ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following management’s discussion and analysis should be read in conjunction with our historical financial statements and the related notes thereto. The management’s discussion and analysis contains forward-looking statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties, including those under “Risk Factors” in our Annual Report, as updated in subsequent filings we have made with the SEC that could cause actual results or events to differ materially from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this Quarterly Report.
Basis of Presentation
The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described, and provides information that management believes is relevant for an assessment and understanding of the statements of financial condition and results of operations presented herein. The following discussion and analysis are based on our unaudited financial statements contained in this Quarterly Report, which we have prepared in accordance with United States generally accepted accounting principles. You should read the discussion and analysis together with such financial statements and the related notes thereto.
As a result of the Contribution (as defined below) and the related change in our business and operations, a discussion of our past financial results is not pertinent, and under applicable accounting principles the historical financial results of CÜR Media, LLC (formerly Raditaz, LLC), the accounting acquirer, prior to the Contribution, are considered the historical financial results of the Company.
The audited financial statements for our fiscal year ended December 31, 2015, contained in our Annual Report, include a summary of our significant accounting policies and should be read in conjunction with the discussion below. In the opinion of management, all material adjustments necessary to present fairly the results of operations for such periods have been included in these audited financial statements. All such adjustments are of a normal recurring nature.
References in this section to “CÜR Media,” “we,” “us,” “our,” “the Company” and “our Company” refer to CÜR Media, Inc., and its consolidated subsidiary, CÜR Media, LLC.
General Overview
We were incorporated in the State of Delaware as Duane Street Corp. on November 17, 2011. Our original business was manufacturing and marketing baby products. Prior to the Contribution (as defined below), our Board determined to discontinue operations in this area and to seek a new business opportunity.
On January 28, 2014, we consummated a contribution transaction with CÜR Media, LLC, a limited liability company organized in the State of Connecticut on February 15, 2008 (the “Contribution”), pursuant to a Contribution Agreement by and among the Company, CÜR Media, LLC, and the holders of a majority of CÜR Media, LLC's limited liability company membership interests (the "Contribution Agreement"). In connection with the Contribution, and in accordance with the terms and conditions of the Contribution Agreement, all outstanding securities of CÜR Media, LLC were exchanged for securities of ours.
Prior to the Contribution, CÜR Media, LLC's activities since inception had been devoted primarily to the development and commercialization of Raditaz, a DMCA compliant internet radio product. Raditaz was launched in early 2012 and the platform was continually developed and improved through November 2013 when its iOS, Android and web products were removed from the market, to allow us to focus on the further development of our CÜR Music product.
The Raditaz music streaming platform and products were under development since 2010 and, prior to the 2014 PPO (as defined below), were financed primarily from angel investments in the aggregate amount of approximately $4,858,000, $150,000 of financing from a promissory note from CT Innovations, Incorporated, and a $100,000 promissory note and a $100,000 grant from the State of Connecticut Department of Economic Development.
As a result of the Contribution, CÜR Media, LLC became our wholly owned subsidiary, and we adopted the business of CÜR Media, LLC, which is to develop and commercialize a streaming music experience for listening on the web and mobile devices, as our sole line of business.
On January 31, 2014, we changed our name to CÜR Media, Inc., a name that more accurately represents our new business focus. In connection with the name change, we changed our OTC trading symbol to "CURM."
In addition, on January 31, 2014, we increased our number of authorized shares to 310,000,000 shares, consisting of (i) 300,000,000 shares of Common Stock, and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share (“Preferred Stock”).
Further, on January 31, 2014, our Board of Directors (“Board”) authorized a 1.26953123-for-1 forward split of our Common Stock, in the form of a dividend, pursuant to which each shareholder of our Common Stock as of the record date received 1.19260815 additional shares of Common Stock for each one share owned.
In a private placement financing we conducted with respect to which closings occurred on January 28, 2014, March 14, 2014 and March 28, 2014 (the "2014 PPO"), we sold an aggregate of 744,756 shares of our Common Stock, and warrants to purchase an aggregate of 744,756 shares of our Common Stock at an exercise price of $26.00 per share for a term of five (5) years ("PPO Warrants"), for gross proceeds of approximately $9,680,000 (before deducting placement agent fees and expenses of the 2014 PPO estimated at approximately $1,529,000).
The placement agent for the 2014 PPO and its sub-agent were paid an aggregate commission of approximately $968,000 and were issued warrants to purchase an aggregate of 74,483 shares of our Common Stock at an exercise price of $13.00 per share for a term of five (5) years ("Broker Warrants").
On April 6, 2015, we consummated an offer to amend and exercise the PPO Warrants (the "Offer to Amend and Exercise Warrants"). The PPO Warrants of holders who elected to participate in the Offer to Amend and Exercise Warrants were amended to, among other things, remove the price-based anti-dilution provisions contained therein and reduce the exercise price from $26.00 to $6.50 per share of Common Stock. Pursuant to the Offer to Amend and Exercise Warrants, an aggregate of 497,548 PPO Warrants were amended and exercised by their holders, for gross proceeds of approximately $3,234,000 (before deducting warrant agent fees and expenses of the Offer to Amend and Exercise estimated at approximately $417,000).
Effective on or prior to April 6, 2015, the Company and the holders of (a) 113,469 PPO Warrants, that chose not to participate in the Offer to Amend and Exercise Warrants ("Non-Participating Original Warrants"), and (b) all 74,483 Broker Warrants, approved an amendment to remove the price-based anti-dilution provisions in their warrants. As a result, the price-based anti-dilution provisions contained in these Non-Participating Original Warrants and Broker Warrants have been removed and are of no further force or effect as of April 6, 2015.
The warrant agent for the offer to Amend and Exercise Warrants was paid an aggregate commission of approximately $323,350 and was issued warrants to purchase an aggregate of 49,752 shares of our Common Stock at an exercise price of $6.50 per share for a term of five (5) years ("Warrant Agent Warrants").
Certain securities we issued in the 2014 PPO had price-based anti-dilution protection (“Anti-Dilution Rights”), if, within twenty-four (24) months after the final closing of the 2014 PPO, we issue additional shares of Common Stock or Common Stock equivalents (subject to customary exceptions) for a consideration per share less than $13.00. Of the 744,756 PPO Warrants, 133,739 still remained with these priced-based anti-dilution rights. With the consummation of the exercise and amendment of the PPO Warrants and the issuance of the Warrant Agent Warrants to the Warrant Agent, the anti-dilution provisions were triggered and the non-participating warrant holders received (i) an aggregate of 17,180 additional shares of Common Stock (ii) a reduction in the price of their PPO Warrants from $26.00 per share to $23.01 per share, and (iii) an aggregate of 17,180 additional warrants to purchase shares of Common Stock of the company at an exercise price of $23.01 per share.
On October 20, 2015, October 26, 2015, November 13, 2015, November 24, 2015, November 30, 2015, December 30, 2015 and January 14, 2016 we entered into Securities Purchase Agreements (in this case, the "Purchase Agreements") with certain "accredited investors (the "Unsecured Buyers"), pursuant to which the Unsecured Buyers purchased 12% Unsecured Convertible Promissory Notes of the Company (the "Unsecured Notes") in the aggregate principal amount of $2,113,500 (the "First Convertible Note Offering"). The aggregate gross proceeds to the Company were $2,113,500 (before deducting expenses related to the purchase and sale of the Unsecured Notes of approximately $45,000), of which $586,000 in proceeds were from members of the Board.
With the issuance of Unsecured Notes, the Anti-Dilution Rights were triggered and the holders of the Non-Participating Original Warrants received, or are entitled to receive (i) an aggregate of 18,674 additional shares of Common Stock, (ii) a reduction in the price of their PPO Warrants from $23.01 per share to $20.50 per share, and (iii) an aggregate of 18,674 additional warrants to purchase shares of Common Stock of the Company at an exercise price of $20.50 per share.
On February 16, 2016, we effected a 1-for-13 reverse stock split (the “Reverse Stock Split”). Upon effectiveness of the Reverse Stock Split, every thirteen (13) outstanding shares of our Common Stock ("Old Common Stock") were, without any further action by us, or any holder thereof, combined into and automatically became one share of our Common Stock. Any fractional shares have been rounded up to one whole common share. All shares of Common Stock eliminated as a result of the Reverse Stock Split have been cancelled such that they were returned to our authorized and unissued capital stock, and our capital has been reduced by an amount equal to the par value of the Old Common Stock so retired.
On April 12, 2016, April 15, 2016, May 26, 2016, June 7, 2016 and July 20, 2016 the Company entered into Securities Purchase Agreements (in this case, the "Purchase Agreements") with certain "accredited investors" (the "Secured Buyers"), pursuant to which the Secured Buyers purchased 12% Senior Secured Convertible Promissory Notes of the Company (the "Secured Notes") in the aggregate principal amount of $2,515,000 (before deducting placement agent fees and expenses of $282,454) (the "Second Convertible Note Offering").
The Company used the net proceeds from the Second Convertible Note Offering for certain payments to content owners, and working capital and general corporate purposes.
The Secured Notes are secured by a security interest in and lien on all now owned or hereafter acquired assets and property, real and personal, of the Company and its subsidiaries, including the Company's intellectual and technology property pursuant to the terms of a security agreement (in this case, the "Security Agreement") among the Company and the Secured Buyers. The security interest in and liens on all assets and property of the Company will be a first priority security interest.
The Secured Notes have an aggregate principal balance of $2,515,000, and a stated maturity date of 6 months from the date of issuance. The principal on the Secured Notes bears interest at a rate of 12% per annum, which is also payable on maturity. The Secured Notes will rank senior to all existing indebtedness of the Company, except as otherwise set forth in the Secured Notes. Upon the closing of a financing (in this case, a "Qualified Offering") by the Company during the term of the Secured Notes involving the sale of at least $15,000,000 in Equity Financing Securities, all of the outstanding principal amount of the Secured Notes, together with accrued and unpaid interest due thereon, will automatically convert (in this case, a "Mandatory Conversion") into units of the Company's securities (the "Second Units") at a conversion price per Second Unit equal to the lesser of (a) 80% of the price per share of the Equity Financing Securities sold in the Qualified Offering, or (b) $2.00. At any time prior to a Mandatory Conversion, the holders of the Secured Notes may convert all or part of the outstanding principal amount of the Secured Notes, together with accrued and unpaid interest due thereon, into Second Units at a conversion price of $2.00 per Unit (in this case, an "Optional Conversion"). Each Second Unit will consists of one share (the "Second Unit Shares") of the Company's Common Stock, and one five-year warrant (the "Second Unit Warrants") to purchase one additional share (the "Second Unit Warrant Shares") of the Company's Common Stock at an exercise price equal to (a) 125% of the price at which the Company's equity securities (or securities convertible into or exercisable for equity securities) are sold in a Qualified Offering in the event of a Mandatory Conversion, or (b) 125% of $2.00 in the event of an Optional Conversion. Upon failure by the Company to pay any principal amount or interest due under the Secured Notes within 5 days of the date such payment is due, or the occurrence of other event of default under the terms of the Secured Notes, the entire unpaid principal balance of the Secured Notes, together with any accrued and unpaid interest thereon, will become due and payable, without presentment, demand, protest or notice of any kind. In the event of any liquidation, dissolution or winding up of the Company, each holder of a Secured Note will be entitled to receive, pari passu with the other holders of the Secured Notes, and in preference to the holders of the Company's other outstanding securities, an amount equal to two times the principal amount of, and any accrued and unpaid interest on, such holder's Secured Note. The conversion price and number of Second Units issuable upon conversion of the Secured Notes will be subject to adjustment from time to time for subdivision or consolidation of shares and other standard dilutive events.
Pursuant to the terms of a Placement Agency Agreement (in this case, the "Placement Agency Agreement") between the Company and the placement agent for the Second Convertible Note Offering (in this case, the "Placement Agent"), in connection with the closing of the Second Convertible Note Offering, the Placement Agent was paid a commission of an aggregate of $236,500. In addition, the Placement Agent, or its designees, received warrants to purchase a number of shares of Common Stock equal to 10% of the number of Second Unit Shares into which Secured Notes sold in the Second Convertible Note Offering to Secured Buyers introduced to the Second Convertible Note Offering by the Placement Agent, and 8% of the number of Second Unit Shares into which Secured Notes sold in the Second Convertible Note Offering to Secured Buyers introduced to the Second Convertible Note Offering by the Company or its representatives, are converted upon a Mandatory Conversion, with a term of 5 years and an exercise price per share equal to the exercise price of the Second Unit Warrant Shares issued to Secured Buyers introduced to the Second Convertible Note Offering by the Placement Agent upon a Mandatory Conversion ("Placement Agent Warrants").
The Second Unit Warrants, to be received upon conversion of the Secured Notes, provide for the purchase of shares of the Company's Common Stock an exercise price equal to (a) 125% of the price at which the Company's Equity Financing Securities are sold in a Qualified Offering in the event of a Mandatory Conversion, or (b) 125% of $2.00 in the event of an Optional Conversion. The Second Unit Warrants are exercisable for cash only, for a term of 5 years from the date of issuance. The number of shares of Common Stock to be deliverable upon exercise of the Second Unit Warrants is subject to adjustment for subdivision or consolidation of shares and other standard dilutive events.
The Company granted registration rights to each Secured Buyer with respect to the Second Unit Shares and Second Unit Warrant Shares, and to the Placement Agent, with respect to the Common Stock issuable upon exercise of the Placement Agent Warrants, in each case on a pari passu basis with, and upon substantially the same terms as the registration rights granted to, the investors in a Qualified Offering.
As of September 30, 2016, we had devoted substantially all of our efforts to product development, raising capital and building our technology infrastructure. As of that date, we did not receive any material revenues from our planned principal operations.
Our Strategy
Our CÜR Music product is a new streaming music experience that combines the listening experience of free internet radio products with an on-demand listening experience for listening on web and mobile devices, beginning at $1.99 per month. CÜR Music will target consumers who are seeking a more comprehensive music streaming service than current free, ad-supported music streaming products. We believe that the CÜR Music product will include a hybrid model that includes many features that free, ad-supported internet radio products provide, without interruptive advertising, with a limited on-demand offering, and will include a social toolset that enables consumers to curate certain aspects their playlists.
In addition to revenue from subscriptions, our business plan includes a second revenue stream of personalized advertising, which will not interrupt a stream, but will target a user's listening habits. The advertising may be in the form of display ads, email and text messages. Our business plan further includes a third revenue stream from the sale of music, concert tickets and merchandise through our music streaming service, to be tailored to each listeners taste based on prior listening trends. We plan to sell advertising, music downloads and concert tickets and merchandise in the future subsequent to launch.
In addition, our business plan includes distributing our music streaming service through Apple's iTunes App Store to iOS devices, Google's Google Play Store to Android devices and the internet, among other distribution channels and platforms. At launch, we plan to have an iOS application, Android application and a CÜR website.
We plan to source our music from MusicNet, Inc. d/b/a Media Net Digital, Inc. We also plan to use Amazon web services to support certain of the technological needs of the business.
As of September 30, 2016, we continued to pursue sources of equity and/or debt financing to support our operations. We were not successful in raising the necessary funds as of September 30, 2016. We cannot launch our music streaming product and platform until we have raised the necessary funds.
Recent Developments
Extension of Agreements with Content Providers
As previously reported, the Company had entered into agreements ("Music Label Agreements") with certain music labels ("Music Labels"), pursuant to which the Company has been provided limited, non-exclusive licenses to digitally distribute certain sound recordings and related materials owned or controlled by the Music Labels in connection with the Company's CÜR-branded Internet music service, CÜR Music, to be composed of three progressively priced and increasingly functional tiers, within the United States and its territories, commonwealths, and possessions. The Company had also entered into agreements ("Publishing Agreements") with certain music publishing companies ("Music Publishers") either directly or through a third party, pursuant to which the Company had been provided the non-exclusive right and license to use certain musical works owned, controlled and/or administered by the Music Publishers in connection with CÜR Music, within the United States and its territories, commonwealths, and possessions. The Music Label Agreements and Publishing Agreements may be collectively referred to herein as the "Content Agreements," and the Music Labels and Music Publishers may be collectively referred to herein as the "Content Providers.”
Pursuant to the Content Agreements, the Company was required to pay certain minimum content fees over the term of the Content Agreements as follows: $14,000,000 in the first year of the agreements, of which approximately $8,000,000 was due on January 31, 2016, $25,500,000 in the second year of the agreements, and $18,500,000 in the third year of the agreements. The Content Providers previously agreed to provide the Company additional time to make the $8,000,000 in payments through both oral and written agreements. Under those agreements, the Company had until June 15, 2016 to make such payments. The Company paid an aggregate of $500,000 of the proceeds from the closing of the Secured Notes to the Content Providers.
On September 20, 2016, we received notice from Sony Music Entertainment ("SME") confirming that our Framework Distribution Agreement with SME, as amended (the "Sony Agreement"), automatically terminated effective June 14, 2016 as a result of our failure to pay SME the advance due pursuant to the Sony Agreement on that date.
On September 20, 2016, we received notice from UMG Recordings, Inc. ("UMG") that our Audio Streaming and Conditional Download Agreement with UMG (the "UMG Agreement") automatically terminated effective September 20, 2016 as a result of our failure to pay UMG the advance due pursuant to the UMG Agreement on that date.
The Company is in default of its Subscription Streaming and Enhanced Radio Services Agreement (The Warner Agreement”) with Warner Music, Inc. (“Warner”) as a result of our failure to pay UMG the advance due pursuant to the Warner Agreement on that date.
The Company issued the Content Providers warrants ("Content Provider Warrants") to purchase an aggregate of 215,279 shares (the "Content Provider Warrant Shares") of the Company's Common Stock at a weighted average exercise price of $6.41 per share. The Content Provider Warrants have a weighted average contractual term of 6.45 years. The exercise price and number of Content Provider Warrant Shares are subject to adjustment for any stock dividend, stock split, stock combination, recapitalization, reclassification, reorganization or other similar event.
Default on Secured Notes
On October 12, 2016, October 15, 2016, November 26, 2016, December 7, 2016, December 20, 2016 and January 20, 2017, the principal and any accrued and unpaid interest on our outstanding Secured Notes and Additional Secured Notes in the principal amount of an aggregate of $2,515,000 became due and payable. We were unable to repay the noteholders at that time. Pursuant to the terms of the Secured Notes and Additional Secured Notes, our failure to pay any principal or interest within five (5) days of the date such payment was due constituted an event of default. Following the occurrence of an event of default, among other things, the interest rate on the Secured Notes and Additional Secured Notes increased to 15%. In addition to other remedies available to the noteholders, our obligation to repay amounts due under the Secured Notes and Additional Secured Notes is secured by a first priority security interest in and lien on all of our assets and property, including our intellectual property.
We are actively seeking sources of equity or debt financing in order to support our operations. If we are able to secure adequate financing, we intend to attempt to negotiate certain amendments to the Secured Notes with the noteholders. However, if adequate funds are not available to us on acceptable terms, or at all, we will be unable to restart operations.
Receipt of Wells Notice
On July 19, 2017, we received a “Wells Notice” from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”). The Wells Notice provides notification to the Company that the Staff has made a preliminary determination to recommend that the SEC institute administrative proceedings against the Company pursuant to Sections 12(j) and 12(k) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), based solely upon the Company’s failure to comply with its reporting obligations under Section 13(a) of the Exchange Act. Sections 12(j) grants the SEC the right, after notice and opportunity for a hearing, to revoke the registration of a security. Section 12(k) grants the SEC the right to suspend trading in a security.
In accordance with SEC rules, on August 25, 2017, the Company made a written submission to the SEC in response to the Wells Notice, in which, among other things, it conveyed the Company’s present intention to file the delinquent reports and become current with its SEC filing requirements and, as such, set forth the reasons why the proposed enforcement action should not be filed. While no assurances can be made, the Company believes that, as a result of making these filings, the SEC will have no further reason to institute the proposed administrative proceedings, or, if instituted, to continue such proceedings. However, there can be no assurance that the SEC will not bring an enforcement action against the Company, which could result in a trading suspension of the Company’s common stock and the de-registration of the Company’s securities under the Exchange Act. Administrative proceedings, if instituted, will be held before an administrative law judge.
In order to file the delinquent reports, the Company needs to obtain adequate financing.
Defaults on Vendor Agreements
As of September 27, 2016, our Data License and Services Agreement (the "Rovi Agreement") with Rovi Data Solutions, Inc. and Veveo, Inc. (collectively, “Rovi”) terminated as a result of our failure to pay Rovi past due balances for the services they provided under the Rovi Agreement.
We are in default under our Distribution Agreement (the "MediaNet Agreement") with MusicNet, Inc., d/b/a MediaNet Digital, Inc. ("MediaNet") as a result of our failure to pay MediaNet past due balances for the services they provided under the MediaNet Agreement. To date, we have not received a notice of default from MediaNet. The Company intends to cure the default once it is adequately funded.
On October 12, 2016, we received a notice of default from Zuora, Inc. ("Zuora") confirming that the Company is in default under its Master Subscription Agreement with Zuora (the "Zuora Agreement") as a result of our failure to pay Zuora past due balances for the services they provided under the Zuora Agreement. On July 31, 2017, we signed a new order form (“New Order Form”) with Zuora under the Zuora Agreement, providing for the full settlement and release of the parties from all obligations under the old order form, dated July 31, 2014, in consideration for entering into the New Order Form. Pursuant to the New Order Form, we will pay Zuora $150,000 for the first year of the three-year agreement for Zuora to provide subscription services to the Company.
We are in default under our Sponsorship Agreement (the "Live Nation Agreement") with Live Nation Marketing, Inc. ("Live Nation") as a result of the Company’s failure to pay Live Nation past due balances for the services they provided under the Live Nation Agreement. To date, we have not received a notice of default from Live Nation. The Company intends to cure the default once it is adequately funded.
As of this date, we are in default of all of our vendor agreements as a result of not making the required payments.
Results of Operations
Three Month Period Ended September 30, 2016 Compared to Three Month Period Ended September 30, 2015
Revenues
We have not generated any material revenues for the three months ended September 30, 2016 or 2015.
Operating Expenses
Overview
Total operating expenses for the three month periods ended September 30, 2016 and 2015 were $1,759,180 and $2,470,886, respectively. The decrease in total operating expenses of $711,706, or approximately 29%, was primarily related to a decrease in research and development costs offset by increases in general and administrative costs and stock based compensation.
Research and Development Expenses
For the three month periods ended September 30, 2016 and 2015, research and development expenses were $1,053,000 and $1,902,871, respectively. Research and development expenses decreased by $849,871, or approximately 45%, primarily due to a decrease in compensation costs related to our employee base as we experienced financial difficulties in 2016 and had to decrease our staffing and technical spending.
General and Administrative Expenses
For the three month periods ended September 30, 2016 and 2015, general and administrative expenses were $668,083 and $570,379 respectively. General and administrative expenses increased by $97,704, or approximately 17%, primarily due to an increase in legal costs related to raising capital for a financing that didn’t close, non-cash expense for Content Provider Warrants issued to the three major music labels and an increase in compensation costs related to the hiring of James Urie as Interim Chief Executive Officer.
Stock based Compensation Expenses
For the three month periods ended September 30, 2016 and 2015, stock based compensation expense were $35,984 and ($7,536), respectively, an increase of $43,520. The increase was primarily due to the issuance of stock options to employees.
Other Income (Expense)
For the three month periods ended September 30, 2016 and 2015, other income (expense) was $1,904,630 and $136,864, respectively. Other expense increased due to a $3,010,980 increase in the change in the fair value of derivative liabilities offset by a $1,228,135 increase in interest expense.
Nine Month Period Ended September 30, 2016 Compared to Nine Month Period Ended September 30, 2015
Revenues
We have not generated any material revenues for the nine months ended September 30, 2016 or 2015.
Operating Expenses
Overview
Total operating expenses for the nine month periods ended September 30, 2016 and 2015 were $6,740,282 and $7,051,944, respectively. The decrease in total operating expenses of $311,662, or approximately 4.4%, was primarily related to a decrease in research and development expenses.
Research and Development Expenses
For the nine month periods ended September 30, 2016 and 2015, research and development expenses were $3,942,067 and $5,469,040, respectively. Research and development expenses decreased by $1,526,973, or approximately 28%, primarily due to a decrease in compensation costs related to our employee base as we experienced financial difficulties in 2016 and had to decrease our staffing and technical spending.
General and Administrative Expenses
For the nine month periods ended September 30, 2016 and 2015, general and administrative expenses were $2,602,089 and $1,394,403, respectively. General and administrative expenses increased by $1,207,686, or approximately 87%, primarily due to payments to the major music labels, an increase in costs related to raising capital for a financing that did not close and an increase in compensation costs related to the hiring of James Urie as Interim Chief Executive Officer.
Stock based Compensation Expenses
For the nine month periods ended September 30, 2016 and 2015, stock based compensation expense were $183,950 and $166,269, respectively. Stock based compensation expenses increased by approximately $17,681, or 10.6%, due to the issuance of stock options to employees.
Other Income (Expense)
For the nine month periods ended September 30, 2016 and 2015, other income (expense) was $915,658 and $1,409,706, respectively. Other income decreased by $494,048, or 35%, primarily due to a $1,818,083 increase in the change in fair value of derivative liabilities, a $464,686 loss on extinguishment of derivative liabilities in the nine months ended September 30, 2015, offset by a $2,636,033 increase in interest expense and a $120,266 loss on issuance of convertible debt.
Liquidity and Capital Resources
Sources of Liquidity
As of September 30, 2016, cash and cash equivalents were approximately $125, as compared to $734 at December 31, 2015.
As of September 30, 2016, we had a working capital deficit of $8,222,520. As of December 31, 2015, we had a working capital deficit of $4,288,488. The increase of $3,934,032, or approximately 92%, in working capital deficit was attributable to an increase in accounts payable, accrued and other current liabilities, an increase in current convertible promissory notes, net, offset by a decrease in accrued derivative liabilities.
In January 2014, warrants to purchase 14,315 shares of Common Stock were exercised resulting in gross proceeds of $99,695.
We raised aggregate gross proceeds of approximately $9,680,000 in our 2014 PPO (before deducting placement agent fees and expenses of the 2014 PPO of approximately $1,529,000).
On April 6, 2015, we raised aggregate gross proceeds of approximately $3,234,000 in our Offer to Amend and Exercise Warrants (before deducting placement agent fees and expenses of the Offer to Amend and Exercise Warrants of approximately $417,000).
On October 20, 2015, October 26, 2015, November 13, 2015, November 24, 2015, November 30, 2015, December 30, 2015 and January 14, 2016 we entered into Purchase Agreements with certain Unsecured Note Buyers, pursuant to which the Unsecured Buyers purchased Unsecured Notes in the aggregate principal amount of $2,113,500 (before deducting fees and expenses of approximately $45,000).
On April 12, 2016, April 15, 2016, May 26, 2016, June 7, 2016 and July 20, 2016, we entered into Purchase Agreements with certain Secured Note Buyers, pursuant to which the Secured Buyers purchased Secured Notes in the aggregate principal amount of $2,515,000 (before deducting placement agent fees and expenses of approximately $282,454).
Our agreements with UMG and SME have been terminated and we are in default of our agreement with Warner. If we are able to secure adequate financing, we intend to enter into revised agreements with UMG, SME and Warner. We also plan to enter into content licensing agreements with certain independent music labels, music publishers and publisher rights organizations. The cost of entering into our previous content licensing agreements with major music labels, publisher rights organizations and publishers including legal and consulting fees was approximately $9,000,000, the majority of which was initial prepayments to content providers. If we are able to secure adequate financing, we expect the initial prepayments to content providers to be significantly lower than the previous $9,000,000. If we are able to secure adequate financing, we intend to have a dedicated team of software engineers, led by our Chief Technology Officer and Chief Operating Officer, working on enhancing the technology platform, as well as the iOS and Android applications and the CÜR Music website.
Not including non-cash expenses, we have spent approximately $21,600,000 on research and development, sales and marketing and general and administrative costs to complete the development of the CÜR Music, for the time period since the Contribution in January 2014 through the third quarter of 2016. Of the total $21,600,000, a total of approximately $15,900,000 is related to research and development and approximately $5,700,000 is related to general and administrative costs. In addition to the aforementioned costs, we expect to pay approximately $3,000,000 dollars as prepayments in connection with the agreements that we plan to have with the major music labels, independent labels and publishers
In order to bring CÜR Music to market, we need to raise a substantial amount of capital, to implement our business plan, market CÜR Music, for content license costs, and for general working capital. There can be no assurance that financing will be available when required in sufficient amounts, on acceptable terms or at all. If we are unsuccessful at raising sufficient funds, for whatever reason, to fund our operations, we may be forced to seek a buyer for our business or seek a similar transaction. If all of these alternatives fail, we expect that we will be required to seek protection from creditors under applicable bankruptcy laws.
Net Cash Used in Operating Activities
Net cash used in operating activities was $2,650,776 for the nine month period ended September 30, 2016, as compared to net cash used of $5,973,358 for the nine month period ended September 30, 2015. The decrease of $3,322,582, or approximately 56%, in net cash used in operations was primarily due to an increase in accrued and other current liabilities of $1,679,563, an increase in accounts payable of $1,445,081, an increase in non-cash interest expense of $2,307,968, offset by a decrease of $3,688,963 in change in fair value of derivative liabilities.
Net Cash Provided by (Used in) Investing Activities
During the nine month periods ended September 30, 2016 and 2015, net cash provided by and used in investing activities was $0 and $19,256, respectively. The current year decrease was due to the company not spending any funds on equipment.
Net Cash Provided by Financing Activities
During the nine month period ended September 30, 2016 and 2015, we received $2,656,000 and $2,819,366, respectively, in proceeds from the sale of convertible notes. In the nine months ended September 30, 2016 and 2015, payments on notes payable were $5,833 and $21,269, respectively.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Contractual Obligations
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.