UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the Securities Exchange Act of
1934
Date
of Report (Date of Earliest event Reported): February 16, 2021,
(January 27, 2021)
FORCE
PROTECTION VIDEO EQUIPMENT CORP.
(Exact
name of registrant as specified in its charter)
Florida |
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000-55519 |
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45-1443512 |
(State
or other jurisdiction of
incorporation or organization) |
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(Commission
File
Number)
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(IRS
Employer
Identification
No.)
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2629
Townsgate Road, Suite 215
Westlake
Village, CA 91361
(Address
of principal executive offices )
(714)
312-6844
(Registrant’s
telephone number, including area code)
Check
the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant
under any of the following provisions (see General
Instruction A.2. below):
[ ] |
Written
communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425) |
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[ ] |
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a -12) |
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[ ] |
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d -2(b)) |
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[ ] |
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e -4(c)) |
Title
of Class |
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Trading
Symbol |
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Name
of Each Exchange on Which Registered |
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Indicate
by check mark whether the registrant is an emerging growth company
as defined in in Rule 405 of the Securities Act of 1933 (§230.405
of this chapter) or Rule 12b-2 of the Securities Exchange Act of
1934 (§240.12b-2 of this chapter).
Emerging
growth company [ ]
If an
emerging growth company, indicate by checkmark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
[ ]
EXPLANATORY
NOTE
Capitalized terms not
otherwise described in this Explanatory Note will have the meanings
ascribed to them elsewhere in this Current Report on Form 8-K. On
October 5, 2020, the Company disclosed in a Current Report on Form
8-K that it entered into the Share Exchange Agreement. In order to
consummate the transaction, the Company was required to file an
amendment to its articles of incorporation authorizing one trillion
(1,000,000,000,000) shares of Common Stock (“Amended Articles”). On
September 30, 2020, the holders of a majority of the voting power
of the Company’s outstanding capital stock took action by way of a
written consent and approved the Amended Articles.
On January
27, 2021, BIG Token announced the closing of the Share Exchange.
Shortly after the announcement, the Company ascertained that it had
failed to file the Amended Articles prior to such announcement and
thus there were insufficient authorized shares available to
consummate the transaction on the date of the announcement. As a
result, the Company filed the Amended Articles subsequent to
January 27, 2021 and the Company received approval from the
Secretary of State of Florida that the Amended Articles were filed
on February 3, 2021. As a result, the Company closed the Share
Exchange on February 4, 2021.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Except
for historical information, this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such forward-looking statements involve risks and uncertainties,
including, among other things, statements regarding our business
strategy, future revenues and anticipated costs and expenses. Such
forward-looking statements include, among others, those statements
including the words “expects,” “anticipates,” “intends,” “believes”
and similar language. Our actual results may differ significantly
from those projected in the forward-looking statements. Factors
that might cause or contribute to such differences include, but are
not limited to, those discussed in the sections “Description of
Business,” “Risk Factors” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” You should
carefully review the risks described in this Current Report on Form
8-K and in other documents we file from time to time with the
Securities and Exchange Commission including our Annual Reports on
Form 10-K and Quarterly Reports on Form 10-Q. You are cautioned not
to place undue reliance on the forward-looking statements, which
speak only as of the date of this report. We undertake no
obligation to publicly release any revisions to the forward-looking
statements or reflect events or circumstances after the date of
this document.
Although
we believe that the expectations reflected in these forward-looking
statements are based on reasonable assumptions, there are a number
of risks and uncertainties that could cause actual results to
differ materially from such forward-looking statements.
All
references in this Form 8-K to the “Company,” “we,” “us” or “our”
refer to Force Protection Video Equipment Corporation and our
wholly owned subsidiary BIG token, Inc. on a consolidated basis.
All references to “Common Stock” or “Common Shares” refers to the
common stock, $0.0001 par value, of Forced Protection Video
Equipment. All references to “BIG Token Application” refers to our
consumer based platform, technologies offer and services used to
identify and reach target consumers.
Item
1.01 |
Entry
into a Material Definitive Agreement. |
On
February 4, 2021, Force Protection Video Equipment Corporation (the
“Company”) and SRAX, Inc. (“SRAX”) completed the share exchange
transaction (“Share Exchange”) as described in the share exchange
agreement (“Exchange Agreement”) entered into by and between the
Company, SRAX, and Paul Feldman (the Company’s CEO and sole
director) on September 30, 2020. The Exchange Agreement and
proposed Share Exchange was disclosed in our Current Report on Form
8-K that was filed with the Securities and Exchange Commission (the
“Commission” or “SEC”)) on October 5, 2020.
Pursuant
to the Share Exchange, we acquired all of the outstanding capital
stock of BIG Token, Inc. (“BIG Token”), a wholly owned subsidiary
of SRAX. As a result, we became a majority owned subsidiary of
SRAX, BIG Token became our wholly owned subsidiary and Force
Protection Video Equipment Corporation adopted BIG Token’s business
plan. In connection with the Share Exchange, we entered into the
following agreements:
Amendment
to Share Exchange Agreement
On
January 27, 2021, the Company amended the Exchange Agreement
(“Exchange Amendment”) pursuant to which, on a post-closing issued
and outstanding basis, and not taking into account any shares of
Common Stock issuable pursuant to the Company’s current Series B
Preferred Stock offering or shares of Common Stock issuable upon
the exercise or conversion of common stock equivalents: (i) SRAX
will receive 88.90% of the issued and outstanding Common Stock,
(ii) Paul Feldman will receive 0.50% of the issued and outstanding
Common Stock in consideration for past due and unpaid deferred
compensation, and (iii) Red Diamond Partners, LLC (“Red Diamond”)
will receive 7,000,000,000 shares of unrestricted Common Stock as
well as, 8,318 shares of the Company’s Series C Preferred Stock,
convertible into approximately 12,864,419,313 shares of Common
Stock, collectively representing approximately 10.1% of the Company
on a fully diluted as converted basis. Please see the section
below entitled—Exchange Agreement with Red Diamond Partners LLC
for further information regarding this
transaction.
Additionally,
the Exchange Amendment provides that in the event the Company sells
equity securities at a pre-money valuation of less than
$10,000,000, resulting in SRAX owning less than 70% of the voting
power of the issued and outstanding capital stock of the Company
(on a fully diluted basis) post transaction, then SRAX will receive
additional shares of Common Stock in such amount to make SRAX’s
ownership percentage of the Company post transaction, equal to its
ownership percentage immediately prior to such transaction (the
“Anti-Dilution Protection”). Such Anti-Dilution Protection will
lapse upon the Company raising aggregate funds of $5,000,000 at any
time after September 30, 2020 or upon the Company’s securities
being listed on a national exchange or quotation system.
Transition
Services Agreement
On
January 27, 2021, the Company entered into a Transition Services
Agreement (“TSA”) with SRAX and BIG Token. Pursuant to the TSA,
SRAX will provide the Company with certain transitional related
services for such period of time as needed. Subsequent to the Share
Exchange, the Company and BIG Token will pay SRAX, on a monthly
basis, for certain services required to run the BIG Token business
and platform separately from SRAX (as described in Item of this
Current Report on Form 8-K (the “BIG Token Business”)), including
but not limited to: (i) general and administrative services, (ii)
finance and accounting services, (iii) technical operations, (iv)
software services, (v) human resources services, (vi) use of
facilities, (vii) and other services on an as needed basis if
requested by the Company.
The
TSA can be terminated by the Company upon notice to SRAX, or by the
Company or SRAX upon 15 days-notice for certain uncured breaches,
or in the event of other conditions as more fully set forth in the
TSA.
Master
Separation Agreement
On
January 27, 2021, we entered into a Master Separation Agreement
(“MSA”) with SRAX. Pursuant to the MSA, at or prior to the closing
of the Share Exchange, (a) SRAX will transfer all of the BIG Token
assets required to run the BIG Token Business including but not
limited to (i) SRAXauto, SRAXcore, and SRAXshopper advertising
tools and software, (ii) the BIG Token platform, (iii) associated
BIG Token software and hardware; (iv) contracts associated with BIG
Token, (v) intellectual property rights associated with BIG Token,
(vi) bank accounts and certain inventory of BIG Token, and (vii)
other assets that would be reflected on the carve out balance sheet
of BIG Token contained in Item 9.01 of this Current Report on Form
8-K (the “BIG Token Balance Sheet”); and (b) certain liabilities
and obligations related to the BIG Token Business including but not
limited to (v) liabilities contained in the BIG Token Balance
Sheet, (w) certain BIG Token accounts payable, (x) liabilities
resulting from BIG Token contracts, (y) liabilities arising out of
third-party claims against the BIG Token Business and its assets,
and (z) other liabilities that arise out of or result from the BIG
Token Business prior or subsequent to the closing of the Share
Exchange. SRAX and the Company further agreed to take such steps
necessary to facilitate the transfers, including continued efforts
on each party if there is any delay in the assignment of any asset
or liability.
The
Company and SRAX further agreed to release each other from claims
related to their respective assets and liabilities and to indemnify
each other against claims related thereto, as more fully set forth
in the MSA.
The
MSA also requires, for as long as SRAX is required to consolidate
our results of operations and financial position, that we agree to:
(i) prepare its annual and quarterly financial statements in
accordance with the general accepted accounting principles (GAAP),
(ii) undertake certain internal controls and procedures over
financial reporting, (iii) provide our preliminary financial
statements to SRAX form review, (iv) file all required quarterly
and annual reports with the Commission on a timely basis, (v)
provide SRAX with all annual budgets and periodic financial
projections related to our operations on a consolidated basis, (vi)
cooperate with SRAX on all public filings, press releases, and
proxy statements filed or disseminated by SRAX as needed, and (vii)
to use the same certified public accountant as SRAX.
Provided
that SRAX owns at least fifty percent (50%) of the total voting
power of our capital stock, without the prior consent of SRAX, we
(i) will not restrict the ability of SRAX to sell, transfer or
dispose of the Common Stock, (ii) will not breach certain
contraction obligation to which SRAX is a party to and pursuant to
which we receive a benefit pursuant to the TSA, and (iii) will not
make any acquisitions or dispositions of businesses or assets in
excess of $3,000,000 in the aggregate, or acquire shares, or
interest in any company or partnership or loans in excess of
$3,000,000 in the aggregate.
Separation
Agreement with Paul Feldman
On
January 27, 2021, the Company entered into a separation agreement
with Paul Feldman (“Separation Agreement”). Pursuant to the
Separation Agreement, (i) Mr. Feldman’s employment with the Company
was terminated effective January 27, 2021, (ii) Mr. Feldman
received 841,184,289 shares of Common Stock in full satisfaction of
any past due and unpaid compensation, and (iii) the parties
mutually released each other from all claims associated with Mr.
Feldman’s employment.
Common
Stock Purchase Warrant issued to certain SRAX Debenture
Holders
Pursuant
to SRAX’s June 30, 2020 convertible debt offering (“Debt
Offering”), as a condition to the divestiture of BIG Token by SRAX,
we assumed the obligation to issue an aggregate of 25,568,064,462
Common Stock purchase warrants (the “FPVD Warrants”) to: (i)
purchasers in the Debenture Offering and (ii) to certain SRAX
warrant holders as consideration for amending their outstanding
warrants to remove certain fundament transaction adjustments. The
FPVD Warrants have a term of three (3) years, an exercise price of
$0.00005844216 per share, and contain adjustments in the event of
stock dividends and splits, subsequent rights offerings, pro rata
distributions, and certain fundamental transactions as more fully
described in the FPVD Warrants.
Additionally,
the FPVD Warrants provide for price protection in the event that we
issue Common Stock or Common Stock equivalents at an imputed
pre-money valuation of less than $10,000,000 (“Qualifying Dilutive
Issuance”). Upon the occurrence of a Qualifying Dilutive Issuance,
(i) the number of shares underlying the FPVD Warrants will increase
so that the holder of the FPVD Warrants will maintain the same
percentage ownership immediately after the Qualified Dilutive
Issuance as it did immediately prior thereto and (ii) the exercise
price will be reduced so that the aggregate exercise price will
remain unchanged after taking into account the additional shares.
The adjustments to exercise price and number of shares underlying
the FPVD Warrants will lapse and be of no further force or
consequence upon the earlier of (y) the Company raising aggregate
proceeds of $5,000,000 at any time after the issuance of the FPVD
Warrants (with the holders receiving the benefit of such protection
afforded by a Qualifying Dilutive Issuance until the first dollar
over $5,000,000 is raised), and (z) the Common Stock becoming
listed on a national exchange or quotation system. The FPVD Warrant
provide for cashless exercise at any time after six (6) months of
the issuance date in the event that the shares underlying the FPVD
Warrants are not subject to an effective registration
statement.
Exchange
Agreement with Red Diamond Partners LLC
On
January 27, 2021, the Company entered into an exchange agreement
(“Debt Exchange Agreement”) with Red Diamond. Pursuant to the Debt
Exchange Agreement, Red Diamond exchanged an aggregate of $815,520
plus accrued interest for (i) 7,000,000,000 shares of unrestricted
Common Stock and (ii) 8,313 shares of Series C Convertible
Preferred Stock, convertible into approximately 12,864,419,313
shares of Common Stock (“Series C Preferred Stock”). The terms of
the Series C Preferred Stock are more fully described in Item 5.03
of this Current Report on Form 8-K. The Debt Exchange Agreement
also provides that for a period of 6 months, Red Diamond will be
limited to selling 20% of the five-day trailing average daily
volume of the Common Stock.
Registration Rights
Agreement with SRAX
On January
28, 2021, the Company entered into a registration rights agreement
(“SRAX RRA”) with SRAX pursuant to which SRAX was provided with
“Demand” and “Piggyback” registration rights with respect to
149,562,566,534 shares of Common Stock issued upon completion of
the Share Exchange.
The
foregoing summaries of each of the Exchange Amendment, TSA, MSA,
Separation Agreement, FPVD Warrant, Debt Exchange Agreement, and
SRAX RRA are qualified in their entirety by references to the full
text of each such document, each of which is attached hereto as
Exhibits 10.01, 10.02, 10.03, 10.04, 4.01, 10.05, and 10.09
respectively, and each of which is incorporated herein in its
entirety by reference.
Item
2.01 |
Completion
of Acquisition or Disposition of Assets. |
As
previously disclosed, on September 30, 2020, we entered into a
share exchange agreement (the “Share Exchange Agreement”) with Paul
Feldman, and SRAX to acquire BIG Token. The Share Exchange closed
on February 4, 2021 The transaction resulted in a change of control
of the Company and the appointment of a new board of directors and
officers as described in Item 5.02 of this Current report on Form
8-K.
Item
1. Business.
Prior
to the completion of the Share Exchange, BIG Token was an operating
segment of SRAX. On February 4, 2021 we completed the Share
Exchange. As a result, BIG Token became our wholly owned subsidiary
and we adopted its business plan. We anticipate formally changing
our name to BIG Token in the future. In connection with the Share
Exchange, we also entered into certain agreements with SRAX
including but not limited to the TSA and MSA. For description of
the Share Exchange, Exchange Agreement, TSA and MSA, as well as a
description of the other agreements entered into in connection with
the Share Exchange, see the Item 1.01 of this Current Report on
Form 8-K entitled “Entry into a Material Definitive Agreement” and
the section of this Item 2.01 entitled “Certain
Relationships and Related Party Transactions—Relationship with
SRAX” The terms of these agreements may be more or less
favorable to us than if they had been negotiated with unaffiliated
third parties. See the section entitled “Risk Factors—Risks
Related to Our Separation from SRAX” Contained in this Section
2.01 below.
We
were initially incorporated as M Street Gallery, Inc. in March of
2011, in the state of Florida. On September 25, 2013, we changed
our name to Enhance-Your-Reputation.com, Inc. On February 1, 2015,
we changed our name to Force Protection Video Equipment
Corporation. Our headquarters are located in Westlake Village,
California, but we work as a virtually distributed
organization.
Company
Overview
We
are a data technology company offering a consumer based mobile
application that allows consumers to own and earn from their
digital data. We generate revenue by anonymizing the data, and
using it to glean consumer insights that we sell to brand
advertisers. Our consumer based platform and technologies offer
tools and services to identify and reach the target consumers of
our brand advertisers. Our technologies assist our clients in
identifying their core consumers and such consumers’
characteristics across various channels in order to discover new
and measurable opportunities that amplify the performance of
marketing campaigns in order to maximize a return on marketing
spend.
When consumers download our app, we ask them some questions, engage
them with surveys, and ask them to connect their various online
accounts including their bank accounts, credit card accounts, and
social media accounts. Based on the amount of information they
provide directly by answering questions or taking surveys, or
passively, by connecting accounts, we’re able to track more than
4,000 attributes per consumer.
We derive our revenues from taking the data we collect, and
deriving insights and audiences that we use to increase the
efficiency of the online advertising of our clients. We then share
the revenue generated with our consumers based on their activity
and various other parameters.
To date, there have been more than 16 million accounts registered
on BIGtoken. The vast majority of our registrations have been
driven by referrals from existing users who get rewards for driving
new users. Of the 16 million, we’ve “verified” over 9 million
through emails and bot detection techniques.
Our
Market Opportunity – Data Economy
The
global big data market is forecasted to grow to $103B by 2027, more
than double its market size in 2018. A consumer’s digital footprint
includes everything they search for, view, read, listen to,
purchase, like or comment on.
Data
spending keeps rising - The majority of survey respondents (69.2%)
said their organizations increased spending on data and related
services in 2018 (relative to 2017), while over three-fourths
(78.2%) anticipate investing even more in the coming
year.

Data
spending keeps rising - The majority of survey respondents (69.2%)
said their organizations increased spending on data and related
services in 2018 (relative to 2017), while over three-fourths
(78.2%) anticipate investing even more in the coming
year.
Companies
are prioritizing data-driven insights in order to develop marketing
strategy and allocate marketing spend
Government
Regulation On Data Privacy Is Driving Major Tech Companies To
Restrict Or Eliminate Traditional Data Collection
Techniques
Regulation
is changing the way businesses and tech can use data. In 2016, the
European Union (EU) passed the General Data Protection Regulation
(GDPR) to give individuals control over their personal data and to
unify regulations within the EU. Other seminal regulatory events
include the 2018 passage of the California Consumer Privacy Act
(CCPA) intended to enhance privacy rights and consumer protection
for Californians.
In response to the changing global regulatory environment around
data privacy, major tech companies are changing how they allow
their customers to collect user data. Notably, the major browsers,
including Google’s Chrome and Apple’s Safari, are eliminating, or
severely restricting, the use of 3rd party cookies. Those cookies
have been a major way that brands have been able to identify and
market to consumers. In addition, in iOS 14, Apple is
changing the
Identifier For Advertiser
(IDFA) tags used by mobile apps to identify users from opt out, to
opt-in.
As a result of the intensifying regulatory landscape, and the tech
industry’s response, first-party
opt-in data, like that collected by BIGtoken, is becoming
increasingly valuable. As we scale our compliant first party data
set, BIGtoken will be strongly positioned to capitalize on the
rapidly evolving data marketplace. We are currently focused on
increasing registered users on the platform, increasing the
engagement of our users, monetizing our data driven insights, and
rewarding our users for sharing their data.
Given
the massive tailwinds in data privacy, and our focus on first-party
opt-in data, we believe BIGToken is well positioned to accelerate
growth as we play an increasingly larger role in ensuring data
privacy is treated as a human right.
For
additional information about government regulation applicable to
our business, see Risk Factors in Part I, Item 1A.
Our
Competitive Advantages — What Sets Us Apart
With
the changing data privacy landscape, BIGtoken’s product offering
is well positioned to provide marketing solutions compliant
with these new and evolving regulations. BIGtoken’s product
offering provides marketers with data solutions that traditional
data providers cannot:
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Data
accuracy for research and ad targeting |
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Manage
reach and frequency with greater accuracy across multiple media
platforms |
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Access
to consumers at scale for research, measurement, and
attribution |
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Speed
of execution for research and new targeting cohorts |
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Ability
to target advertising to consumers based on identity without
cookies |
Consumers
are increasingly demanding data privacy, compensation for their
data, and transparency and choice of how their data is used. The
BIGtoken platform is focused on providing consumers with the tools
they need to achieve their unique data requirements,
including:
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Compensation |
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Consumers
earn when they opt-in to sharing their data and when that data is
purchased. |
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Choice |
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Consumers
decide what data is shared & who can buy it. |
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Transparency |
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Consumers
are fully aware of how their data is used.
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Our
Growth Strategy
Our
business is currently based on using our mobile app to aggregate
users who opt-in to providing us their data via direct and passive
actions, anonymizing that data, and using that data to provide
unique consumer insights that enable marketers to advertise more
efficiently. We believe that as the information gathered through
the BIGToken platform scales, we will be able to introduce new
products, and monetize our growing user base at increasingly higher
rates.
We
are currently focused on increasing registered users on the
platform, increasing the engagement of our users, monetizing our
data driven insights, and rewarding our users for sharing their
data. As part of this strategy, we continue to explore partnership
opportunities that would allow us to leverage the capabilities of
the BIGtoken platform to effectively grow the platform and increase
and enhance our user experience and user rewards /
compensation.
Examples
of how we plan to use BIGToken and the proprietary consumer data
derived therefrom include:
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The
use of BIGToken user surveys and the sale of such information
received from surveys. |
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The
creation and management of targeted rewards and loyalty programs
based on information and buying trends ascertained by data captured
on our BIGToken platform. We
offer this solution both on and off the BIGtoken
app. |
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The
ability to assist our customers in conducting market research based
on analytics received from users of the BIGtoken
platform. |
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The
ability to identify specific audiences for our customers and to
target questions, surveys and data analytics geared toward our
customers’ products / industries. Additionally, if we are unable to
scale the needed information for a customer’s target audience, we
may utilize our proprietary analytics to gain insight to further
focus and refine user segments that need to be targeted in order to
optimize data and media spend. |
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The
use of Lightning Insights that allow our customers to conduct
research around specific audience groups through both long and
short research studies. |
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The
creation of customized loyalty programs that utilize rewards to
drive consumer purchasing habits.
●
We plan to increasingly embrace crypto,
including, but limited to, offering to reward our users with
Bitcoin and other cryptocurrency, offering to pay our employees and
vendors with crypto, offering our users digital wallets to store
their crypto, enabling our users to store rewards in interest
bearing stablecoins, holding cryptocurrency in our Treasury,
developing our own Layer One Protocol optimized for users to own
and monetize data, developing our own cryptocurrency to be used as
rewards.
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Marketing
and sales
We
market our services through our in-house sales team, with a focus
today on the largest brand advertisers with the biggest advertising
budgets. Our customers include 8 of the 10 largest brand
advertisers, each poised to dramatically increase their spend with
BIGtoken in 2021. We believe that our focus on the largest brand
advertisers will not only drive meaningful revenue growth but will
help build the BIGtoken brand as the leader in privacy focused, opt
in, first-party data, positioning us well when we expand our focus
to mid-market agencies and brands.
On
the client side, our in-house marketing is focused on positioning
BIGtoken as a thought leader in data privacy, via social media,
including Facebook, LinkedIn and Twitter, public relations (PR),
industry events and the creation of white papers which assist in
our marketing efforts and are used as lead generation tools for our
sales team.
On
the consumer side, we are focused on marrying our privacy
leadership, with a reward system that provides meaningful value to
our users who provide us with meaningful data.
Intellectual
property
We
currently rely on a combination of trade secret laws and
restrictions on disclosure to protect our intellectual property
rights. Our success depends on the protection of the proprietary
aspects of our technology as well as our ability to operate without
infringing on the proprietary rights of others. We also enter into
proprietary information and confidentiality agreements with our
employees, consultants and commercial partners and control access
to, and distribution of, our software documentation and other
proprietary information. We have one Trademark,
“BIGtoken.”
Competition
We
operate in a highly competitive digital media and ad tech
environment. We compete based on our ability to: assist our
customers in obtaining the best available prices, data, and
analytics, our customer service and, the quality and accessibility
of our innovative products and service offerings. We believe our
platform provides for a competitive advantage. We expect an
increasing number of other companies to provide similar services,
leading to an increasingly competitive landscape.
Management
Opportunities, Challenges and Risks
As of
February 14, 2021, BIG Token had 50 full-time employees.
Item
1A. Risk Factors.
RISK
FACTORS
Investing
in our Common Stock involves substantial risk. You should carefully
consider the risks and uncertainties described below, together with
all of the other information in this Current Report, including our
financial statements and the related notes included elsewhere in
this Current Report, before deciding whether to invest in shares of
our common stock. We describe below what we believe are currently
the material risks and uncertainties we face, but they are not the
only risks and uncertainties we face. Additional risks and
uncertainties that we are unaware of, or that we currently believe
are not material, may also become important factors that adversely
affect our business. If any of the following risks actually occur,
our business, financial condition, results of operations and future
prospects could be materially and adversely affected. In that
event, the market price of our common stock could decline and you
could lose part or all of your investment.
Risks
Related to the COVID-19 Pandemic
The COVID-19 pandemic, or other epidemic and pandemic diseases or
governmental or other actions taken in response to them, could
significantly disrupt our business.
Outbreaks
of epidemic, pandemic or contagious diseases, such as the recent
SARS-CoV-2 virus, or coronavirus, which causes coronavirus disease
2019, or COVID-19, or, historically, the Ebola virus, Middle East
Respiratory Syndrome, Severe Acute Respiratory Syndrome or the H1N1
virus, could significantly disrupt our business. These outbreaks
pose the risk that we or our employees, contractors, and other
partners may be prevented from conducting business activities for
an indefinite period of time due to spread of the disease within
these groups, or due to restrictions that may be requested or
mandated by governmental authorities. Business disruptions could
include disruptions or restrictions on our ability to travel, as
well as temporary closures of all or part of our facilities and the
facilities of our partners. As the COVID-19 pandemic rapidly
evolves and spreads, both across the United States and through much
of the world, we continue to actively monitor the impact that
COVID-19 is having and may have on our business.
As a
result of the COVID-19 pandemic, the state of California, where our
corporate offices are located, and many counties where our
employees reside, have issued and may in the future issue orders
for all residents to remain at home, except as needed for essential
activities, and have placed restrictions on the scope and conduct
of business activities. As a result, we have implemented work from
home policies for a majority of our employees that may continue for
an indefinite period. We have taken steps to ensure the safety of
our patients and employees, while working to ensure the
sustainability of our business operations as this unprecedented
situation continues to evolve.
In
addition, a significant outbreak of epidemic, pandemic or
contagious diseases in the human population, such as the global
COVID-19 pandemic, could result in a widespread health crisis and
adversely affect the economies and financial markets of many
countries, resulting in an economic downturn that could affect
demand for our current or future products.
While
the potential economic impact brought by, and the duration of,
COVID-19 may be difficult to assess or predict, a continuing
widespread pandemic could result in significant disruption of
global financial markets, reducing our ability to access capital,
which could in the future negatively affect our liquidity. In
addition, a recession or market correction resulting from the
spread of COVID-19 could materially affect the value of our common
stock.
Risks
Related to Our Business
We have a history of operating losses and there are no assurances
we will report profitable operations in the foreseeable
future.
We
have losses from operations of $15,981,000 and $8,916,000 for the
years ended December 31, 2018 and 2019, respectively, and
$6,851,000 and $12,270,000 for the nine-month period ended
September 30, 2020 2019, respectively. Our future success depends
upon our ability to continue to grow our revenues, contain our
operating expenses and generate profits. We do not have any
long-term agreements with our customers. There are no assurances
that we will be able to increase our revenues and cash flow to a
level which supports profitable operations. We may continue to
incur losses in future periods until such time, if ever, as we are
successful in significantly increasing our revenues and cash flow
beyond what is necessary to fund our ongoing operations and pay our
obligations as they become due. If we are not able to grow,
increase revenue and begin generating consistent profits, it is
unlikely we will be able to generate sufficient cash from
operations to pay our operating expenses and service our debt
obligations, or report profitable operations in future
periods.
We may not be able to continue as a going concern if we do not
obtain additional financing.
We have
incurred losses since our inception and have not demonstrated an
ability to generate revenues from the sales of our proposed
products. Our ability to continue as a going concern is dependent
on raising capital from the sale of our common stock and/or
obtaining debt financing. Our cash, cash equivalents and short-term
investment balance as of September 30, 2020 was approximately
$92,000. At the closing of the Share Exchange on February 4, 2021,
we gained access to approximately $1,000,000 of previously
encumbered cash pursuant to the sale of the Company’s Series B
Preferred Stock, previously announced on October 26, 2020. Based on
our cash, cash equivalents and short term investments, as well as
the proceeds from our private placement, as well as our current
expected level of operating expenditures, we expect to be able to
fund our operations until February 28, 2021. Our ability to remain
a going concern is wholly dependent upon our ability to continue to
obtain sufficient capital to fund our operations. Accordingly,
despite our ability to secure capital in the past, there can be no
assurance that additional equity or debt financing will be
available to us when needed or that we may be able to secure
funding from any other sources. In the event that we are not able
to secure funding, we may be forced to curtail operations, delay or
stop ongoing clinical trials, cease operations altogether or file
for bankruptcy.
We will need to raise additional capital to continue
operations.
We have
historically operated as a business unit of SRAX and accordingly,
SRAX has funded our operations. As of September 30, 2020, we had
minimal cash or cash equivalents or short-term investment. On
February 4, 2021, upon the closing of the Share Exchange, we gained
access to approximately $1,000,000 of previously encumbered
capital. The funds were raised pursuant to our October 2020 private
offering of our securities and were restricted until the closing of
the Share Exchange. We anticipate that based upon our cash position
on September 30, 2020 and taking into account the $1,000,000 in
cash that we received in February 2021, we will be able to fund our
operations until February 28, 2021. We cannot assure you that we
will be able to secure additional capital through financing
transactions, including issuance of debt. Our inability to operate
profitably, or secure additional financing will materially impact
our ability to fund our current and planned operations.
We
have spent and expect to continue spending substantial cash in the
execution of our business plan and the development of the BIG Token
platform. We cannot assure you that financing will be available if
needed. If additional financing is not available, we may not be
able to fund our operations, develop or enhance our product
offerings, take advantage of business opportunities or respond to
competitive market pressures. If we exhaust our cash reserves and
are unable to secure additional financing, we may be unable to meet
our obligations which could result in us initiating bankruptcy
proceedings or delaying or eliminating some or all our research and
product development programs.
Our failure to maintain an effective system of internal control
over financial reporting may result in the need for us to restate
previously issued financial statements. As a result, current and
potential stockholders may lose confidence in our financial
reporting, which could harm our business and value of our
stock.
Or
management has determined that, as of September 30, 2020, we did
not maintain effective internal controls over financial reporting
based on criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal
Control-Integrated Framework as a result of identified material
weaknesses in our internal control over financial reporting. A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement
of the company’s annual or interim financial statements will not be
prevented or detected on a timely basis.
Our auditors have expressed substantial doubt about our ability to
continue as a going concern.
Our
auditors’ report on our December 31, 2019 consolidated financial
statements expresses an opinion that our capital resources as of
the date of their audit report were not sufficient to sustain
operations or complete our planned activities for the upcoming year
unless we raised additional funds. Our current cash level raises
substantial doubt about our ability to continue as a going concern
past the beginning of the second quarter of 2021. If we do not
obtain additional capital by such time, we may no longer be able to
continue as a going concern and may cease operation or seek
bankruptcy protection.
If we are unable to successfully retain and integrate a new
management team, our business could be harmed.
We have historically operated as a business unit of SRAX. Our
success depends largely on the development and execution of our
business strategy by our senior management team. Effective February
16, 2021, Lou Kerner was appointed Chief Executive Officer. Our
success depends largely on the development and execution of our
business strategy by our senior management team. We currently have
a limited executive team which may adversely affect our business.
Additionally, the loss of any members or key personnel would likely
harm our ability to implement our business strategy and respond to
the rapidly changing market conditions in which we operate. There
may be a limited number of persons with the requisite skills to
serve in these positions, and we cannot assure you that we would be
able to identify or employ such qualified personnel on acceptable
terms, if at all. We cannot assure you that management will succeed
in working together as a team. In the event we are unsuccessful,
our business and prospects could be harmed.
We depend on the services of our executive officers and the loss of
any of their services could harm our ability to operate our
business in future periods.
Our
success largely depends on the efforts and abilities of our or
Chief Executive Officer, Lou Kerner. We are a party to an
employment agreement with Mr. Kerner. Although we do not expect to
lose his services in the foreseeable future, the loss of any of
them could materially harm our business and operations in future
periods until such time as we were able to engage a suitable
replacement.
We have no operating history as a standalone entity or management
team as presently configured which results in a high degree of
uncertainty regarding our ability to effectively operate our
business.
Our
limited staff, operating history as well as our recently appointed
management team means that there is a high degree of uncertainty
regarding our ability to:
|
● |
develop
and commercialize our technologies and proposed
products; |
|
● |
identify,
hire and retain the needed personnel to implement our business
plan; |
|
● |
manage
growth; or |
|
● |
respond
to competition. |
No
assurances can be given as to exactly when, if at all, we will be
able to develop our business or take the necessary steps to derive
net income.
The employment contract of Lou Kerner contains anti-termination
provisions which could make changes in management difficult or
expensive.
We
have entered into an employment agreement with Lou Kerner, our
Chief Executive Officer. This agreement may require the payment of
severance in the event he ceases to be employed. The provision
makes the replacement of Mr. Kerner costly and could cause
difficulty in effecting any required changes in management or a
change in control.
We may be required to expend significant capital to redeem BIGToken
Points which will negatively impact our ability to fund our core
operations.
Users
of BIGToken receive points for undertaking certain actions on the
platform that may be redeemed directly for cash from us, with such
value as determined by management. Accordingly, we are currently
obligated to redeem users’ points which are earned on BIGToken. We
are currently redeeming each point for up to $0.01, subject to the
user meeting certain conditions. As of September 30, 2020, we
recorded a contingent liability for future point redemptions equal
to approximately $263,000 and we have redeemed an aggregate amount
of approximately $700,000. As of September 30, 2020, we had
approximately 16 million application downloads. If our users
continue to increase, we will be required to have enough cash
reserves to redeem points held by our qualified users for cash.
There can be no assurance that we will have enough cash reserves,
or if we do have sufficient cash, if we will be able to continue to
fund our other business obligations and operational
expenses.
If our efforts to attract and retain BIGToken users are not
successful, our number of users and the amount of data collected
could fail to reach critical mass, grow or decline and our
potential for BIGToken to earn revenues may be materially
affected.
We
will be dependent on advertisers to pay us for access to user data.
We must attract users to grow the amount of accessible data and
make it attractive to these third parties. If the public does not
perceive our mission or our services to be reliable, valuable or of
high quality, we may not be able to attract or retain users and
create a critical mass of data which will impact our ability to
earn revenues which could have a materially adversely affected
us.
Natural disasters, epidemic or pandemic disease outbreaks, trade
wars, political unrest or other events could disrupt our business
or operations or those of our development partners, manufacturers,
regulators or other third parties with whom we conduct business now
or in the future.
A
wide variety of events beyond our control, including natural
disasters, epidemic or pandemic disease outbreaks (such as the
recent novel coronavirus outbreak), trade wars, political unrest or
other events could disrupt our business or operations or those of
our manufacturers, regulatory authorities, or other third parties
with whom we conduct business. These events may cause businesses
and government agencies to be shut down, supply chains to be
interrupted, slowed, or rendered inoperable, and individuals to
become ill, quarantined, or otherwise unable to work and/or travel
due to health reasons or governmental restrictions. For example,
California recently ordered most businesses closed, mandating
work-from-home arrangements, where feasible, in response to the
coronavirus pandemic. These limitations could negatively affect our
business operations and continuity and could negatively impact
ability to timely perform basic business functions, including
making SEC filings and preparing financial reports. If our
operations or those of third parties with whom we have business are
impaired or curtailed as a result of these events, the development
and commercialization of our products and product candidates could
be impaired or halted, which could have a material adverse impact
on our business.
Challenges in acquiring user data could adversely affect our
ability to retain and expand BIGToken, and therefore could
materially affect our business, financial condition and results of
operations.
In
order to expand BIGToken, we must continue to expend resources to
make the submission of user data as user-friendly as possible. We,
and our users, may face legal, logistical, cultural and commercial
challenges in procuring user data. Additionally, once such data is
obtained, if the process for validation and collection of rewards
may be perceived as too cumbersome and discourage potential users
from submission. We may need to expend significant resources on
user interfaces for evolving platforms, such as mobile devices.
Inconveniences to our users or potential users at any stage of the
process may materially challenge our growth.
If we fail to ensure that the user data derived from BIGToken is of
high quality, our ability to attract customers or monetize the data
may be materially impaired.
The
reliability of our user data depends upon the integrity and the
quality of the process of accepting user data into BIGToken. We
will take certain measures to validate user data submitted by our
users and potential users to assure a high quality of data in
BIGToken and generally confirming that data is submitted in
accordance with our terms for such data. We must continue to invest
in our quality control measures relating to BIGToken in order to
provide a high-quality product to potential customers.
If BIGToken experiences an excessive rate of user attrition, our
ability to attract customers could fail.
Users
may elect to have their data deleted from BIGToken at any time. We
must continually add new users both to replace users who choose to
delete their data and to increase our user base. Users may choose
to delete their data for many reasons. If users are concerned about
privacy and security and do not perceive BIGToken to be reliable,
if we fail to keep users engaged and interested in our application,
or if we simply lose our users’ attention, we could fail to gather
sufficient user data and our ability to earn revenues may be
materially affected.
If we are unable to manage our marketing and advertising expenses,
it could materially harm our results of operations and
growth.
We
plan to rely in part on our marketing and advertising efforts to
attract new members. Our future growth and profitability, as well
as the maintenance and enhancement of our brand, will depend in
large part on the effectiveness and efficiency of our marketing and
advertising strategies and expenditures. If we are unable to
maintain our marketing and advertising channels on cost-effective
terms, our marketing and advertising expenses could increase
substantially, and our business, financial condition and results of
operations may suffer. In addition, we may be required to incur
significantly higher marketing and advertising expenses than we
currently anticipate if excessive numbers of members withdraw their
member data from our database.
Failure to comply with federal, state and local laws and
regulations or our contractual obligations relating to data
privacy, protection and security of BIGToken user data, and civil
liabilities relating to breaches of privacy and security of user
data, could damage our reputation and harm our
business.
A
variety of federal, state and local laws and regulations govern the
collection, use, retention, sharing and security of user data. We
will collect BIGToken user data from and about our members when
they redeem rewards and maintain that date in our BIGToken
Application. Claims or allegations that we have violated applicable
laws or regulations related to privacy, data protection or data
security could in the future result in negative publicity and a
loss of confidence in us by our users and potential new users and
may subject us to fines and penalties by regulatory authorities. In
addition, we have privacy policies and practices concerning the
collection, use and disclosure of user data as part of our
agreements with our members, including ones posted on our website.
Several Internet companies have incurred penalties for failing to
abide by the representations made in their privacy policies and
practices. In addition, our use and retention of user data could
lead to civil liability exposure in the event of any disclosure of
such information due to hacking, malware, phishing, inadvertent
action or other unauthorized use or disclosure. Several companies
have been subject to civil actions, including class actions,
relating to this exposure.
We
have incurred, and will continue to incur, expenses to comply with
data privacy, protection and security standards and protocols for
BIGToken user data imposed by law, regulation, self-regulatory
bodies, industry standards and contractual obligations. Such laws,
standards and regulations, however, are evolving and subject to
potentially differing interpretations, and federal, state and
provincial legislative and regulatory bodies may expand current or
enact new laws or regulations regarding privacy matters.
Additionally, we accept user from foreign countries which subjects
us to the personal and other data privacy, protection and security
laws of those countries, We are unable to predict what additional
legislation, standards or regulation in the area of privacy and
security of personal information could be enacted or its effect on
our operations and business.
If we are unable to satisfy data privacy, protection, security, and
other government- and industry-specific requirements, our growth
could be harmed.
We
need or may in the future need to comply with a number of data
protection, security, privacy and other government- and
industry-specific requirements, including those that require
companies to notify individuals of data security incidents
involving certain types of personal data. Security compromises
could harm our reputation, erode user confidence in the
effectiveness of our security measures, negatively impact our
ability to attract new members, or cause existing users to withdraw
their data from BIGToken.
Regulatory, legislative or self-regulatory developments regarding
internet privacy matters could adversely affect our ability to
conduct our business.
The
United States and foreign governments have enacted, considered or
are considering legislation or regulations that could significantly
restrict our ability to collect, process, use, transfer and pool
data collected from and about consumers and devices. Trade
associations and industry self-regulatory groups have also
promulgated best practices and other industry standards relating to
targeted advertising. Various U.S. and foreign governments,
self-regulatory bodies and public advocacy groups have called for
new regulations specifically directed at the digital advertising
industry, and we expect to see an increase in legislation,
regulation and self-regulation in this area. The legal, regulatory
and judicial environment we face around privacy and other matters
is constantly evolving and can be subject to significant change.
For example, the General Data Protection Regulation, or GDPR, which
was agreed by E.U. institutions in 2016 and came into effect after
a two-year transition period on May 25, 2018, updated and
modernized the principles of the 1995 Data Protection Directive and
significantly increases the level of sanctions for non-compliance.
Data Protection Authorities will have the power to impose
administrative fines of up to a maximum of €20 million or 4% of the
data controller’s or data processor’s total worldwide turnover of
the preceding financial year. Similarly, the E-Privacy Regulation,
which was launched by the European Parliament in October 2016,
could result in, once enacted, new rules and mechanisms for
“cookie” consent. In addition, the interpretation and application
of data protection laws in the U.S., Europe and elsewhere are often
uncertain and in flux. Legislative and regulatory authorities
around the world may decide to enact additional legislation or
regulations, which could reduce the amount of data we can collect
or process and, as a result, significantly impact our business.
Similarly, clarifications of and changes to these existing and
proposed laws, regulations, judicial interpretations and industry
standards can be costly to comply with, and we may be unable to
pass along those costs to our clients in the form of increased
fees, which may negatively affect our operating results. Such
changes can also delay or impede the development of new solutions,
result in negative publicity and reputational harm, require
significant incremental management time and attention, increase our
risk of non-compliance and subject us to claims or other remedies,
including fines or demands that we modify or cease existing
business practices, including our ability to charge per click or
the scope of clicks for which we charge. Additionally, any
perception of our practices or solutions as an invasion of privacy,
whether or not such practices or solutions are consistent with
current or future regulations and industry practices, may subject
us to public criticism, private class actions, reputational harm or
claims by regulators, which could disrupt our business and expose
us to increased liability. Finally, our legal and financial
exposure often depends in part on our clients’ or other third
parties’ adherence to privacy laws and regulations and their use of
our services in ways consistent with visitors’ expectations. We
rely on representations made to us by clients that they will comply
with all applicable laws, including all relevant privacy and data
protection regulations. We make reasonable efforts to enforce such
representations and contractual requirements, but we do not fully
audit our clients’ compliance with our recommended disclosures or
their adherence to privacy laws and regulations. If our clients
fail to adhere to our contracts in this regard, or a court or
governmental agency determines that we have not adequately,
accurately or completely described our own solutions, services and
data collection, use and sharing practices in our own disclosures
to consumers, then we and our clients may be subject to potentially
adverse publicity, damages and related possible investigation or
other regulatory activity in connection with our privacy practices
or those of our clients.
Privacy concerns could damage our reputation and deter current and
potential users from contributing additional data through our
BIGToken Application. If our security measures are breached
resulting in the improper use and disclosure of user data, BIGToken
may be perceived as not being secure, users and customers may
curtail or stop using BIGToken, and we may incur significant legal
and financial exposure.
Concerns
about our practices with regard to the collection, use, disclosure,
or security of user data or other privacy related matters, even if
unfounded, could damage our reputation and adversely affect our
operating results. Our services will involve the purchase, storage,
transmission and sale of user data, and theft and security breaches
expose us to a risk of loss of this information, improper use and
disclosure of such information, litigation, and potential
liability. Any systems failure or compromise of our security that
results in the release of user data, or in our or our users’
ability to access such data, could seriously harm our reputation
and brand and, therefore, our business, and impair our ability to
attract and retain users. Additionally, if user data is somehow
made public or made available through a security breach, it may be
used to identify our users and people related thereto. We may
experience cyber attacks of varying degrees. Our security measures
may also be breached due to employee error, malfeasance, system
errors or vulnerabilities, including vulnerabilities of our
vendors, suppliers, their products, or otherwise. Such breach or
unauthorized access, increased government surveillance, or attempts
by outside parties to fraudulently induce employees, users, or
customers to disclose sensitive information in order to gain access
to user data could result in significant legal and financial
exposure, damage to our reputation, and a loss of confidence in the
security of BIGToken that could potentially have an adverse effect
on our business. Because the techniques used to obtain unauthorized
access, disable or degrade service, or sabotage systems change
frequently, become more sophisticated, and often are not recognized
until launched against a target, we may be unable to anticipate
these techniques or to implement adequate preventative measures.
Additionally, cyber attacks could also compromise trade secrets and
other sensitive information and result in such information being
disclosed to others and becoming less valuable, which could
negatively affect our business. If an actual or perceived breach of
our security occurs, the market perception of the effectiveness of
our security measures could be harmed and we could lose members and
customers.
Our business is subject to complex and evolving U.S. and foreign
laws and regulations regarding privacy, data protection, content,
competition, consumer protection, and other matters. Many of these
laws and regulations are subject to change and uncertain
interpretation, and could result in claims, changes to our business
practices, monetary penalties, increased cost of operations, or
declines in user growth or engagement, or otherwise harm our
business.
We
are subject to a variety of laws and regulations in the United
States and abroad that involve matters central to our business,
such as privacy, data protection and personal information, rights
of publicity, content, intellectual property, advertising,
marketing, distribution, data security, data retention and
deletion, electronic contracts and other communications,
competition, protection of minors, consumer protection, taxation
and securities law compliance. Expansion of our activities in
certain jurisdictions, or other actions that we may take, may
subject us to additional laws, regulations, or other government
scrutiny. In addition, foreign data protection, privacy, content,
competition, and other laws and regulations can impose different
obligations or be more restrictive than those in the United
States.
Additionally,
as we allow European users, we are subject to the European General
Data Protection Regulation (GDPR), effective as of May 2018. The
GDPR increases privacy rights for individuals in Europe, extends
the scope of responsibilities for data controllers and data
processors and imposes increased requirements and potential
penalties on companies offering goods or services to individuals
who are located in Europe or monitoring the behavior of such
individuals (including by companies based outside of Europe).
Noncompliance can result in penalties of up to the greater of €20
million, or 4% of global company revenues.
These
U.S. federal and state and foreign laws and regulations, which in
some cases can be enforced by private parties in addition to
government authorities, are constantly evolving and can be subject
to significant change. As a result, the application,
interpretation, and enforcement of these laws and regulations are
often uncertain, particularly in the newer industry in which we
operate, and may be interpreted and applied inconsistently from
country to country and inconsistently with our current policies and
practices.
These
laws and regulations, as well as any associated inquiries or
investigations or any other government actions, may be costly to
comply with and may delay or impede our international growth,
result in negative publicity, increase our operating costs, require
significant management time and attention, and subject us to
remedies that may harm our business.
Security breaches and improper access to or disclosure of our data
or user data, or other hacking and phishing attacks on our systems,
could harm our reputation and adversely affect our
business.
Our
industry is prone to cyber-attacks by third parties seeking
unauthorized access to our data or users’ data or to disrupt our
ability to provide service. Any failure to prevent or mitigate
security breaches and improper access to or disclosure of our data
or user data, including personal information, content, or payment
information from or to users, or information from marketers, could
result in the loss or misuse of such data, which could harm our
business and reputation and diminish our competitive position. In
addition, computer malware, viruses, social engineering
(predominantly spear phishing attacks), and general hacking have
become more prevalent in our industry. Our BIGToken platform has
experienced an increase in the occurrence of such attempts and we
cannot be assured that we will be able to prevent a successful
attack on our systems in the future. We also regularly encounter
attempts to create false or undesirable user accounts or take other
actions on our BIGToken platform for purposes such as spreading
misinformation, attempting to have us improperly purchase user data
or other objectionable ends. As a result of recent attention and
growth of our BIGToken platform, the size of our user base, and the
types and volume of personal data on our systems, we believe that
we are a particularly attractive target for such breaches and
attacks. Our efforts to address undesirable activity may also
increase the risk of retaliatory attacks. Such attacks may cause
interruptions to the services we provide, degrade the user
experience, cause users or marketers to lose confidence and trust
in our products, impair our internal systems, or result in
financial harm to us. Our efforts to protect our company data or
the information we receive may also be unsuccessful due to software
bugs or other technical malfunctions; employee, contractor, or
vendor error or malfeasance; government surveillance; or other
threats that evolve. In addition, third parties may attempt to
fraudulently induce employees or users to disclose information in
order to gain access to our data or our users’ data. Cyber-attacks
continue to evolve in sophistication and volume, and inherently may
be difficult to detect for long periods of time. Although we are
currently in the process of developing systems and processes that
are designed to protect our data and user data, to prevent data
loss, to disable undesirable accounts and activities on our
BIGToken platform, and to prevent or detect security breaches, we
cannot assure you that such measures will ultimately become
operational or provide absolute security, and we may incur
significant costs in protecting against or remediating
cyber-attacks.
Affected
users or government authorities could initiate legal or regulatory
actions against us in connection with any actual or perceived
security breaches or improper disclosure of data, which could cause
us to incur significant expense and liability or result in orders
or consent decrees forcing us to modify our business practices,
especially with regard to the BIGToken platform. Such incidents or
our efforts to remediate such incidents may also result in a
decline in our active user base or engagement levels. Any of these
events could have a material and adverse effect on our business,
reputation, or financial results.
Certain user data must be provided on a recurring basis in order to
provide full value.
Certain
types of user data will need to be contributed by users recurrently
for such data to provide full value to our potential customers. If
users fail to provide us with sufficient recurring data, the value
of the user data may substantially decrease and our ability to earn
revenues may be materially affected.
Unfavorable media coverage could negatively affect our
business.
Unfavorable
publicity regarding, for example, our privacy practices, terms of
service, regulatory activity, the actions of third parties, the use
of our products or services for illicit, objectionable, or illegal
ends or the actions of other companies that provide similar
services to us, could adversely affect our reputation. Such
negative publicity also could have an adverse effect on the size,
engagement, and loyalty of our user base and result in user
attrition which could adversely affect our business and financial
results.
Weak economic conditions may reduce consumer demand for products
and services.
A
weak economy in the United States could adversely affect demand for
advertising products, and services. A substantial portion of our
revenue is derived from businesses that are highly dependent on
discretionary spending by individuals, which typically falls during
times of economic instability. Accordingly, the ability of our
advertisers to increase or maintain revenue and earnings could be
adversely affected to the extent that relevant economic
environments remain weak or decline further. We currently are
unable to predict the extent of any of these potential adverse
effects.
Because we store, process and use data, some of which contain
personal information, we are subject to complex and evolving
federal, state and foreign laws and regulations regarding privacy,
data protection and other matters, which are subject to
change.
We
are subject to a variety of laws and regulations in the United
States and other countries that involve matters central to our
business, including with respect to user privacy, rights of
publicity, data protection, content, protection of minors and
consumer protection. These laws can be particularly restrictive in
countries outside the United States. Both in the United States and
abroad, these laws and regulations constantly evolve and remain
subject to significant change. In addition, the application and
interpretation of these laws and regulations are often uncertain,
particularly in the new and rapidly evolving industry in which we
operate. Because we store, process and use data, some of which
contain personal information, we are subject to complex and
evolving federal, state and foreign laws and regulations regarding
privacy, data protection and other matters. Many of these laws and
regulations are subject to change and uncertain interpretation and
could result in investigations, claims, changes to our business
practices, increased cost of operations and declines in user
growth, retention or engagement, any of which could materially
adversely affect our business, results of operations and financial
condition.
Several
proposals are pending before federal, state and foreign legislative
and regulatory bodies that could significantly affect our business.
For example, a revision to the 1995 European Union Data Protection
Directive is currently being considered by European legislative
bodies that may include more stringent operational requirements for
data processors and significant penalties for non-compliance. In
addition, the EU General Data Protection Regulation 2016/679
(“GDPR”), which came into effect on May 25, 2018, establishes new
requirements applicable to the processing of personal data (
i.e. , data which identifies an individual or from which an
individual is identifiable), affords new data protection rights to
individuals ( e.g. , the right to erasure of personal data)
and imposes penalties for serious data breaches. Individuals also
have a right to compensation under GDPR for financial or
non-financial losses. GDPR will impose additional responsibility
and liability in relation to our processing of personal data. GDPR
may require us to change our policies and procedures and, if we are
not compliant, could materially adversely affect our business,
results of operations and financial condition.
If advertising on the Internet loses its appeal, our revenue could
decline.
Our
business model may not continue to be effective in the future for a
number of reasons, including:
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a
decline in the rates that we can charge for advertising and
promotional activities; |
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our
inability to create applications for our customers; |
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Internet
advertisements and promotions are, by their nature, limited in
content relative to other media; |
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companies
may be reluctant or slow to adopt online advertising and
promotional activities that replace, limit or compete with their
existing direct marketing efforts; |
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companies
may prefer other forms of Internet advertising and promotions that
we do not offer; |
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the
quality or placement of transactions, including the risk of
non-screened, non-human inventory and traffic, could cause a loss
in customers or revenue; and |
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regulatory
actions may negatively impact our business practices. |
If
the number of companies who purchase online advertising and
promotional services from us does not grow, we may experience
difficulty in attracting publishers, and our revenue could
decline.
Our stock price may be volatile and your investment in our common
stock could suffer a decline in value.
There
has been significant volatility in the market price and trading
volume of securities of technology and other companies, which may
be unrelated to the financial performance of these companies. These
broad market fluctuations may negatively affect the market price of
our common stock.
Some
specific factors that may have a significant effect on the market
price of our common stock include:
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actual
or anticipated fluctuations in our results of operations or our
competitors’ operating results; |
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actual
or anticipated changes in the growth rate of the connected
lifestyle market, our growth rates or our competitors’ growth
rates; |
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conditions
in the financial markets in general or changes in general economic
conditions; |
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changes
in governmental regulation, including taxation and tariff
policies; |
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interest
rate or currency rate fluctuations; |
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our
ability to forecast accurate financial results; and |
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changes
in stock market analyst recommendations regarding our common stock,
other comparable companies or our industry generally |
We rely upon third parties for technology that is critical to our
products, and if we are unable to continue to use this technology
and future technology, our ability to develop, sell, maintain and
support technologically innovative products would be
limited.
We
rely on third parties to obtain non-exclusive patented hardware and
software license rights in technologies that are incorporated into
and necessary for the operation and functionality of most of our
products. In these cases, because the intellectual property we
license is available from third parties, barriers to entry into
certain markets may be lower for potential or existing competitors
than if we owned exclusive rights to the technology that we license
and use. Moreover, if a competitor or potential competitor enters
into an exclusive arrangement with any of our key third-party
technology providers, or if any of these providers unilaterally
decides not to do business with us for any reason, our ability to
develop and sell products and services containing that technology
would be severely limited.
If we
are offering products or services that contain third-party
technology that we subsequently lose the right to license, then we
will not be able to continue to offer or support those products or
services. In addition, these licenses may require royalty payments
or other consideration to the third-party licensor. Our success
will depend, in part, on our continued ability to access these
technologies, and we do not know whether these third-party
technologies will continue to be licensed to us on commercially
acceptable terms, if at all. In addition, if these third-party
licensors fail or experience instability, then we may be unable to
continue to sell products and services that incorporate the
licensed technologies, in addition to being unable to continue to
maintain and support these products and services. We do require
escrow arrangements with respect to certain third-party software
which entitle us to certain limited rights to the source code, in
the event of certain failures by the third party, in order to
maintain and support such software. However, there is no guarantee
that we would be able to fully understand and use the source code,
as we may not have the expertise to do so. We are increasingly
exposed to these risks as we continue to develop and market more
products containing third-party technology and software. If we are
unable to license the necessary technology, we may be forced to
acquire or develop alternative technology, which could be of lower
quality or performance standards. The acquisition or development of
alternative technology may limit and delay our ability to offer new
or competitive products and services and increase our costs of
production. As a result, our business, results of operations and
financial condition could be materially adversely
affected.
The development of our operations and infrastructure in connection
with our separation from SRAX, and any future expansion of such
operations and infrastructure, may not be successful, and may
strain our operations and increase our operating
expenses.
In
connection with our separation from SRAX, we have begun to
implement a new information technology infrastructure for our
business, which includes the creation of management information
systems and operational and financial controls unique to our
business. We may not be able to put in place adequate controls in
an efficient and timely manner in connection with our separation
from SRAX and as our business grows, and our current systems may
not be adequate to support our future operations. The difficulties
associated with installing and implementing new systems, procedures
and controls may place a significant burden on our management and
operational and financial resources. In addition, as we grow
internationally, we will have to expand and enhance our
communications infrastructure. If we fail to continue to improve
our management information systems, procedures and financial
controls, or encounter unexpected difficulties during expansion and
reorganization, our business could be harmed.
For
example, we plan to invest significant capital and human resources
in the design, development and enhancement of our financial and
operational systems. We will depend on these systems in order to
timely and accurately process and report key components of our
results of operations, financial condition and cash flows. If the
systems fail to operate appropriately or we experience any
disruptions or delays in enhancing their functionality to meet
current business requirements, fulfill contractual obligations,
accurately report our financials and otherwise run our business
could be adversely affected. Even if we do not encounter these
adverse effects, the development and enhancement of systems may be
much more costly than we anticipated. If we are unable to continue
to develop and enhance our information technology systems as
planned, our business, results of operations and financial
condition could be materially adversely affected.
As part of growing our business, we may make acquisitions. If we
fail to successfully select, execute or integrate our acquisitions,
then our business, results of operations and financial condition
could be materially adversely affected and our stock price could
decline.
From
time to time, we may undertake acquisitions to add new product and
service lines and technologies, acquire talent, gain new sales
channels or enter into new sales territories. Acquisitions involve
numerous risks and challenges, including relating to the successful
integration of the acquired business, entering into new territories
or markets with which we have limited or no prior experience,
establishing or maintaining business relationships with new
retailers, distributors or other channel partners, vendors and
suppliers and potential post-closing disputes.
We
cannot ensure that we will be successful in selecting, executing
and integrating acquisitions. Failure to manage and successfully
integrate acquisitions could materially harm our business,
financial condition and results of operations. In addition, if
stock market analysts or our stockholders do not support or believe
in the value of the acquisitions that we choose to undertake, our
stock price may decline.
Risks
Related to Our Separation from SRAX
The separation may not be successful.
Pursuant
to the completion of the Share Exchange, we became a stand-alone
public company, although we will continue to be controlled by SRAX.
The process of becoming a stand-alone public company is complex and
may distract our management from focusing on our business and
strategic priorities. Further, although we expect to have direct
access to the debt and equity capital markets following this
offering, we may not be able to issue debt or equity on terms
acceptable to us or at all. Moreover, even with equity compensation
tied to our business, we may not be able to attract and retain
employees as desired.
We
also may not fully realize the intended benefits of being a
stand-alone public company if any of the risks identified in this
“Risk Factors” section, or other events, were to occur.
These intended benefits include improving the strategic and
operational flexibility of both companies, increasing the focus of
the management teams on their respective business operations,
allowing each company to adopt the capital structure, investment
policy and dividend policy best suited to its financial profile and
business needs, and providing each company with its own equity
currency to facilitate acquisitions and to better incentivize
management. If we do not realize these intended benefits for any
reason, our business may be negatively affected. In addition, the
separation could materially adversely affect our business, results
of operations and financial condition.
As long as SRAX controls us, the ability of our other shareholders
to influence matters requiring stockholder approval will be
limited.
As a
result of the Share Exchange, SRAX owns 149,562,566,584 shares of
our common stock and 5,000,000 shares of our Series A Preferred
Stock, representing voting power of approximately 95% of our issued
and outstanding capital stock. For so long as SRAX beneficially
owns shares of our outstanding securities representing at least a
majority of the votes entitled to be cast by the holders of our
outstanding securities, SRAX will be able to elect all of the
members of our board of directors and influence other voting
matters.
SRAX’s ability to control our board of directors may make it
difficult for us to recruit high-quality independent
directors.
So
long as SRAX beneficially owns shares of our outstanding securities
representing at least a majority of the votes entitled to be cast
by the holders of our outstanding shares, SRAX can effectively
control and direct our board of directors. Further, the interests
of SRAX and our other stockholders may diverge. Under these
circumstances, persons who might otherwise accept our invitation to
join our board of directors may decline.
SRAX’s interests may conflict with our interests and the interests
of our other stockholders. Conflicts of interest between us and
SRAX could be resolved in a manner unfavorable to us and our other
stockholders.
Various
conflicts of interest between us and SRAX could arise. The
ownership interest and voting power of SRAX in our capital stock
and ownership interests of our directors and officers in SRAX
capital stock, or service by an individual as either a director
and/or officer of both companies, could create or appear to create
potential conflicts of interest when such individuals are faced
with decisions relating to us. These decisions could
include:
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corporate
opportunities; |
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the
impact that operating or capital decisions (including the
incurrence of indebtedness) relating to our business may have on
SRAX’s consolidated financial statements and/or current or future
indebtedness (including related covenants); |
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business
combinations involving us; |
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our
dividend and stock repurchase policies; |
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compensation
and benefit programs and other human resources policy
decisions; |
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management
stock ownership; |
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the
intercompany agreements and services between us and SRAX, including
the agreements relating to our separation from SRAX; |
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the
payment of dividends on our common stock; and |
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determinations
with respect to our tax returns. |
Potential
conflicts of interest could also arise if we decide to enter into
new commercial arrangements with SRAX in the future or in
connection with SRAX’s desire to enter into new commercial
arrangements with third parties. Additionally, we may be
constrained by the terms of agreements relating to our indebtedness
or equity securities from taking actions, or permitting us to take
actions, that may be in our best interest.
Furthermore,
disputes may arise between us and SRAX relating to our past and
ongoing relationships, and these potential conflicts of interest
may make it more difficult for us to favorably resolve such
disputes, including those related to:
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tax,
employee benefit, indemnification and other matters arising from
the separation; |
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the
nature, quality and pricing of services SRAX agrees to provide to
us; and |
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sales
and other disposals by SRAX of all or a portion of its ownership
interest in us. |
We do
not have a policy that any material transactions with a related
part in which there is an actual, or in some cases, perceived,
conflict of interest, will be subject to any prior review or
approval.
We
may not be able to resolve any potential conflicts, and even if we
do, the resolution may be less favorable to us than if we were
dealing with an unaffiliated third party. While we are controlled
by SRAX, we may not have the leverage to negotiate amendments to
our various agreements with SRAX (if any are required) on terms as
favorable to us as those we would negotiate with an unaffiliated
third party.
The terms of the agreements that we expect to enter into with SRAX
in connection with the separation may limit our ability to take
certain actions which may prevent us from pursuing opportunities to
raise capital, acquire other businesses or provide equity
incentives to our employees, which could impair our ability to
grow.
The
terms of the agreements that we expect to enter into with SRAX in
connection with the separation, including the MSA, may limit our
ability to take certain actions, which could impair our ability to
grow. The MSA provides that, as long as SRAX beneficially owns at
least 50% of the total voting power of our outstanding capital
stock entitled to vote in the election of our board of directors,
we will not (without SRAX’s prior written consent) take certain
actions, such as incurring additional indebtedness and acquiring
businesses or assets or disposing of assets in excess of certain
amounts.
We have no operating history as a stand-alone public company and
our historical and carve-out financial information is not
necessarily representative of the results we would have achieved as
a stand-alone public company and may not be a reliable indicator of
our future results.
The
historical financial information we have included in this Current
Report does not reflect, what our financial condition, results of
operations or cash flows would have been had we been a stand-alone
entity during the historical periods presented, or what our
financial condition, results of operations or cash flows will be in
the future as an independent entity.
In
addition, we have not made pro forma adjustments to reflect many
significant changes that will occur in our cost structure, funding
and operations as a result of our transition to becoming a public
company, including changes in our employee base, potential
increased costs associated with reduced economies of scale and
increased costs associated with being a publicly traded,
stand-alone company.
If SRAX experiences a change in control, our current plans and
strategies could be subject to change.
As
long as SRAX controls us, it will have significant influence over
our plans and strategies, including strategies relating to
marketing and growth. In the event SRAX experiences a change in
control, SRAX’s incumbent owner(s) may attempt to cause us to
revise or change our plans and strategies, as well as the
agreements between SRAX and us, described in this Current
Report.
The assets and resources that we acquire from SRAX in the
separation may not be sufficient for us to operate as a stand-alone
company, and we may experience difficulty in separating our assets
and resources from SRAX.
Because
we have not operated as an independent company in the past, we will
need to acquire assets in addition to those contributed by SRAX and
its subsidiaries to us and our subsidiaries in connection with our
separation from SSRAX. We may also face difficulty in separating
our assets from SRAX’s assets and integrating newly acquired assets
into our business. Our business, financial condition and results of
operations could be harmed if we fail to acquire assets that prove
to be important to our operations or if we incur unexpected costs
in separating our assets from SRAX’s assets or integrating newly
acquired assets.
The services that SRAX provides to us may not be sufficient to meet
our needs, which may result in increased costs and otherwise
adversely affect our business.
Pursuant
to the TSA, we expect SRAX to continue to provide us with corporate
and shared services for a transitional period related to corporate
functions, such as executive oversight, risk management,
information technology, accounting, audit, legal, investor
relations, tax, treasury, shared facilities, operations, customer
support, human resources and employee benefits, sales and sales
operations and other services in exchange for the fees specified in
the TSA between us and SRAX. SRAX will not be obligated to provide
these services in a manner that differs from the nature of the
services provided to the BIGToken business during the 12-month
period prior to the separation, and thus we may not be able to
modify these services in a manner desirable to us as a stand-alone
public company. Further, if we no longer receive these services
from SRAX due to the termination of the TSA or otherwise, we may
not be able to perform these services ourselves and/or find
appropriate third party arrangements at a reasonable cost (and any
such costs may be higher than those charged by SRAX).
Our ability to operate our business effectively may suffer if we
are unable to cost-effectively establish our own administrative and
other support functions in order to operate as a stand-alone
company after the termination of our shared services and other
intercompany agreements with SRAX.
As an
operating segment of SRAX, we relied on administrative and other
resources of SRAX, including information technology, accounting,
finance, human resources and legal services, to operate our
business. In anticipation of the closing of the Share Exchange, we
have entered into various service agreements to retain the ability
for specified periods to use these SRAX resources. These services
may not be provided at the same level as when we were a business
segment within SRAX, and we may not be able to obtain the same
benefits that we received prior to becoming a stand-alone company.
These services may not be sufficient to meet our needs, and after
our agreements with SRAX terminates, we may not be able to replace
these services at all or obtain these services at prices and on
terms as favorable as we currently have with SRAX. We will need to
create our own administrative and other support systems or contract
with third parties to replace SRAX’s systems. In addition, we have
received informal support from SRAX, which may not be addressed in
the agreements we have entered into with SRAX, and the level of
this informal support may diminish as we become a more independent
company. Any failure or significant downtime in our own
administrative systems or in SRAX’S administrative systems during
the transitional period could result in unexpected costs, impact
our results and/or prevent us from paying our suppliers or
employees and performing other administrative services on a timely
basis.
We are a smaller company relative to SRAX, which could result in
increased costs and decreased revenue due to difficulty maintaining
existing customer relationships and obtaining new
customers.
Prior
to this offering, we were able to take advantage of SRAX’s size,
technology and services, including insurance, employee benefit
support and audit and other professional services. We are a smaller
company than SRAX and we cannot assure you that we will have access
to financial and other resources comparable to those available to
us prior to this offering. As a stand-alone company, we may be
unable to obtain office space, goods, technology and services in
general, as well as components and services that are part of our
supply chain, at prices or on terms as favorable as those available
to us prior to this offering, which could increase our costs and
reduce our profitability. Our future success depends on our ability
to maintain our current relationships with existing customers, and
we may have difficulty attracting new customers.
SRAX has agreed to indemnify us for certain liabilities. However,
we cannot assure that the indemnity will be sufficient to insure us
against the full amount of such liabilities, or that SRAX’s ability
to satisfy its indemnification obligation will not be impaired in
the future.
Pursuant
to the MSA and certain other agreements with SRAX, SRAX has agreed
to indemnify us for certain liabilities. The MSA will provide for
cross-indemnities principally designed to place financial
responsibility for the obligations and liabilities of our business
with us and financial responsibility for the obligations and
liabilities of SRAX’s business with SRAX.
However,
third parties could also seek to hold us responsible for any of the
liabilities that SRAX has agreed to retain, and we cannot assure
that an indemnity from SRAX will be sufficient to protect us
against the full amount of such liabilities, or that SRAX will be
able to fully satisfy its indemnification obligations in the
future. Even if we ultimately succeed in recovering from SRAX any
amounts for which we are held liable, we may be temporarily
required to bear these losses. Each of these risks could materially
adversely affect our business, results of operations and financial
condition.
Certain contracts used in our business will need to be replaced, or
assigned from SRAX or its affiliates in connection with the
separation, which may require the consent of the counterparty to
such an assignment, and failure to obtain such replacement
contracts or consents could increase our expenses or otherwise
adversely affect our results of operations.
Our
separation from SRAX requires us to replace shared contracts and,
with respect to certain contracts that are to be assigned from SRAX
or its affiliates to us or our affiliates, to obtain consents and
assignments from third parties. It is possible that, in connection
with the replacement or consent process, some parties may seek more
favorable contractual terms from us. If we are unable to obtain
such replacement contracts or consents, as applicable, we may be
unable to obtain some of the benefits, assets and contractual
commitments that are intended to be allocated to us as part of the
separation. If we are unable to obtain such replacement contracts
or consents, the loss of these contracts could increase our
expenses or otherwise materially adversely affect our business,
results of operations and financial condition.
Some of our directors and officers own SRAX common stock,
restricted shares of SRAX common stock or options to acquire SRAX
common stock and hold positions with SRAX, which could cause
conflicts of interest, or the appearance of conflicts of interest,
that result in our not acting on opportunities we otherwise may
have.
Some
of our directors and executive officers own SRAX common stock,
restricted shares of SRAX stock or options to purchase SRAX common
stock.
Ownership
of SRAX common stock, restricted shares of SRAX common stock and
options to purchase SRAX common stock by our directors and
executive officers after this offering and the presence of
executive officers or directors of SRAX on our board of directors
could create, or appear to create, conflicts of interest with
respect to matters involving both us and SRAX that could have
different implications for SRAX than they do for us. For example,
potential conflicts of interest could arise in connection with the
resolution of any dispute between SRAX and us regarding terms of
the agreements governing the separation and the relationship
between SRAX and us thereafter, including the MSA or the transition
services agreement. Potential conflicts of interest could also
arise if we enter into commercial arrangements with SRAX in the
future. As a result of these actual or apparent conflicts of
interest, we may be precluded from pursuing certain growth
initiatives.
We may have received better terms from unaffiliated third parties
than the terms we will receive in the agreements that we entered
with SRAX.
The
agreements that entered into with SRAX in connection with the
separation, including the MSA and the TSA were prepared in the
context of the separation while we were still a wholly owned
subsidiary of SRAX.
Ownership
of Our Common Stock
Sales of a substantial number of shares of our common stock in the
public market could cause our stock price to
fall.
On
January 27, 2021 we entered into the Debt Exchange Agreement with
Red Diamond. Pursuant to the Debt Exchange Agreement, we issued Red
Diamond 7,000,000,000 free trading shares of Common Stock or
approximately 837% of the prior public float of 841,184,289. We
also issued Red Diamond 8,313 shares of Series C Preferred Stock,
convertible into approximately 12,864,419,313 shares of Common
Stock. Although Red Diamond agreed to a leak out of 20% of average
daily volume for the five trading days preceding the sale, this
will still result in a significant number of shares compared to our
prior public float and will be difficult to monitor compliance.
Sales of a substantial number of such shares now and upon
expiration of the leak-out period or the perception that such sales
may occur, could cause our market price to fall or make it more
difficult for you to sell your common stock at a time and price
that you deem appropriate.
If our stock price is extremely volatile and subject to price which
may result in you losing a significant part of your
investment.
The
market price of our common stock will be influenced by many
factors, some of which are beyond our control, including those
described in this Risk Factors section and include the
following:
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the
failure of securities analysts to cover our common stock after this
offering or changes in financial estimates by analysts; |
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the
inability to meet the financial estimates of securities analysts
who follow our common stock or changes in earnings estimates by
analysts; |
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strategic
actions by us or our competitors; |
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announcements
by us or our competitors of significant contracts, acquisitions,
joint marketing relationships, joint ventures or capital
commitments; |
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our
quarterly or annual earnings, or those of other companies in our
industry; |
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actual
or anticipated fluctuations in our operating results and those of
our competitors; |
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general
economic and stock market conditions; |
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the
public reaction to our press releases, our other public
announcements and our filings with the SEC; |
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risks
related to our business and our industry, including those discussed
above; |
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changes
in conditions or trends in our industry, markets or
customers; |
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the
trading volume of our common stock; |
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future
sales of our common stock or other securities; |
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investor
perceptions of the investment opportunity associated with our
common stock relative to other investment alternatives. |
In
particular, the realization of any of the risks described in these
“Risk Factors” could have a material adverse impact on the
market price of our common stock in the future and cause the value
of your investment to decline. In addition, the stock market in
general has experienced extreme volatility that has often been
unrelated to the operating performance of particular companies.
These broad market and industry factors may materially reduce the
market price of our common stock, regardless of our operating
performance. In addition, price volatility may be greater if the
public float and trading volume of our common stock is
low.
We have never paid a cash dividend and do not intend to pay cash
dividends on our common stock in the foreseeable
future.
We
have never paid a cash dividend, nor do we anticipate paying cash
dividends in the foreseeable future. Accordingly, any return on
your investment will be as a result of the appreciation of our
common stock if any.
Future sales, or the perception of future sales, of our common
stock, including by SRAX, may depress the price of our common
stock.
The
market price of our common stock could decline significantly as a
result of sales or other distributions of a large number of shares
of our common stock in the market, including shares that might be
offered for sale or distributed by SRAX. The perception that these
sales might occur could depress the market price of our common
stock. These sales, or the possibility that these sales may occur,
also might make it more difficult for us to sell equity securities
in the future at a time and at a price that we deem appropriate. As
a result of the Share Exchange, we issued SRAX 149,562,566,584
shares of common stock. As we are currently not cash flow positive,
we will be required to raise significant capital in the future
through the sale of our debt and equity securities. Also, in the
future, we may issue our securities in connection acquisitions. The
amount of shares of our common stock issued in connection with an
investment or acquisition could constitute a material portion of
our then-outstanding shares of our common stock. The sale of these
shares into the market could greatly depress the market price of
our common stock.
Our costs will increase significantly as a result of operating as a
public company, and our management will be required to devote
substantial time to complying with public company
regulations.
We
have historically operated our business as a segment of a public
company. As a stand-alone public company, we will have additional
legal, accounting, insurance, compliance and other expenses that we
have not incurred historically. After this offering, we will become
obligated to file with the SEC annual and quarterly reports and
other reports that are specified in Section 13 and other sections
of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). We will also be required to ensure that we have the ability
to prepare financial statements that are fully compliant with all
SEC reporting requirements on a timely basis. In addition, we will
become subject to other reporting and corporate governance
requirements, including certain provisions of the Sarbanes-Oxley
Act of 2002 (“Sarbanes-Oxley”) and the regulations promulgated
thereunder, which will impose significant compliance obligations
upon us.
Sarbanes-Oxley,
as well as rules subsequently implemented by the SEC, have imposed
increased regulation and disclosure and required enhanced corporate
governance practices of public companies. We are committed to
maintaining a high standard of public disclosure, and our efforts
to comply with evolving laws, regulations and standards in this
regard are likely to result in increased selling and administrative
expenses and a diversion of management’s time and attention from
revenue-generating activities to compliance activities. These
changes will require a significant commitment of additional
resources. We may not be successful in implementing these
requirements and implementing them could materially adversely
affect our business, results of operations and financial condition.
In addition, if we fail to implement the requirements with respect
to our internal accounting and audit functions, our ability to
report our operating results on a timely and accurate basis could
be impaired. If we do not implement such requirements in a timely
manner or with adequate compliance, we might be subject to
sanctions or investigation by regulatory authorities, such as the
SEC. Any such action could harm our reputation and the confidence
of investors and customers in us and could materially adversely
affect our business and cause our share price to fall.
Failure to achieve and maintain effective internal controls in
accordance with Section 404 of Sarbanes-Oxley could materially
adversely affect our business, results of operations, financial
condition and stock price.
As a
public company, we will be required to document and test our
internal control procedures in order to satisfy the requirements of
Section 404 of Sarbanes-Oxley (“Section 404”), which will require
annual management assessments of the effectiveness of our internal
control over financial reporting. Upon loss of emerging growth
company status, an annual report by our independent registered
public accounting firm that addresses the effectiveness of internal
control over financial reporting will be required. During the
course of our testing, we may identify deficiencies which we may
not be able to remediate in time to meet our deadline for
compliance with Section 404. Testing and maintaining internal
control can divert our management’s attention from other matters
that are important to the operation of our business. We also expect
the regulations under Sarbanes-Oxley to increase our legal and
financial compliance costs, make it more difficult to attract and
retain qualified officers and members of our board of directors,
particularly to serve on our audit committee, and make some
activities more difficult, time consuming and costly. We may not be
able to conclude on an ongoing basis that we have effective
internal control over our financial reporting in accordance with
Section 404 or our independent registered public accounting firm
may not be able or willing to issue an unqualified report on the
effectiveness of our internal control over financial reporting. If
we conclude that our internal control over financial reporting is
not effective, we cannot be certain as to the timing of completion
of our evaluation, testing and remediation actions or their effect
on our operations because there is presently no precedent available
by which to measure compliance adequacy. If either we are unable to
conclude that we have effective internal control over our financial
reporting or our independent auditors are unable to provide us with
an unqualified report as required by Section 404, then investors
could lose confidence in our reported financial information, which
could have a negative effect on the trading price of our
stock.
If securities or industry analysts do not publish research or
reports about our business, if they adversely change their
recommendations regarding our stock or if our operating results do
not meet their expectations, our stock price could
decline.
The
trading market for our common stock will be influenced by the
research and reports that industry or securities analysts publish
about us or our business. If one or more of these analysts cease
coverage of us or fail to publish reports on us regularly, we could
lose visibility in the financial markets, which in turn could cause
our stock price or trading volume to decline. Moreover, if one or
more of the analysts who cover us downgrades our stock or if our
operating results do not meet their expectations, our stock price
could decline.
We could be subject to securities class action
litigation.
In
the past, securities class action litigation has often been
instituted against companies whose securities have experienced
periods of volatility in market price. Securities litigation
brought against us following volatility in the price of our common
stock, regardless of the merit or ultimate results of such
litigation, could result in substantial costs, which would hurt our
financial condition and results of operations and divert
management’s attention and resources from our business.
Your percentage ownership may be diluted in the
future.
In
the future, your percentage ownership may be diluted because of our
need to raise additional capital, the conversion of outstanding
convertible securities and the granting of equity awards to our
directors, officers and employees or otherwise as a result of
equity issuances for acquisitions or capital market transactions.
In connection with and following the Share Exchange, we anticipate
granting equity awards to our employees and directors. In addition,
following the Share Exchange, we will have outstanding a number of
securities that are convertible into shares of our common stock.
Upon conversion, you will experience substantial
dilution.
In
addition, our Articles of Incorporation authorize us to issue,
without the approval of our stockholders, one or more classes or
series of preferred stock having such designation, powers,
preferences and relative, participating, optional and other special
rights, including preferences over our common stock respecting
dividends and distributions, as our board of directors generally
may determine. The terms of one or more classes or series of
preferred stock could dilute the voting power or reduce the value
of our Common Stock. For example, the Company could grant the
holders of preferred stock the right to elect some number of our
directors in all events or on the happening of specified events or
the right to veto specified transactions.
We are a smaller reporting company and as a result have certain
reduced disclosure requirements.
We
are a “smaller reporting company” as defined in the Securities Act,
as such, we are required to comply with certain reduced disclosure
requirements for public company reporting requirements for future
filings. As a smaller reporting company, we are not required to
disclose certain executive compensation information only two years
of audited financial statements in our public filings.
Our board of directors will have the ability to issue blank check
preferred stock, which may discourage or impede acquisition
attempts or other transactions.
Our
board of directors will have the power, subject to applicable law,
to issue series of preferred stock that could, depending on the
terms of the series, impede the completion of a merger, tender
offer or other takeover attempt. For instance, subject to
applicable law, a series of preferred stock may impede a business
combination by including class voting rights, which would enable
the holder or holders of such series to block a proposed
transaction. Our board of directors will make any determination to
issue shares of preferred stock on its judgment as to our and our
stockholders’ best interests. Our board of directors, in so acting,
could issue shares of preferred stock having terms which could
discourage an acquisition attempt or other transaction that some,
or a majority, of the stockholders may believe to be in their best
interests or in which stockholders would have received a premium
for their stock over the then prevailing market price of the
stock.
Item
2. Financial Information.
Management’s
discussion and analysis of financial condition and results of
operations.
Company
Overview
We
are a data technology company offering a consumer-based application
that allows consumers to own and earn from their digital identity
and data. We generate revenue by providing this data, insights and
the ability to connect with our users, to marketers. Our
consumer-based platform and technologies offer tools and services
to identify and reach their target consumers. Our technologies
assist our clients in: (i) identifying their core consumers and
such consumers’ characteristics across various channels in order to
discover new and measurable opportunities that amplify the
performance of marketing campaign in order to maximize a return on
marketing spend.
Our
Relationship with SRAX
Arrangements
Between SRAX and Our Company
Pursuant
to the completion of the Share Exchange, SRAX has entered into
certain agreements that will affect the separation of our business
from SRAX, provide a framework for our relationship with SRAX after
the separation and provide for the allocation between us and SRAX
of SRAX’s assets, employees, liabilities and obligations (including
its investments, property and employee benefits assets and
liabilities) attributable to periods prior to, at and after our
separation from SRAX, specifically,
|
● |
a
master separation agreement, or MSA; |
|
● |
a
transition services agreement, or TSA; |
Arrangements
Between SRAX and Our Company
SRAX
currently owns 95% of the voting power of our capital
securities.
For as long as SRAX continues to control more than 50% of our
outstanding common stock, SRAX or its successor-in-interest will be
able to direct the election of all the members of our board of
directors. Similarly, SRAX will have the power to determine matters
submitted to a vote of our stockholders without the consent of our
other stockholders, will have the power to prevent a change in
control of us and will have the power to take certain other actions
that might be favorable to SRAX. In addition, the MSA provides
that, as long as SRAX beneficially owns at least 50% of the total
voting power of our outstanding capital stock entitled to vote in
the election of our board of directors, we will not (without SRAX’s
prior written consent) take certain actions, such as incurring
additional indebtedness and acquiring businesses or assets or
disposing of assets in excess of certain amounts.
Components
of Operating Results
Revenue
Our
revenues consist of the sale of consumer data obtained through the
BIGtoken platform in conjunction with various marketing related
services, such as the following:
|
● |
The
use of BIGToken user surveys and the sale of such information
received from surveys. |
|
|
|
|
● |
The
creation and management of targeted rewards and loyalty programs
based on information and buying trends ascertained by data captured
on our BIGToken platform. |
|
|
|
|
● |
The
ability to assist our customers in conducting market research based
on analytics received from users of the BIGToken
platform |
|
● |
The
ability to identify specific audiences for our customers and to
target questions, surveys and data analytics geared toward our
customers’ products / industries. Additionally, if we are unable to
scale the needed information for a customer’s target audience, we
may utilize our proprietary analytics to gain insight to further
focus and refine user segments that need to be targeted in order to
optimize data and media spend |
|
|
|
|
● |
The
use of Lightning Insights that allow our customers to conduct
research around specific audience groups through both long and
short research studies |
|
|
|
|
● |
The
creation of customized loyalty programs that utilize rewards to
drive consumer purchasing habits. |
Our
revenue can vary based on a number of factors, including changes in
the overall advertising and data markets, user adoption of the
BIGtoken platform, the effectiveness of our audience targeting
abilities; changes in technology; and adoption of our current and
future BIGtoken product offerings.
Cost
of Revenue
Cost
of revenue consists of the costs of media and other third-party
costs incurred in conjunction with the marketing related services
we provide.
Our
cost of revenue as a percentage of revenue can vary based upon a
number of factors, including those that may affect our revenue set
forth above and factors that may affect our cost of revenue,
including, without limitation: the cost of media utilized to
perform our marketing services, the volume of media or the
effectiveness of our services. From time to time, however, we may
experience fluctuations in our gross margin as a result of the
factors discussed above.
Employee
related costs
Employee
related costs consist of salaries other compensation and related
costs paid to our employees and contractors. We expect these costs
to increase in absolute dollars as we invest and expand our
business.
Marketing
and selling expenses
Marketing
and selling expenses consist primarily of advertising, corporate
communications and user acquisition related costs. We expect our
sales and marketing expense to increase in absolute dollars for the
foreseeable future as we continue to invest in brand marketing to
strengthen our competitive position, to accelerate growth and to
raise brand awareness.
Platform
costs
Platform
costs consist the technology and content hosting of our BIGtoken
platform. We expect these costs to increase in absolute dollars for
the foreseeable future as we continue to expand our user
base.
Depreciation
and Amortization
Depreciation
and Amortization cost represent an allocation of the costs incurred
to acquire the long-lived assets used in our business over their
estimated useful lives. Our long-lived assets consist of property
and equipment and internally developed software.
General
and Administrative
General
and administrative expense consists primarily of human resources,
information technology, professional fees, IT and facility
overhead, and other general corporate expense. We expect our
general and administrative expense to increase in absolute dollars
primarily as a result of the increased costs associated with being
a stand-alone public company. However, we also expect our general
and administrative expense to fluctuate as a percentage of our
revenue in future periods based on fluctuations in our revenue and
the timing of such expense.
Results
of Operations
We
operate as one operating and reportable segment. The following
table sets forth, for the periods presented, the combined
statements of operations data, which we derived from the
accompanying financial statements.
|
|
Nine
months ended September 30, |
|
|
Year
ended December 31, |
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
Change |
|
|
|
2020 |
|
|
2019 |
|
|
$ |
|
|
% |
|
|
2019 |
|
|
2018 |
|
|
$ |
|
|
% |
|
Revenue |
|
$ |
1,146,000 |
|
|
$ |
2,242,000 |
|
|
$ |
(1,096,000 |
) |
|
|
(48.9 |
)% |
|
$ |
3,228,000 |
|
|
$ |
2,725,000 |
|
|
$ |
503,000 |
|
|
|
18.5 |
% |
Cost
of revenue |
|
$ |
491,000 |
|
|
$ |
1,013,000 |
|
|
$ |
(522,000 |
) |
|
|
(51.5 |
)% |
|
$ |
1,613,000 |
|
|
$ |
1,605,000 |
|
|
$ |
8,000 |
|
|
|
0.5 |
% |
Gross
Profit |
|
$ |
655,000 |
|
|
$ |
1,229,000 |
|
|
$ |
(574,000 |
) |
|
|
(46.7 |
)% |
|
$ |
1,615,000 |
|
|
$ |
1,120,000 |
|
|
$ |
495,000 |
|
|
|
44.2 |
% |
Profit
Margin |
|
|
57.2 |
% |
|
|
54.8 |
% |
|
|
|
|
|
|
|
|
|
|
50.0 |
% |
|
|
41.1 |
% |
|
|
|
|
|
|
|
|
Operating
expense |
|
$ |
7,506,000 |
|
|
$ |
13,499,000 |
|
|
$ |
(5,993,000 |
) |
|
|
(44.4 |
)% |
|
$ |
17,596,000 |
|
|
$ |
10,036,000 |
|
|
$ |
7,560,000 |
|
|
|
75.3 |
% |
Operating
loss |
|
$ |
(6,851,000 |
) |
|
$ |
(12,270,000 |
) |
|
$ |
5,419,000 |
|
|
|
(44.2 |
)% |
|
$ |
(15,981,000 |
) |
|
$ |
(8,916,000 |
) |
|
$ |
(7,065,000 |
) |
|
|
79.2 |
% |
Interest
expense, net |
|
$ |
(3,624,000 |
) |
|
$ |
(669,000 |
) |
|
$ |
(2,955,000 |
) |
|
|
441.7 |
% |
|
$ |
(686,000 |
) |
|
$ |
(4,312,000 |
) |
|
$ |
3,626,000 |
|
|
|
(84.1 |
)% |
Change
in fair value of derivative liabilities |
|
$ |
218,000 |
|
|
$ |
1,342,000 |
|
|
$ |
(1,124,000 |
) |
|
|
(83.8 |
)% |
|
$ |
1,000,000 |
|
|
$ |
5,252,000 |
|
|
$ |
(4,252,000 |
) |
|
|
(81.0 |
)% |
Other
income |
|
$ |
333,000 |
|
|
$ |
63,000 |
|
|
$ |
270,000 |
|
|
|
428.6 |
% |
|
$ |
63,000 |
|
|
$ |
5,000 |
|
|
$ |
58,000 |
|
|
|
1,160.0 |
% |
Provision
for income tax benefit |
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
0.0 |
% |
|
$ |
- |
|
|
$ |
2,510,000 |
|
|
$ |
(2,510,000 |
) |
|
|
(100.0 |
)% |
Net
loss |
|
$ |
(9,924,000 |
) |
|
$ |
(11,534,000 |
) |
|
$ |
1,610,000 |
|
|
|
(14.0 |
)% |
|
$ |
(15,604,000 |
) |
|
$ |
(5,461,000 |
) |
|
$ |
(7,633,000 |
) |
|
|
95.8 |
% |
BIGToken revenues
BIGToken
revenues for the nine months ended September 30, 2020 decreased to
$1,146,000 compared to $2,242,000 during the nine months ended
September 30, 2019. This decrease is primarily driven by the loss
of core customers from our legacy sales verticals. Revenues for the
year-ended December 31, 2019 increased $503,000 or 18.5% to
$3,228,000 from revenues for the year-ended December 31, 2018
driven by the expansion of the Company’s legacy sales
verticals.
BIGToken Profit Margin
BIGToken’s
costs of revenue consist of media acquired from third parties to
fulfill the media and advertising components of our revenues.
BIGToken’s profit margin for the nine months ended September 30,
2020 increased to 57.2% as compared to 54.8% for the nine months
ended September 30, 2019. Profit margin for the year-ended December
31, 2019 increased to 50.0% as compared to 41.1% in 2018. The
increase is driven by the increase in revenues and enhanced
operational execution.
Operating Expenses
Our
operating costs for nine months ended September 30, 2020 declined
to $7,506,000 as compared to $13,499,000 for the nine months-ended
September 30, 2019 representing a decrease of $5,993,000. The
decrease was primarily attributable to the reductions in staffing
related and other general administrative expenses attributable to
our legacy media verticals, and the reduction of our BIG Token
point liability. Operating expense for the year ended December 31,
2019 as compared to December 31, 2018 increased by $7,560,000 due
to the following increases; $2,700,000 increase in employee related
cost, $2,000,000 in marketing and selling expenses, $700,000 in
platform cost, $1,600,000 in general and administrative expenses
and $550,000 in depreciation and amortization.
Interest Expense
Our
interest cost for the nine months ended September 30, 2020
increased to $3,624,000 compared to $669,000 for 2019 for an
increase of approximately $2,955,000. The increase is driven by
cost incurred by our Parent in order to fund operations through the
sale of convertible debentures in June of 2020 as compared to
financing the operations of the business through the sale of assets
and equity securities in 2019. Interest Expense for the year-ended
December 31, 2019 as compared to December 31, 2018 decreased
approximately $3,626,000 due to the decrease in costs associated
with our Parent’s accounts receivable factoring facility and
elimination of our Parent’s outstanding debentures.
Change
in the Fair Value our Warrant Liabilities
Income
or loss associated with the changes in the fair value of warrant
liabilities we have recorded in other income for the nine months
ended September 30 and for the full years ended December 31
represent a proportionate allocation of the income / (loss) our
Parent has incurred attributable to the changes in the calculated
value of warrants it issued through various financing transactions
in 2017 through 2019.
Liquidity
and Capital Resources
Historically, our
operations have participated in cash management and funding
arrangements managed by SRAX. Cash flows related to financing
activities primarily reflect changes in Net parent investment.
Other than those that are in BIGToken designated legal entities,
SRAX’s cash has not been assigned to us for any of the periods
presented because those cash balances are not directly attributable
to us. Cash and cash equivalents presented in the combined balance
sheets represent amounts pertaining to the BIGToken legal entity
only. Cash used in operations was $3,400,000 for the nine months
ended September 30, 2020, compared with cash used in operations of
$5,973,000 for the nine months ended September 30, 2019, due
primarily to lower operating expenses. Cash used in operations
increased from $1,521,000 for the year ended December 31, 2018
to $7,484,000 for the year ended December 31, 2019 due
primarily to increased operating expenses with the increased
development and operations of BIGToken. Prior to the Share
Exchange, we are dependent on SRAX for our continued support to
fund our operations. Upon the close of our Share Exchange, we
obtained access to approximately $1,000,000 in cash on hand and
expect to raise an additional $2,000,000 to $3,000,000 shortly
hereafter through a private offering of our Series B Preferred
Stock.
Our
capital structure and sources of liquidity will change
significantly from our historical capital structure. Following the
Share Exchange, we expect to use cash flows generated from
operations, together with $1,000,000 in cash on-hand and our
estimated net proceeds of approximately $3,000,000 from the sale of
preferred stock in a private offering, as our primary sources of
liquidity. Based on our current plans and market conditions, we
believe that such sources of liquidity will be sufficient to
satisfy our anticipated cash requirements for at least the next six
months. However, we may require or desire additional funds to
support our operating expenses and capital requirements or for
other purposes, such as acquisitions, and may seek to raise such
additional funds through public or private equity or debt financing
or from other sources. We cannot assure you that additional
financing will be available at all or that, if available, such
financing would be obtainable on terms favorable to us and would
not be dilutive. Our future liquidity and cash requirements will
depend on numerous factors, including the introduction of new
products and potential acquisitions of related businesses or
technology.
Going
Concern
The
Company has incurred significant losses since its inception and has
not demonstrated an ability to generate sufficient revenues from
the sales of its goods and services to achieved profitable
operations. In addition, the Company’s operations will require
significant additional financing. As of the closing of the Share
Exchange, the Company had cash and cash equivalents of
approximately $1 million which is not sufficient to fund the
Company’s planned operations through one year after the date the
consolidated financial statements are issued, and accordingly,
these factors create substantial doubt about the Company’s ability
to continue as a going concern within one year after the date that
the consolidated financial statements are issued. The consolidated
financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
Accordingly, the consolidated financial statements have been
prepared on a basis that assumes the Company will continue as a
going concern and which contemplates the realization of assets and
satisfaction of liabilities and commitments in the ordinary course
of business.
In
making this assessment we performed a comprehensive analysis of our
current circumstances including: our financial position, our cash
flow and cash usage forecasts, and obligations and debts. Although
management has a long history of successful capital raises, the
analysis used to determine the Company’s ability to continue as a
going concern does not include cash sources outside the Company’s
direct control that management expects to be available within the
next 12 months.
Summary
of Cash Flows
|
|
Nine Months Ended
September 30, |
|
|
Full Year Ended
December 31, |
|
|
|
2020 |
|
|
2019 |
|
|
2019 |
|
|
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in
operating activities |
|
$ |
(3,400,000 |
) |
|
|
(5,973,000 |
) |
|
$ |
(7,484,000 |
) |
|
|
(1,521,000 |
) |
Net cash used in
investing activities |
|
|
(38,000 |
) |
|
|
(537,000 |
) |
|
|
(748,000 |
) |
|
|
(448,000 |
) |
Net cash provided by
financing activities |
|
|
3,529,000 |
|
|
|
6,492,000 |
|
|
|
8,194,000 |
|
|
|
2,001,000 |
|
Cash
flows from operating activities
Net
cash used in operating activities was $3,400,000 during the nine
months ended September 30, 2020 compared to $5,973,000 for the
comparable period in 2019. The decrease of cash used in operating
activities of approximately $2,600,000 is driven by; (i) a decrease
in our cash operating expenses of approximately $6,000,000. This
partially offset by a decrease in revenues of $1,100,000, increase
in allocation of corporate overhead of $2,100,000 and decrease in
working capital of approximately $200,000. For the year-ended
December 31, 2019 as compared to the year ended December 31, 2018
cash used in operating activities increased approximately by
$5,963,000 to $7,484,000. This increase was driven by a $2,100,000
increase in employee related cost, $2,000,000 in marketing and
selling expenses, $700,000 in platform cost, $1,600,000 in general
and administrative expenses and partially offset by decrease in
working capital of approximately $400,000.
Cash
flows from investing activities
During
the nine months ended September 30, 2020 net cash used in investing
decreased approximately $499,000 to $38,000 due to lower cost
incurred with the development of the BIGToken application. For the
year-ended December 31, 2019 as compared to the year ended December
31, 2018 cash used in investing activities increased approximately
$300,000 to $748,000. This increase was driven by an increase in
costs incurred for the development of the BIGToken application and
related software.
Cash
flows from financing activities
Cash
provided by financing activities represents cash contributed by our
Parent to fund our operations and investing activities. We have
accounted for these cash contributions as Net Parent Investment
within the equity section of our Balance Sheets.
During
the nine months ended September 30, 2020, cash provided by
financing activities decreased approximately $2,963,000 due to low
cash required to fund operations as compared to the nine months
ended September 30, 2019. Cash provided by financing activities for
the year ended December 31, 2019 increased approximately $6,193,000
driven primarily by the increase in the cash required to fund our
operations.
Critical
Accounting Policies and Estimates
Use of Estimates
The
Carve-Out Financial Statements have been prepared in conformity
with U.S. GAAP and requires management of the Company to make
estimates and assumptions in the preparation of these Carve-Out
Financial Statements that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the Carve-Out Financial Statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates and
assumptions.
The
most significant areas that require management judgment and which
are susceptible to possible change in the near term include the
Company’s revenue recognition, provision for bad debts, BIGToken
point redemption liability, stock-based compensation, income taxes,
goodwill and intangible assets.
As of
September 30, 2020, the impact of COVID-19 continues to unfold and
as a result, certain estimates and assumptions require increased
judgment and carry a higher degree of variability and volatility
that could result in material changes to our estimates in future
periods.
Fair Value of Financial Instruments
The
accounting standard for fair value measurements provides a
framework for measuring fair value and requires disclosures
regarding fair value measurements. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date, based on the Company’s principal or, in
absence of a principal, most advantageous market for the specific
asset or liability.
The
Company uses a three-tier fair value hierarchy to classify and
disclose all assets and liabilities measured at fair value on a
recurring basis, as well as assets and liabilities measured at fair
value on a non-recurring basis, in periods subsequent to their
initial measurement. The hierarchy requires the Company to use
observable inputs when available, and to minimize the use of
unobservable inputs, when determining fair value. The three tiers
are defined as follows:
Level
1—Observable inputs that reflect quoted market prices (unadjusted)
for identical assets or liabilities in active markets;
Level
2—Observable inputs other than quoted prices in active markets that
are observable either directly or indirectly in the marketplace for
identical or similar assets and liabilities; and
Level
3—Unobservable inputs that are supported by little or no market
data, which require the Company to develop its own
assumptions.
The
determination of fair value and the assessment of a measurement’s
placement within the hierarchy requires judgment. Level 3
valuations often involve a higher degree of judgment and
complexity. Level 3 valuations may require the use of various cost,
market, or income valuation methodologies applied to unobservable
management estimates and assumptions. Management’s assumptions
could vary depending on the asset or liability valued and the
valuation method used. Such assumptions could include: estimates of
prices, earnings, costs, actions of market participants, market
factors, or the weighting of various valuation methods. The Company
may also engage external advisors to assist us in determining fair
value, as appropriate.
Although
the Company believes that the recorded fair value of our financial
instruments is appropriate, these fair values may not be indicative
of net realizable value or reflective of future fair
values.
The
Company’s financial instruments, including cash and cash
equivalents, net accounts receivable, accounts payable and accrued
expenses, are carried at historical cost. At September 30, 2020
(unaudited), December 31, 2019 and 2018, the carrying amounts of
these instruments approximated their fair values because of the
short-term nature of these instruments. The Company measures
certain non-financial assets, liabilities, and equity issuances at
fair value on a non-recurring basis. These non-recurring valuations
include evaluating assets such as long-lived assets and goodwill
for impairment; allocating value to assets in an acquired asset
group; and applying accounting for business
combinations.
Accounts Receivable
Credit is
extended to customers based on an evaluation of their financial
condition and other factors. Management periodically assesses the
Company’s accounts receivable and, if necessary, establishes an
allowance for estimated uncollectible amounts. Accounts determined
to be uncollectible are charged to operations when that
determination is made. The Company usually does not require
collateral.
Concentration of Credit Risk, Significant Customers and Supplier
Risk
Financial
instruments that potentially subject the Company to concentration
of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with financial
institutions within the United States. The balances maintained at
these financial institutions are generally more than the Federal
Deposit Insurance Corporation insurance limits. The Company has not
experienced any loss on these accounts.
As of
September 30, 2020 (unaudited), the Company had three customers
with accounts receivable balances of approximately 23.7%, 19.2% and
17.1% of total accounts receivable. At December 31, 2019, the
Company had three customers with accounts receivable balances of
approximately 25.9%, 16.4% and 15.0%. At December 31, 2018, the
Company had two customers with accounts receivable balances of
approximately 42.9% and 10.5%.
For the
period ended September 30, 2020 (unaudited), the Company had one
customer that account for approximately 19.1% of total revenue. For
the year ended December 31, 2019, the Company had two customers
that account for approximately 19.3% and 14.1% of total revenue.
For the year ended December 31, 2018, the Company had three
customers that accounted for 21.0%, 14.1% and 10.3%.
MARKETABLE
SECURITIES
Shares
received will be accounted for in accordance with ASC 320 –
Investments – Debt and Equity Securities, as such the shares will
be classified as available-for-sale securities and will be measured
at each reporting period at fair value with the unrealized gain
(loss) as a component of other income (expense). Upon the sale of
the shares, the Company will record the gain (loss) in the
carve-out statement of operations as a component of other income
(expense).
LONG-LIVED
ASSETS
Management
evaluates the recoverability of the Company’s identifiable
intangible assets and other long-lived assets when events or
circumstances indicate a potential impairment exists. Events and
circumstances considered by the Company in determining whether the
carrying value of identifiable intangible assets and other
long-lived assets may not be recoverable include, but are not
limited to: significant changes in performance relative to expected
operating results; significant changes in the use of the assets;
significant negative industry or economic trends; a significant
decline in the Company’s stock price for a sustained period of
time; and changes in the Company’s business strategy. In
determining if impairment exists, the Company estimates the
undiscounted cash flows to be generated from the use and ultimate
disposition of these assets. If impairment is indicated based on a
comparison of the assets’ carrying values and the undiscounted cash
flows, the impairment loss is measured as the amount by which the
carrying amount of the assets exceeds the fair value of the
assets.
No
impairments have been recorded regarding its identifiable
intangible assets or other long-lived assets during the nine months
ended September 30, 2020 (unaudited) and 2019 (unaudited) and the
years ended December 31, 2019 or 2018, respectively.
Property and equipment
Property
and equipment is stated at cost less
accumulated depreciation. Depreciation is provided on the
straight-line basis over the estimated useful lives of the assets
of three to seven years.
Expenditures for
repair and maintenance which do not materially extend the useful
lives of property and equipment are charged to operations. When
property or equipment is sold or otherwise disposed of, the cost
and related accumulated depreciation are removed from the
respective accounts with the resulting gain or loss reflected in
operations. Management periodically reviews the carrying value of
its property and equipment for impairment.
Intangible assets
Intangible
assets consist of the Company’s intellectual property of internally
developed software and are stated at cost less accumulated
amortization. Amortization is provided for on the straight-line
basis over the estimated useful lives of the assets of five to nine
years.
Costs
incurred to develop computer software for internal use are
capitalized once: (1) the preliminary project stage is completed,
(2) management authorizes and commits to funding a specific
software project, and (3) it is probable that the project will be
completed and the software will be used to perform the function
intended. Costs incurred prior to meeting the qualifications are
expensed as incurred. Capitalization of costs ceases when the
project is substantially complete and ready for its intended use.
Post-implementation costs related to the internal use computer
software, are expensed as incurred. Internal use software
development costs are amortized using the straight-line method over
its estimated useful life which ranges up to three years. Software
development costs may become impaired in situations where
development efforts are abandoned due to the viability of the
planned project becoming doubtful or due to technological
obsolescence of the planned software product.
During
2016, the Company capitalizes the costs of developing internal-use
computer software, including directly related payroll
costs.
The
Company capitalizes costs incurred during the application
development stage of internal-use software and amortize these costs
over the estimated useful life. Upgrades and enhancements are
capitalized if they result in added functionality which enable the
software to perform tasks it was previously incapable of
performing. Software maintenance, training, data conversion, and
business process reengineering costs are expensed in the period in
which they are incurred.
Goodwill
Goodwill
is comprised of the purchase price of business combinations in
excess of the fair value assigned at acquisition to the net
tangible and identifiable intangible assets acquired. Goodwill is
not amortized. The Company tests goodwill for impairment for its
reporting units on an annual basis, or when events occur or
circumstances indicate the fair value of a reporting unit is below
its carrying value. If the fair value of a reporting unit is less
than its carrying value, an impairment loss is recorded to the
extent that implied fair value of the goodwill within the reporting
unit is less than its carrying value. The Company performed its
most recent annual goodwill impairment test as of
December 31, 2019 using market data and discounted cash flow
analysis. Based on this analysis, it was determined that the fair
value exceeded the carrying value of its reporting
units.
The
Company had historically performed its annual goodwill and
impairment assessment on
December 31st of each year. This aligns the Company with
other advertising sales companies who also generally conduct this
annual analysis in the fourth quarter.
When
evaluating the potential impairment of goodwill, management first
assess a range of qualitative factors, including but not limited
to, macroeconomic conditions, industry conditions, the competitive
environment, changes in the market for the Company’s products and
services, regulatory and political developments, entity specific
factors such as strategy and changes in key personnel, and the
overall financial performance for each of the Company’s reporting
units. If, after completing this assessment, it is determined that
it is more likely than not that the fair value of a reporting unit
is less than its carrying value, we then proceed to the impairment
testing methodology primarily using the income approach (discounted
cash flow method).
We
compare the carrying value of the goodwill, with its fair value, as
determined by a combination of the market approach and income
approach, its estimated discounted cash flows. If the carrying
value of goodwill exceeds its fair value, then the amount of
impairment to be recognized. We operate as one reporting
unit.
When
required, we arrive at our estimates of fair value using a
discounted cash flow methodology which includes estimates of future
cash flows to be generated by specifically identified assets, as
well as selecting a discount rate to measure the present value of
those anticipated cash flows. Estimating future cash flows requires
significant judgment and includes making assumptions about
projected growth rates, industry-specific factors, working capital
requirements, weighted average cost of capital, and current and
anticipated operating conditions. The use of different assumptions
or estimates for future cash flows could produce different
results.
Revenue Recognition
The
Company adopted Accounting Standards Codification (“ASC”) Topic
606, Revenue from Contracts with Customers (“ASC Topic 606”)
on January 1, 2018 using the modified retrospective method. Our
operating results for reporting periods beginning after January 1,
2018 are presented under ASC Topic 606, while prior period amounts
continue to be reported in accordance with our historic accounting
under Topic 605. The timing and measurement of our revenues under
ASC Topic 606 is similar to that recognized under previous
guidance, accordingly, the adoption of ASC Topic 606 did not have a
material impact on our financial position, results of operations,
cash flows, or presentation thereof at adoption or in the current
period. There were no changes in our opening retained earnings
balance as a result of the adoption of ASC Topic 606.
ASC
Topic 606 is a comprehensive revenue recognition model that
requires revenue to be recognized when control of the promised
goods or services are transferred to our customers at an amount
that reflects the consideration that we expect to receive.
Application of ASC Topic 606 requires us to use more judgment and
make more estimates than under former guidance. Application of ASC
Topic 606 requires a five-step model applicable to all product
offerings revenue streams as follows:
Identification
of the contract, or contracts, with a customer
A
contract with a customer exists when (i) we enter into an
enforceable contract with a customer that defines each party’s
rights regarding the goods or services to be transferred and
identifies the payment terms related to these goods or services,
(ii) the contract has commercial substance and, (iii) we determine
that collection of substantially all consideration for goods or
services that are transferred is probable based on the customer’s
intent and ability to pay the promised consideration.
We
apply judgment in determining the customer’s ability and intention
to pay, which is based on a variety of factors including the
customer’s historical payment experience or, in the case of a new
customer, published credit or financial information pertaining to
the customer.
Identification
of the performance obligations in the contract
Performance
obligations promised in a contract are identified based on the
goods or services that will be transferred to the customer that are
both capable of being distinct, whereby the customer can benefit
from the goods or service either on its own or together with other
resources that are readily available from third parties or from us,
and are distinct in the context of the contract, whereby the
transfer of the goods or services is separately identifiable from
other promises in the contract.
When
a contract includes multiple promised goods or services, we apply
judgment to determine whether the promised goods or services are
capable of being distinct and are distinct within the context of
the contract. If these criteria are not met, the promised goods or
services are accounted for as a combined performance
obligation.
Determination
of the transaction price
The
transaction price is determined based on the consideration to which
we will be entitled to receive in exchange for transferring goods
or services to our customer. We estimate any variable consideration
included in the transaction price using the expected value method
that requires the use of significant estimates for discounts,
cancellation periods, refunds and returns. Variable consideration
is described in detail below.
Allocation
of the transaction price to the performance obligations in the
contract
If
the contract contains a single performance obligation, the entire
transaction price is allocated to the single performance
obligation. Contracts that contain multiple performance obligations
require an allocation of the transaction price to each performance
obligation based on a relative Stand-Alone Selling Price (“SSP,”)
basis. We determine SSP based on the price at which the performance
obligation would be sold separately. If the SSP is not observable,
we estimate the SSP based on available information, including
market conditions and any applicable internally approved pricing
guidelines.
Recognition
of revenue when, or as, we satisfy a performance
obligation
We
recognize revenue at the point in time that the related performance
obligation is satisfied by transferring the promised goods or
services to our customer.
Principal
versus Agent Considerations
When
another party is involved in providing goods or services to our
customer, we apply the principal versus agent guidance in ASC Topic
606 to determine if we are the principal or an agent to the
transaction. When we control the specified goods or services before
they are transferred to our customer, we report revenue gross, as
principal. If we do not control the goods or services before they
are transferred to our customer, revenue is reported net of the
fees paid to the other party, as agent. Our evaluation to determine
if we control the goods or services within ASC Topic 606 includes
the following indicators:
We
are primarily responsible for fulfilling the promise to provide the
specified good or service.
When
we are primarily responsible for providing the goods and services,
such as when the other party is acting on our behalf, we have
indication that we are the principal to the transaction. We
consider if we may terminate our relationship with the other party
at any time without penalty or without permission from our
customer.
We
have risk before the specified good or service have been
transferred to a customer or after transfer of control to the
customer.
We
may commit to obtaining the services of another party with or
without an existing contract with our customer. In these
situations, we have risk of loss as principal for any amount due to
the other party regardless of the amount(s) we earn as revenue from
our customer.
The
entity has discretion in establishing the price for the specified
good or service.
We
have discretion in establishing the price our customer pays for the
specified goods or services.
Contract
Liabilities
Contract
liabilities consist of customer advance payments and billings in
excess of revenue recognized. We may receive payments from our
customers in advance of completing our performance obligations. We
record contract liabilities equal to the amount of payments
received in excess of revenue recognized, including payments that
are refundable if the customer cancels the contract according to
the contract terms. Contract liabilities have been historically low
historically recorded as current liabilities on our Carve-Out
Financial Statements when the time to fulfill the performance
obligations under terms of our contracts is less than one year. We
have no Long-term contract liabilities which would represent the
amount of payments received in excess of revenue earned, including
those that are refundable, when the time to fulfill the performance
obligation is greater than one year.
Practical
Expedients and Exemptions
We
have elected certain practical expedients and policy elections as
permitted under ASC Topic 606 as follows:
|
● |
We
applied the transitional guidance to contracts that were not
complete at the date of our initial application of ASC Topic 606 on
January 1, 2018. |
|
● |
We
adopted the practical expedient related to not adjusting the
promised amount of consideration for the effects of a significant
financing component if the period between transfer of product and
customer payment is expected to be less than one year at the time
of contract inception; |
|
● |
We
made the accounting policy election to not assess promised goods or
services as performance obligations if they are immaterial in the
context of the contract with the customer; |
|
● |
We
made the accounting policy election to exclude any sales and
similar taxes from the transaction price; and |
|
● |
We
adopted the practical expedient not to disclose the value of
unsatisfied performance obligations for contracts with an original
expected length of one year or less. |
Cost of Revenue
Cost of
revenue consists of payments to media providers that are directly
related to a revenue-generating event and project and application
design costs. The Company becomes obligated to make payments
related to media providers in the period the media is provided to
us. Such expenses are classified as cost of revenue in the
corresponding period in which the revenue is recognized in the
accompanying Carve-Out Statements of Operations.
Stock-Based Compensation
The
Company’s employees have historically participated in SRAX’s
stock-based compensation plans. Stock-based compensation expense
has been allocated to the Company based on the awards and terms
previously granted to the Company’s employees as well as an
allocation of SRAX’s corporate and shared functional employee
expenses.
We
account for our stock-based compensation under ASC 718
“Compensation – Stock Compensation” using the fair
value-based method. Under this method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period. This guidance establishes standards for the accounting for
transactions in which an entity exchanges it equity instruments for
goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that
are based on the fair value of the entity’s equity instruments or
that may be settled by the issuance of those equity
instruments.
We
use the fair value method for equity instruments granted to
non-employees and use the Black-Scholes model for measuring the
fair value of options. The stock based fair value compensation is
determined as of the date of the grant or the date at which the
performance of the services is completed (measurement date) and is
recognized over the vesting periods.
Income taxes
The
Company’s operations have historically been included in SRAX’s
combined U.S. income tax returns. Income tax expense included in
the Carve-Out Financial Statements has been calculated following
the separate return method, as if the Company was a stand-alone
enterprise and a separate taxpayer for the periods presented. The
calculation of income taxes on a separate return basis requires
considerable judgment and the use of both estimates and allocations
that affect the calculation of certain tax liabilities and the
determination of the recoverability of certain deferred tax assets,
which arise from temporary differences between the tax and the
Carve-Out Financial Statement recognition of revenues and expenses.
As a result, the Company’s deferred income tax rate and deferred
tax balances may differ from those in SRAX’s historical
results.
The
provision for income taxes is determined using the asset and
liability approach. Deferred taxes represent the future tax
consequences expected when the reported amounts of assets and
liabilities are recovered or paid. Deferred taxes result from
differences between the Carve-Out Financial Statement and tax bases
of the Company’s assets and liabilities. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. In evaluating the
Company’s ability to recover our deferred tax assets within the
jurisdiction from which they arise, we consider all available
positive and negative evidence, including scheduled reversals of
deferred tax liabilities, projected future taxable income, tax
planning strategies, and results of operations. Any tax
carryforwards reflected in the Carve-Out Financial Statements have
also been determined using the separate return method. Tax
carryforwards include net operating losses.
The
complexity of tax regulations requires assessments of uncertainties
in estimating taxes the Company will ultimately pay. The Company
recognizes liabilities for anticipated tax audit uncertainties
based on its estimate of whether, and the extent to which
additional taxes would be due on a separate return basis. Tax
liabilities are presented net of any related tax loss
carryforwards.
Item
3. Properties.
As
part of the TSA, SRAX provides us with facilities in Westlake
Village, CA and Mexicali, Mexico where we lease a portion of the
respective office spaces. Our costs associated with these
facilities is a component of management costs we incur. As we are a
virtual company, we believe these locations are suitable and
adequate for our current levels of operations and anticipated
growth.
Item
4. Security Ownership of Certain Beneficial Owners and
Management.
Security
ownership of certain beneficial owners.
Beneficial
ownership for the purposes of the following table is determined in
accordance with the rules and regulations of the SEC. These rules
generally provide that a person is the beneficial owner of
securities if they have or share the power to vote or direct the
voting thereof, or to dispose or direct the disposition thereof or
have the right to acquire such powers within 60 days. Accordingly,
the following table does not include options to purchase our common
stock that are not exercisable within the next 60 days.
Name
and Address of Beneficial Owner (1) |
|
Shares |
|
|
Shares
Underlying Convertible Securities |
|
|
Total |
|
|
Percent
of Class (2) |
|
Directors and named
executive officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul
Feldman (3) |
|
|
841,184,289 |
|
|
|
- |
|
|
|
841,184,289 |
|
|
|
* |
|
Lou Kerner
(4) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
* |
|
George Stella
(5) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
* |
|
Michael
Malone |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
* |
|
Daina
Middleton |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
* |
|
Yin Woon
Rani |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
* |
|
Christopher
Miglino |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
* |
|
All
directors and named executive officers as a group (7
individuals) |
|
|
|
|
|
|
|
|
|
|
841,184,289 |
|
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% owners |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SRAX,
Inc. |
|
|
149,562,566,534 |
|
|
|
- |
|
|
|
149,562,566,534 |
|
|
|
94.51 |
% |
All
directors, named executive officers, and 5% owners as a group (8
entities) |
|
|
|
|
|
|
|
|
|
|
150,403,750,823 |
|
|
|
95.55 |
% |
* |
Represents
less than one percent. |
(1) |
Except
as otherwise indicated, the persons named in this table have sole
voting and investment power with respect to all shares of common
stock shown as beneficially owned by them, subject to community
property laws where applicable and to the information contained in
the footnotes to this table. Unless otherwise indicated, the
address of the beneficial owner is c/o BIG Token, Inc. 2629
Townsgate Road #215, Westlake Village, CA 91361. |
(2) |
Pursuant
to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership
includes any shares as to which a shareholder has sole or shared
voting power or investment power, and also any shares which the
shareholder has the right to acquire within 60 days, including upon
exercise of common share purchase options or warrants. There are
158,244,935,162 shares of common stock issued and outstanding as of
January 27, 2021. |
(3) |
Address
for holder is 1249 Kildare Farm Road, Suite 2019, Cary, NC 27511.
Mr. Feldman’s employment as CEO and sole member of the Board was
terminated as of the close of business on January 27,
2021. |
(4) |
Mr. Kerner
began service as CEO on February 16, 2021.
|
|
|
(5) |
George Stella began
service as Chief Revenue Officer on February 4, 2021.
|
Item
5. Directors and Executive Officers.
The
names of our directors and executive officers and their ages,
positions, and biographies as of the closing of the Share Exchange
(except as expressly stated) are set forth below. Our executive
officers are appointed by, and serve at the discretion of the
Board. There are no family relationships among any of our directors
or executive officers. For a description of the employment
agreements and other ancillary agreements entered into between our
officers and directors and the Company, please refer to Item 5.02
of this Current Report on Form 8-K.
Executive Officers and Directors
Name |
|
Age |
|
Positions |
|
Officer /
Director
Since |
Lou Kerner |
|
59 |
|
Chief Executive
Officer |
|
2021 |
George
Stella |
|
49 |
|
Chief Revenue
Officer |
|
2021 |
Michael
Malone |
|
39 |
|
Chief Financial
Officer and Principal Accounting Officer |
|
2021 |
Christopher
Miglino |
|
52 |
|
Director |
|
2021 |
Daina
Middleton |
|
55 |
|
Director |
|
2021 |
Yin Woon
Rani |
|
48 |
|
Director |
|
2021 |
The
following is biographical information on the members of our
executive officers and board of directors as of the closing of the
Share Exchange:
Lou
Kerner, age 59, joined the Company as chief executive officer
in February 2021. Prior to joining the Company, since June 29,
2017, Mr. Kerner had been focused on cryptocurrency, including as a
VC at CryptoOracle, which he Co-Founded, as an active blogger,
currently with Quantum Economics, and as an advisor to, and partner
of, Blockchain Coinvestors, a fund-of-fund and operator of an
AngelList syndicate investing in crypto related ventures. Mr.
Kerner also founded CryptoMondays, a decentralized Meetup Group
which he’s led since January 2018. Prior to his involvement in
cryptocurrency, Mr. Kerner was a partner at Flight Ventures, an
investment firm from March 2015 through December 2017 and served as
a partner at Chameleon Collective, a strategic advisory firm from
September 2015 through October 2017. Mr. Kerner holds a bachelor’s
degree in economics from UCLA and an MBA from Stanford University.
In evaluating Mr. Kerner’s specific experience, qualifications,
attributes and skills in connection with his appointment as
BIGToken CEO.
George
Stella, age 49, joined the Company as chief revenue officer in
February 2021. Prior to that, Mr. Stella served as executive vice
president of SRAX since March 2018. George began his career in
digital advertising spending 12 years with 24/7 Media where they
played a huge role as the data driven digital marketing space
emerged. He then entered the digital shopper marketing space in its
infancy with OwnerIQ and then HookLogic. Prior to joining SRAX Mr.
Stella served as vice president of sales, helping Yieldbot develop
its digital shopper business.
Christopher
Miglino, age 52, is the co-founder of SRAX, Inc Since April
2010, Mr. Miglino has served as its Chief Executive Officer and a
member its board of directors. He was appointed President of SRAX
company in January 2017. He also served as SRAX’s Chief Financial
Officer from April 2010 until November 2014, and as its principal
financial and accounting officer since August 2015. Mr. Miglino has
over 15 years of experience running various data companies, and
oversaw the creation and development of BIG Token. He also is the
creator of the companies Sequire platform that provides data to
publicly traded companies. In addition, from August 2008 until
March 2010, Mr. Miglino was CEO of the Lime Ad Network, a
subsidiary of Gaiam, Inc. (Nasdaq: GAIA), where his
responsibilities included management of interactive and innovative
advertising programs for 250 green and socially conscious websites.
Prior to that, from June 2004 until August 2008, Mr. Miglino was
Founder and CEO of Conscious Enlightenment, where he oversaw their
day to day operations in the publishing and advertising industry.
Mr. Miglino holds a bachelor’s degree from the University of
Southern California. Mr. Miglino’s role as a co-founder of SRAX,
his operational experience in SRAX as well as his professional
experience technology and advertising sectors were factors
considered with his appointment to the BIG Tokens Board upon
completion of the Share Exchange.
Michael
Malone, age 39, became our principal accounting officer since
January 2021. Mr. Malone has over sixteen (16) years of experience
in corporate finance in public and private companies. From 2014
until December 2018, he served as Vice President Finance of
Westwood One, LLC, a subsidiary of Cumulus Media, Inc. (NYSE:
“CMLS”), an audio broadcast network in New York. Prior to that,
from January 2013 through June 2014, he served as Finance Director
/ Controller for Cumulus Media Network’, audio broadcast network,
until its merger with Westwood One, LLC. Prior to that from 2012 to
2013, he worked as Director of Internal Auditing of Cumulus Media
from. He holds a BA in accounting from Monmouth College.
Daina
Middleton, age 55, is the CEO of Britelite Immersive. She also
is an advisor and board member assisting companies in increasing
their growth potential. From September 2017 through September 2019,
she served as the Chief Executive Officer of Ansira Partners, a
PE-backed marketing technology and services firm. Prior to that,
from 2016 through September 2017, she served as a principal in
Larsen Consulting Group, an arm of Gryphon Investors, coaching
portfolio executives. Prior to joining LCG, she ran B2B Marketing
for Twitter, and was the CEO of Performics, the performance
marketing arm of Publicis. Earlier in her career, she worked for
Hewlett-Packard for 16 years. She joined the board of directors at
Marin Software (NASDAQ: MRIN) in 2014 where she serves on the
Audit/ Finance and Compensation committees. She also serves on the
board of PE-backed account-based marketing firm Madison Logic. She
acts as an advisor for early start ups Ad Fontes Media and
MarketBeam. She is also a published author, publishing “Marketing
in the Participation Age: A Guide to Motivating People to Join,
Share, Take Part, Connect, and Engage,” and “Grace Meets Grit: How
to bring out the Remarkable Courageous Leader Within.” She holds a
bachelor’s degree from Oregon State University. In evaluating Ms.
Middleton’s specific experience, qualifications, attributes and
skills in connection with her appointment to the BIG Tokens Board
upon completion of the Share Exchange, the Company’s Board, and
SRAX’s Board took into account her extensive experience in raising
capital, revenue growth, leadership coaching, marketing and
branding, technology, and her leadership skills throughout such
industries.
Yin
Woon Rani, age 48, has served as the chief executive officer of
MilkPEP, a government administrated program that helps promote the
consumption of fluid milk (best known for the Got Milk? campaign)
since October 2019. Prior to that, from January 2014 – June 2018,
she served as VP and chief customer experience officer for the
Campbell Soup Company (NYSE: CPB), where she helped modernize and
lead integrated communications for the company. Prior to that, from
November 2011 through March 2013, she served as president (North
America) of Universal MCCann, a global media and advertising
agency. She graduated from Yale University, summa cum laude and
earned a Masters of Business Administration from New York
University Stern, where she graduated second in her class. In
evaluating Ms. Rani’s specific experience, qualifications,
attributes and skills in connection with her appointment to the BIG
Tokens Board upon completion of the Share Exchange, the Company’s
Board, and SRAX’s Board took into account her extensive experience
in marketing, media, technology, and her leadership skills
throughout such industries.
Legal
Proceedings.
On
November 13, 2013, Lou Kerner, our chief executive officer was
found to be in violation of NASD Rule 2210(d)(1)(A) and FINRA Rule
2010 with regard to certain statements / posting made with regard
to risk assessment and failure to properly disclose the name of
member firm’s name, and failed to disclose certain ownership of
certain securities discussed in television appearances in violation
of NASD Rule 2711(h)(1)(A) and NASD Rule 2711(h)(1)(C). (See
Cautionary Action - #20110274649). Given FINRA’s determination that
Mr. Kerner did not (i) intend to mislead investors, (ii) attempt to
conceal his financial interests and (iii) intentionally fail to
include written website disclosure contained associated with his
public appearances, FINRA only took a cautionary action.
Item
6. Executive Compensation.
Employment
agreements and how the executive’s compensation is
determined
We
are a party to an employment agreement with Mr. Kerner, which
provides the compensation arrangements with Mr. Kerner.
Mr.
Stella, our chief revenue officer, and Mr. Malone our principal
accounting officer pursuant to the services provided under the
Company’s TSA with SRAX, do not have employment agreements with the
Company. For a further description of the employment agreements and
compensation arrangements of our executive officers, please refer
to Item 5.02 of this Current Report on Form 8-K.
We
have not engaged a compensation consultant or other consultant
performing similar functions to advise our company on compensation
arrangements for our executive officers and directors.
Summary
Compensation Table
The
following table summarizes all compensation recorded by us in each
of the last two completed years ended December 31 (which was the
fiscal year end of SRAX, our parent corporation upon completion of
the Share Exchange on February 4, 2021), for:
|
● |
all
individuals serving as our principal executive officer or acting in
a similar capacity; |
|
● |
our
two most highly compensated named executive officers, whose annual
compensation exceeded $100,000; and |
|
● |
up to
two additional individuals for whom disclosure would have been made
in this table but for the fact that the individual was not serving
as a named executive officer of our company, at December 31,
2020. |
Name and
principal position |
|
Year |
|
|
Salary
($) |
|
|
Bonus
($) |
|
|
Stock
Awards
($)
|
|
|
Option
Awards ($) (1) |
|
|
No equity
incentive plan compensation ($) |
|
|
Non-qualified
deferred
compensation
earnings
($)
|
|
|
All other
compensation ($) |
|
|
Total
($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
George
Stella |
|
|
2020 |
|
|
|
175,000 |
|
|
|
23,047 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14,087 |
|
|
212,134 |
|
Chief
Revenue Officer (2) |
|
|
2019 |
|
|
|
175,000 |
|
|
|
10,534 |
|
|
|
- |
|
|
|
110,450 |
(3) |
|
|
- |
|
|
|
- |
|
|
|
437,392 |
|
|
733,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lou Kerner |
|
|
2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
Chief
Executive Officer (4) |
|
|
2019 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael
Malone |
|
|
2020 |
|
|
|
200,000 |
|
|
|
- |
|
|
|
75,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
21,554 |
|
|
296,554 |
|
Chief
Financial Officer (5) |
|
|
2019 |
|
|
|
199,242 |
|
|
|
- |
|
|
|
75000 |
|
|
|
167,798 |
(6) |
|
|
- |
|
|
|
- |
|
|
|
28,722 |
|
|
470,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul
Feldman |
|
|
2020 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
Chief
Executive Officer(7) |
|
|
2019 |
|
|
|
16,538 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
16,538 |
|
|
(1) |
The
amounts included in the “Option Awards” column represent the
aggregate grant date fair value of the stock options, computed in
accordance with ASC Topic 718. The assumptions made in the
valuations of the option awards are included in Note 12 of the
notes to our Parent Company’s consolidated financial statements
appearing in the 10-K for the year end December 31, 2019 for
options awarded in 2019 or prior. |
|
(2) |
All
amounts paid to Mr. Stella were from SRAX, the parent company of
BIG Token prior to the closing of the Share Exchange on February 4,
2021. |
|
(3) |
Mr.
Stella’s stock option award consisted of 50,000 options to purchase
Class A Common Stock of SRAX at $3.47 per share. The Options vest
1/3 annually beginning March 24, 2019. |
|
(4) |
Lou
Kerner became our Chief Executive Officer effective February 16,
2021. |
|
(5) |
All
amounts paid to Mr. Malone were from SRAX, the parent company of
BIG Token prior to the closing of the Share Exchange on February 4,
2021. |
|
(6) |
Mr.
Malone’s stock option award consisted of 100,000 options to
purchase Class A Common Stock of SRAX at $2.56 per share. The
Options vest quarterly over a three-year period beginning January
1, 2019. |
|
(7) |
Effective
January 27, 2021, Mr. Feldman resigned as chief executive officer,
principal accounting officer, and as a member of our board of
directors. He received no compensation for 2020. Notwithstanding,
Mr. Feldman received 841,184,289 shares of Common Stock for certain
past due and unpaid deferred compensation pursuant to his
separation agreement entered into on January 27, 2021. |
Employment
Agreement with Mr. Kerner
For a
further description of Mr. Kerner’s employment, please refer to
Item 5.02 of this Current Report on Form 8-K.
Employment
Agreement with Mr. Stella
Mr.
Stella does not have an employment agreement with the Company. For
a further description of his compensation arrangement, please refer
to Item 5.02 of this Current Report on Form 8-K.
Employment
Agreement with Mr. Malone
Pursuant
to the terms of the TSA, Mr. Malone will serve as our principal
accounting officer until as the earlier of (i) Mr. Malone’s
resignation or termination, (ii) a replacement candidate is
retained, or (iii) upon the termination of the TSA.
DIRECTOR
COMPENSATION
Director
Compensation
Below is a
description of the Company’s compensation policy for non-employee
director compensation, which is in effect beginning February 4,
2021, the date that the Share Exchange closed.
Board
Compensation Policy
Beginning
on February 4, 2021, each non-employee
director will receive a cash payment of $7,500 per full quarter of
service on the Board. All fees will be paid at the end of each
respective quarter. In the event of partial service for a quarter,
such Board member will receive such prorated portion of director
fees for days of service in the applicable quarter.
The
following table provides information concerning the compensation
paid to our non-executive directors for their services as members
of our board of directors for the year ended December 31, 2020.
Upon completion of the Share Exchange, the Company is adopting a
December 31 fiscal year end. The information in the following table
excludes any reimbursement of out-of-pocket travel and lodging
expenses which we may have paid.
Name |
|
Fees
earned or paid in cash ($) |
|
|
Stock
awards
($)
|
|
|
Option
awards ($) |
|
|
Non-equity
incentive plan compensation ($) |
|
|
Nonqualified
deferred compensation earnings
($)
|
|
|
All other
compensation ($) |
|
|
Total
($)
|
|
Christopher
Miglino(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
1,090,031 |
|
|
|
1,090,031 |
|
Yin Woon
Rani |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Daina
Middleton |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
(1) |
Represents
amounts paid to Mr. Miglino by SRAX, the parent company of BIG
Token pursuant to his services as CEO of SRAX for the year end
12/31/20. Includes, salary, bonus, options, and fringe
benefits.
|
Item
7. Certain Relationships and Related Transactions, and Director
Independence.
Certain
Relationships and Related Party Transactions
Since
January 1, 2020, the Company has entered into the following
transactions that may include related parties:
|
(i) |
On January
27, 2021, Mr. Feldman’s was terminated as our chief executive
officer and sole director and in consideration for past due and
unpaid deferred compensation, the Company issued him 841,184,289
shares of Common Stock.
|
List
of Promotors and certain control persons:
Red
Diamond Partners, LLC, and its affiliates (“Red Diamond”) made a
series of investments in the Company during the period from 2016
through 2020. The investments were made predominantly through the
sale of convertible debentures. In late 2019, the Company began the
process of preparing to undertake a strategic transaction.
Beginning in the fourth quarter of calendar year 2019 and
continuing through calendar year 2020, Red Diamond re-commenced its
investments in the Company to provide ongoing working capital to
the Company in furtherance of such process.
During
this 2019-2020 time period, the Company used the proceeds of Red
Diamond’s investments for operations and for general corporate
purposes, including (but not limited to) the payment of personnel,
legal and outside auditor expenses related to bringing the Company
current in its SEC filings.
As a
result of Red Diamond being a significant creditor of the Company,
during the period commencing in mid-2020, Red Diamond attended
strategic planning meetings with our management and the management
of SRAX where the parties discussed: (i) the requirements and
timelines for bringing the Company current in its filings with the
SEC, (ii) the terms of the Exchange Agreement, (iii) the terms of
the Debt Exchange Agreement pursuant to which Red Diamond would
convert its outstanding debt as required by the Exchange Agreement,
and (iv) overall planning and execution of the strategy that
resulted in BIG Token becoming a publicly reporting company as of
January 27, 2021.
During the period from 2016 through 2021, Red Diamond made the
following investments:
|
● |
During 2016, Red
Diamond invested a total of $682,500 into the Company in exchange
for certain convertible promissory notes. |
|
● |
During 2017, Red
Diamond invested a total of $532,625 into the Company in exchange
for certain convertible promissory notes. |
|
● |
On October 11, 2019,
Red Diamond invested $27,500 into the Company in exchange for a
certain 5% secured promissory note. As of January 28, 2021, this
promissory note accrued $1,814.24 in interest resulting in an
outstanding balance of $29,314.24. |
|
● |
During the fourth
quarter of 2019, Red Diamond invested a total of $170,606 into the
Company in exchange for certain convertible promissory
notes. |
|
● |
During the period
January 2020 to July 2020, Red Diamond invested a total of $41,200
into the Company in exchange for certain convertible promissory
notes. |
|
● |
During the period
August 2020 to September 2020, Red Diamond invested a total of
$90,679 into the Company in exchange for certain convertible
promissory notes with a fixed conversion price of $0.0003. As of
January 28, 2021, these convertible promissory notes accrued
$2,889.30 in interest, resulting in an outstanding balance of
$93,568.30. |
|
● |
On October 22, 2020,
Red Diamond purchased 10,000 shares of Series B Preferred Stock for
$1,000,000. The 10,000 shares of Series B Preferred Stock will be
convertible into shares of Common Stock in accordance with the
conversion price terms set forth in the terms of the Series B
Preferred Stock. |
|
● |
On October 29, 2020
Red Diamond invested an additional $50,000 to purchase an
additional 500 shares of the Series B preferred stock. The 500
shares of Series B Preferred Stock will be convertible into shares
of Common Stock in accordance with the conversion price terms set
forth in the terms of the Series B Preferred Stock. |
On January
27, 2021, the Company and Red Diamond entered into the Debt
Exchange Agreement pursuant to which the Company issued Red Diamond
7,000,000,000 unrestricted shares of Common Stock and 8,318 shares
of its Series C Preferred Stock, convertible into 12,864,419,313
shares of Common Stock, in exchange for and cancellation of Red
Diamond’s outstanding convertible debentures. The January 27, 2021
Exchange Agreement contains a provision that limits the amount of
Company common shares that Red Diamond may sell into the public
markets over the six month period following the closing January 27,
2021 closing under the Exchange Agreement.
The
7,000,000,000 shares of unrestricted Common Stock were issued in
exchange for convertible notes with an outstanding principal and
interest balance of $298,867.04 which relate to Red Diamond
investments that were originally made between March of 2016 and
August of 2017.
The
8,318 shares of Series C Preferred Stock, which are convertible
into 12,864,419,313 of Common Stock, were issued in exchange for
the remaining Red Diamond convertible and non-convertible notes
have an outstanding principal and interest balance of
$549,250.14.
Based on the closing
price of the Company’s common stock of $0.0001 on August 5, 2020
(the date on which Red Diamond agreed to forebear collection
efforts on the Company’s secured debt and about the time Red
Diamond agreed in principle to exchange its debt) the aggregate
value of the Common Stock and Series C preferred Stock, on an as
converted basis and not taking into account any beneficial
ownership limitation, was approximately $1.99 million.
The
number of shares to be received by Red Diamond in exchange for such
promissory notes was determined via negotiations with Paul Feldman,
the Company’s former CEO, Red Diamond and SRAX. Red Diamond did not
pay any additional consideration in connection with the conversion
of the notes.
During the period from 2016 to 2020, Red Diamond entered into the
following agreements and/or modifications:
|
● |
On July 30, 2020, but
effective as of May 1, 2019, the Company and Red Diamond entered
into an amendment agreement, amending the conversion price for all
outstanding promissory notes to a fixed price of
$0.0003. |
|
● |
On August 1, 2020, Red
Diamond and the Company entered into an exchange agreement,
exchanging all previously outstanding Red Diamond convertible
promissory notes as of that date into one master note with a
principal amount of $697,341 with a maturity date of February 1.
2021. As of January 28, 2021 the Master Note accrued $27,893.64 in
interest, resulting in an outstanding balance of
$725,234.64. |
|
● |
On August 5, 2020, the
Company and Red Diamond entered into an amendment agreement
pursuant to which Red Diamond agreed to forebear any collection
action against the Company with respect to the October 11, 2019
secured promissory note until such time as Red Diamond provided the
Company written notice of its intent to commence collection
activities. |
|
● |
During the third and
fourth quarter of 2020, Red Diamond negotiated the terms of the
Debt Exchange Agreement with the Company and SRAX. Pursuant to the
Debt Exchange Agreement, in exchange for 7,000,000,000 unrestricted
shares of Common Stock and 8,318 shares of its Series C Preferred
Stock, convertible into 12,864,419,313 shares of Common Stock, Red
Diamond agreed to exchange and cancel all of its outstanding
convertible and non-convertible notes. |
Red
Diamond disclaims that it is a controlling person or promoter of
the Company. Red Diamond’s current beneficial ownership of the
Company’s outstanding common stock is less than 5%. The shares of
Series B Preferred Stock and Series C Preferred Stock both contain
provisions which limit conversions by Red Diamond (or any other
holder) if any conversion would increase the holder’s beneficial
ownership of the Company’s common stock above 4.99%.
Red
Diamond has made previous investments in SRAX, our parent company.
Red Diamond currently holds 38,200 SRAX common shares, a secured
convertible debenture with a principal amount of $1,174,163.69 and
warrants for 469,666 SRAX common shares. Any conversion or exercise
of such SRAX convertible debentures or warrants would be limited if
any conversion or exercise would increase the holder’s beneficial
ownership of SRAX’s outstanding common stock above 4.99%. Red
Diamond, along with the other participants in SRAX’s June 2020
private placement of $16.1 million secured convertible debentures,
will be entitled to receive certain additional Company common stock
warrants as an adjustment to their SRAX warrants to reflect the
sale of BIG Token to the Company.
List
of Parent Companies
Effective
February 4, 2021, SRAX became a majority shareholder of the Company
and its subsidiary BIG Token. As of the date of this Current Report
on Form 8-K, SRAX owns 149,562,566,584 shares of Common Stock of
the Company, accounting for approximately 95% of the outstanding
Common Stock. Notwithstanding, as more fully described in Item 1.01
of this Current Report on Form 8-K. SRAX also owns 5,000,000 shares
of the Company’s Series A Preferred Stock, accounting for 100% of
the Series A Preferred Stock outstanding. The Series A Preferred
Stock votes 200 votes per share. As a result of such ownership of
securities, SRAX has unilateral control over the Company in all
matters of voting, including election of directors as of the date
hereof.
Independence of Directors
As of
January 27, 2021, the Company’s directors are contained below. For
purposes of determining independence, the Company has adopted the
definition of independence as contained in Nasdaq Market Place Rule
5605(a)(2). Pursuant to the definition, the Company has determined
that Yin Woon Rani and Daina Middleton qualify as
independent.
Director |
|
Independent |
Christopher
Miglino |
|
No |
Yin
Woon Rani |
|
Yes |
Daina
Middleton |
|
Yes |
Prior
to the Share Exchange, BIG Token operated as an operating segment
of SRAX. Immediately following the Share Exchange, SRAX owns
approximately 95% of the outstanding common stock of the Company.
SRAX will continue to have the power acting alone to approve any
action requiring the affirmative vote of a majority of the votes
entitled to be cast and to elect all of our directors.
Pursuant
to the closing of the Share Exchange, the Company entered into
certain agreements with SRAX and BIG Token relating to and the
Company and BIG Token’s ongoing relationship with SRAX. The
material terms of such agreements with SRAX relating to our
historical relationship, the Share Exchange and our relationship
with SRAX subsequent thereto are described below. We do not
currently expect to enter into any additional agreements or other
transactions with SRAX outside the ordinary course or with any of
our directors, officers or other affiliates, other than those
specified below. Any transactions with directors, officers or other
affiliates will be subject to requirements of Sarbanes-Oxley and
SEC rules and regulations.
Relationship
with SRAX
Historical
Relationship with SRAX
SRAX
currently provides certain services to us, and costs associated
with these functions have been allocated to us. The allocations
include costs related to corporate services, such as executive
management, information technology, legal, finance and accounting,
human resources, tax, treasury, research and development, sales and
marketing, shared facilities and other services. These costs were
allocated on a basis of operating expenses, headcount or other
measures we have determined as reasonable. Stock-based compensation
includes expense attributable to our employees and an allocation of
stock-based compensation attributable to employees of SRAX. These
allocations are primarily reflected within operating expenses in
our carve-out statements of operations. Management believes the
basis on which the expenses have been allocated to be a reasonable
reflection of the utilization of services provided to, or the
benefit received by, us during the periods presented. However,
these allocations may not necessarily be indicative of the actual
expenses we would have incurred as an independent company during
the periods prior to Share Exchange or of the costs we will incur
in the future.
We
have operated as an operating segment of SRAX since April 1, 2020.
SRAX currently provides certain services to us, and costs
associated with these functions have been allocated to us. The
allocations include costs related to corporate services, such as
executive management, information technology, legal, finance and
accounting, human resources, tax, treasury, research and
development, sales and marketing, shared facilities and other
services. These costs were allocated on a basis of revenue,
headcount or other measures we have determined as reasonable. The
stock-based compensation includes expense attributable to our
employees and an allocation of stock-based compensation
attributable to employees of SRAX. These allocations are primarily
reflected within operating expenses in our carve-out statements of
operations. Management believes the basis on which the expenses
have been allocated to be a reasonable reflection of the
utilization of services provided to, or the benefit received by, us
during the periods presented. However, these allocations may not
necessarily be indicative of the actual expenses we would have
incurred as an independent company during the periods prior to the
Share Exchange or of the costs we will incur in the
future.
The
amount of these allocations from SRAX was $1.64 million for the
three months ended September 30, 2020, and $1.58
million.
For
the years ended December 31, 2019 and 2018, allocations amounted to
$3.88 million and $3.29 million, respectively for general and
administrative expense.
SRAX
as Our Controlling Stockholder
SRAX
currently owns 95% of our outstanding Common Stock.
Notwithstanding, pursuant to the Share Exchange, the Company has
issued (i) FPVD Warrants to purchase up to 25,568,064,453 shares of
Common Stock, (ii) 8,318 shares of Series C Preferred Stock
convertible into approximately 12,864,419,306 shares of Common
Stock, subject to certain beneficial ownership limitations.
Accordingly, on a fully diluted as converted and as exercised
basis, SRAX will own approximately 76.04% of the
Company.
For
as long as SRAX continues to control more than 50% of our
outstanding common stock, SRAX or its successor-in-interest will be
able to direct the election of all the members of our board of
directors. Similarly, SRAX will have the power to determine matters
submitted to a vote of our stockholders without the consent of our
other stockholders, will have the power to prevent a change in
control of us and will have the power to take certain other actions
that might be favorable to SRAX. In addition, the master separation
agreement will provide that, as long as SRAX beneficially owns at
least 50% of the total voting power of our outstanding capital
stock entitled to vote in the election of our board of directors,
we will not (without SRAX’s prior written consent) take certain
actions, such as incurring additional indebtedness and acquiring
businesses or assets or disposing of assets in excess of certain
amounts. To preserve the tax-free treatment of the separation, the
master separation agreement will include certain covenants and
restrictions to ensure that, until immediately prior to the share
exchange, SRAX will retain beneficial ownership of at least 80% of
our carve-out voting power and 80% of each class of nonvoting
capital stock, if any is outstanding. In addition, to preserve the
tax-free treatment of the separation, we will agree in the tax
matters agreement to restrictions, including restrictions that
would be effective during the period following the distribution,
that could limit our ability to pursue certain strategic
transactions, equity issuances or repurchases or other transactions
that we may believe to be in the best interests of our stockholders
or that might increase the value of our business.
Arrangements
Between SRAX and Our Company
Upon
completion of the Share Exchange, SRAX has enter into certain
agreements that will effect the separation of our business from
SRAX, provide a framework for our relationship with SRAX after the
separation and provide for the allocation between us and SRAX of
SRAX’s assets, employees, liabilities and obligations (including
its investments, property and employee benefits assets and
liabilities) attributable to periods prior to, at and after our
separation from SRAX, specifically:
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a
master separation agreement, or MSA; |
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a
transition services agreement, or TSA; |
The
material terms of each of these agreements are summarized below.
These summaries are qualified in their entirety by reference to the
full text of such agreements, which are filed as exhibits to the
registration statement of which this Form 10 is a part.
When
used in this section, “separation date” refers to the date on which
SRAX will contribute the BIG Token business to us, which will occur
prior to the completion of this Share Exchange.
Master
Separation Agreement
Upon
completion of the Share Exchange, we entered into the MSA with
SRAX, which will set forth the agreements between us and SRAX
regarding the principal corporate transactions required to effect
our separation from SRAX, and other agreements governing the
relationship between SRAX and us.
The
Separation
The MSA
identifies assets to be
transferred, liabilities to be assumed and contracts to be assigned
to each of us and SRAX as part of the separation of SRAX into two
companies, and will provide for when and how these transfers,
assumptions and assignments will occur. In particular, the MSA
provides for, among other things, that, subject to certain
exceptions and the terms and conditions contained
therein:
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the
assets exclusively related to the businesses and operations of
SRAX’s BIG Token business as well as certain other assets mutually
agreed upon by SRAX and BIG Token, which we collectively refer to
as the “BIG Token Assets,” will be transferred to FPVD or one of
our subsidiaries; |
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certain
liabilities (including whether accrued, contingent or otherwise)
arising out of or resulting from the BIG Token Assets, and other
liabilities related to the businesses and operations of SRAX’s BIG
Token business, which we collectively refer to as the “BIG Token
Liabilities,” will be retained by or transferred to us or one of
our subsidiaries; |
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certain
shared contracts will be assigned in part to us or our applicable
subsidiaries or be appropriately amended. |
Except
as may expressly be set forth in the MSA or any other transaction
agreements, all assets will be transferred on an “as is,” “where
is” basis, and the respective transferees will bear the economic
and legal risks that (1) any conveyance will prove to be
insufficient to vest in the transferee good title, free and clear
of any security interest, and (2) any necessary consents or
governmental approvals are not obtained or that any requirements of
laws or judgments are not complied with.
Claims
In
general, each party to the MSA will assume liability for all
pending, threatened and unasserted legal matters related to its own
business or its assumed or retained liabilities and will indemnify
the other party for any liability to the extent arising out of or
resulting from such assumed or retained legal matters.
Intercompany
Accounts
The MSA
provides that, subject to any provisions in the MSA or any other
transaction agreement to the contrary, at or prior to the
separation from SRAX, all intercompany accounts between SRAX and
its subsidiaries, on the one hand, and BIG Token and its
subsidiaries, on the other hand, will be settled.
Further
Assurances
To
the extent that any transfers or assignments contemplated by the
MSA have not been consummated on or prior to the date of the
separation, the parties will agree to cooperate to effect such
transfers as promptly as practicable following the date of the
separation. In addition, each of the parties will agree to
cooperate with the other party and use commercially reasonable
efforts to take or to cause to be taken all actions, and to do, or
to cause to be done, all things reasonably necessary under
applicable law or contractual obligations to consummate and make
effective the transactions contemplated by the MSA and the other
transaction agreements.
Financial
Covenants; Auditors and Audits; Annual Financial Statements and
Accounting
We
have agreed that, for so long as SRAX is required to consolidate
our results of operations and financial position or account for its
investment in our company under the equity method of accounting, we
will, among other things:
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maintain
disclosure controls and procedures and internal control over
financial reporting that will provide reasonable assurance that,
among other things, (1) our annual and quarterly financial
statements are reliable and timely prepared in accordance with GAAP
and applicable law, (2) our transactions are recorded as necessary
to permit the preparation of our financial statements, (3) receipts
and expenditures are authorized at the appropriate level within BIG
Token and (4) unauthorized uses and dispositions of assets that
could have a material effect on our financial statements are
prevented or detected in a timely manner; |
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maintain
the same fiscal year as SRAX; |
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establish
a disclosure committee that will review our Forms 10-Q, 10-K and
other significant filings with the SEC, and permit up to three
employees selected by SRAX to attend such committee’s
meetings; |
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not
change our independent auditors without SRAX’s prior written
consent; |
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use
our reasonable best efforts to enable our independent auditors to
complete their audit of our financial statements in a timely manner
so as to permit timely filing of SRAX’s financial
statements; |
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provide
to SRAX and its independent auditors all information required for
SRAX to meet its schedule for the filing and distribution of its
financial statements and to make available to SRAX and its
independent auditors all documents necessary for the annual audit
of our company as well as access to the responsible company
personnel so that SRAX and its independent auditors may conduct
their audits relating to our financial statements; |
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adhere
to certain specified SRAX accounting policies and notify and
consult with SRAX regarding any changes to our accounting
principles and estimates used in the preparation of our financial
statements, and any deficiencies in, or violations of law in
connection with, our internal control over financial
reporting; |
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coordinate
with SRAX regarding the timing and content of our earnings releases
and cooperate fully (and cause our independent auditors to
cooperate fully) with SRAX in connection with any of its public
filings; and |
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promptly
report in reasonable detail to SRAX the following events or
circumstances that we become aware of: (1) significant deficiencies
and material weaknesses which are reasonably likely to adversely
affect our ability to report financial information; |
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(1)
any fraud that involves management or other employees who have a
significant role in our internal control over financial reporting;
(3) illegal acts; and (4) any report of a material violation of law
made pursuant to the SEC’s attorney conduct rules. |
Indemnification
In
addition, the MSA provides for cross-indemnities principally
designed to place financial responsibility for the obligations and
liabilities of our business with us and financial responsibility
for the obligations and liabilities of SRAX’s business with SRAX.
Specifically, each party will indemnify, defend and hold harmless
the other party, its affiliates and subsidiaries and their
respective officers, directors, employees and agents (collectively,
the “indemnified parties”) for any losses arising out of or
otherwise in connection with:
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the
liabilities that each such party assumed or retained pursuant to
the MSA (which, in our case, would include the BIG Token
Liabilities and, in the case of SRAX, would include the SRAX
Liabilities) and the other transaction agreements;
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the
failure of SRAX or us to pay, perform or otherwise promptly
discharge any of the SRAX Liabilities or the BIG Token Liabilities,
respectively, in accordance with their terms, whether prior to, at
or after the separation; |
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any
breach by such party of the MSA or the other transaction agreements
(other than the intellectual property rights cross-license
agreement, which specifies the parties’ obligations therein);
and |
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except to the extent
relating to a BIG Token Liability, in the case of SRAX, or a SRAX
Liability, in our case, any guarantee, indemnification or
contribution obligation, surety bond or other credit support
agreement or arrangement for the benefit of SRAX or us,
respectively.
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We
will also indemnify, defend and hold harmless the SRAX indemnified
parties for any losses arising out of or otherwise in connection
with any untrue statement or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, with respect to all information (1)
contained in any of our public filings with the SEC following the
Share Exchange or (3) provided by us to SRAX specifically for
inclusion in SRAX’s annual or quarterly or current reports
following the Share Exchange to the extent (A) such information
pertains to us or the BIG Token business or (B) SRAX has provided
prior written notice to us that such information will be included
in one or more annual or quarterly or current reports, specifying
how such information will be presented, and the information is
included in such annual or quarterly or current reports (except, in
the case of clause (B), for liabilities arising out of or resulting
from, or in connection with, any action or inaction of any member
of SRAX, including as a result of any misstatement or omission of
any information by SRAX to us).
SRAX
will also indemnify, defend and hold harmless the BIG Token
indemnified parties for any losses arising out of or otherwise in
connection with any untrue statement or alleged untrue statement of
a material fact or omission or alleged omission to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading, with respect to all information
(1) contained in our registration statement on Form S-1, of which
this Form 10 is a part, or any Form 10 provided by SRAX
specifically for inclusion therein to the extent such information
pertains to (A) SRAX or (B) SRAX’s business (for the avoidance of
doubt, other than the BIG Token business) or (2) provided by SRAX
to us specifically for inclusion in our annual or quarterly or
current reports following the Share Exchange to the extent (A) such
information pertains to (x) SRAX or (y) SRAX’s business (for the
avoidance of doubt, other than the BIG Token business) or (B) we
have provided written notice to SRAX that such information will be
included in one or more annual or quarterly or current reports,
specifying how such information will be presented, and the
information is included in such annual or quarterly or current
reports (except, in the case of clause (B), for liabilities arising
out of or resulting from, or in connection with, any action or
inaction of ours, including as a result of any misstatement or
omission of any information by us to SRAX.
The
MSA also specifies procedures with respect to claims subject to
indemnification and related matters.
Other
Provisions
The
master separation agreement will also govern other matters related
to the consummation of this Share Exchange and the distribution,
the provision and retention of records, access to information,
confidentiality, cooperation with respect to governmental filings
and third-party consents and insurance.
Transition
Services Agreement
In
connection with the completion of this Share Exchange we entered
into a TSA with SRAX pursuant to which SRAX will provide us with
specified services for an indefinite period of limited time to help
ensure an orderly transition following the separation. The TSA
specifies the calculation of our costs for these services. The cost
of these services will be negotiated between us and
SRAX.
In
general, the services will begin on the date of the closing of the
Share Exchange and will cover a period generally not expected to
exceed 12 months. We and SRAX have agreed to perform our respective
services with substantially the same nature, quality, standard of
care and service levels at which the same or similar services were
performed by or on behalf of us or SRAX, as applicable, prior to
the separation or, if not so previously provided, then
substantially similar to those which are applicable to similar
services provided to the affiliates or other business components of
us or SRAX, as applicable.
The TSA
generally provides that the applicable service recipient
indemnifies the applicable service provider for liabilities that
such service provider incurs arising from the provision of services
other than liabilities arising from such service provider’s gross
negligence, bad faith or willful misconduct or material breach of
the TSA, and that the applicable service provider indemnifies the
applicable service recipient for liabilities that such service
recipient incurs arising from such service provider’s gross
negligence, bad faith or willful misconduct or material breach of
the TSA.
Item
8. Legal Proceedings.
None.
Item
9. Market Price of and Dividends on the Registrant’s Common Equity
and Related Stockholder Matters.
Market
Information
The
Company’s common shares are quoted on the pink sheets of the OTC
Markets under the symbol FPVD. Any over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
Holders
As of
January 20, 2021, the Company had approximately 41 record holders
of our common stock.
As of
January 20, 2021, BIG Token had 1 record holder of BIG Token common
stock, SRAX, its parent corporation.
Dividend
Policy
The
Company has never declared or paid any cash dividends on our
capital stock and it does not currently anticipate declaring or
paying cash dividends on our capital stock in the foreseeable
future. The Company currently intends to retain all of our future
earnings, if any, to finance the operation and expansion of the
Company and its business. Any future determination relating to the
Company’s dividend policy will be made at the discretion of the
board of directors and will depend on a number of factors,
including future earnings, capital requirements, financial
conditions, future prospects, contractual restrictions and
covenants, applicable law and other factors that the board of
directors may deem relevant. If the Company does not pay dividends,
a return on your investment will occur only if the market price of
the Company’s common stock appreciates.
Equity
Compensation Plan Information
Neither
FPVD nor BIG Token have any securities authorized for issuance
under equity compensation plans.
Equity
Compensation Plans Not Approved by Security Holders
N/A
Item
10. Recent Sales of Unregistered Securities.
Recent
Sales of Unregistered Securities
The
following information is given with regard to unregistered
securities sold since January 1, 2018 by the Company. The following
securities were issued in private offerings pursuant to the
exemption from registration contained in the Securities Act and the
rules promulgated thereunder in reliance on Section 4(2) thereof,
relating to offers of securities by an issuer not involving any
public offering.
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During
the three months ended January 31, 2018, the Company issued 1)
34,802,500 shares of Common Stock to RDW Capital, LLC upon the
conversion of debt totaling $56,529; and 2) 100,000 shares in
exchange for services valued at $600. |
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During
the six months ended October 31, 2018, the Company issued
570,451,868 shares of Common Stock pursuant to convertible note
conversions of debt totaling $110,710. |
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During
the nine months ended January 31, 2019, the Company issued
646,768,535 shares of Common Stock pursuant to convertible note
conversions of debt totaling $115,290. |
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During
the three months ended July 31, 2020, the Company sold $36,050 in
8%, convertible notes, under similar terms as its previous
convertible note financings; and an additional $66,859 was sold
during August and September 2020. |
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During
the six months ended October 31, 2020, the Company sold $126,729 in
8%, convertible notes. |
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On
October 22, 2020, the Company sold 10,500 shares of Series B
Preferred Stock, with each share having a stated value of $100 for
gross proceeds of $1,050,000. The Series B Preferred Stock is
convertible into Common Stock at any time by the holder at
conversion prices subject to certain adjustments as more fully
described in the Company’s Designation of Preferences Rights and
Limitations of Series B Preferred Stock. As of the date hereof, the
Series B Preferred Shares are convertible into an aggregate of
13,636,906,500 shares of Common Stock. |
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As
disclosed elsewhere in this Current Report on Form
8-K,pursuant to the
closing of the Share Exchange, the Company issued (i) 841,184,289
shares of Common Stock to Paul Feldman, our former CEO, (ii)
149,562,566,534 shares of Common Stock to SRAX, (iii) 7,000,000,000
shares of unrestricted Common Stock to Red Diamond, (iv) 8,318
shares of Series C Preferred Stock convertible into approximately
12,864,419,306 shares of Common Stock, and (v) FPVD Warrants to
purchase 25,568,064,453 shares of Common Stock at an exercise price
per share of $0.00005844216 per share. |
Item
11. Description of Registrant’s Securities to be
Registered.
Description
of registrant’s securities.
Common Stock
Holders
of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, and
do not have cumulative voting rights. Subject to preferences that
may be applicable to any outstanding shares of preferred stock,
holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by our
board of directors out of funds legally available for dividend
payments. All shares of common stock outstanding as of the date of
this Current Report are fully paid and nonassessable. The holders
of common stock have no preferences or rights of conversion,
exchange, pre-emption or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common
stock. In the event of any liquidation, dissolution or winding-up
of the Company’s affairs, holders of Common Stock will be entitled
to share ratably in our assets that are remaining after payment or
provision for payment of all of Seneca’s debts and obligations and
after liquidation payments to holders of outstanding shares of
preferred stock, if any.
Preferred Stock
The
Company’s Board has the authority, without action by its
stockholders, to designate and issue up to an additional 20,000,000
shares of preferred stock in one or more series and to designate
the rights, preferences, and limitations of all such series, any or
all of which may be superior to the rights of the Company’s Common
Stock. It is not possible to state the actual effect of the
issuance of any shares of preferred stock upon the rights of the
holders of Common Stock until the Company’s Board determines the
specific rights of the holders of preferred stock. However, effects
of the issuance of preferred stock include restricting dividends on
the Company’s Common Stock, diluting the voting power of its Common
Stock, impairing the liquidation rights of its Common Stock, and
making it more difficult for a third party to acquire the Company,
which could have the effect of discouraging a third party from
acquiring, or deterring a third party from paying a premium to
acquire, a majority of Seneca’s outstanding voting stock. The
Company is currently undertaking an offering of its Series B
Preferred Stock.
The
Company’s Board may, without further action by its stockholders,
from time to time, direct the issuance of shares of preferred stock
in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series, including voting
rights, dividend rights and redemption and liquidation preferences.
Satisfaction of any dividend preferences of outstanding shares of
preferred stock would reduce the amount of funds available for the
payment of dividends on shares of the Company’s Common Stock.
Holders of shares of preferred stock may be entitled to receive a
preference payment in the event of any liquidation, dissolution or
winding-up of the Company before any payment is made to the holders
of shares of the Company’s Common Stock. In some circumstances, the
issuance of shares of preferred stock may render more difficult or
tend to discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of the Company’s
securities or the removal of incumbent management. Upon the
affirmative vote of the Company’s Board, without stockholder
approval, the Company may issue shares of preferred stock with
voting and conversion rights which could adversely affect the
holders of shares of the Company’s Common Stock.
Series A Preferred Stock
The
Company has a class of preferred stock called Series A Preferred
Stock, par value $0.0001 per share. The Series A Preferred Stock is
not entitled to receive dividends and is not convertible into any
other class of stock or security of the Company. Each Share of
Series A Preferred Stock has the right to vote 200 votes per share
on all shareholder matters where it is entitled to vote. The
Company will redeem any issues shares of Series A Preferred Stock
in whole, but not in part at the option of the holder for $0.0001
per share. As of January 27, 2021, pursuant to the completion of
the Share Exchange, Mr. Feldman, our former CEO had transferred all
5,000,000 shares of Series A Preferred Stock outstanding to
SRAX.
Series
B Preferred Stock
The
Company has a class of Preferred Stock called Series B Preferred
Stock, par value $0.0001 per share. The Series B Preferred Stock
has a stated value of $100 per share and can be converted into
Common Stock of the Company at any time by the holder at a
conversion price that adjusts pursuant to the terms as further
described in the Certificate of Designation of Series B Preferred
Stock. The Series B Preferred Stock is also subject to automatic
conversion upon the occurrence of a “qualified financing” as
described in the Certificate of Designation of Series B Preferred
Stock. Upon a liquidation, the holders of Series B Preferred stock
are entitled to receive their pro-rata portion on an as converted
to Common Stock basis. The Series B Preferred Stock provides for 5%
per annum dividend beginning one year after issuance, to be paid in
Series B Preferred Stock. The Series B Preferred stock does not
have any voting rights. The Company is authorized to issue up to
34,729 shares of Series B Preferred Stock, of which 10,500 has been
issued as of the date hereof.
Series
C Preferred Stock
The
Company has a class of Preferred Stock called Series C Preferred
Stock, par value $0.0001 per share. The Series C Preferred Stock is
not redeemable and has no voting rights. Upon a liquidation, the
holders of Series C Preferred stock are entitled to receive their
pro-rata portion on an as converted to Common Stock basis. Each
share of Series C Preferred Stock is convertible into 1,546,576
shares of Common Stock, subject to certain beneficial ownership
limitations. The Company is authorized to issue up to 8,318 shares
of Series C Preferred Stock, all of which have been issued as of
the date hereof.
FPVD
Warrants
The
Company has issued 25,568,064,462 FPVD Warrants. The FPVD Warrants
have a term of three (3) years, an exercise price of
$0.00005844216, and contain adjustments in the event of stock
dividends and splits, subsequent rights offerings, pro rata
distributions, and certain fundamental transactions as more fully
described in the FPVD Warrants.
Additionally,
the FPVD Warrants provide for (i) price protection in the event
that the Company issues Common Stock or securities convertible into
Common Stock at a imputed pre-money valuation of less than $10
million (“Qualifying Dilutive Issuance”) (ii) the increase in the
number of shares underlying the FPVD Warrants in the event that the
Company undertakes a Qualifying Dilutive Issuance, the shares
underlying the FPVD warrants will adjust so the holder will
maintain its percentage ownership held immediately prior to the
Dilutive Issuance. Additionally, the exercise price of the FPVD
warrants will adjust so that the aggregate consideration received
for the exercise of the warrant taking into account the additional
shares will remain unchanged. The adjustments to exercise price and
number of shares underlying the FPVD Warrant will lapse and be of
no further force or consequence upon the earlier of (i) the Company
raising aggregate proceeds of $5,000,000 at any valuation beginning
on the date of the FPVD Warrants (with the holders receiving the
benefit of such protection afforded by a Qualifying Dilutive
Issuance until the first dollar over $5,000,000 is raised, and (ii)
the Company’s Common Stock becomes listed on a national exchange or
quotation system. The FPVD Warrant allow for cash-less exercise at
any time after six months of issuance in the event that the shares
underlying the FPVD warrants are not subject to an effective
registration statement.
Registration Rights
Agreement for Series B Preferred Stock
Pursuant
to the sale of Series B Preferred Stock, the Company entered into a
registration rights agreement (“RRA”) whereby the Company agreed to
register all of the shares of Common Stock underlying the shares of
Series B Preferred Stock sold to investors. The Company agreed to
file the registration statement registering the shares of Common
Stock within 180 days after the first sale of Series B Preferred
Stock, which occurred on October 22, 2020.
Leak
Out Agreement
Pursuant
to the Debt Exchange Agreement entered into by and between the
Company and Red Diamond on January 27, 2021, as described in Item
1.01 of this Current Report on Form 8-K, Red Diamond agreed that
during the six (6) month period following the date of the
Agreement, it will not offer or sell in a public broker
transaction, any of the 7,000,000,000 unrestricted shares of Common
Stock or shares of Common Stock underlying the 8,318 shares of
Series C Preferred Stock on any trading day in an amount greater
than 20% of the average daily trading volume over the five (5)
trading days preceding any such sale.
SRAX
Registration Rights Agreement
On January
28, 2021, the Company entered into the SRAX RRA with SRAX pursuant
to which SRAX was provided with “Demand” and “Piggyback”
registration rights with respect to 149,562,566,534 shares of
Common Stock issued upon completion of the Share
Exchange.
Transfer
Agent and Registrar
The
transfer agent and registrar for the Company’s Common Stock is
Issuer Direct located at 1 Glenwood Avenue, Suite 1001, Raleigh,
North Carolina, 27603, telephone (919) 481-4000. The Company acts
as the transfer agent and registrar for its Series A, B and C
Preferred Stock.
Listing
on the OTC Pink Sheets
The
Company’s Common Stock is quoted on the pink sheets of the OTC
Markets under the symbol FPVD. Any over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
Item
12. Indemnification of Directors and Officers.
Florida
law permits, under certain circumstances, the indemnification of
any person with respect to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative
or investigative, to which such person was or is a party or is
threatened to be made a party, by reason of his or her being an
officer, director, employee or agent of the corporation or is or
was serving at the request of such corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against liability
incurred in connection with such proceeding, including appeals
thereof; provided, however, that the officer, director, employee or
agent acted in good faith and in a manner that he or she reasonably
believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his or her conduct was unlawful.
The termination of any such third-party action by judgment, order,
settlement, or conviction or upon a plea of nolo contendere or its
equivalent does not, of itself, create a presumption that the
person (i) did not act in good faith and in a manner which he or
she reasonably believed to be in, or not opposed to, the best
interests of the corporation or (ii) with respect to any criminal
action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful. In the case of proceedings by or in the
right of the corporation, Florida law permits indemnification of
any person by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation or is or
was serving at the request of such corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against liability
incurred in connection with such proceeding, including appeals
thereof; provided, however, that the officer, director, employee or
agent acted in good faith and in a manner that he or she reasonably
believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification is made where such
person is adjudged liable, unless a court of competent jurisdiction
determines that, despite the adjudication of liability but in view
of all circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which such court
shall deem proper.
To
the extent that such person is successful on the merits or
otherwise in defending against any such proceeding, Florida law
provides that he or she shall be indemnified against expenses
actually and reasonably incurred by him or her in connection
therewith.
Also,
under Florida law, expenses incurred by an officer or director in
defending a civil or criminal proceeding may be paid by the
corporation in advance of the final disposition of such proceeding
upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if he or she is ultimately found not
to be entitled to indemnification by the corporation pursuant to
this section. Expenses incurred by other employees and agents may
be paid in advance upon such terms or conditions that the Board of
Directors deems appropriate.
Our
Bylaws provides that we shall indemnify our officers, directors,
and employees, and agents unless specifically approved in writing
by the Board of Directors, to the fullest extent authorized by
Section 607.0850 of the Florida Business Corporation Act, or the
FBCA, as it existed when the Bylaws were adopted or as it may
hereafter be amended, but, in the case of any such amendment, only
to the extent that such amendment permits us to provide broader
indemnification rights than were permitted prior to such amendment.
Such indemnification shall continue as to a person who has ceased
to be a director, officer, employee, or agent; provided, however,
that we shall indemnify any such person seeking indemnity in
connection with an action, suit, or proceeding (or part thereof)
initiated by such person only if such action, suit, or proceeding
(or part thereof) was authorized by the our Board of
Directors.
The
Bylaws also provide that such rights of indemnification shall be a
contract right and shall include the right to be paid by us for all
reasonable expenses incurred in defending any such proceeding in
advance of final disposition; provided, however, that the payment
of such expenses incurred by a director or officer in his or her
capacity as a director or officer in advance of the final
disposition of such proceeding shall be made only upon delivery to
us of an undertaking, by or on behalf of such director or officer,
to repay amounts so advanced if it should be determined ultimately
that such director or officer is not entitled to be indemnified
under the Bylaws or otherwise.
In
addition to the authority granted to us by Florida law to indemnify
our directors, certain other provisions of the Florida Act have the
effect of further limiting the personal liability of our directors.
Pursuant to Florida law, a director of a Florida corporation cannot
be held personally liable for monetary damages to the corporation
or any other person for any act or failure to act regarding
corporate management or policy except in the case of certain
qualifying breaches of the director’s duties.
As a
general policy, the Company anticipates entering into
indemnification agreements with our officers and
directors.
Insofar
as indemnification for liabilities arising under the Securities
Act, as amended, may be permitted to our directors and officers, or
to persons controlling us, pursuant to our charter documents and
Florida law, we have been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933, as
amended and is therefore unenforceable.
Item
13. Financial Statements and Supplementary Data.
BIGToken
(A
Business of SRAX, Inc.)
Carve-Out
Financial Statements
Table
of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
SRAX,
Inc.
Opinion
on the Financial Statements
We have
audited the accompanying balance sheets of BigToken, an operating
segment of SRAX, Inc., (A carve-out of SRAX, Inc.), (the
“Company”), as of December 31, 2019 and 2018, and the related
carve-out statements of operations, changes in net-parent
investment and cash flows for each of the two years in the period
ended December 31, 2019 and the related notes (collectively
referred to as the “ carve-out financial statements”). In our
opinion, the carve-out financial statements present fairly, in all
material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and
its cash flows for each of the two years in the period ended
December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
Substantial Doubt
about the Company’s Ability to Continue as a Going
Concern
The
accompanying carve-out financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note 1 to the carve-out financial statements, the
Company has recurring losses from operations, limited cash flow,
and an accumulated deficit. These conditions raise substantial
doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in
Note 1. The carve-out financial statements do not include any
adjustment that might result from the outcome of this uncertainty.
Our opinion is not modified with respect to that matter.
Change
in Accounting Principle
As
discussed in Note 1 to the carve-out financial statements, the
Company has changed its method of accounting for leases as of
January 1, 2019 due to the adoption of the Accounting Standards
Codification Topic 842, Leases.
Basis
for Opinion
These
carve-out financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion
on these carve-out financial statements based on our audits. We are
a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The company is not required to have, nor were we engaged to
perform, an audit of the Company’s internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits
included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that
our audits provide a reasonable basis for our opinion.
Emphasis of
Matter
As
discussed in Note 1, BigToken is an integrated business, an
operating segment, of SRAX, Inc. and is not a stand-alone entity.
The carve-out financial statements of the BigToken reflect the
assets, liabilities, revenue and expenses directly attributable to
BigToken, as well as allocations deemed reasonable by management,
to present the carve-out financial position, results of operations,
changes in net parent investment and cash flows of BigToken on a
stand-alone basis and do not necessarily reflect the carve-out
financial position, results of operations, changes in net parent
investment and cash flows of BigToken in the future or what they
would have been had the BigToken been a separate, stand-alone
entity during the periods presented. Our opinion is not modified
with respect to this matter.
We have
served as SRAX, Inc.’s auditor since 2011.
New York,
NY
February
16, 2021
BigToken
(A
Business of SRAX, Inc.)
Carve-Out Balance Sheets
|
|
As
of |
|
|
As of
December 31, |
|
|
|
September
30, 2020 |
|
|
2019 |
|
|
2018 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents |
|
$ |
92,000 |
|
|
$ |
1,000 |
|
|
$ |
39,000 |
|
Accounts
receivable, net |
|
|
682,000 |
|
|
|
876,000 |
|
|
|
790,000 |
|
Prepaid
expenses |
|
|
21,000 |
|
|
|
189,000 |
|
|
|
133,000 |
|
Marketable
securities |
|
|
- |
|
|
|
64,000 |
|
|
|
20,000 |
|
Other
current assets |
|
|
1,000 |
|
|
|
1,000 |
|
|
|
- |
|
Total current
assets |
|
|
796,000 |
|
|
|
1,131,000 |
|
|
|
982,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and
equipment, net |
|
|
1,000 |
|
|
|
3,000 |
|
|
|
4,000 |
|
Goodwill |
|
|
5,445,000 |
|
|
|
5,445,000 |
|
|
|
5,445,000 |
|
Intangible
assets, net |
|
|
919,000 |
|
|
|
869,000 |
|
|
|
469,000 |
|
Total
Assets |
|
$ |
7,161,000 |
|
|
$ |
7,448,000 |
|
|
$ |
6,900,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Net
Parent Investment |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and
accrued expenses |
|
$ |
855,000 |
|
|
$ |
1,225,000 |
|
|
$ |
689,000 |
|
Other
current liabilities |
|
|
263,000 |
|
|
|
445,000 |
|
|
|
- |
|
Total
Liabilities |
|
|
1,118,000 |
|
|
|
1,670,000 |
|
|
|
689,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies (see Note 7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net parent
investment |
|
|
6,043,000 |
|
|
|
5,778,000 |
|
|
|
6,211,000 |
|
Total Net
Parent Investment |
|
|
6,043,000 |
|
|
|
5,778,000 |
|
|
|
6,211,000 |
|
Total
Liabilities and Net Parent Investment |
|
$ |
7,161,000 |
|
|
$ |
7,448,000 |
|
|
$ |
6,900,000 |
|
The
accompanying notes are an integral part of these Carve-Out
Financial Statements.
BigToken
(A
Business of SRAX, Inc.)
Carve-Out Statements of
Operations
|
|
Nine
Months ended |
|
|
Year
ended |
|
|
|
September
30, |
|
|
December
31, |
|
|
|
2020 |
|
|
2019 |
|
|
2019 |
|
|
2018 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,146,000 |
|
|
$ |
2,242,000 |
|
|
$ |
3,228,000 |
|
|
$ |
2,725,000 |
|
Cost of
revenues |
|
|
491,000 |
|
|
|
1,013,000 |
|
|
|
1,613,000 |
|
|
|
1,605,000 |
|
Gross
profit |
|
|
655,000 |
|
|
|
1,229,000 |
|
|
|
1,615,000 |
|
|
|
1,120,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
related costs |
|
|
3,630,000 |
|
|
|
6,322,000 |
|
|
|
8,123,000 |
|
|
|
5,470,000 |
|
Marketing
and selling expenses |
|
|
725,000 |
|
|
|
2,144,000 |
|
|
|
2,515,000 |
|
|
|
514,000 |
|
Platform
costs |
|
|
844,000 |
|
|
|
812,000 |
|
|
|
1,251,000 |
|
|
|
533,000 |
|
Depreciation and
amortization |
|
|
714,000 |
|
|
|
631,000 |
|
|
|
929,000 |
|
|
|
379,000 |
|
General
and administrative expenses |
|
|
1,593,000 |
|
|
|
3,590,000 |
|
|
|
4,778,000 |
|
|
|
3,140,000 |
|
Total
operating expenses |
|
|
7,506,000 |
|
|
|
13,499,000 |
|
|
|
17,596,000 |
|
|
|
10,036,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
|
(6,851,000 |
) |
|
|
(12,270,000 |
) |
|
|
(15,981,000 |
) |
|
|
(8,916,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
costs |
|
|
(3,624,000 |
) |
|
|
(677,000 |
) |
|
|
(694,000 |
) |
|
|
(4,346,000 |
) |
Interest
income |
|
|
- |
|
|
|
8,000 |
|
|
|
8,000 |
|
|
|
34,000 |
|
Gain
(loss) on sale of assets |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Change in
fair value of derivative liabilities |
|
|
218,000 |
|
|
|
1,342,000 |
|
|
|
1,000,000 |
|
|
|
5,252,000 |
|
Realized
gain on marketable securities |
|
|
333,000 |
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
23,000 |
|
Unrealized
loss on marketable securities |
|
|
- |
|
|
|
(6,000 |
) |
|
|
(6,000 |
) |
|
|
(3,000 |
) |
Exchange
Gain (loss) |
|
|
- |
|
|
|
19,000 |
|
|
|
19,000 |
|
|
|
(15,000 |
) |
Total
other income (expense) |
|
|
(3,073,000 |
) |
|
|
736,000 |
|
|
|
377,000 |
|
|
|
945,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision
for income taxes |
|
|
(9,924,000 |
) |
|
|
(11,534,000 |
) |
|
|
(15,604,000 |
) |
|
|
(7,971,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income tax benefit |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,510,000 |
|
Net
loss |
|
$ |
(9,924,000 |
) |
|
$ |
(11,534,000 |
) |
|
$ |
(15,604,000 |
) |
|
$ |
(5,461,000 |
) |
The
accompanying notes are an integral part of these Carve-Out
Financial Statements.
BigToken
(A
Business of SRAX, Inc.)
Carve-Out Statements of Changes in Net
Parent Investment
|
|
Net Parent
Investment |
|
|
|
|
|
Balance as
of December 31, 2017 |
|
$ |
6,211,000 |
|
Net
loss |
|
|
(5,461,000 |
) |
Net
transfers from parent |
|
|
5,018,000 |
|
Stock-based
compensation expense |
|
|
443,000 |
|
Balance as
of December 31, 2018 |
|
$ |
6,211,000 |
|
Net
loss |
|
|
(15,604,000 |
) |
Net
transfers from parent |
|
|
14,188,000 |
|
Stock-based
compensation expense |
|
|
983,000 |
|
Balance as
of December 31, 2019 |
|
$ |
5,778,000 |
|
Net loss
(unaudited) |
|
|
(9,924,000 |
) |
Net
transfers from parent (unaudited) |
|
|
9,419,000 |
|
Stock-based
compensation expense (unaudited) |
|
|
770,000 |
|
Balance as
of September 30, 2020 (unaudited) |
|
$ |
6,043,000 |
|
The
accompanying notes are an integral part of these Carve-Out
Financial Statements.
BigToken
(A
Business of SRAX, Inc.)
Carve-Out Statements of Cash
Flows
|
|
Nine
Months ended |
|
|
Year
ended |
|
|
|
September
30, |
|
|
December
31, |
|
|
|
2020 |
|
|
2019 |
|
|
2019 |
|
|
2018 |
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
From Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(9,924,000 |
) |
|
$ |
(11,534,000 |
) |
|
$ |
(15,604,000 |
) |
|
$ |
(5,461,000 |
) |
Adjustments to
reconcile net loss to net cash used in operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocations of
corporate overhead |
|
|
6,423,000 |
|
|
|
4,525,000 |
|
|
|
6,510,000 |
|
|
|
3,460,000 |
|
Stock-based
compensation expense |
|
|
237,000 |
|
|
|
278,000 |
|
|
|
467,000 |
|
|
|
- |
|
Provision
for bad debts |
|
|
29,000 |
|
|
|
246,000 |
|
|
|
446,000 |
|
|
|
3,000 |
|
Depreciation
expense |
|
|
2,000 |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
|
- |
|
Amortization of
intangibles |
|
|
385,000 |
|
|
|
240,000 |
|
|
|
348,000 |
|
|
|
143,000 |
|
Realized
gain on marketable securities |
|
|
(333,000 |
) |
|
|
(50,000 |
) |
|
|
(50,000 |
) |
|
|
(23,000 |
) |
Unrealized
loss on marketable securities |
|
|
- |
|
|
|
6,000 |
|
|
|
6,000 |
|
|
|
3,000 |
|
Changes in
operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
165,000 |
|
|
|
(353,000 |
) |
|
|
(532,000 |
) |
|
|
82,000 |
|
Prepaid
expenses |
|
|
168,000 |
|
|
|
(122,000 |
) |
|
|
(56,000 |
) |
|
|
9,000 |
|
Other
current assets |
|
|
- |
|
|
|
(5,000 |
) |
|
|
(1,000 |
) |
|
|
- |
|
Accounts
payable and accrued expenses |
|
|
(370,000 |
) |
|
|
23,000 |
|
|
|
536,000 |
|
|
|
263,000 |
|
Other
current liabilities |
|
|
(182,000 |
) |
|
|
772,000 |
|
|
|
445,000 |
|
|
|
- |
|
Net Cash
Used in Operating Activities |
|
|
(3,400,000 |
) |
|
|
(5,973,000 |
) |
|
|
(7,484,000 |
) |
|
|
(1,521,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
From Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of marketable securities |
|
|
397,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Purchase
of property and equipment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,000 |
) |
Purchase
of software |
|
|
(435,000 |
) |
|
|
(537,000 |
) |
|
|
(748,000 |
) |
|
|
(444,000 |
) |
Net Cash
Used by Investing Activities |
|
|
(38,000 |
) |
|
|
(537,000 |
) |
|
|
(748,000 |
) |
|
|
(448,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
From Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
transfer from parent, net |
|
|
3,529,000 |
|
|
|
6,492,000 |
|
|
|
8,194,000 |
|
|
|
2,001,000 |
|
Net Cash
Provided by Financing Activities |
|
|
3,529,000 |
|
|
|
6,492,000 |
|
|
|
8,194,000 |
|
|
|
2,001,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase
(decrease) in Cash |
|
|
91,000 |
|
|
|
(18,000 |
) |
|
|
(38,000 |
) |
|
|
32,000 |
|
Cash, Beginning of
Period |
|
|
1,000 |
|
|
|
39,000 |
|
|
|
39,000 |
|
|
|
7,000 |
|
Cash, End of
Period |
|
$ |
92,000 |
|
|
$ |
21,000 |
|
|
$ |
1,000 |
|
|
$ |
39,000 |
|
The
accompanying notes are an integral part of these Carve-Out
Financial Statements.
BigToken
(A
Business of SRAX, Inc.)
Notes to Carve-Out Financial
Statements
NOTE
1 – THE COMPANY, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The Company
BIGToken
(“We”,
“Our”, or the “Company”) is a data technology company offering
tools and services to identify and reach consumers for the purpose
of marketing and advertising communication. We are located in Los
Angeles, California. Our technologies assist our clients in: (i)
identifying their core consumers and such consumers’
characteristics across various channels in order to discover new
and measurable opportunities to maximize profits associated with
advertising campaigns and (ii) gaining insight into the activities
of their customers. We derive our revenues from the sale of
proprietary consumer data and sales of digital advertising
campaigns.
The
Company currently operates as an operating segment of SRAX, Inc.
(“SRAX”), as discussed in the Basis of Presentation, below. On
October 1, 2020, SRAX entered into a share exchange agreement (the
“Transaction”) with Force Protection Video Equipment Corp, a
Florida corporation (“Force”). Prior to the Transactions, SRAX
transferred the component of the BIGToken operating segment,
excluding the accounts receivable balance (as of the transfer date)
that did not reside in BIGToken, Inc. SRAX agreed to transfer 100%
of the issued and outstanding common stock of BIGToken, Inc, for
90% of the issued and outstanding shares of Force and 100% of the
issued and outstanding shares of Force’s preferred
stock.
Basis of Presentation
The
Carve-Out Financial Statements of the Company are presented in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”).
Throughout
the periods covered by the Carve-Out Financial Statements, the
Company did not operate as a separate stand-alone entity but,
rather as a business of the SRAX. Consequently, stand-alone
financial statements were not historically prepared for the
Company. The Carve-Out Financial Statements have been prepared in
connection with the Transaction, and are derived from the
accounting records of SRAX using the historical results of
operations and the historical bases of assets and liabilities of
the Company, adjusted as necessary to conform to U.S. GAAP. The
Carve-Out Financial Statements present the assets, liabilities,
revenues, and expenses directly attributed to the Company as well
as certain allocations from the SRAX. Intercompany balances and
transactions between the Company and SRAX have been presented in
Net Parent investment within the Carve-Out Balance Sheets. SRAX’s
debt, the related interest expense and derivative liabilities have
not been allocated and reflected within the Carve-Out Financial
Statements as the Company is not the legal obligor of the debt and
SRAX’s borrowings were not directly attributable to the Company’s
business. The Carve-Out Financial Statements may, therefore, not
reflect the results of operations, financial position or cash flows
that would have resulted had the Company been operated as a
separate entity.
Cash management
Historically,
the Company received funding to cover any shortfalls on operating
cash requirements through a centralized treasury function of
SRAX.
Net Parent investment
As the
Carve-Out Financial Statements are derived from the historical
records of SRAX, the historical equity accounts are eliminated, and
net parent investment is presented in lieu of shareholders’ equity
on the Carve-Out Balance Sheets. The primary components of the net
parent investment are intercompany balances other than related
party payables and the allocation of shared costs. Balances between the Company and SRAX
that were not historically cash settled are included in net parent
investment. Balances between the Company and SRAX that would
historically be cash settled are included in prepaid expenses and
other current assets and accrued liabilities on the
Carve-Out Balance Sheets. Net
parent investment represents SRAX’s interest in the recorded assets
of BIGToken and represents the cumulative investment by SRAX in
BIGToken through the dates presented, inclusive of operating
results.
Cost allocation and attribution
The
Carve-Out Statements of Operations include all costs directly
attributable to the Company, as well as costs for certain functions
and services used by the Company that have been allocated from
SRAX. Costs were allocated to the Carve-Out Financial Statements
for certain operating, selling, governance and corporate functions
such as direct labor, overhead, sales and marketing,
administration, legal and information technology. The costs for
these services and support functions were allocated to the Company
using either specific identification or a pro-rata allocation using
operating expenses, labor allocations and other drivers. Management
believes the methodology for cost allocations is a reasonable
reflection of common expenses incurred by SRAX on the Company’s
behalf.
Liquidity and Going Concern
The
Company has incurred significant losses since its inception and has
not demonstrated an ability to generate sufficient revenues from
the sales of its goods and services to achieved profitable
operations. There can be no assurance that profitable operations
will ever be achieved, or if achieved, could be sustained on a
continuing basis. These factors create substantial doubt about the
Company’s ability to continue as a going concern within one year
after the date that the Carve-Out Financial Statements are issued.
The Carve-Out Financial Statements do not include any adjustments
that might be necessary if the Company is unable to continue as a
going concern. Accordingly, the Carve-Out Financial Statements have
been prepared on a basis that assumes the Company will continue as
a going concern and which contemplates the realization of assets
and satisfaction of liabilities and commitments in the ordinary
course of business.
In
making this assessment we performed a comprehensive analysis of our
current circumstances including: our financial position at
September 30, 2020 our cash flow and cash usage forecasts for the
period covering one-year from the issuance date of these Carve-Out
Financial Statements and our current capital structure.
We
anticipate
raising additional capital through alternative private and public
sales of our equity or debt securities, or a combination thereof.
Although management believes that such capital sources will be
available, there can be no assurance that financing will be
available to us when needed in order to allow us to continue our
operations, or if available, on terms acceptable to us. As our
operations have historically been funded through SRAX’s treasury
program, the Company has minimal cash and cash equivalents and
minimal working capital. If we do not raise sufficient capital in a
timely manner, among other things, we may be forced to scale back
our operations or cease operations all together.
Currently,
we are dependent on SRAX for our continued support to fund our
operations, without which we would need to curtail our
operations.
Use of Estimates
The
Carve-Out Financial Statements have been prepared in conformity
with U.S. GAAP and requires management of the Company to make
estimates and assumptions in the preparation of these Carve-Out
Financial Statements that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities
at the date of the Carve-Out Financial Statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from these estimates and
assumptions.
The
most significant areas that require management judgment and which
are susceptible to possible change in the near term include the
Company’s revenue recognition, provision for bad debts, BIGToken
point redemption liability, stock-based compensation, income taxes,
goodwill and intangible assets.
As of
September 30, 2020, the impact of COVID-19 continues to unfold and
as a result, certain estimates and assumptions require increased
judgment and carry a higher degree of variability and volatility
that could result in material changes to our estimates in future
periods.
Fair Value of Financial Instruments
The
accounting standard for fair value measurements provides a
framework for measuring fair value and requires disclosures
regarding fair value measurements. Fair value is defined as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date, based on the Company’s principal or, in
absence of a principal, most advantageous market for the specific
asset or liability.
The
Company uses a three-tier fair value hierarchy to classify and
disclose all assets and liabilities measured at fair value on a
recurring basis, as well as assets and liabilities measured at fair
value on a non-recurring basis, in periods subsequent to their
initial measurement. The hierarchy requires the Company to use
observable inputs when available, and to minimize the use of
unobservable inputs, when determining fair value. The three tiers
are defined as follows:
Level
1—Observable inputs that reflect quoted market prices (unadjusted)
for identical assets or liabilities in active markets;
Level
2—Observable inputs other than quoted prices in active markets that
are observable either directly or indirectly in the marketplace for
identical or similar assets and liabilities; and
Level
3—Unobservable inputs that are supported by little or no market
data, which require the Company to develop its own
assumptions.
The
determination of fair value and the assessment of a measurement’s
placement within the hierarchy requires judgment. Level 3
valuations often involve a higher degree of judgment and
complexity. Level 3 valuations may require the use of various cost,
market, or income valuation methodologies applied to unobservable
management estimates and assumptions. Management’s assumptions
could vary depending on the asset or liability valued and the
valuation method used. Such assumptions could include: estimates of
prices, earnings, costs, actions of market participants, market
factors, or the weighting of various valuation methods. The Company
may also engage external advisors to assist us in determining fair
value, as appropriate.
Although
the Company believes that the recorded fair value of our financial
instruments is appropriate, these fair values may not be indicative
of net realizable value or reflective of future fair
values.
The
Company’s financial instruments, including cash and cash
equivalents, net accounts receivable, accounts payable and accrued
expenses, are carried at historical cost. At September 30, 2020
(unaudited), December 31, 2019 and 2018, the carrying amounts of
these instruments approximated their fair values because of the
short-term nature of these instruments. The Company measures
certain non-financial assets, liabilities, and equity issuances at
fair value on a non-recurring basis. These non-recurring valuations
include evaluating assets such as long-lived assets and goodwill
for impairment; allocating value to assets in an acquired asset
group; and applying accounting for business
combinations.
Accounts Receivable
Credit is
extended to customers based on an evaluation of their financial
condition and other factors. Management periodically assesses the
Company’s accounts receivable and, if necessary, establishes an
allowance for estimated uncollectible amounts. Accounts determined
to be uncollectible are charged to operations when that
determination is made. The Company usually does not require
collateral.
Concentration of Credit Risk, Significant Customers and Supplier
Risk
Financial
instruments that potentially subject the Company to concentration
of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with financial
institutions within the United States. The balances maintained at
these financial institutions are generally more than the Federal
Deposit Insurance Corporation insurance limits. The Company has not
experienced any loss on these accounts.
As of
September 30, 2020 (unaudited), the Company had three customers
with accounts receivable balances of approximately 23.7%, 19.2% and
17.1% of total accounts receivable. At December 31, 2019, the
Company had three customers with accounts receivable balances of
approximately 25.9%, 16.4% and 15.0%. At December 31, 2018, the
Company had two customers with accounts receivable balances of
approximately 42.9% and 10.5%.
For
the period ended September 30, 2020 (unaudited), the Company had
one customer that account for approximately 19.1% of total revenue.
For the year ended December 31, 2019, the Company had two customers
that account for approximately 19.3% and 14.1% of total revenue.
For the year ended December 31, 2018, the Company had three
customers that accounted for 21.0%, 14.1% and 10.3%.
PREPAID
EXPENSES
Prepaid
expenses are assets held by the Company, which are expected to be
realized and consumed within twelve months after the reporting
period.
MARKETABLE
SECURITIES
Shares
received will be accounted for in accordance with ASC 320 –
Investments – Debt and Equity Securities, as such the shares will
be classified as available-for-sale securities and will be measured
at each reporting period at fair value with the unrealized gain
(loss) as a component of other income (expense). Upon the sale of
the shares, the Company will record the gain (loss) in the
carve-out statement of operations as a component of other income
(expense).
LONG-LIVED
ASSETS
Management evaluates
the recoverability of the Company’s identifiable intangible assets
and other long-lived assets when events or circumstances indicate a
potential impairment exists. Events and circumstances considered by
the Company in determining whether the carrying value of
identifiable intangible assets and other long-lived assets may not
be recoverable include, but are not limited to: significant changes
in performance relative to expected operating results; significant
changes in the use of the assets; significant negative industry or
economic trends; a significant decline in the Company’s stock price
for a sustained period of time; and changes in the Company’s
business strategy. In determining if impairment exists, the Company
estimates the undiscounted cash flows to be generated from the use
and ultimate disposition of these assets. If impairment is
indicated based on a comparison of the assets’ carrying values and
the undiscounted cash flows, the impairment loss is measured as the
amount by which the carrying amount of the assets exceeds the fair
value of the assets.No impairments have
been recorded regarding its identifiable intangible assets or other
long-lived assets during nine months ended September 30, 2020
(unaudited) and 2019 (unaudited) and the years ended December 31,
2019 or 2018, respectively.
Property and equipment
Property
and equipment is stated at cost less accumulated depreciation.
Depreciation is provided on the straight-line basis over the
estimated useful lives of the assets of three to seven
years.
Expenditures for
repair and maintenance which do not materially extend the useful
lives of property and equipment are charged to operations. When
property or equipment is sold or otherwise disposed of, the cost
and related accumulated depreciation are removed from the
respective accounts with the resulting gain or loss reflected in
operations. Management periodically reviews the carrying value of
its property and equipment for impairment.
Intangible assets
Intangible
assets consist of the Company’s intellectual property of internally
developed software and are stated at cost less accumulated
amortization. Amortization is provided for on the straight-line
basis over the estimated useful lives of the assets of five to nine
years.
Costs
incurred to develop computer software for internal use are
capitalized once: (1) the preliminary project stage is completed,
(2) management authorizes and commits to funding a specific
software project, and (3) it is probable that the project will be
completed and the software will be used to perform the function
intended. Costs incurred prior to meeting the qualifications are
expensed as incurred. Capitalization of costs ceases when the
project is substantially complete and ready for its intended use.
Post-implementation costs related to the internal use computer
software, are expensed as incurred. Internal use software
development costs are amortized using the straight-line method over
its estimated useful life which ranges up to three years. Software
development costs may become impaired in situations where
development efforts are abandoned due to the viability of the
planned project becoming doubtful or due to technological
obsolescence of the planned software product.For the nine months
ended September 30, 2020 (unaudited) and 2019 (unaudited) there has
been no impairment associated with internal use software. For the
years ended December 31, 2019, and 2018 there has been no
impairment associated with internal use software. For the nine
months ended September 30, 2020 and years ended December 31, 2019,
and 2018, the Company capitalized software development costs of
$435,000 (unaudited) and $748,000 and $444,000,
respectively.
During
2016, the Company began capitalizing the costs of developing
internal-use computer software, including directly related payroll
costs. The Company amortizes costs associated with its internally
developed software over periods up to three years, beginning when
the software is ready for its intended use.
The
Company capitalizes costs incurred during the application
development stage of internal-use software and amortize these costs
over the estimated useful life. Upgrades and enhancements are
capitalized if they result in added functionality which enable the
software to perform tasks it was previously incapable of
performing. Software maintenance, training, data conversion, and
business process reengineering costs are expensed in the period in
which they are incurred.
Goodwill
Goodwill
is comprised of the purchase price of business combinations in
excess of the fair value assigned at acquisition to the net
tangible and identifiable intangible assets acquired. Goodwill is
not amortized. The Company tests goodwill for impairment for its
reporting units on an annual basis, or when events occur or
circumstances indicate the fair value of a reporting unit is below
its carrying value. If the fair value of a reporting unit is less
than its carrying value, an impairment loss is recorded to the
extent that implied fair value of the goodwill within the reporting
unit is less than its carrying value. The Company performed its
most recent annual goodwill impairment test as of
December 31, 2019 using market data and discounted cash flow
analysis. Based on this analysis, it was determined that the fair
value exceeded the carrying value of its reporting units. The
Company concluded the fair value of the goodwill exceed the
carrying value accordingly there were no indicators of impairment
for the nine months ended September 30, 2020 (unaudited) and 2019
(unaudited) and years ended December 31, 2019 and 2018.
The
Company had historically performed its annual goodwill and
impairment assessment on
December 31st of each year. This aligns the Company with
other advertising sales companies who also generally conduct this
annual analysis in the fourth quarter.
When
evaluating the potential impairment of goodwill, management first
assess a range of qualitative factors, including but not limited
to, macroeconomic conditions, industry conditions, the competitive
environment, changes in the market for the Company’s products and
services, regulatory and political developments, entity specific
factors such as strategy and changes in key personnel, and the
overall financial performance for each of the Company’s reporting
units. If, after completing this assessment, it is determined that
it is more likely than not that the fair value of a reporting unit
is less than its carrying value, we then proceed to the impairment
testing methodology primarily using the income approach (discounted
cash flow method).
We
compare the carrying value of the goodwill, with its fair value, as
determined by a combination of the market approach and income
approach, its estimated discounted cash flows. If the carrying
value of goodwill exceeds its fair value, then the amount of
impairment to be recognized. We operate as one reporting
unit.
When
required, we arrive at our estimates of fair value using a
discounted cash flow methodology which includes estimates of future
cash flows to be generated by specifically identified assets, as
well as selecting a discount rate to measure the present value of
those anticipated cash flows. Estimating future cash flows requires
significant judgment and includes making assumptions about
projected growth rates, industry-specific factors, working capital
requirements, weighted average cost of capital, and current and
anticipated operating conditions. The use of different assumptions
or estimates for future cash flows could produce different
results.
Revenue Recognition
The
Company adopted Accounting Standards Codification (“ASC”) Topic
606, Revenue from Contracts with Customers (“ASC Topic 606”)
on January 1, 2018 using the modified retrospective method. Our
operating results for reporting periods beginning after January 1,
2018 are presented under ASC Topic 606, while prior period amounts
continue to be reported in accordance with our historic accounting
under Topic 605. The timing and measurement of our revenues under
ASC Topic 606 is similar to that recognized under previous
guidance, accordingly, the adoption of ASC Topic 606 did not have a
material impact on our financial position, results of operations,
cash flows, or presentation thereof at adoption or in the current
period. There were no changes in our opening retained earnings
balance as a result of the adoption of ASC Topic 606.
ASC
Topic 606 is a comp