Amended Quarterly Report (10-q/a)

Date : 08/16/2019 @ 9:33PM
Source : Edgar (US Regulatory)
Stock : Themaven, Inc. (QB) (MVEN)
Quote : 0.79  0.04 (5.33%) @ 7:27PM

Amended Quarterly Report (10-q/a)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

 

(Amendment No. 2)

 

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

 

For the quarterly period ended June 30, 2018

 

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

 

For the transition period from __________ to __________

 

Commission file number 1-12471

 

THEMAVEN, INC.

(Exact name of registrant as specified in its charter)

 

Delaware 68-0232575

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

1500 Fourth Avenue, Suite 200

Seattle, WA

98101
(Address of principal executive offices) (Zip Code)

 

(775) 600-2765

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [  ]*   Smaller reporting company [X]
*(Do not check if a smaller reporting company)   Emerging growth company [  ]

 

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act   [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] or  No   [X]

 

Securities registered pursuant to Section 12(b) of the Securities and Exchange Act of 1934

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
-   -   -

 

As of August 6, 2019, the Registrant had 36,938,926 shares of common stock outstanding.

 

 

 

     

 

 

EXPLANATORY NOTE

 

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 Securities and Exchange Commission (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 their being filed with the Securities and Exchange Commission. 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 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 certain corrective adjustments 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 other disclosures included therein. A summary of the accounting impact of these adjustments to the Company’s condensed consolidated unaudited financial statements as of and for the three months and six months ended June 30, 2018 is provided at “Note 1. Organization and Basis of Presentation – Restatement”. These adjustments primarily reflected revisions 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.

 

     

 

 

THEMAVEN, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

Page

Number

   
PART I - FINANCIAL INFORMATION 5
   
Item 1. Condensed Consolidated Financial Statements 5
   
Condensed Consolidated Balance Sheets – June 30, 2018 (Unaudited) and December 31, 2017 5
   
Condensed Consolidated Statements of Operations (Unaudited) – Three Months and Six Months Ended June 30, 2018 and 2017 6
   
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) – Six Months Ended June 30, 2018 7
   
Condensed Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2018 and 2017 8
   
Notes to Condensed Consolidated Financial Statements (Unaudited) – Three Months and Six Months Ended June 30, 2018 and 2017 9
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 59
   
Item 4. Controls and Procedures 59
   
PART II - OTHER INFORMATION 61
   
Item 1. Legal Proceedings 61
   
Item 1A. Risk Factors 61
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 61
   
Item 3. Defaults Upon Senior Securities 61
   
Item 4. Mine Safety Disclosures 61
   
Item 5. Other Information 61
   
Item 6. Exhibits 61
   
SIGNATURES 62

 

  3  

 

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q of TheMaven, Inc. (the “Company”) contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These might include statements regarding the Company’s financial position, business strategy and other plans and objectives for future operations, and assumptions and predictions about future product demand, supply, manufacturing costs, marketing and pricing factors are all forward-looking statements. These statements are generally accompanied by words such as “intend”, “anticipate”, “believe”, “estimate”, “potential(ly)”, “continue”, “forecast”, “predict”, “plan”, “may”, “will”, “could”, “would”, “should”, “expect” or the negative of such terms or other comparable terminology. The Company believes that the assumptions and expectations reflected in such forward-looking statements are reasonable, based on information available to it on the date hereof, but the Company cannot provide assurances that these assumptions and expectations will prove to have been correct or that the Company will take any action that the Company may presently be planning. These forward-looking statements are inherently subject to known and unknown risks and uncertainties. Actual results or experience may differ materially from those expected, anticipated or implied in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, regulatory policies or changes thereto, available cash, research and development results, competition from other similar businesses, and market and general economic factors. This discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017. The Company does not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise.

 

  4  

 

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

THEMAVEN, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

   

June 30,

2018

   

December 31,

2017

 
    (Unaudited)        
    (Restated –
Note 1)
       
ASSETS                
Current assets:                
Cash   $ 116,187     $ 619,249  
Restricted cash     -       3,000,000  
Accounts receivable     208,140       53,202  
Deferred contract fulfillment costs     11,449       14,147  
Prepaid expenses and other current assets     293,002       174,369  
Total current assets     628,778       3,860,967  
Other assets:                
Advance relating to acquisition of HubPages, Inc.     5,000,000       -  
Note receivable from Say Media, Inc., including accrued interest of $14,384     1,014,384       -  
Property and equipment and website development costs, net     4,196,794       2,687,727  
Other intangible asset     20,000       20,000  
Total assets   $ 10,859,956     $ 6,568,694  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 515,685     $ 162,308  
Accrued expenses     475,908       222,699  
Deferred revenue     23,763       31,437  
Liquidated damages payable under registration rights agreements     15,001       -  
Derivative liabilities:                
Convertible notes payable     623,182       -  
Warrants     1,854,158       -  
Notes payable to officer, including accrued interest of $1,496     736,032       -  
8% convertible notes payable, including accreted original issue discount of $10,159, net of unamortized discounts of $693,058, and including accrued interest of $4,501     321,602       -  
10% senior convertible debenture, net of unamortized discounts of $452,410 and including accrued interest of $20,844 (includes principal amount of $1,025,000 to officers)     4,343,434       -  
Total current liabilities     8,908,765       416,444  
Investor demand payable     -       3,000,000  
Total liabilities     8,908,765       3,416,444  
                 
Commitments and contingencies (Note 12)                
                 
Redeemable Series G convertible preferred stock, $0.01 par value, $1,000 per share liquidation value; aggregate liquidation values $168,496; Series G shares designated: 1,800; Series G shares issued and outstanding: 168.496; common shares issuable upon conversion: 188,791 shares and 98,698 shares at June 30, 2018 and December 31, 2017, respectively     168,496       168,496  
                 
Stockholders’ equity:                
Common stock, $0.01 par value, authorized - 100,000,000 shares; issued and outstanding and issuable - 31,119,016 shares and 28,516,009 shares at June 30, 2018 and December 31, 2017, respectively     311,189       285,159  
Additional paid-in capital     18,732,164       11,170,666  
Accumulated deficit     (17,260,658 )     (8,472,071 )
Total stockholders’ equity     1,782,695       2,983,754  
Total liabilities and stockholders’ equity   $ 10,859,956     $ 6,568,694  

 

See accompanying notes to condensed consolidated financial statements .

 

  5  

 

 

THEMAVEN, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
    2018     2017     2018     2017  
    (Restated -           (Restated -        
    Note 1)           Note 1)        
Revenue   $ 216,356     $ -     $ 303,041     $ -  
Cost of revenue     1,102,813       192,039       2,138,521       192,039  
Gross loss     (886,457 )     (192,039 )     (1,835,480 )     (192,039 )
                                 
Operating Expenses:                                
Research and development costs     96,973       9,297       187,377       73,319  
General and administrative costs     2,892,964       1,387,327       5,425,466       2,328,187  
Total operating expenses     2,989,937       1,396,624       5,612,843       2,401,506  
                                 
Loss from operations     (3,876,394 )     (1,588,663 )     (7,448,323 )     (2,593,545 )
                                 
Other (expense) income:                                
Decrease in derivatives valuation     128,544       -       128,544       -  
Interest expense     (123,543 )     -       (123,543 )     -  
Interest income     14,384       296       14,384       350  
True-up termination fee     (1,344,648 )     -       (1,344,648 )     -  
Liquidated damages under registration rights agreements     (15,001 )     -       (15,001 )     -  
Total other (expense) income, net     (1,340,264 )     296       (1,340,264 )     350  
                                 
Net loss   $ (5,216,658 )   $ (1,588,367 )   $ (8,788,587 )   $ (2,593,195 )
                                 
Basic and diluted net loss per common share   $ (0.21 )   $ (0.12 )   $ (0.36 )   $ (0.23 )
                                 
Weighted average number of shares outstanding – basic and diluted     25,290,190       13,293,694       24,258,944       11,425,984  

 

See accompanying notes to condensed consolidated financial statements .

 

  6  

 

 

THEMAVEN, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

Six Months Ended June 30, 2018 (Restated)

 

    Common Stock    

Additional

Paid-in-

    Accumulated    

Total

Stockholders’

 
    Shares     Par Value     Capital     Deficit     Equity  
Balance at December 31, 2017     28,516,009     $ 285,159     $ 11,170,666     $ (8,472,071 )   $ 2,983,754  
Proceeds from private placement of common stock     1,700,000       17,000       4,233,000       -       4,250,000  
Costs incurred in connection with private placement of common stock     60,000       600       (600 )     -       -  
Cashless exercise of common stock warrants     736,853       7,369       (7,369 )     -       -  
Cashless exercise of common stock options     106,154       1,061       (1,061 )     -       -  
Stock based compensation     -       -       3,337,528       -       3.337,528  
Net loss     -       -       -       (8,788,587 )     (8,788,587 )
Balance at June 30, 2018 (Restated – Note 1)     31,119,016     $ 311,189     $ 18,732,164     $ (17,260,658 )   $ 1,782,695  

 

See accompanying notes to condensed consolidated financial statements .

 

  7  

 

 

THEMAVEN, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

Six Months Ended

June 30,

 
    2018     2017  
    (Restated -        
    Note 1)        
Cash flows from operating activities:                
Net loss   $ (8,788,587 )   $ (2,593,195 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Stock-based compensation charged to operations     2,191,132       843,841  
True-up termination fee     1,344,648       -  
Amortization of website development costs     782,717       53,000  
Liquidated damages under registration rights agreements     15,001       -  
Depreciation of property and equipment     12,243       3,335  
Decrease in valuation of derivative liabilities     (128,544 )     -  
Amortization of debt discounts     86,121       -  
Accretion of original issue discount on 8% convertible notes payable     10,159       -  
Increase in accrued interest payable     26,841       -  
Increase in accrued interest receivable     (14,384 )     -  
Changes in operating assets and liabilities:                
(Increase) decrease in -                
Accounts receivable     (154,938 )     -  
Prepaid expense and other assets     (115,935 )     24,836  
Increase (decrease) in -                
Accounts payable     383,024       (127,474 )
Accrued expenses     253,209       57,585  
Deferred revenue     (7,674 )     -  
Net cash used in operating activities     (4,104,967 )     (1,738,072 )
                 
Cash flows from investing activities:                
Loan to Say Media, Inc. in connection with pending acquisition     (1,000,000 )     -  
Advance relating to pending acquisition of HubPages, Inc.     (5,000,000 )     -  
Property and equipment and website development costs     (1,157,631 )     (948,800 )
Net cash used in investing activities     (7,157,631 )     (948,800 )
                 
Cash flows from financing activities:                
Proceeds from officer notes payable     797,982       -  
Repayment of officer notes payable     (63,446 )     -  
Proceeds from 8% convertible notes payable     1,000,000       -  
Proceeds from 10% senior convertible debenture     4,775,000       -  
Proceeds from private placement of common stock     1,250,000       3,537,052  
Net cash provided by financing activities     7,759,536       3,537,052  
                 
Cash and restricted cash:                
Net increase (decrease)     (3,503,062 )     850,180  
Balance at beginning of period     3,619,249       598,294  
Balance at end of period   $ 116,187     $ 1,448,474  
                 
Supplemental disclosures of cash flow information:                
Cash paid for -                
Interest   $ 449     $ -  
Income taxes   $ -     $ -  
                 
Noncash investing and financing activities:                
Stock-based compensation capitalized to website development costs   $ 1,146,396     $ 444,841  
Discount on 8% convertible note payables credited to derivative liability   $ 760,499     $ -  
Discount on 10% convertible note payables credited to derivative liability   $ 2,088,380     $ -  
Accrual of private placement costs   $ -     $ 17,508  
Aggregate exercise price of common stock options exercised on a cashless basis   $ 21,250     $ -  
Aggregate exercise price of common stock warrants exercised on a cashless basis   $ 168,423     $ -  
Reclassification of investor demand payable to stockholders’ equity   $ 3,000,000     $ -  
Fair value of common shares issued for private placement fees   $ 150,000     $ 200,880  

 

See accompanying notes to condensed consolidated financial statements.

 

  8  

 

 

THEMAVEN, INC. AND SUBSIDIARIES

 

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”.

 

  9  

 

 

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.

 

  10  

 

 

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  

 

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    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  

 

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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.

 

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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  

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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”).

 

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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.

 

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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  

 

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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.

 

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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

 

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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  

 

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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       -