Item 1. Consolidated Financial Statements
theMaven, Inc. and
Subsidiary
Consolidated Balance Sheets
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,699,061
|
|
|
$
|
598,294
|
|
Accounts receivable
|
|
|
3,482
|
|
|
|
-
|
|
Deferred contract costs
|
|
|
15,986
|
|
|
|
-
|
|
Prepayments and other current assets
|
|
|
102,265
|
|
|
|
121,587
|
|
Total current assets
|
|
|
1,820,794
|
|
|
|
719,881
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
2,515,930
|
|
|
|
547,804
|
|
Intangible assets
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,356,724
|
|
|
$
|
1,287,685
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
51,568
|
|
|
$
|
154,361
|
|
Accrued expenses
|
|
|
442,061
|
|
|
|
54,789
|
|
Deferred revenue
|
|
|
31,634
|
|
|
|
-
|
|
Conversion feature liability
|
|
|
130,238
|
|
|
|
137,177
|
|
Total current liabilities
|
|
|
655,501
|
|
|
|
346,327
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, $0.01 par value,
1,000,000 shares authorized; 168 shares issued and outstanding ($168,496 aggregate liquidation value)
|
|
|
168,496
|
|
|
|
168,496
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100,000,000 shares authorized; 26,005,140
and 22,047,531 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
260,051
|
|
|
|
220,475
|
|
Common stock to be issued in private placement
|
|
|
1,566,000
|
|
|
|
9,375
|
|
Additional paid-in capital
|
|
|
8,265,925
|
|
|
|
2,730,770
|
|
Accumulated deficit
|
|
|
(6,559,249
|
)
|
|
|
(2,187,758
|
)
|
Total stockholders’ equity
|
|
|
3,532,727
|
|
|
|
772,862
|
|
Total liabilities and stockholders’ equity
|
|
$
|
4,356,724
|
|
|
$
|
1,287,685
|
|
See accompanying notes to consolidated
financial statements.
theMaven, Inc. and
Subsidiary
Consolidated Statements of Operations
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue
|
|
$
|
6,064
|
|
|
$
|
-
|
|
|
$
|
6,064
|
|
|
$
|
-
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Costs
|
|
|
449,567
|
|
|
|
-
|
|
|
|
641,606
|
|
|
|
-
|
|
Research and development
|
|
|
30,776
|
|
|
|
374,944
|
|
|
|
104,095
|
|
|
|
374,944
|
|
General and administrative
|
|
|
1,300,767
|
|
|
|
1,110,461
|
|
|
|
3,639,204
|
|
|
|
1,110,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,775,046
|
)
|
|
|
(1,485,405
|
)
|
|
|
(4,378,841
|
)
|
|
|
(1,485,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income, net
|
|
|
61
|
|
|
|
-
|
|
|
|
411
|
|
|
|
-
|
|
Interest expense
|
|
|
-
|
|
|
|
(4,044
|
)
|
|
|
-
|
|
|
|
(4,044
|
)
|
Change in fair value of conversion feature
|
|
|
(3,311
|
)
|
|
|
-
|
|
|
|
6,939
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(3,250
|
)
|
|
|
(4,044
|
)
|
|
|
7,350
|
|
|
|
(4,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,778,296
|
)
|
|
$
|
(1,489,449
|
)
|
|
|
(4,371,491
|
)
|
|
|
(1,489,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding – basic and diluted
|
|
|
16,367,424
|
|
|
|
4,243,607
|
|
|
|
13,091,231
|
|
|
|
4,243,607
|
|
See accompanying notes to consolidated
financial statements
.
theMaven, Inc. and
Subsidiary
Consolidated Statement of Stockholders’
Equity (Unaudited)
Nine Months Ended September 30, 2017
|
|
Common Stock
|
|
|
To Be Issued
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
|
22,047,531
|
|
|
$
|
220,475
|
|
|
|
8,929
|
|
|
$
|
9,375
|
|
|
$
|
2,730,770
|
|
|
$
|
(2,187,758
|
)
|
|
$
|
772,862
|
|
Common stock to be issued in private placement, net of issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
1,521,739
|
|
|
$
|
1,566,000
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,566,000
|
|
Common stock to be issued
|
|
|
8,929
|
|
|
|
89
|
|
|
|
(8,929
|
)
|
|
|
(9,375
|
)
|
|
|
9,286
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock, net of offering costs
|
|
|
3,765,000
|
|
|
|
37,650
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,281,014
|
|
|
|
-
|
|
|
|
3,318,664
|
|
Shares issued for investment banking fees
|
|
|
162,000
|
|
|
|
1,620
|
|
|
|
-
|
|
|
|
-
|
|
|
|
199,260
|
|
|
|
-
|
|
|
|
200,880
|
|
Exercise of stock options
|
|
|
21.680
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
|
(217)
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,045,812
|
|
|
|
-
|
|
|
|
2,045,812
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
(4,371,491
|
)
|
|
|
(
4,371,491
|
)
|
Balance at September 30, 2017
|
|
|
26,005,140
|
|
|
$
|
260,051
|
|
|
|
1,521,739
|
|
|
$
|
1,566,000
|
|
|
$
|
8,265,925
|
|
|
$
|
(6,559,249
|
)
|
|
$
|
3,532,727
|
|
See accompanying notes to consolidated
financial statements
.
theMaven,
Inc. and Subsidiary
Consolidated Statement
of Cash Flows
|
|
Nine Months Ended
|
|
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,371,491
|
)
|
|
$
|
(1,489,449
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Change in fair value of conversion feature
|
|
|
(6,939
|
)
|
|
|
-
|
|
Stock based compensation
|
|
|
1,357,510
|
|
|
|
935,058
|
|
Depreciation and amortization
|
|
|
233,990
|
|
|
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepayments and other current assets
|
|
|
19,322
|
|
|
|
(5,222
|
)
|
Accounts receivable
|
|
|
(3,482
|
)
|
|
|
-
|
|
Deferred costs
|
|
|
(15,986
|
)
|
|
|
-
|
|
Accounts payable
|
|
|
(102,793
|
)
|
|
|
30,600
|
|
Deferred revenue
|
|
|
31,634
|
|
|
|
-
|
|
Accrued expenses
|
|
|
203,271
|
|
|
|
36,992
|
|
Net cash used in operating activities
|
|
|
(2,654,964
|
)
|
|
|
(492,021
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Website development costs and fixed assets
|
|
|
(1,513,813
|
)
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(1,513,813
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from common stock to be issued in private placement
|
|
|
1,750,000
|
|
|
|
-
|
|
Proceeds from notes payable
|
|
|
-
|
|
|
|
638,351
|
|
Net proceeds from issuance of common stock
|
|
|
3,519,544
|
|
|
|
2,952
|
|
Net cash provided by financing activities
|
|
|
5,269,544
|
|
|
|
641,303
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
1,100,767
|
|
|
|
149,282
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
598,294
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
1,699,061
|
|
|
$
|
149,282
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Reclassification of stock-based compensation to website development costs
|
|
|
688,302
|
|
|
|
-
|
|
Accrual of stock issuance costs
|
|
|
184,000
|
|
|
|
-
|
|
Shares issued for investment banking fees
|
|
|
200,880
|
|
|
|
-
|
|
See accompanying notes to consolidated
financial statements
theMaven, Inc. and
Subsidiary
Notes to Consolidated Financial Statements
September 30, 2017
(Unaudited)
1. Nature of Operations
theMaven, Inc. (“Parent”)
and theMaven Network, Inc. (“Subsidiary”) (collectively “theMaven” or the “Company”) are developing
an exclusive network of professionally managed online media channels, with an underlying technology platform. Each channel will
be operated by a “invite only” “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.
During the second quarter of 2017 the Company’s
platform and media channel operations were launched in beta stage and by the end of the third quarter there were a total of 23
channel partners operating on theMaven Network. Internet users since the launch of our channels are able to utilize the platform
on desktop, laptop and mobile devices for these channels. We expect that during the fourth quarter additional channels will be
launched. As of November 13, 2017, we have over sixty signed channel partners and 28 channel partners operating on theMaven Network.
We do not expect to have significant revenue during the fourth quarter as we continue development of our technology and the commencement
of business operations establishing a media audience.
2. Basis of Presentation
theMaven Network, Inc. was incorporated
in Nevada on July 22, 2016, under the name “Amplify Media, Inc.” On July 27, 2016, the corporate name was amended
to “Amplify Media Network, Inc.” and on October 14, 2016, the corporate name was changed to “theMaven Network,
Inc.”.
theMaven, Inc. was formerly known as Integrated
Surgical Systems, Inc., a Delaware corporation (“
Integrated
”). From June 2007 until November 4, 2016, Integrated
was a non-active “shell company” as defined by regulations of the Securities and Exchange Commission (SEC). On August
11, 2016, Integrated entered into a loan to Subsidiary that provided initial funding totaling $735,099 for the Subsidiary’s
operations. Integrated’s Board of Directors structured the loan to the Subsidiary as fully secured so that Integrated would
receive cash at maturity of the loan if negotiations for a combination did not result in the consummated Recapitalization transaction.
If the loan was not repaid then the remedies in the event of default were to pursue (a) the personal guarantee and/or (b) the
mortgaged real estate collateral. The loan was not secured by the intellectual property of the Subsidiary, but there was a covenant
that the Subsidiary would not, without prior written consent, sell or assign the business or intellectual property. This negative
covenant did not give Integrated control or rights other than as a creditor. The loan did not provide Integrated with an equity
interest or other ownership or control rights in the Subsidiary. The loan did not have any rights to conversion into equity in
the Subsidiary. The note, and the associated payable, was cancelled as part of the Recapitalization and the proceeds from the
borrowing from Integrated was considered as cash received due to the Recapitalization in addition to the net assets acquired.
On October 14, 2016, Integrated entered
into a Share Exchange Agreement (the “
Share Exchange Agreement
”) with Subsidiary and the shareholders of Subsidiary
holding all of the issued and outstanding shares of Subsidiary (collectively, “
Subsidiary Shareholders
”). The
Share Exchange Agreement was amended on November 4, 2016, to include certain newly issued shares of Subsidiary in the transaction
and make related changes to the agreement and the Share Exchange was consummated. The transaction resulted in Parent acquiring
Subsidiary by the exchange of all of the outstanding shares of Subsidiary for 12,517,152 newly issued shares of the common stock,
$0.01 par value (the “
Common Stock
”) of Parent, representing approximately 56.7% of the issued and outstanding
shares of Common Stock of Parent immediately after the transaction.
In determining the accounting treatment
for the Share Exchange Agreement, the primary factor was determining which party, directly or indirectly, holds greater than 50
percent of the voting shares has control and is considered to be the acquirer. Because the former shareholders of the Subsidiary
received 56.7 percent voting control of the issued and outstanding shares of the Company after the transaction, the transaction
was considered to be a reverse recapitalization for accounting purposes. Other factors that indicated that the former stockholders
of the Subsidiary had control of the Company after the transaction included, (1) fully diluted equity interests, (2) composition
of senior management, (3) former officers of the Parent ceded day-to-day responsibilities to officers of the Subsidiary, and (4)
composition of Board of Directors. On a fully diluted basis, the former shareholders of the Subsidiary received 53.5 percent of
the equity interests in the Company. All the members of senior management of the Company, other than the part-time Chief Financial
Officer, were former shareholders of the Subsidiary. The former officers of the non-active shell ceded day-to-day management to
officers of the Subsidiary. The Board of Directors, immediately after the Recapitalization included three members from the Parent
and two members from the Subsidiary. Because the former shareholders of the Subsidiary could vote to make changes in the Board
composition, the conclusion was that control of the Board, in substance, was vested in the former shareholders of the Subsidiary.
The transaction is referred to as the
“Recapitalization.” The Recapitalization was consummated on November 4, 2016, as a result of which theMaven Network,
Inc. became a wholly owned subsidiary of Integrated (the “
Closing
”). The note payable between Integrated and
Subsidiary was an interdependent transaction with the Recapitalization and was cancelled upon closing of the Recapitalization.
On December 2, 2016, Integrated amended its Certificate of Incorporation to change its name from “Integrated Surgical Systems,
Inc.” to “theMaven, Inc.”
From June 2007 until the closing of the
Recapitalization, Integrated was a non-active “shell company” as defined by regulations of the SEC and, accordingly,
the Recapitalization was accounted for as a reverse recapitalization rather than a business combination. As the Subsidiary is
deemed to be the purchaser for accounting purposes under reverse recapitalization accounting, the Company’s financial statements
are presented as a continuation of Subsidiary, and the accounting for the Recapitalization is equivalent to the issuance of stock
by Subsidiary for the net monetary assets of Parent as of the Closing accompanied by a recapitalization. See Note 9 Stockholders’
Equity for summary of the assets acquired, transaction costs and the consideration exchanged in the Recapitalization.
The accompanying unaudited financial statements
have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. The Balance
Sheet at December 31, 2016 has been derived from the Company’s audited financial statements.
In the opinion of management, these financial
statements reflect all normal recurring, and other adjustments, necessary for a fair presentation. These financial statements
should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2016. Operating results for interim periods are not necessarily indicative of operating results
for an entire fiscal year or any other future periods.
Comparative Period from Inception on
July 22, 2016 to September 30, 2016
theMaven Network, Inc. was incorporated
on July 22, 2016 and initially issued shares of its common stock on August 1, 2016 in exchange for cash at par value. Through September
30, 2016, the previously reported financial statements of Integrated did not include the operations of theMaven Network, Inc. However,
unaudited financial statements of theMaven Network, Inc. for the three months ended September 30, 2016 were previously issued.
As a result of the accounting for the Recapitalization as of the November 4, 2016 effective date of the transaction, the financial
statements of theMaven Network, Inc. became the financial statements of Integrated for all periods previously presented. Subsequently,
in conjunction with the preparation of audited consolidated financial statements of the Company for the year ended December 31,
2016, the Company recorded certain stock-based compensation adjustments to reflect the accounting for the fair value of the shares
of common stock issued by theMaven Network, Inc. in August 2016 that were subject to vesting and redemption provisions (see Note
9). As a result, the accompanying consolidated unaudited statements of operations for the three months ended September 30, 2016
include stock-based compensation costs of $935,058, of which $67,842 was allocated to research and development expense and $867,216
was allocated to general and administrative expense. These stock-based compensation adjustments did not have any effect on cash
flows from operating activities for the three months ended September 30, 2016 or on total stockholders’ equity as of September
30, 2016.
3. Going Concern
The Company’s consolidated financial
statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company’s activities are subject to significant risks and uncertainties,
including the need for additional capital, as described below.
The Company has not generated significant
revenues since July 22, 2016 (Inception) and has financed its operations through (a) the Recapitalization transaction with Parent,
(b) a loan from Parent that was cancelled upon closing of the Recapitalization and (c) two private placements of common stock
in April 2017 and in October 2017. The Company has incurred operating losses and negative operating cash flows, and it expects
to continue to incur operating losses and negative operating cash flows for at least the next few years. As a result, management
has concluded that there is substantial doubt about the Company’s ability to continue as a going concern, and the Company’s
independent registered public accounting firm, in its report on the Company’s 2016 consolidated financial statements, has
raised substantial doubt about the Company’s ability to continue as a going concern.
As fully described in Note 9 Stockholders’
Equity, in April 2017, the Company completed a private placement of its common stock, raising proceeds of $3.5 million net of
cash offering costs. As described in Note 13 Subsequent Events the Company completed a second private placement raising gross
proceeds of $2.75 million in October 2017, of which $1.75 million had been received as of September 30, 2017. The Company believes
that it does not have sufficient funds to support its operations through the end of the first quarter of 2018. In order to continue
business operations past that point, the Company currently anticipates that it will need to raise additional debt and/or equity
capital in the first quarter of 2018.
There can be no assurances that the Company
will be able to secure any such additional financing on acceptable terms and conditions, or at all. If cash resources become insufficient
to satisfy the Company’s ongoing cash requirements, the Company will be required to scale back or discontinue its technology
development programs, or obtain funds, if available (although there can be no certainty), or to discontinue its operations entirely.
4. Significant Accounting Policies
and Estimates
Principles of Consolidation
The accompanying consolidated financial
statements include the financial position, results of operations and cash flows for the three and nine months ended September
30, 2017 and the three months ended September 30, 2016. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses for the reporting period. Actual results could materially
differ from those estimates.
Digital Media Content
The Company intends to operate a network
of online media channels and will provide 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 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
1000 impressions”) based on the volume of advertising impressions served. We disclose fixed dollar commitments for channel
content licenses in Note 12 Commitments and Contingencies. Channel partner agreements that include fixed yield based on the volume
of impressions served are not included in Note 12 because they cannot be quantified, but are expected to be significant. The expense
related to channel partner agreements are reported in “Service Costs” in the Statement of Operations. The cash payments
related to channel partner agreements are classified within “Net cash used in operating activities” on the Statement
of Cash Flows. Also under ASC 920, if channel partner agreements are structured such that the fee paid precedes the right to use
the content because the broadcasts will occur in future periods, the Company will record a Content Asset and a related Content
Obligation when all of the following conditions are met, (1) the cost of the content is known or reasonably determinable, (2)
the content has been accepted and (3) the content is available for broadcasting under the terms of the channel partner agreement.
Capitalized content cost will be amortized on a systematic basis over the agreement term on a straight-line method or an accelerated
method depending on the economic and agreement terms. Capitalized content costs will be evaluated for impairment at least annually
or whenever circumstances indicate that Content Assets may be impaired.
Revenue Recognition
During the third quarter of 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 our 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 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 our various channels.
In accordance with ASC 606 the Company recognizes revenue from advertisements at the point in time when each ad is viewed as reported
by our 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 our independent publisher channel partners a revenue share of the advertising
revenue earned and this is recorded as service costs in the same period in which the associated advertising revenue is recognized.
Membership
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
subscription to access the premium content for a given period of time, which is generally one year. In accordance with ASC 606
the Company recognizes revenue from each membership subscription over time based on a daily calculation of revenue during the
reporting period. Subscribers make payment for a subscription by credit card and the amount of the subscription collected in cash
is initially recorded as deferred revenue on the balance sheet. As the Company provides access to the premium content over the
subscription term the Company recognizes revenue and proportionately reduces the deferred revenue balance. The Company owes our
independent publisher channel partners a revenue share of the membership revenue earned and this is initially deferred as deferred
contract costs. The Company recognizes deferred contract costs over the subscription term in the same pattern that the associated
membership 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 September 30, 2017
|
|
Nine months ended September 30, 2017
|
|
Advertising
|
Membership
|
Total
|
|
Advertising
|
Membership
|
Total
|
By Product Lines:
|
$2,146
|
$3,918
|
$6,064
|
|
$2,146
|
$3,918
|
$6,064
|
|
|
|
|
|
|
|
|
|
United States
|
Other
|
Total
|
|
United States
|
Other
|
Total
|
By Geographical Markets:
|
$6,064
|
$-
|
$6,064
|
|
$6,064
|
$-
|
$6,064
|
|
|
|
|
|
|
|
|
|
At a Point in Time
|
Over Time
|
Total
|
|
At a Point in Time
|
Over Time
|
Total
|
By Timing of Revenue Recognition:
|
$2,146
|
$3,918
|
$6,064
|
|
$2,146
|
$3,918
|
$6,064
|
Contract
Balances
The
following table provides information about contract balances as of September 30, 2017:
|
Advertising
|
Membership
|
Total
|
|
|
|
|
Accounts receivables
|
$2,074
|
$
1,408
|
$3,482
|
|
|
|
|
Short-term contract assets (deferred contract costs)
|
-
|
$15,986
|
$15,986
|
|
|
|
|
Short-term contract liabilities (deferred revenue)
|
-
|
$31,634
|
$31,634
|
|
|
|
|
The Company receives payments from advertising
customers based upon contractual payment terms; accounts receivable are recorded when the right to consideration becomes unconditional
and generally collected within 90 days. The Company generally receives payments from membership 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 generally collected weekly. Contract assets include contract fulfillment costs related to revenue shares
owed to channel partners, which are amortized along with 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 in the period.
Contract acquisition costs and practical
expedients
For contracts that have a duration of less
than one year, the Company follows ASC 606 practical expedients and expenses these costs when incurred; for contracts with life
exceeding one year, which did not apply during the current period, the Company records these costs in proportion to completion
of each completed performance obligation. The Company generally expenses sales commissions when incurred because the amortization
period would have been less than one year. The Company records these costs within general and administrative expenses.
Fixed Assets
Fixed assets are recorded at cost. 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 income and expense 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
|
Website development costs
|
|
|
3 years
|
Intangible Assets
The intangible assets consist of the cost
of a purchased website domain name with an indefinite useful life.
Impairment of Long-Lived Assets
The long-lived assets, consisting of fixed
assets and intangible assets, held and used by the Company are reviewed for impairment no less frequently than annually or whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts
and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed.
Management has determined that there was no impairment in the value of long-lived assets during the period ended September 30,
2017.
Website Development Costs
In accordance with authoritative guidance,
the Company begins to capitalize website and software 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 within the consolidated
statement of operations. The Company places capitalized website and software development assets into service and commences depreciation/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 and software development assets when
the upgrade or enhancement will result in new or additional functionality. Certain website and software development assets are
placed into service and amortized and the Company continues to capitalize costs associated with other website and software development
assets that are still in the development stage.
The Company capitalizes internal labor
costs, including compensation, benefits and payroll taxes, incurred for certain capitalized website and software 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.
Research and Development
Research and development costs are charged
to operations in the period incurred and amounted to $30,776 and $104,095 for the three and nine months ended September 30, 2017.
Research and development costs are amounted to $374,944 for the three months ended September 30, 2016.
Fair Value Measurements
Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 820
“Fair Value Measurements and Disclosures”
clarifies that fair value
is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions
that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, FASB ASC 820
establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
|
·
|
Level
1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets
or liabilities in active markets.
|
|
·
|
Level
2 - Include other inputs that are directly or indirectly observable in the marketplace.
|
|
·
|
Level
3 - Unobservable inputs which are supported by little or no market activity.
|
The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In accordance with FASB ASC 820, the Company
measures its derivative liability at fair value. The Company’s derivative liability is classified within Level 3.
The carrying value of other current assets
and liabilities are considered to be representative of their respective fair values because of the short-term nature of those
instruments.
Concentrations of Credit Risk
Cash
The Company maintains cash at a bank where
amounts on deposit may exceed the Federal Deposit Insurance Corporation limit throughout the year. The Company has not experienced
losses in such accounts and believes it is not exposed to significant credit risk regarding its cash.
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 applies FASB ASC 718, “Stock
Compensation,” when recording stock based compensation to employees and directors. The estimated fair value of stock based
awards is recognized as compensation expense over the vesting period of the award. The Company has adopted ASU 2016-09 in 2016
with early application and account for actual forfeitures of awards as they occur.
The fair value of restricted stock awards
by Subsidiary at Inception was estimated on the date of the award using the exchange value used by Integrated and the Subsidiary
to establish the relative voting control ratio in the Recapitalization.
Restricted stock that was subject to an
escrow arrangement and/or a performance condition in conjunction with the Recapitalization was remeasured and fair value was estimated
using the quoted price of our common stock on the date of the Recapitalization. The Company uses a Monte Carlo simulation model
to determine the number of shares expected to be released from the performance condition escrow. Each quarter the Company reevaluates
the number of shares expected to be released from the performance condition escrow until the final determination is made as of
December 31, 2017.
The fair value of fully vested stock awards
is estimated using the quoted price of our common stock on the date of the grant. The fair value of stock option awards is estimated
at grant date using the Black-Scholes option pricing model that requires various highly judgmental assumptions including expected
volatility and option life.
The Company accounts for stock issued
to non-employees in accordance with provisions of FASB ASC 505-50, “Equity Based Payments to Non-Employees.” FASB
ASC 505-50 states that equity instruments that are issued in exchange for the receipt of goods or services should be measured
at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliability
measurable. The measurement date occurs as of the earlier of (a) the date at which a performance commitment is reached or (b)
absent a performance commitment, the date at which the performance necessary to earn the equity instruments is complete (that
is, the vesting date). Equity grants with performance conditions that do not have sufficiently large disincentive for non-performance
may be measured at fair value that is not fixed until performance is complete. The fair value of common stock warrants is estimated
at grant date using the Black-Scholes option pricing model that requires various highly judgmental assumptions including expected
volatility and option life. The Company recognizes expense for equity based payments to non-employees as the services are received.
The Company has specific objective criteria, such as the date of launch of a Channel on the Company’s platform, for determination
of the period over which services are received and expense is recognized.
The Company uses a Monte Carlo simulation
model to determine the number of shares expected to be earned by Channel Partners based on performance obligations to be satisfied
over a defined period which will commence at the launch of a Channel on the Company’s platform.
The Company issues common stock upon exercise
of equity awards and warrants.
Income Taxes
The Company recognizes the tax effects
of transactions in the year in which such transactions enter into the determination of net income regardless of when reported
for tax purposes. Deferred taxes are provided in the financial statements to give effect to the temporary differences which may
arise from differences in the bases of fixed assets, depreciation methods and allowances based on the income taxes expected to
be payable in future years. Deferred tax assets arising primarily as a result of net operating loss carry-forwards, and research
and development credit have been offset completely by a valuation allowance due to the uncertainty of their utilization in future
periods.
The Company recognizes interest accrued
relative to unrecognized tax benefits in interest expense and penalties in operating expense. During the three and nine months
ended September 30, 2017 and the three months ended September 30, 2016, the Company recognized no income tax related interest
and penalties. The Company had no accruals for income tax related interest and penalties at September 30, 2017.
Basic and Diluted 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. Restricted stock is considered outstanding and included
in the computation of basic income or loss per share when underlying restrictions expire and the shares are no longer forfeitable.
Diluted income per 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. Unvested but outstanding restricted stock (which are forfeitable) are included in the diluted
income per share calculation. In a period where there is a net loss, the diluted loss per share is computed using the basic share
count. At September 30, 2017, potentially dilutive shares outstanding amounted to 14,737,558, of which 13,417,951 are not currently
registered and/or subject to future vesting conditions. Included in these totals are 6,663,244 common stock equivalents that must
be exercised which would result in aggregate proceeds from the sale of stock to the Company of $6,735,000.
Risks and Uncertainties
The Company has a limited operating history
and has not generated revenue 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 economies. 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.
Recently Adopted Standards
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (ASC 606) - Revenue from
Contracts with Customers (“ASU 2014-09”), which provides guidance for revenue recognition. This ASU will supersede
the revenue recognition requirements in Topic 605, and most industry specific guidance. The standard’s core principle is
that revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity
should apply the following steps:
Step 1: Identify the contract(s) with
a customer
Step 2: Identify the performance obligations
in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price
to the performance obligations in the contract.
Step 5: Recognize revenue when (or as)
the entity satisfies a performance obligation.
The guidance in ASU 2014-09 also specifies
the accounting for some costs to obtain or fulfill a contract with a customer. ASC 606 requires the Company to make significant
judgments and estimates. ASC 606 also requires more extensive disclosures regarding the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers.
The FASB has also issued several additional
ASUs which amend ASU 2014-09. The amendments do not change the core principle of the guidance in ASC 606.
Public business entities are required
to apply the guidance of ASC 606 to annual reporting periods beginning after December 15, 2017 (2018 for calendar year end reporting
companies), including interim reporting periods within that reporting period. Early adoption is permitted.
The Company has adopted ASC 606 in the
current quarter ended September 30, 2017 and began recognition of revenue from contracts with customers as a result of the launch
of its network operations. 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”.
In November 2015, the FASB issued Accounting
Standards Update No. 2015-17 (ASU 2015-17), Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU
2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. The adoption of ASU 2015-17 did not have any impact on Company’s financial statement
presentation or disclosures.
Recent Issued Accounting Pronouncements
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC Topic 840. ASU 2016-02
is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding
lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases as either finance or operating, with
classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.
ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various
optional practical expedients. The Company is currently assessing the potential impact of adopting ASU 2016-02 on its financial
statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 refines how
companies classify certain aspects of the cash flow statement in regards to debt prepayment, settlement of debt instruments, contingent
consideration payments, proceeds from insurance claims and life insurance policies, distribution from equity method investees,
beneficial interests in securitization transactions and separately identifiable cash flows. ASU 2016-15 is effective for
annual periods beginning after December 15, 2017, and interim periods within those fiscal years. No early adoption is permitted.
Management is currently assessing the potential impact of adopting ASU 2016-15 on the financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides clarity and reduces both
(1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718 to a change in terms or conditions
of a share-based payment award. The amendments in this ASU are effective for public entities for fiscal years and interim periods
beginning after December 15, 2017, with early adoption permitted. The ASU should be applied prospectively on and after the effective
date. The Company is evaluating the impact of this ASU.
5. Fixed Assets
At September 30, 2017 and December 31,
2016, fixed assets, net consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Office equipment and computers
|
|
$
|
29,871
|
|
|
$
|
8,048
|
|
Furniture and Equipment
|
|
|
21,220
|
|
|
|
-
|
|
Website development costs
|
|
|
2,699,219
|
|
|
|
540,146
|
|
|
|
|
2,750,310
|
|
|
|
548,194
|
|
Accumulated depreciation and amortization
|
|
|
(234,380
|
)
|
|
|
(390
|
)
|
Fixed assets, net
|
|
$
|
2,515,930
|
|
|
$
|
547,804
|
|
In June 2017, the Company launched certain
elements of its website and began amortization of capitalized website development costs, and accordingly, $173,000 and $226,000
of amortization expense was recorded during the three and nine months ended September 30, 2017, respectively. In the nine months
ended September 30, 2017, depreciation expense of approximately $8,000 was recorded.
6. Investments in Available-for-Sale
Securities
The Company maintained an investment portfolio
consisting of available-for-sale-securities during the period ended December 31, 2016, which it had acquired through the Recapitalization.
All available-for-sale-securities either matured or were liquidated prior to December 31, 2016.
7. Redeemable Convertible
Preferred Stock
The Company’s Certificate of Incorporation
authorized 1,000,000 shares of undesignated, serial preferred stock. Preferred stock may be issued from time to time in one or
more series. The Board of Directors is authorized to determine the rights, preferences, privileges, and restrictions granted to
and imposed upon any wholly unissued series of preferred stock and designation of any such series without any further vote or
action by the Company’s stockholders.
As of September 30, 2017, the Company’s
only outstanding series of convertible preferred stock is the Series G Convertible Preferred Stock (“Series G”).
The Series G stock has a stated value
of $1,000 per share, and is convertible into common stock at a conversion price equal to 85% of the lowest sale price of the common
stock on its listed market over the five trading days preceding the date of conversion (“Beneficial Conversion Feature”),
subject to a maximum conversion price. The number of shares of common stock that may be converted is determined by dividing the
stated value of the number of shares of Series G to be converted by the conversion price. The Company may elect to pay the Series
G holder in cash at the current market price multiplied by the number of shares of common stock issuable upon conversion.
For the three and nine months ended September
30, 2017, no shares of Series G were converted into shares of common stock. At September 30, 2017, the outstanding
Series G shares were convertible into a minimum of 172,374 shares of common stock.
Upon a change in control, sale or similar
transaction, as defined in the Certificate of Designation for the Series G, each holder of the Series G has the option to deem
such transaction as a liquidation and may redeem his or her shares at the liquidation value of $1,000, per share, for an aggregate
amount of $168,496. The sale of all the assets on June 28, 2007 triggered the preferred stockholders’ redemption
option. As such redemption is not in the control of the Company, the Series G stock has been accounted for as if it
was redeemable preferred stock and is classified on the balance sheet between liabilities and stockholders’ equity.
The conversion feature of the preferred
stock is considered a derivative according to ASC 815 “Derivatives and Hedging”, therefore, the fair value of the
derivative is reflected in the financial statements as a liability, which was determined to be $130,238 and $137,177 as of September
30, 2017 and December 31, 2016, respectively and has been included as “conversion feature liability” on the accompanying
balance sheets.
The fair value of the conversion feature
liability is calculated under a Black-Scholes Model, using the market price of the Company’s common stock on each of the
balance sheet dates presented, the expected dividend yield, the expected life of the redemption and the expected volatility of
the Company’s common stock.
The Company’s assessment of the
significance of a particular input to the fair value measurement requires judgment and considering factors specific to the conversion
feature liability. Since some of the assumptions used by the Company are unobservable, the conversion feature liability is classified
within the level 3 hierarchy in the fair value measurement.
The expected volatility of the conversion
feature liability was based on the historical volatility of the Company’s common stock. The expected life assumption was
based on the expected remaining life of the underlying preferred stock redemption. The risk-free interest rate for the expected
term of the conversion feature liability was based on the average market rate on U.S. treasury securities in effect during the
applicable quarter. The dividend yield reflected historical experience as well as future expectations over the expected term of
the underlying preferred stock redemption. Therefore, the fair value of the conversion feature liability is sensitive to changes
in above assumptions and changes of the Company’s common stock price.
The table below shows the quantitative
information about the significant unobservable inputs used in the fair value measurement of level 3 conversion feature liability
at September 30, 2017:
Expected life of the redemption in years
|
|
|
1.0
|
|
Risk free interest rate
|
|
|
1.31
|
%
|
Expected annual volatility
|
|
|
177.29
|
%
|
Annual rate of dividends
|
|
|
0
|
%
|
The changes in the fair value of the derivative
are as follows:
Beginning as of January 1, 2017
|
|
$
|
137,177
|
|
Decrease in fair value
|
|
|
(6,939
|
)
|
|
|
|
|
|
Ending balance as of September 30, 2017
|
|
$
|
130,238
|
|
8. Recapitalization
As described in Note 2 Basis of Presentation,
the Company has accounted for the Recapitalization, which closed on November 4, 2016, as a reverse recapitalization. Because Integrated
was a non-operating public shell corporation the transaction is considered to be a capital transaction in substance rather than
a business combination. The transaction is equivalent to the issuance of stock by the Subsidiary for the net monetary assets of
the Parent accompanied by a recapitalization.
Prior to the Recapitalization, Integrated
had 9,530,379 issued and outstanding shares of common stock. In the Recapitalization, holders of Subsidiary’s common stock
received 4.13607 shares of Parent common stock for each Subsidiary share, totaling 12,517,152 shares. After the Recapitalization
a total of 22,047,531 shares of Parent common stock were outstanding.
As of September 30, 2017, as a result
of other equity transactions described in Note 9 Stockholders’ Equity, a total of 26,005,140 shares of Parent common stock
are issued and outstanding.
Integrated and Subsidiary agreed to the
terms of Recapitalization to reflect the arms-length negotiated fair value of the Subsidiary as $2.5 million relative to the fair
value of Integrated’s cash and available for sale investment securities. This resulted in the former shareholders of Subsidiary
obtaining 56.7% voting control of the Company’s issued and outstanding common stock. The intent of the Recapitalization
was to provide funding for Subsidiary’s operations initially under a loan that was canceled upon closing of the Recapitalization.
In determining the accounting treatment
for the Share Exchange Agreement, the primary factor was determining which party, directly or indirectly, held greater than 50
percent of the voting shares has control and is considered to be the acquirer. Because the former shareholders of the Subsidiary
received 56.7 percent voting control of the issued and outstanding shares of the Company after the transaction, the transaction
was considered to be a reverse recapitalization for accounting purposes. Other factors that indicated that the former stockholders
of the Subsidiary had control of the Company after the transaction included, (1) fully diluted equity interests, (2) composition
of senior management, (3) former officers of the Parent ceded day-to-day responsibilities to officers of the Subsidiary, and (4)
composition of Board of Directors. On a fully diluted basis, the former shareholders of the Subsidiary received 53.5 percent of
the equity interests in the Company. All the members of senior management of the Company, other than the part-time Chief Financial
Officer, were former shareholders of the Subsidiary. The former officers of the non-active shell ceded day-to-day management to
officers of the Subsidiary. The Board of Directors, immediately after the Recapitalization included three members from the Parent
and two members from the Subsidiary. Because the former shareholders of the Subsidiary could vote to make changes in the Board
composition, the conclusion was that control of the Board, in substance, was vested in the former shareholders of the Subsidiary.
The following table summarizes the calculation
of the relative voting control at the time of the Recapitalization:
|
|
Shares
|
|
|
Per Share
|
|
|
Fair Value
|
|
|
Voting %
|
|
Integrated shareholders pre-Recapitalization
|
|
|
9,530,379
|
|
|
$
|
0.20
|
|
|
$
|
1,903,464
|
|
|
|
43.3
|
%
|
Integrated options pre-Recapitalization
|
|
|
175,000
|
|
|
|
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Warrant issued to MDB Capital Group
|
|
|
1,169,607
|
|
|
|
|
|
|
|
-
|
|
|
|
0.0
|
%
|
TheMaven Network, Inc. shareholders
|
|
|
12,517,152
|
|
|
$
|
0.20
|
|
|
|
2,500,000
|
|
|
|
56.7
|
%
|
Total fully diluted shares
|
|
|
23,392,138
|
|
|
|
|
|
|
$
|
4,403,464
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued and outstanding as of Closing
|
|
|
22,047,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the Investment Banking
Advisory Agreement more fully described in Note 11 Related Parties, Integrated issued warrants to MDB Capital Group, LLC (“MDB”)
to purchase 1,169,607 shares of Parent common stock. The warrants have an exercise price of $0.20 per share and expire on November
4, 2021. Integrated incurred transaction costs of $921,698 consisting of $744,105 for the fair value of warrants issued to MDB
and $177,593 in cash for legal and related transaction costs. The costs incurred by Integrated were recorded in financial statements
of the Parent prior to Recapitalization and reduced the net monetary assets acquired. The aggregate intrinsic value of the warrants
issued to MDB at September 30, 2017 is $1,111,000.
The Recapitalization resulted in the acquisition
of gross assets of $1,447,000 consisting primarily of cash and available for sale investment securities and the assumption of
$470,000 of liabilities. Included in the total liabilities assumed was 168 shares of Class G Preferred Stock, which is reported
as a liability at aggregated liquidation value of $168,496 because it is a redeemable instrument at the option of the holder (see
Note 7 Redeemable Convertible Preferred Stock).
Prior to the closing of the Recapitalization,
the Subsidiary had received $735,099 in multiple borrowings from Integrated on a note payable beginning on August 11, 2016 and
ending on November 4, 2016. Integrated’s Board of Directors structured the loan to the Subsidiary as a loan that was fully
secured so that Integrated would receive cash at maturity of the loan if the negotiations did not result in the consummated Recapitalization
transaction. If the loan was not repaid then the remedies in the event of default were to pursue (a) the personal guarantee and/or
(b) the mortgaged real estate collateral. The loan was not secured by the intellectual property of theMaven, but there was a covenant
that theMaven would not, without prior written consent, sell or assign the business or intellectual property. This negative covenant
did not give Integrated control or rights other than as a creditor. The loan did not provide Integrated with an equity interest
or other ownership or control rights in theMaven. The Note did not have any rights to conversion into equity in theMaven. The
note payable was cancelled as part of the Recapitalization and the proceeds from the borrowing from Integrated is considered as
cash received due to the Recapitalization in addition to the net assets acquired. Legal and transaction costs incurred by Subsidiary
of $50,000 related to the capital transaction were expensed and charged to General and Administrative expense in 2016.
9. Stockholders’ Equity
The Company has authorized 100,000,000
shares of common stock, $0.01 par value, of which 26,005,140 shares were issued and outstanding as of September 30, 2017. As of
September 30, 2017, the Company’s Directors and Officers held 12,202,885 or 45.33% of the issued and outstanding shares.
Restricted Stock Awards
On August 11, 2016, management and employees
of Subsidiary in conjunction with the incorporation on July 22, 2016, received 12,209,677 shares of common stock as adjusted for
the Recapitalization exchange ratio of 4.13607. These shares are subject to a Company option to buy back the shares at the original
cash consideration paid, which totaled $2,952 or approximately $0.0002 per share. A total of 7,966,070 shares were subject to
the Company buy back right as of August 1, 2016, and 4,094,708 were made subject to the Company buy back right on November 4,
2016, in conjunction with the Recapitalization. The employees vest their ownership in these 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. The fair value
of these shares of Subsidiary stock was estimated on the date of the award using the exchange value used by Integrated and the
Subsidiary to establish the relative voting control ratio in the Recapitalization (See Note 8 Recapitalization). Because these
shares require continued service to the Company the estimated fair value is recognized as compensation expense over the vesting
period of the award.
On October 13, 2016, Subsidiary granted
62,041 shares of common stock to an employee. On October 16, 2016, an additional 245,434 shares of Subsidiary common stock were
granted to a director. The fair value of these shares of Subsidiary stock was estimated on the date of the awards based on the
quoted closing stock price on November 4, 2016, since the Recapitalization was pending. These shares are subject to a Company
option to buy back the shares at the original cash consideration paid.
As a condition of the Recapitalization,
a total of 4,094,708 shares were required to be placed into an escrow arrangement for purposes of enforcement of the Company option
to buy back shares for the balance of the three-year service period. A total of 4,381,003 shares, which includes 35% of the 4,094,708
shares added to the buyback option, are escrowed and subject to a performance condition requiring the Company to achieve certain
operating metrics regarding monthly unique users by December 31, 2017. Pursuant to a negotiated schedule the performance condition
can be satisfied in partial increments up to the full number of shares escrowed. The Company uses a Monte Carlo simulation model
to determine the number of shares expected to be released from the performance condition escrow.
Pursuant to FASB ASC 718, escrowed share
arrangements in a capital raising transaction are considered to be compensatory, as such, the shares subject to these escrow provisions
were re-measured as of November 4, 2016, the date of the Recapitalization. The estimated fair value of these shares was determined
based on the quoted closing stock price on November 4, 2016. Because these shares require continued service to the Company the
estimated fair value is recognized as compensation expense over the vesting period of the award.
At December 31, 2016, it was estimated
that 72.5% of the shares subject to the performance condition will be released. At September 30, 2017, the expected achievement
of the performance condition was reevaluated and it was determined that the shares estimated to be released had increased to 100%.
Restricted stock award activity for the
period from July 22, 2016 (Inception) to September 30, 2017, including the reevaluation of the shares estimated to be release,
was as follows:
|
|
Shares
|
|
|
Shares
Remeasured
|
|
|
Weighted-
Average
Price
|
|
Stock awards granted at Inception
|
|
|
12,209,677
|
|
|
|
|
|
|
$
|
0.20
|
|
Granted October 13, 2016
|
|
|
62,041
|
|
|
|
|
|
|
|
0.70
|
|
Granted October 16, 2016
|
|
|
245,434
|
|
|
|
|
|
|
|
0.70
|
|
Remeasurement at November 4, 2016
|
|
|
-
|
|
|
|
5,837,788
|
*
|
|
|
0.43
|
|
Vested
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Reevaluation of shares expected to be released as of March 31, 2017
|
|
|
-
|
|
|
|
1,007,633
|
*
|
|
|
0.06
|
|
Reevaluation of shares expected to be released as of June 30,
2017
|
|
|
-
|
|
|
|
197,145
|
*
|
|
|
0.01
|
|
Total at September 30, 2017
|
|
|
12,517,152
|
|
|
|
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2017
|
|
|
4,504,180
|
|
|
|
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after September 30, 2017
|
|
|
8,012,972
|
|
|
|
|
|
|
$
|
0.48
|
|
|
*
|
The number of shares Remeasured as of November 4, 2016, March 31, 2017, June 30, 2017 and September 30,
2017 reflect the effect of the Monte Carlo simulation determination of the estimated number of shares expected to be released from
the performance condition escrow. This estimate will be reevaluated at each quarter end until the final outcome of the performance
condition is satisfied on December 31, 2017.
|
At September 30, 2017, total compensation
cost related to restricted stock awards but not yet recognized was $3,372,000. This cost will be amortized on a straight-line method
over a period of approximately 1.85 years.
Stock Options
On December 19, 2016, the Company’s
Board of Directors approved the 2016 Stock Incentive Plan (“Plan”) and reserved 1,670,867 shares of common stock for
issuance under the Plan, including options and restricted performance stock awards. On June 28, 2017, the Board of Directors approved
an increase in the total number of shares reserved from 1,670,867 to 3,000,000. 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 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.
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 are 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
values of our stock option grants were estimated with the following average assumptions:
The fair value of stock options granted
during the period ended September 30, 2017 were estimated with the following assumptions:
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
Expected life in years
|
|
|
6.0
|
|
|
|
5.9
|
|
|
|
6.0
|
|
Risk-free interest rate
|
|
|
2.13
|
%
|
|
|
1.97
|
%
|
|
|
2.01
|
%
|
Expected annual volatility
|
|
|
114.20
|
%
|
|
|
117.87
|
%
|
|
|
115.13
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
For the six months ended September 30, 2017 stock option activity
was as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
275,137
|
|
|
$
|
0.48
|
|
|
|
5.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.
|
|
|
|
|
|
Granted
|
|
|
1,914,000
|
|
|
|
1.28
|
|
|
|
9.04
|
|
|
|
|
|
Exercised
|
|
|
(25,000
|
)
|
|
|
.17
|
|
|
|
1.62
|
|
|
|
|
|
Forfeited
|
|
|
(95,000
|
)
|
|
|
1.41
|
|
|
|
9.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
2,069,137
|
|
|
$
|
1.24
|
|
|
|
9.02
|
|
|
$
|
170,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2017
|
|
|
2,069,137
|
|
|
$
|
1.24
|
|
|
|
9.02
|
|
|
$
|
170,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
309,967
|
|
|
$
|
0.85
|
|
|
|
5.83
|
|
|
$
|
147,000
|
|
As of September 30, 2017, the Company has granted 1,914,000
options under the Plan, of which 159,967 are vested. In the three and nine months ended September 30, 2017, the Company recorded
stock-based compensation of $259,508 and $508,635, respectively related to the options granted under the Plan. Of the total stock-based
compensation in the three months, $216,920 was expensed in General and Administrative expenses and $42,588 was capitalized as
Website Development Costs. Of the total stock-based compensation in the nine months, $440,268 was expensed in General and Administrative
expenses and $68,367 was capitalized as Website Development Costs.
At September 30, 2017, total compensation
cost related to stock options granted under the Plan but not yet recognized was $1,574,000. This cost will be amortized on a straight-line
method over a period of approximately 1.67 years. The aggregate intrinsic value represents the difference between the exercise
price of the underlying options and the quoted price of our common stock for the number of options that were in-the-money at September
30, 2017.
In addition, the Company assumed 175,000
fully-vested options in connection with the Recapitalization with an exercise price of $0.17 per share which expire on May 15,
2019. During the quarter ended September 30, 2017, 25,000 of these options were cashless exercised into 21,680 common shares and
150,000 options are outstanding.
The following table summarizes certain
information about stock options for the nine months ended September 30, 2017:
Weighted average grant-date fair value for options granted during the
year
|
|
$
|
1.28
|
|
|
|
|
|
|
Vested options in-the-money at September 30, 2017
|
|
|
150,000
|
|
|
|
|
|
|
Aggregate intrinsic value of options exercised during the year
|
|
$
|
27,750
|
|
The following table summarizes the common
shares reserved for future issuance under the Plan:
Stock options outstanding under the Plan
|
|
|
1,919,137
|
|
Stock options available for future grant
|
|
|
1,080,863
|
|
|
|
|
3,000,000
|
|
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.
The following table summarizes the activity
in Channel Partner Warrants during the nine months ended September 30, 2017:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
350,000
|
|
|
$
|
1.05
|
|
|
|
4.75
|
|
|
|
|
|
Granted
|
|
|
3,074,500
|
|
|
|
1.33
|
|
|
|
4.51
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2017
|
|
|
3,424,500
|
|
|
$
|
1.30
|
|
|
|
4.48
|
|
|
$
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at September 30, 2017
|
|
|
1,556,000
|
|
|
$
|
1.30
|
|
|
|
4.48
|
|
|
$
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
In the nine months ended September 30,
2017, the Company issued 3,074,500 common stock warrants to Channel Partners. The warrants have a performance condition and vest
over three years and expire in five years from issuance. The exercise prices range from $1.05 to $1.90 with a weighted average
of $1.33. The performance conditions are generally based on the average number of unique visitors on the Channel operated by the
Channel Partner generated during the period from July 1, 2017, to December 31, 2017, or the revenue generated during the period
from issuance date through September 30, 2019. Equity grants with performance conditions that do not have sufficiently large disincentive
for non-performance may be measured at fair value that is not fixed until performance is complete. The Company recognizes expense
for equity based payments to non-employees as the services are received. The Company has specific objective criteria, such as
the date of launch of a Channel on the Company’s platform, for determination of the period over which services are received
and expense is recognized.
The Company uses a Monte Carlo simulation
model to determine the number of shares expected to be earned by Channel Partners based on performance obligations to be satisfied
over a defined period which will commence at the launch of a Channel on the Company’s platform. As of September 30, 2017,
the Company has estimated that 1,556,000 of Channel Partner Warrants will be earned. The Company recorded in Service Costs a total
of $35,000 and $115,000 of stock-based compensation related to Channel Partner warrants in the three and nine months ended September
30, 2017, respectively.
Other Warrants
In accordance with the Investment Banking Advisory Agreement more fully described in Note 11 Related Parties,
Integrated issued warrants to MDB Capital Group, LLC to purchase 1,169,607 shares of Parent common stock. The warrants have an
exercise price of $0.20 per share and expire on November 4, 2021. The aggregate intrinsic value of the warrants at September 30,
2017, is $1,111,000
Common Stock – Private Placement of Common Stock
On April 4, 2017, the Company completed
a private placement of its common stock, selling 3,765,000 shares at $1.00 per share, for total gross proceeds of $3,765,000.
In connection with the offering, the Company paid $188,250 and issued 162,000 shares of common stock to MDB Capital Group LLC,
which acted as placement agent. The transaction costs of $446,000, including $201,000 of non-cash expenses, have been recorded
as a reduction in paid-in capital.
Stock-based Compensation
The impact on our results of operations
of recording stock-based compensation expense for the three months ended September 30, 2017 was as follows:
|
|
Restricted
|
|
|
|
|
|
Channel
|
|
|
|
|
|
|
|
|
|
Stock at
|
|
|
Stock
|
|
|
Partner
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
Options
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Total
|
|
Service Costs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35,000
|
|
|
$
|
-
|
|
|
$
|
35,000
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
261,749
|
|
|
|
216,920
|
|
|
|
-
|
|
|
|
|
|
|
|
478,669
|
|
|
|
$
|
261,749
|
|
|
$
|
216,920
|
|
|
$
|
35,000
|
|
|
$
|
-
|
|
|
$
|
513,669
|
|
In addition, during the three months ended
September 30, 2017, stock-based compensation totaling $243,484 during the application and development stage was capitalized for
website development.
The impact on our results of operations
of recording stock-based compensation expense for the nine months ended September 30, 2017, was as follows:
|
|
Restricted
|
|
|
|
|
|
Channel
|
|
|
|
|
|
|
|
|
|
Stock at
|
|
|
Stock
|
|
|
Partner
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
Options
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Total
|
|
Service Costs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
115,000
|
|
|
$
|
-
|
|
|
$
|
115,000
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
801,743
|
|
|
|
408,432
|
|
|
|
-
|
|
|
|
32,335
|
|
|
|
1,242,510
|
|
|
|
$
|
801,743
|
|
|
$
|
408,432
|
|
|
$
|
115,000
|
|
|
$
|
32,335
|
|
|
$
|
1,357,510
|
|
In addition, during the nine months ended
September 30, 2017, stock-based compensation totaling $688,302 during the application and development stage was capitalized for
website development.
10. Income Taxes
The Company accounts for income taxes
under FASB ASC 740 “Accounting for Income Taxes.” Deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the Company’s
financial statements and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Parent’s net operating loss
carryforwards (NOL) and credit carryforwards are subject to limitations on the use of the NOLs by the Company in consolidated
tax returns after the Reverse Recapitalization. Where there is a “change in ownership” within the meaning of Section
382 of the Internal Revenue Code, the Parent’s net operating loss carryforwards and credit carryforwards are subject to
an annual limitation. The Company believes that such an ownership change occurred because the shareholders of the Subsidiary acquired
56.7 percent of the Parent’s stock. Because the Parent’s value at the date of recapitalization was attributable solely
to non-business assets, the utilization of the carryforwards is limited such that the majority of the carryforwards will never
be available. Accordingly, the Company has not recorded those NOL carryforwards and credit carryforwards in its deferred tax assets.
The Parent is no longer subject to U.S.
federal and state income tax examinations by tax authorities for years before 2012. The Company currently is not under examination
by any tax authority.
As of September 30, 2017, the Company
had deferred tax assets primarily consisting of net operating losses, stock-based compensation and accrued liabilities not currently
deductible. However, because of the current loss since Inception, the Company has recorded a full valuation allowance such that
its net deferred tax asset is zero.
Deferred tax assets consist of the following
components:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued liabilities not currently deductible
|
|
$
|
80,520
|
|
|
$
|
64,210
|
|
Deferred revenue net of deferred costs
|
|
|
5,320
|
|
|
|
-
|
|
Stock-based compensation
|
|
|
137,936
|
|
|
|
-
|
|
Net operating loss and capital loss carryforwards
|
|
|
1,906,109
|
|
|
|
506,259
|
|
Gross deferred tax assets
|
|
|
2,129,885
|
|
|
|
570,469
|
|
Valuation allowance
|
|
|
(1,553,776
|
)
|
|
|
(417,581
|
)
|
Gross deferred tax assets net of valuation allowance
|
|
|
576,109
|
|
|
|
152,888
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
16,625
|
|
|
|
16,625
|
|
Website development costs and fixed assets
|
|
|
559,484
|
|
|
|
136,263
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company must make judgments as to
whether the deferred tax assets will be recovered from future taxable income. To the extent that the Company believes that recovery
is not likely, it must establish a valuation allowance. A valuation allowance has been established for deferred tax
assets which the Company does not believe meet the “more likely than not” criteria. The Company’s
judgments regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies
or other factors. If the Company’s assumptions and consequently its estimates change in the future, the valuation
allowances it has established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.
At September 30, 2017, the Company had
net operating loss carryforwards of approximately $5.6 million for federal income tax purposes. The NOL carryforward
may be used to reduce taxable income, if any, in future years through their expiration in 2036 and 2037.
The provision for income taxes on the
consolidated statement of operations differs from the amount computed by applying the statutory Federal income tax rate to income
before the provision for income taxes for the nine months ended September 30, 2017 and three months ended September 30, 2016,
as follows:
|
|
September 30,
2017
|
|
|
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal expense (benefit) expected
at statutory rate
|
|
$
|
(1,486,307
|
)
|
|
|
34.0
|
%
|
|
$
|
(506,413
|
)
|
|
|
34.0
|
%
|
Permanent differences
|
|
|
331,628
|
|
|
|
-7.6
|
%
|
|
|
317,920
|
|
|
|
-21.3
|
%
|
Change in valuation allowance
|
|
|
1,154,679
|
|
|
|
-26.4
|
%
|
|
|
188,493
|
|
|
|
-12.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit and effective
tax rate
|
|
$
|
-
|
|
|
|
0
|
%
|
|
$
|
-
|
|
|
|
0
|
%
|
The Company recognizes tax benefits from
an uncertain position only if it is “more likely than not” that the position is sustainable, based on its technical
merits. The Company’s policy is to include interest and penalties in general and administrative expenses. There
were no interest and penalties recorded for the nine months ended September 30, 2017. The Company has evaluated and
concluded that there are no uncertain tax positions requiring recognition in the Company’s financial statements for the
nine months ended September 30, 2017.
11. Related Party Transactions
The Parent entered into an Investment
Banking Advisory Services agreement in November 2007 with MDB Capital Group LLC (“MDB”), and the parties extended
the agreement indefinitely in April 2009. The agreement terminated on completion of the Recapitalization. Under the agreement,
MDB acted as an advisor to the Parent in connection with the Recapitalization. At the closing of the Recapitalization, the Parent
paid MDB a cash fee of $54,299 (including $4,299 to reimburse MDB’s expenses in connection with the Recapitalization) and
issued to MDB and its designees, Mr. Christopher A. Marlett, Robert Levande, and Mr. Schuman, a 5-year warrants to purchase an
aggregate of 1,169,607 shares of Common Stock, with an exercise price of $0.20 per share, representing 5% of the number of shares
of the Parent on a fully diluted basis immediately after the Closing. The fair value of the warrants using Black Scholes Option
Pricing model was determined to be $744,105. These amounts were recorded in the financial statements of the Parent prior to the
Recapitalization.
Prior to and interdependent upon the closing
of the Recapitalization, the Parent provided a series of advances for an aggregated amount of approximately $735,000 to the Subsidiary
under a promissory note (the “Term Note”). The Term Note was guaranteed by MDB in the amount of $150,000 and Mr. Heckman
in the amount of $350,000 and secured by a mortgage held by the Parent on certain properties owned by Mr. Heckman located in the
State of Washington and the Province of British Columbia (“Mortgage”). At the Closing of the Recapitalization, the
Term Note was cancelled and the Personal Guarantee, the Mortgage and the MDB Guarantee were terminated.
On August 17, 2016 the Subsidiary borrowed
$35,000 from a shareholder on demand. This loan was non-interest bearing and repaid on September 16, 2016 with proceeds from a
loan from Integrated.
On April 4, 2017, the Company completed
a private placement of its common stock, selling 3,765,000 shares at $1.00 per share, for total gross proceeds of $3,765,000.
In connection with the offering, the Company paid $188,250 and issued 162,000 shares of common stock, valued at $201,000, to MDB
Capital Group LLC, which acted as placement agent.
Mr. Christopher Marlett, a director of
the Company, is also the Chief Executive Officer of MDB. Mr. Gary Schuman, who was the Chief Financial Officer of the Company
until May 15, 2017, is also the Chief Financial Officer and Chief Compliance Officer of MDB. The Company compensated Mr. Schuman
for his services at the rate of $3,000 per month totaling $18,000 until June 30, 2017.
Effective on September 20, 2017, the Company
entered into a six-month contract, with automatic renewals unless cancelled, with a company located in Nicaragua that is owned
by Mr. Christopher Marlett, a director of the Company to provide content conversion services. The estimated monthly costs are
expected to be less than $5,000 per month.
12. Commitments and Contingencies
From time to time, the Company may be
subject to claims and litigation arising in the ordinary course of business. The Company is not currently a party to
any legal proceedings that it believes would reasonably be expected to have a material adverse effect on the Company’s business,
financial condition or results of operations.
The Company may have a liability for additional
state franchise taxes payable in the amount of approximately $44,000, plus interest at 18% per annum, for the years 2008-2014.
Because of state statutory provisions, the underpaid amount will only be due once assessed and demanded by the state. The
tax liability and associated interest has not been included as an accrued liability because management has determined that the
likelihood of the state making the assessment is low. Depending on circumstances, management may change its estimate of the
probability of an assessment and establish either an accrual or record a payment for the tax liability if assessed.
The Company’s offices are leased
with a term that expires January 31, 2018, with approximately$25,000 commitment, subject to renewal with 30 days advance notice.
On a select basis, the Company has provided
revenue share guarantees to certain independent publishers that transition their publishing operations from another platform to
theMaven.net. These arrangements generally guarantee the publisher a monthly amount of income for a period of 12 to 24 months
from inception of the publisher contract that is the greater of (a) fixed monthly minimum, or (b) the calculated earned revenue
share. To the extent that the fixed monthly minimum paid exceeds the earned revenue share (defined as an Over Advance) in any
month during the first 12 to 24 months (“the Guarantee Period”), then the Company may recoup the aggregate Over Advance
that was expensed in the Guarantee Period during the 12 months following the Guarantee Period of the publisher contract to the
extent that the earned revenue share exceeds the monthly minimum in those future months. As of September 30, 2017, the aggregate
commitment is $1,215,000 and the Over Advance contingent amount that the Company may recoup is $264,000. The following table shows
the aggregate commitment by year:
|
|
Commitment
|
|
2017
|
|
$
|
300,000
|
|
2018
|
|
|
775,000
|
|
2019
|
|
|
140,000
|
|
|
|
$
|
1,215,000
|
|
The Company may have a liability for additional
state franchise taxes in the amount of approximately $44,000, plus interest at 18% per annum for certain annual periods prior
to 2014. Because of state statutory provisions, the underpaid amount will only be due once assessed and demanded by the state.
The tax liability and associated interest has not been included as an accrued liability because management has determined that
the likelihood of the state making the assessment is low. Depending on circumstances, management may change its estimate
of the probability of an assessment and establish either an accrual or record a payment for the tax liability if assessed.
13. Subsequent Events
On October 19, 2017, the Company completed
a private placement of its common stock, selling 2,391,304 shares at $1.15 per share, for total gross proceeds of $2,750,000.
In connection with the offering, the Company issued 119,565 shares of common stock and 119,565 warrants to acquire common stock
at a price of $1.15 per share to MDB Capital Group LLC, which acted as placement agent. The estimated transaction costs
of $320,000, including $282,000 of non-cash expenses, have been recorded as a reduction in paid-in capital. MDB Capital Group
LLC is a related party as discussed in Note 11 Related Parties.
Related to the private placement completed
on October 19, 2017, the Company filed a registration statement on Form S-1 to register the shares issued in the common stock offering.
The Securities and Exchange Commission declared the registration effective on November 6, 2017.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis
should be read in conjunction with the Company’s financial statements, including the notes thereto, appearing elsewhere
in this report. This discussion may contain certain forward-looking statements based on current expectations that involve
risks and uncertainties. Actual results and timing of certain events may differ significantly from those projected
in such forward-looking statements due to a number of factors, including those set forth elsewhere in this Report.
Overview
The Company was incorporated under the
name of Integrated Surgical Systems, Inc. (“Integrated”) in Delaware in 1990. It was founded to design, manufacture,
sell and service image-directed, computer-controlled robotic software and hardware products for use in orthopedic surgical procedures.
On June 28, 2007, Integrated sold substantially all of its operating assets, and Integrated no longer engaged in any business
activities other than seeking to locate a suitable acquisition target to complete a business combination. From June 2007 until
the closing of the Recapitalization (as defined in Note 2 Basis of Presentation of Item 1. Financial Statements) on November 4,
2016, Integrated was a non-active “shell company” as defined by regulations of the SEC. As a result of the Recapitalization,
on a going forward basis, the Company continued to file its public reports with the SEC on an operating company basis. On December
2, 2016, the corporate name was changed from “Integrated Surgical Systems, Inc.” to “theMaven, Inc.”
In determining the accounting treatment
for the Share Exchange Agreement, the primary factor was determining which party, directly or indirectly, holds greater than 50
percent of the voting shares has control and is considered to be the acquirer. Because the former shareholders of the Subsidiary
received 56.7 percent voting control of the issued and outstanding shares of the Company after the transaction, the transaction
was considered to be a reverse recapitalization for accounting purposes. Other factors that indicated that the control of the
Company after the transaction included, (1) fully diluted equity interests, (2) composition of senior management, (3) former officers
of the Parent ceded day-to-day responsibilities to officers of the Subsidiary, and (4) composition of Board of Directors. On a
fully diluted basis, the former shareholders of the Subsidiary received 53.5 percent of the equity interests in the Company. All
the members of senior management of the Company, other than the part-time Chief Financial Officer, were former shareholders of
the Subsidiary. The former officers of the non-active shell ceded day-to-day management to officers of the Subsidiary. The Board
of Directors, immediately after the Recapitalization included three members from the Parent and two members from the Subsidiary.
Because the former shareholders of the Subsidiary could vote to make changes in the Board composition, the conclusion was that
control of the Board, in substance, was vested in the former shareholders of the Subsidiary.
theMaven Network, Inc. was incorporated
in Nevada on July 22, 2016, under the name “Amplify Media, Inc.” On July 27, 2016, the corporate name was amended
to “Amplify Media Network, Inc.” and on October 14, 2016, the corporate name was changed to “theMaven Network,
Inc.” theMaven Network, Inc. is a 100% owned subsidiary of the theMaven, Inc.
Going Concern
The Company’s consolidated financial
statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company’s activities are subject to significant risks and uncertainties,
including the need for additional capital, as described below.
The Company has not generated significant
revenues since July 22, 2016 (Inception) and has financed its operations through (a) the Recapitalization transaction with Parent,
(b) a loan from Parent that was cancelled upon closing of the Recapitalization and (c) two private placements of common stock
in April 2017 and in October 2017. The Company has incurred operating losses and negative operating cash flows, and it expects
to continue to incur operating losses and negative operating cash flows for at least the next few years. As a result, management
has concluded that there is substantial doubt about the Company’s ability to continue as a going concern, and the Company’s
independent registered public accounting firm, in its report on the Company’s 2016 consolidated financial statements, has
raised substantial doubt about the Company’s ability to continue as a going concern.
As fully described in Note 9 Stockholders’
Equity, in April 2017, the Company completed a private placement of its common stock, raising proceeds of $3.5 million net of cash
offering costs. As described in Note 13 Subsequent Events and completed a second private placement raising $2.75 million in October
2017, of which $1.75 million has been received as of September 30, 2017. The Company believes that it does not have sufficient
funds to support its operations through the end of the first quarter of 2018. In order to continue business operations past that
point, the Company currently anticipates that it will need to raise additional debt and/or equity capital in the first quarter
of 2018.
There can be no assurances that the Company
will be able to secure any such additional financing on acceptable terms and conditions, or at all. If cash resources become insufficient
to satisfy the Company’s ongoing cash requirements, the Company will be required to scale back or discontinue its technology
development programs, or obtain funds, if available (although there can be no certainty), or to discontinue its operations entirely.
Results of Operations
Because the Company was founded in
July 2016, the operating results in the three-month period ended September 30, 2016 are not directly comparable to the
results in the 2017 three- and nine-month periods ended September 30, 2017. The 2016 period was primarily focused on the
initial planning and design phase of technology development, Company organization and negotiation of the terms of the
Recapitalization transaction completed on November 4, 2016 with Integrated. The 2017 period was primarily focused on the
actual software development of the Company’s technology, the recruitment and selection of independent publisher channel
partners and the development of advertising network business relationships.
For the three and nine months ended September
30, 2017, total loss from operations was:
|
|
Three Months
|
|
|
Nine Months
|
|
Revenue
|
|
$
|
6,064
|
|
|
$
|
6,064
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Service Costs
|
|
|
449,567
|
|
|
|
641,606
|
|
Research and development expenses
|
|
|
30,776
|
|
|
|
104,095
|
|
General and administrative expenses
|
|
|
1,300,767
|
|
|
|
3,639,204
|
|
Loss from operations
|
|
$
|
(1,775,046
|
)
|
|
$
|
(4,378,841
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.11
|
)
|
|
$
|
(0.33
|
)
|
During the second quarter of 2017 the Company’s
platform and media channel operations were launched in beta stage and by the end of the third quarter there were a total of 23
channel partners operating on theMaven Network. Internet users since the launch of our channels are able to utilize the platform
on desktop, laptop and mobile devices for these channels. We expect that during the fourth quarter additional channels will be
launched. As of November 13, 2017, we have over sixty signed channel partners and 28 channel partners operating on theMaven Network.
We do not expect to have significant revenue during the fourth quarter as we continue development of our technology and the commencement
of business operations establishing a media audience.
Service Costs
Service costs are the costs incurred to
operate and maintain the Company’s technology platform and exclusive network of professionally managed online media channels.
Service costs include hosting and bandwidth costs, amortization of website development costs, revenue share or guaranteed minimum
payments to independent publishers for licensed content, advertising network costs and other operational costs. During the three
and nine months ended September 30, 2017, the Company incurred $449,567 and $641,606 of Service Costs, respectively. The following
table provides detail of service costs for the three and nine months ended September 30, 2017:
|
|
Three Months
|
|
|
Nine Months
|
|
Amortization of website development costs
|
|
$
|
173,000
|
|
|
$
|
226,000
|
|
Channel partner guarantees – See Note 12
|
|
|
164,000
|
|
|
|
203,000
|
|
Stock-based compensation - Channel Partner warrants
|
|
|
35,000
|
|
|
|
115,000
|
|
Hosting and bandwidth costs
|
|
|
49,000
|
|
|
|
65,000
|
|
Other cost of service
|
|
|
29,000
|
|
|
|
33,000
|
|
|
|
$
|
450,000
|
|
|
$
|
642,000
|
|
As described in Note 4 – Significant
Accounting Policies and Estimates, the Company capitalizes the costs incurred to develop theMaven Network technology platform,
and these costs are amortized to service costs over a period of 36 months. As described in Note 12 – Commitments and Contingencies,
the Company has agreed to pay revenue share guarantees to certain independent publisher channel partners for a finite period of
time. It is expected these costs will be significant in the next few quarters prior to network operations reaching full scale.
As revenue increases the Company will have an expense for revenue share payments to Channel Partners that will be approximately
30 to 50% of revenue. In the periods ended September 30, 2017, revenue share payments to Channel Partners, other than guarantees,
were not material.
As described in Note 9 –
Stockholders’ Equity, the Company has a common stock warrant program to provide equity incentives to its Channel
Partners to motivate and reward them for their service to the Company and align the interests of Channel Partners with those
of stockholders of the Company. The stock-based compensation expense associated with Channel Partner warrants is estimated
each quarter and is subject to a significant degree of variability since these are performance based equity awards with the
value determined as a function of the Company’s stock price (using Black-Scholes option pricing model) and the relative
performance to the criteria established for each Channel Partner at the time that they complete the performance conditions.
The estimated value of the awards are expensed over the services period which is approximately three years. We expect that by
December 31, 2017 the majority of Channel Partners will have completed the performance conditions and we will be able to
complete the final calculation of the value of these awards. Hosting and bandwidth costs during the periods ended September
30, 2017 reflect that the Company’s network was in beta launch stage and not at full scale. As the number of Channel
Partners launch in the fourth quarter the hosting and bandwidth costs will increase.
Research and development expenses
Research and development costs are charged
to operations in the period incurred and amounted to $30,776 and $104,095 for the three and nine months ended September 30, 2017.
The costs charged to research and development costs are primarily certain compensation expenses and expenses for computer software
and supplies. Note that during 2017, the majority of the Company’s engineering team was devoted to developing theMaven Network
technology with the associated costs capitalized as website development costs.
Research and development costs amounted
to $374,944 for the three months ended September 30, 2016 because the Company was in the planning and design phase of developing
theMaven Network technology and these costs were expensed as incurred. There were no costs incurred for website development that
were capitalized in the three months ended September 30, 2016.
General and administrative expenses
General and administrative expenses for
the three and nine months ended September 30, 2017, were $1,300,767 and $3,639,204, respectively. Included in general and administrative
expenses is stock based compensation of $478,669 and $1,242,510 for the three and nine -month periods, respectively. Our general
administrative expenses of carrying on our business consist of a variety of costs that are primarily compensation related for
employees and professional resources and consultants. The following table provides detail of general and administrative expenses
for the three and nine months ended September 30, 2017:
|
|
Three Months
|
|
|
Nine Months
|
|
Stock-based compensation
|
|
$
|
479,000
|
|
|
$
|
1,243,000
|
|
Wages of employees
|
|
|
447,000
|
|
|
|
1,074,000
|
|
Professional and consulting fees
|
|
|
105,000
|
|
|
|
512,000
|
|
Travel, meals and conferences
|
|
|
85,000
|
|
|
|
336,000
|
|
Insurance and payroll and other taxes
|
|
|
85,000
|
|
|
|
249,000
|
|
Board of Directors stipends
|
|
|
34,000
|
|
|
|
101,000
|
|
Rent
|
|
|
18,000
|
|
|
|
51,000
|
|
Other
|
|
|
48,000
|
|
|
|
73,000
|
|
|
|
$
|
1,301,000
|
|
|
$
|
3,639,000
|
|
Liquidity and Capital Resources
Working Capital
The Company had working capital of approximately
$1.49 million as of September 30, 2017, excluding liabilities that will not be settled in cash. This was an increase of approximately
$1.1 million is due to the receipt of net proceeds of $5.3 million received during the year from two private placements, net of
stock issuance costs and cash used in operations of $2,7 million and cash used for investment of $1.5 million during the nine
months ended September 30, 2017.
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
1,820,794
|
|
|
$
|
719,881
|
|
Current Liabilities
|
|
$
|
(330,338
|
)
|
|
$
|
(346,327
|
)
|
Working Capital, net of liabilities that will not be settled
in cash
|
|
$
|
1,490,456
|
|
|
$
|
373,554
|
|
The following table summarizes the Company’s cash flows
during the nine months ended September 30, 2017 and the three months ended September 30, 2016:
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
$
|
(2,654,964
|
)
|
|
$
|
(492,021
|
)
|
Net Cash Used in Investing Activities
|
|
|
(1,513,813
|
)
|
|
|
-
|
|
Net Cash Provided by Financing Activities
|
|
|
5,269,544
|
|
|
|
641,303
|
|
Increase in Cash during the Period
|
|
$
|
1,100,767
|
|
|
$
|
149,282
|
|
|
|
|
|
|
|
|
|
|
Cash at Beginning of Period
|
|
|
598,294
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash at End of Period
|
|
$
|
1,699,061
|
|
|
$
|
149,282
|
|
For the nine months ended September 30,
2017, net cash used in operating activities was $2,654,964 which was primarily due to the net loss of $4,371,491 reduced by non-cash
expenses for stock-based compensation of approximately $1,358,000 and amortization and depreciation of $234,000 and increased
by working capital changes of approximately $125,000. The Company used cash of $1,514,000 for investment in website development
costs and fixed assets. Operating activities and investment expenditures were funded by the beginning cash of hand as of January
1, 2017 of approximately $600,000 and primarily by two private placements completed in April and October 2017 that raised approximately
$5.3 million net of stock issuance expenses in the nine months ended September 30, 2017.
For the three months ended September 30,
2016, net cash used in operating activities was $492,021 which was primarily due to the net loss of $1,489,449 reduced by non-cash
expenses for stock-based compensation of approximately $935,000 and increased by working capital changes of approximately $62,000.
Operating activities were funded primarily by proceeds from notes payable from Integrated prior to the completion of the Recapitalization
on November 4, 2016.
We anticipate needing a substantial amount
of additional capital to sustain our current operations and implement the current business plan of the Company as now budgeted.
We do not believe that the proceeds of the private placement of common stock completed on October 19, 2017, will be sufficient
to allow us to implement our business plan to the point where our revenues will cover our operating costs and the expansion of
our business offerings. Without additional funding, we will have to modify our longer-term business plan. The funds that we will
need may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity
ownership of our shares. We anticipate thereafter that we will need additional capital in the first quarter of 2018 as we expand
our operations, and do not anticipate that our income will cover our full operating expenses for the foreseeable future. We have
no contracts or arrangements for any additional funding at this time. There can be no assurance that we will be able to raise
any funding or will be able to meet our accrued obligations. If we are not able to obtain the additional financing on a timely
basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become
due. In such event, we will be forced to scale down or perhaps even cease our operations. These estimates may change significantly
depending on the nature of our business activities and our ability to raise capital from our shareholders or other sources.
There are no assurances that we will be
able to obtain further funds required for our continued operations. We will pursue various financing alternatives to meet our
immediate and long-term financial requirements. There can be no assurance that additional financing will be available to us when
needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional
financing on a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other
obligations as they become due. In such event, we will be forced to scale down or perhaps even cease our operations.
Contractual Obligations
As a “smaller reporting company”,
we are not required to provide tabular disclosure obligations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance
sheet arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap
transactions or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Seasonality
Once we are actively providing services
to our customer base, we expect to experience typical media company ad and sponsorship sales seasonality, which is strong in the
fourth quarter and slower in the first quarter.
Effects of Inflation
To date inflation has not had a material
impact on our business or operating results.
Significant Accounting Policies and
Estimates
The Company’s discussion and analysis
of the financial condition and results of operations is based upon the Company’s audited financial statements included elsewhere
in this Report, which have been prepared in accordance with generally accepted accounting principles in the United States of America
(“GAAP”). The Company believes the following critical accounting policies affect the Company’s more significant
judgments and estimates used in the preparation of the financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
Principles of Consolidation
The accompanying consolidated financial
statements include the financial position, results of operations and cash flows for the three and nine months ended September
30, 2017 and the three months ended September 30, 2016. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses for the reporting period. Actual results could materially
differ from those estimates.
Digital Media Content
The Company intends to operate a network
of online media channels and will provide 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 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
1000 impressions”) based on the volume of advertising impressions served. We disclose fixed dollar commitments for channel
content licenses in Note 12 Commitments and Contingencies. Channel partner agreements that include fixed yield based on the volume
of impressions served are not included in Note 12 because they cannot be quantified, but are expected to be significant. The expense
related to channel partner agreements are reported in “Service Costs” in the Statement of Operations. The cash payments
related to channel partner agreements are classified within “Net cash used in operating activities” on the Statement
of Cash Flows. Also under ASC 920, if channel partner agreements are structured such that the fee paid precedes the right to use
the content because the broadcasts will occur in future periods, the Company will record a Content Asset and a related Content
Obligation when all of the following conditions are met, (1) the cost of the content is known or reasonably determinable, (2)
the content has been accepted and (3) the content is available for broadcasting under the terms of the channel partner agreement.
Capitalized content cost will be amortized on a systematic basis over the agreement term on a straight-line method or an accelerated
method depending on the economic and agreement terms. Capitalized content costs will be evaluated for impairment at least annually
or whenever circumstances indicate that Content Assets may be impaired.
Revenue Recognition
During the third quarter of 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 our 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 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 our various channels.
In accordance with ASC 606 the Company recognizes revenue from advertisements at the point in time when each ad is viewed as reported
by our 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 our independent publisher channel partners a revenue share of the advertising
revenue earned and this is recorded as service costs in the same period in which the associated advertising revenue is recognized.
Membership
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 subscription to access the premium content for a given period of time, which is generally one year. In accordance with
ASC 606 the Company recognizes revenue from each membership subscription over time based on a daily calculation of revenue
during the reporting period. Subscribers make payment for a subscription by credit card and the amount of the subscription
collected in cash is initially recorded as deferred revenue on the balance sheet. As the Company provides access to the
premium content over the subscription term the Company recognizes revenue and proportionately reduces the deferred revenue
balance. The Company owes our independent publisher channel partners a revenue share of the membership revenue earned and
this is initially deferred as deferred contract costs. The Company recognizes deferred contract costs over the subscription
term in the same pattern that the associated membership 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 September 30, 2017
|
|
Nine months ended September 30, 2017
|
|
Advertising
|
Membership
|
Total
|
|
Advertising
|
Membership
|
Total
|
By Product Lines:
|
$2,146
|
$3,918
|
$
6,064
|
|
$
2,146
|
$
3,918
|
$
6,064
|
|
|
|
|
|
|
|
|
|
United States
|
Other
|
Total
|
|
United States
|
Other
|
Total
|
By Geographical Markets:
|
$6,064
|
$-
|
$
6,064
|
|
$
6,064
|
$-
|
$
6,064
|
|
|
|
|
|
|
|
|
|
At a Point in Time
|
Over Time
|
Total
|
|
At a Point in Time
|
Over Time
|
Total
|
By Timing of Revenue Recognition:
|
$2,146
|
$
3,918
|
$6,064
|
|
$2,146
|
$
3,918
|
$
6,064
|
Contract Balances
The following table provides information about contract balances
as of September 30, 2017:
|
Advertising
|
Membership
|
Total
|
|
|
|
|
Accounts receivables
|
$2,074
|
$1,408
|
$
3,482
|
|
|
|
|
Short-term contract assets (deferred contract costs)
|
-
|
$
15,986
|
$
15,986
|
|
|
|
|
Short-term contract liabilities (deferred revenue)
|
-
|
$31,634
|
$31,634
|
|
|
|
|
The Company receives payments from advertising
customers based upon contractual payment terms; accounts receivable are recorded when the right to consideration becomes unconditional
and generally collected within 90 days. The Company generally receives payments from membership 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 generally collected weekly. Contract assets include contract fulfillment costs related to revenue shares owed
to channel partners, which are amortized along with 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 in the period.
Contract acquisition costs and practical
expedients
For contracts that have a duration of less
than one year, the Company follows ASC 606 practical expedients and expenses these costs when incurred; for contracts with life
exceeding one year, which did not apply during the current period, the Company records these costs in proportion to completion
of each completed performance obligation. The Company generally expenses sales commissions when incurred because the amortization
period would have been less than one year. The Company records these costs within general and administrative expenses.
Fixed Assets
Fixed assets are recorded at cost. 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 income and expense 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
|
Website development costs
|
|
|
3 years
|
Intangible Assets
The intangible assets consist of the cost
of a purchased website domain name with an indefinite useful life.
Impairment of Long-Lived Assets
The long-lived assets, consisting of fixed
assets and intangible assets, held and used by the Company are reviewed for impairment no less frequently than annually or whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts
and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed.
Management has determined that there was no impairment in the value of long-lived assets during the period ended September 30,
2017.
Website Development Costs
In accordance with authoritative guidance,
the Company begins to capitalize website and software 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 within the consolidated
statement of operations. The Company places capitalized website and software development assets into service and commences depreciation/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 and software development assets when
the upgrade or enhancement will result in new or additional functionality. Certain website and software development assets are
placed into service and amortized and the Company continues to capitalize costs associated with other website and software development
assets that are still in the development stage.
The Company capitalizes internal labor
costs, including compensation, benefits and payroll taxes, incurred for certain capitalized website and software 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.
Research and Development
Research and development costs are charged
to operations in the period incurred and amounted to $30,776 and $104,095 for the three and nine months ended September 30, 2017.
Research and development costs amounted to $374,944 for the three months ended September 30, 2016.
Fair Value Measurements
Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 820
“Fair Value Measurements and Disclosures”
clarifies that fair value
is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions
that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, FASB ASC 820
establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
|
·
|
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for
identical assets or liabilities in active markets.
|
|
·
|
Level 2 - Include other inputs that are directly or indirectly
observable in the marketplace.
|
|
·
|
Level 3 - Unobservable inputs which are supported by little
or no market activity.
|
The fair value hierarchy also requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In accordance with FASB ASC 820, the Company
measures its derivative liability at fair value. The Company’s derivative liability is classified within Level 3.
The carrying value of other current assets
and liabilities are considered to be representative of their respective fair values because of the short-term nature of those
instruments.
Concentrations of Credit Risk
Cash
The Company maintains cash at a bank where
amounts on deposit may exceed the Federal Deposit Insurance Corporation limit throughout the year. The Company has not experienced
losses in such accounts and believes it is not exposed to significant credit risk regarding its cash.
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 applies FASB ASC 718, “Stock
Compensation,” when recording stock based compensation to employees and directors. The estimated fair value of stock based
awards is recognized as compensation expense over the vesting period of the award. The Company has adopted ASU 2016-09 in 2016
with early application and account for actual forfeitures of awards as they occur.
The fair value of restricted stock awards
by Subsidiary at Inception was estimated on the date of the award using the exchange value used by Integrated and the Subsidiary
to establish the relative voting control ratio in the Recapitalization.
Restricted stock that was subject to an
escrow arrangement and/or a performance condition in conjunction with the Recapitalization was remeasured and fair value was estimated
using the quoted price of our common stock on the date of the Recapitalization. The Company uses a Monte Carlo simulation model
to determine the number of shares expected to be released from the performance condition escrow. Each quarter the Company reevaluates
the number of shares expected to be released from the performance condition escrow until the final determination is made as of
December 31, 2017.
The fair value of fully vested stock awards
is estimated using the quoted price of our common stock on the date of the grant. The fair value of stock option awards is estimated
at grant date using the Black-Scholes option pricing model that requires various highly judgmental assumptions including expected
volatility and option life.
The Company accounts for stock issued
to non-employees in accordance with provisions of FASB ASC 505-50, “Equity Based Payments to Non-Employees.” FASB
ASC 505-50 states that equity instruments that are issued in exchange for the receipt of goods or services should be measured
at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliability
measurable. The measurement date occurs as of the earlier of (a) the date at which a performance commitment is reached or (b)
absent a performance commitment, the date at which the performance necessary to earn the equity instruments is complete (that
is, the vesting date). Equity grants with performance conditions that do not have sufficiently large disincentive for non-performance
may be measured at fair value that is not fixed until performance is complete. The fair value of common stock warrants is estimated
at grant date using the Black-Scholes option pricing model that requires various highly judgmental assumptions including expected
volatility and option life. The Company recognizes expense for equity based payments to non-employees as the services are received.
The Company has specific objective criteria, such as the date of launch of a Channel on the Company’s platform, for determination
of the period over which services are received and expense is recognized.
The Company uses a Monte Carlo simulation
model to determine the number of shares expected to be earned by Channel Partners based on performance obligations to be satisfied
over a defined period which will commence at the launch of a Channel on the Company’s platform.
The Company issues common stock upon exercise
of equity awards and warrants.
Income Taxes
The Company recognizes the tax effects
of transactions in the year in which such transactions enter into the determination of net income regardless of when reported
for tax purposes. Deferred taxes are provided in the financial statements to give effect to the temporary differences which may
arise from differences in the bases of fixed assets, depreciation methods and allowances based on the income taxes expected to
be payable in future years. Deferred tax assets arising primarily as a result of net operating loss carry-forwards, and research
and development credit have been offset completely by a valuation allowance due to the uncertainty of their utilization in future
periods.
The Company recognizes interest accrued
relative to unrecognized tax benefits in interest expense and penalties in operating expense. During the three and nine months
ended September 30, 2017 and the three months ended September 30, 2016, the Company recognized no income tax related interest and
penalties. The Company had no accruals for income tax related interest and penalties at September 30, 2017.
Basic and Diluted 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. Restricted stock is considered outstanding and included
in the computation of basic income or loss per share when underlying restrictions expire and the shares are no longer forfeitable.
Diluted income per 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. Unvested but outstanding restricted stock (which are forfeitable) are included in the diluted
income per share calculation. In a period where there is a net loss, the diluted loss per share is computed using the basic share
count. At September 30, 2017, potentially dilutive shares outstanding amounted to 14,737,558, of which 13,417,951 are not currently
registered and/or subject to future vesting conditions. Included in these totals are 6,663,244 common stock equivalents that must
be exercised which would result in aggregate proceeds from the sale of stock to the Company of $6,735,000.
Risks and Uncertainties
The Company has a limited operating history
and has not generated revenue 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 economies. 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.
Recently Adopted Standards
In May 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (ASC 606) - Revenue from
Contracts with Customers (“ASU 2014-09”), which provides guidance for revenue recognition. This ASU will supersede
the revenue recognition requirements in Topic 605, and most industry specific guidance. The standard’s core principle is
that revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity
should apply the following steps:
Step 1: Identify the contract(s) with
a customer
Step 2: Identify the performance obligations
in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price
to the performance obligations in the contract.
Step 5: Recognize revenue when (or as)
the entity satisfies a performance obligation.
The guidance in ASU 2014-09 also specifies
the accounting for some costs to obtain or fulfill a contract with a customer. ASC 606 requires the Company to make significant
judgments and estimates. ASC 606 also requires more extensive disclosures regarding the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers.
The FASB has also issued several additional
ASUs which amend ASU 2014-09. The amendments do not change the core principle of the guidance in ASC 606.
Public business entities are required
to apply the guidance of ASC 606 to annual reporting periods beginning after December 15, 2017 (2018 for calendar year end reporting
companies), including interim reporting periods within that reporting period. Early adoption is permitted.
The Company has adopted ASC 606 in the
current quarter ended September 30, 2017 and began recognition of revenue from contracts with customers as a result of the launch
of its network operations. 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”.
In November 2015, the FASB issued Accounting
Standards Update No. 2015-17 (ASU 2015-17), Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU
2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. The adoption of ASU 2015-17 did not have any impact on Company’s financial statement
presentation or disclosures.
Recent Issued Accounting Pronouncements
In February 2016, the FASB issued ASU
2016-02, Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC Topic 840. ASU 2016-02
is intended to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding
lease liabilities on the balance sheet. ASU 2016-02 will continue to classify leases as either finance or operating, with
classification affecting the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted.
ASU 2016-02 is required to be applied with a modified retrospective approach to each prior reporting period presented with various
optional practical expedients. The Company is currently assessing the potential impact of adopting ASU 2016-02 on its financial
statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 refines how
companies classify certain aspects of the cash flow statement in regards to debt prepayment, settlement of debt instruments, contingent
consideration payments, proceeds from insurance claims and life insurance policies, distribution from equity method investees,
beneficial interests in securitization transactions and separately identifiable cash flows. ASU 2016-15 is effective for
annual periods beginning after December 15, 2017, and interim periods within those fiscal years. No early adoption is permitted.
Management is currently assessing the potential impact of adopting ASU 2016-15 on the financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU provides clarity and reduces both
(1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718 to a change in terms or conditions
of a share-based payment award. The amendments in this ASU are effective for public entities for fiscal years and interim periods
beginning after December 15, 2017, with early adoption permitted. The ASU should be applied prospectively on and after the effective
date. The Company is evaluating the impact of this ASU.