playing contracts are adjusted for inflation to better predict the contract values of future playing contracts for our contract parties. In addition, we also review the existing endorsement contracts of our contract parties and make certain estimates with respect to future endorsement contracts that our contract parties may receive.

The following table shows the change in fair value of our brand contract portfolio by Category A, Category B and Category C from the inception date of all of our completed brand contracts through March 31, 2016.


	Inception		Payments on Brand Contracts		Increase in Present Value		Gain (Loss)		Transfers / Reclassifications		Balance March 31, 2016
Category A
Player Contract	$	1,140,098	$	(2,442,430)	$	108,685	$	608,937	$	2,396,036	$	1,811,325
Endorsements		14,657		(268,185)		2,134		9,634		241,760		—
Category B
Player Contract		1,062,511		—		178,553		77,257		(299,707)		1,018,614
Endorsements		67,183		—		29,907		(36,165)		(60,925)		—
Category C
Player Contract		23,319,928		—		5,558,464		(8,501,547)		(2,651,307)		17,725,537
Endorsements		1,995,595		—		366,412		(1,659,039)		(189,307)		513,661
Post-Career		175,029		—		65,875		69,233		2,802		312,938
Total	$	27,775,000	$	(2,710,615)	$	6,310,030	$	(9,431,690)	$	(560,649)	$	21,382,076

See “Results of Operations – Three Months Ended March 31, 2016 and 2015” above for discussion of changes in the estimates of certain cash flows and changes in realized and unrealized gains and losses under our brand contracts.

For a detailed discussion of the change in fair value of our brand contract portfolio by tracking stock, see Exhibit 99.1, “Attributed Financial Information for Our Platform Common Stock and Tracking Stocks.”

For additional information on how we estimated the fair values of our brand contracts, see Note 4, “Investment In Brand Contracts, at Fair Value” in the Notes to Condensed Financial Statements.

Income (Loss) From Brand Contracts

We recognize income or loss based on the change in fair value of the brand contracts from period to period and receipts of payments or other consideration from the brand contracts. Other consideration received by the contract party may include stock, automobiles, or other items of value. In the event other consideration are received by the contract party, we will recognize income from brand contracts equal to our proportionate share of the estimated fair value of the other consideration received, and will receive payment in either cash or such other consideration based on the contractual arrangement. Amounts due to us under the brand contract are either remitted directly from the source of such income or through payment by the contract party. The brand contract stipulates that income once we earn it is not subject to recapture by the contract party.

For purposes of our financial statements and the notes thereto, cash received under the brand contract will either be recognized as a reduction of our carrying value (i.e., a reduction in the brand contract asset) or income (loss) from brand contracts. Whether cash receipts will be recognized as a reduction in carrying value or income (loss) from brand contracts will depend on the timing of such cash receipt.

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Additionally, the timing of changes in our estimates of future cash flows will impact whether cash receipts are recognized as a reduction of our carrying value or as income (loss) from brand contracts. If, for example, we increase the estimate of cash flows which are not received until a future period, this increase will be recognized as income from brand contracts. If, on the other hand, the cash flows are received in the current period and had not been estimated, the entire cash flow will be recognized as income from brand contracts.

Expected cash flows will be based on the included contracts the contract party has in place and the expectations of future contracts. As it becomes more likely that the contract party will collect contracted amounts the expected discount rate will decrease. A decrease in the discount rate will result in the receipt of cash primarily being allocated to reduction of carrying value. The discount rates are determined at the purchase date and are revised each period based on the performance of the brand and the likelihood of collection of future contracted amounts.

Income (loss) from brand contracts is based on an estimate of expected cash flows and the associated expected discount rates. Changes in fair value resulting from changes in the expected performance of the brand or market factors are included in income (loss) from brand contracts in the statements of operations.

We are entitled to certain information and audit rights pursuant to the brand contracts that enable us to adequately calculate and collect the ABI under the brand contract. In addition to such annual audit rights, we intend to create a contract administration and surveillance division to proactively monitor and administer our rights under the brand contracts. Following the execution of a brand contract, the contract administration and surveillance division shall prepare a schedule charting the timing and amounts of expected future payments associated with that certain counterparty’s existing contracts that are subject to our brand contract, along with the term and the expected timing each contract would be expected to be renegotiated or renewed. The division will also be tasked with ensuring that all directives to pay Fantex directly have been executed and accepted by the parties making such payments. We will contact the contract party at renewal terms to determine whether the contracts will be renewed and take necessary steps to ensure that any new agreements are covered under the brand contract.

The division will also be tasked with reviewing each brand contract quarterly and to contact each of our contract parties to determine if the parties entered into additional agreements or renegotiated existing agreements that may impact our ABI. To supplement these direct inquiries, this division will also monitor social and mainstream media on at least a weekly basis for information relevant to our brand contract or relationship with each of our contract parties, including trade rumors, reports of new endorsements or other agreements that may be subject to our brand contract with such contract parties, reports of renegotiation of existing agreements and reports of personal behavior that may be beneficial or detrimental to the brand contract in general.

In addition to the above, in the event that expected payments are not received on a timely basis (generally within five days of receipt of income by the contract party), we will attempt to contact the contract party and resolve any issues of nonpayment amicably. If our efforts are unsuccessful, any issues with contract payments will initially be escalated to senior management for resolution. Depending on the nature and materiality of the contract party’s nonperformance, we may initiate legal action to recover any unpaid amounts under the brand contract. Significant or continuous nonpayment may be material and may trigger additional disclosure under the Securities Act as well as impair the fair value of the asset on our books.

Income Taxes

Income taxes are accounted for under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The current and deferred tax expense is presented under the separate return method. Under the separate return method, Fantex calculates its tax provision as if it were filing a separate tax return.

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Deferred tax assets are recorded to the extent management believes these assets will more likely than not be realized. In making such a determination, all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations is considered. In the event it is determined that we would be able to realize deferred tax assets in the future, an adjustment to the deferred tax asset valuation allowance would be made, which would reduce the provision for income taxes.

Uncertain tax positions are recorded on the basis of a two-step process whereby (1) it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) those tax positions that meet the more-likely-than-not recognition threshold, the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority would be recognized.

Contractual Obligations

Our principal contractual obligations are limited to our obligations under our management agreement with our Parent and our brand contracts. We are not committed to any future capital expenditures and certain agreements, such as rental commitments, are the responsibility of our Parent.

We have no financial obligations under our consummated brand contracts other than certain indemnity obligations. We have evaluated the impact of these indemnity obligations on our financial statements and determined that they are not material individually or in the aggregate.

We have entered into brand contracts with the Contract Parties listed in the table below. As of March 31, 2016, these brand contracts were unconsummated. As consideration for the ABI under each of the below brand contracts, we will pay the Contract Party the purchase price of the brand contract contingent upon our ability to obtain financing for the purchase price. We will have no further financial obligations to the Contract Party under the brand contract once this payment is made, if at all, other than certain obligations to indemnity the Contract Party. We have evaluated the impact of these indemnity obligations on our financial statements and determined that they are not material. According to the terms of each such Contract Party’s brand contract, the Contract Party is not obligated to make payments to us until the upfront payment is made by us to the Contract Party. Therefore, as of March 31, 2016, there is no amount due from any of the Contract Parties listed in the table below. Our right to ABI under each brand contract listed in the table below is contingent upon our payment of the purchase price with respect to such brand contract.


Contract Party	Purchase Price for the Brand Contract (in millions)
Kendall Wright(1)	$	3.13
Terrance Williams(1)	$	3.06
Ryan Shazier(1)	$	3.11
Scott Langley(2)	$	3.06
Tyler Duffey(2)	$	2.23

(1)

In February 2016, we and the Contract Party mutually agreed to extend to May 1, 2016, the date by which either party could terminate the brand contract. As consideration for such extension, we paid the Contract Party a non-refundable $100,000 advance. On April 29, 2016, we consummated the brand contract and applied the $100,000 advance against the purchase price. See Note 10, “Subsequent Events” in the Notes to Condensed Financial Statements, for discussion of the consummation of the Contract Party’s brand contract.

(2)

In April 2016, we paid the Contract Party 5% of the purchase price of the Contract Party’s brand contract to consummate 5% of the brand contract. Under the brand contract, we will be entitled to 5% of the Contract Party’s ABI, but we will not collect payments from the Contract Party until we pay the remaining 95% of the purchase price or we fail to pay the remaining purchase price by the closing date.

Management Agreement

We have entered into a management agreement with our Parent, pursuant to which our Parent has agreed to provide us with management and administrative services, including providing and compensating our executive

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management and other personnel, as well as services relating to information technology support, brand management and other support operations, facilities, human resources, tax planning and administration, accounting, treasury and insurance. We have agreed to pay 5% of the amount of the gross cash received by us, if any, pursuant to our brand contracts during any quarterly period as remuneration for the services provided. The amount of gross cash received used to calculate this 5% fee will include any portion allocated to reduction in carrying value on our financial statements but will not take into account the changes in fair value of the brand contracts. As such, the service fee under the management agreement will be determined based on the total amount of actual cash received under the brand contracts in a given quarterly period prior to any adjustments for fair value and without regard to the expected cash receipts in such quarter as reflected in the financial statements for that quarter. To the extent we receive no cash for any period then we would not owe any fee for any services provided during that period. We may evaluate the service fee from time to time to assess the continued appropriateness of the percentage of our cash receipts upon which the service fee is calculated, in light of the services being provided by our Parent at the time and cost of those services.

The agreement had an initial term through December 31, 2014, and was automatically renewed for a one-year terms through December 31, 2016. It will continue to automatically renew for successive one-year terms each December 31 unless either party provides written notice of its intent not to renew at least three months prior to such renewal. We may also terminate any specific service and/or the agreement, without penalty, with 30 days prior written notice to Fantex Holdings. Fantex Holdings may terminate any specific service and/or the agreement with 180 days prior written notice to us, but if we, using our commercially reasonable efforts, are unable to either perform the services ourselves or enter into a reasonable arrangement with a third party to perform the services that we are unable perform ourselves, then Fantex Holdings will continue to perform such services for an additional period of 180 days.

The agreement contains certain provisions requiring us to indemnify our Parent with respect to all losses or damages arising from acts not constituting bad faith, willful misconduct, or gross negligence. We have evaluated the impact of these indemnity obligations on our financial statements and determined that they are remote. The management agreement became effective upon the consummation of our first initial public offering on April 28, 2014.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

ITEM 3: Quantitative and Qualitative Disclosures About Market Risk

A smaller reporting company is not required to provide the information required by this Item.

ITEM 4: Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in

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evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2016, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1: Legal Proceedings

We may from time to time be involved in various legal proceedings of a character normally incident to the ordinary course of our business. We are not currently a party to any material litigation or other material legal proceedings.

ITEM 1A: Risk Factors

A smaller reporting company is not required to provide the information required by this item.

ITEM 2: Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

Not applicable.

ITEM 3: Default Upon Senior Securities

None.

ITEM 4: Mine Safety Disclosures

Not applicable.

ITEM 5: Other Information

None.

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ITEM 6. Exhibits

EXHIBIT INDEX

		Incorporation by reference herein
Exhibit Number	Description	Form	Date
3.1	Amended and Restated Certificate of Incorporation of Fantex, Inc.	Registration Statement on Form S-1, as amended (File No 333-192476) as Exhibit 3.1	November 21, 2013
3.2	Amended and Restated Bylaws of Fantex, Inc.	Registration Statement on Form S-1, as amended (File No 333-191772) as Exhibit 3.4	October 17, 2013
3.3	Certificate of Designation for Fantex Series Vernon Davis	Registration Statement on Form S-1, as amended (File No 333-203457) as Exhibit 3.4	June 5, 2015
3.4	Certificate of Designation for Fantex Series EJ Manuel	Registration Statement on Form S-1, as amended (File No 333-203457) as Exhibit 3.5	June 5, 2015
3.5	Certificate of Designation for Fantex Series Mohamed Sanu	Registration Statement on Form S-1, as amended (File No 333-203457) as Exhibit 3.6	June 5, 2015
3.6	Certificate of Designation for Fantex Series Alshon Jeffery	Current Report on Form 8-K as Exhibit 3.1	March 19, 2015
3.7	Certificate of Designation for Fantex Series Michael Brockers	Current Report on Form 8-K as Exhibit 3.1	June 1, 2015
3.8	Certificate of Designations for Fantex Series Jack Mewhort	Current Report on Form 8-K as Exhibit 3.1	July 14, 2015
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-15(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-15(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1	Attributed Financial Information for Our Platform Common Stock and Tracking Stocks
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* The certifications attached as Exhibits 32.1 that accompany this Quarterly Report on Form 10-Q is not deemed filed with the SEC and is not to be incorporated by reference into any filing of Fantex, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Fantex, Inc.

May 16, 2016	By:	/s/ David Mullin

		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Fantex, Inc. - FORM 10-Q - May 16, 2016

Attached files

Fantex, Inc. Reports