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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended
or
For the transition period from ________ to ________
Commission
File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former Name)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | 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. ☒ 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 and post such files). ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 ☐ | |
| Smaller
reporting company | ||
| Emerging
growth company |
If an emerging growth company, indicate by checkmark 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 ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The issuer had shares of Class A common stock issued and outstanding as of August 13, 2021.
TABLE OF CONTENTS
| Page No | ||
| PART I - FINANCIAL INFORMATION | ||
| ITEM 1. | Financial Statements. | F-1 |
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 3 |
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk. | 13 |
| ITEM 4. | Controls and Procedures. | 13 |
| PART II - OTHER INFORMATION | ||
| ITEM 1. | Legal Proceedings. | 14 |
| ITEM 1A. | Risk Factors. | 14 |
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 24 |
| ITEM 3. | Defaults Upon Senior Securities. | 24 |
| ITEM 4. | Mine Safety Disclosures. | 24 |
| ITEM 5. | Other Information. | 24 |
| ITEM 6. | Exhibits. | 24 |
| 1 |
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, 2020, 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 $.001 par value Class A common stock.
Any reference to “BIGToken” or the “BIGToken Project” refers to our previously wholly owned subsidiary, BIGToken, Inc. and the assets used in its operations which we transferred to Force Protection Video Equipment, Inc. (“FPVD”), which became a majority owned subsidiary on February 4, 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.
| 2 |
PART 1 - FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS. |
SRAX, Inc. and Subsidiaries
Index to the Financial Statements
| F-1 |
SRAX, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| As of | As of | |||||||
| June 30,2021 | December 31, 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Marketable securities | ||||||||
| Total current assets | ||||||||
| Notes receivable | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Right of use assets | ||||||||
| Other assets | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Deferred revenue | ||||||||
| Other current liabilities | ||||||||
| Payroll protection loan - short-term | ||||||||
| OID convertible debentures | ||||||||
| Current liabilities | ||||||||
| Right of use liability - long term | ||||||||
| Payroll protection loan, less current portion | - | |||||||
| Deferred tax liability | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity | ||||||||
| Common stock, authorized shares, $ par value, and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total equity attributable to SRAX, Inc. | ||||||||
| Noncontrolling interest | - | |||||||
| Total stockholders’ equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
| F-2 |
SRAX, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
| Three Months ended | Six Months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses | ||||||||||||||||
| Employee related costs | ||||||||||||||||
| Marketing and selling expenses | ||||||||||||||||
| Platform costs | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Financing costs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain (loss) from marketable securities | ( | ) | ( | ) | ||||||||||||
| Interest income | - | - | ||||||||||||||
| Other income | - | - | - | |||||||||||||
| Change in fair value of derivative liabilities | - | ( | ) | - | ||||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss before provision for income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | - | - | - | - | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to noncontrolling interest | - | - | ||||||||||||||
| Net loss attributable to SRAX, Inc. and subsidiaries | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average shares outstanding – basic and diluted | ||||||||||||||||
See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
| F-3 |
SRAX, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the Six Months Ended June 30, 2021 and 2020
| Common Stock | Additional paid-in | Accumulated | Noncontrolling | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | | ||||||||||||||||
| Share based compensation | - | - | - | - | ||||||||||||||||||||
| Shares issued for cash | - | - | - | |||||||||||||||||||||
| Conversion of convertible debt to equity | - | - | ||||||||||||||||||||||
| Shares issued for exercise of warrants, net of offering costs | - | - | ||||||||||||||||||||||
| Warrants issued as inducement to exercise warrants | - | - | - | - | ||||||||||||||||||||
| Acquisition of noncontrolling interest of FVPD | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||
| Warrants issued by FVPD for SRAX, Inc. debenture holders | - | - | - | - | ||||||||||||||||||||
| Series B convertible preferred stock issued by FPVD | - | - | - | - | ||||||||||||||||||||
| Beneficial conversion feature FPVD series B convertible preferred stock | - | - | - | - | ||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||
| Balance, March 31, 2021 | ( | ) | ||||||||||||||||||||||
| Share based compensation | - | - | - | - | ||||||||||||||||||||
| Conversion of convertible debt to equity | - | - | - | |||||||||||||||||||||
| Shares issued for exercise of warrants, net of offering costs | - | - | ||||||||||||||||||||||
| Series B convertible preferred stock issued by FPVD | - | - | - | - | ||||||||||||||||||||
Beneficial conversion feature FPVD series B convertible preferred stock | - | - | - | - | ||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common Stock | Additional paid-in | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Share based compensation | - | - | - | |||||||||||||||||
| Relative fair value of warrants issued with notes payable | - | - | - | |||||||||||||||||
| Shares issued for extension agreement | - | - | ||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance, March 31, 2020 | ( | ) | ||||||||||||||||||
| Share based compensation | - | - | - | |||||||||||||||||
| Reclassification of warrants from liability to equity | - | - | - | |||||||||||||||||
| Shares issued for debt extinguishment | - | - | ||||||||||||||||||
| Premium on debt extinguishment | - | - | - | |||||||||||||||||
| Beneficial conversion feature | - | - | - | |||||||||||||||||
| Fair value of warrants issued with notes | - | - | - | |||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
| F-4 |
SRAX, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Unrealized loss (gain) from securities held for sale | ( | ) | ||||||
| Realized gain on securities held for sale | ( | ) | ( | ) | ||||
| Interest income | ( | ) | - | |||||
| Fair value of warrants issued by FPVD for SRAX, Inc. debenture holders | - | |||||||
| Stock based compensation | ||||||||
| Amortization of debt issue costs | ||||||||
| Loss on extinguishment of debt | - | |||||||
| Recognition of beneficial conversion feature - FPVD series B preferred stock | - | |||||||
| Warrant inducement expense | - | |||||||
| Change in fair value of derivative liabilities | - | ( | ) | |||||
| Marketable securities received for accounts receivable previously written off | ( | ) | - | |||||
| Provision for bad debts | ||||||||
| Depreciation expense | ||||||||
| Amortization of intangibles | ||||||||
| Change in right of use asset | - | |||||||
| Non-cash financing expense | - | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Prepaid expenses | ( | ) | ||||||
| Other current assets | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Other current liabilities | ( | ) | ( | ) | ||||
| Change in right of use liability | ( | ) | ( | ) | ||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities | ||||||||
| Net cash received from acquisition of FPVD | - | |||||||
| Proceeds from the sale of marketable securities | ||||||||
| Payment for deferred consideration to LD Micro | ( | ) | - | |||||
| Purchase of property and equipment | ( | ) | - | |||||
| Development of software | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Net Cash Provided by (Used in) Investing Activities | ( | ) | ||||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from issuance of FPVD series B preferred stock | - | |||||||
| Proceeds from the exercise of warrants | - | |||||||
| Proceeds from issuance of common stock | - | |||||||
| Proceeds from issuance of OID convertible debentures, less issuance cost | - | |||||||
| Proceeds from the issuance of short-term notes payable, less issuance cost | - | |||||||
| Repayment of short-term notes payable | - | ( | ) | |||||
| Proceeds from payroll protection program loan | - | |||||||
| Proceeds from the issuance of notes payable | - | |||||||
| Repayment of notes payable | - | ( | ) | |||||
| Net Cash Provided by Financing Activities | ||||||||
| Net increase in Cash | ||||||||
| Cash, Beginning of Period | ||||||||
| Cash, End of Period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Noncash investing and financing activities: | ||||||||
| Convertible notes converted into shares | $ | $ | ||||||
| Fair value of marketable securities received for revenue contracts | $ | $ | ||||||
| Vesting of prepaid common stock award | $ | $ | ||||||
| Relative fair value of warrants issued with term loan | $ | $ | ||||||
| Derivative liabilities transferred to equity | $ | $ | ||||||
| Shares of common stock issued for extension agreement | $ | $ | ||||||
| Fair value of BCF for debt financings | $ | $ | ||||||
| Fair value of warrants issued for debt financings | $ | $ | ||||||
| Premium on debt financings | $ | $ | ||||||
| Original issue discount recorded on OID convertible debentures | $ | $ | ||||||
| Payables converted into convertible notes payable | $ | $ | ||||||
See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.
| F-5 |
SRAX, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
For the Three and Six Months Ended June 30, 2021
NOTE 1 – Organization and Basis Of Presentation
Organization
SRAX, Inc. (“SRAX”, “we”, “us”, “our” or the “Company”) is a Delaware corporation formed on August 2, 2011.
The Condensed Consolidated Financial Statements consist of SRAX and its wholly owned subsidiaries LD Micro, Inc. (“LD Micro”) and SRAX’s majority owned subsidiary Force Protection Video Equipment Corporation (“FPVD”) and FPVD’s wholly owned subsidiary BIG Token, Inc. (“BIGToken”) (See Note 9 – Stockholders’ Equity Noncontrolling Interest). All intercompany transactions have been eliminated.
Our business is organized into two reportable segments: Sequire and BIGToken. The Sequire segment includes the operations of LD Micro, and the BIGToken segment includes the operations of our majority owned subsidiary FPVD and its wholly owned subsidiary BIG Token, Inc.
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 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, we organize and host investor conferences within the micro and small- cap markets, and plan to create several more niche events for the investor community. |
Each of SRAX’s business units deliver valuable insights that assist our clients with their investor relations and communications initiatives.
We are headquartered in Westlake Village, California but work as a distributed virtual Company.
Basis of Presentation
The accompanying unaudited 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, 2020 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 three and six-month period ended June 30, 2021 and 2020. The results for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021 or for any future period.
These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2020, included in the Company’s annual report on Form 10-K filed with the SEC on March 31, 2021.
RECLASSIFICATIONS—Certain balances included in prior year's financial statements have been reclassified to conform to the current year's presentation
Liquidity and Capital Resources
In connection with preparing the Condensed Consolidated Financial Statements for the six months ended June 30, 2021, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.
In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flow and cash usage forecasts, and obligations and debts. 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 has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from
the sales of its services to achieve profitable operations on a consolidated basis. In addition, BIGToken will continue to generate
losses from operations for at least one year, and will require significant additional financing until the operations achieve
profitability. These factors could create substantial doubt as to the Company’s ability to continue as a going concern for at
least one year after the date that the our unaudited Condensed Consolidated Financial Statements are issued. However, as a result of
the Company’s cash on hand of approximately $
We expect that our existing cash and cash equivalents, our accounts receivable and marketable securities as of June 30, 2021, will be sufficient to fund our anticipated level of operations, including our working capital needs, through at least August 2022.
| F-6 |
Covid-19
The ultimate impact of the COVID-19 pandemic on the operations of the Company and BIGToken continues to be unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, the Company, or BIGToken, may direct, which may result in an extended period of continued business disruption and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on both companies’ business, financial condition and results of operations.
We use Accounting Standards Codification (“ASC”) 260, “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share are the same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share.
| F-7 |
Recent Accounting Pronouncements
Changes to accounting principles are established by the Financial Accounting Standards Board’s (“FASB”) in the form of Accounting Standards Update (“ASU”) to the FASB’s Codification. We consider the applicability and impact of all ASUs on our financial position, results of operations, cash flows, or presentation thereof. The Company reviewed all recently issued pronouncement in 2021, but not yet effective, and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on the Company’s financial condition or the results of its operations.
NOTE 2 – Acquisition
On
February 4, 2021 (“Acquisition Date”), the Company completed a share exchange agreement (“Exchange Agreement”)
with FVPD (“Reverse Merger”). Pursuant to the Exchange Agreement the Company exchanged
On the Acquisition date, the assets, liabilities, and net book value of FPVD were as follows:
| Assets | ||||
| Cash | $ | |||
| Liabilities and Stockholders’ Deficit | ||||
| Series B preferred stock | ||||
| Stockholders’ deficit | ||||
| Series A preferred stock | ||||
| Series C preferred stock | ||||
| Additional paid-in capital | ||||
| Accumulated deficit | ( | ) | ||
| Total Stockholders’ deficit | ( | ) | ||
| Total Liabilities and Stockholders’ Deficit | $ |
See Note 8 - Series B Preferred Stock for the description of the series B preferred Stock.
FPVD was authorized to issue up to shares of series A preferred stock (“Series A Preferred”), $par value, which was redeemable at the option of the holder, with no fixed redemption date. As of the Acquisition Date there were shares issued and outstanding, all of which were owned by SRAX, Inc.
FPVD was authorized to issue up to shares of series C preferred stock (“Series C Preferred”) with a stated value of $. The Series C Preferred are not redeemable, but convertible into shares of common stock for each share of Series C Preferred or shares of common stock. As of the Acquisition Date and June 30, 2021, there were shares issued and outstanding.
NOTE 3 – Marketable Securities
During the second quarter of 2020, the Company began offering customers of its Sequire segment who purchase services on the Company’s proprietary SaaS platform the option to pay the contract price in securities issued by the Customer. The customers securities must be publicly quoted. In accordance with ASC 606 - Revenue Recognition, the Company will value the shares received at the fair market value of the date the contract is executed. The shares received will be accounted for in accordance with ASC 320 – Investments – Debt and Equity Securities, as such the shares will be classified as available-for-sale securities and will be measured at each reporting period at fair value with the unrealized gain or (loss) as a component of other income (expense). Upon the sale of the shares, the Company will record the gain or (loss) in the statement of operations as a component of net income (loss).
| F-8 |
The movement in this account is as follows:
| Balance as of | ||||||||||||
| June 30, | Common | Convertible | ||||||||||
| 2021 | Stock | Debentures and Preferred Stock | ||||||||||
| Balances at beginning of year | $ | $ | $ | |||||||||
| Additions | ||||||||||||
| Sale of marketable securities | ( | ) | ( | ) | ||||||||
| Change in fair value | ( | ) | ( | ) | ||||||||
| Balances at end of year | $ | $ | $ | |||||||||
| Balance as of | ||||||||||||
| December 31, | Common | Convertible | ||||||||||
| 2020 | Stock | Debentures | ||||||||||
| Balances at beginning of year | $ | $ | $ | |||||||||
| Additions | ||||||||||||
| Sale of marketable securities | ( | ) | ( | ) | ||||||||
| Change in fair value | ( | ) | ||||||||||
| Balances at end of year | $ | $ | $ | |||||||||
The
Company’s sale of securities for the six months ended June 30, 2021, were approximately $
The Company recorded as a component of other income the realized and unrealized gain on marketable securities for the three and six month periods ended June 30:
| For the three months ended June 30 | ||||||||
| 2021 | 2020 | |||||||
| Unrealized gain (loss) | $ | ( | ) | $ | ||||
| Realized gain | ||||||||
| Change in fair value of marketable securities | $ | ( | ) | $ | ||||
| For the six months ended June 30 | ||||||||
| 2021 | 2020 | |||||||
| Unrealized gain (loss) | $ | ( | ) | $ | ||||
| Realized gain | ||||||||
| Change in fair value of marketable securities | $ | ( | ) | $ | ||||
The Company accounts for its investments in equity securities in accordance with ASC 321-10 Investments - Equity Securities. The equity securities may be 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. Any dividends received are recorded in interest income, 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. Any dividends received are recorded in interest income. For equity investments without readily determinable fair values, when an orderly transaction for the identical or similar investment of the same issuer is identified, we use the valuation techniques permitted under ASC 820 Fair Value Measurement to evaluate the observed transaction(s) and adjust the fair value of the equity investment |
| F-9 |
NOTE 4 – Right To Use Asset
The Company’s leases include both lease and non-lease components which are accounted for as a single lease component as we have elected the practical expedient. Some of our operating lease agreements include variable lease costs, primarily taxes, insurance, common area maintenance or increases in rental costs related to inflation. Substantially all of our equipment leases and some of our real estate leases have terms of less than one year and, as such, are accounted for as short-term leases as we have elected the practical expedient.
Operating leases are included in the right-of-use lease assets, other current liabilities and long-term lease liabilities on our Condensed Consolidated Balance Sheet. Right-of-use assets and lease liabilities are recognized at each lease’s commencement date based on the present values of its lease payments over its respective lease term. When a borrowing rate is not explicitly available for a lease, our incremental borrowing rate is used based on information available at the lease’s commencement date to determine the present value of its lease payments. Operating lease payments are recognized on a straight-line basis over the lease term. We had no financing leases as of June 30, 2021.
We
have operating leases for office space. Our leases have remaining lease terms of
As
of June 30, 2021, there were
Three Months Ended June 30
| 2021 | 2020 | |||||||
| Operating lease expense | $ | $ | ||||||
| Short-term lease expense | ||||||||
| Total lease expense | $ | $ | ||||||
Six Months Ended June 30
| 2021 | 2020 | |||||||
| Operating lease expense | $ | $ | ||||||
| Short-term lease expense | ||||||||
| Total lease expense | $ | $ | ||||||
The below table summarizes these lease asset and liability accounts presented on our accompanying Condensed Consolidated Balance Sheets as of:
| Operating Leases | Consolidated Balance Sheet Caption | June 30, 2021 | December 31, 2020 | |||||||
| Operating lease right-of-use assets - non-current | Right of use asset | $ | $ | |||||||
| Operating lease liabilities - current | Other current liabilities | $ | $ | |||||||
| Operating lease liabilities - non-current | Right to use liability - long term | |||||||||
| Total operating lease liabilities | $ | $ | ||||||||
| F-10 |
Components of Lease Expense
We recognize lease expense on a straight-line basis over the term of our operating leases, as reported within “general and administrative” expense on the accompanying Condensed Consolidated Statement of Operations.
Weighted Average Remaining Lease Term and Applied Discount Rate
Weighted Average Remaining Lease Term |
Weighted Average Discount Rate |
||||||
| Operating leases as of June 30, 2021 | |||||||
| Operating leases as of December 31, 2020 | |||||||
Future Contractual Lease Payments as of June 30, 2021
The below table summarizes our (i) minimum lease payments over the next five years, (ii) lease arrangement implied interest, and (iii) present value of future lease payments for the years ending December 31:
| Operating Leases - future payments | ||||
| 2021 (remaining 6 months) | $ | |||
| 2022 | ||||
| 2023 | ||||
| Total future lease payments, undiscounted | ||||
| Less: Implied interest | ( |
) | ||
| Present value of operating lease payments | $ | |||
NOTE 5 – Other Current Liabilities
The following table summarizes the composition of other current liabilities presented on our accompanying Condensed Consolidated Balance Sheets:
| June 30, 2021 | December 31, 2020 | |||||||
| BIGToken point liability | ||||||||
| Operating lease liabilities - current | ||||||||
| Other current liabilities | ||||||||
| Total other current liabilities | $ | $ | ||||||
NOTE 6 – Deferred Revenue
Deferred
revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenue that will be recognized during the
succeeding 12-month period is recorded as current deferred revenue, and the remaining portion, if any, is recorded as long-term deferred
revenue. Deferred revenue during the six months ended June 30, 2021, increased by $
NOTE 7 – OID Convertible Debentures
On
June 25, 2020, the Company entered into a definitive securities purchase agreement (the “Securities Purchase Agreement or Transaction”)
with certain accredited and institutional investors for the purchase and sale of an aggregate of: (i)
$
| F-11 |
The
Debentures, mature on
In the event a holder converts a portion of its Debenture into shares of 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. The Company’s obligations under the Debentures are secured by substantially all the assets of the Company.
The
Debentures are convertible at the option of the holder into shares of Common Stock at an initial conversion price of $
The
Debentures also contain certain customary events of default provisions, including, but not limited to, default in payment of principal
or interest thereunder, breaches of covenants, agreements, representations or warranties thereunder, the occurrence of an event of default
under certain material contracts of the Company, failure to register the shares underlying the Debentures in Warrants (as described below),
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
Warrants are initially exercisable at
| F-12 |
In
connection with the offering of the Debentures, issue to the Placement Agent (as defined below), an aggregate of
Bradley
Woods & Co. Ltd. (“Placement Agent”) acted as the placement agent, in connection with the sale of the Debentures and
Warrants. As compensation, we paid the Placement agent: (i) cash commission of $1,040,000
and (ii) an aggregate of
The
Transaction closed on June 30, 2020, with approximately $
On
February 21, 2021, the Company conducted an inducement offering whereby the warrant holders were given the right to exercise the existing
warrants in exchange for replacement warrants. As a result of the inducement,
The Company evaluated all of the associated financial instruments in accordance with ASC 815 Derivatives and Hedging. Based on this evaluation, the Company has determined that no provisions required derivative accounting.
In accordance with ASC 470 - Debt, the Company first allocated the cash proceeds to the Debentures and the Warrants on a relative fair value basis, secondly, the proceeds were allocated to the beneficial conversion feature.
During
the six months ended June 30, 2021, certain Debenture holders converted $
| F-13 |
The table below summarizes the OID convertible debenture balances for the six months ended June 30, 2021:
| Principal | Debt discount | Net book value | ||||||||||
| Balances at beginning of year | $ | $ | ( | ) | $ | |||||||
| Additions | ||||||||||||
| Conversion | ( | ) | ( | ) | ||||||||
| Amortization | ||||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
During
the three and six month periods ended June 30, 2021, the Company recognized amortization expense of $
During
the three months ended June 30, 2021 the holders of the remaining Debentures notified the Company of their election to defer the inception
of amortization payments due under the Debentures until June 30, 2022. As a result of their election, the holders are entitled to a
As of June 30, 2021, the Company has classified the Debentures as current liability because management intends to redeem the remaining convertible debentures within the following 12 months.
NOTE 8 – Series B Preferred Stock
On
March 12, 2021, FPVD entered into a securities purchase agreements and registration rights agreements with accredited investors
pursuant to which investors purchased shares of Series B preferred Stock (“Series
B Stock”) for an aggregate of $
Pursuant
to the terms of the terms of the Series B Stock, (i) each share has a stated value of $,
(ii) accrues a
The conversion increases the noncontrolling interest from approximately
| F-14 |
NOTE 9 – Stockholders’ Equity
Common Stock Warrants
On
February 21, 2021 the Company entered into an agreement with the certain Debenture holders to exercise
The
New Warrants were valued using the Black Scholes option pricing model at a total of $
During the six months ended June 30, 2021, the Company: (i) received cash of approximately $4,774,000, (ii) cancelled 349,197 warrants (as a result of cashless exercises) and (iii) issued an aggregate of 1,710,078 shares of Common Stock, in connection with the exercise of outstanding warrants.
In total the Company issued a total of
A summary of the Company’s warrant activity and related information for the six months ended June 30, 2021 is as follows:
| Number of Shares | Weighted Average Strike Price/Share | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding — December 31, 2020 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | – | |||||||||||||||
| Outstanding — March 31, 2021 | $ | $ | ||||||||||||||
| Vested and exercisable — March 31, 2021 | ||||||||||||||||
| Unvested and non-exercisable - March 31, 2021 | ||||||||||||||||
| Outstanding — March 31, 2021 | $ | $ | ||||||||||||||
| Granted | – | |||||||||||||||
| Exercised | ( | ) | ||||||||||||||
| Forfeited | – | |||||||||||||||
| Outstanding — June 30, 2021 | $ | $ | ||||||||||||||
| Vested and exercisable — June 30, 2021 | ||||||||||||||||
| Unvested and non-exercisable – June 30, 2021 | ||||||||||||||||
As
part of the Company’s Convertible Debenture offering in June 2020 (as described in Note 7 – OID Convertible Debentures),
the Company negotiated the ability to release the BIGToken business, as security for the OID Convertible Debentures, for the purposes
of selling BIGToken. As consideration for the release, the Company agreed to require the purchaser of BIGToken to issue warrants in the
new entity. The warrants were to represent 13% of the new entities issued and outstanding on a fully diluted basis upon closing. As disclosed
in Note 2– Acquisitions, the Company entered into an agreement to merge BIGToken with FPVD on February 4, 2021, which required
the issuance of
| F-15 |
AT THE MARKET SALES AGREEMENT
During the six months ended June 30, 2021, the
Company sold shares of common stock, resulting in proceeds of approximately $
STOCK BASED COMPENSATION
During the Quarter ended June 30, 2021, the Company did not issue any new stock-based awards. Stock based compensation expense for the three and six months ended June 30, 2021 was $and $respectively.
Noncontrolling Interest
As
disclosed in Note 2 – Acquisition, the Company entered into an agreement to merge BIGToken with FPVD on February 4, 2021. Since
this was treated as a reverse merger, the transaction created a noncontrolling interest in FPVD. As a result, shares were issued to noncontrolling parties,
which was approximately
| Net book value of FPVD | $ | ( | ) | |
| Warrants issued by FPVD for SRAX, Inc. debenture holders | ||||
| Series B convertible preferred stock issued by FPVD | ||||
| Beneficial conversion feature FPVD series B convertible preferred stock | ||||
| Net loss attributable to noncontrolling interest | ( | ) | ||
| $ |
NOTE 10 – Fair Value of Financial Instruments
The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash and accounts payable and accrued expenses, approximate their respective fair values due to the short-term nature of such instruments.
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 quoted on the OTC Pink sheets to be fair valued with Level 2 inputs. The Company had the following financial assets of June 30, 2021 and December 31, 2020:
| Quoted Prices in | Significant | |||||||||||||||
| Balance as of | Active Markets for | Other Observable | Significant Unobservable | |||||||||||||
| June 30, | Identical Assets | Inputs | Inputs | |||||||||||||
| 2021 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Marketable securities | $ | $ | $ | $ | ||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Quoted Prices in | Significant | |||||||||||||||
| Balance as of | Active Markets for | Other Observable | Significant Unobservable | |||||||||||||
| December 31, | Identical Assets | Inputs | Inputs | |||||||||||||
| 2020 | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
| Marketable securities | $ | $ | $ | $ | ||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| F-16 |
NOTE 11 – Segment Reporting
We
have
Our Chief Operating Decision Maker (CODM) does not evaluate operating segments using asset or liability information. The following table presents revenues and gross profits by reportable segment.
| For the Three Months Ended June 30, | ||||||||||||||||||||||||||||||||||||
| SEQUIRE | BIGToken | Corporate and Other | 2021 | Consolidated | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | Eliminations | 2021 | 2020 | ||||||||||||||||||||||||||||
| Sequire platform revenue | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Conference revenue | ||||||||||||||||||||||||||||||||||||
| Consumer Media / Data | ||||||||||||||||||||||||||||||||||||
| Other | ( | ) | ||||||||||||||||||||||||||||||||||
| Total Revenue | ( | ) | ||||||||||||||||||||||||||||||||||
| Cost of Revenue | ||||||||||||||||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| For the Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||
| SEQUIRE | BIGToken | Corporate and Other | 2021 | Consolidated | ||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | Eliminations | 2021 | 2020 | ||||||||||||||||||||||||||||
| Sequire platform revenue | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Conference revenue | ||||||||||||||||||||||||||||||||||||
| Consumer Media / Data | ||||||||||||||||||||||||||||||||||||
| Other | ( | ) | ||||||||||||||||||||||||||||||||||
| Total Revenue | ( | ) | ||||||||||||||||||||||||||||||||||
| Cost of Revenue | ||||||||||||||||||||||||||||||||||||
| Gross profit | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||||||
| F-17 |
Revenue Disaggregation
The following table breaks out the revenue types for Sequire and BIGToken for the three and six months ended June 30:
| Three Months Ended | Six Months Ended | Change | ||||||||||||||||||||||||||||||
| June 30, | June 30, | Three Months | Six Months | |||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Dollar | Percentage | Dollar | Percentage | |||||||||||||||||||||||||
| Sequire platfrom revenue | $ | $ | $ | $ | $ | % | $ | n/a | ||||||||||||||||||||||||
| Conference revenue | n/a | |||||||||||||||||||||||||||||||
| Sequire revenues | % | % | ||||||||||||||||||||||||||||||
| Consumer Media / Data | − | − | − | − | − | − | − | − | ||||||||||||||||||||||||
| Platform Subscription | − | − | ||||||||||||||||||||||||||||||
| BIGtoken & Media vertical revenues | % | % | ||||||||||||||||||||||||||||||
| Other revenues | ( | ) | - | % | ( | ) | - | % | ||||||||||||||||||||||||
| Total revenues | $ | $ | $ | $ | $ | % | $ | % | ||||||||||||||||||||||||
As
of June 30, 2021 and June 30, 2020, revenue contract liabilities were approximately $
NOTE 12 – Subsequent Events
The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The following are the events after the reporting period:
PPP Loan Forgiveness
On July 20, 2021, the Company received notification from its lender that the PPP Loan was forgiven in full by the U.S. Small Business Administration at which time the Company recognized the extinguishment of debt as Other Income.
| F-18 |
| 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 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 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:
Executive Overview
Our key operating metrics and financial results for the first quarter of 2021 are as follows:
Sequire platform growth:
| ● | Sequire subscribers of 225 as of August 14, 2021, up from 200 as of March 25, 2021 | |
| ● | Over of 5 million investors within Sequire platform. |
Financial results:
| ● | Revenue was $7,677,000 million, up approximately 558% and 41% year-over-year and versus prior quarter, respectively. | |
| ● | Cash, cash equivalents and marketable securities were $34,190,000 as of June 30, 2021. |
Reportable Segments
Our current operating business is Sequire, which consists of two components: Sequire and LD Micro. We report our financial performance inclusive of the BIGToken business as we currently hold a majority interest. Our Condensed Consolidated Financial Statements include the following segments: Sequire and BIGToken. 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.
| 3 |
Business Focus
During the first half of 2021, we have continued to focus on : (i) the continued growth of our Sequire platform user base and (ii) the expansion of the LD micro events and offerings.
Covid-19
Our business has been impacted by the COVID-19 pandemic, which has resulted in authorities implementing numerous preventative measures to contain or mitigate the outbreak of the virus, such as travel bans and restrictions, limitations on business activity, quarantines, and shelter-in-place orders. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide, which have significantly impacted our business and results of operations. We are unable to predict the impact of the pandemic on user growth and engagement with any certainty, and we expect these trends to continue to be subject to volatility.
More recently, we believe the pandemic has contributed to an acceleration in the shift of commerce from offline to online, as well as increasing consumer demand for purchasing products as opposed to services, and we experienced increasing demand for our products as a result of these trends. The impact of the pandemic on our overall results of operations, remains highly uncertain for the foreseeable future.
We intend to continue to invest in our business based on our company priorities, and we anticipate that additional investments in our network infrastructure, as well as scaling our headcount to support our growth, will continue to drive expense growth in 2021.
Company Overview
About
We are a technology firm focused on enhancing communications between public companies and their investors. Our unique SaaS platform, among many features, it allows issuers to track their shareholders’ behaviors and trends, then use data-driven insights to engage with investors across marketing channels.
Our endeavor to unlock the value of data for our clients drove us to develop this platform, acquire LD Micro, and begin cultivating the Sequire Community. Each piece of the SRAX puzzle delivers valuable insights that assist our clients with their marketing and advertising efforts.
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.
Through the acquisition of LD Micro, we organize and host investor conferences within the micro and small- cap space, and plan to create several more niche events for the investor community.
We derive our revenues from the:
| ● | Licensing of our proprietary SaaS platform; and | |
| ● | Sales of proprietary consumer data; and | |
| ● | Attendance and sponsorship fees from investor conferences and events; and | |
| ● | Sales of digital advertising campaigns. |
Sequire
The Sequire platform is a central hub where companies reach out and engage with shareholders, manage their outstanding securities, and identify potential investors.
This powerful software utilizes machine learning and advanced analytics to bring our clients actionable information that can be used to maximize ROI, as an innovative investor communication tool.
We built the Sequire platform to help our customers understand shareholder behavior, including the ability to identify buyers and sellers. Clients then have the ability to 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. Every bit of this data helps how we target ads and craft messaging to leverage the desired outcome for a client.
| 4 |
An important part of monitoring shareholders is the greater context of the investment landscape. Sequire features real-time level-two trading data, the ability to monitor competition, news alerts, and more.
We are always seeking ways to improve our clients’ communications with their shareholders, and we built a custom survey feature so that they could ask questions to all their shareholders at once or to specified groups.
The Sequire platform also allows users to manage warrants, attaining high-level insight by year and month, including a list of expiring and outstanding warrants. They can then calculate what their proceeds could be if those warrants were issued before they expire. Clients can also keep tabs on investor relations programs and corporate communication firms, all in one place.
We expanded the functionality of Sequire to include the hosting of virtual events, as more and more networking functions are being held in the digital space. Clients can attend an event held by industry guests or hold a conference themselves. They then have the ability to import contacts from those events directly into their own list for later use and targeting.
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.
Virtual Events and LD Micro
LD Micro was originally founded in 2006 as an independent resource for the microcap world. It quickly grew into a premier event platform in the space, successfully connecting investors and promoting small cap businesses. In September of 2020, we acquired LD Micro, and hosted the 2020 Main Event on our Sequire Virtual Events platform. We are proud to say we had over 50K attendees and hosted webinars with 250 companies.
The LD Micro Main Event is one of the most influential conferences in the small-cap space, and our acquisition has been able to provide LD access to our growing database of 5M+ investors.
At our core, we are in the business of helping companies connect to their audience, and creating events where companies are presenting to investors is a great way to execute on our mission. The LD Micro Main Event is just the start.
We are currently expanding our slate of events to include specialty conferences for individual industries such as: EdTech, FinTech, Minerals, Pharma, etc. We have built up a retail investor community of 5M+, and the ability to help educate investors with these events is valuable to our investor community.
We see the Sequire Virtual Events platform growing into the premier investor event tool. With the help of our events team, companies have the ability to create and organize their own webinars at scale. The Covid-19 Pandemic certainly created growth in this space, but we believe that virtual events are the future of targeted investor communication.
| 5 |
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 functionality is key, and some of the features we offer include multi-presenter capabilities, integrated graphic presentation options, tech support, real-time analytics, audience polling, downloadable resource offerings, and more. Each presentation, when concluded, delivers an analytics report to the client for data-driven review.
We are offering users a seamless, centrally-managed virtual events solution that can be customized to any industry. Sequire Virtual Events has already demonstrated success with the LD Micro Main Event, and we will continue to devote resources to the growth of this area of our business.
Sequire Community
Building a thriving community is often an overlooked aspect of business. With a significant number of investors aware of the LDMicro brand, we are moving to ensure that those people become passionate advocates, engaging with each other on a wide range of topics.
We have plans to develop investor education tools, host professional investment events, and cultivate a mature, educated community. Our vision for the Sequire Community is that it becomes a place where people can communicate and network, to learn and grow as investors, and ultimately become brand advocates.
| 6 |
FINANCIAL CONDITION
Cash, Cash Equivalents, and Investments
Cash, cash equivalents, and marketable securities totaled approximately $34,190,000 and $8,898,000 as of June 30, 2021 and December 31, 2020. Our marketable securities have been obtained through our Sequire business as payment for our services. They consist predominantly of debt and equity securities, diversified among industries and individual issuers. The investments are all U.S. dollar-denominated securities, but also include foreign issuer securities to diversify risk. Cash and cash equivalents consist primarily of highly liquid investments such as money market funds and deposits held at major banks.
Liquidity and Capital Resources
We believe that our existing cash and cash equivalents, marketable securities, and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, sales of our marketable securities, 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, and the current uncertainty in the global markets resulting from the ongoing COVID-19 pandemic on our customers’ businesses and operations. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.
A substantial source of our cash from operations and investing activities is from our deferred revenue, which is included in the liabilities section of our condensed consolidated balance sheet. Deferred revenue consists of the unearned portion of our Sequire contracts, which will be recognized as revenue in accordance with our revenue recognition policy. As of June 30, 2021, we had deferred revenue of $13,186,000, all of which is classified as a current liability and expected to be recognized as revenue in the next 12 months, provided all other revenue recognition criteria have been met.
At the Market Sales Agreement
In May 2020, we entered into an at-the-market Sales Agreement with B. Riley FBR, Inc. (“ATM”). Pursuant to the terms of the ATM, we may issue and sell up to $3,150,000 of our Common Stock, from time to time, through our B. Riley FBR, Inc. During the six months ended June 30, 2021, we sold 53,616 shares of Common Stock at a weighted average sales price of $5.62 and received net proceeds from such sales of $284,000. To date we have sold an aggregate of $302,000 of securities pursuant to our ATM and have future availability of $2,823,000.
Valuation
In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government securities, common and preferred stock, and mutual funds. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. Level 3 investments are valued using internally developed models with unobservable inputs. Assets and liabilities measured at fair value on a recurring basis using unobservable inputs are an immaterial portion of our portfolio.
Goodwill
We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (December 31 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.
| 7 |
The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.
Components of Results of Operations
Sequire 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.
Cost of Revenue and Operating Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated with the cost of media from third parties.
Employee Related Costs. These are the costs we incur to employ our staff.
Platform costs. Consist of the technology and content hosting of our Sequire platform and BIGToken platform.
Marketing, data services and sales. These are the costs we incur to market our products, data service fees and third-party selling costs.
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.
General and administrative. General and administrative expense consists primarily of human resources, information technology, professional fees, IT and facility overhead, and other general corporate expense. We expect our general and administrative expense to increase in absolute dollars primarily as a result of the increased costs associated with being a stand-alone public company. However, we also expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.
Results of operations
Selected Segment Financial Data
Quarter Ended June 30, 2021 compared to quarter ended June 30, 2020 (in $’s)
| For the Three Months Ended June 30, (Unaudited) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sequire | BIGToken | Corporate and Other | Eliminations | Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 vs. 2020 Change | 2021 | 2020 | 2021 vs. 2020 Change | 2021 | 2020 | 2021 vs. 2020 Change | 2021 | 2020 | 2021 vs. 2020 Change | 2021 | 2020 | 2021 vs. 2020 Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sequire platform revenue | 6,483,000 | 746,000 | 5,737,000 | 769 | % | - | - | - | n/a | - | - | - | n/a | - | - | - |
n/a | 6,483,000 | $ | 746,000 | 5,737,000 | -100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conference revenue | 345,000 | - | 345,000 | n/a | - | - | - | n/a | - | - | - | n/a | - | - | - | n/a | 345,000 | $ | - | 345,000 | n/a | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BIGtoken revenue | - | - | - | n/a | 849,000 | 377,000 | 472,000 | 125 | % | - | - | - | n/a | - | - | - | n/a | 849,000 | $ | 377,000 | 472,000 | -100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | - | - | - | n/a | - | - | - | n/a | 330,000 | 42,000 | 288,000 | 686 | % | (330,000 | ) | - | - | n/a | - | $ | 42,000 | (42,000 | ) | -100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | 6,828,000 | 746,000 | 6,082,000 | 815 | % | 849,000 | 377,000 | 472,000 | 125 | % | 330,000 | 42,000 | 288,000 | 686 | % | (330,000 | ) | - | - | n/a | 7,677,000 | 1,165,000 | (1,165,000 | ) | -100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of Revenue | 1,146,000 | 231,000 | 915,000 | 396 | % | 235,000 | 164,000 | 71,000 | 43 | % | 72,000 | 1,000 | 71,000 | 7100 | % | 0 | 0 | - | n/a | 1,453,000 | $ | 396,000 | 1,057,000 | -100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 5,682,000 | 515,000 | 5,167,000 | n/m | 614,000 | 213,000 | 401,000 | 188 | % | 258,000 | 41,000 | 217,000 | 529 | % | (330,000 | ) | 0 | - | n/a | 6,224,000 | 769,000 | 5,455,000 | -100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| margin % | 83.2 | % | 69.0 | % | 85 | % | 72.3 | % | 56.5 | % | 85 | % | 78.2 | % | 97.6 | % | 75.3 | % | 100.0 | % | 81.1 | % | 66.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses | 2,583,000 | 620,000 | 1,963,000 | 317 | % | 2,599,000 | 2,523,000 | 76,000 | 3 | % | 2,441,000 | 875,000 | 1,566,000 | 179 | % | (330,000 | ) | 0 | - | n/a | 7,293,000 | $ | 4,018,000 | 3,275,000 | -100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Income | $ | 3,099,000 | (105,000 | ) | 3,204,000 | -3051 | % | (1,985,000 | ) | (2,310,000 | ) | 325,000 | -14 | % | (2,183,000 | ) | (834,000 | ) | (1,349,000 | ) | 162 | % | 0 | 0 | - | n/a | -1,069,000 | -3,249,000 | 2,180,000 | -100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Six months ended June 30, 2021 compared to six months ended June 30, 2020
| For the Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sequire | BIGToken | Corporate and Other | Eliminations | Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 vs. 2020 Change | 2021 | 2020 | 2021 vs. 2020 Change | 2021 | 2020 | 2021 vs. 2020 Change | 2021 | 2020 | 2021 vs. 2020 Change | 2021 | 2020 | 2021 vs. 2020 Change | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | % | $ | % | $ | n/a | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Sequire platform revenue | 10,991,000 | 852,000 | 10,139,000 | n/m | - | - | - | n/a | - | - | - | n/a | - | - | - | n/a | 10,991,000 | $ | 852,000 | 10,139,000 | n/m | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Conference revenue | 390,000 | - | 390,000 | n/a | - | - | - | n/a | - | - | - | n/a | - | - | - | n/a | 390,000 | $ | - | 390,000 | n/a | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BIGtoken revenue | - | - | - | n/a | 1,704,000 | 570,000 | 1,134,000 | 199 | % | - | - | - | n/a | - | - | - | n/a | 1,704,000 | $ | 570,000 | 1,134,000 | -100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | - | - | - | n/a | - | - | - | n/a | 694,000 | 94,000 | 600,000 | 638 | % | (660,000 | ) | - | - | n/a | 34,000 | $ | 94,000 | (60,000 | ) | -100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Revenue | 11,381,000 | 852,000 | 10,529,000 | n/m | 1,704,000 | 570,000 | 1,134,000 | 199 | % | 694,000 | 94,000 | 600,000 | 638 | % | (660,000 | ) | - | - | n/a | 13,119,000 | 1,516,000 | (1,516,000 | ) | -100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of Revenue | 2,534,000 | 245,000 | 2,289,000 | 934 | % | 508,000 | 262,000 | 246,000 | 94 | % | 61,000 | 1,000 | 60,000 | 6000 | % | 0 | 0 | - | n/a | 3,103,000 | $ | 508,000 | 2,595,000 | -100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 8,847,000 | 607,000 | 8,240,000 | n/m | 1,196,000 | 308,000 | 888,000 | 288 | % | 633,000 | 93,000 | 540,000 | 581 | % | (660,000 | ) | 0 | - | n/a | 10,016,000 | 1,008,000 | 9,008,000 | -100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| margin % | 77.7 | % | 71.2 | % | 78 | % | 70.2 | % | 54.0 | % | 78 | % | 91.2 | % | 98.9 | % | 90 | % | 100.0 | % | 76.3 | % | 66.5 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses | 4,515,000 | 805,000 | 3,710,000 | 461 | % | 4,702,000 | 5,669,000 | (967,000 | ) | -17 | % | 3,954,000 | 1,657,000 | 2,297,000 | 139 | % | (660,000 | ) | 0 | - | n/a | 12,511,000 | $ | 8,131,000 | 4,380,000 | -100 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Operating Income | $ | 4,332,000 | (198,000 | ) | 4,530,000 | -2288 | % | (3,506,000 | ) | (5,361,000 | ) | 1,855,000 | -35 | % | (3,321,000 | ) | (1,564,000 | ) | (1,757,000 | ) | 112 | % | 0 | 0 | - | n/a | (2,495,000 | ) | (7,123,000) | 4,628,000 | -100 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
2020 was the first full year of operations for our Sequire business. During the three months ended June 30, 2021 our customer base grew to approximately 225 subscribing companies. We charge a base monthly license fee for a Sequire subscription, which ranges from $1,000 per month up to $5,000 per month.
During the third quarter of 2020, we acquired LD Micro, Inc. LD Micro’s primary line of business was the hosting of investor related conferences. Historically, LD Micro’s investor conferences have been in-person, however, during the past year we have successfully hosted virtual conferences leveraging Sequire’s platform technology to execute these events.
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Sequire revenues
Sequire revenues for the three and six month periods ended June 30, 2021 increased to $6,483,000 and $10,991,000 compared to $746,000 and $852,000 for the comparable periods of 2020. Sequire’s continued growth was primarily driven by the growth of the services provided to issuers through the Sequire platform. During the quarter ended June 30, 2021 the Company closed sales with total contract value of approximating $11.1 million.
Sequire Profit Margin
Sequire’s costs of revenue consist primarily of media acquired from third parties to fulfill the advertising components of our revenues. Sequire’s profit margin for three and six month periods ended June 30, 2021 was 83.2% and 77.7%, respectively.
Sequire Operating Expenses
Sequire’s operating expenses for the three and six month period ended June 30, 2021 were $2,583,000 and $4,515,000, respectively compared to $620,000 and $805,000 for the comparable periods of 2020.
Operating expenses consisted of the following:
Employee Related Costs. These are the costs we incur to employ our staff. Employee related costs increased to $1,016,000 and $1,852,000 during the three and six month periods ended June 30, 2021 compared to $510,000 and $610,000 for the comparable periods of 2020. The increase is primarily the result of an increase in staffing expenses due to an increase in the number of employees in all departments of the business to support the growth in operations during the year. We expect these expenses to continue to increase in absolute dollars as revenue increases.
Platform costs. Consist of the technology and content hosting. Platform costs for the three and six month periods ended June 30, 2021 were $31,000 and $53,000. We expect these costs to continue to increase in absolute dollars as we continue to grow but expect that they continue to decrease as a percentage of our revenues.
Marketing, data services and sales. These are the costs we incur to market our products and third-party services and selling costs. Marketing, data services and sales for the three and six month periods ended June 30, 2021 were $1,246,000 and $2,137,000 compared to $69,000 and $109,000 for the comparable periods of 2020. We expect these costs to continue to grow in nominal dollars as we continue to grow but expect that they continue to decrease as a percentage of our revenues.
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 primarily consist of internally developed software. For the three and six month periods ended June 30, 2021 depreciation and amortization was $60,000 and $135,000 compared to $31,000 and $57,000 for the comparable periods of 2020. We expect these expenses to continue to increase as we anticipate further investment in long-lived assets to support our business growth.
General and administrative. General and administrative expense consists primarily of, information technology, professional fees, IT and facility overhead. We expect our general and administrative expense to increase in absolute dollars primarily as a result of the increased costs associated with being a stand-alone public company. However, we also expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense. For the three months and six month periods ended June 30, 2021 general and administrative expenses were $230,000 and $338,000 as compared to $10,000 and $29,000 for the comparable periods of 2020.
BIGToken revenues
BIGToken revenues for the three months ended June 30, 2021 increased to $849,000 or 125% compared to $377,000 during the three months ended June 30, 2020. BIGToken revenues for the six months ended June 30, 2021 increased to $1,704,000 or 199% compared to $570,000 during the six months ended June 30, 2020. This increase was primarily driven by the increased acceptance of our product offering, the growth of our product offering and the continued investment in BIGToken user database.
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BIGToken Profit Margin
BIGToken’s costs of revenue consist of media acquired from third parties to fulfill the media and advertising components of our revenues. Profit margin for the three months ended June 30, 2021 increased to 72% as compared to 57% for the three months ended June 30, 2020. Profit margin for the six months ended June 30, 2021 increased to 70% as compared to 54% for the six months ended June 30, 2020. The increase is driven by increased revenues and enhanced operational execution.
BIGToken Operating Expenses
Our operating costs for the three months ended June 30, 2021 increased to $2,599,000 or by $76,000 or 3% as compared to $2,523,000 for the three months ended June 30, 2020. Our operating costs for the six months ended June 30, 2021 decreased to $4,702,000 or by $967,000 or 17% as compared to $5,669,000 for the six months ended June 30, 2020. The increase in operating expense is primarily attributable to an increase in General and Administrative costs as further discussed below.
Employee Related Costs. These are the costs we incur to employ our staff. For the three months ended June 30, 2021 employee related costs decreased to $936,000 from $1,208,000 for the three months ended June 30, 2020, representing an decrease of approximately $272,000 or 23%. For the six months ended June 30, 2021 employee related costs decreased to $1,702,000 from $3,076,000 for the six months ended June 30, 2020, representing a decrease of approximately $1,374,000 or 45%. The decrease is primarily due to a reduction in employees in our sales and operations departments.
Platform costs. Consist of the technology and content hosting. Platform costs for the three months ended June 30, 2021 were $81,000 as compared to $113,000 for the three months ended June 30, 2020, representing a decrease of $32,000 or 28%. Platform costs for the six months ended June 30, 2021 were $167,000 as compared to $252,000 for the six months ended June 30, 2020, representing a decrease of $85,000 or 34%. The decrease in expenses is driven by a $53,000 allocation of current year platform costs to Sequire. We expect these costs to increase in absolute dollars as we continue to grow our user database but expect that they will decrease as a percentage of our revenues.
Marketing, data services and sales. These are the costs we incur to market our products including the expenses we incur through BIGToken point redemptions. For the three months ended June 30, 2021 and 2020 the company incurred $99,000 and $8,000 respectively in expenses related to payments to users and accruals for future redemptions. Marketing, data services and sales for the three months ended June 30, 2021 and 2020 were $224,000 and $189,000 respectively. For the six months ended June 30, 2021 and 2020 the company incurred $164,000 and $46,000 respectively in expenses related to payments to users and accruals for future redemptions. Marketing, data services and sales for the six months ended June 30, 2021 and 2020 were $325,000 and $418,000 respectively. We expect these costs to continue to grow in nominal dollars as we continue to grow but expect that they continue to decrease as a percentage of our revenues.
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 primarily consist of internally developed software. For the three months ended June 30, 2021 and 2020, depreciation and amortization was $139,000 and $237,000 respectively. For the six months ended June 30, 2021 and 2020, depreciation and amortization was $281,000 and $506,000 respectively. We expect these expenses to increase as we anticipate further investment in long-lived assets to support our business growth.
General and administrative. General and administrative expense consists primarily of, information technology, professional fees, IT, facility overhead and an allocation of corporate overhead. General and Administrative expenses were $1,120,000 for the three months ended June 30, 2021, which represents an increase of $352,000 or 46%. General and Administrative expenses were $2,063,000 for the six months ended June 30, 2021, which represents an increase of $692,000 or 50%. We expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.
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Corporate and Other Operating Expenses
Corporate and Other Operating expense consists primarily of human resources, information technology, professional fees, IT and facility overhead, and other general corporate expense. General and Administrative expenses were $2,441,000 and $3,954,000 for the three and six months ended June 30, 2021, as compared to $875,000 and $1,657,000 for the same periods in 2020. The increase in expense for the three-month period is driven by an increase in corporate employee and staffing related expenses to support the growth of the Company and continued support for the BIGToken operations.
We expect our general and administrative expense to increase in absolute dollars as we continue to grow our business. However, we also expect our general and administrative expense to decrease as a percentage of our revenues as revenues increase.
The following table presents working capital as of June 30, 2021 and December 31, 2020:
| 2021 | 2020 | |||||||
| Cash, cash equivalents and marketable securities | $ | 34,190,000 | $ | 8,898,000 | ||||
| Working capital | $ | 15,738,000 | $ | (7,162,000 | ) | |||
Cash flows from operating activities
The primary use of operating cash is to pay our media, data and platform vendors, employees and our users through point redemptions, others for a wide range of services. Cash flows used in operating activities increased by $7,932,000 during the six months ended June 30, 2021 primarily driven by an increase in operating expenses and costs of revenues, partially offset by increases in cash receipts and revenues.
Cash flows from 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, 2021, net cash provided by investing activities was $1,385,000 as compared to net cash used of $175,000 for the six months ended June 30, 2020. Expenditures for software development were $354,000 and $575,000 for the three months ended June 30, 2021, and 2020, respectively. During the six months ended June 30, 2021, the Company generated $2,903,000 from the sale of marketable securities.
Cash flows from financing activities
During the six months ended June 30, 2021 we generated net cash provided by financing activities of $20,890,000. During the six months ended June 30, 2020 cash provided by financing activities was $9,489,000. These proceeds consisted of the following:
| 2021 | 2020 | |||||||
| Proceeds from warrant exercises | $ | 15,796,000 | $ | − | ||||
| Sale of Common stock | 284,000 | − | ||||||
| Subsidiary sale of Preferred shares | 4,810,000 | − | ||||||
| Proceeds from the issuance of notes payable | − | 8,415,000 | ||||||
| Proceeds from payroll protection program | − | 1,074,000 | ||||||
| Total | 20,890,000 | 9,489,000 | ||||||
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Employees and Human Capital Resources
As of June 30, 2021, we had 158 full-time employees. 7 are engaged in executive management such as our Chief Executive Officer, 100 in information technology including those participating in our research and development efforts, 27 in sales and marketing, 16 in integration and customer support and 8 in administration. All employees are employed “at will.” We believe our relations with our employees are generally positive and we have no collective bargaining agreements with any labor unions.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new employees. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel, whether existing employees or new hires, through the granting of stock-based and cash-based compensation awards. We believe that this increases value to our stockholders and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives.
As the success of our business is fundamentally connected to the well-being of our employees, we are committed to their health, safety and wellness. We provide our employees and their families with access to convenient health and wellness programs, including benefits that provide protection and security giving them peace of mind concerning events that may require time away from work or that impact their financial well-being; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees, as well as the community in which we operate, and which comply with government regulations, including working in a remote environment where appropriate or required.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.
Recently Issued Accounting Pronouncements
For further information on recently issued accounting pronouncements, see Note 1—Summary of Significant Accounting Policies in the accompanying notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K.
Off balance sheet arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
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| 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, 2021, 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, 2021.
Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures.
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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
There were no changes in our internal control over financial reporting during the three months ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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.
Risks Related to our Business
We have a history of operating losses and there are no assurances we will report profitable operations in the foreseeable future.
For the year-ended December 31, 2020 and 2019, we reported losses from operations $11,597,000 and $17,858,000, and accumulated deficit of $50,342,000 and $35,637,000, respectively. Additionally, for the six months ended June 30, 2021 and 2020, we recorded losses from operations of $2,495,000 and $7,123,000. Our future success depends on our ability to continue to grow our revenues, contain our operating expenses and generate profits. We do not have any long-term agreements with our customers. There are no assurances that we will be able to increase our revenues and cash flow to a level which supports profitable operations. We may continue to incur losses in future periods until such time, if ever, as we are successful in significantly increasing our revenues and cash flow beyond what is necessary to fund our ongoing operations and pay our obligations as they become due. If we significantly increase our revenues in future periods, the rapid growth may strain our organization and we may encounter difficulties in maintaining the quality of our operations. If we are not able to successfully increase our revenues, it is unlikely we will be able to generate sufficient cash from operations to pay our operating expenses and service our debt obligations or report profitable operations in future periods.
Our auditors have expressed substantial doubt about our ability to continue as a going concern.
Our auditors’ report on our December 31, 2020 Consolidated Financial Statements expresses an opinion that our capital resources as of the date of their audit report were not sufficient to sustain operations or complete our planned activities for the upcoming year unless we raised additional funds. Our cash position on June 30, 2021, was $10,060,000. Based upon our cash position, other resources, operating plan and anticipated revenues, management anticipates that is has sufficient cash and short term assets to fund the company’s operating through at least August of 2022. Accordingly, management feels they have alleviated the concerns contained in our audit report regarding the company’s ability to continue as a going concern.
A pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or advisors could adversely impact our business.
If a pandemic, epidemic, or outbreak of an infectious disease including the recent outbreak of respiratory illness caused by a novel coronavirus (COVID-19) or other public health crisis were to affect our operations, facilities or those of our customers or suppliers, our business could be adversely affected. A pandemic typically results in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only materially impact our operations, financial condition and demand for our services but our overall ability to react timely to mitigate the impact of this event. Also, it may hamper our efforts to comply with our filing obligations with the Securities and Exchange Commission.
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We may need to raise additional capital to pay our indebtedness as it comes due.
In June 2020, we entered into a securities purchase agreement with institutional investors for the issuance of approximately $16.1 million in principal of debentures. Pursuant to the terms of the debentures (subject to two (2) additional deferrals of six (6) months each in exchange for increased principal added to the Debentures), we will be required to begin making amortization payments on the debentures beginning on June 30, 2022. Payment of the debentures is secured by substantially all the assets and the intellectual property of the Company. Although we have recently achieved profitability, we may not be able to generate sufficient cash flow to repay the debentures as they come due. As of June 30, 2021, the outstanding balance of the debentures was approximately $3 million. If we are not able to generate enough cashflow through the operation of our business, we will need to raise additional capital through the sale of debt or equity or the sale of assets, in order to make the required amortization payments. If we are unable to make the required payments, or if we fail to comply with the various requirements and covenants of the debentures, we would be in default, which would permit the holders of the debentures to accelerate the maturity and require immediate repayment and lead to potential foreclosure on the assets securing the debt. If we are unable to refinance or repay our indebtedness as it becomes due, including upon an event of default, we may become insolvent and be unable to continue operations.
Our failure to maintain an effective system of internal control over financial reporting, has resulted in the need for us to restate previously issued financial statements. As a result, current and potential stockholders may lose confidence in our financial reporting, which could harm our business and value of our stock.
Or management has determined that, as of June 30, 2021, we did not maintain effective internal controls over financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework as a result of identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Natural disasters, epidemic or pandemic disease outbreaks, trade wars, political unrest or other events could disrupt our business or operations or those of our development partners, manufacturers, regulators or other third parties with whom we conduct business now or in the future.
A wide variety of events beyond our control, including natural disasters, epidemic or pandemic disease outbreaks (such as the recent novel coronavirus outbreak), trade wars, political unrest or other events could disrupt our business or operations or those of our manufacturers, regulatory authorities, or other third parties with whom we conduct business. These events may cause businesses and government agencies to be shut down, supply chains to be interrupted, slowed, or rendered inoperable, and individuals to become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. These limitations could negatively affect our business operations and continuity, and could negatively impact ability to timely perform basic business functions, including making SEC filings and preparing financial reports. If our operations or those of third parties with whom we have business are impaired or curtailed as a result of these events, the development and commercialization of our products and product candidates could be impaired or halted, which could have a material adverse impact on our business.
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Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our business.
The United States and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict our ability to collect, process, use, transfer and pool data collected from and about consumers and devices. Trade associations and industry self-regulatory groups have also promulgated best practices and other industry standards relating to targeted advertising. Various U.S. and foreign governments, self-regulatory bodies and public advocacy groups have called for new regulations specifically directed at the digital advertising industry, and we expect to see an increase in legislation, regulation and self-regulation in this area. The legal, regulatory and judicial environment we face around privacy and other matters is constantly evolving and can be subject to significant change. For example, the General Data Protection Regulation, or GDPR, which was agreed by E.U. institutions in 2016 and came into effect after a two year transition period on May 25, 2018, updated and modernized the principles of the 1995 Data Protection Directive and significantly increases the level of sanctions for non-compliance. Data Protection Authorities will have the power to impose administrative fines of up to a maximum of €20 million or 4% of the data controller’s or data processor’s total worldwide turnover of the preceding financial year. Similarly, the E-Privacy Regulation, which was launched by the European Parliament in October 2016, could result in, once enacted, new rules and mechanisms for “cookie” consent. In addition, the interpretation and application of data protection laws in the U.S., Europe and elsewhere are often uncertain and in flux. Legislative and regulatory authorities around the world may decide to enact additional legislation or regulations, which could reduce the amount of data we can collect or process and, as a result, significantly impact our business. Similarly, clarifications of and changes to these existing and proposed laws, regulations, judicial interpretations and industry standards can be costly to comply with, and we may be unable to pass along those costs to our clients in the form of increased fees, which may negatively affect our operating results. Such changes can also delay or impede the development of new solutions, result in negative publicity and reputational harm, require significant incremental management time and attention, increase our risk of non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices, including our ability to charge per click or the scope of clicks for which we charge. Additionally, any perception of our practices or solutions as an invasion of privacy, whether or not such practices or solutions are consistent with current or future regulations and industry practices, may subject us to public criticism, private class actions, reputational harm or claims by regulators, which could disrupt our business and expose us to increased liability. Finally, our legal and financial exposure often depends in part on our clients’ or other third parties’ adherence to privacy laws and regulations and their use of our services in ways consistent with visitors’ expectations. We rely on representations made to us by clients that they will comply with all applicable laws, including all relevant privacy and data protection regulations. We make reasonable efforts to enforce such representations and contractual requirements, but we do not fully audit our clients’ compliance with our recommended disclosures or their adherence to privacy laws and regulations. If our clients fail to adhere to our contracts in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our own solutions, services and data collection, use and sharing practices in our own disclosures to consumers, then we and our clients may be subject to potentially adverse publicity, damages and related possible investigation or other regulatory activity in connection with our privacy practices or those of our clients.
Unfavorable media coverage could negatively affect our business.
Unfavorable publicity regarding, for example, our privacy practices, terms of service, regulatory activity, the actions of third parties, the use of our products or services for illicit, objectionable, or illegal ends or the actions of other companies that provide similar services to us, could adversely affect our reputation. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our customer base which could adversely affect our business and financial results.
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Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, content, competition, consumer protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, such as privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation and securities law compliance. Expansion of our activities in certain jurisdictions, or other actions that we may take, may subject us to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be more restrictive than those in the United States.
Additionally, as we expand our product offerings, we may become subject to the European General Data Protection Regulation (GDPR), effective as of May 2018. The GDPR increases privacy rights for individuals in Europe, extends the scope of responsibilities for data controllers and data processors and imposes increased requirements and potential penalties on companies offering goods or services to individuals who are located in Europe or monitoring the behavior of such individuals (including by companies based outside of Europe). Noncompliance can result in penalties of up to the greater of €20 million, or 4% of global company revenues.
These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government authorities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the newer industry in which we operate, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.
These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede our international growth, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business.
Security breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our systems, could harm our reputation and adversely affect our business.
Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users’ data or to disrupt our ability to provide service. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data, including personal information, content, or payment information from or to users, or information from marketers, could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become more prevalent in our industry. As a result of recent attention and growth of, the size of our user base, and the types and volume of personal data on our systems, we believe that we are a particularly attractive target for such breaches and attacks. Our efforts to address undesirable activity may also increase the risk of retaliatory attacks. Such attacks may cause interruptions to the services we provide, degrade the user experience, cause users or marketers to lose confidence and trust in our products, impair our internal systems, or result in financial harm to us. Our efforts to protect our company data or the information we receive may also be unsuccessful due to software bugs or other technical malfunctions; employee, contractor, or vendor error or malfeasance; government surveillance; or other threats that evolve. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users’ data. Cyber-attacks continue to evolve in sophistication and volume, and inherently may be difficult to detect for long periods of time. Although we are currently in the process of developing systems and processes that are designed to protect our data and user data, to prevent data loss and to prevent or detect security breaches, we cannot assure you that such measures will ultimately become operational or provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.
Affected parties or government authorities could initiate legal or regulatory actions against us in connection with any actual or perceived security breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Such incidents or our efforts to remediate such incidents may also result in a decline in our active user base or engagement levels. Any of these events could have a material and adverse effect on our business, reputation, or financial results.
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If we were to lose or have limited access to certain platforms or data sources, we will lose our existing revenue from these platform and sources.
The loss of access to any platforms or data sources could limit our ability to effectively grow a portion of our operations. Our business would be harmed if these platforms:
| ● | discontinues or limits access to its platform by us and other application developers; | |
| ● | modify terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers, or changes how the personal information of its users is made available to application developers; | |
| ● | establishes more favorable relationships with one or more of our competitors; or | |
| ● | develops its own competitive offerings. |
We depend on the services of our executive officers and the loss of any of their services could harm our ability to operate our business in future periods.
Our success largely depends on the efforts and abilities of our executive officers, including Christopher Miglino, Michael Malone, and Christopher Lahiji, the president of our wholly owned subsidiary, LD Micro. We are a party to an employment agreement with each of Mr. Miglino, Mr. Malone and Mr. Lahiji. Although we do not expect to lose their services in the foreseeable future, the loss of any of them could materially harm our business and operations in future periods until such time as we were able to engage a suitable replacement.
If advertising on the Internet loses its appeal, our revenue could decline.
Our business model may not continue to be effective in the future for a number of reasons, including:
| ● | our ability to create applications for our customers; | |
| ● | internet advertisements and promotions are, by their nature, limited in content relative to other media; | |
| ● | companies may prefer other forms of Internet advertising and promotions that we do not offer; and | |
| ● | regulatory actions may negatively impact our business practices. |
Weak economic conditions may reduce consumer demand for products and services.
A weak economy in the United States could adversely affect demand for advertising products, and services. A substantial portion of our revenue is derived from businesses that are highly dependent on discretionary spending by individuals, which typically falls during times of economic instability. Accordingly, the ability of our advertisers to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments remain weak or decline further. We currently are unable to predict the extent of any of these potential adverse effects.
Certain of our subsidiaries and business affiliates have operations outside of the United States that are subject to numerous operational risks.
Certain of our subsidiaries and business affiliates have operations in countries other than the United States. In many foreign countries, it is not uncommon to encounter business practices that are prohibited by certain regulations, such as the Foreign Corrupt Practices Act and similar laws. Although certain of our subsidiaries and business affiliates have undertaken compliance efforts with respect to these laws, their respective employees, contractors and agents, as well as those companies to which they outsource certain of their business operations, may take actions in violation of their policies and procedures. Any such violation, even if prohibited by the policies and procedures of these subsidiaries and business affiliates or the law, could have certain adverse effects on the financial condition of these subsidiaries and business affiliates. Any failure by these subsidiaries and business affiliates to effectively manage the challenges associated with the international operation of their businesses could materially adversely affect their, and hence our, financial condition.
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In the event that we are unable to conduct business with certain third-party providers of data and information integral to our operations, our revenue and business prospects may suffer.
We rely on access to certain third-party providers of data in the investment sector in order for the Sequire platform to function and provide meaningful data and insights for our customers. We have benefited from the data that these third-parties have provided to us on behalf of their customers. In the event that we lose access to these third-party providers, it would limit our ability to effectively market the Sequire platform and sell our services to our customers. In the event that these third-party providers change their terms or our ability to access their data on a cost-effective basis to us, our business may be materially harmed.
Competitors may create products that compete with the Sequire platform and there can be no assurances that we will be able to protect our intellectual property related to Sequire.
The Sequire platform’s success depends heavily on our intellectual property and the continued development and innovation of the platform. Notwithstanding, there may be competitors seeking to compete by creating similar platforms with more aggressive pricing or lower cost structures, greater functionality, and by emulating the services provided by the Sequire platform. Furthermore, certain of the information that we implement in our Sequire platform is either publicly available or ascertained through third-party service providers for which no barrier to entry exists. Companies with significantly more resources than us may attempt to create competing products at lower prices. Furthermore, there can be no assurances that we are able to adequately defend our trade secrets or intellectual property rights with respect to competitors.
Our insurance coverage strategy may not be adequate to protect us from all business risks.
We may be subject, in the ordinary course of business, to losses resulting from accidents, acts of God and other claims against us, for which we may have no insurance coverage. As a general matter, we do not maintain as much insurance coverage as many other companies do, and in some cases, we do not maintain any at all. Additionally, the policies that we do have may include significant deductibles or self-insured retentions, policy limitations and exclusions, and we cannot be certain that our insurance coverage will be sufficient to cover all future losses or claims against us. A loss that is uninsured or which exceeds policy limits may require us to pay substantial amounts, which may harm our financial condition and operating results.
Risks Related to receipt of Securities for Services
We are not, and do not intend to become, regulated as an investment company under the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions) and if we are deemed an “investment company” under the U.S. Investment Company Act of 1940, applicable restrictions would make it impractical for us to operate as contemplated.
The U.S. Investment Company Act of 1940 and the rules thereunder (and similar legislation in other jurisdictions) provide certain protections to investors and impose certain restrictions on companies that are registered as investment companies. Among other things, such rules limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities and impose certain governance requirements. We have not been and do not intend to become regulated as an investment company and we intend to conduct its activities so it will not be deemed to be an investment company under the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions). In order to ensure that we are not deemed to be an investment company, we may be required to materially restrict or limit the scope of our operations or plans related to Sequire, we will be limited in the types of acquisitions that we may make and we may need to modify our organizational structure or dispose of assets that we would not otherwise dispose of. Moreover, if anything were to happen which would potentially cause us to be deemed an investment company under the U.S. Investment Company Act of 1940, it would be impractical for us to operate as intended pursuant to the Sequire platform and our business, financial condition and results of operations would be materially adversely affected. Accordingly, we would be required to take extraordinary steps to address the situation, such as the modification and restructuring of our Sequire platform, which would materially adversely affect our ability to derive revenue.
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Sequire’s services are primarily paid for in restricted shares of its customers’ stock, which are often smaller publicly traded companies with volatile stock prices, limited liquidity, and risker operations.
Payment related to our Sequire platform and services is often made through the equity securities of our customers instead of cash. The securities issued are often those of smaller public companies that often have limited operating cash and negative cash flows. Additionally, these securities are primarily restricted, and are subject to legal holding periods pursuant to Rule 144. The value of such securities on the date of receipt compared to the date when we are able to legally sell the securities may decrease, and the stock price of such issuers is often volatile, unpredictable and has limited liquidity. As a result, the value of the equity received on the date of payment may be significantly greater than the actual revenue derived by us upon a sale of the securities. Furthermore, there is no guarantee that the companies we receive securities from will remain solvent during the legally required holding period under Rule 144, which would result in the loss of some or all of our anticipated revenue. As we are not experienced traders, there can be no assurances that our personnel responsible for selling the securities will do so at opportune times, or be able to maximize revenue.
Our receipt of securities in lieu of cash may be negatively affected by a downturn in the U.S. and/or global securities markets and could significantly reduce our revenue.
General political and economic conditions and events such as U.S. fiscal and monetary policy, economic recession, governmental shutdown, trade tensions and disputes, global economic slowdown, widespread health epidemics or pandemics, natural disasters, terrorist attacks, war, changes in local and national economic and political conditions, regulatory changes or changes in the law, or interest rate or currency rate fluctuations could create a downturn in the U.S. and/or global securities markets. As we receive restricted securities of companies, a downturn in the U.S. or global markets may impact such companies and the value of our securities.
Risks Related to LD Micro
In the event that we are unable to integrate LD Micro, our newly acquired wholly owned subsidiary with our current assets or continue to develop LD Micro, it could materially affect our business, financial condition and results of operations.
In September 2020, we acquired LD Micro as a wholly owned subsidiary. We are currently integrating LD Micro’s processes and operations into our infrastructure and system. There can be no assurances that we will successfully integrate LD Micro’s business with that of SRAX, or that we are able to profitably operate LD Micro’s business. The failure to do any of the foregoing could materially affect our business, financial condition, and results of operations.
LD Micro, our newly acquired subsidiary operates in a business segment that has been negatively affected by the COVID-19 pandemic.
Our recently acquired subsidiary, LD Micro has historically hosted in-person, and to a less degree, online, investor conferences for publicly traded companies. While we believe we will be able to transition most of the events and conferences into an online format during the COVID-19 pandemic, there can be no assurances that we will be able to do so successfully, or that investors and other attendees will find such virtual conferences as compelling.
Risk Related to Force Protection Video Equipment Corp., the Acquirer of BIGToken
The financial statements of Force Protection Video Equipment Corp. are consolidated with our financials.
On February 4, 2021, we completed the divestiture of our wholly owned subsidiary, BIGToken, Inc. pursuant to the terms of our share exchange agreement entered into on September 30, 2020. As a result of the transaction, we were issued 149,562,566,534 shares of Force Protection Video Equipment Corp. (“FPVD”) common stock representing approximately 95% of FPVD’s voting power. As a result, we are required by GAAP to consolidated FPVD’s financial statements with ours. As a result of market conditions, FPVD has an implied market value of approximately $1 billion as of June 30, 2021. As a result of this valuation, FPVD may incur significant non-cash expenses related to charges associated with its financial instruments, which we will be required to consolidate into our Condensed Consolidated Financial Statements. Additionally, we may have to expend significant human capital to assist FPVD in its operations which could detract from management’s ability to focus on our business.
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FPVD has a history of operating losses and there are no assurances it will report profitable operations in the foreseeable future, which may impact our ownership of FPVD Common Stock.
Upon completion of the divestiture of BIG Token to FPVD, we received 149,562,566,534 shares of FPVD’s restricted common stock. There are no assurances that FPVD’s common stock will trade in high enough volume or have a liquid market pursuant to which we are able to sell our shares if and when they are registered or otherwise available for public resale pursuant to securities laws. Further, there are no assurances that FPVD will be able to continue its operations, or ever achieve profitability, both of which may impact that value of our FPVD common stock. For the year-ended December 31, 2020, FPVD reported losses from operations and an accumulated deficit of $8,581,000 and $36,571,000 respectively. Additionally, for the 3 months ended March 31, 2021 and 2020, FPVD recorded losses from operations of $1,521,000 and $3,051,000 and accumulated deficit of $43,867,000 and $36,571,000, respectively. FPVD’s future success depends upon its ability to continue to grow its revenues, contain its operating expenses and generate profits. FPVD does not have any long-term agreements with its customers. There are no assurances that FPVD will be able to increase revenues and cash flow to a level which supports profitable operations. FPVD may continue to incur losses in future periods until such time, if ever, as FPVD is successful in significantly increasing its revenues and cash flow beyond what is necessary to fund its ongoing operations and pay its obligations as they become due. If FPVD is unable to significantly increase its revenues in future periods, the rapid growth which FPVD is pursuing will strain the organization and it may encounter difficulties in maintaining the quality of its operations. If FPVD is not able to grow successfully or continue as a going concern, or able to continue its operations it would materially impact the value of the shares of FPVD common stock that we own,
FPVD has a limited number of employees and depends highly on SRAX’s employees and management to provide services under the Transition Services Agreement.
FPVD’s ability to successfully operate, including making its public filings with the SEC, is largely dependent on the services that SRAX provides pursuant to the Transition Services Agreement. If SRAX is required to provide services at a greater than expected level, it could materially impact our management’s ability to focus on SRAX’s business and operations.
Risks Related to Ownership of our Securities.
The market price of our common stock may be adversely affected by sales of substantial amounts of our common stock pursuant to our at the market sales agreement.
We are a party to an at-the-market sales agreement or ATM, pursuant to which we are able to sell our Class A common shares directly into the market. Currently, we would be required to use the proceeds to pay for the redemption of our outstanding debentures, subject to certain amounts as more fully set forth in the debentures. If we are required to sell a substantial number of shares, or the public perceives that these sales may occur, it could cause the market price of our Class A Common Stock to decline. In addition, the sale of these shares in the public market, or the possibility of such sales, could impair our ability to raise capital through the sale of additional equity securities.
Our management will have broad discretion over the use of proceeds from sales of our common stock under our at-the-market sales agreement, and may not use the proceeds effectively.
Subject to certain covenants and provisions contained in our outstanding debentures, our management will have broad discretion in the application of net proceeds from any sales made pursuant tour at-the-market sales agreement. You will be relying on the judgment of our management concerning these uses and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The failure of our management to apply these funds effectively could result in a material adverse effect on our business and result of operations.
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The actual number of shares we will issue under the at-the-market sales agreement, at any one time or in total, is uncertain.
Subject to certain limitations contained in the ATM and compliance with applicable law, we and the sales agent may mutually agree to sell shares of our Class A Common Stock at any time. The number of shares that are sold by the sales agent after agreement on the terms of the transaction will fluctuate based on the market price of the shares of our Class A Common Stock during the sales period and limits we set with our Sales Agent. Because the price per share of each share sold will fluctuate based on the market price of our shares of Class A Common Stock during the sales period, it is not possible to predict the number of shares that will ultimately be issued.
Conversions of our convertible debentures and the exercise of our common stock warrants may dilute the ownership interest of existing stockholders or may otherwise depress the price of our common stock.
The conversion of some or all of the outstanding convertible debentures issued by us would dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion or exercise of outstanding warrants could adversely affect their prevailing market prices. In addition, the existence of the convertible debentures and purchase warrants may encourage short selling by market participants because the conversion of such notes could be used to satisfy short positions, or the anticipated conversion of such debentures into shares of our common stock could depress the price of our common stock.
The market price of our Class A common stock may be volatile.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than those of a seasoned issuer. The volatility in our share price is attributable to a number of factors. Mainly however, we are a speculative or “risky” investment due to our limited operating history, lack of significant revenues to date, our continued operating losses and missed guidance. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Additionally, in the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
The trading price of the shares of our Class A common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this quarterly report, these factors include:
| ● | the success of competitive products; | |
| ● | actual or anticipated changes in our growth rate relative to our competitors; | |
| ● | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments; | |
| ● | regulatory or legal developments in the United States and other countries; | |
| ● | the recruitment or departure of key personnel; | |
| ● | the level of expenses; | |
| ● | actual or anticipated changes in estimates to financial results, development timelines or recommendations by securities analysts; |
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| ● | variations in our financial results or those of companies that are perceived to be similar to us; | |
| ● | fluctuations in the valuation of companies perceived by investors to be comparable to us | |
| ● | inconsistent trading volume levels of our shares; | |
| ● | announcement or expectation of additional financing efforts; | |
| ● | sales of our Class A common stock by us, our insiders or our other stockholders; | |
| ● | additional issuances of securities upon the exercise of outstanding options and warrants; | |
| ● | market conditions in the technology sectors; and | |
| ● | general economic, industry and market conditions. |
In addition, the stock market in general, and advertising technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our Class A common stock, regardless of our actual operating performance. The realization of any of these risks could have a dramatic and material adverse impact on the market price of the shares of our Class A common stock.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of the shares of our Class A common stock may be volatile, and in the past companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. To the extent that any claims or suits are brought against us and successfully concluded, we could be materially adversely affected, jeopardizing our ability to operate successfully. Furthermore, our human and capital resources could be adversely affected by the need to defend any such actions, even if we are ultimately successful in our defense.
Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in a decline in our stock price.
We have previously provided, and may provide in the future, public guidance on our expected financial results for future periods. Although we believe that this guidance provides investors with a better understanding of management’s expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties. Our actual results may not always be in line with or exceed the guidance we have provided. For example, in the past, we have missed guidance a number of times. If our financial results for a particular period do not meet our guidance or if we reduce our guidance for future periods, the market price of our Class A common stock may decline.
Delaware law contains anti-takeover provisions that could deter takeover attempts that could be beneficial to our stockholders.
Provisions of Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. Section 203 of the Delaware General Corporation Law may make the acquisition of our company and the removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring us, without our board of directors’ consent, for at least three years from the date they first hold 15% or more of the voting stock.
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If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the trading price of our Class A common stock and trading volume could decline.
The trading market for our shares of our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. A small number of securities and industry analysts currently publish research regarding our Company on a limited basis. In the event that one or more of the securities or industry analysts who have initiated coverage downgrade our securities or publish inaccurate or unfavourable research about our business, the price of our shares of Class A common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our securities could decrease, which might cause the trading price of our shares of Class A common stock and trading volume to decline.
The elimination of monetary liability against our directors and officers under Delaware law and the existence of indemnification rights held by our directors and officers may result in substantial expenditures by us and may discourage lawsuits against our directors and officers.
Our certificate of incorporation eliminates the personal liability of our directors and officers to our company and our stockholders for damages for breach of fiduciary duty as a director or officer to the extent permissible under Delaware law. Further, our bylaws provide that we are obligated to indemnify any of our directors or officers to the fullest extent authorized by Delaware law. We are also parties to separate indemnification agreements with certain of our directors and our officers which, subject to certain conditions, require us to advance the expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition. Those indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against our directors or officers, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even if such actions, if successful, might otherwise benefit us or our stockholders.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable to our company’s operations.
| ITEM 5. | OTHER INFORMATION. |
On August 4, 2021, pursuant to a recommendation by the Compensation Committee, the Board declared a one-time bonus payment of $15,000 to all non-employee directors. As a result, the Company paid an aggregate of $60,000 in bonuses.
| ITEM 6. | EXHIBITS. |
| Incorporated by Reference | ||||||||||||
| Filed/ | ||||||||||||
| Exhibit | Furnished | Exhibit | Filing | |||||||||
| No. | Description | Herewith | Form | No. | File No. | Date | ||||||
| 3.01(i) | Certificate of Incorporation, filed on 8/3/11 | S-1 | 3.01(i) | 333-179151 | 1/24/12 | |||||||
| 3.02(i) | Certificate of Correction to Certificate of Incorporation, filed on 8/31/11 | S-1 | 3.01(ii) | 333-179151 | 1/24/12 | |||||||
| 3.03(i) | Certificate of Amendment to Certificate of Incorporation authorizing 1:5 reverse stock split | 8-K | 3.5 | 000-54996 | 9/19/16 | |||||||
| 3.04(i) | Certificate of Designation of Series 1 Preferred Stock | 8-K | 3.4 | 000-54996 | 8/22/13 | |||||||
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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 16, 2021 | By: | /s/ Christopher Miglino |
Christopher Miglino, Chief Executive Officer, principal executive officer | ||
| August 16, 2021 | By: | /s/ Michael Malone |
Michael Malone, Chief Financial Officer, principal financial and accounting officer | ||
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