NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three
Months and Six Months Ended June 30, 2018 (Restated) and 2017
1.
Organization and Basis of Presentation
Organization
and Reverse Merger
On
October 11, 2016, Integrated Surgical Systems, Inc. (“Integrated”), a Delaware corporation incorporated on October
1, 1990, and Amplify Media Network, Inc. (“Amplify”), a Nevada corporation incorporated on July 22, 2016, executed
a Share Exchange Agreement, as amended (the “Exchange Agreement”), that provided for each outstanding common share
of Amplify to be converted into 4.13607 common shares of Integrated (the “Exchange Ratio”), and for each outstanding
warrant and stock option to purchase shares of Amplify common stock be cancelled in exchange for a warrant or stock option to
purchase shares of Integrated common stock based on the exchange ratio (the “Recapitalization”).
On
November 4, 2016 (the “Recapitalization Date”), the consummation of the Recapitalization became effective and Amplify
became a wholly-owned subsidiary of Integrated. Pursuant to the Recapitalization, Integrated: (1) issued to the shareholders of
Amplify an aggregate of 12,517,152 shares of Integrated common stock (see “Note 9. Restricted Stock Awards”); and
(2) issued to MDB Capital Group, LLC (“MDB”) as an advisory fee, warrants to purchase 1,169,607 shares of Integrated
common stock. Existing Integrated stock options to purchase 175,000 shares of Integrated common stock were assumed pursuant to
the Recapitalization. Amplify had no common stock options or warrants outstanding as of the Recapitalization Date.
Amplify
was originally incorporated in Nevada on July 22, 2016 under the name Amplify Media, Inc., and its Certificate of Incorporation
was subsequently amended to change its name to Amplify Media Network, Inc. on July 27, 2016, to TheMaven Network, Inc. on October
14, 2016, and to Maven Coalition, Inc. on March 5, 2018. Amplify is subsequently referred to herein as “Coalition”.
Integrated
was originally incorporated in Delaware on October 1, 1990 under the name Integrated Surgical Systems, Inc, and its
Certificate of Incorporation was subsequently amended to change its name to TheMaven, Inc. on December 2, 2016. Integrated is
subsequently referred to herein as “TheMaven”. Unless the context indicates otherwise, TheMaven and Coalition are
together hereinafter referred to as the “Company”.
Business
Operations
The
Company operates and continues to develop an exclusive network of professionally managed online media channels, with an underlying
technology platform. Each channel will be operated by an invitation-only channel partner (“Channel Partner”) drawn
from subject matter experts, reporters, group evangelists and social leaders. Channel Partners will publish content and oversee
an online community for their respective channels, leveraging a proprietary, socially-driven, mobile-enabled, video-focused technology
platform to engage niche audiences within a single network.
The
Company’s growth strategy includes the acquisition of related online media, publishing and technology businesses that management
believes will expand the scale of unique users interacting on the Company’s technology platform. The Company believes that
with an increased scale in unique users, it will be able to obtain improved advertising terms and grow advertising revenue. In
2018, the Company completed two acquisitions as described in “Note 13. Subsequent Events”.
The
Company’s activities are subject to significant risks and uncertainties, including the need for additional capital, as described
herein. The Company has not yet developed sustainable revenue-generating operations, does not have positive cash flows from operations,
and is dependent on periodic infusions of debt and equity capital to fund its operating requirements.
The
Company’s common stock is traded on the Over-the-Counter Market under the symbol “MVEN”.
Basis
of Presentation
The
condensed consolidated financial statements of the Company at June 30, 2018, and for the three months and six months ended June
30, 2018 and 2017, are unaudited. In the opinion of management of the Company, all adjustments, including normal recurring accruals,
have been made that are necessary to present fairly the financial position of the Company as of June 30, 2018, and the results
of its operations for the three months and six months ended June 30, 2018 and 2017, and its cash flows for the six months ended
June 30, 2018 and 2017. Operating results for the interim periods presented are not necessarily indicative of the results to be
expected for a full fiscal year. The consolidated balance sheet at December 31, 2017, has been derived from the Company’s
audited financial statements at such date.
The
statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the financial statements and other information included in the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2017, as filed with the SEC on May 15, 2018.
Going
Concern
The
Company’s condensed consolidated financial statements have been presented on the basis that the Company is a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As reflected in
the accompanying condensed consolidated financial statements, the Company has had nominal revenues to date, and has experienced
recurring net losses from operations and negative operating cash flows. During the six months ended June 30, 2018, the Company
incurred a net loss of $8,788,587 and utilized cash in operating activities of $4,104,967 and had an accumulated deficit of $17,260,658
as of June 30, 2018. The Company has financed its working capital requirements since inception through the issuance of its debt
and equity securities.
At
June 30, 2018, the Company had cash of $116,187. From July 2018 through July 2019, the Company has raised aggregate net
proceeds of approximately $112,815,000 through various debt and preferred stock private placements (see “Note 13.
Subsequent Events”). Notwithstanding these recent financings, the Company does not have sufficient resources to fully fund
its business operations through June 30, 2020. The Company estimates that it will require
a significant amount of capital over a sustained period of time to advance the development of the Company’s business to
the point at which it becomes commercially viable and self-sustaining. Accordingly, the Company is currently seeking to raise
additional funds, primarily through the issuance of debt and/or equity securities. However, there can be no assurances that the
Company will be successful in this regard.
As
a result, management has concluded that there is substantial doubt about the Company’s ability to continue as a going concern
within one year of the date that the accompanying condensed consolidated financial statements are being issued. In addition, the
Company’s independent registered public accounting firm, in their report on the Company’s consolidated financial statements
for the year ended December 31, 2017, has also expressed substantial doubt about the Company’s ability to continue as a
going concern. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise
additional funds and implement its business plan, and to ultimately achieve sustainable operating revenues and profitability.
The accompanying condensed consolidated financial statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
As
market conditions present uncertainty as to the Company’s ability to secure additional funds, there can be no assurances
that the Company will be able to secure additional financing on acceptable terms, or at all, as and when necessary to continue
to conduct operations. A debt financing may contain undue restrictions on the Company’s operations and/or liens on the Company’s
tangible and intangible assets, and an equity financing may cause substantial dilution to the Company’s common stockholders.
If cash resources are insufficient to satisfy the Company’s ongoing cash requirements, the Company may be required to scale
back or discontinue its operations, obtain funds, if available, although there can be no certainty, through strategic alliances
that may require the Company to relinquish rights to its technology, or to discontinue its operations entirely.
The
development and expansion of the Company’s business during the remainder of 2018 and in 2019 and thereafter will be dependent
on the capital resources available to the Company. No assurances can be given that any future financing will be available or,
if available, that it will be on terms that are satisfactory to the Company or adequate to fund the development and expansion
of the Company’s business to a level that is commercially viable and self-sustaining.
Reclassifications
Certain
comparative amounts as of December 31, 2017 and for the three months and six months ended June 30, 2017 have been reclassified
to conform to the current period’s presentation. These reclassifications were immaterial, both individually and in the aggregate.
These changes did not impact previously reported loss from operations or net loss.
Correction
of Accounting Errors - Restatement for the Three Months and Six Months Ended June 30, 2018
On
September 28, 2018, the Company originally filed its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018,
with the SEC (and subsequently filed Amendment No. 1 to such report on October 12, 2018, to submit XBRL files as Exhibit 101)
that included its condensed consolidated unaudited financial statements for the three months and six months ended June 30, 2018
and 2017. These condensed consolidated unaudited financial statements for the three months and six months ended June 30, 2018
had not been reviewed by an independent certified public accounting firm in accordance with Public Company Accounting Oversight
Board Section AS 4105: Reviews of Interim Financial Information prior to such filing with the SEC. The condensed consolidated
unaudited financial statements for the three months and six months ended June 30, 2017 included in such report were not revised
from their original filing in 2017.
The
condensed consolidated unaudited financial statements for the three months and six months ended June 30, 2018 included herein
have been reviewed by the Company’s independent certified public accounting firm in accordance with Public Company Accounting
Oversight Board Section AS 4105: Reviews of Interim Financial Information. In conjunction with the review, the Company made various
adjustments and revisions to the previously filed financial statements for the three months and six months ended June 30, 2018,
as well as to the related footnotes and management’s discussion and analysis included therein, to correct certain accounting
errors. A summary of the impact of the adjustments to the Company’s condensed consolidated unaudited financial statements
as of and for the three months and six months ended June 30, 2018 to correct the accounting errors is presented below. These adjustments
primarily reflect certain reclassifications and corrections to the accounting treatment for the issuance of certain fully-vested
warrants and the issuance of certain derivatives and debt discounts associated with debt financing transactions entered into during
the three months and six months ended June 30, 2018.
|
|
|
June
30, 2018
|
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED BALANCE SHEET:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$
|
628,778
|
|
|
$
|
-
|
|
|
$
|
628,778
|
|
|
Total
assets
|
|
$
|
10,845,572
|
|
|
$
|
14,384
|
|
|
$
|
10,859,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
liabilities
|
|
$
|
1,856,394
|
|
|
$
|
620,946
|
|
|
$
|
2,477,340
|
|
|
Notes
payable
|
|
|
2,895,103
|
|
|
|
2,505,965
|
|
|
|
5,401,068
|
|
Liquidated
damages payable under registration
rights agreements
|
|
|
|
|
|
|
15,001
|
|
|
|
15,001
|
|
|
Other
current liabilities
|
|
|
1,460,227
|
|
|
|
(444,871
|
)
|
|
|
1,015,356
|
|
|
Total
liabilities
|
|
|
6,211,724
|
|
|
|
2,697,041
|
|
|
|
8,908,765
|
|
|
Redeemable
Series G convertible preferred stock
|
|
|
168,496
|
|
|
|
-
|
|
|
|
168,496
|
|
|
Total
stockholders’ equity
|
|
|
4,465,352
|
|
|
|
(2,682,657
|
)
|
|
|
1,782,695
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
10,845,572
|
|
|
$
|
14,384
|
|
|
$
|
10,859,956
|
|
|
|
|
Three
Months Ended June 30, 2018
|
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
216,356
|
|
|
$
|
-
|
|
|
$
|
216,356
|
|
|
Gross
loss
|
|
|
(867,966
|
)
|
|
|
(18,491
|
)
|
|
|
(886,457
|
)
|
|
Total
operating expenses
|
|
|
2,729,691
|
|
|
|
260,246
|
|
|
|
2,989,937
|
|
|
Loss
from operations
|
|
|
(3,597,657
|
)
|
|
|
(278,737
|
)
|
|
|
(3,876,394
|
)
|
|
Change
in derivatives valuation
|
|
|
315,194
|
|
|
|
(186,650
|
)
|
|
|
128,544
|
|
|
Interest
expense
|
|
|
(179,155
|
)
|
|
|
55,612
|
|
|
|
(123,543
|
)
|
|
Interest
income
|
|
|
-
|
|
|
|
14,384
|
|
|
|
14,384
|
|
|
True-up
termination fee
|
|
|
-
|
|
|
|
(1,344,648
|
)
|
|
|
(1,344,648
|
)
|
|
Liquidated
damages under registration rights agreements
|
|
|
-
|
|
|
|
(15,001
|
)
|
|
|
(15,001
|
)
|
|
Net
loss
|
|
|
(3,461,618
|
)
|
|
|
(1,755,040
|
)
|
|
|
(5,216,658
|
)
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.14
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.21
|
)
|
|
|
|
Six
Months Ended June 30, 2018
|
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
303,041
|
|
|
$
|
-
|
|
|
$
|
303,041
|
|
|
Gross
loss
|
|
|
(1,816,989
|
)
|
|
|
(18,491
|
)
|
|
|
(1,835,480
|
)
|
|
Total
operating expenses
|
|
|
5,352,597
|
|
|
|
260,246
|
|
|
|
5,612,843
|
|
|
Loss
from operations
|
|
|
(7,169,586
|
)
|
|
|
(278,737
|
)
|
|
|
(7,448,323
|
)
|
|
Change
in derivatives valuation
|
|
|
315,194
|
|
|
|
(186,650
|
)
|
|
|
128,544
|
|
|
Interest
expense
|
|
|
(179,155
|
)
|
|
|
55,612
|
|
|
|
(123,543
|
)
|
|
Interest
income
|
|
|
-
|
|
|
|
14,384
|
|
|
|
14,384
|
|
|
True-up
termination fee
|
|
|
-
|
|
|
|
(1,344,648
|
)
|
|
|
(1,344,648
|
)
|
|
Liquidated
damages under registration rights agreements
|
|
|
-
|
|
|
|
(15,001
|
)
|
|
|
(15,001
|
)
|
|
Net
loss
|
|
|
(7,033,547
|
)
|
|
|
(1,755,040
|
)
|
|
|
(8,788,587
|
)
|
|
Basic
and diluted net loss per common share
|
|
$
|
(0.29
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
Six
Months Ended June 30, 2018
|
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, shares outstanding
|
|
|
30,975,206
|
|
|
|
143,810
|
|
|
|
31,119,016
|
|
|
Common
stock, par value
|
|
$
|
309,751
|
|
|
$
|
1,438
|
|
|
$
|
311,189
|
|
|
Additional
paid-in capital
|
|
|
19,661,219
|
|
|
|
(929,055
|
)
|
|
|
18,732,164
|
|
|
Accumulated
deficit
|
|
|
(15,505,618
|
)
|
|
|
(1,755,040
|
)
|
|
|
(17,260,658
|
)
|
|
Total
stockholders’ equity
|
|
$
|
4,465,352
|
|
|
$
|
(2,682,657
|
)
|
|
$
|
1,782,695
|
|
|
|
|
Six
Months Ended June 30, 2018
|
|
|
|
|
As
Reported
|
|
|
Adjustments
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
$
|
(4,104,967
|
)
|
|
$
|
-
|
|
|
$
|
(4,104,967
|
)
|
|
Net
cash used in investing activities
|
|
|
(7,157,631
|
)
|
|
|
-
|
|
|
|
(7,157,631
|
)
|
|
Net
cash provided by financing activities
|
|
|
7,759,536
|
|
|
|
-
|
|
|
|
7.759,536
|
|
|
Net
decrease in cash and restricted cash
|
|
|
(3,503,062
|
)
|
|
|
-
|
|
|
|
(3,503,062
|
)
|
|
Balance at
beginning of period
|
|
|
3,619,249
|
|
|
|
-
|
|
|
|
3,619,249
|
|
|
Balance
at end of period
|
|
$
|
116,187
|
|
|
$
|
-
|
|
|
$
|
116,187
|
|
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying condensed consolidated financial statements of the Company have been prepared in accordance with United States generally
accepted accounting principles (“GAAP”) and include the financial statements of TheMaven and its wholly-owned subsidiary,
Coalition. Intercompany balances and transactions have been eliminated in consolidation. As described in “Note 3. Advances
Relating to Acquisition of HubPages, Inc.”, on March 13, 2018, the Company formed a new wholly-owned subsidiary in order
to facilitate an acquisition transaction.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during
the reporting period. Management bases its estimates on historical experience and on various assumptions that are believed to
be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information,
changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate,
those estimates are adjusted accordingly. Some of those judgments can be subjective and complex, and therefore, actual results
could differ materially from those estimates under different assumptions or conditions. Significant estimates include those related
to assumptions used in accruals for potential liabilities, capitalization of website development costs, valuation of equity instruments,
including the calculation of volatility, valuation of derivatives, and the realization of deferred tax assets.
Risks
and Uncertainties
The
Company has a limited operating history and has not generated significant revenues to date. The Company’s business and operations
are sensitive to general business and economic conditions in the U.S. and worldwide. These conditions include short-term and long-term
interest rates, inflation, fluctuations in debt and equity capital markets and the general condition of the U.S. and world economy.
A host of factors beyond the Company’s control could cause fluctuations in these conditions. Adverse developments in these
general business and economic conditions could have a material adverse effect on the Company’s financial condition and the
results of its operations.
In
addition, the Company will compete with many companies that currently have extensive and well-funded projects, marketing and sales
operations as well as extensive human capital. The Company may be unable to compete successfully against these companies. The
Company’s industry is characterized by rapid changes in technology and market demands. As a result, the Company’s
products, services, and/or expertise may become obsolete and/or unmarketable. The Company’s future success will depend on
its ability to adapt to technological advances, anticipate customer and market demands, and enhance its current technology under
development.
B.
Riley FBR, Inc. (“B. Riley FBR”) is a registered broker-dealer owned by B. Riley Financial, Inc., a diversified publicly-traded
financial services company (“B. Riley”), which acted as placement agent for the Series H Preferred Stock financing
(see “Note 13. Subsequent Events”). In consideration for its services as placement agent, the Company paid B. Riley
FBR a cash fee of $575,000 (including a previously paid retainer of $75,000) and issued to B. Riley FBR 669 shares of Series H
Preferred Stock. In addition, entities affiliated with B. Riley FBR purchased 5,592 shares of Series H Preferred Stock in the
financing. John A. Fichthorn joined the Board of Directors of the Company in September 2018 and was elected as Chairman of the
Board of Directors and Chairman of the Finance and Audit Committee in November 2018. Mr. Fichthorn currently serves as Head of
Alternative Investments for B. Riley Capital Management, LLC, which is an SEC-registered investment adviser and a wholly-owned
subsidiary of B. Riley. Todd D. Sims also joined the Board of Directors of the Company in September 2018 and is also a member
of the Board of Directors of B. Riley. Mr. Fichthorn and Mr. Sims serve on the Board of Directors of the Company as designees
of B. Riley. Since August 2018, B. Riley FBR has been instrumental in providing investment banking services to the Company
and in raising debt and equity capital for the Company. These services having included raising debt and equity capital to support
the acquisitions of HubPages, Inc. and Say Media, Inc., the ABG-SI LLC Licensing Agreement, and the acquisition of TheStreet,
Inc. These services have also included raising debt and equity capital for refinancing and working capital purposes through the
sale of the Series I Convertible Preferred Stock, the 10% Original Issue Discount Senior Secured Debentures, the 12% Senior Secured
Subordinated Convertible Debentures, and the 12.0% Senior Secured Note. Information with respect to these services and financings
are provided at “Note 13. Subsequent Events”.
Digital
Media Content and Channel Partners
The
Company operates a coalition of online media channels and provides digital media (text, audio and video) over the internet that
users may access on demand. As a broadcaster that transmits third party content owned by our Channel Partners via digital media,
the Company applies Accounting Standards Codification (“ASC”) 920, “Entertainment – Broadcasters”.
The Channel Partners generally receive variable amounts of consideration that are dependent upon the calculation of revenue earned
by the channel in a given month, referred to as a “revenue share”, that are payable in arrears. In certain circumstances,
there is a monthly fixed fee minimum or a fixed yield (“revenue per thousand visitors”) based on the volume of visitors.
Information with respect to fixed dollar commitments for channel content licenses are disclosed in “Note 12. Commitments
and Contingencies”; Channel Partner agreements that include fixed yield based on the volume of visitors are not included
in such disclosures because, although they are expected to be significant, they cannot be quantified at this time. Expenses related
to Channel Partner agreements are reported in cost of revenue in the Statement of Operations. The cash payments related to Channel
Partner agreements are classified within operating activities in the Statement of Cash Flows.
Revenue
Recognition
Effective
July 1, 2017, the Company adopted ASC 606, “Revenue from Contracts with Customers”, as the accounting standard for
revenue recognition. Since the Company had not previously generated revenue from customers, the Company did not have to transition
its accounting method from ASC 605, “Revenue Recognition”.
Revenues
are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that
reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company generates
all of its revenue from contracts with customers. The Company accounts for revenue on a gross basis, as compared to a net basis,
in its statement of operations. Cost of revenues is presented as a separate line item in the statement of operations. The Company
has made this determination based on it taking the credit risk in its revenue-generating transactions and it also being the primary
obligor responsible for providing the services to the customer.
The
following is a description of the principal activities from which the Company generates revenue:
Advertising
- The Company enters into contracts with advertising networks to serve display or video advertisements on the digital
media pages associated with its various channels. The Company recognizes revenue from advertisements at the point in time when
each ad is viewed as reported by the Company’s advertising network partners. The quantity of advertisements, the impression
bid prices and revenue are reported on a real-time basis. Although reported advertising transactions are subject to adjustment
by the advertising network partners, any such adjustments are known within a few days of month end. The Company owes its independent
publisher Channel Partners a revenue share of the advertising revenue earned which is recorded as service costs in the same period
in which the associated advertising revenue is recognized.
Membership
Subscriptions
- The Company enters into contracts with internet users that subscribe to premium content on the digital
media channels. These contracts provide internet users with a membership subscription to access the premium content for a given
period of time, which is generally one year. The Company recognizes revenue from each membership subscription over time based
on a daily calculation of revenue during the reporting period. Subscriber payments are initially recorded as deferred revenue
on the balance sheet. As the Company provides access to the premium content over the membership subscription term, the Company
recognizes revenue and proportionately reduces the deferred revenue balance. The Company owes its independent publisher Channel
Partners a revenue share of the membership subscription revenue earned, which is initially deferred and recorded as deferred contract
costs. The Company recognizes deferred contract costs over the membership subscription term in the same pattern that the associated
membership subscription revenue is recognized.
Disaggregation
of Revenue
The
following table provides information about disaggregated revenue by product line, geographical market and timing of revenue recognition:
|
|
|
Three
Months Ended
June
30, 2018
|
|
|
Six
Months Ended
June
30, 2018
|
|
|
|
|
|
|
|
|
|
|
Revenue
by product line:
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
199,616
|
|
|
$
|
272,459
|
|
|
Membership
subscriptions
|
|
|
16,740
|
|
|
|
30,582
|
|
|
Total
|
|
$
|
216,356
|
|
|
$
|
303,041
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
by geographical market:
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
216,356
|
|
|
$
|
303,041
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
Total
|
|
$
|
216,356
|
|
|
$
|
303,041
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
by timing of recognition:
|
|
|
|
|
|
|
|
|
|
At
point in time
|
|
$
|
199,616
|
|
|
$
|
272,459
|
|
|
Over
time
|
|
|
16,740
|
|
|
|
30,582
|
|
|
Total
|
|
$
|
216,356
|
|
|
$
|
303,041
|
|
Contract
Balances
The
following table provides information about contract balances as of June 30, 2018 and December 31, 2017:
|
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable:
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
203,503
|
|
|
$
|
52,348
|
|
|
Membership
subscriptions
|
|
|
4,637
|
|
|
|
854
|
|
|
Total
|
|
$
|
208,140
|
|
|
$
|
53,202
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
contract assets (deferred contract costs):
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Membership
subscription
|
|
|
11,449
|
|
|
|
14.147
|
|
|
Total
|
|
$
|
11,449
|
|
|
$
|
14,147
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term
contract liabilities (deferred revenue):
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Membership
subscriptions
|
|
|
23,763
|
|
|
|
31,437
|
|
|
Total
|
|
$
|
23,763
|
|
|
$
|
31,437
|
|
The
Company receives payments from advertising customers based upon contractual payment terms; accounts receivable are recorded when
the right to consideration becomes unconditional and are generally collected within 90 days. The Company generally receives payments
from membership subscription customers at the time of sign up for each subscription; accounts receivable from merchant credit
card processors are recorded when the right to consideration becomes unconditional and are generally collected weekly. Contract
assets include contract fulfillment costs related to revenue shares owed to Channel Partners, which are amortized to expense over
the same period of the associated revenue. Contract liabilities include payments received in advance of performance under the
contract and are recognized as revenue over time. The Company had no asset impairment charges related to contract assets during
the three months and six months ended June 30, 2018 and 2017.
Cash
Concentrations – Cash and Restricted Cash
The
Company maintains cash and restricted cash at a bank where amounts on deposit may exceed the Federal Deposit Insurance Corporation
limit during the year. The Company has not experienced any losses in such accounts and believes it is not exposed to significant
credit risk regarding its cash. The following table reconciles total cash and restricted cash at June 30, 2018 and December 31,
2017:
|
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
116,187
|
|
|
$
|
619,249
|
|
|
Restricted
cash
|
|
|
-
|
|
|
|
3,000,000
|
|
|
Total
cash and restricted cash
|
|
$
|
116,187
|
|
|
$
|
3,619,249
|
|
In
January 2018, the Company raised pursuant to a private placement $3,000,000. The $3,000,000 was received by the Company prior
to December 31, 2017 and was classified as restricted cash in the December 31, 2017 balance sheet and then subsequently reclassified
to cash in January 2018 upon completion of the private placement. In addition, the $3,000,000 investment was classified as investor
demand payable in the December 31, 2017 balance sheet and then subsequently reclassified to equity in January 2018 upon completion
of the private placement.
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation and amortization. Major improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. Gains and losses from disposition of property and equipment are included in the
statement of operations when realized. Depreciation and amortization are provided using the straight-line method over the following
estimated useful lives:
|
Office
equipment and computers
|
3
- 5 years
|
|
Furniture
and fixtures
|
5
- 8 years
|
Other
Intangible Asset
The
other intangible asset consists of the cost of a purchased website domain name, which is not being amortized due to its indefinite
useful life.
Long-Lived
Assets
The
Company periodically evaluates the carrying value of long-lived assets to be held and used when events or circumstances warrant
such a review. The carrying value of a long-lived asset to be held and used is considered impaired when the anticipated separately
identifiable undiscounted cash flows from such an asset are less than the carrying value of the asset. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined
primarily by reference to the anticipated cash flows discounted at a rate commensurate with the risk involved. No impairment charges
have been recorded in the periods presented.
Website
Development Costs
In
accordance with authoritative guidance, the Company capitalizes website development costs for internal use when planning and design
efforts are successfully completed, and development is ready to commence. Costs incurred during planning and design, together
with costs incurred for training and maintenance, are expensed as incurred and recorded in research and development expense in
the consolidated statement of operations. The Company places capitalized website development assets into service and commences
depreciation and amortization when the applicable project or asset is substantially complete and ready for its intended use. Once
placed into service, the Company capitalizes qualifying costs of specified upgrades or enhancements to capitalized website development
assets when the upgrade or enhancement will result in new or additional functionality.
The
Company capitalizes internal labor costs, including payroll-based and stock-based compensation, benefits and payroll taxes, that
are incurred for certain capitalized website development projects related to the Company’s technology platform. The Company’s
policy with respect to capitalized internal labor stipulates that labor costs for employees working on eligible internal use capital
projects are capitalized as part of the historical cost of the project when the impact, as compared to expensing such labor costs,
is material.
Website
development costs are amortized on a straight-line basis over two to three years, which is the estimated useful life of the related
asset and is recorded in general and administrative costs in the consolidated statement of operations.
Deferred
Financing Costs and Discounts on Debt Obligations
Deferred
financing costs consist of cash and non-cash consideration paid to lenders and third parties with respect to convertible debt
financing transactions, including legal fees and placement agent fees. Such costs are deferred and amortized over the term of
the related debt. Upon the settlement or conversion of convertible debt into common stock, the pro rata portion of any related
unamortized deferred financing costs are charged to operations.
Additional
consideration in the form of warrants and other derivative financial instruments issued to lenders is accounted for at fair value
utilizing information provided in reports prepared by an independent valuation firm. The fair value of warrants and derivatives
is recorded as a reduction to the carrying amount of the related debt, and is being amortized to interest expense over the term
of such debt, with the initial offsetting entries recorded as a liability on the balance sheet. Upon the settlement or conversion
of convertible debt into common stock, the pro rata portion of any related unamortized discount on debt is charged to operations.
Registration
Rights Liquidated Damages and Public Information Failure Payments
Obligations
with respect to registration rights liquidated damages and public information failure payments are accounted for as contingent
obligations, are evaluated when a financing is completed, and are subsequently reviewed at each quarter-end reporting date thereafter.
When such quarterly review indicates that it is likely that registration rights liquidated damages and/or public information failure
payments will be incurred, the Company records an estimate of each such obligation based on the estimated date that such obligation
will be satisfied. The Company reviews and revises such estimates at each quarter-end date based on updated information. During
the three months and six months ended June 30, 2018, the Company recorded $15,001 as liquidated damages under registration rights
agreements in its statement of operations.
Research
and Development
Research
and development costs are charged to operations in the period incurred. During the three months ended June 30, 2018 and 2017,
research and development costs were $96,973 and $9,297, respectively. During the six months ended June 30, 2018 and 2017, research
and development costs were $187,377 and $73,319, respectively.
Derivative
Financial Instruments
The
Company accounts for freestanding contracts that are settled in a company’s own stock, including common stock warrants,
to be designated as an equity instrument, and generally as a liability. A contract so designated is carried at fair value on a
company’s balance sheet, with any changes in fair value recorded as a gain or loss in a company’s results of operations.
The
Company records all derivatives on the balance sheet at fair value, adjusted at the end of each reporting period to reflect any
material changes in fair value, with any such changes classified as changes in derivatives valuation in the statement of operations.
The calculation of the fair value of derivatives utilizes highly subjective and theoretical assumptions that can materially affect
fair values from period to period. The recognition of these derivative amounts does not have any impact on cash flows.
At
the date of exercise of any of the warrants, or the conversion of any convertible debt or preferred stock into common stock, the
pro rata fair value of the related warrant liability and any embedded derivative liability is transferred to additional paid-in
capital.
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels and requires that assets and liabilities carried at fair value be classified
and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity
in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based
derivatives and commingled investment funds and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
carrying amount of the Company’s financial instruments comprising of cash, restricted cash, funds in escrow, accounts receivable,
note receivable, accounts payable and accrued expenses approximate fair value because of the short-term maturity of these instruments.
The
Company accounts for certain warrants and the embedded conversion feature of 10% senior convertible debentures and 8% convertible
notes payable as derivative liabilities, which requires that the Company carry such amount in its consolidated balance sheet as
a liability at fair value, as adjusted at each period-end.
The Company determined
the fair value of the Strome warrant utilizing the Black-Scholes option-pricing model. Due to their greater complexity, the Company
determined the fair value of the warrants and the embedded conversion feature with respect to the 10% senior convertible debenture
and the 8% convertible notes payable using appropriate valuation models derived through consultations with the Company’s
independent valuation firm, as noted below. These warrants and the embedded conversion features are classified as Level 3 within
the fair-value hierarchy. Inputs to the valuation model include the Company’s publicly-quoted stock price, the stock volatility,
the risk-free interest rate, the remaining life of the warrants and the 10% senior convertible debenture and the 8% convertible
notes payable, the exercise price or conversion price, and the dividend rate. The Company uses the closing stock price of its
common stock over an appropriate period of time to compute stock volatility. These inputs are summarized as follows:
Strome Warrant: expected
life – 5 years; risk-free interest rate – 2.81%; volatility factor – 98.10%; dividend rate – 0%; transaction
date closing market price - $1.20; exercise price: $1.19.
8% Convertible Notes
Payable Warrants: Valuation model – Monte-Carlo simulation; expected life – 5 years; risk-free interest rate –
2.81%; volatility factor - 75% - 85%; dividend rate – 0%; transaction date closing market price - $1.20 - $1.27; conversion
price - $1.18.
8% Convertible Notes
Payable Conversion Feature: Valuation model – Binomial Lattice technique; expected life – 7 months; risk-free interest
rate – 2.07% - 2.11%; volatility factor - 75% - 85%; dividend rate – 0%; transaction date closing market price - $1.20
- $1.27; conversion price - $1.21.
10% Senior Convertible
Debenture Conversion Feature: Valuation model – Binomial Lattice technique; expected life – 1 year; risk-free interest
rate – 2.35%; volatility factor – 85.45%; dividend rate – 0%; transaction date closing market price - $1.20;
conversion price - $1.29.
The
following table represents the carrying amount, valuation and roll-forward of activity for the Company’s warrants accounted
for as a derivative liability and classified within Level 3 of the fair-value hierarchy for the six months ended
June 30, 2018:
|
|
|
Strome
Warrant
|
|
|
8%
Convertible
Notes
Payable
Warrants
|
|
|
Total
Warrant
Derivative
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
amount, January 1, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Issuance
of warrant on June 11, 2018
|
|
|
—
|
|
|
|
312,749
|
|
|
|
312,749
|
|
|
Issuance
of warrant on June 15, 2018
|
|
|
1,344,648
|
|
|
|
288,149
|
|
|
|
1,632,797
|
|
|
Change
in fair value
|
|
|
—
|
|
|
|
(91,388
|
)
|
|
|
(91,388
|
)
|
|
Carrying
amount, June 30, 2018
|
|
$
|
1,344,648
|
|
|
$
|
509,510
|
|
|
$
|
1,854,158
|
|
The
following table represents the carrying amount, valuation and a roll-forward of activity for the embedded conversion feature with
respect to the Company’s 10% senior convertible debenture and 8% convertible notes payable accounted for as a derivative
liability and classified within Level 3 of the fair-value hierarchy for the six months ended June 30, 2018:
|
|
|
10%
Senior
Convertible
Debenture
|
|
|
8%
Convertible
Notes
Payable
|
|
|
Total
10%
Senior Convertible
Debenture
and 8% Convertible Notes Payable
Derivative
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
amount, January 1, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Recognition
of conversion feature on June 11, 2018
|
|
|
—
|
|
|
|
78,432
|
|
|
|
78,432
|
|
|
Recognition
of conversion feature on June 15, 2018
|
|
|
471,002
|
|
|
|
81,169
|
|
|
|
552,171
|
|
|
Change
in fair value
|
|
|
(10,494
|
)
|
|
|
(26,662
|
)
|
|
|
(37,156
|
)
|
|
Carrying
amount, June 30, 2018
|
|
$
|
460,508
|
|
|
$
|
132,939
|
|
|
$
|
593,447
|
|
In
addition, the
carrying amount of the embedded conversion feature
with respect to the Company’s Redeemable Series G Convertible Stock at June 30, 2018 and December 31, 2017 was $29,735 and
$72,563, respectively. The carrying amount of the embedded conversion feature with respect to the Company’s 10% senior
convertible debenture, 8% convertible notes payable, and Redeemable Series G Convertible Stock at June 30, 2018 was $623,182.
The
Company did not have any derivative liabilities as of or during the three months and six months ended June 30, 2017.
Stock-Based
Compensation
The
Company provides stock-based compensation in the form of (a) restricted stock awards to employees, (b) vested stock grants to
directors, (c) stock option grants to employees, directors and independent contractors, and (d) common stock warrants to Channel
Partners and other independent contractors.
The
Company accounts for stock-based payments to officers and directors by measuring the cost of services received in exchange for
equity awards based on the grant date fair value of the awards, with the cost recognized as compensation expense on the straight-line
basis in the Company’s financial statements over the vesting period of the awards. The Company accounts for stock-based
payments to consultants by determining the value of the stock compensation based upon the measurement date at either (a) the date
at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments
is complete.
Stock
grants which are time-vested are measured at fair value on the grant date and charged to operations ratably over the vesting period.
Stock grants which are performance-vested are measured at fair value when the performance condition is satisfied and charged to
operations at that time.
Stock
options and warrants granted to vendors and outside consultants are revalued each reporting period to determine the amount to
be recorded as an expense in the respective period. As the stock options vest, they are valued on each vesting date and an adjustment
is recorded for the difference between the value already recorded and the value on the date of vesting.
The
fair value of stock options and warrants granted as stock-based compensation is determined utilizing the Black-Scholes option-pricing
model, and is affected by several variables, the most significant of which are the life of the equity award, the exercise price
of the stock option, or warrant, as compared to the fair market value of the common stock on the grant date, and the estimated
volatility of the common stock over the term of the equity award. Estimated volatility is based on the historical volatility of
the Company’s common stock and is evaluated based upon market comparisons. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant. The fair market value of common stock is determined by reference to the quoted
market price of the Company’s common stock.
The
Company capitalizes the fair value of stock-based compensation awards relating to internal-use website development and otherwise
expenses such stock-based compensation awards to general and administrative costs, or research and development costs, as appropriate,
based on the fair value of such stock-based compensation awards not capitalized, in the Company’s condensed consolidated
statement of operations. The Company issues new shares of common stock to satisfy stock option exercises.
Channel
Partner Warrant Program
On
December 19, 2016, the Company’s Board of Directors approved a program to be administered by management that authorized
the Company to issue up to 5,000,000 common stock warrants to provide equity incentive to its Channel Partners to motivate and
reward them for their services to the Company and to align the interests of the Channel Partners with those of stockholders of
the Company. On August 23, 2018, the Board of Directors approved a reduction of the number of Warrant Reserve Shares from 5,000,000
to 2,000,000.
Warrants
granted under this program have a performance condition and once earned vest over three years and expire five years from issuance.
Performance conditions are generally based on the average number of unique visitors on the channel operated by the Channel Partner
generated during the six-month period from the launch of the Channel Partner’s operations on TheMaven platform or the revenue
generated during the period from issuance date through a specified end date. Equity grants with performance conditions that do
not have sufficiently large disincentive for non-performance are measured at fair value that is not fixed until performance is
complete. The Company recognizes expense for these equity-based payments as the services are received. The Company has specific
objective criteria for determination of the period over which services are received and expense is recognized.
Income
Taxes
Income
taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and
liabilities at the applicable enacted tax rates. A valuation allowance is provided when it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by
assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the
likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies
that could be implemented to realize the net deferred tax assets.
As
a result of the Company’s cumulative losses, management has concluded that a full valuation allowance against the Company’s
net deferred tax assets is appropriate. No income tax liabilities existed as of June 30, 2018 and December 31, 2017 due to the
Company’s continuing operating losses.
The
Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax positions will
be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes
interest and penalties related to income tax matters in income tax expense.
Pursuant
to Internal Revenue Code Sections 382 and 383, use of the Company’s net operating loss carryforwards may be limited if a
cumulative change in ownership of more than 50% occurs within any three-year period since the last ownership change. The Company
believes that it did have a change in control under these Sections in connection with its Recapitalization on November 4, 2016
and may have experienced additional control changes under these Sections as a result of recent financing activities. However,
the Company does not anticipate performing a complete analysis of the limitation on the annual use of the net operating loss carryforwards
until the time that it anticipates it will be able to utilize these tax attributes.
The
Company did not recognize any uncertain tax positions, or any accrued interest and penalties associated with uncertain tax positions
for any of the periods presented in the financial statements. The Company files tax returns in the United States Federal jurisdiction
and the State of California. Generally, the Company is subject to examination by income tax authorities for three years from the
filing of a tax return. The Company has not yet filed its Federal and states income tax returns for the years ended December 31,
2018 and 2017.
Income
(Loss) per Common Share
Basic
income or loss per share is computed using the weighted average number of common shares outstanding during the period and excludes
any dilutive effects of common stock equivalent shares, such as options, restricted stock, and warrants. All restricted stock
is considered outstanding but is included in the computation of basic income (loss) per common share only when the underlying
restrictions expire, the shares are no longer forfeitable, and are thus vested. Diluted income per common share is computed using
the weighted average number of common shares outstanding and common stock equivalent shares outstanding during the period using
the treasury stock method. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.
At
June 30, 2018 and 2017, the Company excluded the outstanding securities summarized below, which entitle the holders thereof to
acquire shares of common stock, from its calculation of net income (loss) per common share, as their effect would have been anti-dilutive.
|
|
|
June
30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
10%
senior convertible debentures
|
|
|
3,698,110
|
|
|
|
-
|
|
|
8%
convertible notes payable
|
|
|
970,787
|
|
|
|
-
|
|
|
Redeemable
Series G convertible preferred stock
|
|
|
188,791
|
|
|
|
132,154
|
|
|
Unvested
and forfeitable restricted stock awards
|
|
|
4,890,857
|
|
|
|
12,517,152
|
|
|
Common
stock options, including options issued in the form of warrants
|
|
|
3,883,003
|
|
|
|
2,004,137
|
|
|
Common
stock warrants – Channel Partner program
|
|
|
1,416,633
|
|
|
|
3,024,500
|
|
|
Common
stock warrants – financing
|
|
|
2,433,613
|
|
|
|
1,169,607
|
|
|
Total
|
|
|
17,481,794
|
|
|
|
18,847,550
|
|
Recent
Accounting Pronouncements
Recently
Adopted Accounting Standards
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 eliminates transaction-
and industry-specific revenue recognition guidance under current GAAP and replaces it with a principles-based approach for determining
revenue recognition. ASU 2014-09 requires that companies recognize revenue based on the value of transferred goods or services
as they occur in the contract. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets
recognized from costs incurred to obtain or fulfill a contract. The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11,
ASU 2016-12, and ASU 2016-20, all of which clarify certain implementation guidance within ASU 2014-09. The Company began recognition
of revenue from contracts with customers as a result of the launch of its network operations during the quarter beginning July
1, 2017; the Company had not previously generated revenues from customers prior to that date. The Company adopted the provisions
of ASU 2014-09 in the quarter beginning July 1, 2017 using the modified retrospective approach, which requires that the Company
apply the new guidance to all new contracts initiated on or after July 1, 2017. As the Company did not have any contracts which
had remaining obligations as of the July 1, 2017 effective date, the Company was not required to record an adjustment to the opening
balance of its retained earnings (accumulated deficit) account on such date. Under this method, the Company is not required to
restate comparative periods in its financial statements.
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). ASU 2016-18 addresses
diversity in practice due to a lack of guidance on how to classify and present changes in restricted cash or restricted cash equivalents
in the statement of cash flows. ASU 2016-18 does not define restricted cash and does not require any change in practice for what
an entity reports as restricted cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period
in restricted cash or restricted cash equivalents, in addition to changes in cash and cash equivalents. Restricted cash and restricted
cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented
as a separate line item in the operating, investing or financing sections of the cash flow statement. ASU 2016-18 requires an
entity to disclose information about the nature of the restrictions and amounts described as restricted cash and restricted cash
equivalents. Further, when cash, cash equivalents, restricted cash, and restricted cash equivalents are presented in more than
one line item on the balance sheet, an entity must reconcile these amounts to the total shown on the statement of cash flows,
either in narrative or tabular format, and should be provided on the face of the cash flow statement or in the notes to the financial
statements. The Company adopted the provisions of ASU 2016-18 in the quarter beginning January 1, 2018. The adoption of ASU 2016-18
did not affect the presentation of the Company’s cash flow statement for the year ended December 31, 2017, however, the
Company has expanded its footnote disclosure with respect to restricted cash.
Recently
Issued Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires a lessee
to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments,
on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing
arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost
of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification of all
cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing
and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees for capital
and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements, with certain practical expedients available. ASU 2016-02 has subsequently been amended and modified by ASU 2018-10,
2018-11 and 2018-20. ASU 2016-02 (including the subsequent amendments and modifications) is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Accordingly, the Company intends to adopt the provisions
of ASU 2016-02 in the quarter beginning January 1, 2019. The Company has not completed its analysis of the impact that the adoption
of ASU 2016-02 will have on the Company’s financial statement presentation or disclosures subsequent to adoption.
In
July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 allows companies
to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered
indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round
features are no longer required to be accounted for as derivative liabilities. A company will recognize the value of a down round
feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding financial
instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available
to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing
down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized
to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal
years. Accordingly, the Company intends to adopt the provisions of ASU 2017-11 in the quarter beginning January 1, 2019. The Company
has not completed its analysis of the impact that the adoption of ASU 2017-11 will have on the Company’s financial statement
presentation or disclosures subsequent to adoption.
In
June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions
for acquiring goods and services from nonemployees. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based payments
used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to
customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). ASU 2018-07 is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Accordingly, the Company
intends to adopt the provisions of ASU 2018-07 in the quarter beginning January 1, 2019. The Company has not completed its analysis
of the impact that the adoption of ASU 2018-07 will have on the Company’s financial statement presentation or disclosures
subsequent to adoption.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s financial statement presentation or disclosures.
3.
Advances Relating to Acquisition of HubPages, Inc.
On
March 13, 2018, the Company and HubPages, Inc. (“HubPages”), together with HP Acquisition Co, Inc. (“HPAC”),
a wholly-owned subsidiary of the Company incorporated in Delaware on March 13, 2018 in order to facilitate the acquisition of
HubPages by the Company, entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which
HPAC will merge with and into HubPages, with HubPages continuing as the surviving corporation in the merger and as a wholly-owned
subsidiary of the Company (the “Merger”). On June 1, 2018, the parties to the Merger Agreement entered into an amendment
(the “Amendment”), pursuant to which the parties agreed, among other things, that on or before June 15, 2018 the Company
would (i) pay directly to counsel for HubPages the legal fees and expenses incurred by HubPages in connection with the transactions
contemplated by the Merger Agreement as of the date of such payment (the “Counsel Payment”); and (ii) deposit into
escrow the sum of (x) $5,000,000 minus (y) the amount of the Counsel Payment. On June 15, 2018, the Company made the requisite
payment of $5,000,000 under the Merger Agreement. The acquisition of HubPages was consummated on August 23, 2018. See “Note
13. Subsequent Events” for additional information concerning this transaction.
4.
Note Receivable from Say Media, Inc.
On
March 19, 2018, the Company entered into a non-binding letter of intent (the “Letter of Intent”) to acquire Say Media
Inc. (“Say Media”), a media and publishing technology company. In connection with the Letter of Intent, on March 26,
2018, the Company loaned $1,000,000 to Say Media and was issued a secured promissory note in the principal amount of $1,000,000
from Say Media (the “Note”). The Note bears interest at the rate of 5% per annum and was secured against all of the
assets of Say Media. The Note was due and payable on the six-month anniversary of the earlier of (i) the termination of the Letter
of Intent or (ii) if Maven and Say Media should execute a definitive agreement with respect to the proposed acquisition, the termination
of the definitive agreement. During the three months and six months ended June 30, 2018, the Company recognized interest income
of $14,384 with respect to this Note. On August 4, 2018, the Company and Say Media entered into an Amended & Restated Asset
Purchase Agreement which was consummated on December 12, 2018. See “Note 13. Subsequent Events” for additional information
concerning this transaction.
5.
Property and Equipment and Website Development Costs, Net
Property
and equipment and website development costs as of June 30, 2018 and December 31, 2017 are summarized as follows:
|
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
|
|
Office
equipment and computers
|
|
$
|
70,402
|
|
|
$
|
46,309
|
|
|
Furniture
and fixtures
|
|
|
22,419
|
|
|
|
21,220
|
|
|
Website
development costs
|
|
|
5,424,043
|
|
|
|
3,145,308
|
|
|
|
|
|
5,516,864
|
|
|
|
3,212,837
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(1,320,070
|
)
|
|
|
(525,110
|
)
|
|
Net
property and equipment and website development costs
|
|
$
|
4,196,794
|
|
|
$
|
2,687,727
|
|
A
summary of website development cost activity for the six months ended June 30, 2018 is as follows:
|
Website
development costs at December 31, 2017
|
|
$
|
3,145,308
|
|
|
Costs
capitalized during the period:
|
|
|
|
|
|
Payroll-based
costs
|
|
|
1,132,339
|
|
|
Stock-based
costs
|
|
|
1,146,396
|
|
|
Website
development costs at June 30, 2018
|
|
$
|
5,424,043
|
|
Depreciation
expense for the three months ended June 30, 2018 and 2017 was $6,613 and $2,065, respectively. Depreciation expense for the six
months ended June 30, 2018 and 2017 was $12,243 and $3,335, respectively. Depreciation expense is included in research and development
costs and general and administrative costs, as appropriate, in the Company’s condensed consolidated statements of
operations.
During
the three months ended June 30, 2018 and 2017, the Company recorded amortization expense for website development costs of $433,204
and $53,000, respectively. During the six months ended June 30, 2018 and 2017, the Company recorded amortization expense for website
development costs of $782,717 and $53,000, respectively. Amortization expense for website development costs is included in general
and administrative costs in the Company’s consolidated statements of operations.
6.
Notes Payable to Officer
In
May 2018, the Company’s Chief Executive Officer began advancing funds to the Company in order to meet minimum operating
needs. Such advances were made pursuant to promissory notes that are due on demand, with interest at the minimum applicable Federal
rate, which was approximately 2.34% at June 30, 2018. At June 30, 2018, the total principal amount of advances outstanding was
$734,536. Accrued interest payable as of June 30, 2018 was $1,496.
7.
Convertible Notes Payable
8%
Convertible Notes Payable
On
June 6, 2018, the Company entered into a securities purchase agreement with L2 Capital, LLC (“L2”), pursuant to which
L2 purchased from the Company a promissory note, issuable in tranches, in the aggregate principal amount of $1,681,668 for an
aggregate purchase price of $1,500,000 (the “Consideration”). On June 11, 2018, an initial tranche of $570,556, which
included $15,000 of L2’s legal expenses, was purchased for a price of $500,000, reflecting an original issue discount of
$70,556.
L2
may pay, in its sole discretion, additional amounts of the Consideration, at such dates as L2 may choose; provided, however, that
L2’s option to pay any additional amount of Consideration terminates on the date that the Company consummates a financing
transaction (or series of interconnected financing transactions) after the date hereof, which results in the Company’s receipt
of an aggregate amount of $5,000,000 (a “Qualified Financing”). If any portion of the Consideration remains unfunded
on the date that the Company consummates a Qualified Financing (the “Remaining Consideration”), then L2 may choose,
in its sole discretion, to participate in the Qualified Financing and fund an amount up to the remaining unfunded Consideration
on the terms of the Qualified Financing. Further, at any time prior to the consummation of the Qualified Financing, L2 may choose,
in its sole discretion, to exchange all or a portion of the outstanding balance of the note for an equivalent portion of the Qualified
Financing pursuant to the terms of the Qualified Financing. In the event that the Company has not consummated a Qualified Financing
within 45 days after the date hereof (or an event of default occurs under the note), then the note, including accrued interest,
shall, at L2’s option, be convertible at any time into shares of the Company’s common stock at a conversion price
equal to the lowest Volume Weighted Average Price (“VWAP”) during the ten trading day period ending on the issue date
of the note. As of June 30, 2018, the 8% Convertible Notes Payable were convertible into 970,787 shares of the Company’s
common stock.
The
note bears interest at 8% per annum and the maturity date for each tranche funded is seven months from the date of issuance. The
note also requires an increasing premium for any prepayment from 20% for the first 90 days to 38% after 181 days, an increased
conversion rate to a 40% discount if in default, a default rate of 18% plus a repayment premium of 40%, plus 5% for each additional
default, and liquidated damages in addition to the default rates, ranging from 30% to 100% for certain breaches of the Note. The
note is subject to mandatory prepayment, including the above described premiums, equal to 50% of new funds raised by the Company
in excess of $11,600,000 in the private placement of its securities.
In
addition, on June 11, 2018, the Company issued a warrant to L2, exercisable for 216,120 shares of the Company’s common stock,
provided, that at the time of L2’s funding of each additional tranche under the note, if any, the number of shares issuable
under the warrant shall increase by the quotient of 50% of the face value of the respective tranche and 110% multiplied by the
VWAP of the Company’s common stock on the trading day immediately prior to the funding date of the respective tranche. The
warrant is exercisable for a period of five years at an exercise price equal to 110% of the VWAP of the Company’s common
stock on the trading day immediately prior to the funding date of the respective tranche, subject to customary anti-dilution adjustments,
and may, in the event there is no effective registration statement covering the re-sale of the warrant shares, be exercised on
a cash-less basis. As of June 30, 2018, the June 11, 2018 warrant was exercisable into 216,120 shares of the Company’s common
stock at an exercise price of $1.30 per share.
On
June 15, 2018, a second tranche of $555,556 was purchased for a price of $500,000, an original issue discount of $55,556. In connection
with the second tranche, the Company issued a warrant to L2, exercisable for 210,438 shares of the Company’s common stock.
As of June 30, 2018, the June 15, 2018 warrant was exercisable into 210,438 shares of the Company’s common stock at an exercise
price of $1.20 per share.
As
a result of the closing of the 10% Convertible Debenture offering on June 15, 2018 (see “10% Convertible Debentures”
below), L2 no longer has the right to invest in the Company under the L2 securities purchase agreement.
The
Company accounts for the warrants and embedded conversion feature of the notes as derivative liabilities, as the Company is required
to adjust downward the exercise price of the warrants and the conversion price of the note under certain circumstances, which
requires that the Company carry such amounts in its consolidated balance sheet as liabilities at fair value, as adjusted at each
period-end.
During
the three months and six months ended June 30, 2018, interest of $14,660 was charged to expense, which consisted of $10,159 from
the accretion of original issue discount and $4,501 from the accrual of interest payable.
The
8% Convertible Notes Payable consists of the following at June 30, 2018:
|
Principal
amount of notes payable
|
|
$
|
1,000,000
|
|
|
Add:
|
|
|
|
|
|
Accreted
original issue discount
|
|
|
10,159
|
|
|
Accrued
interest payable
|
|
|
4,501
|
|
|
|
|
|
1,014,660
|
|
|
Less
unamortized discounts:
|
|
|
|
|
|
Warrants
|
|
|
547,627
|
|
|
Embedded
conversion feature
|
|
|
145,431
|
|
|
Total
unamortized discounts
|
|
|
693,058
|
|
|
|
|
$
|
321,602
|
|
During
the three months and six months ended June 30, 2018, $67,529 was charged to interest expense from the amortization of debt discounts.
See
“Note 13. Subsequent Events” regarding the repayment of the 8% Convertible Notes Payable on September 6, 2018.
10%
Senior Convertible Debenture
On
June 15, 2018, the Company entered into a securities purchase agreement with four accredited investors to purchase an aggregate
of $4,775,000 in principal amount of the Company’s 10% Senior Convertible Debenture, due on June 30, 2019 (the “Debenture”).
Included in the aggregate total of $4,775,000 is $1,025,000 from two of the Company’s executives. The Debenture is convertible
into an aggregate of 3,698,110 shares of the Company’s common stock based on a conversion price of $1.2912 per share. The
Debenture bears interest at the rate of 10% per annum, payable in cash semi-annually on December 31 and June 30, beginning on
December 31, 2018 and is not convertible. Upon the occurrence of certain events, the holders of the Debenture also will be entitled
to receive an additional payment, if necessary, to provide the holders with a 20% annual internal rate of return on their investment,
as further described in the Debenture.
At
any time after the later of (i) March 31, 2019 and (ii) the date that the VWAP (as that term is defined in the Debenture) for
any 20 trading days (out of 30 consecutive trading days) is 120% or more of the then conversion price, the Company has the option
to redeem some or all of the outstanding principal amount of the Debenture for an amount equal to the principal amount (plus accrued
but unpaid interest thereon) being redeemed plus any other amounts due under the Debenture. Otherwise, the Company may not prepay
any portion of the principal amount of a Debenture without the prior written consent of the holders of the Debenture.
If
the Company undertakes subsequent financings for gross proceeds of at least $20,000,000 (a “Qualified Offering”),
the Company has the option to cause the holders to convert their Debenture at a conversion price equal to the lesser of (i) the
then conversion price and (ii) the price per share paid for in the Qualified Offering.
As
long as any portion of the Debenture remain outstanding, unless investors holding at least 51% in principal amount of the then
outstanding Debenture otherwise agree, the Company shall not, among other things enter into, incur, assume or guarantee any indebtedness,
except for certain permitted indebtedness, as set forth in the Debenture.
Additionally,
pursuant to a Registration Rights Agreement entered into in connection with the purchase agreement, the Company agreed to register
the shares issuable upon conversion of the Debenture for resale by the holders of the Debenture. The Company has committed to
file the registration statement by no later than 45 days after June 15, 2018 and to cause the registration statement to become
effective by no later than 120 days after June 15, 2018 (or, in the event of a full review by the staff of the Securities and
Exchange Commission, 150 days following June 15, 2018). The Registration Rights Agreement provides for liquidated damages upon
the occurrence of certain events up to a maximum amount of 6% of the aggregate amount invested by such holder of the Debenture
pursuant to the purchase agreement. Liquidated damages were waived as part of the roll-over of the Debenture into Series H Convertible
Preferred Stock.
The
Securities Purchase Agreement also included a provision that requires the Company to maintain its periodic filings with the SEC
in order to satisfy the public information requirements under Rule 144(c) of the Securities Act. If the Company fails for any
reason to satisfy the current public information requirement (a “Public Information Failure”), then the Company will
be obligated to pay to each holder a cash payment equal to 1.0% of the amount invested as partial liquidated damages, up to a
maximum of six months. Such payments are subject to interest at the rate of 1.0% per month until paid in full. The Debenture was
rolled over into Series H Convertible Preferred Stock before the due date for the commencement of liquidated damages.
The
Company accounts for the embedded conversion feature of the Debenture as a derivative liability, as the Company is required to
adjust downward the conversion price of the Debenture under certain circumstances, which requires that the Company carry such
amount in its consolidated balance sheet as a liability at fair value, as adjusted at each period-end.
During
the three months and six months ended June 30, 2018, the Company recognized interest expense of $20,844 from the accrual of interest
payable.
The
10% Senior Convertible Debenture consists of the following at June 30, 2018:
|
Principal
amount of notes payable, including $1,025,000 to officers
|
|
$
|
4,775,000
|
|
|
Add
accrued interest payable
|
|
|
20,844
|
|
|
|
|
|
4,795,844
|
|
|
Less
unamortized discount:
|
|
|
|
|
|
Embedded
conversion feature
|
|
|
452,410
|
|
|
Total
unamortized discount
|
|
|
452,410
|
|
|
|
|
$
|
4,343,434
|
|
During
the three months and six months ended June 30, 2018, $18,592 was charged to interest expense from the amortization of debt discount.
See
“Note 13. Subsequent Events” for information regarding the conversion of the 10% Senior Convertible Debenture into
Series H Convertible Preferred Stock.
8.
Redeemable Series G Convertible Preferred Stock
On
May 30, 2000, the Company sold 1,800 shares of its Redeemable Series G Convertible Preferred Stock (“Series G Preferred
Stock”) and warrants (“Warrants”) to purchase 63,000 shares of common stock to four investors. The Series G
Preferred Stock has a stated value of $1,000 per share and is convertible into shares of common stock, at the option of the holder,
subject to certain limitations. The Series G Preferred Stock was initially convertible into common stock at a conversion price
equal to 85% of the lowest sale price of the common stock over the five trading days preceding the date of the conversion, subject
to a maximum conversion price of $16.30, adjusted for a 1-for-10 reverse stock split effective July 26, 2007. The Company may
require holders to convert all (but not less than all) of the Series G Preferred Stock at any time after November 30, 2003 or
buy out all outstanding shares of Series G Preferred Stock at the then conversion price. Holders of Series G Preferred Stock are
not entitled to dividends and have no voting rights, unless required by law or with respect to certain matters relating to the
Series G Preferred Stock.
The
Warrants expired unexercised on November 29, 2003, and prior to November 2001, 1,631.504 of the initial 1,800 shares of Series
G Preferred Stock were converted into the Company’s common stock by the holders thereof. No conversions have taken place
since November 2001. The remaining 168.496 shares of Series G Preferred Stock outstanding at June 30, 2018 and December 31, 2017
are convertible into a minimum of 188,791 shares and 98,698 shares of common stock, respectively, and are owned by one of the
original Series G investors.
Upon
a change in control, sale of or similar transaction, as defined in the Certificate of Designation for the Series G Preferred Stock,
each holder of the Series G Preferred Stock has the option to deem such transaction as a liquidation and may redeem their shares
at the liquidation value of $1,000 per share, or an aggregate amount of $168,496 for the remaining 168,496 shares of Series G
Preferred Stock outstanding. The sale of all the assets of the Company on June 28, 2007 triggered the preferred stockholders’
redemption option. As such redemption was not in the control of the Company, the Series G Preferred Stock has been accounted for
as if it was redeemable preferred stock and is classified in the balance sheet as a mezzanine obligation between liabilities and
stockholders’ equity.
9.
Stockholders’ Equity
The
total number of shares that the Company has the authority to issue is 101,000,000, consisting of 100,000,000 shares of common
stock, $0.01 par value per share, and 1,000,000 shares of preferred stock, $0.01 par value per share. As of June 30, 2018 and
December 31, 2017, there were 10,270 authorized shares of preferred stock originally designated as series A through E with designations
subsequently eliminated, 2,000 authorized shares of preferred stock designated as “Series F Convertible Preferred Stock”,
none of which were outstanding, and 1,800 authorized shares of preferred stock designated as “Series G Convertible Preferred
Stock”, of which 168.496 shares were outstanding (see “Note 8. Redeemable Series G Convertible Preferred Stock”).
Series
H Convertible Preferred Stock
Information
with respect to Series H Convertible Preferred Stock is provided in “Note 13. Subsequent Events”.
Series I Convertible Preferred Stock
Information with respect
to Series I Convertible Preferred Stock is provided in “Note 13. Subsequent Events”.
Common
Stock
On
January 4, 2018, the Company issued an aggregate of 1,200,000 shares of its common stock to an investor in a private placement
at a price of $2.50 per share. The Company received gross proceeds of $3,000,000 from the private placement, which was received
prior to December 31, 2017, and was therefore classified as restricted cash and as a private placement advance in the consolidated
balance sheet at December 31, 2017. Upon completion of the private placement on January 4, 2018, the funds were reclassified to
cash and stockholders’ equity.
In
connection with the January 4, 2018 closing of the private placement, MDB Capital Group LLC (“MDB”), as the placement
agent, was entitled to receive 60,000 shares of the Company’s common stock valued at $150,000 ($2.50 per share) based
on the transaction price. In addition, MDB was also entitled to receive warrants to purchase 60,000 shares of the Company’s
common stock at an exercise price of $2.50 per share.
On
March 30, 2018, the Company issued an aggregate of 500,000 shares of its common stock to the same investor as in the January 4,
2018 private placement in a second closing of the private placement at a price of $2.50 per share. The Company received gross
proceeds of $1,250,000 from the private placement. No costs were incurred in connection with the March 30, 2018 closing of the
private placement.
In
addition, the Company entered into a Registration Rights Agreement with the investor dated January 4, 2018, pursuant to which
the Company agreed to register for resale the shares of common stock purchased pursuant to the placement. The Company was also
committed to register the 60,000 shares issued to MDB. The Company committed to file the registration statement no later than
200 days after the closing and to cause the registration statement to become effective no later than the earlier of (i) seven
business days after the SEC informs the Company that no review of the registration statement will be made or that the SEC has
no further comments on the registration statement. The Registration Rights Agreement provides for liquidated damages upon the
occurrence of certain events, including the Company’s failure to file the registration statement or to cause it to become
effective by the deadlines set forth above. The amount of liquidated damages payable to an investor is 1.0% of the aggregate amount
invested by such investor for each 30-day period, or pro rata portion thereof, during which the default continues, up to a maximum
amount of 5.0% of the aggregate amount invested by an investor pursuant to the purchase agreement or the value of the securities
registered by the Placement Agent. The purchaser of the shares of common stock waived the liquidated damages when the purchaser
converted their investment into Series H Convertible Preferred Stock in August 2018. The Company recognized a registration rights
penalty of $15,001 for the three and six months ended June 30, 2018, with respect to its registration rights obligation
for the common shares issued to MDB in conjunction with the January 4, 2018 placement.
The
Company entered into a Registration Rights Agreement with the investor dated March 30, 2018, pursuant to which the Company agreed
to register for resale the shares of common stock purchased pursuant to the placement. The Company committed to file the registration
statement no later than 270 days after the closing and to cause the registration statement to become effective no later than the
earlier of (i) seven business days after the SEC informs the Company that no review of the registration statement will be made
or that the SEC has no further comments on the registration statement. The Registration Rights Agreement provides for liquidated
damages upon the occurrence of certain events, including the Company’s failure to file the registration statement or to
cause it to become effective by the deadlines set forth above. The amount of liquidated damages payable to an investor is 1.0%
of the aggregate amount invested by such investor for each 30-day period, or pro rata portion thereof, during which the default
continues, up to a maximum amount of 5.0% of the aggregate amount invested by an investor pursuant to the purchase agreement.
The purchaser of the shares of common stock converted their investment into Series H Convertible Preferred Stock in August 2018
prior to the registration rights penalty becoming effective.
See
“Common Stock Warrants – Financing” for additional information with respect to a warrant to that was issued
in connection with the January 4, 2018 private placement.
Information
with respect to the issuance of common stock in connection with acquisition of subsidiaries is provided in “Note 13. Subsequent
Events”.
Restricted
Stock Awards
On
August 11, 2016, management and employees of Amplify, in conjunction with the incorporation of Amplify on July 22, 2016, were
issued 12,209,677 shares of common stock, as adjusted for the Recapitalization Exchange Ratio of 4.13607. The shares are subject
to a Company option to buy back the shares at the original cash consideration paid, which totals $2,952 or approximately $0.0002
per share. Pursuant to the achievement of the Unique User Performance Condition, as defined, the employees vest their ownership
in the shares over a three-year period beginning August 1, 2016, with one-third vesting on August 1, 2017 and the balance monthly
over the remaining two years. Because these shares require continued service to the Company, the estimated fair value of these
shares is being recognized as compensation expense over the vesting period of the award.
During
October 2016, management and employees of Amplify were issued an additional 307,475 shares of common stock in connection with
this arrangement.
As
of December 31, 2017, the Unique User Performance Condition was determined based on 4,977,144 unique users accessing TheMaven
channels in November 2017. Based on this level of unique users, 2,453,362 of the shares or 56% subject to the performance condition
were released and 1,927,641 of the escrow shares or 44% were subject to the Company’s buy-back right. The Company’s
Board of Directors made a determination on March 12, 2018 to waive the buy-back right. This waiver of the buy-back right related
to 1,927,641 shares was determined to be a modification of the terms of the restricted stock awards and resulted in incremental
compensation cost of $2,756,527 that will be recognized over a period of approximately 1.45 years, with a total of $2,148,811
to be recognized in 2018, of which $226,978 and $1,768,253 was recognized in the three months and six months ended June 30, 2018.
A
summary of restricted stock award activity during the six months ended June 30, 2018 is as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
of Shares
|
|
|
Average
|
|
|
|
|
Unvested
|
|
|
Vested
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock awards outstanding at December 31, 2017
|
|
|
6,979,596
|
|
|
|
5,537,556
|
|
|
$
|
0.41
|
|
|
Vested
|
|
|
(2,088,739
|
)
|
|
|
2,088,739
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Restricted
stock awards outstanding at June 30, 2018
|
|
|
4,890,857
|
|
|
|
7,626,295
|
|
|
$
|
0.72
|
|
At
June 30, 2018, total compensation cost, including the effect of the waiver of the buy-back right, related to restricted stock
awards but not yet recognized was $2,741,137. This cost will be recognized over a period of approximately 1.1 years with a total
of $1,586,698 remaining to be recognized before December 31, 2018.
Common
Stock Options
On
March 28, 2018, the Board of Directors approved an increase in the number of shares of the Company’s common stock reserved
for grant pursuant to the 2016 Stock Incentive Plan (the “Plan”) from 3,000,000 shares to 5,000,000 shares. The Plan
is administered by the Board of Directors, and there were no grants prior to the formation of the Plan. Shares of common stock
that are issued under the Plan or subject to outstanding incentive awards will be applied to reduce the maximum number of shares
of common stock remaining available for issuance under the Plan, provided, however, that shares subject to an incentive award
that expire will automatically become available for issuance. Options issued under the Plan may have a term of up to ten years
and may have variable vesting provisions.
As
of June 30, 2018, options to acquire 3,883,003 shares of the Company’s common stock had been granted under the Plan, and
options to acquire 1,116,997 shares of common stock remain available for future grant.
In
conjunction with the Recapitalization, the Company assumed 175,000 fully-vested options having an exercise price of $0.17 per
share and an expiration date of May 15, 2019. Of those options, 125,000 were exercised in June 2018 on a cashless basis resulting
in the issuance of 106,154 net shares of common stock,
The
estimated fair value of stock-based awards is recognized as compensation expense over the vesting period of the award. The fair
value of restricted stock awards is determined based on the number of shares granted and the quoted price of the Company’s
common stock on the date of grant. The fair value of stock option awards is estimated at the grant date as calculated using the
Black-Scholes option-pricing model. The Black-Scholes model requires various highly judgmental assumptions including expected
volatility and option life.
The
fair value of stock options granted during the six months ended June 30, 2018 were calculated using the Black-Scholes option-pricing
model utilizing the following assumptions:
|
Risk-free
interest rate
|
|
|
2.60%
to 2.77
|
%
|
|
Expected
dividend yield
|
|
|
0
|
%
|
|
Expected
volatility
|
|
|
108.59%
to 113.87
|
%
|
|
Expected
life
|
|
|
6
years
|
|
Information
with respect to the expensing and capitalization stock options and other stock-based compensation is provided in “Note 10.
Stock-Based Compensation”.
A
summary of stock option activity, including options issued in the form of warrants, during the six months ended June 30, 2018
is as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options outstanding at December 31, 2017
|
|
|
2,176,637
|
|
|
$
|
1.25
|
|
|
|
|
|
|
Granted
|
|
|
2,021,250
|
|
|
|
1.74
|
|
|
|
|
|
|
Exercised
|
|
|
(125,000
|
)
|
|
|
0.17
|
|
|
|
|
|
|
Forfeited
|
|
|
(189,884
|
)
|
|
|
1.43
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Stock
options outstanding at June 30, 2018
|
|
|
3,883,003
|
|
|
$
|
1.49
|
|
|
|
9.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options exercisable at June 30, 2018
|
|
|
937,271
|
|
|
$
|
1.25
|
|
|
|
8.78
|
|
The
aggregate grant date fair value of stock options granted during the six months ended June 30, 2018 was $2,953,964.
The
exercise prices of common stock options, including options issued in the form of warrants, outstanding and exercisable are as
follows at June 30, 2018:
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Price
|
|
|
(Shares)
|
|
|
(Shares)
|
|
|
|
|
|
|
|
|
|
|
|
Under
$1.01
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
$1.01
to $1.25
|
|
|
|
1,766,753
|
|
|
|
717,354
|
|
|
$1.26
to $1.50
|
|
|
|
125,000
|
|
|
|
1,949
|
|
|
$1.51
to $1.75
|
|
|
|
665,000
|
|
|
|
105,000
|
|
|
$1.76
to $2.00
|
|
|
|
1,055,000
|
|
|
|
87,968
|
|
|
$2.01
to $2.25
|
|
|
|
205,000
|
|
|
|
—
|
|
|
Over
$2.25
|
|
|
|
41,250
|
|
|
|
—
|
|
|
|
|
|
|
3,883,003
|
|
|
|
9
37,271
|
|
Outstanding
stock options to acquire 2,945,732 shares of the Company’s common stock had not vested at June 30, 2018.
As
of June 30, 2018, there was approximately $3,312,000 of total unrecognized compensation expense related to stock options granted
which is expected to be recognized over a weighted-average period of approximately 2.18 years.
The
intrinsic value of exercisable but unexercised in-the-money stock options at June 30, 2018 was approximately $65,100, based on
a fair market value of $1.20 per share on June 30, 2018.
Common
Stock Warrants – Channel Partner Program
On
December 19, 2016, the Company’s Board of Directors approved a program to be administered by management that authorized
the Company to issue up to 5,000,000 common stock warrants to provide equity incentive to its Channel Partners to motivate and
reward them for their services to the Company and to align the interests of the Channel Partners with those of stockholders of
the Company. On August 23, 2018, the Board of Directors approved a reduction of the number of Warrant Reserve Shares from 5,000,000
to 2,000,000.
A
summary of Channel Program common stock warrant activity during the six months ended June 30, 2018 is as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Channel
Program warrants outstanding at January 1, 2018
|
|
|
1,303,832
|
|
|
$
|
1.48
|
|
|
|
|
|
|
Issued
|
|
|
295,000
|
|
|
|
1.74
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Forfeited
|
|
|
(182,200
|
)
|
|
|
1.33
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Channel
Program warrants outstanding at June 30, 2018
|
|
|
1,416,633
|
|
|
$
|
1.49
|
|
|
|
4.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Channel
Program warrants exercisable at June 30, 2018
|
|
|
252,125
|
|
|
$
|
1.46
|
|
|
|
4.06
|
|
During
the six months ended June 30, 2018, the Company issued 295,000 common stock warrants to fourteen of the Channel Partners. The
warrants have a performance condition and once earned vest over three years and expire five years from issuance. The exercise
prices range from $1.32 to $2.25 per share with a weighted average price of $1.74 per share. The performance conditions are generally
based on the average number of unique visitors on the channel operated by the Channel Partner generated during the six-month period
from the launch of the Channel Partner’s operations on TheMaven platform or the revenue generated during the period from
issuance date through December 31, 2021. Equity grants with performance conditions that do not have sufficiently large disincentive
for non-performance are measured at fair value that is not fixed until performance is complete. The Company recognizes expense
for these equity-based payments as the services are received. The Company has specific objective criteria for determination of
the period over which services are received and expense is recognized.
Additional
information with respect to stock-based compensation related to the Channel partner Program warrants is provided at
“Note 10. Stock-Based Compensation”.
Common
Stock Warrants – Financing
On
November 4, 2016, in accordance with the Investment Banking Advisory Agreement more fully described in “Note 11. Related
Party Transactions”, Integrated issued warrants to MDB to purchase 1,169,607 shares of the Company’s common stock
in conjunction with the Recapitalization.
On
April 30, 2018, the holders exercised 842,117 warrants under the cashless exercise provisions and received 736,853 shares of common
stock upon the exercise when the stock price was $1.60 per share. A total of 327,490 warrants remain outstanding as of June 30,
2018. The warrants have an exercise price of $0.20 per share and expire on November 4, 2021. The aggregate intrinsic value of
the 327,490 warrants at June 30, 2018 was approximately $328,000.
On
October 19, 2017, the Company, in connection with a private placement of its common stock, issued 119,565 common stock warrants
to MDB, which acted as placement agent. The warrants have an exercise price of $1.15 per share and expire on October 19, 2022.
In
connection with the January 4, 2018 private placement closing, MDB, as the placement agent, was issued warrants to purchase 60,000
shares of the Company’s common stock. The warrants have an exercise price of $2.50 per share and expire on October 19, 2022.
In
connection with the 8% convertible notes issued on June 11, 2018 and June 15, 2018, (see “Note 7. Convertible Notes Payable”),
the Company also issued warrants to purchase 216,120 shares and 210,438 shares, respectively, representing a total of 426,558
shares of the Company’s common stock, provided, that at the time of the funding of each additional tranche under the related
note, if any, the number of shares issuable under the related warrant shall increase by the quotient of 50% of the face value
of the respective tranche and 110% multiplied by the VWAP of the Company’s common stock on the trading day immediately prior
to the funding date of the respective tranche. The warrants are exercisable for a period of five years at an exercise price equal
to 110% of the VWAP of the Company’s common stock on the trading day immediately prior to the funding date of the respective
tranche, subject to customary anti-dilution adjustments, and may, in the event there is no effective registration statement covering
the re-sale of the warrant shares, be exercised on a cashless basis. The 216,120 warrants and the 210,438 warrants are exercisable
at $1.30 and $1.20 per share, respectively. Effective as of August 3, 2018, pursuant to the anti-dilution provision, the Company
adjusted the exercise price to $0.50 per share and the number of warrants to purchase 561,912 shares and 505,051 shares, representing
a total of 1,066,963 shares of the Company’s common stock
On
January 4, 2018 and March 30, 2018, the Company sold 1,200,000 shares and 500,000 shares of common stock, respectively, to Strome
Mezzanine Fund LP (“Strome”) at $2.50 per share, representing a total of 1,700,000 shares of common stock for gross
proceeds of $4,250,000.
The
January 4, 2018 financing transaction did not include any true-up or make-good provisions, nor did it contain any lock-up provisions.
The
March 30, 2018 financing transaction included a true-up provision and a lock-up provision. The true-up provision required the
Company to issue additional shares of common stock if Strome sold shares on a national securities exchange or the OTC marketplace
or in an arm’s-length unrelated third-party private sale in the 90-day period beginning one year after March 30, 2018 at
less than $2.50 per share, up to a maximum of one share for each share originally sold to Strome. In addition, the Company entered
into a separate agreement with Strome dated March 30, 2018 that extended the true-up provisions to the shares of common stock
sold in the January 4, 2018 financing. Accordingly, under this true-up provision, which became effective March 30, 2018, the Company
was obligated to issue up to an additional 1,700,000 shares of common stock to Strome without any further consideration under
certain conditions in the future. As a result, the maximum number of shares issuable in these transactions and the floor on
the price per share were 3,400,000 shares and $1.25 per share, respectively.
On
June 15, 2018, the Company entered into a securities purchase agreement with four investors to sell $4,775,000 principal amount
of 10% Senior Convertible Debentures. Strome purchased $3,000,000 of such amount and two senior executives of the Company and
another investment fund purchased the remaining $1,775,000 of such amount.
On
June 15, 2018, the Company also modified the two securities purchase agreements dated January 4, 2018 and March 30, 2018 with
Strome to eliminate the true-up provision under which the Company was committed to issue up to 1,700,000 shares of common stock
in certain circumstances as described above. As consideration for such modification, the Company issued a warrant to Strome to
purchase 1,500,000 shares of common stock, exercisable at an initial price of $1.19 per share for a period of 5 years. The common
shares underlying the warrant have certain registration rights. If the underlying common shares are registered, the warrant is
exercisable only for cash, and if they are not registered, the warrant may also be exercised on a cashless basis. Strome was also
granted observer rights on the Company’s Board of Directors.
At
June 30, 2018, the Company accounted for the warrants as a derivative liability, as the Company was required to adjust downward
the exercise price of the warrants under certain circumstances, which required that the Company carry such amounts in its consolidated
balance sheet as liabilities at fair value, as adjusted at each period-end.
The
estimated fair value of this warrant on the June 15, 2018 issuance date of $1,344,648, calculated pursuant to the Black-Scholes
option-pricing model, was charged to operations as true-up termination fee during the three months ended June 30, 2018. This warrant
also had a downward reset provision with a floor of $0.50 per share that required it to be accounted for as a derivative, as a
result of which the Company recognized a derivative liability of $1,344,648 at the June 15, 2018 issuance date and at June 30,
2018. As a result of the triggering of this reset provision on August 3, 2018, the Company subsequently reduced the exercise price
of the warrant from $1.19 per share to $0.50 per share. As a result of the warrant exercise price being reduced to the floor exercise
price on August 3, 2018, the warrant was no longer considered a derivative liability at September 30, 2018.
A
summary of common stock financing warrant activity during the six months ended June 30, 2018 is as follows:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
warrants outstanding at December 31, 2017
|
|
|
1,289,172
|
|
|
$
|
0.29
|
|
|
|
|
|
|
Issued
|
|
|
1,986,558
|
|
|
|
1.24
|
|
|
|
|
|
|
Exercised
|
|
|
(842,117
|
)
|
|
|
0.20
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
Financing
warrants outstanding at June 30, 2018
|
|
|
2,433,613
|
|
|
$
|
1.10
|
|
|
|
4.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
warrants exercisable at June 30, 2018
|
|
|
2,433,613
|
|
|
$
|
1.10
|
|
|
|
4.70
|
|
The
aggregate issue date fair value of financing warrants issued during the six months ended June 30, 2018 was $2,505,132.
The
exercise prices of common stock financing warrants outstanding and exercisable are as follows at June 30, 2018:
|
|
|
|
Financing
|
|
|
Financing
|
|
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Price
|
|
|
(Shares)
|
|
|
(Shares)
|
|
|
|
|
|
|
|
|
|
|
|
$0.20
|
|
|
|
327,490
|
|
|
|
327,490
|
|
|
$1.15
|
|
|
|
119,565
|
|
|
|
119,565
|
|
|
$1.19
|
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
|
$1.20
|
|
|
|
210,438
|
|
|
|
210,438
|
|
|
$1.30
|
|
|
|
216,120
|
|
|
|
216,120
|
|
|
$2.50
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
|
|
|
2,433,613
|
|
|
|
2,433,613
|
|
The
intrinsic value of exercisable but unexercised in-the-money stock warrants at June 30, 2018 was approximately $350,000, based
on a fair market value of $1.20 per share on June 30, 2018.
10.
Stock-Based Compensation
A
summary of stock-based compensation charged to operations or capitalized during the three months and six months ended June 30,
2018 and 2017 is as follows:
|
|
|
Restricted
|
|
|
|
|
|
Channel
|
|
|
|
|
|
|
|
|
|
|
Stock
at
|
|
|
Stock
|
|
|
Partner
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
Options
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Total
|
|
|
During the
three months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
18,491
|
|
|
$
|
-
|
|
|
$
|
18,491
|
|
|
Research
and development costs
|
|
|
-
|
|
|
|
1,184
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,184
|
|
|
General
and administrative costs
|
|
|
381,287
|
|
|
|
439,279
|
|
|
|
-
|
|
|
|
-
|
|
|
|
820,566
|
|
|
Total
costs charged to operations
|
|
|
381,287
|
|
|
|
440,463
|
|
|
|
-
|
|
|
|
-
|
|
|
|
840,241
|
|
|
Capitalized
internal-use website development costs
|
|
|
238,417
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
238,417
|
|
|
Total
stock-based compensation
|
|
$
|
619,704
|
|
|
$
|
440,463
|
|
|
$
|
18,491
|
|
|
$
|
-
|
|
|
$
|
1,078,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the
three months ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
80,000
|
|
|
$
|
-
|
|
|
$
|
80,000
|
|
|
Research
and development costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
General
and administrative costs
|
|
|
269,341
|
|
|
|
176,016
|
|
|
|
-
|
|
|
|
32,335
|
|
|
|
477,692
|
|
|
Total
costs charged to operations
|
|
|
269,341
|
|
|
|
176,016
|
|
|
|
80,000
|
|
|
|
32,335
|
|
|
|
557,692
|
|
|
Capitalized
internal-use website development costs
|
|
|
212,156
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
212,156
|
|
|
Total
stock-based compensation
|
|
$
|
481,497
|
|
|
$
|
176,016
|
|
|
$
|
80,000
|
|
|
$
|
32,335
|
|
|
$
|
769,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the
six months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
155,077
|
|
|
$
|
-
|
|
|
$
|
155,077
|
|
|
Research
and development costs
|
|
|
-
|
|
|
|
1,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,290
|
|
|
General
and administrative costs
|
|
|
1,393,862
|
|
|
|
640,903
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,034,765
|
|
|
Total
costs charged to operations
|
|
|
1,393,862
|
|
|
|
642,193
|
|
|
|
155,077
|
|
|
|
-
|
|
|
|
2,191,132
|
|
|
Capitalized
internal-use website development costs
|
|
|
1,146,396
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,146,396
|
|
|
Total
stock-based compensation
|
|
$
|
2,540,258
|
|
|
$
|
642,193
|
|
|
$
|
155,077
|
|
|
$
|
-
|
|
|
$
|
3,337,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the
six months ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Research
and development costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
General
and administrative costs
|
|
|
539,994
|
|
|
|
191,512
|
|
|
|
80,000
|
|
|
|
32,335
|
|
|
|
843,841
|
|
|
Total
costs charged to operations
|
|
|
539,994
|
|
|
|
191,512
|
|
|
|
80,000
|
|
|
|
32,335
|
|
|
|
843,841
|
|
|
Capitalized
internal-use website development costs
|
|
|
444,841
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
444,841
|
|
|
Total
stock-based compensation
|
|
$
|
984,835
|
|
|
$
|
191,512
|
|
|
$
|
80,000
|
|
|
$
|
32,335
|
|
|
$
|
1,288,682
|
|
11.
Related Party Transactions
Investment
Banking Services
On
April 4, 2017, the Company completed a private placement of its common stock, selling 3,765,000 shares at $1.00 per share, for
total gross proceeds of $3,765,000. In connection with the offering, the Company paid $188,250 in cash and issued 162,000 shares
of common stock to MDB, which acted as placement agent.
On
October 19, 2017, the Company completed a private placement of its common stock, selling 2,391,304 shares at $1.15 per share,
for total gross proceeds of $2,750,000. In connection with the offering, the Company issued 119,565 shares of common stock and
warrants to purchase 119,565 shares of the Company’s common stock to MDB, which acted as placement agent.
On
January 4, 2018, the Company completed a private placement of its common stock, selling 1,200,000 shares at $2.50 per share, for
total gross proceeds of $3,000,000. In connection with the offering, MDB, which acted as placement agent, was entitled to
60,000 shares of common stock and warrants to purchase 60,000 shares of the Company’s common stock.
Mr.
Christopher Marlett was a director of the Company until February 1, 2018. Mr. Marlett is the Chief Executive Officer of MDB. Mr.
Gary Schuman, who was the Chief Financial Officer of the Company until May 15, 2017, is the Chief Financial Officer and Chief
Compliance Officer of MDB. The Company compensated Mr. Schuman for his services at the rate of $3,000 per month until his resignation.
Mr. Robert Levande was a director of the Company until July 5, 2017. Mr. Levande is a senior managing director of MDB.
Service
Contracts
Ms.
Rinku Sen became a director of the Company in November 2017 and has provided consulting services and operates a channel on the
Company’s platform. During the three months ended June 30, 2018 and 2017, the Company paid Ms. Sen $12,000 and $0, respectively,
for these services. During the six months ended June 30, 2018 and 2017, the Company paid Ms. Sen $15,521 and $0, respectively,
for these services.
Effective
on September 20, 2017, the Company entered into a six-month contract, with automatic renewals unless cancelled, with a company
located in Nicaragua that is owned by Mr. Christopher Marlett, a then director of the Company, to provide content conversion services.
During the three months ended June 30, 2018 and 2017, the Company paid $8,450 and $0, respectively, for these services. During
the six months ended June 30, 2018 and 2017, the Company paid $20,150 and $0, respectively, for these services.
Notes
Payable to Officers
In
May 2018, the Company’s Chief Executive Officer began advancing funds to the Company in order to meet minimum operating
needs. Such advances were made pursuant to promissory notes that were due on demand, with interest at the minimum applicable Federal
rate, which was approximately 2.34% at June 30, 2018. At June 30, 2018, the total principal amount of advances outstanding was
$734,536. Accrued interest payable as of June 30, 2018 was $1,520.
On
June 15, 2018, four investors invested a total of $4,775,000 in a convertible debt offering (“Debentures”). Included
in the total was an investment of $1,000,000 by the Company’s Chief Executive Officer and $25,000 from the Company’s
President. Interest is payable on the Debentures at the rate of 10% per annum, payable in cash semi-annually on December 31 and
June 30, and on maturity, beginning on December 31, 2018, and the Debentures are due and payable on June 30, 2019 (the “Maturity
Date”). On the Maturity Date, and on any conversion prior to the Maturity Date, each Investor will be entitled to receive
additional interest payments to provide the Investor with a 20% annual Internal Rate of Return. The Company will recognize this
annual Internal Rate of Return requirement for accounting purposes when such Debentures are repaid or otherwise satisfied.
12.
Commitments and Contingencies
Operating
Lease
In
April 2018, the Company entered into an office sublease agreement to sublease of 7,457 rentable square feet at 1500 Fourth Avenue,
Suite 200, Seattle, Washington 98101. The sublease has a term of 41 months, commencing on June 1, 2018, with base rent at a rate
of $25.95 per square foot per annum in months 1 through 12, rising to $37 per square foot in months 37 to 41. Upon execution of
the sublease in April 2018, the Company paid $60,249 as prepaid rent and a security deposit of $22,992. The following table shows
the aggregate commitment by year:
|
Years
Ending December 31:
|
|
|
|
|
2018
(July – December)
|
|
$
|
97,000
|
|
|
2019
|
|
|
233,000
|
|
|
2020
|
|
|
265,000
|
|
|
2021
|
|
|
227,000
|
|
|
|
|
$
|
822,000
|
|
Revenue
Guarantee
On
a select basis, the Company has provided revenue share guarantees to certain independent publishers that transition their publishing
operations from another platform to theMaven.net or maven.io. These arrangements generally guarantee the publisher a monthly amount
of income for a period of 12 to 24 months from inception of the publisher contract that is the greater of (a) a fixed monthly
minimum, or (b) the calculated earned revenue share. During the three months ended June 30, 2018 and 2017, the Company paid Channel
Partner guarantees of $397,200 and $53,333, respectively. During the six months ended June 30, 2018 and 2017, the Company paid
Channel Partner guarantees of $803,486 and $98,000, respectively. To the extent that the fixed monthly minimum paid exceeds the
earned revenue share (the “Over Advance”) in any month during the first 12 to 24 months (the “Guarantee Period”),
then the Company may recoup the aggregate Over Advance that was expensed in the Guarantee Period during the 12 months following
the Guarantee Period of the publisher contract to the extent that the earned revenue share exceeds the monthly minimum in those
future months. As of June 30, 2018, the aggregate commitment was $547,000 and the Over Advance contingent amount that the Company
may recoup is approximately $500,000. The following table shows the aggregate commitment by year:
|
Years
Ending December 31:
|
|
|
|
|
2018
(July – December)
|
|
$
|
405,000
|
|
|
2019
|
|
|
142,000
|
|
|
|
|
$
|
547,000
|
|
Claims
and Litigation
From
time to time, the Company may be subject to claims and litigation arising in the ordinary course of business. The Company is not
currently a party to any pending or threatened legal proceedings that it believes would reasonably be expected to have a material
adverse effect on the Company’s business, financial condition or results of operations.
13.
Subsequent Events
Notes
Payable to Officers
On
July 13, 2018, the Company borrowed $225,000 from the Chief Executive Officer and issued a new promissory note payable upon demand
with interest at the minimum applicable federal rate of approximately 2.34% per annum.
Warrant
Adjustment
Effective
as of August 3, 2018, the Company adjusted the exercise price of a warrant to purchase up to 1,500,000 shares of the Company’s
common stock that was issued to the investor on June 15, 2018 from $1.19 per share to $0.50 per share.
Series
H Convertible Preferred Stock
On
August 8, 2018, 23,000 authorized shares of the Company’s preferred stock were
designated
as “Series H Convertible Preferred Stock”. On August 10, 2018, the Company closed on a securities purchase agreement
(the “Securities Purchase Agreement”) with certain accredited investors, pursuant to which the Company issued an aggregate
of 19,399 shares of Series H Convertible Preferred Stock (the “Series H Preferred Stock”) at a stated value of $1,000,
initially convertible into 58,784,849 shares of the Company’s common stock at a conversion rate equal to the stated value
divided by the conversion price of $0.33 per share (the “Conversion Price”), for aggregate gross proceeds of $19,399,000.
Of the shares of Series H Preferred Stock issued, 5,730 shares were issued upon conversion of an aggregate principal amount of
$4,775,000, plus prepayment obligations of $955,000, of the 10% Convertible Debenture issued by the Company on June 15, 2018 to
certain accredited investors, including 1,200 shares of Series H Preferred Stock issued to James Heckman, the Company’s
Chief Executive Officer, and 30 shares of Series H Preferred Shares issued to Josh Jacobs, the Company’s President. Also
included in the shares of Series H Preferred Stock issued was 669 shares of Series H Preferred Stock issued to B. Riley FBR, Inc.
(“B. Riley FBR”) for its services as placement agent.
B.
Riley FBR is a registered broker-dealer owned by B. Riley Financial, Inc., a diversified publicly-traded financial services company
(“B. Riley”), which acted as placement agent for the Series H Preferred Stock financing. In consideration for its
services as placement agent, the Company paid B. Riley FBR a cash fee of $575,000 (including a previously paid retainer of $75,000)
and issued to B. Riley FBR 669 shares of Series H Preferred Stock. In addition, entities affiliated with B. Riley FBR purchased
5,592 shares of Series H Preferred Stock in the financing. John A. Fichthorn joined the Board of Directors of the Company in September
2018 and was elected as Chairman of the Board of Directors and Chairman of the Finance and Audit Committee in November 2018. Mr.
Fichthorn currently serves as Head of Alternative Investments for B. Riley Capital Management, LLC, which is an SEC-registered
investment adviser and a wholly-owned subsidiary of B. Riley. Todd D. Sims also joined the Board of Directors of the Company in
September 2018 and is also a member of the Board of Directors of B. Riley. Mr. Fichthorn and Mr. Sims serve on the Board of Directors
of the Company as designees of B. Riley. Since August 2018, B. Riley FBR has been instrumental in raising debt and equity capital
for the Company to supports it acquisitions of HubPages, Inc. and Say Media, Inc., and for refinancing and working capital purposes.
The
number of shares of common stock issuable upon conversion of the Series H Preferred Stock is currently 58,784,848 shares. The
terms of Series H Preferred Stock and the number of shares of common stock issuable is adjustable in the event of stock splits,
stock dividends, combinations of shares and similar transactions. In addition, if at any time prior to the nine month anniversary
of the closing date, the Company sells or grants any option or right to purchase or issues any shares of common stock, or securities
convertible into shares of common stock, with net proceeds in excess of $1,000,000 in the aggregate, entitling any person to acquire
shares of common stock at an effective price per share that is lower than the then Conversion Price (such lower price, the “Base
Conversion Price”), then the Conversion Price shall be reduced to equal the Base Conversion Price. All of the shares of
Series H Preferred Stock shall convert automatically into shares of common stock on the fifth anniversary of the closing date
at the then Conversion Price.
The
Company used the net proceeds from the financing to consummate its acquisitions of HubPages and Say Media, and for working capital
and general corporate purposes.
Additionally,
pursuant to a Registration Rights Agreement (“Registration Rights Agreement”) entered into in connection with the
Securities Purchase Agreement, the Company agreed to register the shares issuable upon conversion of the Series H Preferred Stock
for resale by the investors. The Company has committed to file the registration statement by no later than 75 days after the Closing
Date and to cause the registration statement to become effective by no later than 120 days after the closing date (or, in the
event of a full review by the staff of the Securities and Exchange Commission, 150 days following the closing date). The Registration
Rights Agreement provides for liquidated damages upon the occurrence of certain events up to a maximum amount of 6% of the aggregate
amount invested by such Investor pursuant to the Purchase Agreement. See “Registration Rights Penalties”.
The
Securities Purchase Agreement also included a provision that requires the Company to maintain its periodic filings with the SEC
in order to satisfy the public information requirements under Rule 144(c) of the Securities Act. If the Company fails for any
reason to satisfy the current public information requirement (a “Public Information Failure”), then the Company will
be obligated to pay to each holder a cash payment equal to 1% of the amount invested as partial liquidated damages, up to a maximum
of six months. Such payments are subject to interest at the rate of 1% per month until paid in full. The Company did not incur
any obligation under this provision at June 30, 2018.
Acquisition
of HubPages, Inc.
On
August 23, 2018, the Company consummated the merger between HubPages and the Company’s wholly-owned subsidiary, HP Acquisition
Co., Inc. (“HPAC”), in which HPAC merged with and into HubPages, with HubPages continuing as the surviving corporation
in the merger and a wholly-owned subsidiary of the Company, pursuant to the terms of the Agreement and Plan of Merger, dated as
of March 13, 2018, as amended, among the Company, HubPages, HPAC and Paul Edmondson, solely in his capacity as a representative
of the HubPages security holders.
In
connection with the consummation of the merger, the Company paid a total of $10,000,000 to the stockholders and holders of vested
options of HubPages. The Company also issued a total of 2,400,000 shares of the Company’s common stock, subject to vesting,
to certain key personnel of HubPages who agreed to continue their employment with HubPages subsequent to the closing of the transaction.
Repayment
of 8% Convertible Notes Payable
On
September 6, 2018, the Company repaid the 8% Convertible Notes Payable to L2. The total amount borrowed was $1,000,000, and under
the terms of the loan agreement the Company repaid $1,351,334 to satisfy the debt obligation. A loss on repayment of the debt
in the amount of $499,760 was recorded upon repayment.
10%
Original Issue Discount Senior Secured Debentures
On
October 18, 2018, the Company entered into a purchase agreement with two accredited investors, B. Riley and an affiliated entity
of B. Riley, pursuant to which the Company issued to the investors 10% Original Issue Discount Senior Secured Debentures in the
aggregate principal amount of $3,500,000, which, after taking into account the 5% original issue discount, and legal fees and
expenses of the investors, resulted in the Company receiving net proceeds of $3,285,000.
The
debentures are due and payable on October 31, 2019 (the “Maturity Date”). Interest accrued on the debentures at the
rate of 10% per annum, payable on the earlier of conversion, redemption or the Maturity Date.
The
debentures are convertible into shares of the Company’s common stock at the option of the investor at any time prior to
the Maturity Date, at a conversion price of $1.00 per share, subject to adjustment for stock splits, stock dividends and similar
transactions. If the Company does not perform certain of its obligations in a timely manner, it must pay liquidated damages to
the investors as set forth in the debenture.
Upon
the Company’s first equity or debt financing following the issuance of the debentures (a “Subsequent Financing”),
the Company has the option to redeem some or all of the outstanding principal amount of the debentures for an amount equal to
the principal amount (plus accrued but unpaid interest thereon) being redeemed plus any other amounts due under the debentures.
Otherwise, the Company may not prepay any portion of the principal amount of a debenture without the prior written consent of
the investor.
The
debentures further provide that, subject to the Company exercising its rights to redeem the debentures as described above, upon
the consummation of the first Subsequent Financing, the investors shall exchange the outstanding principal amount of the debentures
(plus accrued but unpaid interest thereon and all other amounts then due under the debentures) for any securities or units (including
warrants) issued in such Subsequent Financing on a $1.00 principal amount of debenture for $1.00 new subscription amount basis
based on the outstanding principal amount of the debentures, along with any accrued but unpaid interest, and all other amounts
then due under the debentures.
In
connection with this financing, the Company also issued warrants to the investors to purchase up to 875,000 shares of the Company’s
common stock. See “12% Senior Secured Subordinated Convertible Debentures” for a description of the subsequent roll-over
of the 10% Original Issue Discount Senior Secured Debentures into 12% Senior Secured Subordinated Convertible Debentures.
12%
Senior Secured Subordinated Convertible Debentures
On
December 12, 2018, the Company entered into a securities purchase agreement with three accredited investors, pursuant to which
the Company issued to the investors 12% Senior Secured Subordinated Convertible Debentures (the “12% Debentures”)
in the aggregate principal amount of $13,091,528, which includes (i) the roll-over of an aggregate of $3,551,528 in principal
and interest of the 10% Original Issue Discount Senior Secured Debentures issued to two of the investors on October 18, 2018,
and (ii) a placement fee, payable in cash, of $540,000 to the Company’s placement agent, B. Riley FBR, in the offering.
After taking into account legal fees and expenses of the investors, the Company received net proceeds of $8,950,000.
The
12% Debentures are due and payable on December 31, 2020 (the “Maturity Date”). Interest accrues on the 12% Debentures
at the rate of 12% per annum, payable on the earlier of conversion or the Maturity Date.
Subject
to the Company receiving shareholder approval to increase its authorized shares of common stock, principal and interest accrued
on the 12% Debentures are convertible into shares of common stock, at the option of the investor at any time prior to the Maturity
Date, at a conversion price of $0.33 per share, subject to adjustment for stock splits, stock dividends and similar transactions,
and beneficial ownership blocker provisions. If the Company does not perform certain of its obligations in a timely manner, it
must pay liquidated damages to the investors as set forth in the 12% Debentures.
As
long as any portion of the 12% Debentures remain outstanding, unless investors holding at least 51% in principal amount of the
then outstanding 12% Debentures otherwise agree, the Company shall not, among other things enter into, incur, assume or guarantee
any indebtedness, except for certain permitted indebtedness, as set forth in the 12% Debentures.
The
Company’s obligations under the 12% Debentures are secured by a security agreement, dated as of October 18, 2018, by and
among the Company and each investor thereto.
On
March 18, 2019, the Company entered into a purchase agreement with two accredited investors, including John Fichthorn, the Company’s
Chairman of the Board of Directors, pursuant to which the Company issued 12% Debentures in the aggregate principal amount of $1,696,000,
which includes a placement fee of $96,000 paid to B. Riley in the form of a 12% Debenture, for acting as the Company’s placement
agent in the offering. After taking into account legal fees and expenses of $10,000 which were paid in cash, the Company received
net proceeds of $1,590,000.
On
March 27, 2019, the Company entered into a securities purchase agreement with an accredited investor pursuant to which the Company
issued 12% Debentures in the aggregate principal amount of $318,000, which includes a placement fee of $18,000 paid to B. Riley
in the form of a 12% Debenture for acting as the Company’s placement agent in the offering. After taking into account legal
fees and expenses, the Company received net proceeds of $300,000.
On
April 8, 2019, the Company entered into a securities purchase agreement with an accredited investor, Todd D. Sims, a member of
the Company’s Board of Directors, pursuant to which the Company issued a 12% Debenture in the aggregate principal amount
of $100,000. In connection with this placement, B. Riley waived its placement fee of $6,000 for acting as the Company’s
placement agent in the offering. After taking into account legal fees and expenses, the Company received net proceeds of $100,000.
The
12% Debentures issued on March 18, 2019, March 27, 2019 and April 8, 2019 are convertible into shares of the Company’s common
stock at the option of the investor at any time prior to the Maturity Date, at a conversion price of $0.40 per share, subject
to adjustment for stock splits, stock dividends and similar transactions, and beneficial ownership blocker provisions. All other
terms of the 12% Debentures issued on March 18, 2019, March 27, 2019 and April 8, 2019 are identical to the 12% Debentures issued
on December 12, 2018.
Additionally,
pursuant to the Registration Rights Agreements (“Registration Rights Agreements”) entered into in connection with
the purchase agreements on March 18, 2019, March 27, 2019 and April 8, 2019, the Company agreed to register the shares issuable
upon conversion of the 12% Debentures for resale by the investors. The Company committed to file the registration statement the
later of (i) the 30th calendar day following the date the Company files its Annual Report on Form 10-K for the fiscal year ended
December 31, 2018 with the SEC, but in no event later than May 15, 2019, and (ii) the 30th calendar day after all the Series H
Underlying Shares have been registered pursuant to a registration statement under that certain Registration Rights Agreement,
dated as of August 9, 2018. The Registration Rights Agreements provide for liquidated damages upon the occurrence of certain events
up to a maximum amount of 6% of the aggregate amount invested by such Investor pursuant to the purchase agreement. See “Registration
Rights Penalties”.
The
Securities Purchase Agreements also included a provision that requires the Company to maintain its periodic filings with the SEC
in order to satisfy the public information requirements under Rule 144(c) of the Securities Act. If the Company fails for any
reason to satisfy the current public information requirement (a “Public Information Failure”), then the Company will
be obligated to pay to each holder a cash payment equal to 1% of the amount invested as partial liquidated damages, up to a maximum
of six months. Such payments are subject to interest at the rate of 1% per month until paid in full. See “Public Information
Failure Penalties”.
Acquisition
of Say Media, Inc.
On
October 12, 2018, the Company, Say Media, Inc., a Delaware corporation (“Say Media”), SM Acquisition Co., Inc., a
Delaware corporation (“SMAC”), which is a wholly-owned subsidiary of the Company incorporated in Delaware on September
6, 2018 to facilitate the merger, and Matt Sanchez, solely in his capacity as a representative of the Say Media security holders,
entered into an Agreement and Plan of Merger (as amended on October 17, 2018), pursuant to which SMAC will merge with and into
Say Media, with Say Media continuing as the surviving corporation in the merger as a wholly-owned subsidiary of the Company.
On
December 12, 2018, the Company consummated the merger with Say Media, pursuant to the terms of an Agreement and Plan of Merger,
dated as of October 12, 2018, as amended.
In
connection with the consummation of the merger, the Company paid (i) $6,703,653 to a creditor of Say Media, (ii) a transaction
bonus of $250,000 to a designated employee of Say Media, and (iii) a further $55,246 to Say Media’s legal counsel for legal
fees and expenses, in additional to a previously paid deposit of $450,000, incurred in connection with the Merger. The Company
also issued a total of 2,000,000 shares of common stock, subject to vesting, to certain key personnel of Say Media who agreed
to continue their employment with Say Media subsequent to the closing of the transaction. Furthermore, under the terms of the
Merger Agreement, the Company is obligated to issue up to 5,500,000 shares of its common stock to the former holders of Say Media’s
Preferred Stock.
2016
Equity Incentive Plan
In
August 2018, the Company increased the authorized number of shares of common stock under the 2016 Equity Incentive Plan (the “2016
Plan”) to 10,000,000 shares from 5,000,000 shares. The Company’s shareholders have not yet ratified this increase
in the number of shares authorized under the 2016 Plan.
2019
Equity Incentive Plan
On
April 4, 2019, the Board of Directors of the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The
purpose of the 2019 Plan is to seek, to better secure, and to retain the services of a select group of persons, to provide incentives
for those persons to exert maximum efforts for the success of the Company and its affiliates, and to provide a means by which
those persons have an opportunity to benefit from increases in the value of the Company’s common stock through the granting
of stock awards.
The
2019 Plan allows the Company to grant non-statutory stock options, stock appreciation rights, restricted
stock awards and/or restricted stock units awards to acquire up to 48,364,018 shares of the Company’s common stock to the
Company’s employees, directors and consultants, all of which require the achievement of certain price targets by the Company’s
common stock.
From
April 10, 2019 through June 11, 2019, the Company granted stock options pursuant to the 2019 Plan to acquire 48,730,300 shares
of the Company’s common stock to officers, directors, employees and consultants, of which 48,364,018 shares were granted
in accordance with the plan’s authorized share limit and the remaining 366,282 shares were in excess of the plan’s
authorized share limit. The Company does not currently have sufficient authorized but unissued common shares to allow for the
exercise of the stock options granted under this plan; accordingly, any stock option grants under this plan are considered as
unfunded.
Equity
Grants Outside of 2016 Equity Incentive Plan and 2019 Equity Incentive Plan
From
September 1, 2018 through March 11, 2019, the Company granted restricted stock awards for 1,039,839 shares of common stock and
stock options to acquire 3,726,000 shares of the Company’s common stock to officers, directors and employees outside of
the 2016 Plan and the 2019 Plan.
As the Company does not currently
have sufficient authorized but unissued common shares to allow for the exercise of these stock options, these stock option grants
are considered as unfunded and cannot be exercised until sufficient common shares have been authorized.
Registration
Rights Penalties
Common
Stock – On July 23, 2018, the Company determined that the registration statement covering the Common Stock sold on
January 4, 2018 to MDB for their placement services would not be declared effective within the requisite time frame, and therefore
the Company accrued liquidated damages under the registration rights agreement aggregating $15,001, which is presented as a current
liability at June 30, 2018.
Series
H Convertible Preferred Stock
–
On October 23, 2018, the Company determined that the registration statement
covering the Series H Convertible Preferred Stock sold on August 10, 2018 would not be declared effective within the requisite
time frame and therefore, as of August 10, 2018, the Company accrued six months liquidated damages under the registration rights
agreement aggregating $1,066,500, which will be presented as a current liability at September 30, 2018.
Public
Information Failure Penalties
12%
Senior Secured Subordinated Debentures – On June 12, 2019, the Company determined that it had failed to satisfy a public
information requirement, as described in the Securities Purchase Agreement covering the 12% Senior Secured Subordinated Debentures
sold on December 12, 2018 and therefore, as of June 12, 2019, the Company accrued liquidated damages under the agreement aggregating
$785,492, which will be presented as a current liability at June 30, 2019. The public information failure penalty bears interest
at 1% per month from the date of the failure until paid.
Appointment
of New Chief Financial Officer
On
May 3, 2019, the Company announced the appointment of Douglas Smith as the Company’s Chief Financial Officer.
Pursuant
to the terms of an Employment Agreement with the Company, dated as of May 1, 2019, Mr. Smith shall receive an annual salary of
$400,000 and be entitled to receive bonuses to be agreed by Company and Mr. Smith in good faith from time to time based on then
current financial status of the Company. If Mr. Smith’s employment with the Company is terminated by the Company Without
Cause or by Mr. Smith for Good Reason (as those terms are defined in the Employment Agreement), then Mr. Smith shall be entitled
to receive a lump sum payment equal to six months of his annual salary.
Mr.
Smith was granted options to purchase up to 1,500,000 shares of the Company’s common stock, having an exercise price of
$0.57 per share, a term of 10 years, and subject to vesting as described below. These options were granted outside of the 2016
Plan and the 2019 Plan. Of the 1,500,000 options granted: (i) 1,000,000 options will vest over 36 months, with 1/3 vesting after
12 months of continuous service and 1/36 vesting monthly for each month of continuous service thereafter; and (ii) 500,000 will
vest over 36 months, with 1/3 vesting after 12 months of continuous service and 1/36 vesting monthly for each month of continuous
service thereafter, subject to the Company’s common stock being listed on a national securities exchange.
Mr.
Smith was also granted options to purchase up to 1,064,008 shares of the Company’s common stock, having an exercise price
of $0.46 per share, a term of 10 years, and subject to vesting based both on time and targets tied to the Company’s common
stock, as follows: (i) the options will vest over 36 months, with 1/3 vesting after 12 months of continuous service and 1/36 vesting
monthly for each month of continuous service thereafter; and (ii) the Company’s common stock must be listed on a national
securities exchange, with incremental vesting upon achievement of certain stock price targets based on a 45-day VWAP during which
time the average monthly trading volume of the common stock must be at least 15% of the Company’s aggregate market capitalization.
Acquisition of TheStreet, Inc. and
Partnership with Cramer Digital
On
June 11, 2019, the Company, TST Acquisition Co., Inc., a Delaware corporation (“TSTAC”), a newly-formed indirect wholly-owned
subsidiary of the Company, and TheStreet, Inc., a Delaware corporation (“TheStreet”), entered into an Agreement and
Plan of Merger (the “Merger Agreement”), pursuant to which TSTAC will merge with and into TheStreet, with TheStreet
continuing as the surviving corporation in the merger and as a wholly-owned subsidiary of the Company.
The
Merger Agreement provided that all issued and outstanding shares of common stock of TheStreet (other than those shares with respect
to which appraisal rights have been properly exercised) will be exchanged for an aggregate of $16,500,000 in cash (the “Merger
Consideration”). Pursuant to the terms of the Merger Agreement, on June 10, 2019, the Company deposited the Merger Consideration
into an escrow account pursuant to an Escrow Agreement, dated June 10, 2019, by and among the Company, TheStreet and Citibank,
N.A., as escrow agent.
On
August 7, 2019, the Company consummated the merger between TheStreet and TSTAC, pursuant to which TSTAC merged with and into TheStreet,
with TheStreet continuing as the surviving corporation in the merger and as an indirect wholly-owned subsidiary of the Company
(the “Merger”), pursuant to the terms of the Merger Agreement dated as of June 11, 2019, as amended. In connection
with the consummation of the Merger, the Company paid a total of $16,500,000 in cash to TheStreet’s stockholders. This transaction
was funded through a debt financing arranged by a subsidiary of B. Riley Financial, Inc. (see “Amended and Restated Note
Purchase Agreement” below).
On August 8, 2019,
in connection with the Merger, finance and stock market expert Jim Cramer, who co-founded TheStreet, agreed to enter into a new
partnership with TheStreet through Cramer Digital, a new production company featuring the digital rights and content created by
Mr. Cramer and his team of financial experts. The partnership will allow Mr. Cramer to continue his subscription and content offerings,
and will be under his editorial control. The Company expects that TheStreet’s senior management will continue with the Company
subsequent to the Merger.
Note Purchase Agreement
On
June 10, 2019, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) with one accredited
investor, BRF Finance Co., LLC (the “Investor”), an affiliated entity of B. Riley FBR, pursuant to which the Company
issued to the Investor a 12.0% senior secured note (the “Note”), due July 31, 2019, in the aggregate principal amount
of $20,000,000, which after taking into account B. Riley’s placement fee of $1,000,000 and legal fees and expenses of the
Investor, resulted in the Company receiving net proceeds of $18,865,000, of which $16,500,000 was deposited into escrow the fund
the Merger Consideration and the balance of $2,365,000 will be used by the Company for working capital and general corporate purposes.
ABG-SI
LLC Licensing Agreement
On
June 14, 2019, the Company and ABG-SI LLC (“ABG”), a Delaware limited liability company and indirect wholly-owned
subsidiary of Authentic Brands Group, entered into a Licensing Agreement (the “Licensing Agreement”) pursuant to which
the Company shall have the exclusive right and license in the United States, Canada, Mexico, The United Kingdom, The Republic
of Ireland, Australia and New Zealand to operate the Sports Illustrated media business (in the English and Spanish languages),
including to (i) operate the digital and print editions of
Sports Illustrated
(including all special interest issues and
the swimsuit issue) and
Sports Illustrated for Kids
, (ii) develop new digital media channels under the Sports Illustrated
brands and (iii) operate certain related businesses, including without limitation, special interest publications, video channels,
bookazines and the licensing and/or syndication of certain products and content under the Sports Illustrated brand (collectively,
the “Licensed Business”). The Company is not required to implement geofiltering or other systems to prevent users
located outside the territory from accessing the digital channels in the territory.
The
initial term of the Licensing Agreement shall commence upon the termination of the Meredith License Agreement (as defined below)
and shall continue through December 31, 2029. The Company has the option, subject to certain conditions, to renew the term of
the Licensing Agreement for nine consecutive renewal terms of 10 years each (collectively, the “Term”), for a total
of 100 years.
The
Licensing Agreement provides that the Company shall pay to ABG annual royalties in respect of each year of the Term based on gross
revenues (“Royalties”) with guaranteed minimum annual amounts. The Company has prepaid ABG $45,000,000 against future Royalties. ABG will pay to the Company a share of revenues relating to certain Sports Illustrated business lines
not licensed to the Company, such as commerce. The two companies will be partnering in building the brand worldwide.
Pursuant
to a publicly announced agreement between ABG and Meredith Corporation (“Meredith”), an Iowa corporation, Meredith
currently operates the Licensed Business under license from ABG (the “Meredith License Agreement). Maven and ABG are pursuing
discussions with Meredith for it to continue to operate certain aspects of the business, including print operations, however the
Licensing Agreement is not contingent on reaching such an agreement with Meredith.
The
Company has agreed to issue to ABG within 30 days of the execution of the Licensing Agreement warrants to acquire common stock
of the Company representing 10% of the Company’s fully diluted equity securities (“Warrants”). Half the Warrants
shall have an exercise price of $0.42 per share (the “Forty-Two Cents Warrants”). The other half of the Warrants shall
have an exercise price of $0.84 per share (the “Eighty-Four Cents Warrants”). The documentation for all the Warrants
shall provide for the following additional terms: (1) 40% of the Forty-Two Cents Warrants and 40% of the Eighty-Four Cents Warrants
shall vest in equal monthly increments over a period of two years beginning on the one year anniversary of the date of issuance
of the Warrants (any unvested portion of such Warrants to be forfeited by ABG upon certain terminations by the Company of the
Licensing Agreement); (2) 60% of the Forty-Two Cents Warrants and 60% of the Eighty-Four Cents Warrants shall vest based on the
achievement of certain performance goals for the Licensed Business in calendar years 2020, 2021, 2022 or 2023; (3) under certain
circumstances the Company may require ABG to exercise all (and not less than all) of the Warrants, in which case all of the Warrants
shall be vested; (4) all of the Warrants shall automatically vest upon certain terminations of the Licensing Agreement by ABG
or upon a change of control of the Company; and (5) ABG shall have the right to participate, on a pro-rata basis (including vested
and unvested Warrants, exercised or unexercised), in any future equity issuance of the Company (subject to customary exceptions).
Additionally,
Ross Levinsohn, the former senior executive from Fox and Yahoo!, has agreed to become the new CEO of the Licensed Business. His
employment agreement with the Company is pending and has not yet been finalized.
Mr.
Levinsohn was a director of the Company from November 4, 2016 through October 20, 2017. In conjunction with Mr. Levinsohn’s
services as a director of the Company, he received Restricted Stock Awards for 245,434 shares of common stock. Mr. Levinsohn retained
his Restricted Stock Awards and they continued to vest subsequent to his resignation from the Board of Directors on October 20,
2017. The Restricted Stock Awards will continue to vest through October 16, 2019. In conjunction with the vesting of the Restricted
Stock Awards, the Company recognized stock-based compensation cost of $16,616 and $55,003 for the three months and six months
ended June 30, 2018, respectively, and $28,634 and $14,317 for the three months and six months ended June 30, 2017, respectively,
which was included in general and administrative expenses in the statement of operations.
On
April 10, 2019, the Company entered into an Advisory Services Agreement with Mr. Levinsohn to provide advisory services with respect
to strategic transactions in the media and digital publishing industries, in exchange for which Mr. Levinsohn was granted a stock
option to purchase 532,004 shares of common stock, exercisable for a period of 10 years at $0.46 per share (the closing market
price on April 10, 2019) subject to vesting (i) based on the achievement by the Company of stock price and liquidity targets and
becoming listed on a national securities exchange and (ii) a concurrent 36-month vesting period with a 12-month cliff. At April
10, 2019, the shares of common stock underlying the stock option are not authorized and available for issuance and, as such, are
considered to be an unfunded stock option and may not be exercised until the Company has increased its authorized shares of common
stock to a sufficient number to permit the full exercise of the stock option.
On
June 11, 2019, Mr. Levinsohn was granted a stock option to acquire 2,000,000 shares of common stock under the Company’s
2019 Stock Incentive Plan, vesting monthly over three years, with one-third vesting after 12 months of continuous service from
the grant date and a further 1/36 vesting at the end of each month of continuous service thereafter, exercisable for a period
of ten years at $0.42 per share (the closing market price on June 11, 2019), and may not be exercised until the Company has increased
its authorized shares of common stock to a sufficient number to permit the full exercise of the stock option. This stock option
was issued in conjunction with Mr. Levinsohn’s services relating to the Company’s entry into the Licensing Agreement.
Mr.
Levinsohn has also entered into an agreement with the Company to purchase $500,000 of the Company’s newly-designated Series
I Convertible Preferred Stock.
Amended
and Restated Note Purchase Agreement
On
June 14, 2019, the Company entered into an Amended and Restated Note Purchase Agreement (the “Amended Note Purchase Agreement”)
with one accredited investor, BRF Finance Co., LLC (the “Investor”), an affiliated entity of B. Riley FBR, Inc. (“B.
Riley”), which amended and restated that previously disclosed Note Purchase Agreement, dated June 10, 2019, by and among
the Company and the Investor. Pursuant to the Amended Note Purchase Agreement, the Company issued an amended and restated 12.0%
senior secured note (the “Amended Note”), due June 14, 2022, in the aggregate principal amount of $68,000,000, which
Amended Note amends, restates and supersedes that $20,000,000 12.0% senior secured note issued by the Company on June 10, 2019
to the Investor. The Company received additional gross proceeds of $48,000,000, which after taking into account B. Riley’s
placement fee of $2,400,000 and legal fees and expenses of the Investor, the Company received net proceeds of $45,550,000, of
which $45,000,000 was paid to ABG-SI LLC against future royalties in connection with the Company’s previously announced
Licensing Agreement, dated June 14, 2019, with ABG-SI LLC, and the balance of $550,000 will be used by the Company for working
capital and general corporate purposes
Series
I Convertible Preferred Stock
On
June 27, 2019
,
2
5
,
8
00 authorized shares of the Company’s
preferred stock were designated as “Series I Convertible Preferred Stock”.
On June 28, 2019, the Company closed
on a securities purchase agreement with certain accredited investors, pursuant to which the Company issued an aggregate of 23,100
shares of Series I Convertible Preferred Stock (the “Series I Preferred Stock”) at a stated value of $1,000, initially
convertible into 46,000,000 shares of the Company’s common stock at a conversion rate equal to the stated value divided
by the conversion price of $0.50 per share (the “Conversion Price”), for aggregate gross proceeds of $23,100,000.
In
consideration for its services as placement agent, the Company paid B. Riley FBR a cash fee of $1,386,000 plus $52,500 in reimbursement
of legal fees and other transaction costs. The Company has used a portion of the net proceeds from the financing to partially
re-pay that previously announced Amended and Restated 12.0% Senior Secured Note, due June 14, 2022, in the aggregate principal
amount of $68,000,000, issued on June 14, 2019 to an affiliated entity of B. Riley, and to pay deferred fees of approximately
$3,400,000 related to that borrowing facility.
The
Company performed an evaluation of subsequent events through the date of filing of these condensed consolidated financial statements
with the SEC. Other than the above described subsequent events, there were no material subsequent events which affected, or could
affect, the amounts or disclosures in the consolidated financial statements
.