NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three
Months and Nine Months Ended September 30, 2018 and 2017
1.
Organization and Basis of Presentation
Organization
and Reverse Merger
On
October 11, 2016, Integrated Surgical Systems, Inc. (“Integrated”), a Delaware corporation incorporated on October
1, 1990, and Amplify Media Network, Inc. (“Amplify”), a Nevada corporation incorporated on July 22, 2016, executed
a share exchange agreement, as amended, that provided for each outstanding common share of Amplify to be converted into 4.13607
common shares of Integrated (the “Exchange Ratio”), and for each outstanding warrant and stock option to purchase
shares of Amplify common stock be cancelled in exchange for a warrant or stock option to purchase shares of Integrated common
stock based on the Exchange Ratio (the “Recapitalization”).
On
November 4, 2016 (the “Recapitalization Date”), the consummation of the Recapitalization became effective and Amplify
became a wholly-owned subsidiary of Integrated. Pursuant to the Recapitalization, Integrated: (1) issued to the shareholders of
Amplify an aggregate of 12,517,152 shares of Integrated common stock (see Note 14); and (2) issued to MDB Capital Group, LLC (“MDB”)
as an advisory fee, warrants to purchase 1,169,607 shares of Integrated common stock. Existing Integrated stock options to purchase
175,000 shares of Integrated common stock were assumed pursuant to the Recapitalization. Amplify had no common stock options or
warrants outstanding as of the Recapitalization Date.
Amplify’s
Certificate of Incorporation was subsequently amended to change
its name to Amplify Media Network, Inc. on July 27, 2016, to TheMaven Network, Inc. on October 14, 2016, and to Maven Coalition,
Inc. on March 5, 2018 (Amplify is subsequently referred to herein as “Coalition”).
Integrated
was originally incorporated in Delaware on October 1, 1990 under the name Integrated Surgical Systems, Inc, and its Certificate
of Incorporation was subsequently amended to change its name to TheMaven, Inc. on December 2, 2016. Integrated is subsequently
referred to herein as “Maven” (unless the context indicates otherwise, Maven, Coalition, and HubPages, Inc. (as described
in Note 3) are together hereinafter referred to as the “Company”).
Business
Operations
The
Company operates a digital, distribution and monetization platforms that is shared by a coalition of independent, professionally
managed online media publishers (“Maven(s)”). Each Maven joins the coalition by invitation-only and is drawn from
professional journalists, subject matter experts, group evangelists and social leaders. Mavens publish content and oversee an
online community for their respective channels, leveraging a proprietary, socially driven, mobile-enabled, video-focused technology
platform to engage niche audiences within a single network. Generally, Mavens are independently owned strategic partners who receive
a share of revenue from the interaction with their content. When they join, Mavens benefit from the state-of-the-art technology
of the Company’s platform, allowing them to dramatically upgrade performance. At the same time, advertising revenue is dramatically
improved due to the scale the Company has achieved by combining all Mavens onto a single platform and the large and experienced
sales organization. They also benefit from the Company’s membership marketing and management systems to further enhance
their revenue. Additionally, the lead brand within each vertical creates a halo benefit for all Mavens in the vertical while each
of them adds to the breadth and quality of content. While they benefit from these critical performance improvements they also
save substantially in costs of technology, infrastructure, advertising sales and member marketing and management.
The
Company’s growth strategy is to continue to expand the coalition by adding new Mavens in key verticals that management believes
will expand the scale of unique users interacting on the Company’s technology platform. In each vertical, the Company seeks
to build around a leading brand, surround it with subcategory Maven specialists and further enhance coverage with individual expert
contributors. The primary means of expansion is adding Mavens as independent strategic partners. However, in some circumstances
the Company will acquire entities that bring crucial technology that will enhance the platform or branded content providers that
may serve as the cornerstone of an important vertical.
The
Company’s common stock is traded on the Over-the-Counter Market under the symbol “MVEN”
Basis
of Presentation
The
condensed consolidated financial statements of the Company as of September 30, 2018, and for the three months and nine
months ended, are unaudited. In the opinion of management of the Company, all adjustments, including normal recurring accruals,
have been made that are necessary to present fairly the financial position of the Company as of September 30, 2018, and the results
of its operations for the three months and nine months ended September 30, 2018 and 2017, and its cash flows for the nine months
ended September 30, 2018 and 2017. Operating results for the interim periods presented are not necessarily indicative of the results
to be expected for a full fiscal year. The consolidated balance sheet at December 31, 2017, has been derived from the Company’s
audited financial statements at such date.
The
condensed consolidated financial statements and related notes
have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). These
condensed consolidated financial statements have been prepared in accordance with the United States generally accepted accounting
principles (“US GAAP”) for interim financial information, the instructions to Form 10-Q and Regulation S-X. Accordingly,
certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction
with the financial statements and other information included in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2017, as filed with the SEC on May 15, 2018.
Going
Concern
The
Company’s condensed consolidated financial statements have been presented on the basis that the Company is a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As reflected in
the accompanying condensed consolidated financial statements, the Company had revenues of $1,460,958
through September 30, 2018, and has experienced
recurring net losses from operations, negative working capital, and negative operating cash flows. During the nine months
ended September 30, 2018, the Company incurred a net loss attributable to common stockholders of $35,463,647, utilized cash in
operating activities of $6,288,695, and had an accumulated deficit of $25,890,222 as of September 30, 2018. The Company has financed
its working capital requirements since inception through the issuance of its debt and equity securities.
In
December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China. On March 11, 2020 the
World Health Organization has declared COVID-19 to constitute a “Public Health Emergency of International Concern.”
Many national governments and sports authorities around the world have made the decision to postpone/cancel high attendance sports
events in an effort to reduce the spread of the COVID-19 virus. In addition, many governments and businesses have limited non-essential
work activity, furloughed and/or terminated many employees and closed some operations and/or locations, all of which has had a
negative impact on the economic environment.
As
a result of these factors the Company has experienced a decline in revenues and earnings since early March 2020.
While the Company has implemented cost reduction measures in an effort to offset such volume declines, the duration of these declines
remains uncertain. If the volume declines do not stabilize over the next few months, the Company’s 2020 financial results
and operations may be adversely impacted. The extent of the impact on the Company’s operational and financial performance will
depend on the Company’s willingness and ability to take further cost reduction measures as well as future developments,
including the duration and spread of the outbreak, related group gathering and sports event advisories and restrictions,
and the extent and effectiveness of containment actions taken, all of which are highly uncertain and cannot be predicted at the
time of issuance of these condensed consolidated financial statements.
As
a result of the above factors, management has concluded that there is substantial doubt about the Company’s ability
to continue as a going concern within one year of the date that the accompanying condensed consolidated financial statements are
being issued. In addition, the Company’s previous independent registered public accounting firm, in their report
on the Company’s consolidated financial statements for the year ended December 31, 2017, had also expressed substantial
doubt about the Company’s ability to continue as a going concern.
The
ability of the Company to continue as a going concern is impacted by the uncertainty surrounding COVID-19 and could therefore
be dependent upon the Company’s ability to raise additional funds to ultimately achieve sustainable operating revenues and
profitability. From October 2018 through April 2020, the Company has raised aggregate net proceeds of approximately $139 million
through various debt and preferred stock private placements (see Note 18). The Company believes that based on its current assessment
of the impact of COVID-19 it has sufficient resources to fully fund its business operations through April 30, 2021. However, due
to the uncertainty regarding the duration of the impact of COVID-19 and its effect on the Company’s financial performance
the Company estimates that it may require additional capital in capital markets today, which are less liquid given the lack of
clarity surrounding COVID-19.
The accompanying condensed consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
Reclassifications
Certain
comparative amounts as of December 31, 2017 and for the three months and nine months ended September 30, 2017 have been reclassified
to conform to the current period’s presentation. These reclassifications were immaterial, both individually and in the aggregate.
These changes did not impact previously reported loss from operations or net loss.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
accompanying condensed consolidated financial statements of the Company have been prepared in accordance with United States generally
accepted accounting principles (“GAAP”) and include the financial statements of Maven and its wholly-owned subsidiaries,
Coalition, and HubPages, a new wholly-owned subsidiary formed on March 13, 2018 to facilitate the acquisition transaction described
in Note 3. Intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant
estimates include those related to the selection of useful lives of property and equipment, intangible assets, capitalization
of platform development and associated useful lives; assumptions used in accruals for potential liabilities; fair value of assets
acquired and liabilities assumed in the business acquisition, the fair value of the Company’s goodwill and the assessment
of acquired goodwill, other intangible assets and long-lived assets for impairment; determination of the fair value of stock based
compensation and valuation of derivatives; and the assumptions used to calculate contingent liabilities, and realization of deferred
tax assets. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors,
including the current economic environment, and makes adjustments when facts and circumstances dictate. Actual results
could differ from these estimates.
Risks
and Uncertainties
The
Company has a limited operating history and has not generated significant revenues to date. The Company’s business and operations
are sensitive to general business and economic conditions in the U.S. and worldwide. These conditions include short-term and long-term
interest rates, inflation, fluctuations in debt and equity capital markets and the general condition of the U.S. and world economy.
A host of factors beyond the Company’s control could cause fluctuations in these conditions. Adverse developments in these
general business and economic conditions could have a material adverse effect on the Company’s financial condition and the
results of its operations.
In
addition, the Company will compete with many companies that currently have extensive and well-funded projects, marketing and sales
operations as well as extensive human capital. The Company may be unable to compete successfully against these companies. The
Company’s industry is characterized by rapid changes in technology and market demands. As a result, the Company’s
products, services, and/or expertise may become obsolete and/or unmarketable. The Company’s future success will depend on
its ability to adapt to technological advances, anticipate customer and market demands, and enhance its current technology under
development.
B.
Riley FBR, Inc. (“B. Riley FBR”) is a registered broker-dealer owned by B. Riley Financial, Inc., a diversified publicly-traded
financial services company (“B. Riley”), which acted as placement agent for the Series H Preferred Stock financing
(see Note 13). In consideration for its services as placement agent, the Company paid B. Riley FBR a cash fee of $575,000 (including
a previously paid retainer of $75,000) and issued to B. Riley FBR 669 shares of Series H Preferred Stock. In addition, entities
affiliated with B. Riley FBR purchased 5,592 shares of Series H Preferred Stock in the financing. John A. Fichthorn joined the
Board of Directors (the “Board”) of the Company in September 2018 and was elected as Chairman of the Board and Chairman
of the Finance Committee in November 2018. Mr. Fichthorn currently serves as Head of Alternative Investments for B. Riley Capital
Management, LLC, which is an SEC-registered investment adviser and a wholly-owned subsidiary of B. Riley. Todd D. Sims also joined
the Board of the Company in September 2018 and is also a member of the board of directors of B. Riley. Mr. Fichthorn and Mr. Sims
serve on the Board of the Company as designees of B. Riley. Since August 2018, B. Riley FBR has been instrumental in providing
investment banking services to the Company and in raising debt and equity capital for the Company. These services having included
raising debt and equity capital to support the acquisitions of HubPages and Say Media, Inc. (“Say Media”),
and the subsequent acquisition of TheStreet, Inc. and licensing agreement with ABG-SI LLC (as described in Note 18). These services
have also included raising debt for refinancing and working capital purposes through the sale of the 10% Convertible Debentures
(as described in Note 12), and the 10% OID Convertible Debentures, 12% Convertible Debentures, and equity capital through the
sale of Series I and J Convertible Preferred Stock (as described in Note 18).
Digital
Media Content and Channel Partners
The
Company operates a coalition of online media channels and provides digital media (text, audio and video) over the internet that
users may access on demand. As a broadcaster that transmits third party content owned by our Channel Partners via digital media,
the Company applies the Financial Accounting Standards (“FASB”) Accounting Standards Codification (“ASC”)
920, Entertainment – Broadcasters. The Channel Partners generally receive variable amounts of consideration that
are dependent upon the calculation of revenue earned by the channel in a given month, referred to as a “revenue share”,
that are payable in arrears. In certain circumstances, there is a monthly fixed fee minimum or a fixed yield (“revenue per
thousand visitors”) based on the volume of visitors. Information with respect to fixed dollar commitments for channel content
licenses are disclosed in Note 17; Channel Partner agreements that include fixed yield based on the volume of visitors are not
included in such disclosures because, although they are expected to be significant, they cannot be quantified at this time. Expenses
related to Channel Partner agreements are reported in cost of revenue in the condensed consolidated statements of operations.
The cash payments related to Channel Partner agreements are classified within operating activities in the condensed consolidated
statements of cash flows.
Revenue
Recognition
The
Company adopted ASC 606, Revenue from Contracts with Customers,
as the accounting standard for revenue recognition, which was effective as of January 1, 2017. Since the Company had not
previously generated revenue from customers, the Company did not have to transition its accounting method from ASC 605, Revenue
Recognition.
Revenues
are recognized when control of the promised goods or services are transferred to the Company’s customers, in an amount that
reflects the consideration that the Company expects to receive in exchange for those goods or services. The Company generates
all of its revenue from contracts with customers. The Company accounts for revenue on a gross basis, as compared to a net basis,
in its statement of operations. Cost of revenues is presented as a separate line item in the statement of operations. The Company
has made this determination based on it taking the credit risk in its revenue-generating transactions and it also being the primary
obligor responsible for providing the services to the customer.
The
following is a description of the principal activities from which the Company generates revenue:
Advertising
– The Company enters into contracts with advertising networks to serve display or video advertisements on the digital
media pages associated with its various channels. The Company recognizes revenue from advertisements at the point in time when
each ad is viewed as reported by the Company’s advertising network partners. The quantity of advertisements, the impression
bid prices and revenue are reported on a real-time basis. Although reported advertising transactions are subject to adjustment
by the advertising network partners, any such adjustments are known within a few days of month end. The Company owes its independent
publisher Channel Partners a revenue share of the advertising revenue earned which is recorded as service costs in the same period
in which the associated advertising revenue is recognized.
Membership
Subscriptions – The Company enters into contracts with internet users that subscribe to premium content on the digital
media channels. These contracts provide internet users with a membership subscription to access the premium content for a given
period of time, which is generally one year. The Company recognizes revenue from each membership subscription over time based
on a daily calculation of revenue during the reporting period. Subscriber payments are initially recorded as deferred revenue
on the balance sheet. As the Company provides access to the premium content over the membership subscription term, the Company
recognizes revenue and proportionately reduces the deferred revenue balance. The Company owes its independent publisher Channel
Partners a revenue share of the membership subscription revenue earned, which is initially deferred and recorded as deferred contract
costs. The Company recognizes deferred contract costs over the membership subscription term in the same pattern that the associated
membership subscription revenue is recognized.
Disaggregation
of Revenue
The
following table provides information about disaggregated revenue by product line, geographical market and timing of revenue recognition:
|
|
Three
Months Ended
September
30, 2018
|
|
|
Nine
Months Ended
September
30, 2018
|
|
Revenue by product line:
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
1,142,229
|
|
|
$
|
1,414,688
|
|
Membership
subscriptions
|
|
|
15,688
|
|
|
|
46,270
|
|
Total
|
|
$
|
1,157,917
|
|
|
$
|
1,460,958
|
|
Revenue by geographical market:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,157,917
|
|
|
$
|
1,460,958
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,157,917
|
|
|
$
|
1,460,958
|
|
Revenue by timing of recognition:
|
|
|
|
|
|
|
|
|
At point in time
|
|
$
|
1,142,229
|
|
|
$
|
1,414,688
|
|
Over
time
|
|
|
15,688
|
|
|
|
46,270
|
|
Total
|
|
$
|
1,157,917
|
|
|
$
|
1,460,958
|
|
Contract
Balances
The
Company receives payments from advertising customers based upon contractual payment terms; accounts receivable are recorded when
the right to consideration becomes unconditional and are generally collected within 90 days. The Company generally receives payments
from membership subscription customers at the time of sign up for each subscription; accounts receivable from merchant credit
card processors are recorded when the right to consideration becomes unconditional and are generally collected weekly. Contract
assets include contract fulfillment costs related to revenue shares owed to Channel Partners, which are amortized to expense over
the same period of the associated revenue. Contract liabilities include payments received in advance of performance under the
contract and are recognized as revenue over time. The Company had no asset impairment charges related to contract assets during
the three months and nine months ended September 30, 2018 and 2017.
Concentrations
Cash
and Restricted Cash – The Company maintains cash and restricted cash at a bank where amounts on deposit may exceed
the Federal Deposit Insurance Corporation limit during the year. The Company has not experienced any losses in such accounts and
believes it is not exposed to significant credit risk regarding its cash. The following table reconciles total cash and restricted
cash as of September 30, 2018 and December 31, 2017:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Cash
|
|
$
|
1,862,012
|
|
|
$
|
619,249
|
|
Restricted
cash
|
|
|
-
|
|
|
|
3,000,000
|
|
Total cash
and restricted cash
|
|
$
|
1,862,012
|
|
|
$
|
3,619,249
|
|
In
January 2018, the Company raised pursuant to a private placement $3,000,000. The $3,000,000 was received by the Company prior
to December 31, 2017 and was classified as restricted cash in the December 31, 2017 balance sheet and then subsequently reclassified
to cash in January 2018 upon completion of the private placement. In addition, the $3,000,000 investment was classified as investor
demand payable in the December 31, 2017 balance sheet and then subsequently reclassified to equity in January 2018 upon completion
of the private placement.
Significant
Customers – Concentration of credit risk with respect to accounts receivable is limited to customers to whom the Company
makes significant sales. While a reserve for the potential write-off of accounts receivable is maintained, the Company has not
written off any significant accounts to date. To control credit risk, the Company performs regular credit evaluations of its customers’
financial condition.
Revenue
from significant customers as a percentage of the Company’s total revenue during the three months and nine months ended
September 30, 2018 are as follows:
|
|
Three
Months
Ended
September
30, 2018
|
|
|
Nine
Months
Ended
September
30, 2018
|
|
Customer 1
|
|
|
-
|
|
|
|
-
|
|
Customer
2
|
|
|
34
|
%
|
|
|
27
|
%
|
Customer 3
|
|
|
13
|
%
|
|
|
17
|
%
|
Significant
accounts receivable balances as a percentage of the Company’s total accounts receivable as of September 30, 2018 and December
31, 2017 are as follows:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Customer
1
|
|
|
12
|
%
|
|
|
-
|
|
Customer 2
|
|
|
20
|
%
|
|
|
-
|
|
Customer 3
|
|
|
12
|
%
|
|
|
-
|
|
Property
and Equipment
Property
and equipment is stated at cost less accumulated depreciation and amortization. Major improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. Gains and losses from disposition of property and equipment are included in the
statement of operations when realized. Depreciation and amortization are provided using the straight-line method over the following
estimated useful lives:
Office equipment and
computers
|
|
3 years
|
Furniture and fixtures
|
|
3 – 5 years
|
Platform
Development
In
accordance with authoritative guidance, the Company capitalizes platform development costs for internal use when planning and
design efforts are successfully completed, and development is ready to commence. Costs incurred during planning and design, together
with costs incurred for training and maintenance, are expensed as incurred and recorded in research and development expense in
the condensed consolidated statements of operations. The Company places capitalized platform development assets into service and
commences depreciation and amortization when the applicable project or asset is substantially complete and ready for its intended
use. Once placed into service, the Company capitalizes qualifying costs of specified upgrades or enhancements to capitalized platform
development assets when the upgrade or enhancement will result in new or additional functionality.
The
Company capitalizes internal labor costs, including payroll-based and stock based compensation, benefits and payroll taxes, that
are incurred for certain capitalized platform development projects related to the Company’s technology platform. The Company’s
policy with respect to capitalized internal labor stipulates that labor costs for employees working on eligible internal use capital
projects are capitalized as part of the historical cost of the project when the impact, as compared to expensing such labor costs,
is material.
Platform
development costs are amortized on a straight-line basis over three years, which is the estimated useful life of the related asset
and is recorded in cost of revenues in the condensed consolidated statements of operations.
Business
Combinations
The
Company accounts for business combinations using the acquisition method of accounting. The acquisition method of accounting requires
that the purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired
and liabilities assumed using the estimated fair values determined by management as of the acquisition date. Goodwill is measured
as the excess of consideration transferred and the net fair values of the assets acquired and the liabilities assumed at the date
of acquisition. While the Company uses its best estimates and assumptions as part of the purchase price allocation process to
accurately value assets acquired and liabilities assumed at the acquisition date, the Company’s estimates are inherently
uncertain and subject to refinement. As a result, during the measurement period, the Company records adjustments to the assets
acquired and liabilities assumed, with the corresponding offset to goodwill to the extent the Company identifies adjustments to
the preliminary purchase price allocation. Upon the conclusion of the measurement period, which may be up to one year from the
acquisition date, or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to the condensed consolidated statements of operations. Additionally, the Company identifies acquisition-related
contingent payments and determines their respective fair values as of the acquisition date, which are recorded as accrued liabilities
on the condensed consolidated balance sheets. Subsequent changes in fair value of contingent payments are recorded in the condensed
consolidated statements of operations. The Company expenses transaction costs related to the acquisition as incurred.
Intangible
Assets
Intangibles
with finite lives, consisting of developed technology and tradenames,
are amortized using the straight-line method over the estimated economic lives of the assets, which is five years. A finite lived
intangible asset is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may
not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the
use of the asset and its eventual disposition. Tradename consists of trade names in affiliation with HubPages. Intangibles
with an indefinite useful life are not being amortized.
Long-Lived
Assets
The
Company periodically evaluates the carrying value of long-lived assets to be held and used when events or circumstances warrant
such a review. The carrying value of a long-lived asset to be held and used is considered impaired when the anticipated separately
identifiable undiscounted cash flows from such an asset are less than the carrying value of the asset. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined
primarily by reference to the anticipated cash flows discounted at a rate commensurate with the risk involved. No impairment charges
have been recorded in the periods presented.
Goodwill
Goodwill
represents the excess of the purchase price over the fair value of the net tangible and intangible assets of businesses
acquired in a business combination. Goodwill is not amortized but rather is tested for impairment at least annually on December
31, or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable.
The Company has elected to first assess the qualitative factors to determine whether it is more likely than not that the fair
value of a reporting unit is less than its carrying amount as a basis of determining whether it is necessary to perform the quantitative
goodwill impairment test. If the Company determines that it is more likely than not that its fair value is less than its carrying
amount, then the quantitative goodwill impairment test will be performed. The quantitative goodwill impairment test identifies
goodwill impairment and measures the amount of goodwill impairment loss to be recognized by comparing the fair value of a reporting
unit with its carrying amount. If the fair value exceeds the carrying amount, no further analysis is required; otherwise, any
excess of the goodwill carrying amount over the implied fair value is recognized as an impairment loss, and the carrying value
of goodwill is written down to fair value.
Deferred
Financing Costs and Discounts on Debt Obligations
Deferred
financing costs consist of cash and non-cash consideration paid to lenders and third parties with respect to convertible debt
financing transactions, including legal fees and placement agent fees. Such costs are deferred and amortized over the term of
the related debt. Upon the settlement or conversion of convertible debt into common stock, the pro rata portion of any related
unamortized deferred financing costs are charged to operations.
Additional
consideration in the form of warrants and other derivative financial instruments issued to lenders is accounted for at fair value
utilizing information provided in reports prepared by an independent valuation firm. The fair value of warrants and derivatives
is recorded as a reduction to the carrying amount of the related debt, and is being amortized to interest expense over the term
of such debt, with the initial offsetting entries recorded as a liability on the balance sheet. Upon the settlement or conversion
of convertible debt into common stock, the pro rata portion of any related unamortized discount on debt is charged to operations.
Liquidated
Damages
Obligations
with respect to Registration Rights Damages (as described below) and Public Information Failure Damages (as described below) (collectively
the “Liquidating Damages”) accounted for as contingent obligations when it is deemed probable the obligations would
not be satisfied at the time a financing is completed, and are subsequently reviewed at each quarter-end reporting date thereafter.
When such quarterly review indicates that it is probable that the Liquidating Damages will be incurred, the Company records an
estimate of each such obligation at the balance sheet date based on the amount due of such obligation. The Company reviews and
revises such estimates at each quarter-end date based on updated information.
Research
and Development
Research
and development costs are charged to operations in the period incurred. During the three months ended September 30, 2018 and 2017,
research and development costs were $411,268 and $30,776, respectively. During the nine months ended September 30, 2018 and 2017,
research and development costs were $598,645 and $104,095, respectively.
Derivative
Financial Instruments
The
Company accounts for freestanding contracts that are settled in a company’s own stock, including common stock warrants,
to be designated as an equity instrument, and generally as a liability. A contract so designated is carried at fair value on a
company’s balance sheet, with any changes in fair value recorded as a gain or loss in a company’s results of operations.
The
Company records all derivatives on the balance sheet at fair value, adjusted at the end of each reporting period to reflect any
material changes in fair value, with any such changes classified as changes in derivatives valuation in the statement of operations.
The calculation of the fair value of derivatives utilizes highly subjective and theoretical assumptions that can materially affect
fair values from period to period. The recognition of these derivative amounts does not have any impact on cash flows.
At
the date of exercise of any of the warrants, or the conversion of any convertible debt or preferred stock into common stock, the
pro rata fair value of the related warrant liability and any embedded derivative liability is transferred to additional paid-in
capital.
Fair
Value of Financial Instruments
The
authoritative guidance with respect to fair value established a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels and requires that assets and liabilities carried at fair value be classified
and disclosed in one of three categories, as presented below. Disclosure as to transfers in and out of Levels 1 and 2, and activity
in Level 3 fair value measurements, is also required.
Level
1. Observable inputs such as quoted prices in active markets for an identical asset or liability that the Company has the ability
to access as of the measurement date. Financial assets and liabilities utilizing Level 1 inputs include active-exchange traded
securities and exchange-based derivatives.
Level
2. Inputs, other than quoted prices included within Level 1, which are directly observable for the asset or liability or indirectly
observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include
fixed income securities, non-exchange-based derivatives, mutual funds, and fair-value hedges.
Level
3. Unobservable inputs in which there is little or no market data for the asset or liability which requires the reporting entity
to develop its own assumptions. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based
derivatives and commingled investment funds and are measured using present value pricing models.
The
Company determines the level in the fair value hierarchy within which each fair value measurement falls in its entirety, based
on the lowest level input that is significant to the fair value measurement in its entirety. In determining the appropriate levels,
the Company performs an analysis of the assets and liabilities at each reporting period end.
The
carrying amount of the Company’s financial instruments comprising of cash, restricted cash, accounts receivable, promissory
notes receivable, accounts payable and accrued expenses approximate fair value because of the short-term maturity of these instruments.
Preferred
Stock
Preferred
stock (the “Preferred Stock”) (as described in Note 13) is reported as a mezzanine obligation between liabilities
and stockholders’ equity. If it becomes probable that the Preferred Stock will become redeemable, the Company will re-measure
the Preferred Stock by adjusting the carrying value to the redemption value of the Preferred Stock assuming each balance sheet
date is a redemption date.
Stock
Based Compensation
The
Company provides stock based compensation in the form of (a) restricted stock awards to employees and directors, (b) stock option
grants to employees, directors and consultants, and (c) common stock warrants to Channel Partners (refer to Channel Partner Warrants
below).
The
Company accounts for restricted stock awards and stock option grants to employees, directors and consultants by measuring the
cost of services received in exchange for the stock based payments as compensation expense in the Company’s financial statements.
Restricted stock awards and stock option grants to employees which are time-vested are measured at fair value on the grant date
and charged to operations ratably over the vesting period. Restricted stock awards and stock option grants to employees which
are performance-vested are measured at fair value on the grant date and charged to operations when the performance condition is
satisfied.
The
Company accounts for stock based payments to certain directors and consultants and its Channel Partners by determining the value
of the stock compensation based upon the measurement date at either (a) the date at which a performance commitment is reached
or (b) at the date at which the necessary performance to earn the equity instruments is complete.
The
fair value of restricted stock awards which are time-vested is determined using the quoted market price of the Company’s
common stock at the grant date. The fair value of restricted stock awards which provide for performance-vesting and a true-up
provision (as described in Note 14) is determined through consultants with the Company’s independent valuation firm using
the binomial pricing model at the grant date. The fair value of stock options granted and Channel Partner warrants granted as
stock based payments are determined utilizing the Black-Scholes option-pricing model which is affected by several variables, the
most significant of which are the life of the equity award, the exercise price of the stock option or warrants, as compared to
the fair market value of the common stock on the grant date, and the estimated volatility of the common stock over the term of
the equity award. Estimated volatility is based on the historical volatility of the Company’s common stock and is evaluated
based upon market comparisons. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of
grant. The fair market value of common stock is determined by reference to the quoted market price of the Company’s common
stock.
The
Company capitalizes the cost of stock based compensation awards based on the fair value of such awards for platform development
and expenses the cost of stock based compensation awards based on the fair value of such awards to cost of revenues, general and
administrative expense, or research and development expenses, as appropriate, in its condensed consolidated statements of operations.
Channel
Partner Warrants
On
December 19, 2016, the Company’s Board approved up to 5,000,000 stock warrants to issue shares of the Company’s common
stock to provide equity incentive to its Channel Partners (the “Channel Partner Warrants”) to motivate and reward
them for their services to the Company and to align the interests of the Channel Partners with those of stockholders of the Company.
On August 23, 2018, the Board approved a reduction of the number of warrant reserve shares from 5,000,000 to 2,000,000. The issuance
of the Channel Partner Warrants is administered by management and approved by the Board.
The
Channel Partner Warrants granted are subject to a performance condition which is generally based on the average number of unique
visitors on the channel operated by the Channel Partner generated during the six-month period from the launch of the Channel Partner’s
operations on Maven’s platform or the revenue generated during the period from issuance date through a specified end date.
The Company recognizes expense for these equity-based payments as the services are received. The Company has specific objective
criteria for determination of the period over which services are received and expense is recognized.
Income
Taxes
Income
taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and
liabilities at the applicable enacted tax rates. A valuation allowance is provided when it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The Company evaluates the realizability of its deferred tax assets by
assessing its valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the
likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies
that could be implemented to realize the net deferred tax assets.
The
Company computes its year-to-date provision for income taxes by applying the estimated annual effective tax rate to year to date
pretax income or loss and adjusts the provision for discrete tax items recorded in the period. For the three and nine months ended
September 30, 2018, the Company reported a tax benefit of $91,633 on a pretax income related to recognition of a discrete tax
benefit from a partial release of the valuation allowance in connection with the acquisition of HubPages. The net deferred tax
liability from the acquisition of HubPages provided a source of additional income to support the realizability of the Company’s
pre-existing deferred tax assets and as a result, the Company released a portion of its valuation allowance.
Pursuant
to Internal Revenue Code Sections 382 and 383, use of the Company’s net operating loss carryforwards may be limited if a
cumulative change in ownership of more than 50% occurs within any three-year period since the last ownership change. The Company
believes that it did have a change in control under these Sections in connection with its Recapitalization on November 4, 2016
and may have experienced additional control changes under these Sections as a result of recent financing activities. However,
the Company does not anticipate performing a complete analysis of the limitation on the annual use of the net operating loss carryforwards
until the time that it anticipates it will be able to utilize these tax attributes.
The
Company recognizes the tax benefit from uncertain tax positions only if it is more likely than not that the tax positions will
be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured
based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes
interest and penalties related to income tax matters in income tax expense. The Company is also required to assess at each reporting
date whether it is reasonably possible that any significant increases or decreases to its unrecognized tax benefits will occur
during the next 12 months.
The
Company did not recognize any uncertain tax positions or any accrued interest and penalties associated with uncertain tax positions
for any of the periods presented in the financial statements. The Company files tax returns in the United States federal jurisdiction
and New York, California, and other states. The Company is generally subject to examination by income tax authorities for
three years from the filing of a tax return, therefore, the federal and certain state returns from 2015 forward and the California
returns from 2014 forward are subject to examination.
Income
(Loss) per Common Share
Basic
income or loss per share is computed using the weighted average number of common shares outstanding during the period and excludes
any dilutive effects of common stock equivalent shares, such as stock options, restricted stock, and warrants. All restricted
stock is considered outstanding but is included in the computation of basic income (loss) per common share only when the underlying
restrictions expire, the shares are no longer forfeitable, and are thus vested. Diluted income per common share is computed using
the weighted average number of common shares outstanding and common stock equivalent shares outstanding during the period using
the treasury stock method. Common stock equivalent shares are excluded from the computation if their effect is anti-dilutive.
At
September 30, 2018 and 2017, the Company excluded the outstanding securities summarized below (capitalized terms are described
herein), which entitle the holders thereof to acquire shares of common stock, from its calculation of net income (loss) per common
share, as their effect would have been anti-dilutive.
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
Series G Preferred Stock
|
|
|
188,791
|
|
|
|
172,374
|
|
Series H Preferred Stock
|
|
|
58,785,606
|
|
|
|
-
|
|
Unvested and forfeitable restricted
stock awards
|
|
|
5,340,362
|
|
|
|
8,012,972
|
|
Financing Warrants
|
|
|
3,074,018
|
|
|
|
1,169,607
|
|
Channel Partner Warrants
|
|
|
1,099,008
|
|
|
|
3,424,500
|
|
Common stock
options
|
|
|
9,693,831
|
|
|
|
2,069,137
|
|
Total
|
|
|
78,181,616
|
|
|
|
14,848,590
|
|
Recent
Accounting Pronouncements
Recently
Adopted Accounting Standards
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers
(Topic 606) (“ASU 2014-09”). ASU 2014-09 eliminates transaction- and industry-specific revenue recognition guidance
under current GAAP and replaces it with a principles-based approach for determining revenue recognition. ASU 2014-09 requires
that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. ASU 2014-09
also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer
contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill
a contract. The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, and ASU 2016-20, all of which clarify
certain implementation guidance within ASU 2014-09. The Company began recognition of revenue from contracts with customers as
a result of the launch of its network operations during the quarter beginning July 1, 2017; the Company had not previously generated
revenues from customers prior to that date. The Company adopted the provisions of ASU 2014-09 in the quarter beginning July 1,
2017 using the modified retrospective approach, which requires that the Company apply the new guidance to all new contracts initiated
on or after January 1, 2017. As the Company did not have any contracts which had remaining obligations as of the January
1, 2017 effective date, the Company was not required to record an adjustment to the opening balance of its retained earnings
(accumulated deficit) account on such date. Under this method, the Company is not required to restate comparative periods in its
financial statements.
In
November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). ASU 2016-18
addresses diversity in practice due to a lack of guidance on how to classify and present changes in restricted cash or restricted
cash equivalents in the statement of cash flows. ASU 2016-18 does not define restricted cash and does not require any change in
practice for what an entity reports as restricted cash. ASU 2016-18 requires that a statement of cash flows explain the change
during the period in restricted cash or restricted cash equivalents, in addition to changes in cash and cash equivalents. Restricted
cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period
and end-of-period total amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash
will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. ASU
2016-18 requires an entity to disclose information about the nature of the restrictions and amounts described as restricted cash
and restricted cash equivalents. Further, when cash, cash equivalents, restricted cash, and restricted cash equivalents are presented
in more than one line item on the balance sheet, an entity must reconcile these amounts to the total shown on the statement of
cash flows, either in narrative or tabular format, and should be provided on the face of the cash flow statement or in the notes
to the financial statements. The Company adopted the provisions of ASU 2016-18 in the quarter beginning January 1, 2018. The adoption
of ASU 2016-18 did not affect the presentation of the Company’s cash flow statement for the year ended December 31, 2017,
however, the Company has expanded its disclosure with respect to restricted cash.
Recently
Issued Accounting Standards
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires a
lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification
of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount,
timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. ASU 2016-02 has subsequently been amended and modified
by ASU 2018-10, 2018-11 and 2018-20. ASU 2016-02 (including the subsequent amendments and modifications) is effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years. Accordingly, the Company intends
to adopt the provisions of ASU 2016-02 in the quarter beginning January 1, 2019. The Company has not completed its analysis of
the impact that the adoption of ASU 2016-02 will have on the Company’s financial statement presentation or disclosures subsequent
to adoption.
In
June 2016, the FASB issued Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires a financial asset (or a group
of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The amendments
broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either
collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected
credit loss, which will be more decision useful to users of the financial statements. ASU 2016-13 is effective for the Company
for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is allowed
as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is
currently evaluating the implementation approach and the impact of adoption of this new standard, along with subsequent clarifying
guidance, on the Company’s financial statements and related disclosures.
In July 2017, the FASB
issued Accounting Standards Update No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part
II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 allows
companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is
considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with
down round features are no longer required to be accounted for as derivative liabilities. A company will recognize the value of
a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding
financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income
available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features
containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be
amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within
those fiscal years. The Company intends to adopt the provisions of ASU 2017-11 in the quarter beginning January 1, 2019. The Company
has not completed its analysis of the impact that the adoption of ASU 2017-11 will have on the Company’s financial statement
presentation or disclosures subsequent to adoption.
In
June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include share-based payment
transactions for acquiring goods and services from nonemployees. ASU 2018-07 also clarifies that Topic 718 does not apply to share-based
payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services
to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic 606). ASU 2018-07 is effective
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Accordingly, the Company
intends to adopt the provisions of ASU 2018-07 in the quarter beginning January 1, 2019. The Company has not completed its analysis
of the impact that the adoption of ASU 2018-07 will have on the Company’s financial statement presentation or disclosures
subsequent to adoption.
Management
does not believe that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would have
a material impact on the Company’s financial statement presentation or disclosures.
3.
Acquisition of HubPages,
Inc.
On
March 13, 2018, the Company and HubPages, together with HP Acquisition Co, Inc. (“HPAC”), a wholly-owned subsidiary
of the Company incorporated in Delaware on March 13, 2018 in order to facilitate the acquisition of HubPages by the Company, entered
into an Agreement and Plan of Merger, as amended (the “Merger Agreement”), pursuant to which HPAC would merge with
and into HubPages, with HubPages continuing as the surviving corporation in the merger and as a wholly-owned subsidiary of the
Company (the “Merger”). On June 1, 2018, the parties to the Merger Agreement entered into an amendment (the “Amendment”),
pursuant to which the parties agreed, among other things, that on or before June 15, 2018 the Company would (i) pay directly to
counsel for HubPages the legal fees and expenses incurred by HubPages in connection with the transactions contemplated by the
Merger Agreement as of the date of such payment (the “Counsel Payment”); and (ii) deposit into escrow the sum of (x)
$5,000,000 minus (y) the amount of the Counsel Payment. On June 15, 2018, the Company made the requisite payment of $5,000,000
under the Merger Agreement.
On
August 23, 2018, the Company acquired all the outstanding shares of HubPages, a Delaware corporation, for total cash consideration
of $10,569,904, pursuant to the Merger. The results of operation of the acquired business and the estimated fair market values
of the assets acquired and liabilities assumed have been included in the condensed consolidated financial statements as of the
acquisition date. The Company acquired HubPages to enhance the user’s experience by increasing content. HubPages is a digital
media company that operates a network of 27 premium content channels that act as an open community for writers, explorers, knowledge
seekers and conversation starters to connect in an interactive and informative online space. HubPages operates in the United States.
The
Company uses the acquisition method of accounting which is based on ASC, Business Combinations (Topic 805), and uses the fair
value concepts which requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair
values as of the acquisition date. Maven is the accounting acquirer and HubPages merged with Maven’s wholly owned subsidiary
HPAC. The condensed consolidated financial statements of Maven for period prior to the Merger are considered to be the historical
financial statements of the Company.
The
Company paid cash consideration of $10,000,000 to the stockholders and holders of vested options of HubPages, including
a $5,000,000 deposit paid on June 15, 2018, as well as additional cash consideration of $569,904, which consists of legal fees
and costs incurred by HubPages, for total cash consideration of $10,569,904. The Company also issued a total of 2,399,997
shares of the Company’s common stock, subject to vesting and a true-up provision (as described in Note 14), to certain key
personnel of HubPages who agreed to continue their employment with HubPages subsequent to the closing of the transaction. The
shares issued are for post combination services (see Note 14).
The
Company incurred $95,393 in transaction costs related to the acquisition, which primarily consisted of banking, legal, accounting
and valuation-related expenses. The acquisition related expenses were recorded in general and administrative expenses in the condensed
consolidated statements of operations.
The
purchase price allocation resulted in the following amounts being allocated to the assets acquired (cash acquired of $1,537,308
is included in current assets) and liabilities assumed at the closing date of the acquisition based upon their respective
fair values as summarized below:
Current assets
|
|
$
|
1,588,096
|
|
Accounts receivable and unbilled receivables
|
|
|
1,033,080
|
|
Other assets
|
|
|
25,812
|
|
Developed technology
|
|
|
6,740,000
|
|
Tradename
|
|
|
268,000
|
|
Goodwill
|
|
|
1,857,663
|
|
Current liabilities
|
|
|
(851,114
|
)
|
Deferred tax
liability
|
|
|
(91,633
|
)
|
Net assets acquired
|
|
$
|
10,569,904
|
|
The
Company funded the closing of the Merger from the net proceeds from the Series H Preferred Stock financing (as described in Note
13).
The
fair value of the intangible assets were determined as follows: developed technology was determined under the income approach;
and tradename was determined by employing the relief from royalty approach. The useful life for the intangible assets is five
years.
The
excess of purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed represents goodwill
from the acquisition. Goodwill is recorded as a non-current asset that is not amortized but is subject to an annual review for
impairment. The Company believes the factors that contributed to goodwill include the acquisition of a talented workforce that
expands the Company’s expertise and synergies that are specific to the Company’s consolidated business and not available
to market participants. No portion of the goodwill will be deductible for tax purposes.
The
amounts of HubPages revenue and earnings included in the Company’s condensed consolidated statements of operations for the
period ended September 30, 2018, and the revenue and earnings of the combined entity had the acquisition date been January 1,
2018 and 2017, are as follows:
|
|
Revenue
|
|
|
Earnings
|
|
Actual from August 23, 2018 to September 30,
2018
|
|
$
|
843,042
|
|
|
$
|
162,550
|
|
Supplemental pro forma from July 1, 2018 to September 30, 2018
(unaudited)
|
|
|
2,250,154
|
|
|
|
(8,854,343
|
)
|
Supplemental pro forma from July 1, 2017 to September 30, 2017
(unaudited)
|
|
|
1,296,903
|
|
|
|
(1,854,412
|
)
|
Supplemental pro forma from January 1, 2018 to September 30,
2018 (unaudited)
|
|
|
6,001,424
|
|
|
|
(18,003,676
|
)
|
Supplemental pro forma from January 1, 2017 to September 30,
2017 (unaudited)
|
|
|
3,095,570
|
|
|
|
(5,403,026
|
)
|
For
the nine months ended September 30, 2018, supplemental pro forma earnings were adjusted to exclude $95,393 of acquisition-related
costs. The supplemental pro forma earnings for the nine months ended September 30, 2018 and 2017 were adjusted for the vesting
of restricted stocks awards to HubPages employees in connection with the Merger of $460,100 and $505,400, respectively, and the
amortization of the acquired assets of $706,600 and $772,200, respectively.
For
the three months ended September 30, 2018, supplemental pro forma earnings were adjusted to exclude $95,393 of acquisition-related
costs. The supplemental pro forma earnings for three months ended September 30, 2018 and 2017 were adjusted for the vesting of
restricted stocks awards to HubPages employees in connection with the Merger of $104,600 and $177,200, respectively, and the amortization
of the acquired assets by $203,500 and $261,200, respectively.
4.
Promissory Notes Receivable
On
March 19, 2018, the Company entered into a non-binding letter of intent (the “Letter of Intent”) to acquire Say Media,
a media and publishing technology company. Pursuant to the Letter of Intent, Maven loaned Say Media $1,000,000 under a
secured promissory note dated March 26, 2018 payable on the six month anniversary of the earlier of (i) the termination of the
Letter of Intent, or (ii) if Maven and Say Media should execute a definitive agreement (as defined in the Letter of Intent), the
termination of the definitive agreement (such date, the “Maturity Date”). Under the secured promissory note, interest
shall accrue at a rate of 5% per annum, with all accrued and unpaid interest payable on the Maturity Date, with prepayment permitted
at any time without premium or penalty. In the event of default, interest would accrue at a rate of 10%.
Additional
promissory notes were issued as follows: (1) on July 23, 2018, a secured promissory note in the principal amount of $250,000,
with a Maturity Date and interest terms as outlined above; (2) on August 21, 2018, a senior secured promissory note in the principal
amount of $322,363, due and payable on February 21, 2019, with interest terms as outlined above; (3) subsequent to the balance
sheet date, on November 30, 2018, a senior secured promissory note in the principal amount of $4,322,165 (as of September 30,
2018 the balance under such promissory note was $2,122,691), due and payable on or before the first business day following the
earlier of (i) the consummation of the Closing, as defined under the Merger Agreements, as described below, and (ii) February
21, 2019, with interest terms as outlined above; totaling $3,695,054 in promissory notes as of September 30, 2018.
On
December 12, 2018 pursuant to an Agreement and Plan of Merger entered into on October 12, 2018 and amended on October 17, 2018
(collectively the “Merger Agreements”), the Company settled the promissory notes receivable by effectively forgiving
$1,166,556 of the balance due as of September 30, 2018 as reflected in the condensed consolidated statements of operations. The
remaining balance due under the promissory notes receivable of $2,528,498 as of September 30, 2018 was reflected as an advance
against the purchase price. See Note 16 and 18 for additional information concerning this transaction.
5.
Property and Equipment
Property
and equipment costs as of September 30, 2018 and December 31, 2017 are summarized as follows:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Office equipment and computers
|
|
$
|
74,369
|
|
|
$
|
46,309
|
|
Furniture
and fixtures
|
|
|
22,419
|
|
|
|
21,220
|
|
|
|
|
96,788
|
|
|
|
67,529
|
|
Less accumulated
depreciation and amortization
|
|
|
(32,200
|
)
|
|
|
(12,859
|
)
|
Net property
and equipment costs
|
|
$
|
64,588
|
|
|
$
|
54,670
|
|
Depreciation
expense for the three months ended September 30, 2018 and 2017 was $7,096 and $2,663, respectively. Depreciation expense for the
nine months ended September 30, 2018 and 2017 was $19,341 and $7,990, respectively. Depreciation expense is included in research
and development expenses and general and administrative expenses, as appropriate, in the condensed consolidated statements of
operations.
6.
Platform Development
Platform
development costs as of September 30, 2018 and December 31, 2017 are summarized as follows:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Platform
development costs
|
|
$
|
6,314,528
|
|
|
$
|
3,145,308
|
|
Less accumulated
amortization
|
|
|
(1,783,532)
|
|
|
|
(512,251)
|
|
Net platform development
costs
|
|
$
|
4,530,996
|
|
|
$
|
2,633,057
|
|
A
summary of platform development cost activity for the nine months ended September 30, 2018 is as follows:
Platform
development at January 1, 2018
|
|
$
|
3,145,308
|
|
Costs capitalized
during the period:
|
|
|
|
|
Payroll-based
costs
|
|
|
1,660,331
|
|
Stock
based compensation costs
|
|
|
1,508,889
|
|
Platform development
at September 30, 2018
|
|
$
|
6,314,528
|
|
Amortization
expense for the platform development costs for the three months ended September 30, 2018 and 2017, was $488,565 and $173,000,
respectively. Amortization expense for the platform development costs for the nine months ended September 30, 2018 and 2017, was
$1,271,281 and $226,000, respectively. Amortization expense for platform development is included in cost of revenues in
the condensed consolidated statements of operations.
7.
Intangible Assets
Intangible
assets subject to amortization as of September 30, 2018 consisted of the following:
|
|
September
30, 2018
|
|
|
|
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying Amount
|
|
Developed technology
|
|
$
|
6,740,000
|
|
|
$
|
(141,323
|
)
|
|
$
|
6,598,677
|
|
Tradename
|
|
|
268,000
|
|
|
|
(5,619
|
)
|
|
|
262,381
|
|
Website domain
name
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
Total intangible
assets
|
|
$
|
7,028,000
|
|
|
$
|
(146,942
|
)
|
|
$
|
6,881,058
|
|
Intangible
assets subject to amortization were recorded as part of the Company’s business acquisition of HubPages for the developed
technology and tradename. The website domain name has an infinite life and is not being amortized. Amortization expense for three
months and nine months ended September 30, 2018 was $146,942.
As
of September 30, 2018, estimated total amortization expense for the next five years related to the Company’s intangible
assets subject to amortization is as follows:
September 30,
|
|
|
|
|
2019
|
|
$
|
1,401,600
|
|
2020
|
|
|
1,401,600
|
|
2021
|
|
|
1,401,600
|
|
2022
|
|
|
1,401,600
|
|
2023
|
|
|
1,254,658
|
|
|
|
$
|
6,861,058
|
|
8.
Goodwill
The
changes in the carrying value of goodwill during the nine months ended September 30, 2018 is as follows:
|
|
September
30, 2018
|
|
Goodwill at January 1, 2018
|
|
$
|
-
|
|
Goodwill
acquired in acquisition of HubPages
|
|
|
1,857,663
|
|
Goodwill at September 30, 2018
|
|
$
|
1,857,663
|
|
The
Company performs its annual impairment test at the reporting unit level, which is the operating segment or one level below the
operating segment. Management determined that the Company would be aggregated into a single reporting unit for purposes of performing
the impairment test for goodwill. For the nine months ended September 30, 2018, there is no change in goodwill and no impairment. The impairment evaluation process includes, amongst other things, making assumptions about variables,
such as revenue growth, including long-term growth rates, profitability and discount rates.
9.
Accrued Expenses
Accrued
expenses as of September 30, 2018 and December 31, 2017 are summarized as follows:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
General accrued expenses
|
|
$
|
175,140
|
|
|
$
|
150,136
|
|
Accrued payroll and related taxes
|
|
|
191,425
|
|
|
|
-
|
|
Accrued publisher expenses
|
|
|
609,525
|
|
|
|
-
|
|
Other accrued
expenses
|
|
|
52,082
|
|
|
|
-
|
|
Total accrued
expenses
|
|
$
|
1,028,172
|
|
|
$
|
150,136
|
|
10.
Liquidating Damages Payable
As of September
30, 2018, the Company recorded $2,667,798 as Liquidated Damages in its condensed consolidated balance sheets. The components
of the Liquidating Damages consist of the following.
Registration
Rights Damages – On September 28, 2018, the Company determined that the registration statement covering the Series H
Preferred Stock would not be probable of being declared effective within the requisite time frame, therefore, the Company would
be liable for the maximum Liquidating Damages in connection with the Series H Preferred Stock issuance, with any related interest
provisions (see Note 13).
Public
Information Failure Damages – On September 28, 2018, the Company determined that the public information requirements
in connection with the Series H Preferred Stock (as further described below) would not be probable of being satisfied within the
requisite time frame, therefore, the Company would be liable for the maximum Liquidating Damages in connection with the Series
H Preferred Stock issuance, with any related interest provisions (see Note 13).
11.
Fair Value Measurements
The
Company accounts for certain warrants and the embedded conversion features of the 8% Promissory Notes and 10% Convertible Debentures
(both as described in Note 12) as derivative liabilities, which requires that the Company carry such amount in its condensed consolidated
balance sheets as a liability at fair value, as adjusted at each reporting period-end.
The
Company determined, due to their greater complexity, prior to the reset provision (as described in Note 12), the fair value of
the L2 Warrants (as described in Note 14) and the embedded conversion feature with respect to the 8% Promissory Notes, as of the
date of repayment, and 10% Convertible Debentures, as of the date of conversion, using appropriate valuation models derived through
consultations with the Company’s independent valuation firm. The Company determined the fair value of the Strome Warrants
(as described in Note 14) utilizing the Black-Scholes valuation model as further described below. After the reset provision, the
Company determined the fair value of the L2 Warrants utilizing the Black-Scholes valuation model as further described below since
such valuation model meets the fair value measurement objective based on the substantive characteristics of the instrument. These
warrants and the embedded conversion features are classified as Level 3 within the fair-value hierarchy. Inputs to the valuation
model include the Company’s publicly-quoted stock price, the stock volatility, the risk-free interest rate, the remaining
life of the warrants, notes and debentures, the exercise price or conversion price, and the dividend rate. The Company uses the
closing stock price of its common stock over an appropriate period of time to compute stock volatility. These inputs are summarized
as follows:
L2
Warrants – Valuation model: Black-Scholes option-pricing; expected life: 4.69 years; risk-free interest rate: 2.94%;
volatility factor: 120.50%; dividend rate: 0.0%; transaction date closing market price: $0.61; exercise price: $0.50.
Strome
Warrants – Valuation model: Black-Scholes option-pricing; expected life: 4.71 years; risk-free interest rate: 2.94%;
volatility factor: 120.34%; dividend rate: 0.0%; transaction date closing market price: $0.61; exercise price: $0.50.
The
following table represents the carrying amount, valuation and roll-forward of activity for the Company’s warrants accounted
for as a derivative liability and classified within Level 3 of the fair-value hierarchy for the nine months ended September 30,
2018:
|
|
L2
Warrants
|
|
|
Strome
Warrants
|
|
|
Total
Derivative
Liabilities
|
|
Carrying amount at January 1, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance of warrants
on June 11, 2018
|
|
|
312,749
|
|
|
|
-
|
|
|
|
312,749
|
|
Issuance of warrants on June 15,
2018
|
|
|
288,149
|
|
|
|
1,344,648
|
|
|
|
1,632,797
|
|
Change in
fair value
|
|
|
(55,026
|
)
|
|
|
(577,199
|
)
|
|
|
(632,225
|
)
|
Carrying amount
at September 30, 2018
|
|
$
|
545,872
|
|
|
$
|
767,449
|
|
|
$
|
1,313,321
|
|
The
following table represents the carrying amount, valuation and a roll-forward of activity for the embedded conversion feature liability
with respect to the 8% Promissory Notes and 10% Convertible Debentures accounted for as a derivative liability and classified
within Level 3 of the fair-value hierarchy for the nine months ended September 30, 2018:
|
|
8%
Promissory Notes
|
|
|
10%
Convertible Debentures
|
|
|
Series
G Conversion Feature
|
|
|
Total
Derivative
Liabilities
|
|
Carrying amount at January 1, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
72,563
|
|
|
$
|
72,563
|
|
Recognition of conversion feature on June 11, 2018
|
|
|
78,432
|
|
|
|
-
|
|
|
|
-
|
|
|
|
78,432
|
|
Recognition of conversion feature on June 15, 2018
|
|
|
81,169
|
|
|
|
471,002
|
|
|
|
-
|
|
|
|
552,171
|
|
Derivative liability change upon extinguishment
of debt
|
|
|
(29,860
|
)
|
|
|
(1,042,000
|
)
|
|
|
-
|
|
|
|
(1,071,860
|
)
|
Change in fair
value
|
|
|
(129,741
|
)
|
|
|
570,998
|
|
|
|
(72,563
|
)
|
|
|
368,694
|
|
Carrying amount at September 30,
2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
change in valuation of derivative liabilities recognized in the condensed consolidated statements of operations as (expense)/income
for the three months and nine months ended September 30, 2017 was $(3,311) and $6,939, respectively.
In
addition, the carrying amount of the embedded conversion feature with respect to the Series G Preferred Stock (as described in
Note 13) as of September 30, 2018 and December 31, 2017 was $29,735 (no further fair value required at each period-end as this
is not considered a derivative liability) and $72,563, respectively.
The
Company did not have any derivative liabilities as of or during the three months and nine months ended September 30, 2017.
12.
Notes Payable
Officer
Promissory Notes
In
May 2018, the Company’s Chief Executive Officer began advancing funds to the Company in order to meet minimum operating
needs. Such advances were made pursuant to promissory notes that were due on demand, with interest at the minimum applicable federal
rate, which was approximately 2.51% at September 30, 2018. At September 30, 2018, the total principal amount of advances outstanding,
including accrued interest of $6,853, was $966,389.
8%
Promissory Notes
On
June 6, 2018, the Company entered into a securities purchase agreement with L2 Capital, LLC (“L2”), pursuant to which
L2 purchased from the Company a convertible promissory note (the “8% Promissory Notes”), issuable in tranches, in
the aggregate principal amount of $1,681,668 for an aggregate purchase price of $1,500,000, with interest at 8% per annum and
the maturity date for each tranche funded is seven months from the date of issuance. The 8% Promissory Notes required an increasing
premium for any prepayment from 20% for the first 90 days to 38% after 181 days, an increased conversion rate to a 40% discount
if in default, a default rate of 18% plus a repayment premium of 40%, plus 5% for each additional default, and liquidated damages
in addition to the default rates, ranging from 30% to 100% for certain breaches of the 8% Promissory Notes, subject to mandatory
prepayment, including the above described premiums, equal to 50% of new funds raised by the Company in excess of $11,600,000 in
the private placement of its securities.
On
June 11, 2018, a first tranche of $570,556, which included $15,000 of L2’s legal expenses, was purchased for a price of
$500,000, reflecting an original issue discount and debt discount of $70,556. On June 15, 2018, a second tranche of $555,556 was
purchased for a price of $500,000, an original issue discount of $55,556. In connection with the first and second tranche, the
Company issued warrants to L2, exercisable for 216,120 and 210,438 shares of the Company’s common stock at an exercise price
of $1.30 and $1.20 per share, respectively (the “L2 Warrants”).
L2
had the sole discretion to purchase additional promissory notes, in certain circumstances, which expired. The promissory notes
and any accrued but unpaid interest were convertible into common stock, at any time, at a conversion price equal to the lowest
volume weighted average price (“VWAP”) during the ten trading day period ending on the issue date of the note. As
a result of the closing of the 10% Debenture offering on June 15, 2018 (refer to 10% Convertible Debentures below), L2 no longer
has the right to invest in the Company under the securities purchase agreement.
The
warrants included a reset provision which provided that the number of shares issuable under the warrants shall increase by the
quotient of 50% of the face value of the respective tranche and 110% multiplied by the VWAP of the Company’s common stock
on the trading day immediately prior to the funding date of the respective tranche (see Note 14).
The
Company accounted for the warrants and embedded conversion features of the promissory notes as derivative liabilities, as the
Company was required to adjust downward (a reset provision) the exercise price of the warrants (floor price of $0.50 per share)
and the conversion price of the promissory note under certain circumstances, which required the Company carry such amounts in
its condensed consolidated balance sheets as liabilities at fair value, as adjusted at each period-end. Upon issuance, the Company
recognized a derivative liability of $760,499 ($600,898 for the warrants and $159,601 for the embedded conversion feature). The
derivative liability was treated as a debt discount and amortized over the term of the debt and upon extinguishment of the debt
the Company recognized a gain for the embedded conversion feature derivative liability of $129,741 for the change in fair value
during the three months ended September 30, 2018 (see Note 11).
During
the three months and nine months ended September 30, 2018, interest of $56,857 and $71,218, respectively, was charged to expense,
which consisted of $40,073 and $50,232, respectively, from the accretion of original issue discount and debt discount and $16,784
and $20,986, respectively, from the accrual of interest payable.
During
the three months and nine months ended September 30, 2018, $241,682 and $309,211, respectively, was charged to interest expense
from the amortization of debt discounts.
On
September 6, 2018, the Company repaid the 8% Promissory Notes. The total amount borrowed was $1,000,000, and under the terms of
the loan agreement the Company repaid $1,351,334 to satisfy the debt obligation. A loss on extinguishment of the debt in the amount
of $722,619 was recorded upon repayment which is reflected in interest expense during the three months ended September 30, 2018.
10%
Convertible Debentures
On
June 15, 2018, the Company entered into a securities purchase agreement with four accredited investors to purchase an aggregate
of $4,775,000 in principal amount of the Company’s 10% Convertible Debenture, due on June 30, 2019 (the “10% Convertible
Debentures”). Included in the aggregate total of $4,775,000 is $1,025,000 from two of the Company’s executives. The
10% Convertible Debentures were convertible into an aggregate of 3,698,110 shares of the Company’s common stock based on
a conversion price of $1.2912 per share. The 10% Convertible Debentures were interest bearing at the rate of 10% per annum, that
was payable in cash semi-annually on December 31 and June 30, beginning on December 31, 2018. Upon the occurrence of certain events,
the holders of the 10% Convertible Debentures were also entitled to receive an additional payment, if necessary, to provide the
holders with a 20% annual internal rate of return on their investment. The Company had the option, under certain circumstances,
to redeem some or all of the outstanding principal amount for an amount equal to the principal amount (plus accrued but unpaid
interest thereon) or the option to cause the holders to convert their debt at a certain conversion price, otherwise, the Company
was not permitted to prepay any portion of the principal amount without the prior written consent of the debt holders.
Additionally,
pursuant to a registration rights agreement entered into in connection with the purchase agreement, the Company agreed to register
the shares issuable upon conversion of the 10% Convertible Debentures for resale by the holders of the 10% Convertible Debentures.
The Company had committed to file the registration statement by no later than 45 days after June 15, 2018 and to cause the registration
statement to become effective by no later than 120 days after June 15, 2018 (or, in the event of a full review by the staff of
the SEC, 150 days following June 15, 2018). The registration rights agreement provided for Liquidated Damages upon the occurrence
of certain events up to a maximum amount of 6% of the aggregate amount invested by such holders. Liquidated Damages were waived
as part of the roll-over of the 10% Convertible Debentures into Series H Preferred Stock.
The
securities purchase agreement also included a provision that required the Company to maintain its periodic filings with the SEC
in order to satisfy the public information requirements under Rule 144(c) of the Securities Act. If the Company failed for any
reason to satisfy the current public information requirement, then the Company would have been obligated to pay to each holder
a cash payment equal to 1.0% of the amount invested as partial Liquidated Damages, up to a maximum of six months. Such payments
were subject to interest at the rate of 1.0% per month until paid in full. The 10% Convertible Debentures was rolled over into
Series H Preferred Stock before the due date for the commencement of the Liquidated Damages.
Upon
issuance, the Company accounted for an embedded conversion feature of the 10% Convertible Debentures as a derivative liability
totaling $471,002, as the Company was required to adjust downward the conversion price of the debt under certain circumstances,
which required that the Company carry such amount in its consolidated balance sheet as a liability at fair value, as adjusted
at each period-end. The derivative liability was treated as a debt discount and amortized over the term of the debt and upon extinguishment
of the debt the Company recognized a loss for the embedded conversion feature derivative liability of $570,998 for the change
in fair value during the three months ended September 30, 2018 (see Note 11).
During
the three months and nine months ended September 30, 2018, interest of $49,076 and $69,920, respectively, was charged to expense
from the accrual of interest payable.
During
the three months and nine months ended September 30, 2018, $45,860 and $64,452, respectively, was charged to interest expense
from the amortization of debt discounts.
On
August 10, 2018, the 10% Convertible Debentures with an aggregate principal amount of $4,775,000 plus obligations of $955,000
were converted into 5,730 shares of Series H Preferred Stock. A loss on extinguishment of the debt in the amount of $249,630 was
recorded upon conversion which is reflected in interest expense during the three months ended September 30, 2018.
13.
Preferred Stock
The
Company has the authority to issue 1,000,000 shares of preferred stock, $0.01 par value per share, consisting of 10,270 authorized
shares originally designated as series A through E with designations subsequently eliminated, 2,000 authorized shares designated
as “Series F Convertible Preferred Stock,” none of which are outstanding, 1,800 authorized shares designated as “Series
G Convertible Preferred Stock” (as further described below), of which 168.496 shares are outstanding as of September 30,
2018, and 23,000 authorized shares designated as “Series H Convertible Preferred Stock” (as further described below),
of which 19,399.25 shares are outstanding as of September 30, 2018.
Series
G Convertible Preferred Stock
On
May 30, 2000, the Company sold 1,800 shares of its Series G Convertible Preferred Stock (the “Series G Preferred Stock”)
and warrants, which expired on November 29, 2003, to purchase 63,000 shares of common stock to four investors. The Series G Preferred
Stock has a stated value of $1,000 per share and is convertible into shares of common stock, at the option of the holder, subject
to certain limitations. The Series G Preferred Stock was initially convertible into common stock at a conversion price equal to
85% of the lowest sale price of the common stock over the five trading days preceding the date of the conversion, subject to a
maximum conversion price of $16.30, adjusted for a 1-for-10 reverse stock split effective July 26, 2007. The Company may require
holders to convert all (but not less than all) of the Series G Preferred Stock at any time after November 30, 2003 or buy out
all outstanding shares of Series G Preferred Stock at the then conversion price. Holders of Series G Preferred Stock are not entitled
to dividends and have no voting rights, unless required by law or with respect to certain matters relating to the Series G Preferred
Stock.
Prior
to November 2001, 1,631.504 of the initial 1,800 shares of Series G Preferred Stock were converted into the Company’s common
stock by the holders thereof. No conversions have taken place since November 2001. The remaining 168.496 shares continue to
be outstanding.
Upon
a change in control, sale of or similar transaction, as defined in the Certificate of Designation for the Series G Preferred Stock,
the holder of the Series G Preferred Stock has the option to deem such transaction as a liquidation and may redeem their 168.496
shares at the liquidation value of $1,000 per share, or an aggregate amount of $168,496. The sale of all the assets of the Company
on June 28, 2007 triggered the redemption option. As such redemption was not in the control of the Company, the Series G Preferred
Stock has been accounted for as if it was redeemable preferred stock and is classified in the condensed consolidated balance sheets
as a mezzanine obligation between liabilities and stockholders’ equity.
Series
H Convertible Preferred Stock
On
August 10, 2018, the Company closed on a securities purchase agreement (the “Securities Purchase Agreement”) with
certain accredited investors, pursuant to which the Company issued an aggregate of 19,399.25 shares of Series H Convertible Preferred
Stock (the “Series H Preferred Stock”) at a stated value of $1,000, initially convertible into 58,785,606 shares of
the Company’s common stock, at the option of the holder subject to certain limitations, at a conversion rate equal to the
stated value divided by the conversion price of $0.33 per share (the “Conversion Price”), for aggregate gross proceeds
of $19,399,250. Of the shares of Series H Preferred Stock issued, 5,730 shares were issued upon conversion of an aggregate principal
amount of $4,775,000, plus prepayment obligations of $955,000, of the 10% Convertible Debentures issued by the Company on June
15, 2018 to certain accredited investors, including 1,200 shares of Series H Preferred Stock issued to Heckman Maven Fund L.P.
(affiliated with James Heckman, the Company’s Chief Executive Officer), and 30 shares of Series H Preferred Shares issued
to Josh Jacobs, the Company’s President.
B.
Riley FBR, Inc. (“B. Riley FBR”) is a registered broker-dealer owned by B. Riley Financial, Inc., a diversified publicly
traded financial services company (“B. Riley”), which acted as placement agent for the Series H Preferred Stock financing.
In consideration for its services as placement agent, the Company paid B. Riley FBR a cash fee of $575,000 (including a previously
paid retainer of $75,000) and issued to B. Riley FBR 669.25 shares (stated value of $1,000 per share) of Series H Preferred
Stock. In addition, entities affiliated with B. Riley FBR purchased 5,592 shares of Series H Preferred Stock in the financing
(total issuance cost of $1,194,546).
The
terms of Series H Preferred Stock and the number of shares of common stock issuable is adjustable in the event of stock splits,
stock dividends, combinations of shares and similar transactions. In addition, if at any time prior to the nine month anniversary
of the closing date, the Company sells or grants any option or right to purchase or issues any shares of common stock, or securities
convertible into shares of common stock, with net proceeds in excess of $1,000,000 in the aggregate, entitling any person to acquire
shares of common stock at an effective price per share that is lower than the then Conversion Price (such lower price, the “Base
Conversion Price”), then the Conversion Price shall be reduced to equal the Base Conversion Price. All the shares of Series
H Preferred Stock shall automatically convert into shares of common stock on the fifth anniversary of the closing date at the
then Conversion Price.
In
addition, if at any time the Company grants, issues or sells any common stock equivalents or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of shares of common stock (the “Purchase Rights”),
then a holder of the Series H Preferred Stock will be entitled to acquire the aggregate Purchase Rights which the holder could
have acquired if the holder had held the number of shares of common stock acquirable upon complete conversion of such holder’s
Series H Preferred Stock immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase
Rights, subject to certain conditions, adjustments and limitations.
Pursuant
to the registration rights agreement entered into on August 10, 2018 in connection with the Securities Purchase Agreement, the
Company agreed to register the shares issuable upon conversion of the Series H Preferred Stock for resale by the holders. The
Company committed to file the registration statement by no later than 75 days after the closing date and to cause the registration
statement to become effective, in general, by no later than 120 days after the closing date (or, in the event of a full review
by the staff of the Securities and Exchange Commission (“SEC”), 150 days following the closing date). The registration
rights agreement provides for a cash payment equal to 1.0% per month of the amount invested as partial liquidated damages upon
the occurrence of certain events, on each monthly anniversary, payable within 7 days of such event, up to a maximum amount of
6.0% of the aggregate amount invested, subject to interest at 12.0% per annum, accruing daily, until paid in full. The Company
recognized $1,347,254 of Liquidating Damages during the three months ended September 30, 2018, with respect to its registration
rights agreement (see Note 10).
The
Securities Purchase Agreement included a provision that requires the Company to maintain its periodic filings with the SEC in
order to satisfy the Public Information Failure Payments requirements under Rule 144(c) of the Securities Act. If the Company
fails for any reason to satisfy the current public information requirement after 6 months of the closing date, then the Company
will be obligated to pay to each holder a cash payment equal to 1.0% of the aggregate amount invested for each 30-day period,
or pro rata portion thereof, as partial liquidated damages per month, up to a maximum of 6 months, subject to interest at the
rate of 1.0% per month until paid in full. The Company recognized $1,305,544 of Liquidating Damages during the three months ended
September 30, 2018, with respect to its public information requirements (see Note 10).
During
the three months ended September 30, 2018, in connection with the 19,399.25 Series H Preferred Stock issuance, the Company recorded
a beneficial conversion feature in the amount of $18,045,496 for the underlying common shares since the nondetachable conversion
feature was in-the-money (the Conversion Price of $0.33 was lower than the Company’s common stock trading price of $0.86)
at the issuance date. The beneficial conversion feature was recognized as a deemed dividend.
Series
I Convertible Preferred Stock
Information
with respect to Series I Convertible Preferred Stock is provided in Note 18.
Series
J Convertible Preferred Stock
Information
with respect to Series J Convertible Preferred Stock is provided in Note 18.
14.
Stockholders’ Equity
Common
Stock
The
Company has the authority to issue 100,000,000 shares of common stock, $0.01 par value per share.
On
January 4, 2018, the Company issued an aggregate of 1,200,000 shares of its common stock to an investor, Strome Mezzanine Fund
LP (“Strome”), in a private placement at a price of $2.50 per share. The Company received gross proceeds of $3,000,000
from the private placement, which was received prior to December 31, 2017, and was therefore classified as restricted cash and
as a private placement advance in the consolidated balance sheet at December 31, 2017. Upon completion of the private placement
on January 4, 2018, the funds were reclassified to cash and stockholders’ equity.
In
connection with the January 4, 2018 closing of the private placement, MDB, as the placement agent, was entitled to receive 60,000
shares of the Company’s common stock (presented as “Common Stock to be Issued” within stockholders’ equity)
valued at $150,000 (value based on private placement price of $2.50 per share). In addition, MDB received warrants to purchase
60,000 shares of the Company’s common stock at an exercise price of $2.50 per share (refer to Common Stock Warrants below).
Pursuant
to the registration rights agreement entered into on January 4, 2018 with the investor, the Company agreed to register for resale
the shares of common stock purchased pursuant to the private placement. The Company also committed to register the 60,000 shares
issued to MDB. The Company committed to file the registration statement no later than 200 days after the closing and to cause
the registration statement to become effective no later than the earlier of (i) 7 business days after the SEC informs the Company
that no review of the registration statement will be made or (ii) when the SEC has no further comments on the registration statement.
The registration rights agreement provides for liquidated damages upon the occurrence of certain events, including the Company’s
failure to file the registration statement or to cause it to become effective by the deadlines set forth above. The amount of
liquidated damages payable to the investor is 1.0% of the aggregate amount invested for each 30-day period, or pro rata portion
thereof, during which the default continues, up to a maximum amount of 5.0% of the aggregate amount invested or the value of the
securities registered by the placement agent. The purchaser of the shares of common stock waived the liquidated damages when the
purchaser converted certain notes payable into Series H Preferred Stock in August 2018 (see Note 17) The Company recognized $15,001
of Liquidating Damages for the three and nine months ended September 30, 2018, with respect to its registration rights agreement
for the common stock issued to MDB in conjunction with the January 4, 2018 private placement.
On
March 30, 2018, the Company issued an aggregate of 500,000 shares of its common stock to Strome in a second closing of the private
placement entered into on January 4, 2018 at a price of $2.50 per share. The Company received gross proceeds of $1,250,000 from
the second closing of the private placement. No costs were incurred in connection with the second closing of the private placement.
The
Company entered into a registration rights agreement on March 30, 2018 with the investor, pursuant to which the Company agreed
to register for resale the shares of common stock purchased pursuant to the placement. The Company committed to file the registration
statement no later than 270 days after the closing and to cause the registration statement to become effective no later than the
earlier of (i) 7 business days after the SEC informs the Company that no review of the registration statement will be made or
(ii) when the SEC has no further comments on the registration statement. The registration rights agreement provides for liquidated
damages upon the occurrence of certain events, including the Company’s failure to file the registration statement or to
cause it to become effective by the deadlines set forth above. The amount of liquidated damages payable to the investor is 1.0%
of the aggregate amount invested for each 30-day period, or pro rata portion thereof, during which the default continues, up to
a maximum amount of 5.0% of the aggregate amount invested. The purchaser of the shares of common stock waived the liquidated damages
when the purchaser converted certain notes payable into Series H Preferred Stock in August 2018 (see Note 12).
Information
with respect to the issuance of common stock in connection with the acquisition of Say Media is provided in Note 18.
Restricted
Stock Awards
During
August 2016 and October 2016 the Company issued 12,209,677 and 307,475, respectively, shares of common stock to management and
employees, as restricted stock awards, that contained a Company buy-back right for a certain number of shares pursuant to the
achievement of a unique user performance condition (the “Performance Condition”) issued at the original cash consideration
paid, which totaled $2,952 or approximately $0.0002 per share. On November 4, 2016, in conjunction with the Recapitalization,
the number of shares subject to the buy-back was modified, resulting in a modification of the restricted stock awards. The shares
vest over a three-year period starting on the beginning of the month of the issuance date, with one-third vesting in one year,
and the balance monthly over the remaining two years. Because these shares require continued service to the Company, the estimated
fair value of the shares is being recognized as compensation expense over the vesting period of the award.
As
of December 31, 2017, the Performance Condition was determined based on 4,977,144 unique users accessing Maven’s channels
in November 2017. Based on this level of unique users, 2,453,362 shares subject to the buy-back right were earned under the Performance
Condition and 1,927,641 shares remained subject to the buy-back right. The Company’s Board made a determination on March
12, 2018 to waive the buy-back right, resulting in a modification of the restricted stock awards which resulted in incremental
compensation cost of $2,756,527 at the time of the modification, of which $202,357 and $1,970,790, respectively, was recognized
during the three months and nine months ended September 30, 2018.
On
August 23, 2018, in connection with the Merger, the Company issued a total of 2,399,997 shares of common stock to certain key
personnel of HubPages who agreed to continue their employment with HubPages, as restricted stock awards, subject to a repurchase
right and vesting, The repurchase right which expired in March 2019 unexercised, gave the Company the option to repurchase a certain
number of shares at par value based on a performance condition as defined in the terms of the Merger Agreement. The shares vest
in twenty-four equal monthly installments beginning September 23, 2019 and ending September 23, 2021 and the estimated fair value
of these shares is being recognized as compensation expense over the vesting period of the award. The restricted stock awards
provide for a true-up period that if the common stock is sold for less than $2.50 the holder will receive, subject to certain
conditions, additional shares of common stock up to a maximum of the amount of shares originally received (or 2,400,000 in aggregate
to all holders) for the shares that re sold for less than $2.50. The true-up period, in general, is 13 months after the consummation
of the Merger until 90 days following completion of vesting, or July 30, 2021. The restricted stock awards were fair valued upon
issuance by an independent appraisal firm. For subsequent event related to these restricted stock awards see Note 18.
On
September 13, 2018, the Company issued 148,813 shares of common stock to certain members of the Board, as restricted awards, subject
to continued service with the Company. The shares vest over a four-month period beginning September 30, 2018 and the estimated
fair value of these shares is being recognized as compensation expense over the vesting period of the award.
The
fair value of a restricted stock award is determined based on the number of shares granted and the quoted price of the Company’s
common stock on the date issued.
A
summary of the restricted stock award activity during the nine months ended September 30, 2018 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number
of Shares
|
|
|
Average
Grant-Date
|
|
|
|
Unvested
|
|
|
Vested
|
|
|
Fair
Value
|
|
Restricted stock awards
outstanding at January 1, 2018
|
|
|
6,979,596
|
|
|
|
5,537,556
|
|
|
$
|
0.41
|
|
Issued
|
|
|
2,548,810
|
|
|
|
-
|
|
|
|
1.01
|
|
Vested
|
|
|
(3,983,309
|
)
|
|
|
3,983,309
|
|
|
|
|
|
Forfeited
|
|
|
(204,735
|
)
|
|
|
-
|
|
|
|
|
|
Restricted stock
awards outstanding at September 30, 2018
|
|
|
5,340,362
|
|
|
|
9,520,865
|
|
|
|
0.86
|
|
At
September 30, 2018, total compensation cost for the restricted stock awards, including the effect of the waiver of the buy-back
right, not yet recognized was $4,101,987. This cost will be recognized over a period of approximately 1.87 years with a total
of $776,423 remaining to be recognized before December 31, 2018. The Company paid to the holder the par value or $2,047 for the
forfeited unvested restricted stock awards of 204,735 in January 2019.
Information
with respect to stock based compensation expense of the restricted stock awards is provided in Note 15.
Common
Stock Warrants
Warrants
issued to purchase shares of the Company’s common stock to MDB, L2, and Strome (collectively the “Financing Warrants”)
are described below.
MDB
Warrants – On November 4, 2016, in conjunction with the Recapitalization, Integrated issued warrants to MDB (the “MDB
Warrants”) to purchase 1,169,607 shares of common stock with an exercise price of $0.20 per share, of which 842,117 were
exercised on April 30, 2018 under the cashless exercise provisions. A total of 327,490 warrants remain outstanding as of September
30, 2018 after the cashless exercise, subject to customary anti-dilution adjustments, and expire on November 4, 2021. On October
19, 2017, the Company issued warrants to MDB which acted as placement agent in connection with a private placement of its common
stock, to purchase 119,565 shares of common stock. The warrants have an exercise price of $1.15 per share, subject to customary
anti-dilution adjustments, and expire on October 19, 2022. On January 4, 2018, the Company issued warrants to MDB which acted
as placement agent in connection with a private placement of its common stock, to purchase 60,000 shares of common stock. The
warrants have an exercise price of $2.50 per share, subject to customary anti-dilution adjustments, and may, in the event there
is no effective registration statement covering the re-sale of the warrant shares, be exercised on a cashless basis, and expire
on October 19, 2022. A total of 507,055 warrants are outstanding as of September 30, 2018. The MDB Warrants are recorded within
additional paid-in capital in the condensed consolidated statements of stockholders’ equity.
L2
Warrants – Effective as of August 3, 2018, pursuant to the reset provision, the Company adjusted the exercise price
to $0.50 per share (the floor exercise price) for the L2 Warrants and issued additional warrants to L2 to purchase 640,405 shares
of common stock at an exercise price of $0.50 per share. As a result of the warrants exercise price being reduced to the floor
exercise price on August 3, 2018 and triggering of the reset provision, the warrants no longer contain any reset provisions and
will continue to be carried in the condensed consolidated balance sheets as a derivative liability at fair value, as adjusted
at each period-end since, among other criteria, they require the delivery of registered shares upon exercise. At September 30,
2018, the warrants derivative liability was $545,872.
The
warrants are exercisable for a period of five years, subject to customary anti-dilution adjustments, and may, in the event there
is no effective registration statement covering the re-sale of the warrant shares, be exercised on a cashless basis in certain
circumstances. A total of 1,066,963 warrants are outstanding as of September 30, 2018, requiring a share reserve under the warrant
instrument calling for three times the number of warrants issuable for anti-dilution provisions, or a total reserve of 3,200,889
shares of common stock.
Strome
Warrants – On June 15, 2018, the Company modified the two securities purchase agreements dated January 4, 2018 and March
30, 2018 with Strome to eliminate the true-up provision under which the Company was committed to issue up to 1,700,000 shares
of common stock in certain circumstances, as further described below. As consideration for such modification, the Company issued
warrants to Strome (the “Strome Warrants”) to purchase 1,500,000 shares of common stock, exercisable at an initial
price of $1.19 per share for a period of five years, subject to a reset provision and customary anti-dilution provisions. Strome
was also granted observer rights on the Company’s Board.
The
January 4, 2018 financing transaction did not include any true-up or make-good provisions, nor did it contain any lock-up provisions,
however, the March 30, 2018 financing transaction included a true-up provision and a lock-up provision. The true-up provision
required the Company to issue additional shares of common stock if Strome sold shares on a national securities exchange or the
OTC marketplace or in an arm’s-length unrelated third-party private sale in the 90-day period beginning one year after March
30, 2018 at less than $2.50 per share, up to a maximum of one share for each share originally sold to Strome. In addition, the
Company entered into a separate agreement with Strome dated March 30, 2018 that extended the true-up provisions to the shares
of common stock sold in the January 4, 2018 financing. Accordingly, under this true-up provision, which became effective March
30, 2018, the Company was obligated to issue up to an additional 1,700,000 shares of common stock to Strome without any further
consideration under certain conditions in the future. As a result of the true-up provision, the maximum number of shares issuable
in these transactions were 3,400,000 with a $1.25 floor price per share, and may, in the event there is no effective registration
statement covering the re-sale of the warrant shares, be exercised on a cashless basis in certain circumstances.
Effective
as of August 3, 2018, pursuant to the reset provision, the Company adjusted the exercise price to $0.50 per share (the floor price)
for such warrants. The Company accounted for the Strome Warrants, upon issuance, as a derivative liability because the warrants
had a downward reset provision with a floor of $0.50 per share. The Company recorded the warrants at fair value in its condensed
consolidated balance sheets, with adjustments to fair value at each period-end. Upon issuance, the Company recognized a derivative
liability of $1,344,648. As a result of the warrants exercise price being reduced to the floor exercise price on August 3, 2018
and the triggering of the reset provision, the warrants no longer contain any reset provisions and will continue to be carried
in the condensed consolidated balance sheets as a derivative liability at fair value, as adjusted at each period-end since, among
other criteria, they require the delivery of registered shares upon exercise. At September 30, 2018, the warrants derivative liability
was $767,449.
A
summary of the Financing Warrants activity during the nine months ended September 30, 2018 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
Years)
|
|
|
|
|
|
|
|
|
|
|
|
Financing Warrants outstanding
at January 1, 2018
|
|
|
1,289,172
|
|
|
$
|
0.29
|
|
|
|
|
|
Issued
|
|
|
1,986,558
|
|
|
|
1.24
|
|
|
|
|
|
Exercised
|
|
|
(842,117
|
)
|
|
|
0.20
|
|
|
|
|
|
Issued as
result of the reset provision on August 3, 2018
|
|
|
640,405
|
|
|
|
0.83
|
|
|
|
|
|
Financing
Warrants outstanding at September 30, 2018
|
|
|
3,074,018
|
|
|
|
1.20
|
|
|
|
4.5
|
|
Financing
Warrants exercisable at September 30, 2018
|
|
|
3,074,018
|
|
|
|
1.20
|
|
|
|
4.5
|
|
The
exercise of the 842,117 warrants in April 2018 on a cashless basis resulting in the issuance of 736,853 net shares of common stock
when the common stock price was $1.60 per share. The aggregate issue date fair value of the Financing Warrants issued during the
nine months ended September 30, 2018 was $3,322,166.
The
exercise prices of the Financing Warrants outstanding and exercisable are as follows as of September 30, 2018:
|
|
|
Financing
|
|
|
Financing
|
|
|
|
|
Warrants
|
|
|
Warrants
|
|
Exercise
|
|
|
Outstanding
|
|
|
Exercisable
|
|
Price
|
|
|
(Shares)
|
|
|
(Shares)
|
|
|
$0.20
|
|
|
|
327,490
|
|
|
|
327,490
|
|
|
$0.50
|
|
|
|
2,566,963
|
|
|
|
2,566,963
|
|
|
$1.15
|
|
|
|
119,565
|
|
|
|
119,565
|
|
|
$2.50
|
|
|
|
60,000
|
|
|
|
60,000
|
|
|
|
|
|
|
3,074,018
|
|
|
|
3,074,018
|
|
The
intrinsic value of exercisable but unexercised in-the-money stock warrants as of September 30, 2018 was approximately $416,000,
based on a fair market value of $0.61 per share on September 30, 2018.
Information
with respect to the equity-based expense related to the Financing Warrants is provided in Note 15.
15.
Stock Based Compensation
Common
Stock Options
On
March 28, 2018, the Board approved an increase in the number of shares of the Company’s common stock reserved for grant
pursuant to the 2016 Stock Incentive Plan (the “2016 Plan”) from 3,000,000 shares to 5,000,000 shares. In August 2018,
the Company increased the authorized number of shares of common stock under the 2016 Plan from 5,000,000 shares to 10,000,000
shares. The Company’s shareholders approved the increase in the number of shares authorized under the 2016 Plan on April
3, 2020. The 2016 Plan is administered by the Board, and there were no grants prior to the formation of the 2016 Plan. Shares
subject to an award that lapse, expire, are forfeited or for any reason are terminated unexercised or unvested will automatically
again become available for issuance under the 2016 Plan. Common stock options issued under the 2016 Plan may have a term of up
to ten years and may have variable vesting provisions.
At
September 30, 2018, options to acquire 9,693,831 shares of the Company’s common stock had been granted under the 2016 Plan,
and options to acquire 306,169 shares of common stock remain available for future grant.
The
estimated fair value of the stock based awards is recognized as compensation expense over the vesting period of the award. The
fair value of the common stock option awards is estimated at the grant date as calculated using the Black-Scholes option-pricing
model. The Black-Scholes model requires various highly judgmental assumptions including expected volatility and option life.
The
fair value of common stock options granted during the nine months ended September 30, 2018 were calculated using the Black-Scholes
option-pricing model utilizing the following assumptions:
Risk-free interest rate
|
|
2.27% to 2.91
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
108.34%
to 130.08
|
%
|
Expected life
|
|
|
3-6
years
|
|
A
summary of the common stock option activity during the nine months ended September 30, 2018 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
Years)
|
|
Common
stock options outstanding at January 1, 2018
|
|
|
2,176,637
|
|
|
$
|
1.25
|
|
|
|
9.25
|
|
Granted
|
|
|
8,131,750
|
|
|
|
0.84
|
|
|
|
|
|
Exercised
|
|
|
(125,000)
|
|
|
|
0.20
|
|
|
|
|
|
Forfeited
|
|
|
(435,285)
|
|
|
|
1.57
|
|
|
|
|
|
Expired
|
|
|
(54,271)
|
|
|
|
1.60
|
|
|
|
|
|
Common stock options
outstanding at September 30, 2018
|
|
|
9,693,831
|
|
|
|
0.63
|
|
|
|
9.58
|
|
Common stock options
exercisable at September 30, 2018
|
|
|
1,264,995
|
|
|
|
1.31
|
|
|
|
8.69
|
|
The
aggregate grant date fair value of common stock options granted during the nine months ended September 30, 2018 was $5,549,585.
The aggregate intrinsic value as of September 30, 2018 and December 31, 2017 was none and $1,573,000, respectively.
In
conjunction with the Recapitalization, the Company assumed 175,000 fully-vested common stock options having an exercise price
of $0.17 per share and an expiration date of May 15, 2019. Of those options, 125,000 were exercised in June 2018 on a cashless
basis resulting in the issuance of 106,154 net shares of common stock.
The
exercise prices of common stock options outstanding and exercisable are as follows as of September 30, 2018:
|
|
Options
|
|
|
Options
|
|
Exercise
|
|
Outstanding
|
|
|
Exercisable
|
|
Price
|
|
(Shares)
|
|
|
(Shares)
|
|
Under $1.00
|
|
|
6,111,500
|
|
|
|
45,832
|
|
$1.01 to $1.25
|
|
|
1,818,859
|
|
|
|
866,658
|
|
$1.26 to $1.50
|
|
|
45,000
|
|
|
|
1,949
|
|
$1.51 to $1.75
|
|
|
487,222
|
|
|
|
130,139
|
|
$1.76 to $2.00
|
|
|
1,055,000
|
|
|
|
190,417
|
|
$2.01 to $2.25
|
|
|
135,000
|
|
|
|
-
|
|
$2.26 to $2.50
|
|
|
41,250
|
|
|
|
30,000
|
|
|
|
|
9,693,831
|
|
|
|
1,264,995
|
|
Outstanding
options for 8,428,836 shares of the Company’s common stock had not vested at September 30, 2018.
At
September 30, 2018, there was approximately $4,950,651 of total unrecognized compensation expense related to common stock options
granted which is expected to be recognized over a weighted-average period of approximately 3.68 years.
The
intrinsic value of exercisable but unexercised in-the-money common stock options as of September 30, 2018 was approximately $45,833,
based on a fair market value of $0.61 per share of the Company’s common stock on September 30, 2018.
Channel
Partner Warrants
At
September 30, 2018, Channel Partner Warrants to purchase 4,215,500 shares of the Company’s common stock had been issued,
and warrants to purchase 900,992, after considering the reduction in the total warrants available of 2,000,000, shares of common
stock remain available for future grant.
Upon
the performance condition being met under the terms of the Channel Partner Warrants, such warrant will be earned and issued, and
once earned will vest over three years and expire five years from issuance. The warrants are revalued each reporting period to
determine the amount to be recorded as an expense in the respective period. As the warrants vest, they are valued on each vesting
date. Channel Partner Warrants with performance conditions that do not have sufficiently large disincentive for non-performance
are measured at fair value that is not fixed until performance is complete. The estimated fair value of the equity-based awards
is recognized as an expense at the vesting date of the award. The fair value of the warrant is estimated at the vesting date as
calculated using the Black-Scholes option-pricing model. The Black-Scholes model requires various highly judgmental assumptions
including expected volatility and warrant life.
The
fair value of Channel Partner Warrants issued during the nine months ended September 30, 2018 were calculated using the Black-Scholes
option-pricing model utilizing the following assumptions:
Risk-free
interest rate
|
|
|
2.53%
to 2.89
|
%
|
Expected
dividend yield
|
|
|
0.00
|
%
|
Expected
volatility
|
|
|
95.73%
to 108.10
|
%
|
Expected
life
|
|
|
3-5
years
|
|
A
summary of the Channel Partner Warrants activity during the nine months ended September 30, 2018 is as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
|
of
|
|
|
Exercise
|
|
|
Life
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
Years)
|
|
|
|
|
|
|
|
|
|
|
|
Channel
Partner Warrants outstanding at January 1, 2018
|
|
|
1,303,832
|
|
|
$
|
1.48
|
|
|
|
|
|
Issued
|
|
|
295,000
|
|
|
|
1.74
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(499,824)
|
|
|
|
1.39
|
|
|
|
|
|
Channel Partner
Warrants outstanding at September 30, 2018
|
|
|
1,099,008
|
|
|
|
1.50
|
|
|
|
3.82
|
|
Channel Partner
Warrants exercisable at September 30, 2018
|
|
|
261,696
|
|
|
|
1.47
|
|
|
|
3.81
|
|
The
exercise prices range from $1.32 to $2.25 per share. The intrinsic value of exercisable but unexercised in-the-money Channel Partner
Warrants as of September 30, 2018 was none based on a fair market value of $0.61 per share on September 30, 2018
A
summary of stock based compensation and equity-based expense charged to operations or capitalized during the three months and
nine months ended September 30, 2018 and 2017 is as follows:
|
|
Restricted
|
|
|
Common
|
|
|
Channel
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Partner
|
|
|
Financing
|
|
|
|
|
|
|
Awards
|
|
|
Options
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Total
|
|
During the three months ended
September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,972
|
|
|
$
|
-
|
|
|
$
|
(1,630)
|
|
|
$
|
-
|
|
|
$
|
342
|
|
Research and development
|
|
|
28,216
|
|
|
|
65,798
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94,014
|
|
General and administrative
|
|
|
960,939
|
|
|
|
169,683
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,130,622
|
|
Total costs charged to operations
|
|
|
991,127
|
|
|
|
235,481
|
|
|
|
(1,630)
|
|
|
|
-
|
|
|
|
1,224,978
|
|
Capitalized platform development
|
|
|
334,749
|
|
|
|
27,744
|
|
|
|
-
|
|
|
|
-
|
|
|
|
362,493
|
|
Total stock based compensation
|
|
$
|
1,325,876
|
|
|
$
|
263,225
|
|
|
$
|
(1,630)
|
|
|
$
|
-
|
|
|
$
|
1,587,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended September 30,
2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35,000
|
|
|
$
|
-
|
|
|
$
|
35,000
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
261,749
|
|
|
|
216,920
|
|
|
|
-
|
|
|
|
-
|
|
|
|
478,669
|
|
Total costs charged to operations
|
|
|
261,749
|
|
|
|
216,920
|
|
|
|
35,000
|
|
|
|
-
|
|
|
|
513,669
|
|
Capitalized platform development
|
|
|
243,484
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
243,484
|
|
Total stock based compensation
|
|
$
|
505,233
|
|
|
$
|
216,920
|
|
|
$
|
35,000
|
|
|
$
|
-
|
|
|
$
|
757,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the nine months ended
September
30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
1,972
|
|
|
$
|
-
|
|
|
$
|
153,447
|
|
|
$
|
-
|
|
|
$
|
155,419
|
|
Research and development
|
|
|
28,216
|
|
|
|
67,088
|
|
|
|
-
|
|
|
|
-
|
|
|
|
95,304
|
|
General and administrative
|
|
|
2,354,801
|
|
|
|
810,586
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,165,387
|
|
Total costs charged to operations
|
|
|
2,384,989
|
|
|
|
877,674
|
|
|
|
153,447
|
|
|
|
-
|
|
|
|
3,416,110
|
|
Capitalized platform development
|
|
|
1,366,161
|
|
|
|
142,728
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,508,889
|
|
Total stock based compensation
|
|
$
|
3,751,150
|
|
|
$
|
1,020,402
|
|
|
$
|
153,447
|
|
|
$
|
-
|
|
|
$
|
4,924,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During
the nine months ended
September
30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
115,000
|
|
|
$
|
-
|
|
|
$
|
115,000
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
801,743
|
|
|
|
408,432
|
|
|
|
-
|
|
|
|
32,335
|
|
|
|
1,242,510
|
|
Total costs charged to operations
|
|
|
801,743
|
|
|
|
408,432
|
|
|
|
115,000
|
|
|
|
32,335
|
|
|
|
1,357,510
|
|
Capitalized platform development
|
|
|
688,302
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
688,302
|
|
Total stock based compensation
|
|
$
|
1,490,045
|
|
|
$
|
408,432
|
|
|
$
|
115,000
|
|
|
$
|
32,335
|
|
|
$
|
2,045,812
|
|
16.
Related Party Transactions
Investment
Banking Services
On
April 4, 2017, the Company completed a private placement of its common stock, selling 3,765,000 shares at $1.00 per share, for
total gross proceeds of $3,765,000. In connection with the offering, the Company paid $188,250 in cash and issued 162,000 shares
of common stock to MDB, which acted as placement agent.
On
October 19, 2017, the Company completed a private placement of its common stock, selling 2,391,304 shares at $1.15 per share,
for total gross proceeds of $2,750,000. In connection with the offering, the Company issued 119,565 shares of common stock and
warrants to purchase 119,565 shares of common stock to MDB, which acted as placement agent.
On
January 4, 2018, the Company completed a private placement of its common stock, selling 1,200,000 shares at $2.50 per share, for
total gross proceeds of $3,000,000. In connection with the offering, MDB, which acted as placement agent, was entitled to 60,000
shares of common stock and warrants to purchase 60,000 shares of common stock.
Mr.
Christopher Marlett was a director of the Company until February 1, 2018. Mr. Marlett is the Chief Executive Officer of MDB. Mr.
Gary Schuman, who was the Chief Financial Officer of the Company until May 15, 2017, is the Chief Financial Officer and Chief
Compliance Officer of MDB. The Company compensated Mr. Schuman for his services at the rate of $3,000 per month until his resignation.
Mr. Robert Levande was a director of the Company until July 5, 2017. Mr. Levande is a senior managing director of MDB.
Board
of Directors and Finance Committee
During
September 2018, John A. Fichthorn joined the Board of the Company and during November 2018 he was elected as Chairman of the Board
and Chairman of the Finance Committee. Until March of 2020 Mr. Fichthorn served as Head of Alternative Investments for B. Riley
Capital Management, LLC, which is an SEC-registered investment adviser and a wholly-owned subsidiary of B. Riley. During September
2018, Todd D. Sims joined the Board of the Company and is also a member of the Board of Directors of B. Riley. Mr. Sims serves
on the Board of the Company as a designee of B. Riley. Since August 2018, B. Riley FBR has been instrumental in raising debt and
equity capital for the Company to supports its acquisitions of HubPages and Say Media (see Note 18) and for refinancing
and working capital purposes.
Service
Contracts
Ms.
Rinku Sen became a director of the Company in November 2017 and has provided consulting services and operates a channel on the
Company’s platform. During the three months and nine months ended September 30, 2018, the Company paid Ms. Sen $0 and $15,521,
respectively, for these services.
Effective
on September 20, 2017, the Company entered into a six-month contract, with automatic renewals unless cancelled, with a company
located in Nicaragua that is owned by Mr. Christopher Marlett, a then director of the Company, to provide content conversion services.
During the three months and nine months ended September 30, 2018, the Company paid $44,200 and $64,350, respectively, for
these services.
Officer
Promissory Notes
In
May 2018, the Company’s Chief Executive Officer began advancing funds to the Company in order to meet minimum operating
needs. Such advances were made pursuant to promissory notes that were due on demand, with interest at the minimum applicable federal
rate, which was approximately 2.51% as of September 30, 2018. At September 30, 2018, the total principal amount of advances outstanding,
including accrued interest of $6,853, was $966,389.
On
June 15, 2018, four investors invested a total of $4,775,000 in a convertible debt offering (“Debentures”). Included
in the total was an investment of $1,000,000 by the Company’s Chief Executive Officer and $25,000 from the Company’s
President. Interest is payable on the Debentures at the rate of 10% per annum, payable in cash semi-annually on December 31 and
June 30, and on maturity, beginning on December 31, 2018, and the Debentures are due and payable on June 30, 2019 (the “Maturity
Date”). On the Maturity Date, and on any conversion prior to the Maturity Date, each Investor will be entitled to receive
additional interest payments to provide the Investor with a 20% annual Internal Rate of Return. The Company will recognize this
annual Internal Rate of Return requirement for accounting purposes when such Debentures are repaid or otherwise satisfied.
Say
Media Promissory Notes Receivable
As
a result of the Say Media acquisition on December 12, 2018, the Company settled the promissory notes receivable by effectively
forgiving $1,166,556 of the balance due as of September 30, 2018 as reflected in the condensed consolidated statements of operations.
The Company has a balance due under the promissory notes receivable of $2,528,498 as of September 30, 2018 which is considered
an advance against the purchase price for the acquisition. See Note 18 for additional information concerning this transaction.
At September 30, 2018, the Company had the following balances on its condensed consolidated balance sheet; accounts receivable
of $84,287, and accounts payable of $186,248. During the three months and nine months ended September 30, 2018, the Company
reflected the following on its condensed consolidated statement of operations; revenues of $81,976 and $84,287, respectively,
and operating expenses of $117,647 and $117,647, respectively.
17.
Commitments and Contingencies
Operating
Lease
In
April 2018, the Company entered into an office sublease agreement to sublease of 7,457 rentable square feet at 1500 Fourth Avenue,
Suite 200, Seattle, Washington. The sublease has a term of 41 months, commencing on June 1, 2018, with base rent at a rate of
$25.95 per square foot per annum in months 1 through 12, rising to $37 per square foot in months 37 to 41. Upon execution of the
sublease in April 2018, the Company paid $60,249 as prepaid rent and a security deposit of $22,992. The following table shows
the aggregate commitment by year:
Years Ending December
31:
|
|
|
|
2018 (October – December)
|
|
$
|
48,000
|
|
2019
|
|
|
233,000
|
|
2020
|
|
|
265,000
|
|
2021
|
|
|
227,000
|
|
|
|
$
|
773,000
|
|
The
Company is currently evaluating the impact that the adoption of ASC Topic 842, Leases, will have at January 1, 2019 upon
recognition of the right-of-use assets and corresponding lease liability, initially measured at the present value of the lease
payments, on its condensed consolidated balance sheets for this lease commitment, as well as the disclosure of key information
about this lease arrangement, including the overall presentation on its condensed consolidated financial statements.
Revenue
Guarantee
On
a select basis, the Company has provided revenue share guarantees to certain independent publishers that transition their publishing
operations from another platform to theMaven.net or maven.io. These arrangements generally guarantee the publisher a monthly amount
of income for a period of 12 to 24 months from inception of the publisher contract that is the greater of (a) a fixed monthly
minimum, or (b) the calculated earned revenue share. During the three months ended September 30, 2018 and 2017, the Company paid
Channel Partner guarantees of $297,887 and $164,336, respectively. During the nine months ended September 30, 2018 and 2017, the
Company paid Channel Partner guarantees of $1,101,373 and $202,669, respectively. At September 30, 2018, the aggregate commitment
was $23,750. The following table shows the aggregate commitment by year:
Years ending December 31,
|
|
|
|
2018 (October – December)
|
|
$
|
12,250
|
|
2019
|
|
|
11,500
|
|
|
|
$
|
23,750
|
|
Claims
and Litigation
From
time to time, the Company may be subject to claims and litigation arising in the ordinary course of business. The Company is not
currently a party to any pending or threatened legal proceedings that it believes would reasonably be expected to have a material
adverse effect on the Company’s business, financial condition or results of operations.
18.
Subsequent Events
The
Company performed an evaluation of subsequent events through the date of filing of these condensed consolidated financial statements
with the SEC. Other than the below described subsequent events, there were no material subsequent events which affected, or could
affect, the amounts or disclosures in the condensed consolidated financial statements.
10%
OID Convertible Debentures
On
October 18, 2018, the Company entered into a securities purchase agreement with two accredited investors, B. Riley and an affiliated
entity of B. Riley, pursuant to which the Company issued to the investors 10% original issue discount senior secured convertible
debentures (the “10% OID Convertible Debentures”) in the aggregate principal amount of $3,500,000, which, after taking
into account the 5% original issue discount, and legal fees and expenses of the investors, resulted in the Company receiving net
proceeds of $3,285,000. The Company issued warrants to the investors to purchase up to 875,000 shares of the Company’s common
stock in connection with this securities purchase agreement. The debentures were due and payable on October 31, 2019. Interest
accrued on the debentures at the rate of 10% per annum, payable on the earlier of conversion, redemption or October 31, 2019.
The
debentures were convertible into shares of the Company’s common stock at the option of the investor at any time prior to
October 31, 2019, at a conversion price of $1.00 per share, subject to adjustment for stock splits, stock dividends and similar
transactions, and were subject to certain redemption rights by the Company. On December 12, 2018, there was a roll-over of the
10% OID Convertible Debentures into the 12% Convertible Debentures (as further described below).
12%
Convertible Debentures
On
December 12, 2018, the Company entered into a securities purchase agreement with three accredited investors, pursuant to which
the Company issued to the investors 12% senior secured subordinated convertible debentures (the “12% Convertible Debentures”)
in the aggregate principal amount of $13,091,528, which includes (i) the roll-over of an aggregate of $3,551,528 in principal
and interest of the 10% OID Convertible Debentures issued to two of the investors on October 18, 2018, and (ii) a placement fee,
payable in cash, of $540,000 to the Company’s placement agent, B. Riley FBR, in the offering. After taking into account
legal fees and expenses of the investors, the Company received net proceeds of $8,950,000. The 12% Convertible Debentures are
due and payable on December 31, 2020. Interest accrues at the rate of 12% per annum, payable on the earlier of conversion or December
31, 2020. The Company’s obligations under the 12% Convertible Debentures are secured by a security agreement, dated as of
October 18, 2018, by and among the Company and each investor thereto.
Subject
to the Company receiving shareholder approval to increase its authorized shares of common stock, principal and interest accrued
on the 12% Convertible Debentures are convertible into shares of common stock, at the option of the investor at any time prior
to December 31, 2020, at a conversion price of $0.33 per share, subject to adjustment for stock splits, stock dividends and similar
transactions, and beneficial ownership blocker provisions. If the Company does not perform certain of its obligations in a timely
manner, it must pay Liquidated Damages to the investors (see Note 17).
As
long as any portion of the 12% Convertible Debentures remain outstanding, unless investors holding at least 51% in principal amount
of the then outstanding 12% Convertible Debentures otherwise agree, the Company shall not, among other things enter into, incur,
assume or guarantee any indebtedness, except for certain permitted indebtedness.
On
March 18, 2019, the Company entered into a securities purchase agreement with two accredited investors, including John Fichthorn,
the Company’s Chairman of the Board, pursuant to which the Company issued 12% Convertible Debentures in the aggregate principal
amount of $1,696,000, which includes a placement fee of $96,000 paid to B. Riley FBR in the form of a 12% Convertible Debenture,
for acting as the Company’s placement agent in the offering. After taking into account legal fees and expenses of $10,000
which were paid in cash, the Company received net proceeds of $1,590,000.
On
March 27, 2019, the Company entered into a securities purchase agreement with an accredited investor pursuant to which the Company
issued 12% Convertible Debentures in the aggregate principal amount of $318,000, which includes a placement fee of $18,000 paid
to B. Riley FBR in the form of a 12% Debenture for acting as the Company’s placement agent in the offering. After taking
into account legal fees and expenses, the Company received net proceeds of $300,000.
On
April 8, 2019, the Company entered into a securities purchase agreement with an accredited investor, Todd D. Sims, a member of
the Company’s Board, pursuant to which the Company issued a 12% Convertible Debenture in the aggregate principal amount
of $100,000. In connection with this placement, B. Riley FBR waived its placement fee of $6,000 for acting as the Company’s
placement agent in the offering. After taking into account legal fees and expenses, the Company received net proceeds of $100,000.
The
12% Convertible Debentures issued on March 18, 2019, March 27, 2019 and April 8, 2019 are convertible into shares of the Company’s
common stock at the option of the investor at any time prior to December 31, 2020, at a conversion price of $0.40 per share, subject
to adjustment for stock splits, stock dividends and similar transactions, and beneficial ownership blocker provisions. All other
terms of the 12% Convertible Debentures issued on March 18, 2019, March 27, 2019 and April 8, 2019 are identical to the 12% Convertible
Debentures issued on December 12, 2018.
Pursuant
to the registration rights agreements entered into in connection with the securities purchase agreements on March 18, 2019, March
27, 2019 and April 8, 2019, the Company agreed to register the shares issuable upon conversion of the 12% Convertible Debentures
for resale by the investors. The Company committed to file the registration statement the later of (i) the 30th calendar day following
the date the Company files its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 with the SEC, but in no
event later than May 15, 2019, and (ii) the 30th calendar day after all the Series H Preferred Stock have been registered pursuant
to a registration statement under a certain registration rights agreement, dated as of August 9, 2018. The registration rights
agreements provide for Registration Rights Damages (as further described in Note 10) upon the occurrence of certain events up
to a maximum amount of 6% of the aggregate amount invested (refer to “Liquidating Damages” below for further details).
The
securities purchase agreements also included a provision that requires the Company to maintain its periodic filings with the SEC
in order to satisfy the public information requirements under Rule 144(c) of the Securities Act. If the Company fails for any
reason to satisfy the current public information requirement, then the Company will be obligated to pay Public Information Failure
Damages (as further described in Note 10) to each holder, consisting of a cash payment equal to 1% of the amount invested as partial
liquidated damages, up to a maximum of six months, subject to interest at the rate of 1% per month until paid in full (refer to
“Liquidating Damages” below for further details).
Acquisition
of Say Media, Inc.
On
October 12, 2018, the Company, Say Media, a Delaware corporation, SM Acquisition Co., Inc., a Delaware corporation (“SMAC”),
which is a wholly-owned subsidiary of the Company incorporated in Delaware on September 6, 2018 to facilitate the merger, and
Matt Sanchez, solely in his capacity as a representative of the Say Media security holders, entered into the Merger Agreements,
pursuant to which SMAC will merge with and into Say Media, with Say Media continuing as the surviving corporation in the merger
as a wholly-owned subsidiary of the Company.
On
December 12, 2018, the Company consummated the merger with Say Media, pursuant to the terms of the Merger Agreements.
In connection with the consummation of the merger, total cash
consideration of $9,537,397 was paid (net of cash acquired of $534,637), including the following: (1) $6,703,653 to a creditor
of Say Media; (2) $250,000 transaction bonus to a designated employee of Say Media; (3) $2,078,498 advanced prior to September
30, 2018 for certain execution payments in connection with the acquisition; and (4) $505,246 for legal fees ($450,000 was advanced
for acquisition related legal fees of Say Media paid on August 27, 2018 and additional cash consideration of $55,246 was paid at
the Closing for acquisition related legal fees incurred). Furthermore, under the terms of the Merger Agreements, the Company agreed
to issue 5,500,000 shares of its common stock to the former holders of Say Media’s Preferred Stock. The Company also issued
a total of 2,000,000 restricted stock awards (see below “Restricted Stock Awards”), subsequent to the acquisition,
to acquire common stock of the Company to key personnel for continuing services with Say Media, subject to vesting, and repurchase
rights under certain circumstances. The shares issued are for post combination services.
2016
Equity Incentive Plan
From
October 1, 2018 through December 12, 2018, the Company granted stock options, of which 56,000 are outstanding as of the issuance
of these condensed consolidated financial statements, to acquire shares of common stock.
2019
Equity Incentive Plan
On
April 4, 2019, the Board of the Company adopted the 2019 Equity Incentive Plan (the “2019 Plan”). The purpose of the
2019 Plan is to seek, to better secure, and to retain the services of a select group of persons, to provide incentives for those
persons to exert maximum efforts for the success of the Company and its affiliates, and to provide a means by which those persons
have an opportunity to benefit from increases in the value of the Company’s common stock through the granting of stock awards.
The
2019 Plan allows the Company to grant non-statutory stock options, stock appreciation rights, restricted stock awards and/or restricted
stock units awards to acquire shares of the Company’s common stock to the Company’s employees, directors and consultants,
all of which require the achievement of certain price targets by the Company’s common stock.
From
April 10, 2019 through March 26, 2020, the Company granted stock options, of which 79,494,813 are outstanding as of the issuance
of these condensed consolidated financial statements, to acquire shares of the Company’s common stock to officers, directors,
employees and consultants. The Company’s shareholders approved the 2019 Plan and the maximum number of shares authorized
of 85,000,000 under the plan on April 3, 2020. The Company does not currently have sufficient authorized but unissued common shares
to allow for the exercise of the stock options granted under this plan; accordingly, any stock option grants under this plan are
considered as unfunded and cannot be exercised until sufficient common shares have been authorized.
Restricted
Stock Awards
From
October 1, 2018 through February 22, 2019, the Company granted restricted stock awards, of which 906,367 are outstanding as of
the issuance of these condensed consolidated financial statements, for shares of common stock. In connection with the Say Media
acquisition the Company granted restricted stock awards, of which 1,175,000 are outstanding as of the issuance of these condensed
consolidated financial statements, for shares of common stock. On May 31, 2019, the Company granted 2,399,997 restricted stock
units to the holders of the restricted stock awards in connection with the Merger in consideration for an amendment to the true
up provisions.
Equity
Grants Outside Option Plans
From
December 12, 2018 through March 16, 2019, the Company granted stock options, of which 3,821,333 are outstanding as of the issuance
of these condensed consolidated financial statements, to acquire shares of the Company’s common stock to officers, directors
and employees outside of the 2016 Plan and the 2019 Plan. The Company does not currently have sufficient authorized but unissued
common shares to allow for the exercise of these stock options, these stock option grants are considered as unfunded and cannot
be exercised until sufficient common shares have been authorized.
Adoption
of Sequencing Policy
Under
ASC 815-40-35, the Company adopted a sequencing policy whereby, in the event that reclassification of contracts from equity to
assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized
shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest
grants receiving the first allocation of shares. Pursuant to ASC 815, issuance of securities to the Company’s employees
or directors are not subject to the sequencing policy.
Appointment
of New Chief Financial Officer
On
May 3, 2019, the Company announced the appointment of Douglas Smith as the Company’s Chief Financial Officer.
Pursuant
to the terms of an Employment Agreement with the Company, dated as of May 1, 2019, Mr. Smith shall receive an annual salary of
$400,000 and be entitled to receive bonuses to be agreed by Company and Mr. Smith in good faith from time to time based on then
current financial status of the Company. If Mr. Smith’s employment with the Company is terminated by the Company Without
Cause or by Mr. Smith for Good Reason (as those terms are defined in the Employment Agreement), then Mr. Smith shall be entitled
to receive a lump sum payment equal to six months of his annual salary.
Mr.
Smith was granted options to purchase up to 1,500,000 shares of the Company’s common stock, having an exercise price of
$0.57 per share, a term of 10 years, and subject to vesting as described below. These options were granted outside of the 2016
Plan and the 2019 Plan. Of the 1,500,000 options granted: (i) 1,000,000 options will vest over 36 months, with 1/3 vesting after
12 months of continuous service and 1/36 vesting monthly for each month of continuous service thereafter; and (ii) 500,000 will
vest over 36 months, with 1/3 vesting after 12 months of continuous service and 1/36 vesting monthly for each month of continuous
service thereafter, subject to the Company’s common stock being listed on a national securities exchange.
Mr.
Smith was also granted options to purchase up to 1,064,008 shares of the Company’s common stock, having an exercise price
of $0.46 per share, a term of 10 years, and subject to vesting based both on time and targets tied to the Company’s common
stock, as follows: (i) the options will vest over 36 months, with 1/3 vesting after 12 months of continuous service and 1/36 vesting
monthly for each month of continuous service thereafter; and (ii) the Company’s common stock must be listed on a national
securities exchange, with incremental vesting upon achievement of certain stock price targets based on a 45-day VWAP during which
time the average monthly trading volume of the common stock must be at least 15% of the Company’s aggregate market capitalization.
Acquisition
of TheStreet, Inc. and Partnership with Cramer Digital
On
June 11, 2019, the Company, TST Acquisition Co., Inc., a Delaware corporation (“TSTAC”), a newly-formed indirect wholly-owned
subsidiary of the Company, and TheStreet, Inc., a Delaware corporation (“TheStreet”), entered into an agreement and
plan of merger, pursuant to which TSTAC will merge with and into TheStreet, with TheStreet continuing as the surviving corporation
in the merger and as a wholly-owned subsidiary of the Company.
The
merger agreement provided that all issued and outstanding shares of common stock of TheStreet (other than those shares with respect
to which appraisal rights have been properly exercised) will be exchanged for an aggregate of $16,500,000 in cash. Pursuant to
the terms of the merger agreement, on June 10, 2019, the Company deposited $16,500,000 into an escrow account pursuant to an escrow
agreement, dated June 10, 2019, by and among the Company, TheStreet and Citibank, N.A., as escrow agent.
On
August 7, 2019, the Company consummated the merger between TheStreet and TSTAC, pursuant to which TSTAC merged with and into TheStreet,
with TheStreet continuing as the surviving corporation in the merger and as an indirect wholly-owned subsidiary of the Company,
pursuant to the terms of the merger agreement dated as of June 11, 2019, as amended. In connection with the consummation of the
merger, the Company paid a total of $16,500,000 in cash to TheStreet’s stockholders. This transaction was funded through
a debt financing arranged by a subsidiary of B. Riley Financial, Inc. (see below “Amended and Restated Note Purchase Agreement”).
On
August 8, 2019, in connection with the merger, finance and stock market expert Jim Cramer, who co-founded TheStreet, agreed to
enter into a new partnership with TheStreet through Cramer Digital, a new production company featuring the digital rights and
content created by Mr. Cramer and his team of financial experts. The partnership will allow Mr. Cramer to continue his subscription
and content offerings and will be under his editorial control. The Company expects that TheStreet’s senior management will
continue with the Company subsequent to the merger.
Note
Purchase Agreement
On
June 10, 2019, the Company entered into a note purchase agreement with one accredited investor, BRF Finance Co., LLC, an affiliated
entity of B. Riley, pursuant to which the Company issued to the investor a 12% senior secured note, due July 31, 2019, in the
aggregate principal amount of $20,000,000, which after taking into account B. Riley’s placement fee of $1,000,000 and legal
fees and expenses of the investor, resulted in the Company receiving net proceeds of $18,865,000, of which $16,500,000 was deposited
into escrow to fund TheStreet merger consideration and the balance of $2,365,000 was to be used by the Company for working capital
and general corporate purposes.
ABG-SI
LLC Licensing Agreement
On
June 14, 2019, the Company and ABG-SI LLC (“ABG”), a Delaware limited liability company and indirect wholly-owned
subsidiary of Authentic Brands Group, entered into a licensing agreement (the “Licensing Agreement”) pursuant to which
the Company shall have the exclusive right and license in the United States, Canada, Mexico, United Kingdom, Republic of Ireland,
Australia and New Zealand to operate the Sports Illustrated media business (in the English and Spanish languages), including to
(i) operate the digital and print editions of Sports Illustrated (including all special interest issues and the swimsuit
issue) and Sports Illustrated for Kids, (ii) develop new digital media channels under the Sports Illustrated brands and
(iii) operate certain related businesses, including without limitation, special interest publications, video channels, bookazines
and the licensing and/or syndication of certain products and content under the Sports Illustrated brand (collectively, the “Licensed
Business”). The Company is not required to implement geo filtering or other systems to prevent users located outside the
territory from accessing the digital channels in the territory.
The
initial term of the Licensing Agreement shall commence upon the termination of the Meredith License Agreement (as defined below)
and shall continue through December 31, 2029. The Company has the option, subject to certain conditions, to renew the term of
the Licensing Agreement for nine consecutive renewal terms of 10 years each (collectively, the “Term”), for a total
of 100 years.
The
Licensing Agreement provides that the Company shall pay to ABG annual royalties in respect of each year of the Term based on gross
revenues (“Royalties”) with guaranteed minimum annual amounts. The Company has prepaid ABG $45,000,000 against future
Royalties. ABG will pay to the Company a share of revenues relating to certain Sports Illustrated business lines not licensed
to the Company, such as commerce. The two companies will be partnering in building the brand worldwide.
Pursuant
to a publicly announced agreement between ABG and Meredith Corporation (“Meredith”), an Iowa corporation, Meredith
operated the Licensed Business under license from ABG (the “Meredith License Agreement). On October 3, 2019 Maven, ABG and
Meredith entered into a Transition Services Agreement and an Outsourcing Agreement whereby the parties agreed to the terms and
conditions under which Meredith would continue to operate certain aspects of the business, and provide certain services during
the fourth quarter of 2019 as all activities were transitioned over to Maven. Through these agreements, Maven took over operating
control of the Sports Illustrated business.
The
Company has agreed to issue to ABG within 30 days of the execution of the Licensing Agreement warrants to acquire common stock
of the Company representing 10% of the Company’s fully diluted equity securities (“Warrants”). Half the Warrants
shall have an exercise price of $0.42 per share (the “Forty-Two Cents Warrants”). The other half of the Warrants shall
have an exercise price of $0.84 per share (the “Eighty-Four Cents Warrants”). The Warrants provide for the following:
(1) 40% of the Forty-Two Cents Warrants and 40% of the Eighty-Four Cents Warrants shall vest in equal monthly increments over
a period of two years beginning on the one year anniversary of the date of issuance of the Warrants (any unvested portion of such
Warrants to be forfeited by ABG upon certain terminations by the Company of the Licensing Agreement); (2) 60% of the Forty-Two
Cents Warrants and 60% of the Eighty-Four Cents Warrants shall vest based on the achievement of certain performance goals for
the Licensed Business in calendar years 2020, 2021, 2022 or 2023; (3) under certain circumstances the Company may require ABG
to exercise all (and not less than all) of the Warrants, in which case all of the Warrants shall be vested; (4) all of the Warrants
shall automatically vest upon certain terminations of the Licensing Agreement by ABG or upon a change of control of the Company;
and (5) ABG shall have the right to participate, on a pro-rata basis (including vested and unvested Warrants, exercised or unexercised),
in any future equity issuance of the Company (subject to customary exceptions).
Additionally,
Ross Levinsohn, the former senior executive from Fox and Yahoo!, had agreed to become the new Chief Executive Officer of the Licensed
Business.
Mr.
Levinsohn was a director of the Company from November 4, 2016 through October 20, 2017. In conjunction with Mr. Levinsohn’s
services as a director of the Company, he received restricted stock awards for 245,434 shares of common stock. Mr. Levinsohn retained
his restricted stock awards and they continued to vest subsequent to his resignation from the Board on October 20, 2017. The restricted
stock awards will continue to vest through October 16, 2019. In conjunction with the vesting of the restricted stock awards, the
Company recognized stock based compensation cost of $16,616 and $71,619 for the three months and nine months ended September 30,
2018, respectively, and $28,634 and $14,317 for the three months and nine months ended September 30, 2017, respectively, which
was included in general and administrative expenses in the condensed consolidated statements of operations.
On
April 10, 2019, the Company entered into an Advisory Services Agreement with Mr. Levinsohn to provide advisory services with respect
to strategic transactions in the media and digital publishing industries, in exchange for which Mr. Levinsohn was granted a stock
option to purchase 532,004 shares of common stock, exercisable for a period of 10 years at $0.46 per share (the closing market
price on April 10, 2019) subject to vesting (i) based on the achievement by the Company of stock price and liquidity targets and
becoming listed on a national securities exchange and (ii) a concurrent 36-month vesting period with a 12-month cliff, and may
not be exercised until the Company has increased its authorized shares of common stock to a sufficient number to permit the full
exercise of the stock options granted; accordingly, these stock option grants are considered as unfunded and cannot be exercised
until sufficient common shares have been authorized.
On
June 11, 2019, Mr. Levinsohn was granted stock options, in conjunction with Mr. Levinsohn’s services relating to the Company’s
entry into the Licensing Agreement, to acquire 2,000,000 shares of common stock under the Company’s 2019 Plan. These stock
options vest monthly over three years, with one-third vesting after 12 months of continuous service from the grant date and a
further 1/36 vesting at the end of each month of continuous service thereafter, exercisable for a period of ten years at $0.42
per share (the closing market price on June 11, 2019), and may not be exercised until the Company has increased its authorized
shares of common stock to a sufficient number to permit the full exercise of the stock options granted; accordingly, these stock
option grants are considered as unfunded and cannot be exercised until sufficient common shares have been authorized.
On
September 16, 2019, Mr. Levinsohn was granted a stock options, in conjunction with Mr. Levinsohn’s services relating to
the Company’s entry into the Licensing Agreement, to acquire 2,000,000 shares of common stock under the Company’s
2019 Plan. These stock options vest monthly over three years, with one-third vesting after 12 months of continuous service
from the grant date and the remaining two-thirds over next 24 months subject to meeting certain revenue targets, exercisable for
a period of ten years, $0.78 per share (the closing market price on September 16, 2019), and may not be exercised until the Company
has increased its authorized shares of common stock to a sufficient number to permit the full exercise of the stock options granted;
accordingly, these stock option grants are considered as unfunded and cannot be exercised until sufficient common shares have
been authorized.
Mr.
Levinsohn has also entered into an agreement with the Company to purchase $500,000 of the Company’s newly-designated Series
I Convertible Preferred Stock.
Amended
and Restated Note Purchase Agreement
On
June 14, 2019, the Company entered into an amended and restated note purchase agreement with one accredited investor, BRF Finance
Co., LLC, an affiliated entity of B. Riley, which amended and restated the 12% senior secured note dated June 10, 2019, by and
among the Company and the investor. Pursuant to this amendment, the Company issued an amended and restated 12% senior secured
note, due June 14, 2022, in the aggregate principal amount of $68,000,000, which amends, restates and supersedes that $20,000,000
12% senior secured note issued by the Company on June 10, 2019 to the investor. The Company received additional gross proceeds
of $48,000,000, which after taking into account B. Riley’s placement fee of $2,400,000 and legal fees and expenses of the
investor, the Company received net proceeds of $45,550,000, of which $45,000,000 was paid to ABG-SI LLC against future royalties
in connection with the Company’s previously announced Licensing Agreement, dated June 14, 2019, with ABG-SI LLC, and the
balance of $550,000 will be used by the Company for working capital and general corporate purposes.
On
August 27, 2019, the Company entered into a first amendment to the amended note purchase agreement with one accredited investor,
BRF Finance Co., LLC, an affiliated entity of B. Riley, which amended the amended and restated 12% senior secured note dated June
14, 2019. Pursuant to this first amendment, the Company received gross proceeds of $3,000,000, which after taking into account
a closing fee paid to the investor of $150,000 and legal fees and expenses of the investor, the Company received net proceeds
of approximately $2,830,000, which will be used by the Company for working capital and general corporate purposes.
On
February 27, 2020, the Company entered into a second amendment to amended and restated note purchase agreement with one accredited
investor, BRF Finance Co., LLC, an affiliated entity of B. Riley,
which amended the first amendment to the amended and restated 12% senior secured note dated
August 27, 2019. Pursuant to the second amendment, the Company is (i) allowed to replace its previous $3.5 million working capital
facility with a new $15.0 million working capital facility; and (ii) permitted to account for the issuance by the investor of
a $3.0 million letter of credit to the Company’s landlord for the Company’s lease of the premises located at 225 Liberty
Street, 27th Floor, New York, NY 10281.
Warrant
Exercise
On September 10, 2019, a
total of 1,078,661 warrants were exercised on a cashless basis, for a total of 539,331 shares of common stock.
Series
I Convertible Preferred Stock
On
June 27, 2019, 25,800 authorized shares of the Company’s preferred stock were designated as “Series I Convertible
Preferred Stock” (the “Series I Preferred Stock”). On June 28, 2019, the Company closed on a securities purchase
agreement with certain accredited investors, pursuant to which the Company issued an aggregate of 23,100 shares of Series I Preferred
Stock at a stated value of $1,000, initially convertible into 46,200,000 shares of the Company’s common stock at a conversion
rate equal to the stated value divided by the conversion price of $0.50 per share, for aggregate gross proceeds of $23,100,000.
In
consideration for its services as placement agent, the Company paid B. Riley FBR a cash fee of $1,386,000 plus $52,500 in reimbursement
of legal fees and other transaction costs. The Company used approximately $21.7 million of the net proceeds from the financing
to partially repay the amended and restated 12% senior secured note dated June 14, 2019, and to pay deferred fees of approximately
$3,400,000 related to that borrowing facility.
Pursuant
to the registration rights agreements entered into in connection with the securities purchase agreements on June 28, 2019, the
Company agreed to register the shares issuable upon conversion of the Series I Preferred Stock for resale by the investors. The
Company committed to file the registration statement no later than the 30th calendar day following the date the Company files
(i) its annual report on Form 10-K for the fiscal year ended December 31, 2018, (ii) all its required quarterly reports on Form
10-Q since the quarter ended September 30, 2018 through September 30, 2019, and (iii) current Form 8-K in connection with the
acquisitions of TheStreet and its license with ABG-SI LLC, with the SEC, but in no event later than December 1, 2019. The Company
committed to cause the registration statement to become effective by no later than 90 days after December 1, 2019, subject to
certain conditions. The registration rights agreements provide for Registration Rights Damages (as further described in Note 10)
upon the occurrence of certain events up to a maximum amount of 6% of the aggregate amount invested (refer to “Liquidating
Damages” below for further details).
The
securities purchase agreements also included a provision that requires the Company to maintain its periodic filings with the SEC
in order to satisfy the public information requirements under Rule 144(c) of the Securities Act. If the Company fails for any
reason to satisfy the current public information requirement, then the Company will be obligated to pay Public Information Failure
Damages (as further described in Note 10) to each holder, consisting of a cash payment equal to 1% of the amount invested as partial
liquidated damages, up to a maximum of six months, subject to interest at the rate of 1% per month until paid in full (refer to
“Liquidating Damages” below for further details).
Series
J Convertible Preferred Stock
On
October 4, 2019, 35,000 authorized shares of the Company’s preferred stock were designated as “Series J Convertible
Preferred Stock” (the “Series J Preferred Stock”). On October 7, 2019, the Company closed on a securities purchase
agreement with certain accredited investors, pursuant to which the Company issued an aggregate of 20,000 shares of Series J Preferred
Stock at a stated value of $1,000, initially convertible into 28,571,428 shares of the Company’s common stock at a conversion
rate equal to the stated value divided by the conversion price of $0.70 per share, for aggregate gross proceeds of $20,000,000.
In
consideration for its services as placement agent, the Company paid B. Riley FBR a cash fee of $525,240 plus $43,043 in reimbursement
of legal fees and other transaction costs. The Company used $5.0 million of the net proceeds from the financing to partially repay
the amended and restated 12% senior secured note dated June 14, 2019, and to use net proceeds of approximately $14.4 million for
working capital and general corporate purposes.
Pursuant
to the registration rights agreements entered into in connection with the securities purchase agreements on October 7, 2019, the
Company agreed to register the shares issuable upon conversion of the Series J Preferred Stock for resale by the investors. The
Company committed to file the registration statement no later than the 30th calendar day following the date the Company files
(i) its annual report on Form 10-K for the fiscal year ended December 31, 2018, (ii) all its required quarterly reports on Form
10-Q since the quarter ended September 30, 2018 through September 30, 2019, and (iii) current Form 8-K in connection with the
acquisitions of TheStreet, Say Media, HubPages, and its license with ABG-SI LLC, with the SEC, but in no event later than March
31, 2020. The Company committed to cause the registration statement to become effective by no later than 90 days after March 31,
2020, subject to certain conditions. The registration rights agreements provide for Registration Rights Damages (as further described
in Note 10) upon the occurrence of certain events up to a maximum amount of 6% of the aggregate amount invested (refer to “Liquidating
Damages” below for further details).
The
securities purchase agreements also included a provision that requires the Company to maintain its periodic filings with the SEC
in order to satisfy the public information requirements under Rule 144(c) of the Securities Act. If the Company fails for any
reason to satisfy the current public information requirement, then the Company will be obligated to pay Public Information Failure
Damages (as further described in Note 10) to each holder, consisting of a cash payment equal to 1% of the amount invested as partial
liquidated damages, up to a maximum of six months, subject to interest at the rate of 1% per month until paid in full (refer to
“Liquidating Damages” below for further details).
Appointment
of Chief Operating Officer
On
December 9, 2019, the Company announced the appointment of William Sornsin as the Company’s Chief Operating Officer. Mr.
Sornsin has been with the Company since 2016 and has filled various roles with the Company since that time. Mr. Paul Edmondson,
who had also held the position of Chief Operating Officer, will continue as the Company’s President.
Appointment
of Chief Revenue Officer
On
December 9, 2019, Company announced the appointment of Mr. Avi Zimak as the Company’s Chief Revenue Officer and Head of
Global Strategic Partnerships. Mr. Zimak, will be employed on a full time basis, at an annual salary of $450,000. Mr. Zimak will
be paid a signing bonus of $250,000, subject to recapture in certain circumstances if Mr. Zimak’s employment ends before
the second anniversary of the date of his employment agreement. Mr. Zimak will be eligible for an annual bonus of up to $450,000,
based on the achievement in each calendar year of defined annual revenue targets, calculated on a quarterly basis, and paid quarterly
subject to an annual reconciliation. Mr. Zimak will be granted a ten-year stock option to purchase up to an aggregate of 2,250,000
shares of common stock under the 2019 Plan. The stock options will vest as to 1,125,000 shares, in three equal installments, based
on performance targets tied to the achievement of established annual revenue targets for fiscal years 2020 to and including 2022.
The remaining 1,250,000 stock options will vest as follows: (i) 1/3 will vest after 12 months from the date of the employment
agreement; and (ii) then 1/36th will vest at the end of each month thereafter, concluding 36 months from the effect date of the
employment agreement. Currently these options are unfunded, and the Company has agreed to timely increase the availability of
shares of common stock to permit the exercise of the options upon vesting. At the commencement of the employment, Mr. Zimak will
also be awarded restricted stock units for 250,000 shares of common stock, vesting one year after the date of the employment agreement,
with the shares to be delivered on the fifth anniversary of the date of the employment agreement. The term of the employment agreement
is for an initial period of two years, and it is automatically renewed for one additional year periods thereafter if not previously
terminated. The employment agreement has early termination provisions for cause, permanent incapacity, and death. Mr. Zimak has
the right to terminate for good reason in certain circumstances. In the event of certain of the early termination events, the
Company will be obligated to pay salary compensation, bonus amounts and various of the restricted stock units will continue to
vest. In the event of termination, the vested stock options and further vesting will be governed by the terms of the stock option
grant and the plan under which they are granted. During the employment period and for one year thereafter, Mr. Zimak will be subject
to the Company’s typical non-solicitation and competition provisions for all executive employees.
Merger
of Subsidiaries
On December 19, 2019, the
Company’s wholly owned subsidiaries Maven Coalition, Inc., a Nevada corporation, and HubPages, Inc, a Delaware corporation,
were merged into the Company’s wholly owned subsidiary Say Media, Inc, a Delaware corporation. On January 6, 2020 Say Media,
Inc. amended its certificate of incorporation to change its name to Maven Coalition, Inc.
Operating
Lease
On
January 14, 2020, the Company entered into a lease agreement for offices at 225 Liberty Street, 27th Floor, New York,
New York, with an effective date in February 1, 2020. Under the terms of the agreement, the Company has a rent abatement for the
initial nine months of the lease term, with rent payments commencing during November 1, 2020 and the lease expiring in November
30, 2032. The Company has a maximum tenant allowance of $408,680 for certain costs. Monthly rental payments are as follows: 1)
initial sixty-month term $252,019; 2) second sixty-month term $269,048; and 3) remainder twenty-five month term $286,076; for
total minimum lease payments of $38,415,920. In addition to the fixed rent the Company will also pay a portion of the operating
costs associated with the space and is entitled to.
The
Company is currently evaluating the impact that the adoption of ASC Topic 842, Leases, will have at January 1, 2019 upon
recognition of the right-of-use assets and corresponding lease liability, initially measured at the present value of the lease
payments, on its balance sheet for this lease commitment, as well as the disclosure of key information about this lease arrangement,
including the overall presentation on its condensed consolidated financial statements.
FastPay
Credit Facility
On
February 27, 2020 the Company entered into a Financing and Security Agreement with FPP Finance LLC (“FastPay”) pursuant
to which FastPay extended a $15,000,000 line of credit for working capital purposes secured by a first lien on all of the Company’s
cash and accounts receivable and a second lien on all other assets. Borrowings under the facility bear interest at the LIBOR Rate
plus 8.50% and have a final maturity of February 6, 2022.
The balance outstanding as of the issuance of these condensed consolidated financial statements was $4,924,531.
Asset
Acquisition of Petametrics Inc.
On
March 9, 2020, the Company entered into an asset purchase agreement with Petametrics Inc., dba LiftIgniter, a Delaware corporation
where it purchased substantially all the assets, including the intellectual property and excluding certain accounts receivable,
and assumed certain liabilities. The purchase price consisted of: 1) cash payment of $184,086 on February 19, 2020, in connection
with the repayment of all outstanding indebtedness, 2) at closing a cash payment of $131,202, 3) collections of certain accounts
receivable, 4) on the first anniversary date of the closing issuance of restricted stock units for an aggregate of up to 312,500
shares of the Company’s common stock, and 5) on the second anniversary date of the closing issuance of restricted stock
units for an aggregate of up to 312,500 shares of the Company’s common stock.
Delayed
Draw Term Loan
On
March 24, 2020, the Company entered into a second amended and restated note purchase agreement with BRF Finance Co., LLC, an affiliated
entity of B. Riley, in its capacity as agent for the purchasers, which amended and restated the amended and restated note purchase
agreement dated June 14, 2019, as amended. Pursuant to the second amended and restated note purchase agreement, the Company issued
a 15% delayed draw term note (the “Term Note”), in the aggregate principal amount of $12,000,000 to the investor.
Up to $8,000,000 in principal amount under the Term Note is due on March 31, 2021, with the balance thereunder due on June 14,
2022. Interest on amounts outstanding under the Term Note are payable in kind in arrears on the last day of each fiscal quarter.
On March 25, 2020, the Company drew down $6,913,865 under the Term Note, and after taking into account $793,109 of commitment
and funding fees paid to the Investor and legal fees and expenses of the investor, the Company received net proceeds of approximately
$6,000,000, which will be used by the Company for working capital and general corporate purposes. Additional borrowings under
the note requested by the Company may be made at the option of the purchasers. Pursuant to the note purchase agreement, interest
on amounts outstanding under the notes previously issued under the amended and restated note purchase agreement with respect to
(x) interest payable on the notes previously issued under the amended and restated note purchase agreement on March 31, 2020 and
June 30, 2020, and (y) at the Company’s option with the consent of requisite purchasers, interest payable on the previously
issued under the amended and restated note purchase agreement on September 30, 2020 and December 31, 2020, in lieu of the payment
in cash of all or any portion of the interest due on such dates, will be payable in kind in arrears on the last day of such fiscal
quarter. The balance outstanding as of the issuance of these condensed consolidated financial statements was $6,913,865.
In
connection with entering into the note purchase agreement, the Company entered into an amendment to its $15 million FastPay working
capital facility to permit the additional secured debt that may be incurred under the note.
Payroll
Protection Program Loan
On
April 6, 2020, the Company entered into a note agreement with JPMorgan Chase Bank, N.A. under the recently enacted Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration (“SBA”).
The Company received total proceeds of approximately $5.7 million under the note. In accordance with the requirements of the
CARES Act, the Company will use proceeds from the note agreement primarily for payroll costs. The note is scheduled to mature
on April 6, 2022 and has a 0.98% interest rate and is subject to the terms and conditions applicable to loans administered by
the SBA under the CARES Act. The balance outstanding as of the issuance of these condensed consolidated financial statements was
$5,702,725.
Forgiveness
of the note is only available for principal that is used for the limited purposes that qualify for forgiveness under SBA requirements,
and that to obtain forgiveness, the Company must request it and must provide documentation in accordance with the SBA requirements,
and certify that the amounts the Company is requesting to be forgiven qualify under those requirements. The Company also understands
that it shall remain responsible under the note for any amounts not forgiven, and that interest payable under the note will not
be forgiven but that the SBA may pay the Loan interest on forgiven amounts. The requirements for forgiveness include, among other
requirements, provide for eligible expenditures, necessary records/documentation, or possible reductions of the forgiven amount
due to changes in number of employees or compensation and the Company is responsible to review the SBA’s program materials.
Liquidating
Damages
The
Company determined that it is contingently liable for certain for the Registration Rights Damages and Public Information Failure
Damages (collectively the Liquidating Damages) covering the 12% Convertible Debentures, Series I Preferred Stock, and Series J
Preferred Stock, therefore, a contingent obligation of $4,178,778 (including interest computed at 1% per month based on the balance
outstanding of these Liquidating Damages) exist as of the issuance of these condensed consolidated financial statements.
Coronavirus
(COVID-19)
In
December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China. On March 11, 2020 the World Health Organization
has declared COVID-19 to constitute a “Public Health Emergency of International Concern.” Many national governments
and sports authorities around the world have made the decision to postpone/cancel high attendance sports events in an effort to
reduce the spread of the COVID-19 virus. In addition, many governments and businesses have limited non-essential work activity,
furloughed and/or terminated many employees and closed some operations and/or locations, all of which has had a negative impact
on the economic environment.
As
a result of these factors the Company has experienced a decline in revenues and earnings since early March 2020. While the Company
has implemented cost reduction measures in an effort to offset such volume declines, the duration of these declines remains uncertain.
If the volume declines do not stabilize over the next few months, the Company’s 2020 financial results and operations may
be adversely impacted. The extent of the impact on the Company’s operational and financial performance will depend on the
Company’s willingness and ability to take further cost reduction measures as well as future developments, including the
duration and spread of the outbreak, related group gathering and sports event advisories and restrictions, and the extent and
effectiveness of containment actions taken, all of which are highly uncertain and cannot be predicted at the time of issuance
of these condensed consolidated financial statements.
The
Coronavirus Aid, Relief, and Economic Security (CARES) Act, was enacted March 27, 2020. Among the business provisions, the CARES
Act provided for various payroll tax incentives, changes to net operating loss carryback and carryforward rules, business interest
expense limitation increases, and bonus depreciation on qualified improvement property. The Company is evaluating the impact
of the CARES Act on its financial statements.