SRAX, Inc. - Quarter Report: 2022 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
| ☒ | Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended June 30, 2022
or
| ☐ | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number 001-37916
SRAX, Inc.
(Exact name of registrant as specified in its charter)
| Delaware | 45-2925231 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
1014 S. Westlake Blvd., Suite 14-29
Westlake Village, CA |
91361 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (323) 205-6109
Securities registered pursuant to Section 12(b) of the Act:
| Class A Common Stock, $0.001 par value | SRAX | NASDAQ Global Market | ||
| (Title of each class) | (Trading Symbol) | (Name of each exchange on which registered) |
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☐Yes ☒ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☒ | Smaller reporting company ☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of August 25, 2023, there were shares of Class A common stock were issued and outstanding.
SRAX, Inc.
Table of Contents
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include, but are not limited to: any projections of revenues, earnings, or other financial items; any statements of the strategies, plans and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” and any other similar words. These statements represent our expectations, beliefs, anticipations, commitments, intentions, and strategies regarding the future and include, but are not limited to, the risks and uncertainties described in the sections of this Quarterly Report entitled Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations and those discussed in other documents we file with the United States Securities and Exchange Commission (“SEC”). Readers are cautioned that actual results could differ materially from anticipated results or other expectations that are expressed in forward-looking statements within this report. The forward-looking statements included in this report speak only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
We urge you to read this entire Quarterly Report on Form 10-Q, including the “Risk Factors” section, the financial statements and the related notes included therein as well as our Annual Report on Form 10-K for the year ended December 31, 2021, including the “Risk Factors” section contained therein. As used in this Quarterly Report, unless context otherwise requires, the words “we,” “us,” “our,” “the Company,” “SRAX,” “Registrant” refer to SRAX, Inc. and its subsidiaries. Additionally, any reference to (i) “LD Micro” refer to the Company’s wholly owned subsidiary, “LD Micro, Inc.” and the assets used in its operation. Also, any reference to “common share” or “common stock,” refers to our $0.001 par value Class A common stock.
Any reference to “BIGToken” and “BIGToken, Inc.” refer to the Company’s previously wholly owned subsidiary, BIGToken, Inc. and the assets used in its operations which we transferred into Force Protection Video Equipment, Inc. (“FPVD”), which became our majority owned subsidiary on February 4, 2021 and was subsequently disposed of on December 29, 2021.
Unless otherwise stated, the information which appears on our web sites www.srax.com are not part of this report and are specifically not incorporated by reference.
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 260,000 | $ | 1,348,000 | ||||
| Accounts receivable, net | 351,000 | 821,000 | ||||||
| Contracts receivable | 1,394,000 | 844,000 | ||||||
| Marketable securities | 3,672,000 | 15,617,000 | ||||||
| Designated assets for return of capital | 582,000 | 3,925,000 | ||||||
| Prepaid expenses and other current assets | 297,000 | 430,000 | ||||||
| TOTAL CURRENT ASSETS | 6,556,000 | 22,985,000 | ||||||
| Marketable securities, net of current portion | 18,423,000 | |||||||
| Notes receivable | 935,000 | |||||||
| Property and equipment, net | 139,000 | 114,000 | ||||||
| Intangible assets, net | 1,443,000 | |||||||
| Right of use assets | 195,000 | 257,000 | ||||||
| Other assets | 43,000 | 36,000 | ||||||
| Goodwill | 7,706,000 | 17,906,000 | ||||||
| TOTAL ASSETS | $ | 33,062,000 | $ | 43,676,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Accounts payable and accrued expenses | $ | 9,996,000 | $ | 4,095,000 | ||||
| Deferred revenue | 14,903,000 | 12,859,000 | ||||||
| Other current liabilities | 4,726,000 | 763,000 | ||||||
| Payroll protection loan | 10,000 | 10,000 | ||||||
| OID convertible notes payable | 1,197,000 | 1,164,000 | ||||||
| Series A redeemable preferred stock | 1,327,000 | 3,925,000 | ||||||
| TOTAL CURRENT LIABILITIES | 32,159,000 | 22,816,000 | ||||||
| Right of use liability, net of current portion | 40,000 | 114,000 | ||||||
| TOTAL LIABILITIES | 32,199,000 | 22,930,000 | ||||||
| STOCKHOLDERS’ EQUITY | ||||||||
Series A preferred stock, $0.001 par value, shares authorized, issued and outstanding, as liability classified at June 30, 2022 and December 31, 2021 | ||||||||
| Class A common stock, $ par value, shares authorized, and shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | 26,000 | 26,000 | ||||||
| Class B common stock, $ par value, shares authorized and issued and outstanding, at June 30, 2022 and December 31, 2021 | ||||||||
| Additional paid-in capital | 50,494,000 | 51,075,000 | ||||||
| Accumulated deficit | (49,657,000 | ) | (30,355,000 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 863,000 | 20,746,000 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 33,062,000 | $ | 43,676,000 | ||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 4 |
SRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended June 30, | Six months ended June 30, 2022 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | 7,722,000 | $ | 7,158,000 | $ | 15,221,000 | $ | 12,075,000 | ||||||||
| Cost and expenses | ||||||||||||||||
| Cost of revenues | 3,953,000 | 2,796,000 | 8,239,000 | 5,187,000 | ||||||||||||
| Employee related costs | 1,161,000 | 1,919,000 | 3,655,000 | 3,469,000 | ||||||||||||
| Selling, general and administrative | 2,020,000 | 1,338,000 | 3,877,000 | 1,633,000 | ||||||||||||
| Depreciation and amortization | 199,000 | 189,000 | 386,000 | 445,000 | ||||||||||||
| Total costs and expenses | 7,333,000 | 6,242,000 | 16,157,000 | 10,734,000 | ||||||||||||
| Income (loss) from operations | 389,000 | 916,000 | (936,000 | ) | 1,341,000 | |||||||||||
| Other income (expense) | ||||||||||||||||
| Financing costs | (1,264,000 | ) | (305,000 | ) | (1,577,000 | ) | (9,570,000 | ) | ||||||||
| Impairment of goodwill | (10,200,000 | ) | (10,200,000 | ) | ||||||||||||
| Impairment of intangibles | (1,481,000 | ) | (1,481,000 | ) | ||||||||||||
| Loss on sale of fixed assets | (47,000 | ) | (47,000 | ) | ||||||||||||
| Realized loss on marketable securities | (5,182,000 | ) | (584,000 | ) | (6,235,000 | ) | (878,000 | ) | ||||||||
| Current period change in fair value of marketable securities | (2,588,000 | ) | (3,978,000 | ) | 3,892,000 | 810,000 | ||||||||||
| Current period change in fair value of contract assets | (1,013,000 | ) | (1,513,000 | ) | ||||||||||||
| Realized loss on designated assets | (783,000 | ) | (899,000 | ) | ||||||||||||
| Current period change in fair value of designated assets | (1,689,000 | ) | (1,332,000 | ) | ||||||||||||
| Change in fair value of preferred stock | 2,472,000 | 2,232,000 | ||||||||||||||
| Interest income | 3,000 | 8,000 | 12,000 | 23,000 | ||||||||||||
| Other income (expense) | (1,647,000 | ) | (1,218,000 | ) | 14,000 | |||||||||||
| Total other expense, net | (23,419,000 | ) | (4,859,000 | ) | (18,366,000 | ) | (9,601,000 | ) | ||||||||
| Loss before income tax expense | (23,030,000 | ) | (3,943,000 | ) | (19,302,000 | ) | (8,260,000 | ) | ||||||||
| Income tax expense | ||||||||||||||||
| Loss from continuing operations | (23,030,000 | ) | (3,943,000 | ) | (19,302,000 | ) | (8,260,000 | ) | ||||||||
| Discontinued operations | ||||||||||||||||
| Loss before income tax expense | (2,069,000 | ) | (9,696,000 | ) | ||||||||||||
| Noncontrolling interest in discontinued operations | 272,000 | 1,126,000 | ||||||||||||||
| Income tax expense | ||||||||||||||||
| Loss from discontinued operations | (1,797,000 | ) | (8,570,000 | ) | ||||||||||||
| Net loss | $ | (23,030,000 | ) | $ | (5,740,000 | ) | $ | (19,302,000 | ) | $ | (16,830,000 | ) | ||||
| Basic and diluted loss per share | ||||||||||||||||
| Continuing operations | $ | (0.88 | ) | $ | (0.17 | ) | $ | (0.74 | ) | $ | (0.38 | ) | ||||
| Discontinued operations | (0.08 | ) | $ | (0.40 | ) | |||||||||||
| Net loss per share, basic and diluted | $ | (0.88 | ) | $ | (0.25 | ) | $ | (0.74 | ) | $ | (0.78 | ) | ||||
| Weighted average shares outstanding, basic and diluted | 26,246,017 | 23,631,449 | 26,139,627 | 21,533,141 | ||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 5 |
SRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Preferred Stock | Common Stock | Additional paid-in | Accumulated | Non Controlling | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | 25,995,172 | $ | 26,000 | $ | 51,075,000 | $ | (30,355,000 | ) | $ | $ | 20,746,000 | ||||||||||||||||||||
| Share based compensation | - | - | 358,000 | 358,000 | ||||||||||||||||||||||||||||
| Shares issued for exercise of employee options, net of taxes | - | 91,981 | (101,000 | ) | (101,000 | ) | ||||||||||||||||||||||||||
| Net income | - | 3,728,000 | 3,728,000 | |||||||||||||||||||||||||||||
| Balance, March 31, 2022 | 26,087,153 | 26,000 | 51,332,000 | (26,627,000 | ) | 24,731,000 | ||||||||||||||||||||||||||
| Share based compensation (benefit) | - | - | (870,000 | ) | (870,000 | ) | ||||||||||||||||||||||||||
| Shares issued for exercise of warrants on a cashless basis | - | 195,525 | ||||||||||||||||||||||||||||||
| Shares issued for exercise of warrants for cash | 32,000 | 32,000 | ||||||||||||||||||||||||||||||
| Net loss | - | - | (23,030,000 | ) | (23,030,000 | ) | ||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | 26,291,079 | $ | 26,000 | $ | 50,494,000 | $ | (49,657,000 | ) | $ | $ | 863,000 | ||||||||||||||||||||
| Preferred Stock | Common Stock | Additional paid-in | Accumulated | Non Controlling | Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
| Balance, December 31,2020 | $ | 16,145,778 | $ | 16,000 | $ | 69,551,000 | $ | (50,342,000 | ) | $ | $ | 19,225,000 | ||||||||||||||||||||
| Share based compensation | - | - | 253,000 | 253,000 | ||||||||||||||||||||||||||||
| Shares issued for cash | - | 53,616 | 284,000 | 284,000 | ||||||||||||||||||||||||||||
| Conversion of convertible debt to equity | - | 2,041,551 | 2,000 | 3,445,000 | 3,447,000 | |||||||||||||||||||||||||||
| Shares issued for exercise of warrants | - | 4,945,320 | 5,000 | 12,215,000 | 12,220,000 | |||||||||||||||||||||||||||
| Warrants issued as inducement to exercise warrants | - | - | 7,737,000 | 7,737,000 | ||||||||||||||||||||||||||||
| Establishment of noncontrolling interest of FVPD | - | - | (95,000 | ) | (95,000 | ) | ||||||||||||||||||||||||||
| Warrants issued by FVPD for SRAX, Inc. debenture holders | - | - | 885,000 | 885,000 | ||||||||||||||||||||||||||||
| Series B convertible preferred stock issued by FPVD | - | - | 5,775,000 | 5,775,000 | ||||||||||||||||||||||||||||
| Beneficial conversion feature FPVD series B convertible preferred stock | - | - | 5,775,000 | 5,775,000 | ||||||||||||||||||||||||||||
| Net loss | - | - | (11,090,000 | ) | (854,000 | ) | (11,944,000 | ) | ||||||||||||||||||||||||
| Balance, March 31,2021 | 23,186,265 | 23,000 | 93,485,000 | (61,432,000 | ) | 11,486,000 | 43,562,000 | |||||||||||||||||||||||||
| Share based compensation | - | - | 253,000 | 253,000 | ||||||||||||||||||||||||||||
| Shares issued for cash | - | - | 701,000 | 701,000 | ||||||||||||||||||||||||||||
| Conversion of convertible debt to equity | - | 350,000 | 3,575,000 | 3,575,000 | ||||||||||||||||||||||||||||
| Shares issued for exercise of warrants | - | 1,310,198 | 1,000 | 85,000 | 86,000 | |||||||||||||||||||||||||||
| Beneficial conversion feature FPVD series B convertible preferred stock | - | - | 85,000 | 85,000 | ||||||||||||||||||||||||||||
| Net loss | - | - | (5,740,000 | ) | (272,000 | ) | (6,012,000 | ) | ||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | 24,846,463 | $ | 24,000 | $ | 98,014,000 | $ | (67,172,000 | ) | $ | 11,384,000 | $ | 42,250,000 | |||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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SRAX, INC. AND SUBSIDIARIES
CONDESNED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
| Six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (19,302,000 | ) | $ | (16,830,000 | ) | ||
| Less: net loss from discontinued operations, net of tax | (8,570,000 | ) | ||||||
| Loss from continuing operations | (19,302,000 | ) | (8,260,000 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Impairment of goodwill | 10,200,000 | |||||||
| Impairment of intangibles | 1,481,000 | |||||||
| Loss on sale of fixed assets | 47,000 | |||||||
| Realized loss on marketable securities | 6,235,000 | 878,000 | ||||||
| Current period change in fair value of marketable securities | (3,892,000 | ) | (810,000 | ) | ||||
| Current period change in fair value of contract assets | 1,513,000 | |||||||
| Realized loss on designated assets | 899,000 | |||||||
| Current period change in fair value of designated assets | 1,332,000 | |||||||
| Change in fair value of preferred stock | (2,232,000 | ) | ||||||
| Stock based compensation (benefit) | (512,000 | ) | 506,000 | |||||
| Interest income | (23,000 | ) | ||||||
| Amortization of debt discount | 33,000 | 686,000 | ||||||
| Loss on settlement of note receivable | 35,000 | |||||||
| Fair value of warrants issued by FPVD to SRAX, Inc. debenture holders | 885,000 | |||||||
| Warrant inducement expense | 7,737,000 | |||||||
| Net provision for (recovery of) bad debts | 137,000 | (330,000 | ) | |||||
| Depreciation expense | 35,000 | 39,000 | ||||||
| Amortization of intangibles | 350,000 | 717,000 | ||||||
| Amortization of right of use assets | 62,000 | 52,000 | ||||||
| Non-cash financing expense | 147,000 | |||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable, net | 334,000 | 766,000 | ||||||
| Prepaid expenses and other current assets | 132,000 | (759,000 | ) | |||||
| Contracts receivable | (2,063,000 | ) | ||||||
| Marketable securities | (11,588,000 | ) | ||||||
| Designated assets for return of capital | 686,000 | |||||||
| Accounts payable and accrued expenses | 5,900,000 | (233,000 | ) | |||||
| Deferred revenue | 2,044,000 | (10,578,000 | ) | |||||
| Other current liabilities | 950,000 | (189,000 | ) | |||||
| Right of use liability | (62,000 | ) | (61,000 | ) | ||||
| Net cash used in continuing operations | (7,246,000 | ) | (8,830,000 | ) | ||||
| Net cash used in discontinued operations | (3,836,000 | ) | ||||||
| Net cash used in operating activities | (7,246,000 | ) | (12,666,000 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of marketable securities | 2,767,000 | 2,903,000 | ||||||
| Proceeds from note receivable | 900,000 | |||||||
| Deferred payments to LD Micro | (2,004,000 | ) | ||||||
| Proceeds from the sale of designated assets | 426,000 | |||||||
| Acquisition of property and equipment | (108,000 | ) | (82,000 | ) | ||||
| Acquisition of intangible assets | (388,000 | ) | (354,000 | ) | ||||
| Other assets | (33,000 | ) | ||||||
| Net cash from continuing operations | 3,597,000 | 430,000 | ||||||
| Net cash from discontinued operations | 955,000 | |||||||
| Net cash from investing activities | 3,597,000 | 1,385,000 | ||||||
| Cash flows from financing activities: | ||||||||
| Preferred stock distributions | (365,000 | ) | ||||||
| Proceeds from issuance of common stock | 284,000 | |||||||
| Payments of taxes related to settlement of restricted stock units | (101,000 | ) | ||||||
| Proceeds from the exercise of warrants | 32,000 |
| 15,796,000 | |||||
| Proceeds from factoring facilities | 5,362,000 | |||||||
| Repayments of factoring facilities | (2,367,000 | ) | ||||||
| Net cash from continuing operations | 2,561,000 | 16,080,000 | ||||||
| Net cash from discontinued operations | 4,810,000 | |||||||
| Net cash from financing activities | 2,561,000 | 20,890,000 | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 7 |
SRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)
(Unaudited)
| Six months ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net (decrease) increase in cash from continuing operations | (1,088,000 | ) | 7,680,000 | |||||
| Net increase in cash from discontinued operations | 1,929,000 | |||||||
| Cash, beginning of period | 1,348,000 | 451,000 | ||||||
| Cash, end of period | $ | 260,000 | $ | 10,060,000 | ||||
| Supplemental schedule of cash flow information | ||||||||
| Cash paid for interest | $ | $ | 14,000 | |||||
| Cash paid for taxes | $ | $ | ||||||
| Supplemental schedule of noncash investing and financing activities | ||||||||
| Fair value of marketable securities received for revenue contracts, net | $ | 18,106,000 | $ | 18,654,000 | ||||
| Convertible notes converted into shares | $ | $ | 6,423,000 | |||||
See accompanying notes to unaudited condensed consolidated financial statements.
| 8 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2022
NOTE 1 – ORGANIZATION AND LIQUIDITY
Organization
SRAX, Inc. (“SRAX”, “we”, “us”, “our” or the “Company”) is a Delaware corporation formed on August 2, 2011. SRAX is headquartered in Westlake Village, California but operates as a distributed virtual Company. As of June 30, 2022, the unaudited Condensed Consolidated Financial Statements consist of SRAX and its wholly owned subsidiary LD Micro, Inc. (“LD Micro”).
SRAX is a technology firm focused on enhancing communications between public companies and their shareholders and investors. The Company currently has one reportable and operating segment, which consists of one reporting unit consisting of two distinct business units:
| ● | The unique SaaS platform, Sequire provides users many features which allow issuers to track their shareholders’ behaviors and trends, then use data-driven insights to engage with shareholders across marketing channels. | |
| ● | Through LD Micro, the Company organizes and hosts investor conferences within the micro and small- cap markets, and plans to create several more niche events for the investor community. |
Each of SRAX’s business units deliver valuable insights that assist the Company’s clients with their investor relations and communications initiatives.
On February 4, 2021, the Company acquired FPVD through a reverse acquisition involving BIG Token, Inc. On December 29, 2021, the Company deconsolidated the Company’s majority owned subsidiary BIG Token, Inc. (“BIGToken”) formerly known as Force Protection Video Equipment Corporation (or “FPVD”). See Note 3 –Discontinued Operations.
Liquidity and Capital Resources
The Company has incurred significant losses since its inception and has not demonstrated an ability to generate cash in excess of its operating expenses for a sustained period of time. As of June 30, 2022, the Company had cash of $260,000 which is not sufficient to fund the Company’s planned operations through one year after the date the unaudited Condensed Consolidated Financial Statements are issued. These factors raise substantial doubt about the Company’s ability to continue as a going concern for at least one year after the date that the unaudited Condensed Consolidated Financial Statements are issued.
The unaudited Condensed Consolidated Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the unaudited Condensed Consolidated Financial Statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
In making this assessment, the Company performed a comprehensive analysis of current circumstances including: its financial position, cash flow and cash usage forecasts, and obligations and debts. Although management has a long history of successful capital raises, the analysis used to determine the Company’s ability as a going concern does not include cash sources outside the Company’s direct control that management expects to be available within the next 12 months.
The Company expects that its existing cash, accounts receivable and sale of marketable securities as of June 30, 2022, will not be sufficient to enable it to fund the anticipated level of operations through one year from the date these financial statements are issued. The Company projects the sale of its marketable security holding will represent a substantial portion of the cash required for operations for the foreseeable future. The Company’s sales of marketable securities are primarily through sale transactions that qualify for exemptions pursuant to Rule 144 of the Securities Act of 1933. The conditions required to be met to qualify for the exemptions under Rule 144 are often difficult to predict, making it difficult to predict the timing of the associated cash flows from the sales of these securities. The Company’s holdings of marketable securities are subject to risks and uncertainties such as fluctuations in pricing in the primary market, and legal restrictions that create uncertainty around realization and timing of cash flows.
| 9 |
The Company anticipates raising additional capital through the private and public sales of its equity or debt securities and selling its marketable securities, or a combination thereof. Although management believes that such capital sources will be available, there can be no assurances that financing will be available when needed in order to allow the Company to continue its operations, or if available, on terms acceptable to it. If the Company does not raise sufficient capital in a timely manner, among other things, it may be forced to scale back its operations or cease operations altogether.
Uncertainty Due to Geopolitical Events
Due to Russia’s invasion of Ukraine, which began in February 2022, and the resulting sanctions and other actions against Russia and Belarus, there has been uncertainty and disruption in the global economy. Although the Russian war against Ukraine did not have a material adverse impact on the Company’s revenue or other financial results for the six months ended June 30, 2022, at this time the Company is unable to fully assess the aggregate impact the Russian war against Ukraine will have on its business due to various uncertainties, which include, but are not limited to, the duration of the war, the war’s effect on the economy, its impact to the businesses of the Company’s customers, and actions that may be taken by governmental authorities related to the war.
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements and notes thereto are unaudited. The unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted. The December 31, 2021 Condensed Consolidated Balance Sheet was derived from financial statements but does not include all disclosures required by GAAP. These interim unaudited Condensed Consolidated Financial Statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim six-month periods ended June 30, 2022 and 2021. The results for the six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 or for any future period.
These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2021, included in the Company’s annual report on Form 10-K filed with the SEC.
Principles of Consolidation
The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation.
Use of Estimates
The unaudited Condensed Consolidated Financial Statements have been prepared in conformity with GAAP and require management of the Company to make estimates and assumptions in the preparation of these unaudited Condensed Consolidated Financial Statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions.
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The most significant areas that require management judgment and which are susceptible to possible change in the near term include, among other items, the Company’s revenue recognition, valuation of marketable investment securities, stock-based compensation, income taxes, purchase price for acquisitions, goodwill, other intangible assets, and the valuation of redemption features and other assets and liabilities.
Fair Value of Financial Instruments
The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as 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, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
In determining fair value, the Company uses various valuation techniques. A fair value hierarchy for inputs is used in measuring fair value. It maximizes observable inputs and minimizes unobservable inputs. Valuation techniques consistent with the market or income approach are used to measure fair value. The fair value hierarchy is categorized into three levels:
| ● | Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access; | |
| ● | Level 2 - Valuations based on inputs, other than quoted prices included in Level 1, that are observable either directly or indirectly; and | |
| ● | Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
Fair value is a market-based measure that is based on assumptions of prices and inputs considered from the perspective of a market participant on the measurement date.
The availability of valuation techniques and observable inputs can vary from investment to investment and are affected by a wide variety of factors. The determination of fair value requires prudent judgment. Due to the inherent uncertainty of valuation, estimated values may be materially different from values were a ready market available. Inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the item being valued is classified based on the hierarchy category of the lowest significant level input to the fair value measurement. See Note 12 Fair Value of Financial Instruments.
Cash
The Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents. Cash is recorded at cost, which approximates its fair value. The Company did not have any cash equivalents as of June 30, 2022 and December 31, 2021. The Company maintains its cash in banks insured by the Federal Deposit Insurance Corporation (“FDIC”) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. As of June 30, 2022 and December 31, 2021, the Company had $0 and $1,098,000 in excess of the federal insurance limit, respectively.
Marketable Securities
Marketable Securities consist of debt and equity securities. The Company accounts for marketable equity securities, including convertible preferred shares at fair value pursuant to ASC 321 Investments – Equity Securities, and marketable debt securities at fair value in accordance with ASC 320 – Investments Debt Securities. Marketable securities were approximately $22.1 million and $15.6 million as of June 30, 2022 and December 31, 2021, respectively.
Accounts Receivable
Credit is extended to customers based on an evaluation of their financial condition and other factors, and the Company usually does not require collateral. Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The allowance for doubtful accounts was approximately $266,000 and $130,000 as of June 30, 2022 and December 31, 2021, respectively.
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Concentration of Credit and Significant Customer Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash, accounts receivable and notes receivable. Cash is deposited with financial institutions within the United States. The balances maintained at these financial institutions are generally more than the FDIC insurance limits. The Company has not experienced any loss on these accounts.
As of June 30, 2022, the Company had 2 customers with accounts receivable balances representing approximately 32% of the Company’s aggregate accounts receivable. As of December 31, 2021, the Company had one customer with an accounts receivable balance of approximately 11%. Additionally, included within accounts receivables, the Company has a receivable of approximately $74,000 as of June 30, 2022 due from a prior subsidiary.
For the six months ended June 30, 2022 and 2021, the Company had no customers that account for a significant percentage of total revenues.
Goodwill and Intangible assets
Intangible assets consist of (i) goodwill, intellectual property, trademarks, trade names and non-compete agreements acquired in business combinations and capitalized software development costs. Other than goodwill and trademarks, intangible assets are stated at cost less accumulated amortization. Amortization is provided for on the straight-line basis over the estimated useful lives of the assets of five years.
Impairment of Goodwill, Intangible Assets and Other Long-lived Assets
Management evaluates the recoverability of the Company’s definitive lived intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company’s stock price for a sustained period of time; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Management evaluates the recoverability of the Company’s goodwill annually at December 31 or more often as events or circumstances indicate the fair value of a reporting unit is below its carrying value. The Company has determined that it operates as a single reporting unit for the purposes of conducting this goodwill impairment assessment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that implied fair value of the goodwill within the reporting unit is less than its carrying value.
An impairment in the amount of $10,200,000 to goodwill, and $1,481,000 to intangible assets was recognized for the six months ended June 30, 2022. The impairment was determined as the carrying amount of goodwill exceeded its implied fair value based on a discounted cash flow projection. The transition to accepting only cash as compensation for services will cause a significant decrease in revenue and cash collections, which has a material negative impact on the discounted cash flow projection. impairments of goodwill or other long-lived assets have been recognized for the six months ended June 30, 2021.
Revenue Recognition
The Company recognizes revenues upon the satisfaction of its performance obligation(s) (upon transfer of control of promised goods or services to its customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services. The Company determines the amount of revenue to be recognized through the application of the five-step process as follows:
| 1) | identification of contracts with customers; | |
| 2) | identification of the distinct performance obligations in the contract; | |
| 3) | determination of the transaction price of the contract; | |
| 4) | allocation of transaction price among the performance obligations in the contract; and | |
| 5) | recognition of revenue as performance obligations are satisfied. |
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The Company has elected the following practical expedients allowed in accounting for its revenue recognition:
| ● | not adjusting contract consideration for the effects of significant financing components if the period between transfer or service and customer payment is expected to be less than one year; | |
| ● | not assessing performance obligations if they are immaterial in the context of the contract; | |
| ● | excluding sales and similar taxes from the transaction price; and | |
| ● | not disclosing the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. |
The Company generates revenue primarily from its Sequire SaaS platform and its LD Micro subsidiary. Specifically, the Sequire SaaS platform related revenue consists of (i) licensing subscriptions to access the platform, (ii) managed services involving data and marketing initiatives and (iii) ancillary data supplementing the use of the platform. LD Micro revenues consist of attendee fees and event sponsorship fees related investor conferences organized and hosted by the Company.
Sequire SaaS platform
Sequire SaaS platform agreements are typically for a period of 12-months and provide for monthly or annual payments in advance.
Many of the Sequire SaaS platform agreements provide customers the ability to pay for the services with the issuance of the customers’ securities including common stock. The amount of consideration for these contracts is based on the estimated fair value of the underlying securities on the contract date. See “Fair Value of Financial Instruments” for details over the calculation of fair value.
When Sequire SaaS platform contracts contain multiple performance obligations, transaction consideration is allocated to each individual performance obligation based on a relative Stand-Alone Selling Price (“SSP,”) basis. The Company determines SSP based on the price at which the performance obligation would be sold separately.
Subscription revenue is generally non-refundable regardless of the actual use and is recognized ratably over the non-cancellable contract term beginning on the commencement date of each contract, which is the date the Company’s service is first made available to customers.
Managed Services and Ancillary Data revenue is typically recognized using an output measure of progress by looking at the time elapsed as the contracts generally provide the customer equal benefit throughout the contract period because the Company transfers control evenly by providing a stand-ready service.
LD Micro - Conference Revenue
LD Micro agreements cover a specific event and provide for payment in advance or at the time of the event. Conference revenue from attendee fees and sponsorship fees is recognized at the time of the event (i.e., at a point-in-time).
Contracts Receivable
Contracts receivable represents amounts for which non-cancellable revenue contracts with customers have been finalized but the payment in the form of securities issued by the customer have not been received by the Company.
Deferred Revenue
Deferred revenue resulting from amounts billed to, or cash received from, customers in advance of the Company satisfying its performance obligation and recognizing the applicable revenue.
Preferred stock
Preferred stock liability represents amounts payable to holders of the Preferred Stock Series A shares upon the eventual liquidation of assets designated for the sole purpose of paying dividends. Accordingly, the Company classified the Series A Preferred Shares as liability instruments because in-substance, they represent a right to the payment of dividends upon the liquidation of specified assets, are automatically returnable to the Company after the payments are made and feature no rights to further equity or residual interests in the Company. The Certificate of Designation of Preferences, Rights and Limitations of Series A Non-Voting Preferred Stock states dividend shall be paid conditioned upon, and subject to a determination by the Board that a distribution is not prohibited pursuant to applicable provisions of the DGCL or other applicable law.
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Costs to Obtain or Costs to Fulfill a Contract
The Company has no costs that qualify as costs to obtain or costs to fulfill customer contracts.
Basic earnings per share is calculated by dividing net loss by the weighted-average number of shares outstanding during the period. Diluted loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding, after giving effect to all potentially dilutive common shares outstanding during the period. For periods with a net loss, basic and diluted earnings per share are the same, in that a potentially common stock equivalent would have the effect of being anti-dilutive in the computation of net loss per share. The number of potentially outstanding dilutive common shares excluded from the diluted net loss per calculation, as they were anti-dilutive were and for the three months and six months ended June 30, 2022 and 2021, respectively.
Recent Accounting Pronouncements
In June 2022, the FASB issued Accounting Standards Update (“ASU”) ASU 2022-03 (“Fair Value Measurements”), which clarifies the guidance in ASC 820 (“Fair Value Measurement”) (“ASC 820”), (1) when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with ASC 820. The adoption did not impact the Company’s financial position, results of operations or cash flows.
Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, Debt-Debt with Conversion and Other Options which simplifies the accounting for convertible instruments by removing certain separation models (including the cash conversion model and the beneficial conversion feature model) for convertible instruments. As a result, for convertible instruments with conversion features that are not required to be accounted for as derivative instruments or that do not result in substantial premiums accounted for as paid-in capital, the embedded conversion features are no longer separated from the host contract. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost as long as no other features require bifurcation and recognition as derivatives. This guidance is effective on a modified retrospective or full retrospective basis for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) addressing accounting for credit losses on financial instruments, which is designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective on a modified retrospective basis for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact on the consolidated financial statements.
The Company’s management reviewed all recently issued ASU’s not yet adopted by the Company and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on the Company’s consolidated financial condition or the results of its operations.
NOTE 3 –DISCONTINUED OPERATIONS
Background
On February 4, 2021, the Company completed a share exchange agreement (“Exchange Agreement”) with FPVD. As part of the Exchange Agreement the Company transferred all of the BIGToken assets and 100% of the issued and outstanding shares of BIGToken for shares of FPVD’s common stock and shares of FPVD’s series A preferred stock. The Company accounted for the transaction as a reverse capitalization and resulted in reducing the Company’s ownership in BIGToken from 100% to 88.9% and establishment of a non-controlling interest. Subsequently, FPVD was renamed BIGToken.
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Deconsolidation
On December 29, 2021, . As a result of the Merger, BIGToken issued shares of its common stock (“Acquisition Shares”) for all of the issued and outstanding equity shares of BritePool. On December 29, 2021, as a condition for the closing of the Merger, the Company exchanged shares of BIGToken common stock for shares of BIGToken’s Series D Convertible Preferred Stock (“Series D Stock”) (the “Exchange”). Simultaneously with the Exchange, the Company converted shares of the Series D Stock into shares of BIGToken’s common stock, or approximately 4.99% of the issued and outstanding shares of BIGToken’s common stock.
Subsequent to the transaction, the Company now owns shares of BIGToken’s series D convertible, non-redeemable, non-voting preferred stock and shares of its common stock. As a result of the transaction, the Company no longer has a controlling financial interest in BIGToken and deconsolidated BIGToken effective December 29, 2021, recognizing a loss of $10.7 million as follows:
| Consideration | Amount | |||
| Fair value of Series D Stock and Common Stock | $ | 31,000 | ||
| Carrying amount of non-controlling interests of BIGToken | 6,045,000 | |||
| Previous equity adjustments of non-controlling interest | (12,510,000 | ) | ||
| Total | (6,434,000 | ) | ||
| Book basis of investment in BIGToken | 4,250,000 | |||
| Loss on disposal of subsidiary | $ | (10,684,000 | ) | |
The Company determined the Series D Stock would be classified as a Level 3 asset as there is no observable market for quoted market price for an identical asset. The Company engaged an independent third-party valuation expert to estimate the fair value of the Series D Stock.
The financial results of BIGToken are presented as loss from discontinued operations, net of income taxes and net of income attributable to non-controlling interests on the Company’s unaudited Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2021. The historical Condensed Consolidated Statement of Cash Flows has also been revised to reflect the effect of the deconsolidation. The following table presents the financial results of BIGToken:
Six Months Ended | Three Months Ended June 30, 2021 | |||||||
| Revenues | $ | 1,704,000 | $ | 849,000 | ||||
| Cost and expenses | ||||||||
| Cost of revenues | 508,000 | 235,000 | ||||||
| Employee related costs | 1,661,000 | 895,000 | ||||||
| Marketing and selling expenses | 489,000 | 323,000 | ||||||
| Platform costs | 167,000 | 81,000 | ||||||
| Depreciation and amortization | 311,000 | 183,000 | ||||||
| General and administrative expenses | 2,405,000 | 1,117,000 | ||||||
| Total cost and expenses | 5,541,000 | 2,834,000 | ||||||
| Loss from operations | (3,837,000 | ) | (1,985,000 | ) | ||||
| Other expense | ||||||||
| Deemed dividend on preferred stock | (5,859,000 | ) | (84,000 | ) | ||||
| Total other expense | (5,859,000 | ) | (84,000 | ) | ||||
| Loss from discontinued operations before income tax expense | (9,696,000 | ) | (2,069,000 | ) | ||||
| Income tax expense | ||||||||
| Loss from discontinued operations | $ | (9,696,000 | ) | $ | (2,069,000 | ) | ||
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NOTE 4 – NOTES RECEIVABLE
In October 2020, the Company entered into unit redemption agreements with two counterparties providing for the counterparties to repurchase from the Company units of the counterparty’s securities owned by the Company. Pursuant to the redemption agreements, the counterparties repurchased the units for a combined repurchase price of $8 million with $ million being paid on closing and the additional $1 million being deferred and due on the earlier of the three-year anniversary or upon sale of the counterparties. The Company had no cost basis in the units and as a result the note receivable has no cost basis. The Company accounts for the note receivable as a loan pursuant to ASC 310 – Loans . The $1 million in deferred payments was recorded with an implied discount of approximately $107,000, which is being amortized over 3 years. During the six months ended June 30, 2022, the Company accepted an offer to settle note balance for a one time payment of $900,000. Notes receivable as of June 30, 2022 and December 31, 2021 amounted to $ and $935,000, respectively.
NOTE 5 – MARKETABLE SECURITIES
The Company offers its customers the option to settle the contract price in the customer’s issued and publicly trading securities or securities convertible into publicly traded securities (e.g., convertible debt), which could be in the form of common stock, preferred stock or convertible debentures. The Company initially values the securities received at the fair market value on the date the contract is executed, which value is used for revenue recognition purposes. After receipt of the securities, the securities are accounted for as investments in debt and equity securities. The Company has concluded that all its debt securities should be classified as trading securities based on its intent to sell them in the near term. Debt securities classified as trading securities and the equity securities are measured at each reporting period at fair value with changes reported in earnings. Upon the sale of the securities, the Company recognizes the final realized gain or (loss) in the consolidated statement of operations as a component of net income (loss).
As of June 30, 2022 marketable securities amounted to $22,095,000, with a current portion $3,672,000, and the long term portion of 18,423,000.
The following tables summarize the changes in the Company’s marketable securities during the six months ended June 30, 2022:
Six months ended June 30, 2022:
| Total | Common Stock | Convertible Debentures | Preferred Stock | Warrants | ||||||||||||||||
Balance as of December 31, 2021 | $ | 15,617,000 | $ | 10,735,000 | $ | 4,187,000 | $ | 599,000 | $ | 96,000 | ||||||||||
| Transfers | 356,000 | (325,000 | ) | (31,000 | ) | |||||||||||||||
| Additions | 13,815,000 | 11,877,000 | 938,000 | 1,000,000 | ||||||||||||||||
| Sales proceeds | (2,767,000 | ) | (2,767,000 | ) | ||||||||||||||||
| Realized loss | (6,235,000 | ) | (6,235,000 | ) | ||||||||||||||||
| Current period change in fair value | 1,665,000 | (577,000 | ) | 3,537,000 | (1,496,000 | ) | 201,000 | |||||||||||||
| Balance as of June 30, 2022 | $ | 22,095,000 | $ | 13,389,000 | $ | 8,337,000 | $ | 72,000 | $ | 297,000 | ||||||||||
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The Company’s sales of securities for the six months ended June 30, 2022, were approximately $2.8 million, with a book basis of approximately $8 million which represented a loss of approximately $6.2 million, which the Company recorded as other expense included in the gains from marketable securities.
The equity securities may be accounted for and classified into two categories and accounted for as follows:
| ● | Equity securities with a readily determinable fair value are reported at fair value, with unrealized gains and losses included in earnings. The fair value of equity investments with fair values is primarily obtained from third-party pricing services. | |
| ● | Equity securities without a readily determinable fair value are reported at their cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer and their impact on fair value. For equity investments without readily determinable fair values, when an orderly transaction for the identical or similar investment of the same issuer is identified, the Company uses valuation techniques to evaluate the observed transaction(s) and adjust the fair value of the equity investment. |
Concentration Risk
The Company’s holdings in marketable securities subject the Company to concentrations of market risks. As of June 30, 2022, the Company’s top five marketable security positions had an aggregate fair value of $9.6 million, which represented approximately 43% of the Company’s holdings, and the top ten marketable security positions had an aggregate fair value of $13.5 million, which represented approximately 61% of the Company’s holdings
BIGtoken Investment
On February 15, 2022, the Company entered into a simple agreement for future equity (the “SAFE”) with its former BIGToken subsidiary. Pursuant to the SAFE, the Company invested $1,000,000 in the SAFE. The amount funded into the SAFE at a given time is referred to herein as the “SAFE Amount”. The Company is accounting for the SAFE as an equity investment carried at fair value with changes recorded in earnings each period and is reflected as such in the above table. As of June 30, 2022 the SAFE had an aggregate fair value of $0, as the Company believed the SAFE to have no value due to the financial condition its former BIGToken subsidiary.
Pursuant to the terms of the SAFE, at any time that BIGtoken sells its securities (a “Financing”) prior to the termination of the SAFE, the Company may, at its option, convert the SAFE into: (i) the number of shares of non-voting Series D Convertible Preferred Stock (“Series D Preferred Stock”) equal to such (a) SAFE Amount divided by (b) the lowest price per share of equity securities sold in any Financing (prior to the termination of the SAFE) multiplied by eighty percent (80%) (the “Conversion Price”) and (ii) such number of warrants to purchase Series D Preferred Stock (the “Warrants”) equal to the SAFE Amount divided by the Conversion Price. Upon issuance, the Warrants will (i) have a term of five (5) years, (ii) an exercise price equal to the Conversion Price, and (iii) contain price protection provisions for subsequent financings.
NOTE 6 – DESIGNATED ASSETS FOR RETURN OF CAPITAL
On August 17, 2021, the Company announced that it will be issuing a one-time dividend consisting of a share of Series A Preferred Stock to shareholders, debenture holders, and certain warrant holders (“Recipients”) of record on September 20, 2021. The Board of Directors designated certain of the Company’s marketable equity securities (“Designated Assets”) as of September 20, 2021 to be used when liquidated, as a return of capital to the Recipients. See Note 9 - Series A Preferred Stock for more details.
The balance of designated assets consists of the following:
| June 30, 2022 | December 31, 2021 | |||||||
| Cash | $ | $ | 686,000 | |||||
| Marketable equity securities | 582,000 | 3,239,000 | ||||||
| Total | $ | 582,000 | $ | 3,925,000 | ||||
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The marketable equity security activity in designated assets is as follows:
| Total | ||||
| Balance as of December 31, 2021 | $ | 3,239,000 | ||
| Sales proceeds | (426,000 | ) | ||
| Realized loss | (899,000 | ) | ||
Current period change in fair value | (1,332,000 | ) | ||
| Balance as of June 30, 2022 | $ | 582,000 | ||
The Company’s sale of marketable securities underlying designated assets for the six months ended June 30, 2022, were approximately $426,000 with a cost basis of approximately $1,326,000 which resulted in a realized loss of $899,000, which the Company recorded as other expense included in the realized loss from designated assets.
NOTE 7 – SALES AND PURCHASE OF ACCOUNTS RECEIVABLE AND SHORT TERM FINANCINGS
Sales of Accounts Receivable
In 2020, the Company entered into certain financing agreements providing for the sale, with full recourse, of certain of its accounts receivable. These transactions were accounted for as financing of accounts receivables and the related accounts receivable were not removed from the Company’s consolidated balance sheet at the time of the transaction; rather, a liability was recorded for the proceeds received. In 2020 subsequent to the transactions, the purchaser converted the payables into approximately $788,000 of the OID Convertible Notes payable (“Debentures”) (See Note 8 - OID Convertible notes payable).
For the year ended December 31, 2021, the Company entered into agreements with a third-party lender whereby it sold the Company’s right to future subscription revenues of $625,000 for net proceeds of $576,000. Under the terms of the agreement, the Company may borrow funds collateralized by the right to the revenues from Sequire platform contracts. The third-party lender receives a discount on the amount sold and remits the net amount to the Company. The Company bears the risk of credit loss on the contracts. These transactions are accounted for as secured borrowing arrangements and not as a sale of financial assets. During the six months ended June 30, 2022 the Company entered into agreements with third party lenders to borrow against future receipts in the amount of $4,170,000 for net proceeds of $3,044,000. These borrowings have terms of less than 12 months.
The amount of borrowings outstanding was approximately $3,817,000 and $633,000 as of June 30, 2022 and December 31, 2021, respectively, and are included in other current liabilities within our unaudited condensed consolidated balance sheets. In August 2022, proceeds from the Senior Secured Revolving Credit Facility were used to pay off the entire balance of outstanding borrowings.
CVR Agreement
During the three and six months ended June 30, 2022, the Company entered into an agreement with an institutional investor whereby in exchange for the payment of $405,000, the investor received (i) the right to receive the net proceeds upon the sale of certain marketable securities held by the Company with a guaranteed minimum return of 120% of such Purchase Price or $486,000 and (ii) the right after 90 days but before 120 days to demand payment of 120% of the Purchase Price in cash less amounts previously paid from the sales of such securities. As of June 30, 2022 the Company recorded a liability in the amount of $613,000 in other current liabilities within our unaudited condensed consolidated balance sheets.
NOTE 8 – OID CONVERTIBLE NOTES PAYABLE
In June 2020, the Company entered into a definitive securities purchase agreement (the “Securities Purchase Agreement or Transaction”) with certain accredited and institutional investors (the “Purchasers”) for the purchase and sale of an aggregate of: (i) $16,101,000 in principal amount of Original Issue Discount Senior Secured Convertible Debenture (the “Debentures”) for $14,169,000 (representing a 12% original issue discount) (“Purchase Price”) and (ii) warrants to purchase up to 6,440,561 shares of the Company’s Class A common stock (the “Warrants”) in a private placement (the “Offering”). The Purchase Price consisted of (a) $13,000,000 in cash and (b) the cancellation of $1,169,000 in outstanding debt. The Company received net proceeds of approximately $9,100,000 after deducting the Placement Agent fees, the Debt Repayments and other offering expenses. The Company’s obligations under the Debentures are secured by substantially all of the assets of the Company.
The Debentures pay interest in cash at the rate of 12.0% per annum commencing on June 30, 2021, with such interest originally payable quarterly, beginning on October 1, 2021. Commencing after the six-month anniversary of the issuance of the Debentures, the Company was required to make amortization payments (“Amortization Payments”) with each Purchaser having the right to delay such Amortization Payments by a six-month period up to three separate times (each, an “Extension”) in exchange for five percent (5%) in principal being added to the balance of such applicable Debenture on each such Extension. The Debentures had an original maturity date of December 31, 2021 but were extended three times and now mature on June 30, 2023. Beginning on the date that the first Amortization Payment is due, and on a monthly basis thereafter, the Company will be required to pay one hundred fifteen percent of the value of one-twelfth of the outstanding principal plus any additional accrued interest due.
The Debentures are convertible at the option of the holder into shares of the Company’s common stock at an initial conversion price of $2.69 per share, subject to adjustment in the event of (i) stock splits and dividends, (ii) subsequent rights offerings, (iii) pro-rata distributions, and (iv) certain fundamental transactions, including but not limited to the sale of the Company, business combinations, and reorganizations.
In the event a Purchaser converts a portion of its Debenture into shares of the Company’s Common Stock, such amount will be deducted from the next applicable Amortization Payment. In the event such conversion exceeds the next applicable Amortization Payment, such excess amount will be deducted, in reverse order, from future Amortization Payments.
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Pursuant to the terms of the Debentures and Warrants, a Purchaser will not have the right to convert any portion of the Debentures or exercise any portion of the Warrants if the holder (together with its affiliates) would beneficially own in excess of 4.99% or 9.99% (at the Purchaser’s option) of the number of shares of Common Stock outstanding immediately after giving effect to such conversion or exercise, as such percentage ownership is determined in accordance with the terms of the Debentures and the Warrants; provided that at the election of a holder and notice to us such percentage ownership limitation may be increased to 9.99%; provided that any increase will not be effective until the 61st day after such notice is delivered from the holder to the Company.
Subject to the Company’s compliance with certain conditions, upon ten trading days’ notice to the Purchasers, the Company has the right to redeem the Debentures in cash at 115% of their outstanding principal, plus accrued interest. Additionally, in the event that the Company (i) sells or reprices any securities (each, a “Redemption Financing”), or (ii) disposes of assets (except those sold or transferred in the ordinary course of business) (each, an “Asset Sale”), then the Purchasers shall have the right to (a) in the event of a Redemption Financing at a price per Common Stock equivalent of $2.50 or less per share, the Purchasers may mandate that 100% of the proceeds be used to redeem the Debentures (b) in the event of a Redemption Financing at a price per Common Stock equivalent of greater than $2.50 per share, the Purchasers may mandate that up to 50% of the proceeds be used to redeem the Debentures, and (c) in the event of an Asset Sale, the Purchasers may mandate that up to 100% of the proceeds be used to redeem the Debentures.
The Debentures also contain certain customary events of default provisions, including, but not limited to, payment default, breaches of covenants, the occurrence of an event of default under certain material contracts of the Company, failure to register the shares underlying the Debentures and Warrants, changes in control of the Company, delisting of its securities from its trading market, and the entering or filing of certain monetary judgments against the Company. Upon the occurrence of any such event of default, the outstanding principal amount of the Debenture plus liquidated damages, interest and other amounts owing in respect thereof through the date of acceleration, shall become, at the Purchaser’s election, immediately due and payable in cash. The Company is also prohibited from certain activities (unless waived by 67% of the then outstanding Purchasers, and including the lead Purchaser), including but not limited to, the creation of certain debt obligations, liens on Company assets, amending its charter documents, repayment or repurchase of securities or certain debt of the Company, or the payment of dividends.
The Warrants are initially exercisable at $2.50 per share and, are subject to cashless exercise after six months if the shares underlying the Warrants are not subject to an effective resale registration statement. The Warrants are also subject to adjustment in the event of (i) stock splits and dividends, (ii) subsequent rights offerings, (iii) pro-rata distributions, and (iv) certain fundamental transactions, including but not limited to the sale of the Company, business combinations, and reorganizations.
Pursuant to a registration rights agreement (“Registration Rights Agreement”), the Company has agreed to file a registration statement registering the resale of the shares of the common stock underlying the Debentures and the Warrants within forty-five days from the date of the Registration Rights Agreement. The Company also agrees to have the registration statement declared effective within 90 days from the date of the Registration Rights Agreement and keep the registration statement continuously effective until the earlier of (i) the date after which all of the securities to be registered thereunder have been sold, or (ii) the date on which all the securities to be registered thereunder may be sold without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 under the Securities Act. The Company is also obligated to pay the Investors, as partial liquidated damages, a fee of 2.0% of each Purchaser’s subscription amount per month in cash upon the occurrence of certain events, including the Company’s failure to file and/or have the registration statement declared effective within the time periods provided. As of June 30, 2022, the Company has continuously met its obligations under the Registration Rights Agreement.
Bradley Woods & Co. Ltd. (“Placement Agent”) acted as the placement agent, in connection with the sale of the securities. Pursuant to an engagement agreement, the Company agreed to pay the Placement Agent a cash commission of $1,040,000 and issue an aggregate of 478,854 Common Stock purchase warrants (“PA Warrants”). The PA Warrants are substantially similar to the Warrants, except that the PA Warrants have an exercise price of $3.3625 per share. Additionally, upon the exercise of the Warrants issued in the Offering, the Placement Agent will be entitled to eight percent (8%) of the cash proceeds received from such exercises. The fair value of the PA Warrants at issuance was estimated to be $360,000.
The Company first allocated the cash proceeds to the loan and the equity classified warrants on a relative fair value basis, secondly, the proceeds were allocated to the beneficial conversion feature. The proceeds allocated to the warrants and the beneficial conversion feature resulted in a debt discount being amortized as additional interest expense using the effective interest method over the term.
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The table below summarizes the Debenture related activity during the three and six months ended June 30, 2022:
| Principal | Debt Discount | Net Book Value | ||||||||||
| Balance as of December 31, 2021 | $ | 1,267,000 | $ | (103,000 | ) | $ | 1,164,000 | |||||
| Amortization | 17,000 | 17,000 | ||||||||||
| Balance as of March 31, 2022 | $ | 1,267,000 | $ | (86,000 | ) | $ | 1,181,000 | |||||
| Amortization | 16,000 | 16,000 | ||||||||||
| Balance as of June 30, 2022 | $ | 1,267,000 | $ | (70,000 | ) | $ | 1,197,000 | |||||
As of June 30, 2022 and December 31, 2021, the Company has classified the debt as current liability because management intends to redeem the remaining convertible debentures within the following 12 months.
NOTE 9 – COMMON AND PREFERRED STOCK
Common Stock
The Company’s certificate of incorporation provides for two classes of common stock: Class A common stock (authorized shares, par value $), which has one vote per share, and Class B common stock (authorized shares, par value $), which has ten votes per share. Any holder of Class B common stock may convert his or her shares at any time into shares of Class A common stock on a share-for-share basis. Otherwise, the rights of the two classes of common stock are identical.
In August 2021, the Board of Directors approved a share repurchase program pursuant to which the Company is authorized to repurchase up to $10,000,000 of Class A Common Stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices. Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. This includes purchases pursuant to Rule 10b5-1 plans, including accelerated share repurchases. The program does not have an expiration date.
During the year ended December 31, 2021, the Company repurchased shares of Common Stock, for an aggregate purchase price of $ pursuant to the Company’s Share Buy-Back program. The shares were retired as of December 31, 2021. amounts were repurchased in the six months ended June 30, 2022. The total remaining authorization for future common share repurchases under the Company’s share repurchase program was $ million as of June 30, 2022.
During the year ended December 31, 2021, the Company sold shares of common stock, resulting in proceeds of approximately $284,000, through sales under its At the Market (ATM) offering.
On January 2, 2022, Michael Malone, our Chief Financial Officer exercised an option to purchase shares of our common stock that was issued on December 15, 2018. The option was exercised on a cashless basis and included shares withheld pursuant to the cashless exercise and an additional shares withheld for tax withholding. Accordingly, we issued Mr. Malone shares of common stock.
During the month of January 2022, non-executive employees exercised a total of stock options. These options were exercised on a cashless basis, and included shares withheld pursuant to cashless exercise and tax withholdings. This resulted in the issuance of shares of common stock.
During the six months ended June 30, 2022, the Company issued 203,926 shares from the exercise of 697,574 warrants, including 689,173 that were exercised on a cashless basis, and 8,401 exercised for $31,504 in cash.
Preferred Stock
The Company is authorized to issue of preferred stock, par value $, of which shares are designated as Series A Preferred Stock (“Dividend Shares”). The Company’s Board of Directors, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The Board of Directors may authorize the issuance of preferred stock, which ranks senior to the Company’s common stock for the payment of dividends and the distribution of assets on liquidation. In addition, the Board of Directors can fix limitations and restrictions, if any, upon the payment of dividends on both classes of the Company’s common stock to be effective while any shares of preferred stock are outstanding.
On September 20, 2021, the Company filed a certificate of designation (the “COD”) of preferences, rights, and limitations of Series A Non-Voting Preferred Stock (“Series A Preferred Stock”) with the Secretary of State of Delaware. Pursuant to the COD, the Company is authorized to issue up to shares of Series A Preferred Stock (the “Dividend Shares”).
On September 27, 2021, the Company issued a one-time dividend of shares of series A preferred stock (“Preferred Stock”) to certain Qualified Recipients (the “Dividend”). The preferred stock entitles the Qualified Recipients with the right to receive the net proceeds from sales of certain marketable securities that the Company received through its Sequire Platform services. See Note 6 – Designated Assets for Return of Capital.
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As of the Record Date, the following holders of securities were entitled to receive the Dividend (collectively, the “Qualified Recipients):
| i. | each outstanding share of Class A common stock (the “Common Stock”), of which shares were issued and outstanding, | |
| ii. | each share of Common Stock underlying outstanding common stock purchase warrants containing a contractual right to receive the Dividend (“Warrants”) of which, 10,327,645 were outstanding, and | |
| iii. | each original issue discount senior convertible debenture (the “Debentures”) issued on June 30, 2021, containing a contractual right to receive the Dividend on an as converted to Common Stock basis, of which $2,486,275 of Debentures were outstanding in principal and interest, convertible into shares of Common Stock. |
The Company’s management has evaluated the Preferred Stock and determined that Preferred Stock is mandatorily redeemable upon the distribution of the net proceeds from the sale of the designated marketable securities. Accordingly, it is classified as a liability recorded at fair value, with changes in fair value being reflected in earnings.
Preferred stock liability represents amounts payable to holders of the Preferred Stock Series A shares upon the eventual liquidation of assets designated for the sole purpose of paying dividends. Accordingly, the Company classified the Series A Preferred Shares as liability instruments because in-substance, they represent a right to the payment of dividends upon the liquidation of specified assets, are automatically returnable to the Company after the payments are made and feature no rights to further equity or residual interests in the Company. The Certificate of Designation of Preferences, Rights and Limitations of Series A Non-Voting Preferred Stock states dividend shall be paid conditioned upon, and subject to a determination by the Board that a distribution is not prohibited pursuant to applicable provisions of the DGCL or other applicable law.
Equity Compensation Plans
As of June 30, 2022, the Company has approximately shares of Class A Common Stock reserved for issuance under the Company’s equity compensation plans.
During the three months ended June 30, 2022 the Company recorded a stock based compensation benefit in the amount of $. During the six months ended June 30, 2022, the Company recorded a stock based compensation expense of , which was offset by a stock based compensation benefit of $, resulting in a net stock based compensation benefit of $.
For the six months ended June 30, 2022, the Company issued the below shares and granted the following stock-based awards:
On January 2, 2022, Michael Malone, our Chief Financial Officer exercised an option to purchase shares of our common stock that was issued on December 15, 2018. The option was exercised on a cashless basis and included shares withheld pursuant to the cashless exercise and an additional shares withheld for tax withholding. Accordingly, we issued Mr. Malone shares of common stock.
On January 3, 2022, we issued four (4) common stock purchase options to our non-employee directors, pursuant to our amended non-employee director compensation policy. Each option entitled the holder to purchase shares of common stock at an exercise price of $per share, for an aggregate exercise amount of $128,500. The options vest in equal quarterly over a one () year period from the issuance date. The options expire on the seven () year anniversary of the issuance date. Each option has a Black-Scholes value of $.
During the month of January 2022, non-executive employees exercised a total of stock options. These options were exercised on a cashless basis, and included shares withheld pursuant to cashless exercise and tax withholdings. This resulted in the issuance of shares of common stock.
On January 6, 2022, we issued non-executive employees, options to purchase shares of Class A common stock. The option has an exercise price of $per share, a term of five () years and vests in equal quarterly installments over a three () year period from the grant date. The option had a Black-Scholes value on the grant date of $.
On January 6, 2022, we issued Christopher Miglino, our Chief Executive Officer, an option to purchase shares of common stock. The option has an exercise price of $ per share, a term of seven () years and vests in equal quarterly installments over a three () year period from the grant date. The option had a Black-Scholes value on the grant date of $.
On January 6, 2022, we issued an employee an option to purchase shares of common stock. The option has an exercise price of $ per share, a term of seven () years and vests in equal quarterly installments over a three () year period from the grant date. The option had a Black-Scholes value on the grant date of $.
On January 6, 2022, we issued Michael Malone, our Chief Financial Officer, a conditional option to purchase shares of Class A common stock. The option is a conditional grant, subject to shareholder approval. Assuming approval by the shareholders, the option has an exercise price of $ per share, a term of seven () years and vests in equal quarterly installments over a three () year period from the grant date. The option had a Black-Scholes value on the grant date of $.
On January 6, 2022, we issued an employee an option to purchase an aggregate of shares of common stock. The option is a conditional grant, subject to shareholder approval. The option has an exercise price of $ per share, a term of five () years, and vest in equal quarterly installments over a three () year period from the grant date. The option had a Black-Scholes value on the grant date of $.
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The per-share fair value of each stock option with service conditions only granted in 2022 was determined on the grant date using the Black-Scholes option pricing model with the following assumptions:
| Grant date | ||||||||||||
| 1/3/2022 | 1/6/2022 | 1/6/2022 | ||||||||||
| Expected term (in years) | 5.0 | 4.4 | 3.4 | |||||||||
| Risk-free interest rate | 1.55 | % | 1.55 | % | 1.60 | % | ||||||
| Expected volatility | 90.0 | % | 90.0 | % | 90.0 | % | ||||||
| Expected dividend yield | % | % | % | |||||||||
Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Term (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding as of December 31, 2021 | 1,334,287 | $ | 3.02 | $ | 3,096,176 | |||||||||||
| Granted | 718,132 | $ | 4.27 | |||||||||||||
| Exercised | (327,667 | ) | $ | 3.15 | - | |||||||||||
| Forfeited | (60,000 | ) | $ | 3.42 | - | - | ||||||||||
| Outstanding as of June 30, 2022 | 1,664,752 | $ | 3.52 | $ | 414,185 | |||||||||||
| Exercisable at June 30, 2022 | 759,053 | $ | 3.18 | $ | 248,583 | |||||||||||
The Company did not issue any stock-based awards in the six months ended June 30, 2021.
During the three and six months ended June 30, 2022 the Company recorded a stock-based compensation benefit of $ and $ respectively. During the three months ended June 30, 2022 the Company determined that the vesting of stock awards to a prior contractor has become improbable and as a result, in accordance with ASC 718, has recognized a cumulative adjustment to reverse approximately $1.1 million of stock based compensation that was previously recognized. During the three and six months ended June 30, 2021, the Company recognized $ and $ of stock-based compensation expense, respectively. The Company has included stock-based compensation expense in employee related costs on our unaudited Condensed Consolidated Statements of Operations. At June 30, 2022, there was $ of unrecognized compensation expense expected to be recognized over the next years on average.
Warrants
During the three and six months ended June 30, 2022, the Company issued 203,926 shares from the exercise of 697,574 warrants, including 689,173 that were exercised on a cashless basis, and 8,401 exercised for $31,504 in cash. During the three and six months ended June 30 2022, 555,697 and 5,101,137 warrants expired, respectively.
On February 21, 2021 the Company entered into an agreement with the Debenture holders to exercise 4,544,440 of the Warrants. In consideration for the Debenture holders to exercise the Warrants, the Debenture holders would receive a new registered warrant (“New Warrant”) to purchase an aggregate of 4,545,440 shares of the Company’s common stock at an exercise price of $7.50 per share expiring on January 31, 2022. Each investor agreed to pay $ for each New Warrant. The net proceeds received of approximately $11,022,000 consisted of the exercise price of $11,363,000, $568,000 for the purchase of the New Warrant less solicitation fees of approximately $909,000.
The New Warrants were valued using the Black Scholes option pricing model at a total of $7,737,000 based on a one-year term, implied volatility of %, a risk-free equivalent yield of %, and stock price of $. The fair value of the New Warrants was expensed and included in Financing Costs for the three months ended March 31, 2021.
Additionally, during the three and six months ended June 30, 2021, there were an additional warrants exercised.
During the three and six months ended June 30, 2021, other warrant holders exercised warrants to purchase 399,880 shares for approximately $1,200,000.
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At June 30, 2022, the Company had the following outstanding and exercisable warrants:
Warrant Shares | Weighted Average Exercise Price | Maturity Date | ||||||||
| 1,697,975 | $ | 3.86 | 2022 | |||||||
| 2,440,359 | $ | 2.73 | 2023 | |||||||
| 95,549 | $ | 4.91 | 2024 | |||||||
| 4,233,833 | $ | 3.22 | ||||||||
NOTE 11 – REVENUE
The Company has two business units, one operating segment, one reportable segment and one reporting unit. The Sequire segment includes the licensing of the Company’s proprietary SaaS platform and associated data analysis technologies, consumer and investor targeted marketing solutions to allow users of the Company’s SaaS platform to act on the insights obtained through the Company’s technologies, and LD Micro, which is in the business of hosting events and conference for microcap public companies.
The following table summarizes revenue by revenue stream for the three and six months ended June 30:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Sequire platform revenue | $ | 6,420,000 | $ | 6,483,000 | $ | 13,919,000 | $ | 10,991,000 | ||||||||
| Conference revenue | 1,302,000 | 345,000 | 1,302,000 | 390,000 | ||||||||||||
| Other revenue | 330,000 | 694,000 | ||||||||||||||
| Total revenue | $ | 7,722,000 | $ | 7,158,000 | $ | 15,221,000 | $ | 12,075,000 | ||||||||
The following table summarizes revenue recognized in exchange for customer securities and cash for the three and six months ended June 30:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Customer securities | $ | 5,642,000 | $ | 5,155,000 | $ | 12,101,000 | $ | 8,626,000 | ||||||||
| Cash | 2,080,000 | 2,003,000 | 3,120,000 | 3,449,000 | ||||||||||||
| Total revenue | $ | 7,722,000 | $ | 7,158,000 | $ | 15,221,000 | $ | 12,075,000 | ||||||||
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NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments, including cash and accounts payable and accrued expenses, approximate their respective fair values due to the short-term nature of such instruments.
The carrying amount of our debt and notes receivable approximate their fair value.
Valuation of Marketable Securities
An integral part of the Company’s fair value measurement process is the assessment of the type of securities as well as the securities’ liquidity and marketability. Warrants are initially valued at cost, if acquired for cash, or at intrinsic value. Convertible debt is valued based on an analysis of the implied call option and a discounted cash flow analysis of the debt component. Equity securities are valued using the quoted prices times the number of shares acquired. The securities are then evaluated based on their marketability (usually based on the restrictions on resale into the securities primary market) and liquidity.
Investments in restricted securities of public companies cannot be offered for sale to the public until the Company complies with certain statutory requirements. Investments in restricted securities of public companies are generally categorized in Level 2 of the fair value hierarchy. However, investments in public companies may be categorized in Level 3 of the fair value hierarchy depending on the level of observable liquidity. Specifically, if the Company determines the market activity is not sufficient to conclude the market activity represents an Active Market.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. The Company considers marketable securities without sufficient liquidity to sell within 6 months of the date of acquisition and securities that will not be eligible for resale in the public markets through Rule 144 for 1 year from the date acquisition to be valued with Level 2 inputs.
The contracts receivables represent a forward contractual right to receive securities pursuant to a revenue contract. As of June 30, 2022 and December 31, 2021, the Company determined the value of the securities underlying the contract asset to have a fair value of $1,394,000 and $844,000, respectively. Contracts receivable within level 3 at December 31, 2021 were received during the six months ended June 30, 2022, and are now included within marketable securities. Contract assets as of June 30, 2022 relate to new contracts for which securities have not been received.
The Company had the following financial assets at June 30, 2022 and December 31, 2021:
Balance as of June 30, 2022 | Quoted Price in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | $ | 22,095,000 | $ | 2,819,000 | $ | 10,321,000 | $ | 8,955,000 | ||||||||
| Designated assets marketable securities | 582,000 | 299,000 | 283,000 | |||||||||||||
| Contract assets | 1,394,000 | 1,394,000 | ||||||||||||||
| Total assets | $ | 24,071,000 | $ | 4,512,000 | $ | 10,604,000 | $ | 8,955,000 | ||||||||
| Liabilities: | ||||||||||||||||
| Series A Preferred Stock | $ | 1,327,000 | $ | $ | 1,327,000 | $ | ||||||||||
| Total liabilities | $ | 1,327,000 | $ | $ | 1,327,000 | $ | ||||||||||
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Balance as of December 31, 2021 | Quoted Price in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | $ | 15,617,000 | $ | 6,134,000 | $ | 2,448,000 | $ | 7,035,000 | ||||||||
| Designated assets marketable securities | 3,925,000 | 259,000 | 3,666,000 | |||||||||||||
| Contract assets | 844,000 | 844,000 | ||||||||||||||
| Total assets | $ | 20,386,000 | $ | 6,393,000 | $ | 6,114,000 | $ | 7,879,000 | ||||||||
| Liabilities: | ||||||||||||||||
| Series A Preferred Stock | $ | 3,925,000 | $ | $ | 3,925,000 | $ | ||||||||||
| Total liabilities | $ | 3,925,000 | $ | $ | 3,925,000 | $ | ||||||||||
Changes in Level 3 assets measured at fair value
The following table presents additional information about Level 3 assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of assets classified within the Level 3 category. As a result, the unrealized gains and losses for the assets and liabilities within the Level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs. Transfers to/from Levels 1, 2 and 3 are recognized at the beginning of the reporting period in which a change in valuation technique or methodology occurs. Changes in Level 3 assets measured at fair value the six months ended June 30, 2022, were as follows:
| Total | Common Stock | Convertible Debentures | Preferred Stock | Warrants | ||||||||||||||||
| Balance as of December 31, 2021 | $ | 7,035,000 | $ | 2,153,000 | $ | 4,187,000 | $ | 599,000 | $ | 96,000 | ||||||||||
| Transfers | (2,418,000 | ) | (2,062,000 | ) | (325,000 | ) | (31,000 | ) | ||||||||||||
| Additions | 2,418,000 | 480,000 | 938,000 | 1,000,000 | ||||||||||||||||
| Sales proceeds | (14,000 | ) | (14,000 | ) | ||||||||||||||||
| Realized loss | (51,000 | ) | (51,000 | ) | ||||||||||||||||
| Current period change in fair value | 1,937,000 | (304,000 | ) | 3,536,000 | (1,496,000 | ) | 201,000 | |||||||||||||
| Balance as of June 30, 2022 | $ | 8,907,000 | $ | 202,000 | $ | 8,336,000 | $ | 72,000 | $ | 297,000 | ||||||||||
Valuation processes for Level 2 and 3 Fair Value Measurements
Fair value measurement of certain of our marketable securities fall within Level 2 and 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.
The Company classifies certain assets as Level 3 assets if the estimated fair value was derived from level 3 inputs. The Company utilizes a put option pricing model to arrive at a discount for lack of marketability and liquidity associated with restrictions on sales into the public market. The Company generally classifies restricted securities in public companies as level 2, however in circumstances where the observed level of liquidity is low and the quoted market price is deemed unreliable they may be categorized in Level 3 of the fair value hierarchy. The Company considers marketable securities without sufficient liquidity to sell within 6 months of the date of acquisition and securities that will not be eligible for resale in the public markets through Rule 144 for 1 year from the date acquisition to be valued with Level 2 inputs.
The fair value of the Company’s Series A Preferred Stock may change significantly, impacting the Company’s assumptions used to estimate its fair value. The valuation of the Series A Preferred Stock is primarily based on the valuation of its underlying marketable securities. The marketable securities that are underlying the Series A Preferred Stock are classified as Designated Assets on the Company’s balance sheet and include Level 1 and Level 2 marketable securities and cash.
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The following table lists the significant unobservable inputs used to value assets classified as Level 3 of June 30, 2022. The table is not intended to be all-inclusive, but instead identifies the significant unobservable inputs relevant to the determination of fair values. The other Level 3 assets have been valued using unadjusted third-party transactions and, unadjusted historical third-party information, or the unadjusted net asset values of the securities’ issuer. No unobservable inputs internally developed by the Company have been applied to these assets, and therefore are omitted from the following table.
| Assets | Valuation Technique | Unobservable inputs | Range | |||||
| Common stocks | Put option pricing model | Discount for lack of marketability | 0% - 32.3 | % | ||||
| Convertible preferred stock | Put option pricing model | Discount for lack of marketability | 0% - 54 | % | ||||
| Convertible debt | Discounted cash flow | Maturity | 0 - 32 months | |||||
| Risk adjusted discount factor | 17.3 | % | ||||||
| Option pricing model | Volatility | 60.2% - 180 | % | |||||
| Risk-free interest rate | 2.27% - 2.96 | % | ||||||
| Dividend yield | 0 | % | ||||||
| Time to Maturity | 0 – 32 months | |||||||
Sensitivity of Level 3 measurements to changes in significant unobservable inputs
The process of estimating the fair value of securities without active markets involves significant estimates and judgement on behalf of management. These estimated fair values may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement techniques, and changes in the underlying assumptions used could significantly affect the fair value measurement amounts.
Changes in each of these significant unobservable valuation inputs will impact the fair value measurement of the financial instrument generally as follows:
| ● | An increase or decrease in the volatility of the common stock that underlies our holdings in convertible debt would result in a directionally similar change in the estimated fair value. | |
| ● | An increase or decrease in the risk-free interest rate or risk adjusted discount factor would result in an inverse change in the estimated fair value of our convertible debt. | |
| ● | An increase in the dividend yield would increase the estimated value of the convertible debt. | |
| ● | A change in the maturity may result in either an increase or decrease in estimated fair value of the convertible debt. | |
| ● | An increase or decrease in the discount for lack of marketability of our common stock holdings and the common stock that underlies our preferred stock would generally result in an inverse change in the estimated fair value. |
Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include securities in which we deem their market to be inactive or unreliable. The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next that are related to the observable inputs to a fair value measurement may result in a reclassification from one hierarchy level to another.
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NOTE 13 – RELATED PARTY TRANSACTIONS
The Company has entered into an agreement providing access to a suite at the Sofi Stadium in Los Angeles from an entity wholly owned by Christopher Miglino, our CEO. The agreement entitles the Company to game tickets, optional tickets for other stadium events, and suite and conference room access during business days. In May of 2022, the Company renewed the agreement for four (4) additional National Football League seasons for an average rate per year of approximately $497,000. The amount charged to the Company is a pass-through of the actual expenses charged by the stadium to the related party, without markup. The agreement terminates in February 2026.
NOTE 14 – SUBSEQUENT EVENTS
Extension of Outstanding Original Issue Discount Senior Secured Convertible Debentures
On July 1, 2022, the holders (“Holders”) of $1,197,000 in principal of the Company’s Original Issue Discount Senior Secured Convertible Debentures (“Debentures”), representing all of the outstanding Debentures that were originally issued on June 30, 2020, entered into an agreement with the Company to (i) extend the maturity date of the Debentures until June 30, 2023 and (ii) extend the first date that monthly redemptions are required to be made by the Company to begin on January 1, 2023 (the “Debenture Extension”). As consideration for the Debenture Extension, the Company increased the principal amount outstanding on the Debentures by five percent (5%). Additionally, the holders of the Debentures have the unilateral right to extend the maturity date and monthly redemption period by an additional six (6) month period at any time prior to January 1, 2023 for an additional five percent (5%) to be added to the outstanding principal of such Debentures. The Debentures, including the additional principal added to the Debentures are secured by substantially all of the assets of the Company pursuant to a security agreement entered into between the Company and Holders contemporaneous with the original issuance of the Debentures (the “Security Agreement”). The Company is currently in discussions with the Lender to restructure the Debentures.
Bridge Note
On July 1, 2022, the Company issued an original issue discount bridge note in principal amount of $650,000 (“Bridge Note”) to an institutional investor in exchange for $500,000 in cash. The bridge note was non-interest bearing and had a maturity date of August 15, 2022. The Company’s obligations pursuant to the bridge note were secured by substantially all of the assets of the Company pursuant to the terms of the Security Agreement.
On August 8, 2022, as described below, the Bridge Note was exchanged for a revolving note in the Senior Secured Revolving Credit Facility.
Senior Secured Revolving Credit Facility
On August 8, 2022, the Company entered into a senior secured revolving credit facility agreement with an institutional investor to initially borrow up to $9,450,000 in the aggregate from time to time (each a “Revolving Loan”). The loan maximum amount accessible is limited to $5.5 million until the Company is current with its reporting obligations. The loan is secured by all the assets of the Company and is guaranteed by the Company’s wholly owned subsidiary, LD Micro, Inc. As part of the transaction, the Company also amended and restated lender’s outstanding warrants to extend the maturity date of a total of 2,590,358 Common Stock purchase warrants until September 30, 2023.
On closing, the lender advanced $5,580,000 consisting of $4,930,000 in cash and the exchange of the existing outstanding $650,000 bridge note. Upon the Company meeting certain conditions, the Lender will advance up to an additional $3,870,000.
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The principal balance of each Revolving Loan will reflect an original issue discount of ten percent (10%); provided that beginning on the date that is twelve (12) months from the Effective Date, such original issue discount will increase to twelve percent (12%) in the event the Prime borrowing rate increases to 6.75%. The Revolving Loans have a maturity date of the earlier of (i) twenty-four (24) months from the Effective Date or (ii) the occurrence of an event of default, as described in the Loan Documents.
Commencing on the first day of each month after the Effective Date, the outstanding balance of the Revolving Loan will be paid as calculated based on a percentage of the Company’s collections from the sale of certain of its marketable securities.
The Revolving Note is initially convertible into shares of Common Stock at a conversion price of $15.00 per share (“Conversion Price”). The Conversion Price is subject to adjustment in the event of stock splits, dividends, fundamental transactions and certain future sales of the Company’s Common Stock.
As consideration for Lender entering into the Loan Documents, Lender will be entitled to receive, in addition to any payment made under the Credit Agreement, 10% of the net proceeds received by the Company from the sales of securities received during the term of the Revolving Loan.
For the Company to enter into the Credit Agreement, we were required to issue shares of the Company’s common stock as a breakup fee to an unrelated lender as a result of a failed offering. The Company is currently in discussions with the Lender to restructure the Revolving Loan.
Extension of Warrants
As part of the transactions contemplated by the Loan Documents, the Company additionally agreed to extend the expiration dates of the following outstanding Common Stock purchase warrants held by the Lender or its affiliated entities until September 30, 2023:
(a) a warrant to purchase shares of Common Stock issued on June 30, 2020, that was initially disclosed on the Company’s Current Report on Form 8-K filed with the SEC on June 30, 2020;
(b) a warrant to purchase shares of Common Stock issued on November 29, 2018, that was initially disclosed on the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2018; and
(c) a warrant to purchase shares of Common Stock issued on November 29, 2018, that was initially disclosed on the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2018;
(d) a warrant to purchase shares of Common Stock issued on October 27, 2017 that was initially disclosed on the Company’s Current Report on Form 8-K filed with the SEC on October 27, 2017.
DNA Asset Acquisition
Asset Purchase Agreement
On February 3, 2023 (the “Closing Date”), the Company entered into and consummated the transactions contemplated by the Asset Purchase Agreement (the “APA”) and the related Bill of Sale and Assignment and Assumption Agreement (the “Assignment Agreement,” and together with the Assignment Agreement, the “Transaction Documents”) with DNA Holdings, LLC, a limited liability company formed under the laws of the Commonwealth of Puerto Rico (the “Seller”), pursuant to which, subject to the terms and conditions of the APA, the Seller sold certain assets from its advisory company that is engaged in the business of, among other things, advising entrepreneurs in connection with capital structuring, marketing, developing decentralized ecosystems and providing introductions to strategic investors (the “Business”). Specifically, pursuant to the Transaction Documents, the Company acquired certain assets of the Business (the “Purchased Assets”), including $1,000,000 in cash, crypto assets, equity investments into three private companies and a customer database from the Seller (the “Acquisition”). The Seller is managed by The Roundtable LLC, which is managed by Brock Pierce, a member of the Company’s board of directors (the “Board”). The Acquisition was approved on February 3, 2023, by the Audit Committee of the Board and the Board. Mr. Pierce did not participate in discussions of the Board about whether to approve the Acquisition, and did not vote on the Acquisition at the Board meeting. In each case, it was considered that Mr. Pierce is an interested director of the Company. In each case, it also was determined, among other things, that, notwithstanding that Mr. Pierce is an interested director of the Company, the assets acquired in the Acquisition constitute fair and adequate consideration for the securities to be issued pursuant to the APA.
Pursuant to the terms of the APA, at the closing of the Acquisition (the “Closing”), in exchange for the Purchased Assets, the Company issued and delivered to Seller (i) 1,313,127 shares of the Company’s Class A common stock, par value $0.001 per share (the “Common Stock”), and (ii) 63,743 shares of the Company’s newly designated class of Series B Non-Voting Convertible Preferred Stock (the “Series B Preferred Stock”) convertible, subject to the receipt of Stockholder Approval (as defined below), into an aggregate of 3,059,664 shares of Common Stock (collectively, the “Upfront Shares”). In addition to the Upfront Shares, the Company delivered into escrow 54,908 shares of Series B Preferred Stock convertible, subject to receipt of Stockholder Approval and the Deferred Payment (as defined below), into 2,635,591 shares of Common Stock (the “Escrow Shares,” together with the Upfront Shares, the “Acquisition Shares”).
In accordance with applicable Nasdaq listing rules, the Company plans to obtain stockholder approval to issue the shares of Common Stock underlying the Series B Preferred Stock so that it may issue shares of Common Stock to the Seller in excess of 1,313,127 shares of Common Stock, the amount of shares equal to 4.99% of the issued and outstanding Common Stock on the Closing Date (“Stockholder Approval”). Within thirty (30) days, but not earlier than fifteen (15) business days after Stockholder Approval is obtained, the Seller will prepare and deliver to the Company a written determination, in the Seller’s sole and absolute discretion, of an amount equal to or less than $2,000,000 to be paid to the Company, if any (such amount to be paid to the Company, the “Deferred Payment” and such amount that will not be paid to the Company, the “Uncollected Deferred Payment”). Within five (5) business days of the delivery of such written determination, subject and upon receipt of the Deferred Payment, the Company and the Seller will instruct the Escrow Agent to release to the Company such number of Escrow Shares based upon the shares of Common Stock underlying the Series B Preferred Stock multiplied by the quotient of (i) the outstanding Uncollected Deferred Payment divided by (ii) $2,000,000. The balance of the Escrow Shares will then be released to the Seller (the “Post-Closing Adjustment”). In the event Stockholder Approval is not received on or prior to the eighteen (18) month anniversary of the Closing, the Deferred Payment will lapse and the Escrow Shares will all be released to the Company.
Amendment and Waiver Agreements
On February 3, 2023, the Company entered into an amendment and waiver agreement (the “Amendment and Waiver Agreement”) with the ATW Fund I, L.P., ATW Master Fund II, L.P. and ATW Opportunities Master Fund II, LP (each, a “Holder” and, collectively, the “Holders”), pursuant to which the parties agreed to amend or modify certain outstanding agreements to permit the consummation of the Acquisition and avoid any potential noncompliance or events of default relating to such prior agreements. The exercise and conversion prices in these agreements were amended to $per share. As part of the amendment, we extended the expiration date of the following warrants until September 30, 2023: (a) warrants to purchase shares of Common Stock issued on June 30, 2020; (b) warrants to purchase shares of Common Stock issued on November 29, 2018; (c) warrants to purchase shares of Common Stock issued on November 29, 2018 and (d) warrants to purchase shares of Common Stock issued on October 27, 2017.
Sale of LD Micro, Inc.
On March 3, 2023, the Company entered into and consummated the transactions contemplated by the Agreement and Plan of Merger (the “Merger Agreement”) with Freedom Holding Corp., a Nevada corporation (the “Parent”), Freedom U.S. Markets, LLC, a Delaware limited liability company and wholly-owned subsidiary of the Parent (the “Buyer”), LDM Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer (“Merger Sub”), LD Micro, Inc., a Delaware corporation and wholly-owned subsidiary of the Company (“LD Micro”), to sell LD Micro. Specifically, pursuant to the terms of the Merger Agreement, at the closing of the transactions contemplated by the Merger Agreement (the “Closing”), LD Micro merged with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger (the “Surviving Corporation”), in a transaction intended to qualify for tax-free treatment under Section 368(a) of the Internal Revenue Code of 1986, as amended.
At the Closing, as consideration for the sale of LD Micro by means of the Merger, the Buyer paid the Company $8,300,000 in consideration, consisting of $4,000,000 in cash (the “Cash Payment”), and shares of the Parent’s common stock, par value $ per share (the “Parent Common Stock”), which is equal to the quotient obtained by dividing (x) $4,300,000 by (y) the volume weighted average of the daily closing sales prices of the Parent Common Stock, as reported on the Nasdaq Capital Market for the thirty (30) consecutive trading days ending on the three (3) trading days prior to the Closing (the “Payment Shares,” and together with the Cash Payment, the “Merger Consideration”). The Company also entered into a four (4) year Sponsorship Agreement that provides the Company certain exclusive rights as it relates to LD Micro following the Merger, as more fully described below.
LD Micro’s President, Christopher Lahiji, is a member of the Company’s board of directors (the “Board”). The Merger was approved on March 2, 2023, by the Board. In such case, it was considered that Mr. Lahiji is an interested director of the Company with respect to the Merger. In such case, it also was determined, among other things, that, notwithstanding that Mr. Lahiji is an interested director of the Company, the Merger Consideration received for the sale of LD Micro, by means of the Merger, constitute fair and adequate consideration.
Further, in connection with the Merger, the Company also entered into a sponsorship agreement with the Surviving Corporation (the “Sponsorship Agreement”), whereby the Surviving Corporation agreed to designate the Company as an exclusive sponsor of certain flagship events that will be organized by the Surviving Corporation after the consummation of the Merger for a period of four (4) years and to provide certain benefits to the Company which include (i) exclusive virtual and live streaming partner for the events; (ii) exclusive partner to provide video recording interviews; and (iii) certain exclusivity to be the only sponsor providing SAAS platform services and digital marketing and services at the events.
Creation of Advisory Board and Stock Compensation
On July 17, 2023 the Company’s Board of Directors authorized the creation of an Advisory Board (“Advisory Board”) to provide strategic guidance and expertise to the Company in the financial technology sector. The establishment of the Advisory Board is aimed at enhancing the Company’s growth strategies and leveraging the insights and experience of industry leaders.
As part of the establishment of the Advisory Board, the Company has granted a total of shares of the Company’s common stock to the members of the Advisory Board as compensation for their services. These grants were made on July 17, 2023 and are subject to vesting schedules and terms as outlined in individual advisory agreements. The shares granted are intended to align the interests of the Advisory Board members with those of the Company’s shareholders and foster a collaborative approach to achieving the Company’s objectives.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding our business development plans, timing, strategies, expectations, anticipated expenses levels, business prospects and positioning with respect to market, demographic and pricing trends, business outlook, technology spending and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations) and express our current intentions, beliefs, expectations, strategies or predictions. These forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Special Note Regarding Forward-Looking Statements” and under “Risk Factors” and elsewhere in our annual report for the year ended December 31, 2021 filed on Form 10-K and this quarterly report. The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this quarterly report.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying unaudited Condensed Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
BUSINESS
We are a technology firm focused on enhancing communications between public companies and their shareholders and investors. We currently have two distinct business units:
| ● | Our unique SaaS platform, Sequire, which allows issuers to track their shareholders’ behaviors and trends, then use data-driven insights to engage with shareholders across marketing channels. Through Sequire, we offer tools and related data and insight services to allow issuers of publicly traded securities to better understand their position in the market. | |
| ● | LD Micro organizes and hosts investor conferences for micro and small-cap companies. |
We derive our revenues from the:
| ● | Licensing of our proprietary SaaS platform; | |
| ● | Sales of proprietary data; | |
| ● | Attendance and sponsorship fees from investor conferences and events; and | |
| ● | Sales of insight and consulting services. |
Sequire
The Sequire platform is a central hub where companies can manage certain administrative functions, reach out and engage with shareholders as well as identify potential new investors. The platform utilizes machine learning and advanced analytics to bring our clients actionable information that we believe can be used to maximize ROI through better investor and stockholder communications. Clients then can engage with targeted shareholder groups across marketing channels including email, social media, programmatic, and hyperlocal.
When interpreting data, clients can see gains and losses over time, buying/selling trends, total outstanding shares, new shareholders, and shareholders broken out by percentage. Based on this data, we can assist our users in developing customized communications campaign utilizing targeted ads and messaging.
Among other features, the Sequire platform provides its users tools to monitor investor sentiment and activities and simplify back office administration such as:
| ● | real-time level-two trading data, | |
| ● | the ability to monitor the activities of competitive public companies of the user, | |
| ● | news alerts, | |
| ● | custom survey feature to enhance shareholder communications; | |
| ● | real-time and searchable warrant and option ledgers; and | |
| ● | integrated communication between investor relations programs and corporate communication firms. |
Data Targeting
We help our clients build an investor base through targeted advertising and marketing campaigns, tailored to their needs. Using data-driven insights, we help clients meet their unique marketing objectives, whether they’re messaging existing investors, new investors, or consumers.
Our team of experts takes a deep dive into each company, building out unique messaging to suit their target investors. Once media campaigns are built, they are run through the Sequire platform across multiple target segments. We then track performance and modify the campaign for the best possible results. Our clients have needs to target particular sectors and exchanges, and the value we deliver lies in the hyper-specific investor insights necessary for that kind of focused outreach.
We are maximizing the efficacy of our media campaigns by providing our clients with custom-built landing pages that are crafted to educate, engage, and convert new investors. When a new investor clicks through an ad, they will land on a story-driven page with data-tracking software embedded to collect analytics for later use.
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Virtual Events and LD Micro
LD Micro is the premier event platform for micro-cap and small cap companies. In September of 2020, we acquired LD Micro, and hosted the 2020 Main Event on our Sequire Virtual Events platform. The 2021 Main Event had over 3,000 attendees and hosted webinars with over 500 companies. We are currently planning to expand the number and subject matter of our conferences and events. Through the events platform, we have the ability to host a variety of virtual events and conferences including investor conferences, earnings calls, shareholder meetings, annual, investor/analyst days, corporate town halls, roadshows, and more. We believe that our ability to offer users a seamless, centrally managed virtual events solution that can be customized to any industry will help transform our platform into the premier investor event tool.
Marketing and sales
We market our services through our in-house sales and marketing team. Our team focuses on social media, including Facebook, LinkedIn and Twitter, public relations (PR), industry events and the creation of white papers which assist in our marketing efforts and are used as lead generation tools.
Intellectual property
We currently rely on a combination of patents, trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary information. We currently have eight (8) US patent applications filed.
Reportable Segments
We have a single operating and business segment, Sequire, which is comprised of two business units; Sequire and LD Micro. Our Sequire segment includes the licensing of our SaaS based Sequire platform and related services, and our event and conference operations. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. All differences between our internal management reporting basis and accounting principles generally accepted in the United States of America (“GAAP”), along with certain corporate-level and other activity, are included in Corporate and Other. Our management, along with our chief executive officer, who acts as our Chief Operating Decision Maker (as such term is defined in segment reporting guidance), review financial information presented on a consolidated basis for purposes of allocating resources and evaluating performance and do not evaluate using asset information.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation.
Deconsolidation of BIGToken, Inc.
On December 29, 2021, BIGToken (formerly FPVD) completed a merger transaction with BritePool, Inc. (“BritePool”) (the “Merger”) resulting in the Company’s ownership in BIGToken being reduced from 66% to approximately 4.99%. As a result of the Merger, BIGToken issued 183,445,351,631 shares of its common stock (“Acquisition Shares”) for all of the issued and outstanding equity shares of BritePool. On December 29, 2021, as a condition for the closing of the Merger, the Company exchanged 149,562,566,534 shares of BIGToken common stock for 242,078 shares of BIGToken’s Series D Convertible Preferred Stock (“Series D Stock”) (the “Exchange”). Simultaneously with the Exchange, the Company converted 22,162 shares of the Series D Stock into 13,692,304,136 shares of BIGToken’s common stock, or approximately 4.99% of the issued and outstanding shares of BIGToken’s common stock.
The financial results of BIGToken’s business are presented as discontinued operations in our unaudited Condensed Consolidated Statement of Operations for all periods presented through the respective transaction close date as the transaction. Please see “Note 3 — Discontinued Operations” in our unaudited Condensed Consolidated Financial Statements included elsewhere in this report for additional information.
Business Focus
During the first half of 2022, we have focused on: (i) the continued growth of our Sequire platform’s functionality and user base and (ii) the expansion of LD micro events and offerings.
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FINANCIAL CONDITION
Going Concern
Cash on hand and current marketable securities at June 30, 2022 was approximately $260,000 and $3.7 million, respectively. Based upon our cash flow projections, including sale of marketable securities and the projected cash flows from operations and access to borrowings under our revolving line of credit there is significant doubt in our ability to continue to fund operations at their currently level through the remainder of the year.
The Company has incurred significant losses since its inception and has not demonstrated an ability to generate operating cash flow. In addition, the Company’s operations may require additional financial support or additional financing. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the issuance date of the consolidated financial statements. The unaudited Condensed Consolidated Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the unaudited Condensed Consolidated Financial Statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Cash and Investments
As of June 30, 2022, we had (i) cash of $260,000, and (ii) current marketable securities of $3.7 million for a total of approximately $4 million as compared to approximately $6.6 million as of December 31, 2021. Cash consist primarily of highly liquid investments such as money market funds and deposits held at major banks. Certain of such unused amounts are subject to satisfying specified conditions prior to draw-down (such as pledging to our lenders sufficient subscriptions and customer contracts).
Components of Operations
Revenues
Sequire Platform. We recognize revenue from the licensing of our Sequire platform, data, marketing and insight services performed in conjunction with the Sequire platform.
Conference Revenue. We recognize revenue from hosting conferences and associated sponsorships. We receive payment from presenting companies and sponsors of the conferences.
Operating Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated with the cost of media and data service fees from third parties, and technology and content hosting costs.
Employee related costs. These are the costs we incur to employ our staff.
Depreciation and Amortization. Depreciation and Amortization cost represent an allocation of the costs incurred to acquire the long-lived assets used in our business over their estimated useful lives. Our long-lived assets consist of property and equipment and internally developed software.
Selling, general and administrative. Selling, general and administrative expense consists primarily the costs associated with being a stand-alone public company, information technology, professional fees, human resources, facility overhead, and other general corporate expense.
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Results of Operations
Revenues
The following table presents net revenues by type for the three and six months ended June 30:
Three Months Ended June 30, | Increase (Decrease) | Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||||||||||||||||
| 2022 | 2021 | $ | % | 2022 | 2021 | $ | % | |||||||||||||||||||||||||
| Sequire platform revenue | $ | 6,420,000 | $ | 6,483,000 | $ | (63,000 | ) | (1 | )% | $ | 13,919,000 | $ | 10,991,000 | $ | 2,982,000 | 27 | % | |||||||||||||||
| Conference revenue | 1,302,000 | 345,000 | 957,000 | 277 | % | 1,302,000 | 390,000 | 912,000 | 234 | % | ||||||||||||||||||||||
| Other revenue | - | 330,000 | (330,000 | ) | (100 | )% | - | 694,000 | (694,000 | ) | (100 | )% | ||||||||||||||||||||
| Total revenue | $ | 7,722,000 | $ | 7,158,000 | $ | 564,000 | 12 | % | $ | 15,221,000 | $ | 12,075,000 | $ | 3,435,000 | 26 | % | ||||||||||||||||
Revenues for the three and six months ended June 30, 2022 increased to approximately $7.7 million and $15.2 million compared to approximately $7.2 million and $12.1 million for the three and six months ended June 30, 2021, respectively. Sequire’s revenue growth is driven by the continued growth in the platform’s subscriber base, as well as an increase in sales of Sequire’s service offerings to existing and new subscribers. As of June 30, 2022 we accepted cash and customers’ securities as compensation for services, however, as we transition to accepting only cash as compensation for services there will be a significant decrease in revenue.
Operating Expenses
The following tables presents operating expenses for the three months ended June 30, 2022 and 2021:
Three Months Ended June 30, | Increase (Decrease) | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Cost of revenues | $ | 3,593,000 | $ | 2,796,000 | $ | 1,157,000 | 41 | % | ||||||||
| % of net revenues | 51 | % | 39 | % | ||||||||||||
| Employee related costs (excluding stock based compensation presented below) | 2,031,000 | 1,666,000 | 365,000 | 22 | % | |||||||||||
| % of net revenues | 25 | % | 23 | % | ||||||||||||
| Selling, general and administrative | 2,020,000 | 1,338,000 | 682,000 | 51 | % | |||||||||||
| % of net revenues | 26 | % | 19 | % | ||||||||||||
| Depreciation and amortization | 199,000 | 189,000 | 10,000 | 5 | % | |||||||||||
| % of net revenues | 2 | % | 3 | % | ||||||||||||
| Stock based compensation | (870,000 | ) | 253,000 | (1,123,000 | ) | (444 | )% | |||||||||
| % of net revenues | (11 | )% | 4 | % | ||||||||||||
| Total expense | $ | 7,333,000 | $ | 6,242,000 | $ | 1,091,000 | 17 | % | ||||||||
| % of net revenues | 94 | % | 87 | % | ||||||||||||
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The following tables presents operating expenses for the six months ended June 30, 2022 and 2021:
Six Months Ended June 30, | Increase (Decrease) | |||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Cost of revenues | $ | 8,239,000 | $ | 5,187,000 | $ | 3,052,000 | 59 | % | ||||||||
| % of net revenues | 54 | % | 43 | % | ||||||||||||
| Employee related costs (excluding stock based compensation presented below) | 4,167,000 | 2,963,000 | 1,204,000 | 41 | % | |||||||||||
| % of net revenues | 27 | % | 25 | % | ||||||||||||
| Selling, general and administrative | 3,877,000 | 1,633,000 | 2,244,000 | 137 | % | |||||||||||
| % of net revenues | 25 | % | 14 | % | ||||||||||||
| Depreciation and amortization | 386,000 | 445,000 | (59,000 | ) | (13 | )% | ||||||||||
| % of net revenues | 2 | % | 4 | % | ||||||||||||
| Stock based compensation | (512,000 | ) | 506,000 | (1,018,000 | ) | (201 | )% | |||||||||
| % of net revenues | (3 | )% | 4 | % | ||||||||||||
| Total expense | $ | 16,157,000 | $ | 10,734,000 | $ | 5,423,000 | 51 | % | ||||||||
| % of net revenues | 106 | % | 89 | % | ||||||||||||
Cost of revenues: The increase in cost of revenues for the three and six months ended June 30, 2022 compared to the same periods in 2021 was primarily due to an increase in data and media costs required to support the growth in revenue.
Employee related costs: Employee related costs increased for the three and six months ended June 30, 2022 as compared to the same periods in the prior year was primarily due to increases in staffing expenses and headcount required to service the increased number of platform subscribers as well as an increase in the number of subscribers utilizing the Company’s service offerings.
Selling, general and administrative: The increase in general and administrative expenses for the three and six months ended June 30, 2022 compared to the same periods in 2021 was primarily driven by an increase in corporate related expenses to support the growth of the Company in areas such as technology, accounting, legal, and general corporate expenses.
Stock based compensation: Stock based compensation decreased for the three and six months ended June 30, 2022 as compared to the same periods in the prior year was due to the reversal of $1.1 million of stock based compensation previously recognized for an award for which the Company believes the achievement of the required vesting conditions have become improbable.
Total Other Expense, Net
| Three Months Ended June 30, | Six Months Ended June 30, 2022 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Other income (expense) | ||||||||||||||||
| Financing costs | (1,264,000 | ) | (305,000 | ) | (1,577,000 | ) | (9,570,000 | ) | ||||||||
| Impairment of goodwill | (10,200,000 | ) | - | (10,200,000 | ) | - | ||||||||||
| Impairment of intangibles | (1,481,000 | ) | - | (1,481,000 | ) | - | ||||||||||
| Loss on sale of fixed assets | (47,000 | ) | - | (47,000 | ) | - | ||||||||||
| Realized loss on marketable securities | (5,182,000 | ) | (584,000 | ) | (6,235,000 | ) | (878,000 | ) | ||||||||
| Current period change in fair value of marketable securities | (2,588,000 | ) | (3,978,000 | ) | 3,892,000 | 810,000 | ||||||||||
| Current period change in fair value of contract assets | (1,013,000 | ) | - | (1,513,000 | ) | - | ||||||||||
| Realized loss on designated assets | (783,000 | ) | - | (899,000 | ) | - | ||||||||||
| Current period change in fair value of designated assets | (1,689,000 | ) | - | (1,332,000 | ) | - | ||||||||||
| Change in fair value of preferred stock | 2,472,000 | - | 2,232,000 | - | ||||||||||||
| Interest income | 3,000 | 8,000 | 12,000 | 23,000 | ||||||||||||
| Other income (expense) | (1,647,000 | ) | - | (1,216,000 | ) | 14,000 | ||||||||||
| Total other expense, net | (23,419,000 | ) | (4,859,000 | ) | (18,366,000 | ) | (9,601,000 | ) | ||||||||
Other expense, net for the three months ended June 30, 2022 increased by approximately $19 million primarily due to the impairment of goodwill and intangibles, and losses in marketable securities and contract assets. Other expense, net for the six months ended June 30, 2022 increased by approximately $9 million primarily due to the impairment of goodwill and intangibles, slightly offset by a non-cash inducement charge in the prior year of $7.7 million related to our February 2021 warrant financing.
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Cash Flows
The following table presents our cash flows for the six months ended June 30, 2022 and 2021:
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash (used in) provided by: | ||||||||
| Continuing operating activities | $ | (7,246,000 | ) | $ | (8,830,000 | ) | ||
| Continuing investing activities | 3,597,000 | 430,000 | ||||||
| Continuing financing activities | 2,561,000 | 16,080,000 | ||||||
| Net cash (used in) provided by continuing operations | (1,088,000 | ) | 7,680,000 | |||||
| Net cash provided by discontinued operations | - | 1,929,000 | ||||||
| Net (decrease) increase | $ | (1,088,000 | ) | $ | 9,609,000 | |||
As of June 30, 2022, our cash on hand was approximately $260,000.
Cash flows from continuing operating activities
The primary use of cash used in operations is to pay our media, data and platform vendors, employees and others for a wide range of services. Cash flows used in continuing operating activities increased by approximately $1.6 million during the six months ended June 30, 2022, as compared to the same period in the prior year. The increase was primarily due to increases in Sequire revenue. The increase was partially offset by payments for operating expenses associated with the increase in cost and expenses required to support the growth of the Sequire business.
The Company expects to continue to use cash in excess of receipts generated from operations for the foreseeable future due to the substantial portion of the Company’s sales paid for in marketable securities of our customers. The Company classifies proceeds from the sales of marketable securities received from our customers for the payment of our services as investing activities.
Cash flows from continuing investing activities
Our principal recurring investing activities are the funding of our internal software development and the sale of marketable securities. During the six months ended June 30, 2022, as compared to the same period in the prior year, net cash provided by investing activities increased by approximately $3.2 million. The increase was primarily due to approximately $2 million in deferred payments related to our acquisition of LD Micro in the prior year.
Cash flows from continuing financing activities
During the six months ended June 30, 2022, as compared to the same period in the prior year, net cash provided by financing activities decreased by approximately $13.5 million. The increase was primarily due to $15.8 million of proceeds from the exercise of warrants in the prior year.
Liquidity
We believe that our current sources of funds will not provide us with adequate liquidity including to repay our remaining debt obligations within one year from the issuance date of the consolidated financial statements. Our future capital requirements will depend on many factors; however, the Company’s primary source of capital is the sale of marketable securities received as consideration for the licensing of our Sequire platform and the associated services. The Company’s sales of marketable securities are primarily through sale transactions that qualify for exemptions pursuant to Rule 144 of the Securities Act of 1933. The conditions required to be met to qualify for the exemptions under Rule 144 are often difficult to predict, making it difficult to predict the timing of the associated cash flows from the sales of these securities. The Company’s holdings of marketable securities are subject to risks and uncertainties such as fluctuations in pricing in the primary market, and legal restrictions that create uncertainty around realization and timing of cash flows. Additionally, other factors contribute to uncertainty of our cash flows, such as our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of Sequire.
The Company projects the sale of its marketable security holding will represent a substantial portion of the cash required for operations for the foreseeable future, and as a consequence, creates substantial doubt about the Company’s ability to continue as a going concern.
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During the six months ended June 30, 2022 the Company entered into a factoring agreement with a financial institution to sell certain accounts receivable and future sales of up to $3 million. The factoring agreement was fully paid off with the proceeds of our revolving credit facility described below.
We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies. Finally, we continually evaluate our cash needs and may decide it is best to raise additional capital or seek alternative financing sources to fund the rapid growth of our business, including through drawdowns on existing debt facilities. Conversely, we may also from time to time determine that it is in our best interests to voluntarily repay certain indebtedness early or repurchase our common stock through our Stock buy-back program.
On July 1, 2022, the Company issued an original issue discount bridge note in principal amount of $650,000 (“Bridge Note”) to an institutional investor in exchange for $500,000 in cash. The bridge note was non-interest bearing and had a maturity date of August 15, 2022. The Company’s obligations pursuant to the bridge note were secured by substantially all of the assets of the Company pursuant to the terms of the Security Agreement.
On July 1, 2022, the holders (“Holders”) of $1,102,682 in principal of the Company’s Original Issue Discount Senior Secured Convertible Debentures (“Debentures”), representing all of the outstanding Debentures that were originally issued on June 30, 2020, entered into an agreement with the Company to (i) extend the maturity date of the Debentures until December 31, 2023 and (ii) extend the first date that monthly redemptions are required to be made by the Company to begin on January 1, 2023 (the “Debenture Extension”). As consideration for the Debenture Extension, the Company increased the principal amount outstanding on the Debentures by five percent (5%). Additionally, the holders of the Debentures have the unilateral right to extend the maturity date and monthly redemption period by an additional six (6) month period at any time prior to January 1, 2023 for an additional five percent (5%) to be added to the outstanding principal of such Debentures. The Debentures, including the additional principal added to the Debentures are secured by substantially all of the assets of the Company pursuant to a security agreement entered into between the Company and Holders contemporaneous with the original issuance of the Debentures (the “Security Agreement”).
On August 8, 2022, we entered into a revolving line of credit allowing us to borrow up to $9.45 million in principal. Until such time that the Company becomes current on its reporting obligations under the Securities Exchange Act of 1934, the maximum amount accessible is limited to $5.6 million in August 2022. The revolving credit line has a two-year term with a variable repayment schedule that is tied to the proceeds the Company generates from the sale of marketable securities from its portfolio. The principal repayment as a percentage of proceeds from marketable securities is 10% for the first three months and increase up to 20% after 12 months. Further, we agreed to pay the lender in the credit facility, an amount equal to ten percent (10%) of the net proceeds actually received by us from the sale any securities of a customer that we acquired during the term of the revolving note(s).
We have historically financed our operations primarily from the sale of debt and equity securities. Recently, our operations from Sequire and LD Micro have resulted in increased revenue, but we are still not cash flow positive, and accordingly cannot fund our operations solely from our revenue. Notwithstanding our recent revolving credit facility financing (including the bridge note), for which we have received approximately $5.5 million, partially offset by the required payments we made under outstanding obligations of $3.75 million at closing, and the acquisition of liquid assets acquired in the through the DNA Acquisition of approximately $1.3 million, we may need to continue to seek capital from the sale of debt and equity securities to fund operations. Additionally, we are delinquent in our SEC reporting obligations and have been delisted from NASDAQ. Although we have been historically successful in raising capital through the sale of our equity and debt securities, and management believes that such capital sources will be available should they be required, there can be no assurance that financing will be available to us when needed in order to allow us to continue our operations, or if available, on terms acceptable to us. Further, due to our delisting from NASDAQ, raising capital through the sale of our equity or debt securities will be more challenging as investors are historically less likely to purchase securities that are not listed on a national exchange.
Series A Preferred Stock
During 2021 we issued 36,462,417 shares of our Series A Preferred Stock to Qualified Recipients (as defined below) on a 1-for-1 as converted to common stock basis (the “Dividend”). The record date for the Dividend was September 20, 2021 (the “Record Date”). The Series A Preferred Stock entitles the Qualified Recipients to receive the net proceeds from sales of certain securities received by SRAX as payment from its customers for access to the Sequire Platform services (the “Designated Assets”).
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As of the Record Date, the following holders of securities were entitled to receive the Dividend (collectively, the “Qualified Recipients”):
| (i) | each outstanding share of common stock, of which 25,160,504 shares were issued and outstanding, | |
| (ii) | each share of common stock underlying outstanding common stock purchase warrants containing a contractual right to receive the Dividend of which, 10,377,645 were outstanding, and | |
| (iii) | each original issue discount senior convertible debenture issued on June 30, 2020, containing a contractual right to receive the Dividend on an as converted to common stock basis, of which $2,486,275 of Debentures were outstanding in principal and interest, convertible into 924,268 shares of common stock. |
As of the Record Date, the Designated Assets had an aggregate value of approximately $6.5 million and consisted of securities (i) from twenty-five (25) companies that trade or are quoted on the OTC Markets, (ii) having stock prices ranging from $0.01 to $5.15, (iii) with aggregate values of the securities held by the Company ranging from $1,930 to $900,000. The Designated Assets consist of (a) 24 issuers’ common stock and (b) one (1) issuer’s convertible debt instrument that is convertible into common stock.
During the fourth quarter and portion of the third quarter of 2021, we sold an aggregate of approximately $680,000 of the Designated Assets. On January 30, 2022, we distributed the net proceeds from those shares to holders of our Series A Preferred Shares. Pursuant to the distribution, each holder of Series A Preferred Stock received approximately $0.01 per share.
As of December 31, 2021, the Designated Assets had a market value of $3,925,000.
During the six months ended June 30, 2022, we generated aggregate proceeds of approximately $427,000 in Designated Assets. On February 1, 2022 the Company paid a dividend of $0.01 per share.
As of June 30, 2022, the Designated Assets had a market value of $582,000.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies during the six months ended June 30, 2022. Critical accounting policies and the significant estimates in accordance with such policies are regularly discussed with our Audit Committee. Those policies are discussed under Note 1—Summary of Significant Accounting Policies, in the notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K filed with the SEC on October 12, 2022 for the fiscal year ended December 31, 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable, as we are a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We evaluated, under the supervision and with the participation of the principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”) as of June 30, 2022, the end of the period covered by this report on Form 10-Q. Based on this evaluation, our Chairman and Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level at June 30, 2022 because the Company has not yet completed its remediation of the material weaknesses previously identified and disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, the end of its most recent fiscal year.
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Specifically, management has determined the following:
| ● | a lack of internal valuation experts; | |
| ● | a lack of sufficient in-house qualified accounting staff; | |
| ● | a lack of validation of completeness and accuracy of internally prepared data, including key reports generated from systems, utilized in the operations of controls, leading to delays in the Company’s closing process; | |
| ● | inadequate controls and segregation of duties due to limited resources and number of employees; | |
| ● | lack of internal personnel to properly evaluate the fair value and the associated revenue recognition related to our non-cash revenue contracts; | |
| ● | substantial reliance on manual reporting processes and spreadsheets external to the accounting system for financial reporting leading to delays in the Company’s closing process; | |
| ● | lack of adequate controls in the accounting for internally developed software costs; products and services; and the recording of sophisticated, material financing transactions which are heavily dependent upon the use of estimates and assumptions and require us using consultants; | |
| ● | and our lack of experience in monitoring and administering, the Company’s internal control over financial reporting |
In addition to the material weaknesses noted above, we noted the following deficiencies that we believe to be material weaknesses:
| ● | Fair Value Measurements: deficiencies in the design of this control and excessive reliance on the work of a third party specialist resulted in undetected errors in the valuation of certain positions that results in adjustments. | |
| ● | Earnings per share; deficiencies in the design of this control resulted in preparation errors that were not prevented or detected. |
Our management concluded that considering internal control deficiencies that, in the aggregate, rise to the level of material weaknesses, we did not maintain effective internal control over financial reporting as of June 30, 2022 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
To mitigate the items identified in the assessment, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals/consultants.
Remediation
We are continuing to seek ways to remediate these weaknesses, which stem from our small workforce and limited resources. Beginning with the quarter ended March 31, 2022, the Company has hired a third party valuation company to perform the valuation of the Company’s marketable securities.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
Other than the changes noted above, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material adverse effect on our business, prospects, financial condition and results of operations, and the market price of our securities could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an adverse effect on our business or similar statements) mean that the event could or would have a material adverse effect on our business, prospects, financial condition, and results of operations, which in turn could or would have a material adverse effect on the market price of our securities. Although we have organized the risk factors below under headings to make them easier to read, many of the risks we face involve more than one type of risk. Consequently, you should read all the risk factors below carefully before making any decision to acquire or hold our securities.
The Company is supplementing the risk factors set out under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed on October 12, 2022, with the additional risk factors set out below. The risk factors below should be read in conjunction with the other risk factors set out in the 2021 Form 10-K.
Risks Related to Conflicts of Interest
Our Director Brock Pierce may have a conflict of interest with respect to the acquisition of DNA’s assets and ongoing matters relating to the transaction due to his affiliation with the Seller. As a result of this conflict of interest Mr. Pierce has abstained from voting or otherwise participating in the Board’s discussions and approval of the transaction or its terms.
We did not seek an opinion from an unaffiliated third party as to the fair value of the assets we acquired or that the price we paid for the assets we acquired is fair to our stockholders from a financial point of view.
We are not required to obtain an opinion from an unaffiliated third party that the acquired assets have a fair value in excess of the fair value of the consideration we paid. We are also not required to obtain an opinion from an unaffiliated third party indicating that the price we paid is fair to our stockholders from a financial point of view
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent sales of unregistered securities
The following information is given with regard to unregistered securities sold since January 1, 2022. The following securities were issued in private offerings pursuant to the exemption from registration contained in the Securities Act of 1933, as amended (the “Securities Act”) and the rules promulgated thereunder in reliance on Section 4(2) thereof, relating to offers of securities by an issuer not involving any public offering:
| ● | On January 2, 2022 Michael Malone, our Chief Financial Officer exercised an option to purchase 100,000 shares of our common stock that was issued on December 15, 2018. The option was exercised on a cashless basis and included 57,016 shares withheld pursuant to the cashless exercise and an additional 16,732 shares withheld for tax withholding. Accordingly, we issued Mr. Malone 26,252 shares of common stock. | |
| ● | On January 3, 2022, we issued four (4) common stock purchase options to our non-employee directors, pursuant to our amended non-employee director compensation policy. Each option entitled the holder to purchase 29,533 shares of common stock at an exercise price of $4.35 per share, for an aggregate exercise amount of $128,500. The options vest in equal quarterly over a one (1) year period from the issuance date. The options expire on the seven (7) year anniversary of the issuance date. Each option has a Black-Scholes value of $100,000. | |
| ● | During the month of January 2022, non-executive employees exercised a total of 227,667 stock options. These options were exercised on a cashless basis, and included 161,938 shares withheld pursuant to cashless exercise and tax withholdings. This resulted in the issuance of 65,729 shares of common stock. | |
| ● | On January 6, 2022, we issued our employees, options to purchase an aggregate of 380,000 shares of common stock. Each of the options has an exercise price of $4.25 per share, a term of five (5) years, and vests in equal quarterly installments over a three (3) year period from the grant date. The aggregate of the 380,000 options had a Black-Scholes value on the grant date $1,038,000. | |
| ● | On January 6, 2022, we issued Christopher Miglino, our Chief Executive Officer, an option to purchase 120,000 shares of common stock. The option has an exercise price of $4.25 per share, a term of seven (7) years and vests in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $356,000 | |
| ● | On January 6, 2022, we issued an employee an option to purchase 100,000 shares of common stock. The option has an exercise price of $4.25 per share, a term of seven (7) years and vests in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $296,000 | |
| ● | On January 6, 2022, we issued Michael Malone, our Chief Financial Officer, a conditional option to purchase 100,000 shares of Class A common stock. The option is a conditional grant, subject to shareholder approval. Assuming approval by the shareholders, the option has an exercise price of $4.25 per share, a term of seven (7) years and vests in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $296,000. |
| ● | On January 6, 2022, we issued an employee an option to purchase an aggregate of 20,000 shares of common stock. The option is a conditional grant, subject to shareholder approval. The option has an exercise price of $4.25 per share, a term of five (5) years, and vest in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $55,000. | |
| ● | On June 13, 2022, we entered into an agreement with an institutional investor whereby in exchange for the payment of $405,000 (the “Purchase Price”), the investor received (i) the right to receive the net proceeds upon the sale of certain securities of the Company (“CVR Payments”) with a quoted price equal to $674,000 (with a guaranteed minimum return of 120% of such Purchase Price and (ii) the right after 90 days but before 120 days to demand payment of 120% of the Purchase Price in cash less amounts previously paid from the CVR Payments. | |
| ● | On July 1, 2022, we issued an original issue discount bridge note in principal amount of $650,000 to an institutional investor in exchange for $500,000 in cash. The Bridge Note was non-interest bearing and a maturity date of August 15, 2022. Effective August 8, 2022, the bridge note was exchanged for revolving notes in the senior secured revolving credit facility. |
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| ● | On August 8, 2022, we entered into a senior secured revolving credit facility agreement with an institutional investor to initially borrow up to $9,450,000 in the aggregate from time to time, subject to certain conditions. The loans are secured by all of our assets. There is currently $5,580,000 in principal outstanding on the revolving loans, which are convertible into our common stock at a conversion price of $15.00 per share, subject to adjustment for stock splits, dividends, fundamental transactions, and upon sales of our equity securities at $5.00 per share or less. In addition, as part of the transaction we extended the maturity dates of 2,590,358 outstanding common stock purchase warrants held by the lender until September 30, 2023. | |
| The revolving loans are convertible into our common stock at an initial price per share of $15.00, subject to adjustment in certain enumerated events, including deemed sales of our common stock or common stock equivalents at a price per share that is $5.00 or less. | ||
On February 3, 2023, in connection with and as consideration to permit consummation of the acquisition of assets of DNA Holdings, LLC (“APA”), the Company agreed to amend the conversion price from $15.00 to $1.00 per share. | ||
| ● | On August 8, 2022, in connection with entering into the senior secured revolving credit facility, we amended and restated the terms of 2,590,358 outstanding common stock purchase warrants owned by the lender. As part of the amendment, we extended the expiration date of the following warrants until September 30, 2023: (a) warrants to purchase 1,363,636 shares of Common Stock issued on June 30, 2020; (b) warrants to purchase 166,667 shares of Common Stock issued on November 29, 2018; (c) warrants to purchase 530,027 shares of Common Stock issued on November 29, 2018 and (d) warrants to purchase 530,028 shares of Common Stock issued on October 27, 2017. | |
| ● | On February 3, 2023, in connection with the acquisition of assets of DNA Holdings, LLC (“APA”), and to the extent issued in full, the maximum number of shares of Common Stock issuable pursuant to the APA (without taking into account any post acquisition closing adjustments) will total 7,008,382 shares of Common Stock (when including 5,695,255 shares of Common Stock issuable upon conversion of the Series B Preferred Stock in accordance with the Certificate of Designation). | |
As part of the amendment, we extended the expiration date of the following warrants until September 30, 2023: (a) warrants to purchase 1,363,636 shares of Common Stock issued on June 30, 2020; (b) warrants to purchase 166,667 shares of Common Stock issued on November 29, 2018; (c) warrants to purchase 530,027 shares of Common Stock issued on November 29, 2018 and (d) warrants to purchase 530,028 shares of Common Stock issued on October 27, 2017. |
Purchases of equity securities by the issuer and affiliated purchasers.
The following table provides information about our repurchases of our common stock that is registered pursuant to Section 12 of the Securities Exchange Act of 1934 during the year ended December 31, 2022.
| Period | Total Number of Shares Purchased(b) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a)(b) | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (a)(b) | ||||||||||||
| January 1, to January 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| February 1, to February 28, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| March 1, to March 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| April 1, to April 30, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| May 1, to May 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| June 1, to June 30, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| July 1, to July 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| August 1, to August 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| September 1, to September 30, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| October 1, to October 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| November 1, to November 30, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| December 1, to December 30, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| Total | — | — | — | $ | 9,206,000 | |||||||||||
| (a) | In August 2021, our Board of Directors approved a share repurchase program pursuant to which we are authorized to repurchase up to $10,000,000 of our common stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices. The total remaining authorization for future common share repurchases under our share repurchase program was $9.2 million as of December 31, 2022. Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. The program does not have an expiration date. |
| (b) | None of the shares purchased were in reliance on the safe harbor in Exchange Act Rule 10b-18 and the Company does not currently have a 10b5-1(c) plan with regard to share being repurchases. |
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Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None
Item 6. Exhibits
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| 4.26 | Form of Series B and Series C Common Stock Warrant from August 2019 Offering | 8-K | 4.02 | 001-37916 | 8/14/19 | |||||||
| 4.27 | Form of Placement Agent Warrant from August 2019 Offering | 8-K | 4.03 | 001-37916 | 8/14/19 | |||||||
| 4.28 | Form of Class A common stock purchase warrant issued in February 2020 Offering | 8-K | 4.01 | 001-37916 | 3/5/20 | |||||||
| 4.29 | Form of Original Issue Discount Senior Secured Convertible Debenture from June 2020 Offering | 8-K | 4.01 | 001-37916 | 6/30/20 | |||||||
| 4.30 | Form of Warrant from June 2020 Offering | 8-K | 4.02 | 001-37916 | 6/30/20 | |||||||
| 4.31 | Form of Placement Agent Warrant from June 2020 Offering | S-3 | 4.06 | 333-240270 | 7/31/20 | |||||||
| 10.01 | Purchase Agreement among Richard Steel, Steel Media, and Social Reality, dated 10/30/14 | 8-K | 2.1 | 000-54996 | 11/4/14 | |||||||
| 10.02 | Asset Purchase Agreement with LeapFrog Media Trading dated 4/20/17 | 10-K | 10.02 | 001-37916 | 4/2/18 | |||||||
| 10.03 | Amendment to Asset Purchase Agreement with Leapfrog Media Trading dated 8/17/17 | 10-K | 10.03 | 001-37916 | 4/2/18 |
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| 10.24 | Form of Term Loan and Security Agreement from February 2020 Offering | 8-K | 10.01 | 001-37916 | 3/5/20 | |||||||
| 10.25 | Form of Intellectual Property Security Agreement from February 2020 Offering | 8-K | 10.01 | 001-37916 | 3/5/20 | |||||||
| 10.26 | Form of Securities Purchase Agreement from June 2020 Offering | 8-K | 10.01 | 001-37916 | 6/30/20 | |||||||
| 10.27 | Form of Registration Rights Agreement from June 2020 Offering | 8-K | 10.02 | 001-37916 | 6/30/20 | |||||||
| 10.28 | Form of Security Agreement from June 2020 Offering | 8-K | 10.03 | 001-37916 | 6/30/20 | |||||||
| 10.29 | Agreement and Plan of Merger dated September 4, 2020 between SRAX, Inc., Townsgate Merger Sub 1, and LD Micro, Inc. | 8-K | 10.01 | 001-37916 | 9/11/20 | |||||||
| 10.30 | Lock-up agreement dated September 4, 2020 between SRAX and Christopher Lahiji | 8-K | 10.02 | 001-37916 | 9/11/20 | |||||||
| 10.31 | Voting Proxy Agreement dated September 4, 2020 between SRAX and Christopher Lahiji | 8-K | 10.03 | 001-37916 | 9/11/20 | |||||||
| 10.32 | Employment Agreement between SRAX and Christopher Lahiji Dated September 4, 2020 | 8-K | 10.04 | 001-37916 | 9/11/20 |
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* Filed herein
** Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
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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.
| SRAX, INC. | ||
| August 28, 2023 | By: | /s/ Christopher Miglino |
Christopher Miglino, Chief Executive Officer, principal executive officer | ||
| August 28, 2023 | By: | /s/ Christopher Miglino |
Christopher Miglino, Interim Chief Financial Officer, principal financial and accounting officer | ||
| 45 |