The following discussion of our financial condition and results of operations for the year endedDecember 31, 2018 should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as "anticipate", "estimate", "plan", "project", "continuing", "ongoing", "expect", "believe", "intend", "may", "will", "should", "could", and similar expressions to identify forward-looking statements.
Please see "Our Future Business" and "Future Liquidity" for additional important information.
Overview We operate a best-in-class technology platform empowering premium publishers who impact, inform, educate, and entertain. We operate the media businesses for Sports Illustrated and TheStreet, and power more than 250 independent brands including History, Maxim, and Biography. The Maven Platform provides digital publishing, distribution, and monetization capabilities to our own Sports Illustrated and TheStreet media businesses as well as to theChannel Partners . Generally, theChannel Partners are independently owned strategic partners who receive a share of revenue from the interaction with their content. They also benefit from our membership marketing and management systems to further enhance their revenue. Our growth strategy is to continue to expand by adding new premium publishers with high quality brands and content either as independentChannel Partners or by acquiring publishers as owned and operated entities. By adding premium content brands, we will further expand the scale of the Maven Platform, improve monetization effectiveness in both advertising and subscription revenues, and enhance the attractiveness to consumers and advertisers.
Liquidity and Capital Resources
As ofDecember 31, 2018 , our principal sources of liquidity consisted of cash of$2,406,596 , approximately$2.5 million available for borrowing under our factoring facility withSallyport Commercial Finance, LLC ("Sallyport"), and anticipated additional funding under the 12% senior secured subordinated convertible debenture (referred to herein as the "12% convertible debentures") financing of approximately$2.1 million , which occurred in March andApril 2019 . The maximum amount available to us under the factoring facility with Sallyport was$3,500,000 . 28 We continued to be focused on growing our existing operations and seeking accretive and complimentary strategic acquisitions as part of our growth strategy. We believed, that with additional sources of liquidity and the ability to raise additional capital or incur additional indebtedness to supplement our then internal projections, we would be able to execute our growth plan and finance our working capital requirements.
We have financed our working capital requirements since inception through
issuances of equity securities and various debt financings. Our working capital
as of
As of December 31, 2018 2017 Current assets$ 9,533,342 $ 3,860,967 Current liabilities (21,849,647 ) (416,444 ) Working (deficit) capital (12,316,305 ) 3,444,523 As ofDecember 31, 2018 , we had a working capital deficit of$12,316,305 , consisting of$9,533,342 in total current assets and$21,849,647 in total current liabilities. Included in current assets as ofDecember 31, 2017 was$3,000,000 of restricted cash. The$3,000,000 of restricted cash was received prior toDecember 31, 2017 and was classified as restricted cash in theDecember 31, 2017 balance sheet and then subsequently reclassified to cash inJanuary 2018 upon completion of the private placement of 1.2 million shares of our common stock. In addition, the investment was classified as an investor demand payable in theDecember 31, 2017 balance sheet and then subsequently reclassified to equity inJanuary 2018 upon completion of this private placement. Our cash flows during the years endedDecember 31, 2018 and 2017 consisted of the following: Years Ended December 31, 2018 2017
Net cash used in operating activities$ (7,417,680 ) $ (4,194,392 ) Net cash used in investing activities (23,589,027 ) (2,039,599 ) Net cash provided by financing activities 29,914,747
9,254,946
Net (decrease) increase in cash, cash equivalents, and restricted cash$ (1,091,960 ) $ 3,020,955 Cash, cash equivalents, and restricted cash, end of year$ 2,527,289 $ 3,619,249
For the year endedDecember 31, 2018 , net cash used in operating activities was$7,417,680 , consisting primarily of approximately$7,080,000 for general and administrative expenses.
For the year endedDecember 31, 2018 , net cash used in investing activities was$23,589,027 , consisting primarily of$18,035,356 for business acquisitions (which included the acquisition of HubPages where we recognized$6,740,000 for developed technology and$268,000 for the trade name, and the acquisition of Say Media where we recognized$8,010,000 for developed technology,$480,000 for the trade name, and$480,000 for a noncompete agreement),$3,366,031 for promissory notes receivable, and$2,156,015 for our capitalized platform development. For the year endedDecember 31, 2018 , net cash provided by financing activities was$29,914,747 , consisting of (i)$12,315,496 in net proceeds after payment of issuance costs from the issuance of shares of Series H convertible preferred stock (the "Series H Preferred Stock") (for additional information see below), (ii)$1,250,000 in net proceeds from a private placement of 500,000 shares of our common stock (iii)$16,637,680 in aggregate proceeds, less repayments, from the issuance of 8% promissory notes, 10% convertible debentures, 10% original issue discount senior secured convertible debentures (referred to herein as the "10% OID convertible debentures), and 12% convertible debentures, and (iv)$667,825 in net proceeds from promissory notes issued in favor of certain of our officers, offset by$956,254 in repayments under our factoring facility with Sallyport. 29 OnAugust 10, 2018 , we entered into a securities purchase agreement with certain accredited investors, pursuant to which we issued an aggregate of 19,400 shares of our Series H Preferred Stock at a stated value of$1,000 , initially convertible into 58,785,606 shares of our 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, for aggregate gross proceeds of$19,399,250 . Of the shares of Series H Preferred Stock issued,Strome Mezzanine Fund LP ("Strome") received 3,600 shares,James C. Heckman , our then-Chief Executive Officer, received 1,200 shares, andJoshua Jacobs , our then-President, received 30 shares upon conversion of the 10% OID convertible debentures.
Our consolidated financial statements have been presented on the basis that we are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We had revenues of$5,700,199 during 2018 and have experienced recurring net losses from operations and negative operating cash flows. Consequently, we were dependent upon continued access to funding and capital resources from both new investors and related parties. If continued funding and capital resources are unavailable at reasonable terms, we may not be able to implement our growth plan and plan of operations. These financings may include terms that may be highly dilutive
to existing stockholders. Future Liquidity
FromJanuary 1, 2019 to the issuance date of our accompanying consolidated financial statements for the year endedDecember 31, 2018 , we continued to incur operating losses and negative cash flow from operating and investing activities. We have raised$64.7 million in net proceeds pursuant to the sale and issuances of Series H Preferred Stock, Series I convertible preferred stock (the "Series I Preferred Stock"), Series J convertible preferred stock (the "Series J Preferred Stock"), and Series K convertible preferred stock (the "Series K Preferred Stock") and$85.9 million in various debt financings. Our cash balance as ofJanuary 4, 2021 was approximately$9.4 million . Summarized below are the additional debt financings and/or issued equity securities through the issuance date of our consolidated financial statements. Debt Financings
Included in the
12% Convertible Debentures. OnMarch 18, 2019 , we entered into a securities purchase agreement with three accredited investors,Strome Mezzanine Fund II, LP ("Strome II"),B. Riley FBR, Inc. ("B. Riley FBR"), andJohn Fichthorn , our Chairman of our Board, pursuant to which we issued 12% convertible debentures in the aggregate principal amount of$1,696,000 . We paid a placement agent fee
of$96,000 toB. Riley FBR .
OnMarch 27, 2019 , we entered into a securities purchase agreement with two accredited investors, includingB. Riley FBR , pursuant to which we issued 12% convertible debentures in the aggregate principal amount of$318,000 . We paid a placement agent fee of$18,000 toB. Riley FBR .
On
The 12% convertible debentures issued onMarch 18, 2019 ,March 27, 2019 , andApril 8, 2019 are convertible into shares of our common stock at the option of the investor at any time prior toDecember 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. UntilDecember 18, 2020 , the date we filed a Certificate of Amendment to our Restated Certificate of Incorporation, as amended (the "Certificate of Amendment"), to increase the number of authorized shares of our common stock, the holders were unable to fully convert their respective 12% convertible debentures. We granted the holders a security interest pursuant to a security agreement, datedOctober 18, 2018 , to secure the obligations under the 12% convertible debentures. We also entered into a registration rights agreement with the investors, pursuant to which we agreed to register for resale on behalf of the selling stockholders, the shares of our common stock issuable upon conversion of the 12% convertible debentures. OnDecember 31, 2020 , noteholders converted the 12% convertible debentures representing an aggregate of$18,104,949 of the then-outstanding principal and accrued but unpaid interest into 53,887,470 shares of our common stock at effective conversion per-share prices ranging from$0.33 to$0.40 . Despite the terms of the 12% convertible debentures, the noteholders agreed to allow us to repay accrued but unpaid interest in shares of our common stock. The remaining 12% convertible debentures representing an aggregate of$1,130,903 of outstanding principal and accrued interest were not converted and, instead, such amounts were repaid in cash to the noteholders. 30
12% Senior Secured Note. OnJune 10, 2019 , we entered into a note purchase agreement with one accredited investor,BRF Finance Co., LLC ("BRF Finance"), an affiliated entity of B. Riley Financial, Inc. ("B. Riley"), pursuant to which we issued to the investor a 12% senior secured note, dueJuly 31, 2019 , in the aggregate principal amount of$20,000,000 , which after taking into account BRF Finance's placement fee of$1,000,000 and its legal fees and expenses, resulted in the receipt by us of net proceeds of$18,865,000 , of which$16,500,000 was used to fund TheStreet escrow account and the remainder for general corporate purposes. The balance outstanding under the 12% senior secured note was no longer outstanding as ofJune 14, 2019 . Please see the section entitled "Amended and Restated 12% Senior Secured Notes" below. Amended and Restated 12% Senior Secured Notes. OnJune 14, 2019 , we entered into an amended and restated note purchase agreement with one accredited investor, BRF Finance, an affiliated entity ofB. Riley , which amended and restated note purchase agreement, and the 12% senior secured note issued by us thereunder onJune 10, 2019 . Pursuant to the amended and restated note purchase agreement, we issued an amended and restated 12% senior secured note, dueJune 14, 2022 , in the aggregate principal amount of$68,000,000 , which amended, restated, and superseded the$20,000,000 12% senior secured note originally issued by us onJune 10, 2019 . We received additional gross proceeds of$48,000,000 , which after taking into account the placement fee paid to BRF Finance, a registered broker-dealer affiliated withB. Riley , of$2,400,000 and legal fees and expenses of the investor, resulted in us receiving net proceeds of$45,550,000 , of which$45,000,000 was used to prepay the Royalties and the remainder for general corporate purposes. We also paid a success fee toB. Riley FBR of$3,400,000 . OnAugust 27, 2019 , we entered into a first amendment to the amended and restated note purchase agreement with one accredited investor, BRF Finance, an affiliated entity ofB. Riley , which amended the amended and restated 12% senior secured note dueJune 14, 2022 . Pursuant to this first amendment, we received additional gross proceeds of$3,000,000 , which after taking into account BRF Finance's placement fee of$150,000 and its legal fees and expenses, resulted in us receiving net proceeds of$2,832,618 . OnOctober 8, 2019 , we issued the third amended and restated 12% senior secured note dueJune 14, 2022 in connection with a partial paydown of the second amended and restated 12% senior secured note dueJune 14, 2022 . We also issued 5,000 shares of our Series J Preferred Stock to BRF Finance as a partial payment of approximately$4,800,000 of the outstanding balance. OnFebruary 27, 2020 , we entered into a second amendment to the amended and restated note purchase agreement dated as ofJune 14, 2019 with one accredited investor, BRF Finance, an affiliated entity ofB. Riley , which further amended the amended and restated 12% senior secured note dueJune 14, 2022 . Pursuant to the second amendment to the amended and restated note purchase agreement, we replaced our previous$3,500,000 working capital facility with Sallyport with a new$15,000,000 working capital facility withFPP Finance LLC ("FastPay"); and (ii) BRF Finance issued a letter of credit in the amount of approximately$3,000,000 to our landlord for our lease of the premises located at225 Liberty Street , 27th Floor,New York, New York 10281. The balance outstanding under our amended and restated 12% senior secured notes as of the issuance date of our consolidated financial statements for the year endedDecember 31, 2018 was$56,296,090 , which included outstanding principal of$48,838,702 , payment of in-kind interest of$7,457,388 that we were permitted to add to the aggregate outstanding principal balance. DuringOctober 2019 , approximately$4,800,000 of the outstanding balance was converted to Series J Preferred Stock (for further details refer to Amendment 1 under the heading Delayed Draw Term Note). FastPay Credit Facility. OnFebruary 6, 2020 , we entered into a financing and security agreement with 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 our 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 ofFebruary 6, 2022 . This line of credit was amended by that certain first amendment to financing and security agreement datedMarch 24, 2020 to permit us to amend and restate the 12% senior secured notes. The aggregate principal amount outstanding, plus accrued and unpaid interest, as ofDecember 31, 2020 was approximately$7,179,000 . 31
EffectiveJanuary 30, 2020 , our factoring facility available with Sallyport was closed and funds were no longer available for advance. As ofMay 4, 2020 , there was no balance outstanding under the facility. Delayed Draw Term Note. OnMarch 24, 2020 , we entered into a second amended and restated note purchase agreement with BRF Finance, an affiliated entity ofB. Riley , in its capacity as agent for the purchasers, which further amended and restated the amended and restated note purchase agreement datedJune 14, 2019 , as amended. Pursuant to the second amended and restated note purchase agreement, we 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 onMarch 31, 2021 , with the balance thereunder due onJune 14, 2022 . Interest on amounts outstanding under the Term Note are payable in kind in arrears on the last day of each fiscal quarter. OnMarch 25, 2020 , we drew down$6,913,865 under the Term Note, and after payment of commitment and funding fees paid to BRF Finance in the amount of$793,109 , and other of its legal fees and expenses that we paid, we received net proceeds of approximately$6,000,000 . The net proceeds were used by us for working capital and general corporate purposes. Additional borrowings under the note requested by us may be made at the option of the purchasers. Pursuant to the second amended and restated note purchase agreement, interest on amounts outstanding under the notes previously issued under the amended and restated note purchase agreement with respect to (i) interest payable on the notes previously issued under the amended and restated note purchase agreement onMarch 31, 2020 andJune 30, 2020 , and (ii) at our option, with the consent of requisite purchasers, interest payable on the notes previously issued under the amended and restated note purchase agreement onSeptember 30, 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.
In connection with entering into the second amended and restated note purchase
agreement, we entered into an amendment to our
Pursuant to the second amended and restated note purchase agreement, datedOctober 23, 2020 ("Amendment 1"), interest payable on the notes onSeptember 30, 2020 ,December 31, 2020 ,March 31, 2021 ,June 30, 2021 ,September 30, 2021 , andDecember 31, 2021 will be payable in-kind in arrears on the last day of such fiscal quarter. Alternatively, at the option of the holder, such interest amounts can be converted into shares of our common stock at the price we last sold shares of our common stock. In addition,$3,367,090 , including$3,295,506 of principal amount of the Term Note and$71,585 of accrued interest, was converted into shares of our Series K Preferred Stock and the maturity date of the Term Note was changed fromMarch 31, 2021 toMarch 31, 2022 . The aggregate principal amount outstanding as ofDecember 31, 2020 was$4,294,228 (including payment of in-kind interest of$675,868 , which was added to the outstanding
note balance). Payroll Protection Program Loan. OnApril 6, 2020 , we issued a note in favor ofJPMorgan Chase Bank, N.A ., pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") administered by theU.S. Small Business Administration ("SBA"). We received total proceeds of approximately$5.7 million under the note. In accordance with the requirements of the CARES Act, we will use proceeds from the note primarily for payroll costs. The note is scheduled to mature onApril 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 our consolidated financial statements was$5,702,725 . The note may be eligible for forgiveness for the principal amounts that are used for the limited purposes that qualify for forgiveness under SBA requirements. In order to obtain forgiveness, we must request it and must provide documentation in accordance with the SBA requirements and certify that the amounts we are requesting to be forgiven qualify under those requirements. We will 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 note interest on forgiven amounts. Requirements for forgiveness, 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. It is our expectation that 100% of the principal amount of the note will be forgiven. 32Equity Securities Included in the$64.7 million of equity raises (see Note 24, Subsequent Events, in the accompanying consolidated financial statements for further details)
are the following: Series H Preferred Stock. BetweenAugust 14, 2020 andAugust 20, 2020 , we entered into several securities purchase agreements for the sale of Series H Preferred Stock with certain accredited investors, pursuant to which we issued an aggregate of 2,253 shares, at a stated value of$1,000 per share, initially convertible into 6,825,000 shares of our common stock at a conversion rate equal to the stated value divided by the conversion price of$0.33 per share, for aggregate gross proceeds of$2,730,000 for working capital and general corporate purposes. The number of shares issuable upon conversion of the Series H Preferred Stock will be adjusted in the event of stock splits, stock dividends, combinations of shares, and similar transactions. Each share of Series H Preferred Stock is entitled to vote on an as-if-converted to common stock basis, subject to beneficial ownership blocker provisions and other certain conditions. OnOctober 28, 2020 , we entered into a mutual rescission agreement with two of the investors, pursuant to which the stock purchase agreements associated with 2,146 shares of Series H Preferred Stock were rescinded and deemed null and void. Series I Preferred Stock. OnJune 27, 2019 , 25,800 authorized shares of our preferred stock were designated by our Board as Series I Preferred Stock. OnJune 28, 2019 , we closed on a securities purchase agreement with certain accredited investors, pursuant to which we 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 our 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 for working capital and general corporate purposes. The number of shares issuable upon conversion of the Series I Preferred Stock will be adjusted in the event of stock splits, stock dividends, combinations of shares and similar transactions. Each share of Series I Preferred Stock is entitled to vote on an as-if-converted to common stock basis, subject to certain conditions. In consideration for its services as placement agent, we paidB. Riley FBR a cash fee of$1,386,000 plus$52,500 in reimbursement of legal fees and other transaction costs. We used approximately$18,300,000 of the net proceeds from the financing to partially repay the amended and restated 12% senior secured note dueJune 14, 2022 , and to pay deferred fees of approximately$3,400,000 related to that borrowing facility. OnDecember 18, 2020 , in connection with the filing of a Certificate of Amendment to increase the number of authorized shares of our common stock, the then-outstanding shares of Series I Preferred Stock automatically converted into shares of our common stock. Accordingly, we do not have any shares of our Series I Preferred Stock currently outstanding. Series J Preferred Stock. OnOctober 4, 2019 , 35,000 authorized shares of our preferred stock were designated by our Board as Series J Preferred Stock. OnOctober 7, 2019 , we closed on a securities purchase agreement with certain accredited investors, pursuant to which we 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 our 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 for working capital and general corporate purposes. The number of shares issuable upon conversion of the Series J Preferred Stock will be adjusted in the event of stock splits, stock dividends, combinations of shares, and similar transactions. Each share of Series J Preferred Stock is entitled to vote on an as-if-converted to common stock basis, subject to certain conditions. 33 OnSeptember 4, 2020 , we closed on an additional Series J Preferred Stock issuance with two accredited investors, pursuant to which we issued an aggregate of 10,500 shares of Series J Preferred Stock at a stated value of$1,000 per share, initially convertible into 15,000,000 shares of our common stock at a conversion rate equal to the stated value divided by the conversion price of$0.70 , for aggregate gross proceeds of$6,000,000 for working capital and general corporate purposes. OnDecember 18, 2020 , in connection with the filing of the Certificate of Amendment to increase the number of authorized shares of our common stock, the then-outstanding shares of Series J Preferred Stock automatically converted into shares of our common stock. Accordingly, we do not have any shares of our Series J Preferred Stock currently outstanding. Series K Preferred Stock. OnOctober 22, 2020 , 20,000 shares of our preferred stock were designated by our Board as Series K Preferred Stock. BetweenOctober 23, 2020 andNovember 11, 2020 , we entered into several securities purchase agreements with accredited investors, pursuant to which we issued an aggregate of 18,042 shares of Series K Preferred Stock at a stated value of$1,000 per share, initially convertible into 45,105,000 shares of our common stock at a conversion rate equal to the stated value divided by the conversion price of$0.40 per share, for aggregate gross proceeds of$18,042,090 . The number of shares issuable upon conversion of the Series K Preferred Stock will be adjusted in the event of stock splits, stock dividends, combinations of shares, and similar transactions. Each share of Series K Preferred Stock is entitled to vote on an as-if-converted to common stock basis, subject to other certain conditions. In consideration for its services as placement agent, we paidB. Riley FBR a cash fee of$400,500 . We used an approximately$3,400,000 of the net proceeds from the financing to partially repay the amended and restated 12% secured senior notes dueJune 14, 2022 and used approximately$2,600,00 for payment on a prior investment, with the remainder of approximately$12,000,000 for working capital and general corporate purposes. OnDecember 18, 2020 , in connection with the filing of the Certificate of Amendment to increase the number of authorized shares of our common stock, the then-outstanding shares of Series K Preferred Stock automatically converted into shares of our common stock. Accordingly, we do not have any shares of our Series K Preferred Stock currently outstanding. Going Concern We performed an annual reporting period going concern assessment. Management is required to assess our ability to continue as a going concern. This Annual Report has been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. Our accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. We have a history of recurring losses. Our recurring losses from operations and net capital deficiency have been evaluated by management to determine if the significance of those conditions or events would limit our ability to meet our obligations when due. In part, the operating loss realized in fiscal 2018 was primarily a result of investments in people, infrastructure for the Maven Platform and the operations rapidly expanding during fiscal 2018 with the acquisitions of HubPages and Say Media, along with continued costs based on the strategic growth plans in other verticals. As reflected in our accompanying consolidated financial statements, we had revenues of$5,700,199 for the year endedDecember 31, 2018 , and have experienced recurring net losses from operations, negative working capital, and negative operating cash flows. During the year endedDecember 31, 2018 , we incurred a net loss attributable to common stockholders of$44,113,379 , utilized cash in operating activities of$7,417,680 , and as ofDecember 31, 2018 , had an accumulated deficit of$34,539,954 . We have financed our working capital requirements since inception through the issuance of debt and equity securities. 34
In 2020, we have also been impacted by the COVID-19 pandemic. 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 COVID-19. 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, we experienced a decline in traffic, advertising revenue, and earnings since earlyMarch 2020 , due to the cancellation of high attendance sports events and the resulting decrease in traffic to the Maven Platform and advertising revenue. We have implemented cost reduction measures in an effort to offset our revenue and earnings declines, while experiencing increased cash flows by growth in digital subscriptions. The extent of the impact on our operational and financial performance will depend on future developments, including the duration and spread of the COVID-19 pandemic, related group gathering and sports event advisories and restrictions, and the extent and effectiveness of containment actions taken, all of which remain uncertain at the time of issuance of our accompanying consolidated financial statements. Management has evaluated whether relevant conditions or events, considered in the aggregate, raise substantial doubt about our ability to continue as a going concern. Substantial doubt exists when conditions and events, considered in the aggregate, indicate it is probable that a company will not be able to meet its obligations as they become due within one year after the issuance date of its financial statements. Management's assessment is based on the relevant conditions that are known or reasonably knowable as ofDecember 31, 2020 . Management's assessment of our ability to meet our future obligations is inherently judgmental, subjective and susceptible to change. The factors that we considered important in our going concern analysis, include, but are not limited to, our fiscal 2021 cash flow forecast and our fiscal 2021 operating budget. Management also considered our ability to repay our convertible debt through future equity and the implementation of cost reduction measures in effect to offset revenue and earnings declines from COVID-19. These factors consider information including, but not limited to, our financial condition, liquidity sources, obligations due within one year after the issuance date of our accompanying financial statements, the funds necessary to maintain operations and financial conditions, including negative financial trends or other indicators of possible financial difficulty. In particular, our plan for the: (1) 2021 cash flow forecast, considered the use of our working capital line with FastPay (as described in Note 24, Subsequent Events, to our accompanying consolidated financial statements) to fund changes in working capital, where we have available credit of approximately$8 million as of the issuance date of the accompanying consolidated financial statements, and that we do not anticipate the need for any further borrowings that are subject to the holders approval, from our 12% amended senior secured notes (as described in Note 24, Subsequent Events, to our accompanying consolidated financial statements) where we may be permitted to borrow up to an additional$5 million ; and (2) 2021 operating budget, considered that approximately sixty-five percent of our revenue is from recurring subscriptions, generally paid in advance, and that digital subscription revenue, that accounts for approximately thirty percent of subscription revenue, grew approximately thirty percent in 2020 demonstrating the strength of our premium brand, and the plan to continue to grow our subscription revenue from our 2019 acquisition of TheStreet (as described in Note 24, Subsequent Events, to our accompanying consolidated financial statements) and to launch premium digital subscriptions from our Sports Illustrated licensed brands (as described in Note 24, Subsequent Events, to our accompanying consolidated financial statements), inJanuary 2021 . We have considered both quantitative and qualitative factors as part of the assessment that are known or reasonably knowable as ofDecember 31, 2020 , and concluded that conditions and events considered in the aggregate, do not raise substantial doubt about our ability to continue as a going concern for a one-year period following the financial statement issuance date. 35 Results of Operations For the year endedDecember 31, 2018 , the total net loss was$26,067,883 . The total net loss increased by$19,783,570 from$6,284,313 in 2017. The primary reasons for the increase in the total net loss is that the operations rapidly expanded during 2018 (see below comparison). The basic and diluted net loss per common share for the year endedDecember 31, 2018 was$1.69 , compared to$0.42 for the year endedDecember 31, 2017 . The primary reasons for the increase in the net loss attributable to common stockholders is the deemed dividend on Series H Preferred Stock of$18,045,496 , the other expenses of$12,145,644 , and the weighted average shares outstanding calculated on a daily weighted average, basic and diluted, increase to 26,135,299 shares from 14,919,232 shares due to the issuance of our common stock in a private placement, partial vesting of restricted stock, exercise of common stock warrants, issuance of restricted stock awards in connection with the acquisitions of HubPages and Say Media, and issuance of shares of our common stock in connection with the acquisition of Say Media.
Our growth strategy is principally focused on adding new publisher partners to our technology platform. In addition, where the right opportunity exists, we will also acquire related online media, publishing and technology businesses by merger. This combined growth strategy has expanded the scale of unique users interacting on our technology platform with increased revenues during 2018. We expect revenues increases in subsequent years will come from organic growth in operations, addition of more publisher partners, and mergers and acquisitions.
Comparison of 2018 to 2017
Years Ended December 31, 2018 2017 $ Change % Change Revenue$ 5,700,199 $ 76,995 $ 5,623,204 7,303.3 % Cost of revenue 7,641,684 1,590,636 6,051,048 380.4 % Gross loss (1,941,485 ) (1,513,641 ) (427,844 ) 28.3 % Operating expenses: Research and development 1,179,944 114,873 1,065,071 927.2 % General and administrative 10,892,443 4,720,824 6,171,619 130.7 % Total operating expenses 12,072,387 4,835,697 7,236,690 149.7 % Loss from operations (14,013,872 ) (6,349,338 ) (7,664,534 ) 120.7 % Total other (expense) income (12,145,644 ) 65,025 (12,210,669 ) -18,778.4 % Loss before income taxes (26,159,516 ) (6,284,313 ) (19,875,203 ) 316.3 % Benefit for income taxes 91,633 - 91,633 100.0 % Net loss (26,067,883 ) (6,284,313 ) (19,783,570 ) 314.8 % Deemed dividend on Series H preferred stock (18,045,496 ) - (18,045,496 ) 100.0 % Basic and diluted net loss per common share$ (44,113,379 ) $ (6,284,313 ) $ (37,829,066 ) 602.0 % Revenue For the year endedDecember 31, 2018 , we had revenue of$5,700,199 , as compared to revenue of$76,995 for the year endedDecember 31, 2017 . The primary source of revenue was from advertising and membership subscriptions of$5,614,953 and$85,246 , respectively, in 2018 and$62,777 and$14,218 , respectively, in 2017. During 2018, revenue was primarily from operations of on-line media channels from the Mavens generating advertising and membership subscriptions, and as a result of the acquisition of HubPages inAugust 2018 and Say Media inDecember 2018 . During 2017, revenue was primarily from operations of on-line media channels, which went live inMay 2017 , generating advertising and memberships that began in the third quarter of 2017. 36 Cost of Revenue For the year endedDecember 31, 2018 , we recognized cost of revenue of$7,641,684 from operating our online media channels primarily attributable to fixed monthly cost of providing our digital media network channels and advertising and membership services, as compared to$1,590,636 for the year endedDecember 31, 2017 . The increase of$6,051,048 in cost is primarily from ourChannel Partners' guarantee payments of$896,928 , payroll and benefits of$450,366 , amortization of our capitalized platform development of$1,324,373 (which resulted from spending for our capitalized platform development of during 2018$4,006,399 ), amortization of acquired developed technology of$558,423 (which resulted from the acquisitions of HubPages and Say Media for the technology development during 2018 of$14,750,000 ), and revenue share payments of$2,247,453 . During the year endedDecember 31, 2018 , since our technology operations were primarily in the application and development phase we capitalized platform development of$4,006,399 , as compared to$2,605,162 in 2017, consisting of$2,086,963 in payroll and related expenses, including taxes and benefits, as compared to$1,990,589 in 2017, and$1,850,384 in stock based compensation for related personnel, as compared to$614,573 in 2017, resulting in amortization of$1,836,625 reflected in cost of revenue for our capitalized platform development, as compared to$512,252 in 2017. Operating Expenses
Research and Development. For the year endedDecember 31, 2018 , we incurred research and development expenses of$1,179,944 from development of our platform in the preliminary project and post-implementation stages, as compared to$114,873 for the year endedDecember 31, 2017 . The increase in research and development expenses is primarily from payroll and benefits of$640,760 , stock-based compensation of$196,867 , and other related research and development costs of$209,120 . General and Administrative. For the year endedDecember 31, 2018 , we incurred general and administrative expenses of$10,892,443 from payroll and related expenses, professional services, facilities costs, stock-based compensation of related personnel, depreciation and amortization, and other corporate expense, as compared to$4,720,824 for the year endedDecember 31, 2017 . The increase in general and administrative expenses of$6,171,619 is primarily from our increase in headcount from 24 to 87, with three additional senior executives, the Chief Operating Officer, the Chief Strategy & Revenue Officer, and the Chief Product Officer, fourteen in technology development and forty-six in administration, along with the related benefits of$1,393,144 . In addition to the payroll and related benefits, we incurred additional stock-based compensation of$2,588,785 , travel of$80,305 , conferences of$444,919 , facilities costs of$230,835 , consultants of$143,972 , public relations of$91,338 , insurance of$92,310 , and professional fees of$997,358 . Other (Expenses) Income For the year endedDecember 31, 2018 , we had net other expenses of$12,145,644 , as compared to net other income of$65,025 for the year endedDecember 31, 2017 , which was the result primarily from the items below.
Change in Valuation of Warrant Derivative Liabilities. For the year ended
Change in Valuation of Embedded Derivative Liabilities. For the year endedDecember 31, 2018 , the increase in the fair value of the embedded derivative liabilities resulted in a loss of$2,971,694 , as compared to the decrease in the fair value of$64,614 for the year endedDecember 31, 2017 . 37 True-Up Termination Fee. OnJune 15, 2018 , we entered into a securities purchase agreement with four investors to sell$4,775,000 principal amount of 10% senior convertible debentures. Strome purchased$3,000,000 of such principal amount and two of our senior executives and another investment fund purchased the remaining$1,775,000 of such amount. OnJune 15, 2018 , we also modified two previous securities purchase agreements datedJanuary 4, 2018 andMarch 30, 2018 with Strome to eliminate the true-up provision under which we were committed to issue up to 1,700,000 shares of our common stock in certain circumstances. As consideration for such modification, we issued a warrant to Strome to purchase 1,500,000 shares of our common stock, exercisable at an initial price of$1.19 per share for a five-year period. The estimated fair value of this warrant on theJune 15, 2018 issuance date of$1,344,648 , calculated pursuant to the Black-Scholes option-pricing model, was charged to operations as true-up termination fee during the year endedDecember 31, 2018 . We did not have a true-up termination fee for the year endedDecember 31, 2017 . Settlement of Promissory Notes Receivable. OnDecember 12, 2018 , pursuant to the merger agreement with Say Media entered into onOctober 12, 2018 , as amended onOctober 17, 2018 , we settled the promissory notes receivable by effectively forgiving$3,366,031 of the balance due as ofDecember 31, 2018 . We did not have any settlement of promissory notes receivable for the year endedDecember 31, 2017 . Interest Expense. For the year endedDecember 31, 2018 , we incurred interest expense of$2,508,874 , primarily consisting of amortization of accretion of original issue discount and debt discount on notes payable of$671,436 , extinguishment of debt of$2,620,253 , accrued interest of$193,416 , and other interest of$120,629 , less gain on extinguishment of embedded derivatives liabilities upon extinguishment of host instrument of$1,096,860 , as compared to no interest expense for the year endedDecember 31, 2017 . Liquidated Damages. For the year endedDecember 31, 2018 , we recorded$2,940,654 of liquidated damages primarily from issuance of the Series H Preferred Stock and 12% convertible debentures since we determined that: (i) a registration statement registering shares of our common stock issuable upon conversion of the Series H Preferred Stock and conversion of the 12% convertible debentures would not be declared effective by theSEC within the requisite time frame; and (ii) that we would not be able to maintain the timely filing of our periodic reports with theSEC in order to satisfy the public information requirements under the securities purchase agreements. We did not have any liquidated damages for
the year endedDecember 31, 2017 . Deemed Dividend on Series H Preferred Stock. For the year endedDecember 31, 2018 , in connection with the issuance of 19,400 shares of our Series H Preferred Stock, we recorded a beneficial conversion feature in the amount of$18,045,496 for the underlying shares of our common stock since the nondetachable conversion feature was in-the-money (the conversion price of$0.33 per share was lower than the closing price of our common stock of$0.86 ) at the issuance date. The beneficial conversion feature was recognized as a deemed dividend. We did not have a deemed dividend for the year endedDecember 31, 2017 .
Recent Disruptions to Our Operations
Our normal business operations have recently been disrupted by a series of events surrounding the COVID-19 pandemic and related measures to control it. See "Item 1A, Risk Factors - Because of the effects of COVID-19 pandemic and the uncertainty about their persistence, we may not be able to continue operations as a going concern." Seasonality
We expect to experience typical media company advertising and membership sales seasonality, which is strong in the fiscal fourth quarter and slower in the fiscal first quarter.
Effects of Inflation
To date inflation has not had a material impact on our business or operating results.
38 Our Future Business During 2019, we announced that our Board, supported by its management team, had commenced a process to explore strategic growth opportunities through mergers and acquisitions. In connection with our strategic growth, in 2019, we completed our previously announced proposed acquisition and licensing agreement as follows: TheStreet OnJune 11, 2019 , we, TSTAC, a newly-formed indirect wholly-owned subsidiary of ours, and TheStreet, entered into TheStreet Merger Agreement, pursuant to which TSTAC would merge with and into TheStreet, with TheStreet continuing as the surviving corporation in TheStreet Merger and as an indirect wholly-owned subsidiary of ours. OnAugust 7, 2019 , we consummated TheStreet Merger, pursuant to which TSTAC merged with and into TheStreet. Pursuant to TheStreet Merger Agreement, all issued and outstanding shares of common stock of TheStreet (other than those shares with respect to which appraisal rights have been properly exercised) were exchanged for an aggregate of$16,500,000 in cash. Further, pursuant to the terms of TheStreet Merger Agreement, onJune 10, 2019 , we deposited$16,500,000 into an escrow account pursuant to an escrow agreement, datedJune 10, 2019 , by and among theCompany, TheStreet andCitibank, N.A ., as escrow agent. TheStreet Merger was funded through a debt financing arranged by a subsidiary ofB. Riley (see below "Funding for Acquisition of TheStreet"). OnAugust 7, 2019 , in connection with TheStreet Merger, we entered into the Cramer Agreement withMr. Cramer , pursuant to whichMr. Cramer andCramer Digital agreed to provide the Cramer Services. In consideration for the Cramer Services, we payCramer Digital the Revenue Share. In addition, we payCramer Digital approximately$3,000,000 as an annualized guarantee payment in equal monthly draws, recoupable against the Revenue Share. We also issued two options toCramer Digital pursuant to our 2019 Plan. The first option was to purchase up to two million shares of our common stock at an exercise price of$0.72 , the closing stock price onAugust 7, 2019 , the grant date. This option vests over 36 months. The second option was to purchase up to three million shares of our common stock at an exercise price of$0.54 , the closing stock price onApril 21, 2020 , the grant date. In the eventCramer Digital and we agree to renew the term of the Cramer Agreement for a minimum of three years from the end of the second year of the current term, 900,000 shares will vest on the Trigger Date. The remaining shares will vest equally on the 12-month anniversary of the Trigger Date, the 24-month anniversary of the Trigger Date, and the 36-month anniversary of the Trigger Date.
In addition, we provide
Funding for Acquisition of TheStreet. OnJune 10, 2019 , we entered into a note purchase agreement with one accredited investor, BRF Finance, an affiliated entity ofB. Riley , pursuant to which we issued to the investor a 12% senior secured note, dueJuly 31, 2019 , in the aggregate principal amount of$20,000,000 , which after taking into account the placement fee toB. Riley FBR of$1,000,000 and legal fees and expenses of the investor, resulted in us receiving net proceeds of$18,865,000 , of which$16,500,000 was deposited into the escrow account to fund TheStreet merger consideration and the balance of$2,365,000 was to be used by us for working capital and general corporate purposes. 39
The Sports Illustrated Licensing Agreement
OnJune 14, 2019 , we and ABG, an indirect wholly-owned subsidiary ofAuthentic Brands Group , entered into the Sports Illustrated Licensing Agreement, pursuant to which we have the exclusive right and license inthe 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 Licensed Brands. We are 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 Sports Illustrated Licensing Agreement commenced on
The Sports Illustrated Licensing Agreement provides that we will pay to ABG Royalties in respect of each year of the Term based on gross revenues, with guaranteed minimum annual amounts. We prepaid$45,000,000 to ABG against future Royalties. ABG will pay to us a share of revenues relating to certain Sports Illustrated business lines not licensed to us, such as all gambling-related advertising and monetization, events, and commerce. The two companies are partnering in building the brand worldwide. This transaction was funded through a debt financing arranged by a subsidiary ofB. Riley (see below "Funding for Sports Illustrated Licensing Agreement"). Pursuant to the Meredith License Agreement between ABG and Meredith, Meredith operated the Sports Illustrated Licensed Brands under license from ABG. OnOctober 3, 2019 , Meredith and we entered into various agreements, including the Transition Agreement, whereby the parties agreed to the terms and conditions under which Meredith continued to operate certain aspects of the Sports Illustrated Licensed Brands, and provided certain services during the fourth quarter of 2019 until all activities were transitioned over to us. Through these agreements, we took over operating control of the Sports Illustrated Licensed Brands, and the Transition Agreement was terminated onOctober 4, 2019 . Pursuant to the Sports Illustrated Licensing Agreement, we issued to ABG warrants to acquire 21,989,844 shares of our common stock (the "Warrants"). Half of the Warrants have an exercise price of$0.42 per share (the "Forty-Two Cents Warrants"). The other half of the Warrants have an exercise price of$0.84 per share (the "Eighty-Four Cents Warrants"). The Warrants provide for the following: (1) 40% of theForty-Two Cents Warrants and 40% of theEighty-Four Cents Warrants will 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 us of the Sports Illustrated Licensing Agreement); (2) 60% of theForty-Two Cents Warrants and 60% of theEighty-Four Cents Warrants will vest based on the achievement of certain performance goals for the Sports Illustrated Licensed Brands in calendar years 2020, 2021, 2022, or 2023; (3) under certain circumstances we may require ABG to exercise all (and not less than all) of the Warrants, in which case all of the Warrants will be vested; (4) all of the Warrants will automatically vest upon certain terminations of the Licensing Agreement by ABG or upon a change of control of us; and (5) ABG will have the right to participate, on a pro-rata basis (including vested and unvested Warrants, exercised or unexercised), in any of our future equity issuances (subject to customary exceptions). 40 Funding for the Sports Illustrated Licensing Agreement. OnJune 14, 2019 , we entered into an amended and restated note purchase agreement with one accredited investor, BRF Finance, an affiliated entity ofB. Riley , which amended and restated the 12% senior secured note datedJune 10, 2019 . Pursuant to this amendment, we issued an amended and restated 12% senior secured note, dueJune 14, 2022 , in the aggregate principal amount of$68,000,000 , which amended, restated, and superseded that$20,000,000 12% senior secured note issued by us onJune 10, 2019 to the investor. We received additional gross proceeds of$48,000,000 , which, after taking into account BRF Finance's placement fee of$2,400,000 and legal fees and expenses of the investor, we received net proceeds of$45,550,000 , of which$45,000,000 was paid to ABG against future Royalties in connection with the Sports Illustrated Licensing Agreement, datedJune 14, 2019 , with ABG, and the balance of$550,000 was used by us for working capital and general corporate purposes.
In 2020, we completed the following acquisitions:
Asset Acquisition of LiftIgniter
OnMarch 9, 2020 , we entered into an asset purchase agreement withLiftIgniter and Maven Coalition , wherebyMaven Coalition purchased substantially all the assets of LiftIgniter's machine learning platform, which personalizes content and product recommendations in real-time. The purchased assets included LiftIgniter's intellectual property and excluded certain accounts receivable.Maven Coalition also assumed certain of LiftIgniter's liabilities. The purchase price consisted of: (i) a cash payment of$184,086 onFebruary 19, 2020 , in connection with the repayment of certain of its outstanding indebtedness; (ii) a cash payment at closing of$131,202 ; (ii) collections of certain accounts receivable; (iv) on the first anniversary date of the closing issuance of restricted stock units for an aggregate of up to 312,500 shares of our Common Stock; and (v) on the second anniversary date of the closing issuance of restricted stock units for an aggregate of up to 312,500 shares of our common stock.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles inthe United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition, platform development, impairment of long-lived assets, and stock-based compensation. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2, Summary of Significant Accounting Policies, in our consolidated financial statements. Our discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements included elsewhere in this Report, which have been prepared in accordance with GAAP. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Revenue We adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"), as the accounting standard for revenue recognition, which was effective as ofJanuary 1, 2017 . Since we had not previously generated revenue from customers, we did not have to transition its accounting method from ASC 605, Revenue Recognition. Revenues are recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. We generate all of our revenue from contracts with customers. The following is a description of the principal activities from which we generate revenue: 41 Advertising. We enter into contracts with advertising networks to serve display or video advertisements on the digital media pages associated with its various channels. In accordance with ASC 606, we recognized revenue from 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. We owe its independent publisherChannel 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. We enter 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. In accordance with ASC 606, we recognize 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 we provide access to the premium content over the membership subscription term, we recognize revenue and proportionately reduce the contract liability balance. We owe its independent publisherChannel Partners a revenue share of the membership subscription revenue earned, which is initially deferred and recorded as a contract fulfillment cost. We recognize contract fulfillment costs over the membership subscription term in the same pattern that the associated membership subscription revenue is recognized. Cost of Revenue Our cost of revenue represents the cost of providing our digital media network channels and advertising and membership services. The cost of revenue that we have incurred in the periods presented primarily include: ? Channel Partner guarantees and revenue share payments; ? amortization of developed technology and platform development; ? hosting and bandwidth and software license fees; ? stock based compensation related to certain warrants to purchase up to 2,000,000 shares of our common stock (the "Channel Partner Warrants") granted pursuant to the Channel Partner Warrant Program (the "Channel Partner Warrant Program"); ? programmatic advertising platform costs; ? payroll and related expenses of related personnel; ? fees paid for data analytics and to other outside service providers; ? stock based compensation of related personnel. Research and Development
Research and development consist primarily of expenses incurred in the research and development of our platform in the preliminary project and post-implementation stages.
Our research and development expenses include:
? payroll and related expenses for personnel; ? costs incurred in developing conceptual formulation and determination of existence of needed technology; and ? stock based compensation of related personnel. 42
Platform Development For the years presented, substantially all of our technology expenses are platform development costs that were capitalized as intangible costs. Technology costs are expensed as incurred or capitalized into property and equipment in accordance with theFinancial Accounting Standards Board ("FASB") ASC Topic 350, Intangibles -Goodwill and Other. This ASC requires that costs incurred in the preliminary project and post-implementation stages of an internal use software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. We capitalize internal labor costs, including compensation, benefits and payroll taxes, incurred for certain capitalized platform development projects. Our 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 capitalized during the application development stage of a project include:
? payroll and related expenses for personnel; ? costs incurred in developing features and functionality; and ? stock based compensation of related personnel. General and Administrative
General and administrative expenses consist primarily of:
? payroll and related expenses for executive, sales and administrative
personnel; ? professional services, including accounting, legal, and insurance;
? depreciation of office equipment, computers, and furniture and fixtures;
? facilities costs; ? conferences; ? other general corporate expenses; and ? stock-based compensation of related personnel. Stock-Based Compensation We provide stock-based compensation in the form of (i) restricted stock awards to employees and directors, (ii) stock option grants to employees, directors, and consultants, and (iii) the Channel Partners Warrants. We account 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 our 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 that are performance-vested are measured at fair value on the grant date and charged to operations when the performance condition is satisfied. 43 We account for stock-based payments to certain directors and consultants and itsChannel Partners by determining the value of the stock compensation based upon the measurement date at either (i) the date at which a performance commitment is reached or (ii) 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 our 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 17, Stockholders' Equity, in our accompanying consolidated financial statements) is determined through consultants with our 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 our common stock on the grant date, and the estimated volatility of our common stock over the term of the equity award. Estimated volatility is based on the historical volatility of our common stock and is evaluated based upon market comparisons. The risk-free interest rate is based on theU.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 our common stock.
We capitalize 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 consolidated statements of operations.
Income Taxes We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in results of operations in the period that includes the enactment date.
Impairment of Long-Lived Assets
We periodically evaluate 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. Sequencing Policy Under authoritative guidance, we 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 our inability to demonstrate we have sufficient authorized shares of our common stock, shares of our common stock 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 our employees or directors are not subject to the sequencing policy. Based on a preliminary analysis, we determined that during the fourth quarter endingDecember 31, 2019 , we did not have authorized and unissued shares of our common stock available for issuance that we could potentially be required to deliver under our equity contracts. Information with respect to the issuance of dilutive and potentially dilutive instruments subsequent to the year endedDecember 31, 2018 is in our accompany consolidated financial statements in Note 24, Subsequent Events, under the heading Sequencing Policy. 44 OnDecember 18, 2020 , we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation to increase the number of authorized shares of our common stock from 100,000,000 shares to 1,000,000,000 shares. As a result, as ofDecember 18, 2020 , we have a sufficient number of authorized but unissued shares of our common stock available for issuance required under all of our securities that are convertible into shares of our common stock.
Recently Issued Accounting Pronouncements
Note 2, Summary of Significant Accounting Policies, in our accompanying consolidated financial statements appearing elsewhere in this Annual Report includes Recently Issued Accounting Pronouncements.
Off-Balance Sheet Arrangements
As of
Warrant Derivative Liabilities
L2 Warrants. Effective as ofAugust 3, 2018 , pursuant to the reset provision, we adjusted the exercise price to$0.50 per share (the floor exercise price) for the warrants previously issued toL2 Capital, LLC ("L2") and issued additional warrants to L2 to purchase up to 640,405 shares of our common stock at an exercise price of$0.50 per share (as further described in Note 17, Stockholders' Equity, in our accompanying consolidated financial statements). As a result of the exercise price of the warrants being reduced to the floor exercise price onAugust 3, 2018 and triggering of the reset provision, the warrants no longer contained any reset provisions and will continue to be carried on our consolidated balance sheets as a derivative liability at fair value, as adjusted at each period-end since, among other criteria, delivery of unregistered shares is precluded upon exercise. 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. Warrants exercisable for up to 1,066,963 shares of our common stock were outstanding as ofDecember 31, 2018 , with a derivative liability at fair value of$418,214 . L2 exercised these warrants duringSeptember 2019 on a cashless basis, therefore, this derivative liability had no impact on our cash resources.
Strome Warrants. OnJune 15, 2018 , we modified the two securities purchase agreements datedJanuary 4, 2018 andMarch 30, 2018 with Strome to eliminate the true-up provision under which we were committed to issue up to 1,700,000 shares of our common stock in certain circumstances (as further described in Note 17, Stockholders' Equity, in our accompanying consolidated financial statements). As consideration for such modification, we issued warrants to Strome (the "Strome Warrants") to purchase up to 1,500,000 shares of our common stock, at an initial exercise 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 our Board. OnAugust 3, 2018 , as a result of the warrant exercise price being reduced to the floor exercise price and the triggering of the reset provision, the warrants no longer contained any reset provisions and will continue to be carried on our consolidated balance sheets as a derivative liability at fair value, as adjusted at each period-end since, among other criteria, delivery of unregistered shares is precluded upon exercise. Warrants exercisable for up to 1,500,000 shares of our common stock were outstanding as ofDecember 31, 2018 , with a derivative liability fair value of$587,971 . In the event Strome decided to exercise these warrants, since shares of our common stock were available to settle the instrument, there would be no impact to
our cash resources. 45
B. Riley Warrants. OnOctober 18, 2018 , we issued warrants to the investors to purchase up to 875,000 shares of our common stock in connection with the 10% OID convertible debentures, with an exercise price of$1.00 per share (as further described in Note 17, Stockholders' Equity, in our accompanying consolidated financial statements). The warrant instrument provides that upon the consummation of a subsequent financing, the$1.00 exercise price shall be adjusted under certain conditions. We determined that the aforementioned$1.00 exercise price adjustment provisions were inconsequential since we did not anticipate a consumption of a subsequent financing that would trigger a subsequent financing condition, therefore, we will carry the warrants on our consolidated balance sheets as a derivative liability at fair value, as adjusted at each period-end since, among other criteria, delivery of unregistered shares is precluded upon exercise. The warrants are exercisable for a period of seven years, subject to customary anti-dilution adjustments, and may, if at any time after the six-month anniversary of the issuance of the warrants there is no effective registration statement covering the re-sale of the shares of common stock underlying the warrants, be exercised on a cashless basis. Warrants exercisable for up to 875,000 shares of our common stock were outstanding as ofDecember 31, 2018 , with a derivative liability fair value of$358,050 . In the eventB. Riley decided to exercise these warrants (which are subject to certain contractual exercise limitations), since shares of our common stock were available to settle the instrument after considering the contractual exercise limitations, there would be no impact to our cash resources.
Embedded Derivative Liabilities
12% Convertible Debentures. OnDecember 12, 2018 , we entered into a securities purchase agreement with three accredited investors, pursuant to which we issued to the investors 12% convertible debentures in the aggregate principal amount of$13,091,528 , which included (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 onOctober 18, 2018 (as further described in Note 15, Convertible Debt, in our accompanying consolidated financial statements), and (ii) a placement fee of$540,000 to the placement agent,B. Riley FBR , in the offering. After payment of legal fees and expenses of the investors, we received net proceeds of$8,950,000 . The 12% convertible debentures issued onDecember 12, 2018 are convertible into shares of our common stock at the option of the investor at any time prior toDecember 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. The 12% convertible debentures are due and payable onDecember 31, 2020 . Interest accrues at the rate of 12% per annum, payable on the earlier of conversion orDecember 31, 2020 . Our obligations under the 12% convertible debentures are secured pursuant to the security agreement we entered into with each investor. Subject to us receiving stockholder approval to increase our authorized number of shares of our common stock, principal on the 12% convertible debentures are convertible into shares of our common stock, at the option of the investor, at any time prior toDecember 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. Upon issuance of the 12% convertible debentures, we recognized a conversion option, buy-in feature, and default remedy feature as embedded derivatives that were bifurcated from the note instruments; therefore, we will carry the embedded derivative liabilities on our consolidated balance sheets at fair value, as adjusted at each period-end since, among other criteria, delivery of unregistered shares is precluded upon conversion. As ofDecember 31, 2018 , the fair value of the embedded derivative liabilities was$7,387,000 . In the event the investors decided to exercise their conversion rights under the debentures (which are subject to certain contractual conversion limitations), since shares of our common stock are available to settle the instruments after considering the contractual conversion limitations, there would be no impact to our cash resources. 46 Contractual Obligations
The following table sets forth our principal cash operating obligations and
commitments as of
Payments due by Year * Total 2019 2020 2021 Operating leases$ 1,100,689 $ 526,027 $ 347,845 $ 226,817 Employment contracts 297,917 297,917 - - Consulting agreement 472,500 465,300 7,200 - Total$ 1,871,106 $ 1,289,244 $ 355,045 $ 226,817 * Subsequent toDecember 31, 2018 , we entered into to several operating lease obligations which are not reflected in the table (refer to Note 24, Subsequent Events, in our accompanying consolidated financial statements).
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