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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
| Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the Quarterly Period Ended
or
| Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 001-36351 |
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
Securities registered pursuant to Section 12(b) of the Act:
| (Title of each class) | (Trading Symbol) | (Name of each exchange on which registered) |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. ☐Yes ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). ☐Yes ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller reporting company
| |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
As of December 29, 2022, there were shares of Class A common stock were issued and outstanding.
SRAX, Inc.
Table of Contents
| 2 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include, but are not limited to: any projections of revenues, earnings, or other financial items; any statements of the strategies, plans and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” and any other similar words. These statements represent our expectations, beliefs, anticipations, commitments, intentions, and strategies regarding the future and include, but are not limited to, the risks and uncertainties described in the sections of this Quarterly Report entitled Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations and those discussed in other documents we file with the United States Securities and Exchange Commission (“SEC”). Readers are cautioned that actual results could differ materially from anticipated results or other expectations that are expressed in forward-looking statements within this report. The forward-looking statements included in this report speak only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
We urge you to read this entire Quarterly Report on Form 10-Q, including the “Risk Factors” section, the financial statements and the related notes included therein as well as our Annual Report on Form 10-K for the year ended December 31, 2021, including the “Risk Factors” section contained therein. As used in this Quarterly Report, unless context otherwise requires, the words “we,” “us,” “our,” “the Company,” “SRAX,” “Registrant” refer to SRAX, Inc. and its subsidiaries. Additionally, any reference to (i) “LD Micro” refer to the Company’s wholly owned subsidiary, “LD Micro, Inc.” and the assets used in its operation. Also, any reference to “common share” or “common stock,” refers to our $.001 par value Class A common stock.
Any reference to “BIGToken” and “BIGToken, Inc.”, or the “BIGToken Project” refer to the Company’s previously wholly owned subsidiary, BIGToken, Inc. and the assets used in its operations which we transferred into Force Protection Video Equipment, Inc. (“FPVD”), which became our majority owned subsidiary on February 4, 2021 and was subsequently disposed of on December 29, 2021.
Unless otherwise stated, the information which appears on our web sites www.srax.com are not part of this report and are specifically not incorporated by reference.
| 3 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SRAX, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2022 (unaudited) | December 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Contracts receivable | ||||||||
| Marketable securities | ||||||||
| Designated assets for return of capital | ||||||||
| Prepaid expenses and other current assets | ||||||||
| 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 expenses | $ | $ | ||||||
| Deferred revenue | ||||||||
| Other current liabilities | ||||||||
| Payroll protection loan | ||||||||
| OID convertible notes payable | ||||||||
| Series A redeemable preferred stock | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| Right of use liability, net of current | ||||||||
| TOTAL LIABILITIES | ||||||||
| STOCKHOLDERS’ EQUITY | ||||||||
| Series
A preferred stock, $ | ||||||||
| Class A common stock, $ par value, shares authorized, and shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | ||||||||
| Class B common stock, $ par value, shares authorized and issued and outstanding, at March 31, 2022 and December 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
| 4 |
SRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENT
(Unaudited)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenues | $ | $ | ||||||
| Cost and expenses | ||||||||
| Cost of revenues | ||||||||
| Employee related costs | ||||||||
| Marketing and selling expenses | ||||||||
| Platform costs | ||||||||
| Depreciation and amortization | ||||||||
| General and administrative expenses | ||||||||
| Total cost and expenses | ||||||||
| (Loss) income from operations | ( | ) | ||||||
| Other income (expense) | ||||||||
| Financing costs | ( | ) | ( | ) | ||||
| Unrealized gain on marketable securities | ||||||||
| Realized (loss) gain on marketable securities | ( | ) | ||||||
| Interest income | ||||||||
| Change in fair value of preferred stock | ||||||||
| Realized loss on designated assets | ( | ) | ||||||
| Unrealized gain on designated assets | ||||||||
| Other income (expense) | ( | ) | ||||||
| Total other income (expense) | ( | ) | ||||||
| Income (loss) before income tax expense | ( | ) | ||||||
| Income tax expense | ||||||||
| Income (loss) from continuing operations | ( | ) | ||||||
| Discontinued operations | ||||||||
| Loss before income tax expense | ( | ) | ||||||
| Noncontrolling interest in discontinued operations | ||||||||
| Income tax expense | ||||||||
| Loss from discontinued operations | ( | ) | ||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Basic income (loss) per share | ||||||||
| Continuing operations | $ | $ | ( | ) | ||||
| Discontinued operations | ( | ) | ||||||
| Net income (loss) per share, basic | $ | $ | ( | ) | ||||
| Diluted income (loss) per share | ||||||||
| Continuing operations | $ | $ | ( | ) | ||||
| Discontinued operations | ( | ) | ||||||
| Net income (loss) per share, diluted | $ | $ | ( | ) | ||||
| Weighted average shares outstanding, basic | ||||||||
| Weighted average shares outstanding, diluted | ||||||||
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
| 5 |
SRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Permanent Equity | ||||||||||||||||||||||||
| Common stock | Additional paid-in | Accumulated | Noncontrolling | Total
stockholders’ equity | ||||||||||||||||||||
| Shares | Amount | capital | deficit | interest | (deficit) | |||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Share based compensation | - | |||||||||||||||||||||||
| Shares issued for exercise of employee options, net of taxes | ( | ) | ( | ) | ||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | ) | $ | ||||||||||||||||||
| Balance at 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 | - | |||||||||||||||||||||||
| Activity by FPVD subsidiary | ||||||||||||||||||||||||
| Establishment of noncontrolling interest of FPVD | - | ( | ) | ( | ) | |||||||||||||||||||
| Warrants issued by FPVD to SRAX, Inc. debenture holders | - | |||||||||||||||||||||||
| Series B convertible preferred stock issued by FPVD | - | |||||||||||||||||||||||
| Beneficial conversion feature of FPVD series B convertible preferred stock | - | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
| 6 |
SRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Less: net loss from discontinued operations | ( | ) | ||||||
| Income (loss) from continuing operations | ( | ) | ||||||
| Adjustments to reconcile net income (loss) from continuing operations to net cash used in continuing operations: | ||||||||
| Unrealized gain on marketable securities | ( | ) | ( | ) | ||||
| Realized loss (gain) on marketable securities | ( | ) | ||||||
| Unrealized (gain) on designated assets | ( | ) | ||||||
| Realized loss on designated assets | ||||||||
| Interest income | ( | ) | ( | ) | ||||
| Fair value of warrants issued by FPVD to SRAX, Inc. debenture holders | ||||||||
| Change in fair value of preferred stock | ( | ) | ||||||
| Stock based compensation | ||||||||
| Amortization of debt discount | ||||||||
| Warrant inducement expense | ||||||||
| Net provision for (recovery of) bad debts | ( | ) | ||||||
| Depreciation expense | ||||||||
| Amortization of intangible assets | ||||||||
| Amortization of right of use asset | ||||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable, net | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
Designated assets for the return of capital | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Other current liabilities | ( | ) | ||||||
| Right of use liability | ( | ) | ||||||
| Net cash used in continuing operations | ( | ) | ( | ) | ||||
| Net cash used in discontinued operations | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Proceeds from sales of marketable securities | ||||||||
| Proceeds from sale of designated assets | ||||||||
| Payment for deferred consideration to LD Micro | ( | ) | ||||||
| Net cash invested in prior subsidiary | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Acquisition of intangible assets | ( | ) | ( | ) | ||||
| Other assets | ( | ) | ||||||
| Net cash from continuing operations | ||||||||
| Net cash from discontinued operations | ||||||||
| Net cash from investing activities | ||||||||
| Cash flows from financing activities | ||||||||
| Due from affiliate | ||||||||
| Payments for taxes related to settlement of restricted stock units | ( | ) | ||||||
| Proceeds from factoring facilities, net of repayments | ||||||||
| Proceeds from exercise of warrants | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Net cash from continuing operations | ||||||||
| Net cash from discontinued operations | ||||||||
| Net cash from financing activities | ||||||||
| Net (decrease) increase in cash from continuing operations | ( | ) | ||||||
| Net increase in cash from discontinued operations | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | ||||||||
| Less cash from discontinued operations | ||||||||
| Cash from continuing operations | $ | $ | ||||||
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
| 7 |
SRAX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Continued)
(Unaudited)
| Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Supplemental schedule of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Supplemental schedule of noncash investing and financing activities | ||||||||
| Convertible notes converted into shares | $ | $ | ||||||
| Fair value of marketable securities received for revenue contracts, net | $ | $ | ||||||
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
| 8 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2022
(unaudited)
NOTE 1 – ORGANIZATION AND LIQUIDITY
Organization
SRAX, Inc. (“SRAX”, “we”, “us”, “our” or the “Company”) is a Delaware corporation formed on August 2, 2011. SRAX is headquartered in Westlake Village, California but operates as a distributed virtual Company. As of March 31, 2022, the unaudited Condensed Consolidated Financial Statements consist of SRAX and its wholly owned subsidiary LD Micro, Inc. (“LD Micro”).
SRAX is a technology firm focused on enhancing communications between public companies and their shareholders and investors. The Company currently has one reportable and operating segment, which consists of one reporting unit consisting of two distinct business units:
| ● | The unique SaaS platform, Sequire provides users many features which allow issuers to track their shareholders’ behaviors and trends, then use data-driven insights to engage with shareholders across marketing channels. |
| ● | Through LD Micro, the Company organizes and hosts investor conferences within the micro and small- cap markets, and plans to create several more niche events for the investor community. |
Each of SRAX’s business units deliver valuable insights that assist the Company’s clients with their investor relations and communications initiatives.
On February 4, 2021, the Company acquired FPVD through a reverse acquisition involving BIGtoken, Inc. On December 29, 2021, the Company deconsolidated the Company’s majority owned subsidiary BIG Token, Inc. (“BIGToken”) formerly known as Force Protection Video Equipment Corporation (or “FPVD”). See Note 3 –Discontinued Operations.
Liquidity and Capital Resources
The
Company has incurred significant losses since its inception and has not demonstrated an ability to generate cash in excess of its operating
expenses for a sustained period of time. As of March 31, 2022, the Company had cash and cash equivalents of $
The unaudited Condensed Consolidated Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the unaudited Condensed Consolidated Financial Statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
In making this assessment, the Company performed a comprehensive analysis of current circumstances including: its financial position, cash flow and cash usage forecasts, and obligations and debts. Although management has a long history of successful capital raises, the analysis used to determine the Company’s ability as a going concern does not include cash sources outside the Company’s direct control that management expects to be available within the next 12 months.
The Company expects that its existing cash and cash equivalents, accounts receivable and marketable securities as of March 31, 2022, will not be sufficient to enable it to fund the anticipated level of operations through one year from the date these financial statements are issued. The Company projects the sale of its marketable security holding will represent a substantial portion of the cash required for operations for the foreseeable future. The Company’s sales of marketable securities are primarily through sale transactions that qualify for exemptions pursuant to Rule 144 of the Securities Act of 1933. The conditions required to be met to qualify for the exemptions under Rule 144 are often difficult to predict, making it difficult to predict the timing of the associated cash flows from the sales of these securities. The Company’s holdings of marketable securities are subject to risks and uncertainties such as fluctuations in pricing in the primary market, and legal restrictions that create uncertainty around realization and timing of cash flows.
The Company anticipates raising additional capital through the private and public sales of its equity or debt securities and selling its marketable securities, or a combination thereof. Although management believes that such capital sources will be available, there can be no assurances that financing will be available when needed in order to allow the Company to continue its operations, or if available, on terms acceptable to it. If the Company does not raise sufficient capital in a timely manner, among other things, it may be forced to scale back its operations or cease operations altogether.
Uncertainty Due to Geopolitical Events
Due to Russia’s invasion of Ukraine, which began in February 2022, and the resulting sanctions and other actions against Russia and Belarus, there has been uncertainty and disruption in the global economy. Although the Russian war against Ukraine did not have a material adverse impact on the Company’s revenue or other financial results for the three months ended March 31, 2022, at this time the Company is unable to fully assess the aggregate impact the Russian war against Ukraine will have on its business due to various uncertainties, which include, but are not limited to, the duration of the war, the war’s effect on the economy, its impact to the businesses of the Company’s customers, and actions that may be taken by governmental authorities related to the war.
COVID-19 Update
The continuing COVID-19 global pandemic has caused significant disruption to the economy and financial markets globally, and the full extent of the potential impacts of COVID-19 are not yet known. Circumstances caused by the COVID-19 pandemic are complex, and uncertain. The impact of COVID-19 has not been significant to the Company’s results of operations, financial condition, and liquidity and capital resources. Although no material impairment or other effects have been identified to date, there is substantial uncertainty in the nature and degree of its continued effects over time. That uncertainty affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions as additional events and information become known. The Company will continue to consider the potential impact of the COVID-19 pandemic on its business operations.
| 9 |
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements and notes thereto are unaudited. The unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted. The December 31, 2021 Condensed Consolidated Balance Sheet was derived from financial statements but does not include all disclosures required by GAAP. These interim unaudited Condensed Consolidated Financial Statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim three-month periods ended March 31, 2022 and 2021. The results for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022 or for any future period.
These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2021, included in the Company’s annual report on Form 10-K filed with the SEC.
Principles of Consolidation
The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The unaudited Condensed Consolidated Financial Statements have been prepared in conformity with GAAP and require management of the Company to make estimates and assumptions in the preparation of these unaudited Condensed Consolidated Financial Statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions.
The most significant areas that require management judgment and which are susceptible to possible change in the near term include, among other items, the Company’s revenue recognition, valuation of marketable investment securities, stock-based compensation, income taxes, purchase price for acquisitions, goodwill, other intangible assets, and the valuation of redemption features and other assets and liabilities.
Fair Value of Financial Instruments
The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
In determining fair value, the Company uses various valuation techniques. A fair value hierarchy for inputs is used in measuring fair value. It maximizes observable inputs and minimizes unobservable inputs. Valuation techniques consistent with the market or income approach are used to measure fair value. The fair value hierarchy is categorized into three levels:
| ● | Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access; |
| ● | Level 2 - Valuations based on inputs, other than quoted prices included in Level 1, that are observable either directly or indirectly; and |
| ● | Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
Fair value is a market-based measure that is based on assumptions of prices and inputs considered from the perspective of a market participant on the measurement date.
The availability of valuation techniques and observable inputs can vary from investment to investment and are affected by a wide variety of factors. The determination of fair value requires prudent judgment. Due to the inherent uncertainty of valuation, estimated values may be materially different from values were a ready market available. Inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the item being valued is classified based on the hierarchy category of the lowest significant level input to the fair value measurement. See Note 12 Fair Value of Financial Instruments.
| 10 |
Cash and Cash Equivalents
The
Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less
to be cash equivalents. Cash and cash equivalents are recorded at cost, which approximates its fair value. The Company maintains its
cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (“FDIC”) in accounts that at times
may be in excess of the federally insured limit of $
Marketable Securities
Marketable
Securities consist of debt and equity securities. The Company accounts for marketable equity securities, including convertible preferred
shares at fair value pursuant to ASC 321 Investments – Equity Securities, and marketable debt securities at fair value in accordance
with ASC 320 – Investments Debt Securities. Marketable securities were approximately $
Accounts Receivable
Credit
is extended to customers based on an evaluation of their financial condition and other factors, and the Company usually does not require
collateral. Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for
estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The
allowance for doubtful accounts was approximately $
Concentration of Credit and Significant Customer Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions within the United States. The balances maintained at these financial institutions are generally more than the FDIC insurance limits. The Company has not experienced any loss on these accounts.
As
of March 31, 2022, the Company had 2 customers with an accounts receivable balance of approximately
For the three months ended March 31, 2022 and 2021, the Company had no customers that account for a significant percentage of total revenues.
Goodwill and Intangible assets
Intangible assets consist of (i) goodwill, intellectual property, trademarks, trade names and non-compete agreements acquired in business combinations and capitalized software development costs. Other than goodwill and trademarks, intangible assets are stated at cost less accumulated amortization. Amortization is provided for on the straight-line basis over the estimated useful lives of the assets of five years.
Impairment of Goodwill, Intangible Assets and Other Long-lived Assets
Management evaluates the recoverability of the Company’s definitive lived intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company’s stock price for a sustained period of time; and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Management evaluates the recoverability of the Company’s goodwill annually at December 31 or more often as events or circumstances indicate the fair value of a reporting unit is below its carrying value. The Company has determined that it operates as a single reporting unit for the purposes of conducting this goodwill impairment assessment. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that implied fair value of the goodwill within the reporting unit is less than its carrying value.
Revenue Recognition
The Company recognizes revenues upon the satisfaction of its performance obligation(s) (upon transfer of control of promised goods or services to its customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services. The Company determines the amount of revenue to be recognized through the application of the five-step process as follows:
| 1) | identification of contracts with customers; | |
| 2) | identification of the distinct performance obligations in the contract; | |
| 3) | determination of the transaction price of the contract; | |
| 4) | allocation of transaction price among the performance obligations in the contract; and | |
| 5) | recognition of revenue as performance obligations are satisfied. |
| 11 |
The Company has elected the following practical expedients allowed in accounting for its revenue recognition:
| ● | not adjusting contract consideration for the effects of significant financing components if the period between transfer or service and customer payment is expected to be less than one year; | |
| ● | not assessing performance obligations if they are immaterial in the context of the contract; | |
| ● | excluding sales and similar taxes from the transaction price; and | |
| ● | not disclosing the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. |
The Company generates revenue primarily from its Sequire SaaS platform and its LD Micro subsidiary. Specifically, the Sequire SaaS platform related revenue consists of (i) licensing subscriptions to access the platform, (ii) managed services involving data and marketing initiatives and (iii) ancillary data supplementing the use of the platform. LD Micro revenues consist of attendee fees and event sponsorship fees related investor conferences organized and hosted by the Company.
Sequire SaaS platform
Sequire SaaS platform agreements are typically for a period of 12-months and provide for monthly or annual payments in advance.
Many of the Sequire SaaS platform agreements provide customers the ability to pay for the services with the issuance of the customers’ securities including common stock. The amount of consideration for these contracts is based on the estimated fair value of the underlying securities on the contract date. See “Fair Value of Financial Instruments” for details over the calculation of fair value.
When Sequire SaaS platform contracts contain multiple performance obligations, transaction consideration is allocated to each individual performance obligation based on a relative Stand-Alone Selling Price (“SSP,”) basis. The Company determines SSP based on the price at which the performance obligation would be sold separately.
Subscription revenue is generally non-refundable regardless of the actual use and is recognized ratably over the non-cancellable contract term beginning on the commencement date of each contract, which is the date the Company’s service is first made available to customers.
Managed Services and Ancillary Data revenue is typically recognized using an output measure of progress by looking at the time elapsed as the contracts generally provide the customer equal benefit throughout the contract period because the Company transfers control evenly by providing a stand-ready service.
LD Micro - Conference Revenue
LD Micro agreements cover a specific event and provide for payment in advance or at the time of the event. Conference revenue from attendee fees and sponsorship fees is recognized at the time of the event (i.e., at a point-in-time).
Contract Receivables
Contracts receivable represents amounts for which non-cancellable revenue contracts with customers have been finalized but the payment in the form of securities issued by the customer have not been received by the Company.
Deferred Revenue
Deferred revenue resulting from amounts billed to, or cash received from, customers in advance of the Company satisfying its performance obligation and recognizing the applicable revenue.
Preferred stock
Preferred stock liability represents amounts payable to holders of the Preferred Stock Series A shares upon the eventual liquidation of assets designated for the sole purpose of paying dividends. Accordingly, the Company classified the Series A Preferred Shares as liability instruments because in-substance, they represent a right to the payment of dividends upon the liquidation of specified assets, are automatically returnable to the Company after the payments are made and feature no rights to further equity or residual interests in the Company.
Costs to Obtain or Costs to Fulfill a Contract
The Company has no costs that qualify as costs to obtain or costs to fulfill customer contracts.
| 12 |
Basic earnings per share is calculated by dividing net income by the weighted-average number of shares outstanding during the period. Diluted earnings per share is calculated by dividing net income by the weighted-average number of common shares outstanding, after giving effect to all potentially dilutive common shares outstanding during the period. Dilutive shares associated with options and warrants there were in the money were computed using the treasury stock method and dilutive shares associated with convertible debt were computed using the if-converted method, which includes the effect of excluding the convertible debenture interest expense from net income.
Securities that could potentially dilute basic net income per share in the future that were not included in the computation of diluted net income per share were and during three months ended March 31, 2022 and March 31, 2021 respectively, because to do so would have been anti-dilutive
Basic and diluted earnings per share were calculated as follows:
Three months ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Numerator: | ||||||||
| Net income (loss) from continuing operations | $ | $ | ( | ) | ||||
| Net loss from discontinued operations | ( | ) | ||||||
| Net income (loss) | ( | ) | ||||||
| Less: Net loss attributable to non-controlling interest in discontinued operations | ||||||||
| Net income (loss) attributable to SRAX, Inc. | $ | $ | ( | ) | ||||
| Denominator: | ||||||||
| Weighted average common shares - basic | ||||||||
| Effect of dilutive securities | ||||||||
| Stock purchase warrants | ||||||||
| Convertible debentures | ||||||||
| Potentially dilutive common share equivalent | ||||||||
| Weighted average common shares - dilutive | ||||||||
| 13 |
Recent Accounting Pronouncements
In June 2022, the FASB issued Accounting Standards Update (“ASU”) ASU 2022-03 Fair Value Measurements, which clarifies the guidance in ASC 820 Fair Value Measurement (“ASC 820”), (1) when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with ASC 820. The adoption did not impact the Company’s financial position, results of operations or cash flows.
Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-06, Debt-Debt with Conversion and Other Options which simplifies the accounting for convertible instruments by removing certain separation models (including the cash conversion model and the beneficial conversion feature model) for convertible instruments. As a result, for convertible instruments with conversion features that are not required to be accounted for as derivative instruments or that do not result in substantial premiums accounted for as paid-in capital, the embedded conversion features are no longer separated from the host contract. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost as long as no other features require bifurcation and recognition as derivatives. This guidance is effective on a modified retrospective or full retrospective basis for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company is currently evaluating the impact on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) addressing accounting for credit losses on financial instruments, which is designed to provide financial statement users with more information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. When determining such expected credit losses, the guidance requires companies to apply a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective on a modified retrospective basis for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact on the consolidated financial statements.
The Company’s management reviewed all recently issued ASU’s not yet adopted by the Company and does not believe the future adoptions of any such ASU’s may be expected to cause a material impact on the Company’s consolidated financial condition or the results of its operations.
NOTE 3 –DISCONTINUED OPERATIONS
Background
On
February 4, 2021, the Company completed a share exchange agreement (“Exchange Agreement”) with FPVD. As part of the
Exchange Agreement the Company transferred all of the BIGToken assets and
Deconsolidation
On
December 29, 2021, As a result of the Merger, BIGToken
issued shares of its common stock (“Acquisition Shares”) for all of the issued and outstanding equity shares
of BritePool. On December 29, 2021, as a condition for the closing of the Merger, the Company exchanged shares of BIGToken
common stock for shares of BIGToken’s Series D Convertible Preferred Stock (“Series D Stock”) (the “Exchange”).
Simultaneously with the Exchange, the Company converted shares of the Series D Stock into shares of BIGToken’s
common stock, or approximately
Subsequent
to the transaction, the Company now owns shares of BIGToken’s series D convertible, non-redeemable, non-voting preferred
stock and shares of its common stock. As a result of the transaction, the Company no longer has a controlling financial
interest in BIGToken and deconsolidated BIGToken effective December 29, 2021, recognizing a loss
of $
| Consideration | ||||
| Fair value of Series D Stock and Common Stock | $ | |||
| Carrying amount of non-controlling interests of BIGToken | ||||
| Previous equity adjustments of non-controlling interest | ( | ) | ||
| ( | ) | |||
| Book basis of investment in BIGToken | ||||
| Loss on disposal of subsidiary | $ | ( | ) |
| 14 |
The Company determined the Series D Stock would be classified as a Level 3 asset as there is no observable market for quoted market price for an identical asset. The Company engaged an independent third-party valuation expert to estimate the fair value of the Series D Stock.
The financial results of BIGToken are presented as loss from discontinued operations, net of income taxes on the Company’s unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2021. The historical Condensed Consolidated Statement of Cash Flows has also been revised to reflect the effect of the deconsolidation. The following table presents the financial results of BIGToken:
Three Months Ended March 31, 2021 | ||||
| Revenues | $ | |||
| Cost and expenses | ||||
| Cost of revenues | ||||
| Employee related costs | ||||
| Marketing and selling expenses | ||||
| Platform costs | ||||
| Depreciation and amortization | ||||
| General and administrative expenses | ||||
| Total cost and expenses | ||||
| Loss from operations | ( | ) | ||
| Other expense | ||||
| Financing costs | ( | ) | ||
| Total other expense | ( | ) | ||
| Loss from discontinued operations before income tax expense | ( | ) | ||
| Income tax expense | ||||
| Loss from discontinued operations | $ | ( | ) | |
NOTE 4 – SALE AND PURCHASE OF ACCOUNTS RECEIVABLE
Sales
In
2020, the Company entered into certain financing agreements providing for the sale, with full recourse, of certain of its accounts receivable.
These transactions were accounted for as financing of accounts receivable and the related accounts receivable were not removed from the
Company’s consolidated balance sheet at the time of the transaction; rather, a liability was recorded for the proceeds received.
In 2020 subsequent to the transactions, the purchaser converted the payables into approximately $
For
the year ended December 31, 2021, the Company entered into agreements with a third-party lender whereby it sold the Company’s right
to future subscription revenues of $
The
amount of borrowings outstanding was approximately $
Purchase
Beginning
in the fourth quarter of 2021 and through March 31, 2022, the Company purchased certain accounts receivable from its formerly consolidated
subsidiary, BIGtoken providing for BIGtoken to sell, assign, transfer, convey and deliver to the Company all rights, title and interest
for its receivable aggregating $
| 15 |
NOTE 5 – MARKETABLE SECURITIES
The Company offers its customers the option to settle the contract price in the customer’s issued and publicly trading securities or securities convertible into publicly traded securities (e.g., convertible debt), which could be in the form of common stock, preferred stock or convertible debentures. The Company initially values the securities received at the fair market value on the date the contract is executed, which value is used for revenue recognition purposes. After receipt of the securities, the securities are accounted for as investments in debt and equity securities. The Company has concluded that all its debt securities should be classified as trading securities based on its intent to sell them in the near term. Debt securities classified as trading securities and the equity securities are measured at each reporting period at fair value with changes reported in earnings. Upon the sale of the securities, the Company recognizes the final realized gain or (loss) in the consolidated statement of operations as a component of net income (loss).
The following tables summarize the changes in the Company’s marketable securities during the three months ended March 31, 2022:
Three months ended March 31, 2022:
| Total | Common Stock | Convertible Debentures | Preferred Stock | Warrants | ||||||||||||||||
| Balances January 1, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Additions | ||||||||||||||||||||
| Sales, at cost basis | ( | ) | ( | ) | ||||||||||||||||
Realized Loss | ||||||||||||||||||||
| Change in fair value | ( | ) | ( | ) | ||||||||||||||||
| Balance March 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
The
Company’s sales of securities for the three months ended March 31, 2022, were approximately $
The equity securities may be accounted for and classified into two categories and accounted for as follows:
| ● | Equity securities with a readily determinable fair value are reported at fair value, with unrealized gains and losses included in earnings. The fair value of equity investments with fair values is primarily obtained from third-party pricing services. |
| ● | Equity securities without a readily determinable fair value are reported at their cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer and their impact on fair value. For equity investments without readily determinable fair values, when an orderly transaction for the identical or similar investment of the same issuer is identified, the Company uses valuation techniques to evaluate the observed transaction(s) and adjust the fair value of the equity investment. |
Concentration Risk
The Company’s holdings in marketable securities subject the Company to concentrations of market risks.
As
of March 31, 2022, the Company’s top six marketable security positions had an aggregate fair value of $
BIGtoken Investment
On
February 15, 2022, the Company entered into a simple agreement for future equity (the “SAFE”) with its former BIGToken subsidiary.
Pursuant to the SAFE, the Company invested $
| 16 |
Pursuant to the terms of the SAFE, at any time that BIGtoken sells its securities (a “Financing”) prior to the termination of the SAFE, the Company may, at its option, convert the SAFE into: (i) the number of shares of non-voting Series D Convertible Preferred Stock (“Series D Preferred Stock”) equal to such (a) SAFE Amount divided by (b) the lowest price per share of equity securities sold in any Financing (prior to the termination of the SAFE) multiplied by eighty percent (80%) (the “Conversion Price”) and (ii) such number of warrants to purchase Series D Preferred Stock (the “Warrants”) equal to the SAFE Amount divided by the Conversion Price. Upon issuance, the Warrants will (i) have a term of five (5) years, (ii) an exercise price equal to the Conversion Price, and (iii) contain price protection provisions for subsequent financings.
NOTE 6 – DESIGNATED ASSETS FOR RETURN OF CAPITAL
On August 17, 2021, the Company announced that it will be issuing a one-time dividend consisting of a share of Series A Preferred Stock to shareholders, debenture holders, and certain warrant holders (“Recipients”) of record on September 20, 2021. The Board of Directors designated certain of the Company’s marketable equity securities (“Designated Assets”) as of September 20, 2021 to be used when liquidated, as a return of capital to the Recipients. See Note 9 - Series A Preferred Stock for more details.
The balance of designated assets consists of the following:
March 31, 2022 | December 31, 2021 | |||||||
| Cash | $ | $ | ||||||
| Marketable equity securities | ||||||||
| Total | $ | $ | ||||||
The activity in designated assets is as follows:
| Total | ||||
| Balance as of December 31, 2021 | $ | |||
| Sales at cost | ( | ) | ||
| Realized loss | ||||
| Change in fair value | ||||
| Balance as of March 31, 2022 | $ | |||
The
Company’s sale of the designated marketable securities for the three months ended March 31, 2022, were approximately $
NOTE 7 – NOTES RECEIVABLE
In
October 2020, the Company entered into unit redemption agreements with two counterparties providing for the counterparties to
repurchase from the Company units of the counterparty’s securities owned by the Company. Pursuant to the redemption
agreements, the counterparties repurchased the units for a combined repurchase price of $
NOTE 8 – OID CONVERTIBLE NOTES PAYABLE
In
June 2020, the Company entered into a definitive securities purchase agreement (the “Securities Purchase Agreement or Transaction”)
with certain accredited and institutional investors (the “Purchasers”) for the purchase and sale of an aggregate of: (i)
$
| 17 |
The
Debentures pay interest in cash at the rate of
The
Debentures are convertible at the option of the holder into shares of the Company’s common stock at an initial conversion price
of $
In the event a Purchaser converts a portion of its Debenture into shares of the Company’s Common Stock, such amount will be deducted from the next applicable Amortization Payment. In the event such conversion exceeds the next applicable Amortization Payment, such excess amount will be deducted, in reverse order, from future Amortization Payments.
The
Debentures also contain certain customary events of default provisions, including, but not limited to, payment default, breaches of covenants,
the occurrence of an event of default under certain material contracts of the Company, failure to register the shares underlying the
Debentures and Warrants, changes in control of the Company, delisting of its securities from its trading market, and the entering or
filing of certain monetary judgments against the Company. Upon the occurrence of any such event of default, the outstanding principal
amount of the Debenture plus liquidated damages, interest and other amounts owing in respect thereof through the date of acceleration,
shall become, at the Purchaser’s election, immediately due and payable in cash.
The
Warrants are initially exercisable at $
Pursuant to a registration rights agreement (“Registration Rights Agreement”), the Company has agreed to file a registration statement registering the resale of the shares of the common stock underlying the Debentures and the Warrants within forty-five days from the date of the Registration Rights Agreement. The Company also agrees to have the registration statement declared effective within 90 days from the date of the Registration Rights Agreement and keep the registration statement continuously effective until the earlier of (i) the date after which all of the securities to be registered thereunder have been sold, or (ii) the date on which all the securities to be registered thereunder may be sold without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 under the Securities Act. The Company is also obligated to pay the Investors, as partial liquidated damages, a fee of 2.0% of each Purchaser’s subscription amount per month in cash upon the occurrence of certain events, including the Company’s failure to file and/or have the registration statement declared effective within the time periods provided. As of March 31, 2022, the Company has continuously met its obligations under the Registration Rights Agreement.
| 18 |
Bradley
Woods & Co. Ltd. (“Placement Agent”) acted as the placement agent, in connection with the sale of the securities. Pursuant
to an engagement agreement, the Company agreed to pay the Placement Agent a cash commission of $
The Company first allocated the cash proceeds to the loan and the equity classified warrants on a relative fair value basis, secondly, the proceeds were allocated to the beneficial conversion feature. The proceeds allocated to the warrants and the beneficial conversion feature resulted in a debt discount being amortized as additional interest expense using the effective interest method over the term.
The table below summarizes the Debenture related activity during the three months ended March 31, 2022:
| Principal | Debt discount | Net book value | ||||||||||
| Balances January 1, 2022 | $ | $ | ( | ) | $ | |||||||
| Amortization | ||||||||||||
| Balance March 31, 2022 | $ | $ | ( | ) | $ | |||||||
As of March 31, 2022 and December 31, 2021, the Company has classified the debt as current liability because management intends to redeem the remaining convertible debentures within the following 12 months.
NOTE 9 – COMMON AND PREFERRED STOCK
Common Stock
The Company’s certificate of incorporation provides for two classes of common stock: Class A common stock (authorized shares, par value $), which has one vote per share, and Class B common stock (authorized shares, par value $), which has ten votes per share. Any holder of Class B common stock may convert his or her shares at any time into shares of Class A common stock on a share-for-share basis. Otherwise, the rights of the two classes of common stock are identical.
In
August 2021, the Board of Directors approved a share repurchase program pursuant to which the Company is authorized to repurchase up
to $
During the year ended December 31, 2021, the Company repurchased shares of Common Stock, for an aggregate purchase price of $ pursuant to the Company’s Share Buy-Back program. The shares were retired as of December 31, 2021. amounts were repurchased in the three months ended March 31, 2022. The total remaining authorization for future common share repurchases under the Company’s share repurchase program was $ million as of March 31, 2022.
During
the year ended December 31, 2021, the Company sold shares of common stock, resulting in proceeds of approximately $
Preferred Stock
The Company is authorized to issue of preferred stock, par value $, of which shares are designated as Series A Preferred Stock (“Dividend Shares”). The Company’s Board of Directors, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. The Board of Directors may authorize the issuance of preferred stock, which ranks senior to the Company’s common stock for the payment of dividends and the distribution of assets on liquidation. In addition, the Board of Directors can fix limitations and restrictions, if any, upon the payment of dividends on both classes of the Company’s common stock to be effective while any shares of preferred stock are outstanding.
| 19 |
On September 20, 2021, the Company filed a certificate of designation (the “COD”) of preferences, rights, and limitations of Series A Non-Voting Preferred Stock (“Series A Preferred Stock”) with the Secretary of State of Delaware. Pursuant to the COD, the Company is authorized to issue up to shares of Series A Preferred Stock (the “Dividend Shares”).
On
September 27, 2021,
As of the Record Date, the following holders of securities were entitled to receive the Dividend (collectively, the “Qualified Recipients):
| i. | each outstanding share of Class A common stock (the “Common Stock”), of which shares were issued and outstanding, |
| ii. | each
share of Common Stock underlying outstanding common stock purchase warrants containing a
contractual right to receive the Dividend (“Warrants”) of which, |
| iii. | each
original issue discount senior convertible debenture (the “Debentures”) issued
on June 30, 2021, containing a contractual right to receive the Dividend on an as converted
to Common Stock basis, of which $ |
The Company’s management has evaluated the Preferred Stock and determined that Preferred Stock is mandatorily redeemable upon the distribution of the net proceeds from the sale of the designated marketable securities. Accordingly, it is classified as a liability recorded at fair value, with changes in fair value being reflected in earnings.
Equity Compensation Plans
As of March 31, 2022, the Company has approximately shares of Class A Common Stock reserved for issuance under the Company’s equity compensation plans.
In the three months ended March 31, 2022, the Company issued the below shares and granted the following stock-based awards:
On January 2, 2022, Michael Malone, our Chief Financial Officer exercised an option to purchase shares of our common stock that was issued on December 15, 2018. The option was exercised on a cashless basis and included shares withheld pursuant to the cashless exercise and an additional shares withheld for tax withholding. Accordingly, we issued Mr. Malone shares of common stock.
On January 3, 2022, we issued four (4) common stock purchase options to our non-employee directors, pursuant to our amended non-employee director compensation policy. Each option entitled the holder to purchase shares of common stock at an exercise price of $ per share, for an aggregate exercise amount of $
During the month of January 2022, non-executive employees exercised a total of stock options. These options were exercised on a cashless basis, and included shares withheld pursuant to cashless exercise and tax withholdings. This resulted in the issuance of shares of common stock.
On January 6, 2022, we issued non-executive employees, options to purchase shares of Class A common stock. The option has an exercise price of $ per share, a term of five () years and vests in equal quarterly installments over a three () year period from the grant date. The option had a Black-Scholes value on the grant date of $.
On January 6, 2022, we issued Christopher Miglino, our Chief Executive Officer, an option to purchase shares of common stock. The option has an exercise price of $ per share, a term of seven () years and vests in equal quarterly installments over a three () year period from the grant date. The option had a Black-Scholes value on the grant date of $.
| 20 |
On January 6, 2022, we issued an employee an option to purchase shares of common stock. The option has an exercise price of $ per share, a term of seven () years and vests in equal quarterly installments over a three () year period from the grant date. The option had a Black-Scholes value on the grant date of $.
On January 6, 2022, we issued Michael Malone, our Chief Financial Officer, a conditional option to purchase shares of Class A common stock. The option is a conditional grant, subject to shareholder approval. Assuming approval by the shareholders, the option has an exercise price of $ per share, a term of seven () years and vests in equal quarterly installments over a three () year period from the grant date. The option had a Black-Scholes value on the grant date of $.
On January 6, 2022, we issued an employee an option to purchase an aggregate of shares of common stock. The option is a conditional grant, subject to shareholder approval. The option has an exercise price of $per share, a term of five () years, and vest in equal quarterly installments over a three () year period from the grant date. The option had a Black-Scholes value on the grant date of $.
The per-share fair value of each stock option with service conditions only granted during the quarter ended March 31, 2022 was determined on the grant date using the Black-Scholes option pricing model with the following assumptions:
| Grant date | ||||||||||||
| 1/3/2022 | 1/6/2022 | 1/6/2022 | ||||||||||
| Expected term (in years) | ||||||||||||
| Risk-free interest rate | % | % | % | |||||||||
| Expected volatility | % | % | % | |||||||||
| Expected dividend yield | % | % | % | |||||||||
Option Shares | Weighted Average Exercise Price | Weighted Average Remaining Term (years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding December 31, 2021 | $ | $ | ||||||||||||||
| Granted | $ | $ | ||||||||||||||
| Exercised | ( | ) | $ | $ | ||||||||||||
| Forfeited | ( | ) | $ | |||||||||||||
| Outstanding March 31, 2022 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2022 | $ | $ | ||||||||||||||
| 21 |
The Company did not issue any stock-based awards in the three months ended March 31, 2021.
During the three months ended March 31, 2022 and 2021, the Company recorded stock-based compensation expense of $ and $, respectively with such costs being included in Employee related costs on our unaudited Condensed Consolidated Statements of Operations. At March 31, 2022, there was $ of unrecognized compensation expense expected to be recognized over the next years on average.
Warrants
During the three months ended March 31, 2022, the Company did not have any activity with warrants.
On
February 21, 2021 the Company entered into an agreement with the Debenture holders to exercise
The
New Warrants were valued using the Black Scholes option pricing model at a total of $
Additionally during the three months ended March 31, 2021, there were an additional warrants exercised.
During
the three months ended March 31, 2021, other warrant holders exercised warrants to purchase
At March 31, 2022, the Company had the following outstanding and exercisable warrants:
Warrant Shares | Weighted Average Exercise Price | Maturity Date | ||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
| $ | ||||||||||
NOTE 11 – REVENUE
The Company has two business units, one operating segment, one reportable segment and one reporting unit. The Sequire segment includes the licensing of the Company’s proprietary SaaS platform and associated data analysis technologies, consumer and investor targeted marketing solutions to allow users of the Company’s SaaS platform to act on the insights obtained through the Company’s technologies, and LD Micro, which is in the business of hosting events and conference for microcap public companies.
| 22 |
The following table summarizes revenue by revenue stream for the three months ended March 31:
| 2022 | 2021 | |||||||
| Sequire platform revenue | $ | $ | ||||||
| Conference revenue | ||||||||
| Other revenue | ||||||||
| Total revenue | $ | $ | ||||||
The following table summarizes revenue recognized in exchange for customer securities and cash for the three months ended March 31:
| 2022 | 2021 | |||||||
| Customer securities | $ | $ | ||||||
| Cash | ||||||||
| Total revenue | $ | $ | ||||||
As
of March 31, 2022 and December 31, 2021, contract liabilities representing deferred revenue were approximately $
As
of March 31, 2022 and December 31, 2021, contracts receivable amounted to $
NOTE 12 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments, including cash and cash equivalents and accounts payable and accrued expenses, approximate their respective fair values due to the short-term nature of such instruments.
The carrying amount of our debt and notes receivable approximate their fair value.
Valuation of Marketable Securities
An integral part of the Company’s fair value measurement process is the assessment of the type of securities as well as the securities’ liquidity and marketability. Warrants are initially valued at cost, if acquired for cash, or at intrinsic value. Convertible debt is valued based on an analysis of the implied call option and a discounted cash flow analysis of the debt component. Equity securities are valued using the quoted prices times the number of shares acquired. The securities are then evaluated based on their marketability (usually based on the restrictions on resale into the securities primary market) and liquidity.
Investments in restricted securities of public companies cannot be offered for sale to the public until the company complies with certain statutory requirements. Investments in restricted securities of public companies are generally categorized in Level 2 of the fair value hierarchy. However, investments in public companies may be categorized in Level 3 of the fair value hierarchy depending on the level of observable liquidity. Specifically, if the Company determines the market activity is not sufficient to conclude the market activity represents an Active Market.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. The Company considers marketable securities without sufficient liquidity to sell within 6 months of the date of acquisition and securities that will not be eligible for resale in the public markets through Rule 144 for 1 year from the date acquisition to be valued with Level 2 inputs.
The
contract assets represent a forward contractual right to receive securities pursuant to a revenue contract. As of March 31, 2022 and
December 31, 2021, the Company determined the value of the securities underlying the contract asset to have a fair value of $
| 23 |
The Company had the following financial assets at March 31, 2022 and December 31, 2021:
Balance as of March 31, 2022 | Quoted Price in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | $ | $ | $ | $ | ||||||||||||
| Designated assets marketable securities | - | |||||||||||||||
| Contract assets | ||||||||||||||||
| Total Assets | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Series A Preferred Stock | $ | $ | $ | $ | ||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
Balance as of December 31, 2021 | Quoted Price in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Marketable securities | $ | $ | $ | $ | ||||||||||||
| Designated assets marketable securities | ||||||||||||||||
| Contract assets | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Series A Preferred Stock | $ | $ | $ | $ | ||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
Changes in Level 3 assets measured at fair value
The following table presents additional information about Level 3 assets measured at fair value. Both observable and unobservable inputs may be used to determine the fair value of assets classified within the Level 3 category. As a result, the unrealized gains and losses for the assets and liabilities within the Level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs. Transfers to/from Levels 1, 2 and 3 are recognized at the beginning of the reporting period in which a change in valuation technique or methodology occurs. Changes in Level 3 assets measured at fair value the three months ended March 31, 2022, were as follows:
Balance at January 1, 2022 | Acquisitions | Sales and dispositions | Transfers into Level 3 | Transfers out of Level 3 | Realized & unrealized gains (losses) | Balance March 31, 2022 | ||||||||||||||||||||||
| Common stock | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
| Convertible debt | ||||||||||||||||||||||||||||
| Warrants | ( | ) | ||||||||||||||||||||||||||
| Preferred stock | ||||||||||||||||||||||||||||
| Total Investments | $ | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
The Company had no Level 3 assets or liabilities in the three months ended March 31, 2021.
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Valuation processes for Level 2 and 3 Fair Value Measurements
Fair value measurement of certain of our marketable securities fall within Level 2 and 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.
The Company classifies certain assets as Level 3 assets if the estimated fair value was derived from level 3 inputs. The Company utilizes a put option pricing model to arrive at a discount for lack of marketability and liquidity associated with restrictions on sales into the public market. The Company generally classifies restricted securities in public companies as level 2, however in circumstances where the observed level of liquidity is low and the quoted market price is deemed unreliable they may be categorized in Level 3 of the fair value hierarchy. The Company considers marketable securities without sufficient liquidity to sell within 6 months of the date of acquisition and securities that will not be eligible for resale in the public markets through Rule 144 for 1 year from the date acquisition to be valued with Level 2 inputs.
The fair value of the Company’s Series A Preferred Stock may change significantly, impacting the Company’s assumptions used to estimate its fair value. The valuation of the Series A Preferred Stock is primarily based on the valuation of its underlying marketable securities. The marketable securities that are underlying the Series A Preferred Stock are classified as Designated Assets on the Company’s balance sheet and include Level 1 and Level 2 marketable securities and cash.
The following table lists the significant unobservable inputs used to value assets classified as Level 3 of March 31, 2022. The table is not intended to be all-inclusive, but instead identifies the significant unobservable inputs relevant to the determination of fair values. The other Level 3 assets have been valued using unadjusted third-party transactions and, unadjusted historical third-party information, or the unadjusted net asset values of the securities’ issuer. No unobservable inputs internally developed by the Company have been applied to these assets, and therefore are omitted from the following table.
| Assets | Valuation Technique | Unobservable inputs | Range | |||||
| Common stocks | Put option pricing model | Discount for lack of marketability | ||||||
| Convertible preferred stock | Put option pricing model | Discount for lack of marketability | ||||||
| Convertible debt | Discounted cash flow | Maturity | ||||||
| Risk adjusted discount factor | ||||||||
| Option pricing model | Volatility | |||||||
| Risk-free interest rate | ||||||||
| Dividend yield | ||||||||
| Time to maturity | ||||||||
Sensitivity of Level 3 measurements to changes in significant unobservable inputs
The process of estimating the fair value of securities without active markets involves significant estimates and judgement on behalf of management. These estimated fair values may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement techniques, and changes in the underlying assumptions used could significantly affect the fair value measurement amounts.
Changes in each of these significant unobservable valuation inputs will impact the fair value measurement of the financial instrument generally as follows:
| ● | An increase or decrease in the volatility of the common stock that underlies our holdings in convertible debt would result in a directionally similar change in the estimated fair value. | |
| ● | An increase or decrease in the risk-free interest rate or risk adjusted discount factor would result in an inverse change in the estimated fair value of our convertible debt. | |
| ● | An increase in the dividend yield would increase the estimated value of the convertible debt. | |
| ● | A change in the maturity may result in either an increase or decrease in estimated fair value of the convertible debt. | |
| ● | An increase or decrease in the discount for lack of marketability of our common stock holdings and the common stock that underlies our preferred stock would generally result in an inverse change in the estimated fair value. |
Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include securities in which we deem their market to be inactive or unreliable. The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next that are related to the observable inputs to a fair value measurement may result in a reclassification from one hierarchy level to another.
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NOTE 13 – RELATED PARTY TRANSACTIONS
The
Company has entered into an agreement providing access to a suite at the Sofi Stadium in Los Angeles from an entity wholly owned by Christopher
Miglino, our CEO. The agreement entitles the Company to game tickets, optional tickets for other stadium events, and suite and conference
room access during business days. In May of 2022, the Company renewed the agreement for four (4) additional National Football League
seasons for an average rate per year of approximately $
NOTE 14 – SUBSEQUENT EVENTS
Common stock issue for Warrants
Subsequent to March 31, 2022, the Company issued approximately
CVR Agreement
On
June 13, 2022, the Company entered into an agreement with an institutional investor whereby in exchange for the payment of $
Extension of Outstanding Original Issue Discount Senior Secured Convertible Debentures
On
July 1, 2022, the holders (“Holders”) of $
Bridge Note
On
July 1, 2022, the Company issued an original issue discount bridge note in principal amount of $
On August 8, 2022, as described below, the Bridge Note was exchanged for a revolving note in the Senior Secured Revolving Credit Facility.
Senior Secured Revolving Credit Facility
On
August 8, 2022, the Company entered into a senior secured revolving credit facility agreement with an institutional investor to initially
borrow up to $
On
closing, the lender advanced $
Commencing on the first day of each month after the Effective Date, the outstanding balance of the Revolving Loan will be paid as calculated based on a percentage of the Company’s collections from the sale of certain of its marketable securities.
As consideration for Lender entering into the Loan Documents, Lender will be entitled to receive, in addition to any payment made under the Credit Agreement, 10% of the net proceeds received by the Company from the sales of securities received during the term of the Revolving Loan.
For the Company to enter into the Credit Agreement, we were required to issue shares of the Company’s common stock as a breakup fee to an unrelated lender as a result of a failed offering.
Extension of Warrants
As part of the transactions contemplated by the Loan Documents, the Company additionally agreed to extend the expiration dates of the following outstanding Common Stock purchase warrants held by the Lender or its affiliated entities until September 30, 2023:
(a) a warrant to purchase shares of Common Stock issued on June 30, 2020, that was initially disclosed on the Company’s Current Report on Form 8-K filed with the SEC on June 30, 2020;
(b) a warrant to purchase shares of Common Stock issued on November 29, 2018, that was initially disclosed on the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2018; and
(c) a warrant to purchase shares of Common Stock issued on November 29, 2018, that was initially disclosed on the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2018;
(d) a warrant to purchase shares of Common Stock issued on October 27, 2017 that was initially disclosed on the Company’s Current Report on Form 8-K filed with the SEC on October 27, 2017.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding our business development plans, timing, strategies, expectations, anticipated expenses levels, business prospects and positioning with respect to market, demographic and pricing trends, business outlook, technology spending and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations) and express our current intentions, beliefs, expectations, strategies or predictions. These forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Special Note Regarding Forward-Looking Statements” and under “Risk Factors” and elsewhere in our annual report for the year ended December 31, 2021 filed on Form 10-K and this quarterly report. The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this quarterly report.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying unaudited Condensed Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
Executive Overview
Financial results:
| ● | Revenue was $7.5 million, up approximately 53% for three months ended March 31, 2022 versus 2021. | |
| ● | Cash, cash equivalents and marketable securities were $29.2 million as of March 31, 2022. |
Reportable Segments
We have a single operating and business segment, Sequire, which is comprised of two business units; Sequire and LD Micro. Our Sequire segment includes the licensing of our SaaS based Sequire platform and related services, and our event and conference operations. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. All differences between our internal management reporting basis and accounting principles generally accepted in the United States of America (“GAAP”), along with certain corporate-level and other activity, are included in Corporate and Other. Our management, along with our chief executive officer, who acts as our Chief Operating Decision Maker (as such term is defined in segment reporting guidance), review financial information presented on a consolidated basis for purposes of allocating resources and evaluating performance and do not evaluate using asset information.
Deconsolidation of BIGToken, Inc.
On December 29, 2021, BIGToken (formerly FPVD) completed a merger transaction with BritePool, Inc. (“BritePool”) (the “Merger”) resulting in the Company’s ownership in BIGToken being reduced from 66% to approximately 4.99%. As a result of the Merger, BIGToken issued 183,445,351,631 shares of its common stock (“Acquisition Shares”) for all of the issued and outstanding equity shares of BritePool. On December 29, 2021, as a condition for the closing of the Merger, the Company exchanged 149,562,566,534 shares of BIGToken common stock for 242,078 shares of BIGToken’s Series D Convertible Preferred Stock (“Series D Stock”) (the “Exchange”). Simultaneously with the Exchange, the Company converted 22,162 shares of the Series D Stock into 13,692,304,136 shares of BIGToken’s common stock, or approximately 4.99% of the issued and outstanding shares of BIGToken’s common stock.
The financial results of BIGToken’s business are presented as discontinued operations in our unaudited Condensed Consolidated Statement of Operations for all periods presented through the respective transaction close date as the transaction. Please see “Note 3 — Discontinued Operations” in our unaudited Condensed Consolidated Financial Statements included elsewhere in this report for additional information.
Business Focus
During the first quarter of 2022, we have focused on: (i) the continued growth of our Sequire platform’s functionality and user base and (ii) the expansion of LD micro events and offerings.
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.
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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 throughout the remainder of 2022.
Company Overview
We are a technology firm focused on enhancing communications between public companies and their shareholders and investors. We currently have two distinct business units:
● Our unique SaaS platform, Sequire, which allows issuers to track their shareholders’ behaviors and trends, then use data-driven insights to engage with shareholders across marketing channels. Through Sequire, we offer tools and related data and insight services to allow issuers of publicly traded securities to better understand their position in the market.
● LD Micro organizes and hosts investor conferences for micro and small-cap companies.
We derive our revenues from the:
| ● | Licensing of our proprietary SaaS platform; | |
| ● | Sales of proprietary data; | |
| ● | Attendance and sponsorship fees from investor conferences and events; and | |
| ● | Sales of insight and consulting services. |
Sequire
The Sequire platform is a central hub where companies can manage certain administrative functions, reach out and engage with shareholders as well as identify potential new investors. The platform utilizes machine learning and advanced analytics to bring our clients actionable information that we believe can be used to maximize ROI through better investor and stockholder communications. Clients then can engage with targeted shareholder groups across marketing channels including email, social media, programmatic, and hyperlocal.
When interpreting data, clients can see gains and losses over time, buying/selling trends, total outstanding shares, new shareholders, and shareholders broken out by percentage. Based on this data, we can assist our users in developing customized communications campaign utilizing targeted ads and messaging.
Among other features, the Sequire platform provides its users tools to monitor investor sentiment and activities and simplify back office administration such as:
| ● | real-time level-two trading data, | |
| ● | the ability to monitor the activities of competitive public companies of the user, | |
| ● | news alerts, | |
| ● | custom survey feature to enhance shareholder communications; | |
| ● | real-time and searchable warrant and option ledgers; and | |
| ● | integrated communication between investor relations programs and corporate communication firms. |
Data Targeting
We help our clients build an investor base through targeted advertising and marketing campaigns, tailored to their needs. Using data-driven insights, we help clients meet their unique marketing objectives, whether they’re messaging existing investors, new investors, or consumers.
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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 is the premier event platform for micro-cap and small cap companies. In September of 2020, we acquired LD Micro, and hosted the 2020 Main Event on our Sequire Virtual Events platform. The 2021 Main Event had over 3,000 attendees and hosted webinars with over 500 companies. We are currently planning to expand the number and subject matter of our conferences and events. Through the events platform, we have the ability to host a variety of virtual events and conferences including investor conferences, earnings calls, shareholder meetings, annual, investor/analyst days, corporate town halls, roadshows, and more. We believe that our ability to offer users a seamless, centrally managed virtual events solution that can be customized to any industry will help transform our platform into the premier investor event tool.
Marketing and sales
We market our services through our in-house sales and marketing team. Our team focuses on social media, including Facebook, LinkedIn and Twitter, public relations (PR), industry events and the creation of white papers which assist in our marketing efforts and are used as lead generation tools.
Intellectual property
We currently rely on a combination of patents, trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary information. We currently have eight (8) US patent applications filed.
FINANCIAL CONDITION
Going Concern
Cash on hand and marketable securities at March 31, 2022 was approximately $0.4 million and $28.8 million, respectively. Based upon our cash flow projections taking into account cash, marketable securities and the projected cash flows from operations and access to borrowings under our revolving line of credit we believe we have enough liquidity, taking into account the uncertainty related to the ongoing pandemic and general economic uncertainty, to continue to fund operations at their currently level through the remainder of the year.
The Company has incurred significant losses since its inception and has not demonstrated an ability to generate operating cash flow. In addition, the Company’s operations may require additional financial support or additional financing. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the issuance date of the consolidated financial statements. The unaudited Condensed Consolidated Financial Statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the unaudited Condensed Consolidated Financial Statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Cash, Cash Equivalents, and Investments
As of March 31, 2022, we had (i) cash of $0.4 million, and (ii) marketable securities of $28.8 million for a total of approximately $29.2 million as compared to $17.0 million as of December 31, 2021. Cash and cash equivalents consist primarily of highly liquid investments such as money market funds and deposits held at major banks. Certain of such unused amounts are subject to satisfying specified conditions prior to draw-down (such as pledging to our lenders sufficient subscriptions and customer contracts).
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Components of Operations
Revenues
Sequire Platform. We recognize revenue from the licensing of our Sequire platform, data, marketing and insight services performed in conjunction with the Sequire platform. We recognize revenue using the percentage of completion method based primarily on time.
Conference Revenue. We recognize revenue from hosting conferences and associated sponsorships. We receive payment from presenting companies and sponsors of the conferences.
Operating Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated with the cost of media 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.
Marketing and selling expenses. 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
Revenues
The following table presents net revenues by type for the three months ended March 31:
| Increase (Decrease) | ||||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Sequire platform revenue | $ | 7,499,000 | $ | 4,508,000 | $ | 2,991,000 | 66 | % | ||||||||
| Conference revenue | - | 45,000 | (45,000 | ) | (100 | )% | ||||||||||
| Other revenue | - | 364,000 | (364,000 | ) | (100 | )% | ||||||||||
| Total revenue | $ | 7,499,000 | $ | 4,917,000 | $ | 2,582,000 | 53 | % | ||||||||
Revenues for the three months ended March 31, 2022 increased to approximately $7.5 million compared to approximately $4.9 million for the three months ended March 31, 2021. Sequire’s revenue growth is driven by the continued growth in the platform’s subscriber base, as well as an increase in sales of Sequire’s service offering to existing and new subscribers.
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Operating Expenses
The following table presents operating expenses by type for the three months ended March 31, 2022:
| Increase (Decrease) | ||||||||||||||||
| 2022 | 2021 | $ | % | |||||||||||||
| Cost of revenues | $ | 2,798,000 | $ | 1,377,000 | $ | 1,421,000 | 103 | % | ||||||||
| % of net revenues | 37 | % | 28 | % | ||||||||||||
| Employee related costs | 2,497,000 | 1,550,000 | 947,000 | 61 | % | |||||||||||
| % of net revenues | 33 | % | 32 | % | ||||||||||||
| Platform costs | 76,000 | 20,000 | 56,000 | 280 | % | |||||||||||
| % of net revenues | 1 | % | 0 | % | ||||||||||||
| Marketing and selling | 1,413,000 | 994,000 | 419,000 | 42 | % | |||||||||||
| % of net revenues | 19 | % | 20 | % | ||||||||||||
| Depreciation and amortization | 187,000 | 256,000 | (69,000 | ) | (27 | )% | ||||||||||
| % of net revenues | 2 | % | 5 | % | ||||||||||||
| General and administrative | 1,856,000 | 295,000 | 1,561,000 | 529 | % | |||||||||||
| % of net revenues | 25 | % | 6 | % | ||||||||||||
| Total expense | $ | 8,827,000 | $ | 4,492,000 | $ | 4,335,000 | 97 | % | ||||||||
Cost of revenue. Cost of revenue for the three months ended March 31 2022 and 2021 were approximately $2,798,000 and $1,377,000, respectively. This increase is a result of the increased revenues. As a percentage of total revenue, the cost of revenues increased from 28% to 37%. The increase as a percentage of revenues is the result of a greater percentage of revenues derived from serviced based revenue.
Employee Related Costs. Employee related costs increased to $2,497,000 during the three months ended March 31, 2022 compared to $1,550,000 for the three months ended March 31, 2021. The increase is primarily the result of an increase in staffing expenses or headcount required to service the increased number of platform subscribers as well as an increase in the number of subscribers utilizing the Company’s service offering.
Platform costs. Platform costs for the three months ended March 31, 2022 and 2021 were $76,000 and $20,000, respectively. Platform costs include costs incurred to host and maintain the Company’s Sequire platform. These costs increased from the prior year due to the increase in platform capacity and functionality required to support the growth in the Company’s subscriber based of the Sequire platform.
Marketing, data services and sales. Marketing, data services and sales for the three months ended March 31, 2022 and 2021 were $1,413,000 and $994,000, respectively. Marketing and data costs increased versus prior year as a result of an increase in the costs incurred to service the expanded customer base.
Depreciation and Amortization. Our long-lived assets primarily consist of internally developed software. For the three months ended March 31, 2022 and 2021 depreciation and amortization were $187,000 and $256,000, respectively.
General and administrative. General and administrative expenses were approximately $1,856,000 and $295,000 for the three months ended March 31, 2022 and 2021, respectively. The increase in expense for the year is driven by an increase in corporate related expenses to support the growth of the Company.
Other income / (loss). Other income / (loss) for the three months ended March 31, 2022 and 2021was $5.1 million versus a loss of $4.7 million. For the three months ended March 31, 2021 this included approximately $9.3 million in financing charges. This is primarily comprised of a non-cash inducement charge of $7.7 million related to our February 2021 warrant financing. Unrealized gains on our marketable securities for the three months ended March 31, 2022 were $6.4 million as compared to $4.0 million for the comparable period of 2021.
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Cash Flows
The following table presents our cash flows for the three months ended March 31, 2022:
| 2022 | 2021 | |||||||
| Net cash (used in) provided by: | ||||||||
| Continuing operating activities | $ | (5,328,000 | ) | $ | (4,651,000 | ) | ||
| Continuing investing activities | 1,279,000 | 1,074,000 | ||||||
| Continuing financing activities | 3,052,000 | 12,968,000 | ||||||
| Net cash (used in) provided by continuing operations | (997,000 | ) | 9,391,000 | |||||
| Net cash provided by discontinued operations | - | 3,667,000 | ||||||
| Net cash (decrease) increase | $ | (997,000 | ) | $ | 13,058,000 | |||
Cash flows from continuing operating activities
The primary use of operating cash is to pay our media, data and platform vendors, employees and others for a wide range of services. Cash flows used in continuing operating activities increased by approximately $0.7 million during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. This is primarily due to increases in operating expense, which include increases in media, data and employee related costs.
The Company expects to continue to use cash in excess of receipts generated from operations for the foreseeable future due to the substantial portion of the Company’s sales paid for in marketable securities of our customers. The Company classifies proceeds from the sales of marketable securities received from our customers for the payment of our services as investing activities.
Cash flows from continuing investing activities
Our principal recurring investing activities are the funding of our internal software development and the sale of marketable securities. During the three months ended March 31, 2022 and 2021, net cash provided by investing activities increased by $205,000. During the three months ended March 31, 2022 and 2021, the Company generated $1,277,000 and $2,266,000, respectively from the sale of marketable securities. Expenditures for software development were $243,000 and $154,000 for the three months ended March 31, 2022 and 2021, respectively. Deferred payments related to our acquisition of LD Micro during the three months ended March 31, 2021, were $1,004,000.
Cash flows from continuing financing activities
During the three months ended March 31, 2022, cash generated from financing activities was primarily attributable to $3,153,000 of proceeds, net of payments from our short-term borrowings partially offset by $101,000 of payments for withholding taxes related to our restricted stock units. During the three months ended March 31, 2021, we generated $12,220,000 of proceeds from the exercise of warrants and $284,000 of proceeds from the issuance of our common stock.
Liquidity
We believe that our current sources of funds will not provide us with adequate liquidity during the 12-month period following December 2022 including to repay our remaining debt obligations. Our future capital requirements will depend on many factors, however, the Company’s primary source of capital is the sale of marketable securities received as consideration for the licensing of our Sequire platform and the associated services. The Company’s sales of marketable securities are primarily through sale transactions that qualify for exemptions pursuant to Rule 144 of the Securities Act of 1933. The conditions required to be met to qualify for the exemptions under Rule 144 are often difficult to predict, making it difficult to predict the timing of the associated cash flows from the sales of these securities. The Company’s holdings of marketable securities are subject to risks and uncertainties such as fluctuations in pricing in the primary market, and legal restrictions that create uncertainty around realization and timing of cash flows. Additionally, other factors contribute to uncertainty of our cash flows, such as our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of Sequire.
The Company projects the sale of its marketable security holding will represent a substantial portion of the cash required for operations for the foreseeable future, and as a consequence, creates substantial doubt about the Company’s ability to continue as a going concern.
We expect to generate net positive operating income and cash flows from our Sequire business in the future, however, due to uncertainty around the timing and realization of cash flow creates substantial doubt about the Company’s ability to continue as a going concern.
During the three months ended March 31, 2022 the Company entered into a factoring agreement with a financial institution to sell certain accounts receivable and future sales of up to $3 million. The factoring agreement was fully paid off with the proceeds of our revolving credit facility described below.
We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies. Finally, we continually evaluate our cash needs and may decide it is best to raise additional capital or seek alternative financing sources to fund the rapid growth of our business, including through drawdowns on existing debt facilities. Conversely, we may also from time to time determine that it is in our best interests to voluntarily repay certain indebtedness early or repurchase our common stock through our Stock buy-back program.
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On July 1, 2022, the Company issued an original issue discount bridge note in principal amount of $650,000 (“Bridge Note”) to an institutional investor in exchange for $500,000 in cash. The bridge note was non-interest bearing and had a maturity date of August 15, 2022. The Company’s obligations pursuant to the bridge note were secured by substantially all of the assets of the Company pursuant to the terms of the Security Agreement.
On July 1, 2022, the holders (“Holders”) of $1,102,682 in principal of the Company’s Original Issue Discount Senior Secured Convertible Debentures (“Debentures”), representing all of the outstanding Debentures that were originally issued on June 30, 2020, entered into an agreement with the Company to (i) extend the maturity date of the Debentures until December 31, 2023 and (ii) extend the first date that monthly redemptions are required to be made by the Company to begin on January 1, 2023 (the “Debenture Extension”). As consideration for the Debenture Extension, the Company increased the principal amount outstanding on the Debentures by five percent (5%). Additionally, the holders of the Debentures have the unilateral right to extend the maturity date and monthly redemption period by an additional six (6) month period at any time prior to January 1, 2023 for an additional five percent (5%) to be added to the outstanding principal of such Debentures. The Debentures, including the additional principal added to the Debentures are secured by substantially all of the assets of the Company pursuant to a security agreement entered into between the Company and Holders contemporaneous with the original issuance of the Debentures (the “Security Agreement”).
On August 8, 2022, we entered into a revolving line of credit allowing us to borrow up to $9.45 million in principal. Until such time that the Company becomes current on its reporting obligations under the Securities Exchange Act of 1934, the maximum amount accessible is limited to $5.6 million in August 2022. The revolving credit line has a two-year term with a variable repayment schedule that is tied to the proceeds the Company generates from the sale of marketable securities from its portfolio. The principal repayment as a percentage of proceeds from marketable securities is 10% for the first three months and increase up to 20% after 12 months. Further, we agreed to pay the lender in the credit facility, an amount equal to ten percent (10%) of the net proceeds actually received by us from the sale any securities of a customer that we acquired during the term of the revolving note(s).
As of March 31, 2022, our cash on hand was approximately $0.4 million.
We have historically financed our operations primarily from the sale of debt and equity securities. Recently, our operations from Sequire and LD Micro have resulted in increased revenue, but we are still not cash flow positive, and accordingly cannot fund our operations solely from our revenue. Notwithstanding our recent revolving credit facility financing (including the bridge note), for which we have received approximately $5.6 million, partially offset by the required payments we made under outstanding obligations of $3.75 million at closing, we are still unable to meet all of our obligations as they become due. We anticipate that we will need to continue to fund our operations from the sale of debt and equity securities. Additionally, we are delinquent in our SEC reporting obligations and have received notices from Nasdaq that if we are not current with our reporting obligations by February 28, 2023, we may be delisted from NASDAQ. Although we have been historically successful in raising capital through the sale of our equity and debt securities, and management believes that such capital sources will be available should they be required, there can be no assurance that financing will be available to us when needed in order to allow us to continue our operations, or if available, on terms acceptable to us. Further, in the event we are delisted from Nasdaq, raising capital through the sale of our equity or debt securities will be more challenging as investors are historically less likely to purchase securities that are not listed on a national exchange.
Series A Preferred Stock
During 2021 we issued 36,462,417 shares of our Series A Preferred Stock to Qualified Recipients (as defined below) on a 1-for-1 as converted to common stock basis (the “Dividend”). The record date for the Dividend was September 20, 2021 (the “Record Date”). The Series A Preferred Stock entitles the Qualified Recipients to receive the net proceeds from sales of certain securities received by SRAX as payment from its customers for access to the Sequire Platform services (the “Designated Assets”).
As of the Record Date, the following holders of securities were entitled to receive the Dividend (collectively, the “Qualified Recipients”):
| (i) | each outstanding share of common stock, of which 25,160,504 shares were issued and outstanding, | |
| (ii) | each share of common stock underlying outstanding common stock purchase warrants containing a contractual right to receive the Dividend of which, 10,377,645 were outstanding, and | |
| (iii) | each original issue discount senior convertible debenture issued on June 30, 2020, containing a contractual right to receive the Dividend on an as converted to common stock basis, of which $2,486,275 of Debentures were outstanding in principal and interest, convertible into 924,268 shares of common stock. |
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As of the Record Date, the Designated Assets had an aggregate value of approximately $6.5 million and consisted of securities (i) from twenty-five (25) companies that trade or are quoted on the OTC Markets, (ii) having stock prices ranging from $0.01 to $5.15, (iii) with aggregate values of the securities held by the Company ranging from $1,930 to $900,000. The Designated Assets consist of (a) 24 issuers’ common stock and (b) one (1) issuer’s convertible debt instrument that is convertible into common stock.
During the fourth quarter and portion of the third quarter of 2021, we sold an aggregate of approximately $680,000 of the Designated Assets. On January 30, 2022, we distributed the net proceeds from those shares to holders of our Series A Preferred Shares. Pursuant to the distribution, each holder of Series A Preferred Stock received approximately $0.01 per share.
As of December 31, 2021, the Designated Assets had a market value of $3,925,000.
During the first quarter of 2022, we sold an aggregate of Designated Assets with a cost basis of $384,000 and generated proceeds of $268,000, which paid the dividend declared during the fourth quarter 2021. The sale of Designated Assets did not result in sufficient proceeds to declare a distribution pursuant to the terms of the Series A Preferred Stock and there was no distribution declared during the first quarter of 2022.
As of March 31, 2022, the Designated Assets had a market value of $3.2 million and the Company was holding cash for distribution of $0.6 million.
The Designated Assets consist of securities (i) from twenty three (23) companies that trade or are quoted on the OTC Markets, (ii) having quoted stock prices ranging from $0.001 to $7.07, (iii) with aggregate values of the securities held by us ranging from $0 to $750,000, and (iv) with an average value equal to $140,000 per issuer.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies during the three months ended March 31, 2022. Critical accounting policies and the significant estimates in accordance with such policies are regularly discussed with our Audit Committee. Those policies are discussed under Note 1—Summary of Significant Accounting Policies, in the notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K filed with the SEC on October 12, 2022 for the fiscal year ended December 31, 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable, as we are a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We evaluated, under the supervision and with the participation of the principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”) as of March 31, 2022, the end of the period covered by this report on Form 10-Q. Based on this evaluation, our Chairman and Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) have concluded that our disclosure controls and procedures were not effective at the reasonable assurance level at March 31, 2022 because the Company has not yet completed its remediation of the material weaknesses previously identified and disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, the end of its most recent fiscal year.
Specifically, management has determined the following:
| ● | a lack of internal valuation experts; | |
| ● | a lack of sufficient in-house qualified accounting staff; | |
| ● | a lack of validation of completeness and accuracy of internally prepared data, including key reports generated from systems, utilized in the operations of controls, leading to delays in the Company’s closing process; | |
| ● | inadequate controls and segregation of duties due to limited resources and number of employees; | |
| ● | lack of internal personnel to properly evaluate the fair value and the associated revenue recognition related to our non-cash revenue contracts; | |
| ● | substantial reliance on manual reporting processes and spreadsheets external to the accounting system for financial reporting leading to delays in the Company’s closing process; | |
| ● | lack of adequate controls in the accounting for internally developed software costs; products and services; and the recording of sophisticated, material financing transactions which are heavily dependent upon the use of estimates and assumptions and require us using consultants; | |
| ● | and our lack of experience in monitoring and administering, the Company’s internal control over financial reporting |
In addition to the material weaknesses noted above, we noted the following deficiencies that we believe to be material weaknesses:
| ● | Fair Value Measurements: deficiencies in the design of this control and excessive reliance on the work of a third party specialist resulted in undetected errors in the valuation of certain positions that results in adjustments. | |
| ● | Earnings per share; deficiencies in the design of this control resulted in preparation errors that were not prevented or detected. |
Our management concluded that considering internal control deficiencies that, in the aggregate, rise to the level of material weaknesses, we did not maintain effective internal control over financial reporting as of March 31, 2022 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
To mitigate the items identified in the assessment, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals/consultants. As we grow, we expect to increase the number of employees, which would enable us to implement adequate segregation of duties within the internal control framework.
Remediation
We are continuing to seek ways to remediate these weaknesses, which stem from our small workforce and limited resources. Beginning with the quarter ended March 31, 2022, the Company has hired a third party valuation company to perform the valuation of the Company’s marketable securities.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
Other than the changes noted above, there were no changes in our internal control over financial reporting during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material adverse effect on our business, prospects, financial condition and results of operations, and the market price of our securities could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an adverse effect on our business or similar statements) mean that the event could or would have a material adverse effect on our business, prospects, financial condition, and results of operations, which in turn could or would have a material adverse effect on the market price of our securities. Although we have organized the risk factors below under headings to make them easier to read, many of the risks we face involve more than one type of risk. Consequently, you should read all the risk factors below carefully before making any decision to acquire or hold our securities.
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 years-ended December 31, 2021 and 2020, we reported loss from operations of $85,000 and $7,032,000, respectively, and accumulated deficits of $30,355,000 and $50,342,000, respectively. Additionally, for the three-month periods ended March 31, 2022 and 2021, we reported we reported (loss) income from operations of ($1,328,000) and $425,000, respectively, and an accumulated deficit of $26,627,000 at March 31, 2022. 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, 2021 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. Based upon our cash position on March 31, 2022, there is substantial doubt about our ability to continue as a going concern beyond twelve months from the filing of this quarterly report. Our ability to continue as a going concern is based on several factors; (i) our ability to sustain our current operating performance, and (ii) our ability to raise additional capital. If we are not successful with either of these, we may no longer be able to continue as a going concern and may cease operation or seek bankruptcy protection.
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, of which $1.3 million remains outstanding as of March 31, 2022. In July 2022, we amended certain terms of the debentures whereby in exchange for an additional five percent (5%) to be added onto the outstanding principal, we extended the maturity dates by six (6) months or until December 31, 2023 as well as extended the date we are required to begin making amortization payments until January 1, 2023. In addition, the holders of the debentures have the unilateral right to extend the maturity date and amortization payments by another six (6) months each in exchange for another additional five percent (5%) to be added to the principal of the debentures.
On July 1, 2022, we entered into an original issue discount bridge loan in the principal amount of $650,000 pursuant to which we received $500,000 in cash. On August 8, 2022, the bridge loan was converted into revolving notes as part of a senior secured revolving credit facility whereby we received $4,930,000 cash on the first draw down. Of the amount received, we used approximately $3.75 million of payoff and retire outstanding obligations. The repayment of the debentures and revolving credit facility are secured by substantially all the assets and the intellectual property of the Company.
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Further, in addition to payments required pursuant the debentures and revolving credit facility, the lender is also entitled to ten percent (10%) of the net proceeds of any sales of securities acquired from our customers during the term of the loan. As a result, this will further negatively impact our cash flows from operations and may require us to raise additional capital earlier than previously anticipated. Depending on our level of operations, we may not be able to generate sufficient cash flow to repay our obligations under the debentures or revolving credit facility as they come due. 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 securities or the sale of assets, in order to make the required 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 and revolving credit facility, we will be in default, which would permit the lender to accelerate the maturity and require immediate repayment of the outstanding principal and interest. In such event, this could 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 outstanding loan obligations contain substantial covenants that may impact our business, our ability to secure additional debt financing, and our ability to pay our debts as they become due.
As of December 29, 2022, we have approximately (i) $1.1 million outstanding of our secured convertible debentures issued in June 2020 that are due and payable on December 31, 2023 and (ii) $5,580,000 of revolving notes outstanding pursuant to our senior secured revolving credit facility. Each of the debentures and revolving notes / credit facility contain a number of affirmative and negative covenants, including, but not limited to: reporting requirements, certain financial covenants related to our stock portfolio, collateral limitations, certain limitations on liens and indebtedness, dispositions, mergers and acquisitions, restricted payments and investments, corporate changes and limitations on waivers and amendments to certain agreements, our organizational documents, etc. Our failure to comply with the covenants in the credit agreement governing the credit facility and the debentures and associated transaction documents could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt and potential foreclosure on the assets pledged to secure the debt.
Further, we agreed to pay the lender in the credit facility, an amount equal to ten percent (10%) of the net proceeds actually received by us from the sale any securities of a customer that we acquired during the term of the revolving note(s). Given that we have not yet achieved profitability, and we will additionally be required to make payments upon the sales of our customer’s securities to the lender, we may be unable to continue to meet our obligations as they become due. If we are unable to refinance or repay our indebtedness as it becomes due or upon an event of default, we may become insolvent and be unable to continue operations.
Additionally, the revolving loan obligations under our secured credit facility provide for variable repayment terms ranging from 10% to 30% of the net proceeds actually received upon the sale of our customer’s securities that we receive pursuant to the provision of services. This will further negatively impact our cash flows and may further accelerate the anticipated timeframe in which we need to raise additional capital.
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 March 31, 2022, 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.
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 Commission.
Impacts of the Conflict between Russia and Ukraine and the COVID-19 Pandemic
Russia invaded Ukraine in February 2022 and is still engaged in active armed conflict against the country. The global COVID-19 pandemic continues to evolve, and we will continue to monitor developments closely. To date, our financial condition and operations have not been significantly impacted by the conflict between Russia and Ukraine and the COVID-19 pandemic. The extent of the impact on our business, operations remains uncertain and will depend on certain developments, including the actions of U.S. and foreign governments to impose sanctions on Russia, regulatory agencies, other third parties with whom we do business. We will continue to actively monitor the rapidly evolving situation and may take actions that alter our operations, including those that may be required by federal, state or local authorities or that we determine are in the best interests of our employees and other third parties with whom we do 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. Additionally, 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.
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.
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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.
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.
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.
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Certain of our business affiliates have operations outside of the United States that are subject to numerous operational risks.
Certain of our 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 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 business affiliates or the law, could have certain adverse effects on the financial condition of these business affiliates. Any failure by these affiliates to effectively manage the challenges associated with the international operation of their businesses could materially adversely affect their, and hence our, financial condition.
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
Many of the securities we receive for services do not have an active trading market, and we value these securities at fair value as determined in good faith under procedures adopted by our Board of Directors, which valuation is inherently subjective and may not reflect what we may actually realize for the sale of these securities.
The majority of securities comprising our stock portfolio are, and are expected to continue to be, in securities that have a limited market, limited liquidity, high volatility, and accordingly, their market price may not accurately reflect the true value in the event that they were traded on an active market. The fair value of assets whose true values are not readily ascertainable are determined in good faith under procedures adopted by our Board of Directors. Our Board of Directors utilizes the services of independent third-party valuation firms in determining the fair value of a portion of the securities we hold. Investment professionals from our investment adviser also prepare valuations using sources and/or proprietary models depending on the availability of information on our assets and the type of asset being valued, all in accordance with our valuation policy. Accordingly, the actual value of the securities we received could be substantially less than we previously estimated.
Because fair valuations, and particularly fair valuations of securities without efficient markets are inherently uncertain, may fluctuate over short periods of time, and are often based to a large extent on estimates, comparisons and qualitative evaluations of information, it may be more difficult for investors to value accurately our securities and could lead to undervaluation or overvaluation of our Common Stock. In addition, the valuation of these types of securities may result in substantial write-downs and earnings volatility.
The value ascribed to our assets in our financial statements as of a particular date may be materially greater than or less than the value that would be realized if our assets were to be liquidated as of such date. For example, if we were required to sell a certain asset or all or a substantial portion of our assets on a particular date, the actual price that we would realize upon the disposition of such asset or assets could be materially less than the value of such asset or assets as reflected in our financial statements. Volatile market conditions could also cause reduced liquidity in the market for certain assets, which could result in liquidation values that are materially less than the values of such assets as reflected in our financial statements.
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We run the risk of inadvertently being deemed to be an investment company that is required to register under the Investment Company Act of 1940.
We run the risk of inadvertently being deemed to be an investment company that is required to register under the Investment Company Act of 1940 (the “Investment Company Act”) because a significant portion of our assets consists of securities in companies in which we own less than a majority interest. The risk varies depending on events beyond our control, such as significant appreciation or depreciation in the market value of certain of our publicly traded holdings, adverse developments with respect to our ownership of certain of our subsidiaries, and transactions involving the sale of certain assets. If we are deemed to be an inadvertent investment company, we may seek to rely on a safe-harbor under the Investment Company Act that would provide us a one-year grace period to take steps to avoid being deemed to be an investment company. In order to ensure we avoid being deemed an investment company, we have taken, and may need to continue to take, steps to reduce the percentage of our assets that constitute investment assets under the Investment Company Act. These steps have included, among others, selling marketable securities that we might otherwise hold for the long-term and deploying our cash in non-investment assets. We have recently sold marketable securities, including at times at a loss, and we may be forced to sell our investment assets at unattractive prices or to sell assets that we otherwise believe benefit our business in the future to remain below the requisite threshold. We may also seek to acquire additional non-investment assets to maintain compliance with the Investment Company Act, and we may need to incur debt, issue additional equity or enter into other financing arrangements that are not otherwise attractive to our business. Any of these actions could have a material adverse effect on our results of operations and financial condition. Moreover, we can make no assurance that we would successfully be able to take the necessary steps to avoid being deemed to be an investment company in accordance with the safe harbor. If we were unsuccessful, then we would have to register as an investment company, and we would be unable to operate our business in its current form. We would be subject to extensive, restrictive, and potentially adverse statutory provisions and regulations relating to, among other things, operating methods, management, capital structure, indebtedness, dividends, and transactions with affiliates. If we were deemed to be an investment company and did not register as an investment company when required to do so, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, that we would be unable to enforce contracts with third parties, and/or that third parties could seek to obtain rescission of transactions with us undertaken during the period in which we were an unregistered investment company.
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 Investment Company Act 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 our activities so that we will not be deemed to be an investment company under the Investment Company Act (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, which may limit us 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 Investment Company Act, 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.
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, riskier operations and whose securities are frequently quoted on the OTC Markets, which includes the OTCQX, OTCQB as well as the OTC Pink, which typically quotes securities with increased risk and less liquidity.
Payment related to our Sequire platform and services is often made through the equity securities of our customers instead of cash. Since larger companies typically pay in cash, the securities issued are often those of smaller public companies that often have limited operating histories, limited operating cash, and negative cash flows. Additionally, these securities are primarily restricted, and are subject to legal holding periods pursuant to Rule 144 or other applicable exemptions. As of March 31, 2022 approximately $22 million of our holdings are issued by companies whose securities trade on the OTC Markets Inc. Additionally, of these securities quoted on the OTC Markets, approximately 76% are quoted on the OTC Pink. While our agreements for OTC issuers may contain certain provisions providing for the issuance of additional securities upon certain events, 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 significantly, and the stock price of such issuers is often volatile, unpredictable, and with limited liquidity. Additionally, the OTC Pink has less stringent requirements for listing than even other OTC Markets, such as the OTCQB or OTCQX. Often, the OTC Pink lists companies that (i) may not be providing current information, (ii) may not have independent directors, (iii) may have little to no trading, and (iv) may be very volatile. 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 that we receive securities from will remain solvent or maintain “current information”, or other required criteria during the legally required holding period under Rule 144, which would result in the loss of some or all of our anticipated revenue. These risks are significantly increased for OTC Pink issuers. 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 profitability.
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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 policies, economic recessions, inflationary events, governmental shutdowns, trade tensions and disputes, global economic slowdowns, widespread health epidemics or pandemics, natural disasters, terrorist attacks, wars, changes in local and national economic and political conditions, regulatory changes or changes in the laws, or interest rate or currency rate fluctuations could create a downturn in the U.S. and/or global securities markets. As we often receive restricted securities of companies, a downturn in the U.S. or global markets may impact such companies and the value of the securities we receive for services pursuant to the Sequire platform.
Risks Related to Ownership of our Securities; Listing of our Securities.
Our Common Stock does not currently meet the continued listing requirements for the Nasdaq Market and accordingly is subject to delisting.
On April 19, 2022, we received a written notice from the Nasdaq Stock Market LLC that we are not in compliance with Nasdaq Listing Rule 5250(c)(1), because we had not yet filed our Annual Report on Form 10-K for the year ended December 31, 2021. Nasdaq Listing Rule 5250(c)(1) requires listed companies to timely file all required periodic reports with the SEC. Pursuant to Nasdaq rules, we have 60 calendar days from the date of the notification letter, or until June 20, 2022, to file the 2021 Annual Report on Form 10-K. Additionally, in May and August of 2022, we received additional written notices from Nasdaq that we were not in compliance with Nasdaq Listing Rule 5250(c)(1) because we had not yet filed our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022.
As previously disclosed, on October 14, 2022, the Staff notified the Company that, based upon the Company’s continued non-compliance with the Filing Requirement, the Company’s securities were subject to delisting unless the Company timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”). The Company timely requested a hearing and, in accordance with Nasdaq Listing Rule 5815(a)(1)(B), a stay of any further suspension or delisting action by Nasdaq, which was subsequently granted. At the hearing, the Company will present its plan to regain compliance with the Filing Requirement and request an extension to file all outstanding periodic reports with the SEC.
Subsequently, on November 16, 2022, we received an additional notice from the Listing Qualifications Staff (the “Staff”) of the Nasdaq that the Company’s failure to timely file its Quarterly Report on Form 10-Q for the period ending September 30, 2022 with the SEC could serve as an additional basis for delisting under Nasdaq Listing rule 5250(c)(1).
On October 12, 2022, the Company filed its Annual Report on Form 10-K for the year ended December 31, 2021 with the SEC; however, the Company has not yet filed its Quarterly reports on Form 10-Q for the quarters ended March 31, 2022, June 30, 2022, and September 30, 2022.
On October 27, 2022, the Company engaged Marcum LLP (“Marcum”) as the Company’s independent registered public accounting firm for the year ending December 31, 2022. The Company is diligently working to complete and file the delinquent reports with the SEC and thereby regain compliance as soon as practicable. Nasdaq previously provided the Company with an extension of one hundred eighty (180) days from the initial due date of the 2021 Form 10-K or until October 12, 2022, to regain compliance with Nasdaq’s continued listing rule as it relates to all of the untimely filings. Accordingly, the Company’s (i) March 30, 2022 Form 10-Q, and (ii) June 30, 2022 and (iii) September 30, 2022 Form 10-Q are all required to be filed with the SEC by February 28, 2023.
If our shares lose their status on the Nasdaq Market, we believe that our shares would likely be eligible to be quoted on the inter-dealer electronic quotation and trading system operated by OTC Markets Group, commonly referred to as the over-the-counter market. These markets are generally considered not to be as efficient as, and not as broad as, the Nasdaq Market. If our common stock is delisted, this would, among other things, substantially impair our ability to raise additional funds and could result in a loss of institutional investor interest and fewer development opportunities for us.
Conversions of our convertible debentures, notes issued under our revolving credit facility, 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 or the revolving note issued in our secured revolving credit facility 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, revolving note, and outstanding 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.
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The market price of our 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 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; | |
| ● | 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 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 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 common stock.
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The Revolving Note issued under our senior secured revolving credit facility contains an adjustment to the price at which the note can be converted into our common stock, which may result in further dilution to our shareholders.
The revolving notes issued in our August 2022 secured revolving credit facility, of which $1.3 million in principal and interest is currently outstanding, is convertible into our common stock at a conversion price of $15.00 per share (the “Conversion Price”). Notwithstanding, the Conversion Price is subject to adjustment upon certain enumerated events which includes the sale of our common stock or equivalents at a deemed price equal to or less than $5.00 per share. On December 28, 2022, the closing price of our common stock was $1.17 per share. In the event that we are required to raise additional capital through the sale of our equity or debt securities, given our current market price, it is likely that the Conversion Price would be adjusted, and we may be required to issue a significantly greater number of shares upon conversion, than currently anticipated, resulting in greater dilution to our existing shareholders.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of the shares of our 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 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.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the trading price of our common stock and trading volume could decline.
The trading market for our shares of our 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 unfavorable research about our business, the price of our shares of 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 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.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent sales of unregistered securities
The following information is given with regard to unregistered securities sold since January 1, 2022. The following securities were issued in private offerings pursuant to the exemption from registration contained in the Securities Act of 1933, as amended (the “Securities Act”) and the rules promulgated thereunder in reliance on Section 4(2) thereof, relating to offers of securities by an issuer not involving any public offering:
| ● | On January 2, 2022 Michael Malone, our Chief Financial Officer exercised an option to purchase 100,000 shares of our common stock that was issued on December 15, 2018. The option was exercised on a cashless basis and included 57,016 shares withheld pursuant to the cashless exercise and an additional 16,732 shares withheld for tax withholding. Accordingly, we issued Mr. Malone 26,252 shares of common stock. | |
| ● | On January 3, 2022, we issued four (4) common stock purchase options to our non-employee directors, pursuant to our amended non-employee director compensation policy. Each option entitled the holder to purchase 29,533 shares of common stock at an exercise price of $4.35 per share, for an aggregate exercise amount of $128,500. The options vest in equal quarterly over a one (1) year period from the issuance date. The options expire on the seven (7) year anniversary of the issuance date. Each option has a Black-Scholes value of $100,000. | |
| ● | During the month of January 2022, non executive employees exercised a total of 227,667 stock options. These options were exercised on a cashless basis, and included 161,938 shares withheld pursuant to cashless exercise and tax withholdings. This resulted in the issuance of 65,729 shares of common stock. | |
| ● | On January 6, 2022, we issued our employees, options to purchase an aggregate of 380,000 shares of common stock. Each of the options has an exercise price of $4.25 per share, a term of five (5) years, and vests in equal quarterly installments over a three (3) year period from the grant date. The aggregate of the 380,000 options had a Black-Scholes value on the grant date $1,153,000. | |
| ● | On January 6, 2022, we issued Christopher Miglino, our Chief Executive Officer, an option to purchase 120,000 shares of common stock. The option has an exercise price of $4.25 per share, a term of seven (7) years and vests in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $397,000 | |
| ● | On January 6, 2022, we issued an employee an option to purchase 100,000 shares of common stock. The option has an exercise price of $4.25 per share, a term of seven (7) years and vests in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $331,000 | |
| ● | On January 6, 2022, we issued Michael Malone, our Chief Financial Officer, a conditional option to purchase 100,000 shares of Class A common stock. The option is a conditional grant, subject to shareholder approval. Assuming approval by the shareholders, the option has an exercise price of $4.25 per share, a term of seven (7) years and vests in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $331,000. |
| ● | On January 6, 2022, we issued an employee an option to purchase an aggregate of 20,000 shares of common stock. The option is a conditional grant, subject to shareholder approval. The option has an exercise price of $4.25 per share, a term of five (5) years, and vest in equal quarterly installments over a three (3) year period from the grant date. The option had a Black-Scholes value on the grant date of $61,000. | |
| ● | On June 13, 2022, we entered into an agreement with an institutional investor whereby in exchange for the payment of $405,000 (the “Purchase Price”), the investor received (i) the right to receive the net proceeds upon the sale of certain securities of the Company (“CVR Payments”) with a quoted price equal to $674,000 (with a guaranteed minimum return of 120% of such Purchase Price and (ii) the right after 90 days but before 120 days to demand payment of 120% of the Purchase Price in cash less amounts previously paid from the CVR Payments. | |
| ● | On July 1, 2022, we issued an original issue discount bridge note in principal amount of $650,000 to an institutional investor in exchange for $500,000 in cash. The Bridge Note was non-interest bearing and a maturity date of August 15, 2022. Effective August 8, 2022, the bridge note was exchanged for revolving notes in the senior secured revolving credit facility. | |
| ● | On August 8, 2022, we entered into a senior secured revolving credit facility agreement with an institutional investor to initially borrow up to $9,450,000 in the aggregate from time to time, subject to certain conditions. The loans are secured by all of our assets. There is currently $5,580,000 in principal outstanding on the revolving loans, which are convertible into our common stock at a conversion price of $15.00 per share, subject to adjustment for stock splits, dividends, fundamental transactions, and upon sales of our equity securities at $5.00 per share or less. In addition, as part of the transaction we extended the maturity dates of 2,590,358 outstanding common stock purchase warrants held by the lender until September 30, 2023. | |
| The revolving loans are convertible into our common stock at an initial price per share of $15.00, subject to adjustment in certain enumerated events, including deemed sales of our common stock or common stock equivalents at a price per share that is $5.00 or less. |
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| ● | On August 8, 2022, in connection with entering into the senior secured revolving credit facility, we amended and restated the terms of 2,590,358 outstanding common stock purchase warrants owned by the lender. As part of the amendment, we extended the expiration date of the following warrants until September 31, 2023: (a) warrants to purchase 1,363,636 shares of Common Stock issued on June 30, 2020; (b) warrants to purchase 166,667 shares of Common Stock issued on November 29, 2018; (c) warrants to purchase 530,027 shares of Common Stock issued on November 29, 2018 and (d) warrants to purchase 530,028 shares of Common Stock issued on October 27, 2017. |
Purchases of equity securities by the issuer and affiliated purchasers.
The following table provides information about our repurchases of our common stock that is registered pursuant to Section 12 of the Securities Exchange Act of 1934 from January 1, 2022 through September 30, 2022.
| Period | Total Number of Shares Purchased(b) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a)(b) | Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (a)(b) | ||||||||||||
| January 1, to January 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| February 1, to February 28, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| March 1, to March 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| April 1, to April 30, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| May 1, to May 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| June 1, to June 30, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| July 1, to July 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| August 1, to August 31, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| September 1, to September 30, 2022 | — | — | — | $ | 9,206,000 | |||||||||||
| Total | — | — | — | 9,206,000 | ||||||||||||
| (a) | In August 2021, our Board of Directors approved a share repurchase program pursuant to which we are authorized to repurchase up to $10,000,000 of our common stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices. The total remaining authorization for future common share repurchases under our share repurchase program was $9.2 million as of September 30, 2022. Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. The program does not have an expiration date. |
| (b) | None of the shares purchased were in reliance on the safe harbor in Exchange Act Rule 10b-18 and the Company does not currently have a 10b5-1(c) plan with regard to share being repurchases. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
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Item 6. Exhibits
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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. | ||
| December 30, 2022 | By: | /s/ Christopher Miglino |
Christopher Miglino, Chief Executive Officer, principal executive officer | ||
| December 30, 2022 | By: | /s/ Michael Malone |
Michael Malone, Chief Financial Officer, principal financial and accounting officer | ||
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