Item 1. Consolidated Financial Statements
theMaven, Inc. and Subsidiary
Consolidated Balance Sheets
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,448,474
|
|
|
$
|
598,294
|
|
Prepayments and other current assets
|
|
|
96,751
|
|
|
|
121,587
|
|
Total current assets
|
|
|
1,545,225
|
|
|
|
719,881
|
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
1,885,087
|
|
|
|
547,804
|
|
Intangible assets
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
3,450,312
|
|
|
$
|
1,287,685
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
44,395
|
|
|
$
|
154,361
|
|
Accrued expenses
|
|
|
122,624
|
|
|
|
54,789
|
|
Conversion feature liability
|
|
|
126,927
|
|
|
|
137,177
|
|
Total current liabilities
|
|
|
293,946
|
|
|
|
346,327
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred stock, $0.01 par value, 1,000,000 shares authorized; 168 shares issued and outstanding ($168,496 aggregate liquidation value)
|
|
|
168,496
|
|
|
|
168,496
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100,000,000 shares authorized;
25,983,461 and 22,047,531 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively
|
|
|
259,834
|
|
|
|
220,475
|
|
Common stock to be issued
|
|
|
-
|
|
|
|
9,375
|
|
Additional paid-in capital
|
|
|
7,508,989
|
|
|
|
2,730,770
|
|
Accumulated deficit
|
|
|
(4,780,953
|
)
|
|
|
(2,187,758
|
)
|
Total stockholders’ equity
|
|
|
2,987,870
|
|
|
|
772,862
|
|
Total liabilities and stockholders’ equity
|
|
$
|
3,450,312
|
|
|
$
|
1,287,685
|
|
See accompanying notes to consolidated financial
statements.
theMaven, Inc.
and Subsidiary
Consolidated Statements of Operations
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
June 30,
2017
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenue
|
|
|
-
|
|
|
|
-
|
|
Service Costs
|
|
$
|
192,039
|
|
|
$
|
192,039
|
|
Research and development
|
|
|
9,297
|
|
|
|
73,319
|
|
General and administrative
|
|
|
1,390,467
|
|
|
|
2,338,437
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,591,803
|
)
|
|
|
(2,603,795
|
)
|
|
|
|
|
|
|
|
|
|
Other income (loss):
|
|
|
|
|
|
|
|
|
Interest and dividend income, net
|
|
|
296
|
|
|
|
350
|
|
Change in fair value of conversion feature
|
|
|
3,140
|
|
|
|
10,250
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
3,436
|
|
|
|
10,600
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,588,367
|
)
|
|
$
|
(2,593,195
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding – basic and diluted
|
|
|
13,293,694
|
|
|
|
11,425,984
|
|
See accompanying notes to consolidated financial
statements
.
theMaven, Inc. and Subsidiary
Consolidated Statement of Stockholders’
Equity (Unaudited)
Six Months Ended June 30, 2017
|
|
Common Stock
|
|
|
To Be Issued
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2017
|
|
|
22,047,531
|
|
|
$
|
220,475
|
|
|
|
8,929
|
|
|
$
|
9,375
|
|
|
$
|
2,730,770
|
|
|
$
|
(2,187,758
|
)
|
|
$
|
772,862
|
|
Common stock to be issued
|
|
|
8,930
|
|
|
|
89
|
|
|
|
(8,929
|
)
|
|
|
(9,375
|
)
|
|
|
9,286
|
|
|
|
|
|
|
|
-
|
|
Issuance of common stock, net of offering costs
|
|
|
3,765,000
|
|
|
|
37,650
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,281,014
|
|
|
|
|
|
|
|
3,318,664
|
|
Shares issued for investment banking fees
|
|
|
162,000
|
|
|
|
1,620
|
|
|
|
|
|
|
|
|
|
|
|
199,260
|
|
|
|
|
|
|
|
200,880
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,288,659
|
|
|
|
|
|
|
|
1,288,659
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,593,195
|
)
|
|
|
(2,593,195
|
)
|
Balance at June 30, 2017
|
|
|
25,983,461
|
|
|
$
|
259,834
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
7,508,989
|
|
|
$
|
(4,780,953
|
)
|
|
$
|
2,987,870
|
|
See accompanying notes to consolidated financial
statements
.
theMaven, Inc. and Subsidiary
Consolidated Statement of Cash Flows
Consolidated Statement of Cash Flows
|
|
Six Months Ended
|
|
|
|
June 30,
2017
|
|
|
|
(Unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
|
$
|
(2,593,195
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
Change in fair value of conversion feature
|
|
|
(10,250
|
)
|
Stock based compensation
|
|
|
843,841
|
|
Depreciation and amortization
|
|
|
56,335
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Prepayments and other current assets
|
|
|
24,836
|
|
Accounts payable
|
|
|
(127,474
|
)
|
Accrued expenses
|
|
|
67,835
|
|
Net cash used in operating activities
|
|
|
(1,738,072
|
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
Website development costs and other fixed assets
|
|
|
(948,800
|
)
|
Net cash used in investing activities
|
|
|
(948,800
|
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Net proceeds from issuance of common stock
|
|
|
3,537,052
|
|
Net cash provided by financing activities
|
|
|
3,537,052
|
|
|
|
|
|
|
Net increase in cash
|
|
|
850,180
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
598,294
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
1,448,474
|
|
|
|
|
|
|
Supplemental disclosures of noncash investing and financing activities:
|
|
|
|
|
Reclassification of stock-based compensation to website development costs
|
|
|
444,818
|
|
Accrual of stock issuance costs
|
|
|
17,508
|
|
Shares issued for investment banking fees
|
|
|
200,880
|
|
See accompanying notes to consolidated financial
statements
theMaven, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
June 30, 2017
(Unaudited)
1. Nature of Operations
theMaven, Inc. (“Parent”) and
theMaven Network, Inc. (“Subsidiary”) (collectively “theMaven” or the “Company”) are developing
an exclusive network of professionally managed online media channels, with an underlying technology platform. Each channel will
be operated by a “invite only” “Channel Partner” drawn from subject matter experts, reporters, group evangelists
and social leaders. Channel Partners will publish content and oversee an online community for their respective channels, leveraging
a proprietary, socially-driven, mobile-enabled, video-focused technology platform to engage niche audiences within a single network.
During the quarter ended June 30, 2017
the Company’s platform and media channel operations were launched in beta stage with ten initial channel partners. Internet
users since the launch of our beta channels are able to utilize the platform on desktop, laptop and mobile devices for these channels.
We expect that during the third and fourth quarters additional channels will be launched. As of August 11, 2017, we have over sixty
signed channel partners. We do not expect to have any revenue producing customers during the beta stage of our technology or at
the commencement of business operations establishing a media audience.
2. Basis of Presentation
theMaven Network, Inc. was incorporated in
Nevada on July 22, 2016, under the name “Amplify Media, Inc.” On July 27, 2016, the corporate name was amended to “Amplify
Media Network, Inc.” and on October 14, 2016, the corporate name was changed to “theMaven Network, Inc.”.
theMaven, Inc. was formerly known as Integrated
Surgical Systems, Inc., a Delaware corporation (“
Integrated
”). From June 2007 until November 4, 2016, Integrated
was a non-active “shell company” as defined by regulations of the Securities and Exchange Commission (SEC). On August
11, 2016, Integrated entered into a loan to Subsidiary that provided initial funding totaling $735,099 for the Subsidiary’s
operations. Integrated’s Board of Directors structured the loan to the Subsidiary as fully secured so that Integrated would
receive cash at maturity of the loan if negotiations for a combination did not result in the consummated Recapitalization transaction.
If the loan was not repaid then the remedies in the event of default were to pursue (a) the personal guarantee and/or (b) the mortgaged
real estate collateral. The loan was not secured by the intellectual property of the Subsidiary, but there was a covenant that
the Subsidiary would not, without prior written consent, sell or assign the business or intellectual property. This negative covenant
did not give Integrated control or rights other than as a creditor. The loan did not provide Integrated with an equity interest
or other ownership or control rights in the Subsidiary. The loan did not have any rights to conversion into equity in the Subsidiary.
The note, and the associated payable, was cancelled as part of the Recapitalization and the proceeds from the borrowing from Integrated
was considered as cash received due to the Recapitalization in addition to the net assets acquired.
On October 14, 2016 Integrated entered
into a Share Exchange Agreement (the “
Share Exchange Agreement
”) with Subsidiary and the shareholders of Subsidiary
holding all of the issued and outstanding shares of Subsidiary (collectively, “
Subsidiary Shareholders
”). The
Share Exchange Agreement was amended on November 4, 2016 to include certain newly issued shares of Subsidiary in the transaction
and make related changes to the agreement and the Share Exchange was consummated. The transaction resulted in Parent acquiring
Subsidiary by the exchange of all of the outstanding shares of Subsidiary for 12,517,152 newly issued shares of the common stock,
$0.01 par value (the “
Common Stock
”) of Parent, representing approximately 56.7% of the issued and outstanding
shares of Common Stock of Parent immediately after the transaction.
In determining the accounting treatment for
the Share Exchange Agreement the primary factor was determining which party, directly or indirectly, holds greater than 50 percent
of the voting shares has control and is considered to be the acquirer. Because the former shareholders of the Subsidiary received
56.7 percent voting control of the issued and outstanding shares of the Company after the transaction, the transaction was considered
to be a reverse recapitalization for accounting purposes. Other factors that indicated that the former stockholders of the Subsidiary
had control of the Company after the transaction included, (1) fully diluted equity interests, (2) composition of senior management,
(3) former officers of the Parent ceded day-to-day responsibilities to officers of the Subsidiary, and (4) composition of Board
of Directors. On a fully diluted basis, the former shareholders of the Subsidiary received 53.5 percent of the equity interests
in the Company. All the members of senior management of the Company, other than the part-time Chief Financial Officer, were former
shareholders of the Subsidiary. The former officers of the non-active shell ceded day-to-day management to officers of the Subsidiary.
The Board of Directors, immediately after the Recapitalization included three members from the Parent and two members from the
Subsidiary. Because the former shareholders of the Subsidiary could vote to make changes in the Board composition, the conclusion
was that control of the Board, in substance, was vested in the former shareholders of the Subsidiary.
The transaction is referred to as the “Recapitalization.”
The Recapitalization was consummated on November 4, 2016, as a result of which theMaven Network, Inc. became a wholly owned subsidiary
of Integrated (the “
Closing
”). The note payable between Integrated and Subsidiary was an interdependent transaction
with the Recapitalization and was cancelled upon closing of the Recapitalization. On December 2, 2016, Integrated amended its Certificate
of Incorporation to change its name from “Integrated Surgical Systems, Inc.” to “theMaven, Inc.”
From June 2007 until the closing of
the Recapitalization, Integrated was a non-active “shell company” as defined by regulations of the SEC
and, accordingly, the Recapitalization was accounted for as a reverse recapitalization rather than a business combination. As
the Subsidiary is deemed to be the purchaser for accounting purposes under reverse recapitalization accounting,
the Company’s financial statements are presented as a continuation of Subsidiary, and the accounting for
the Recapitalization is equivalent to the issuance of stock by Subsidiary for the net monetary assets of Parent as of the
Closing accompanied by a recapitalization. See Note 9 Stockholders’ Equity for summary of the assets acquired,
transaction costs and the consideration exchanged in the Recapitalization.
The accompanying unaudited financial statements
have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for Form 10-Q. The Balance
Sheet at December 31, 2016 has been derived from the Company’s audited financial statements.
In the opinion of management, these financial
statements reflect all normal recurring, and other adjustments, necessary for a fair presentation. These financial statements should
be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2016. Operating results for interim periods are not necessarily indicative of operating results for
an entire fiscal year or any other future periods.
3. Going Concern
The Company’s consolidated financial
statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company’s activities are subject to significant risks and uncertainties,
including the need for additional capital, as described below.
The Company has not generated any operating
revenues since July 22, 2016 (Inception) and has financed its operations through (a) the Recapitalization transaction with Parent,
(b) a loan from Parent that was cancelled upon closing of the Recapitalization and (c) a private placement of common stock in April
2017. The Company has incurred operating losses and negative operating cash flows, and it expects to continue to incur operating
losses and negative operating cash flows for at least the next few years. As a result, management has concluded that there is substantial
doubt about the Company’s ability to continue as a going concern, and the Company’s independent registered public accounting
firm, in its report on the Company’s 2016 consolidated financial statements, has raised substantial doubt about the Company’s
ability to continue as a going concern.
As fully described in Note 9 Stockholders’
Equity, in April 2017, the Company completed a private placement of its common stock, raising proceeds of $3.5 million net of
cash offering costs. The Company believes that it does not have sufficient funds to support its operations through the end of
the third quarter of 2017. In order to continue business operations past that point, the Company currently anticipates that it
will need to raise additional debt and/or equity capital prior to the end of September 2017.
There can be no assurances that the Company
will be able to secure any such additional financing on acceptable terms and conditions, or at all. If cash resources become insufficient
to satisfy the Company’s ongoing cash requirements, the Company will be required to scale back or discontinue its technology
development programs, or obtain funds, if available (although there can be no certainty), or to discontinue its operations entirely.
4. Significant Accounting Policies and Estimates
Principles of Consolidation
The accompanying consolidated financial statements
include the financial position, results of operations and cash flows for the three and six months ended June 30, 2017. All intercompany
transactions and balances have been eliminated in consolidation. Because the Company was incorporated July 22, 2016, there is no
comparable quarterly period as of June 30, 2016.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses for the reporting period. Actual results could materially
differ from those estimates.
Digital Media Content
The Company intends to operate a network of
online media channels and will provide digital media (text, audio and video) over the Internet that users may access on demand.
As a broadcaster that transmits third party content owned by our channel partners via digital media, the Company applies ASC 920,
“Entertainment – Broadcasters”. The channel partners generally receive variable amounts of consideration that
are dependent upon the calculation of revenue earned by the channel in a given month, referred to as a “revenue share”,
that are payable in arrears. In certain circumstances, there is a monthly fixed fee minimum or a fixed yield (“revenue per
1000 impressions”) based on the volume of advertising impressions served. We disclose fixed dollar commitments for channel
content licenses in Note 12 Commitments and Contingencies. Channel partner agreements that include fixed yield based on the volume
of impressions served are not included in Note 12 because they cannot be quantified, but are expected to be significant. The expense
related to channel partner agreements are reported in “Service Costs” in the Statement of Operations. The cash payments
related to channel partner agreements are classified within “Net cash used in operating activities” on the Statement
of Cash Flows. Also under ASC 920, if channel partner agreements are structured such that the fee paid precedes the right to use
the content because the broadcasts will occur in future periods, the Company will record a Content Asset and a related Content
Obligation when all of the following conditions are met, (1) the cost of the content is known or reasonably determinable, (2) the
content has been accepted and (3) the content is available for broadcasting under the terms of the channel partner agreement. Capitalized
content cost will be amortized on a systematic basis over the agreement term on a straight-line method or an accelerated method
depending on the economic and agreement terms. Capitalized content costs will be evaluated for impairment at least annually or
whenever circumstances indicate that Content Assets may be impaired.
Fixed Assets
Fixed assets are recorded at cost. Major improvements
are capitalized, while maintenance and repairs are charged to expense as incurred. Gains and losses from disposition of property
and equipment are included in income and expense when realized. Depreciation and amortization are provided using the straight-line
method over the following estimated useful lives:
Office equipment and computers
|
|
|
3-5 years
|
Furniture and fixtures
|
|
|
5-8 years
|
Website development costs
|
|
|
3 years
|
Intangible Assets
The intangible assets consist of the cost of
a purchase website domain name with an indefinite useful life.
Impairment of Long-Lived Assets
The long-lived assets, consisting of fixed
assets and intangible assets, held and used by the Company are reviewed for impairment no less frequently than annually or whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts
and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed.
Management has determined that there was no impairment in the value of long-lived assets during the period ended June 30, 2017.
Website Development Costs
In accordance with authoritative guidance,
the Company begins to capitalize website and software development costs for internal use when planning and design efforts are
successfully completed and development is ready to commence. Costs incurred during planning and design, together with costs incurred
for training and maintenance, are expensed as incurred and recorded in research and development expense within the consolidated
statement of operations. The Company places capitalized website and software development assets into service and commences depreciation/amortization
when the applicable project or asset is substantially complete and ready for its intended use. Once placed into service, the Company
capitalizes qualifying costs of specified upgrades or enhancements to capitalized website and software development assets when
the upgrade or enhancement will result in new or additional functionality. Certain website and software development assets are
placed into service and amortized and the Company continues to capitalize costs associated with other website and software development
assets that are still in the development stage.
The Company capitalizes internal labor costs,
including compensation, benefits and payroll taxes, incurred for certain capitalized website and software development projects
related to the Company’s technology platform. The Company’s policy with respect to capitalized internal labor stipulates
that labor costs for employees working on eligible internal use capital projects are capitalized as part of the historical cost
of the project when the impact, as compared to expensing such labor costs, is material.
Research and Development
Research and development costs are charged
to operations in the period incurred and amounted to $9,297 and $73,319 for the three and six months ended June 30, 2017.
Fair Value Measurements
Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 820
“Fair Value Measurements and Disclosures”
clarifies that fair value
is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions
that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, FASB ASC 820
establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
|
·
|
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
·
|
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
|
|
·
|
Level 3 - Unobservable inputs which are supported by little or no market activity.
|
The fair value hierarchy also requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In accordance with FASB ASC 820, the Company
measures its derivative liability at fair value. The Company’s derivative liability is classified within Level 3.
The carrying value of other current assets
and liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments.
Concentrations of Credit Risk
Cash
The Company maintains cash at a bank where
amounts on deposit may exceed the Federal Deposit Insurance Corporation limit throughout the year. The Company has not experienced
losses in such accounts and believes it is not exposed to significant credit risk regarding its cash.
Stock-based Compensation
The Company provides stock-based compensation
in the form of (a) restricted stock awards to employees, (b) vested stock grants to directors, (c) stock option grants to employees,
directors and independent contractors, and (d) common stock warrants to Channel Partners and other independent contractors.
The Company applies FASB ASC 718, “Stock
Compensation,” when recording stock based compensation to employees and directors. The estimated fair value of stock based
awards is recognized as compensation expense over the vesting period of the award. The Company has adopted ASU 2016-09 in 2016
with early application and account for actual forfeitures of awards as they occur.
The fair value of restricted stock awards by
Subsidiary at Inception was estimated on the date of the award using the exchange value used by Integrated and the Subsidiary to
establish the relative voting control ratio in the Recapitalization.
Restricted stock that was subject to an escrow
arrangement and/or a performance condition in conjunction with the Recapitalization was remeasured and fair value was estimated
using the quoted price of our common stock on the date of the Recapitalization. The Company uses a Monte Carlo simulation model
to determine the number of shares expected to be released from the performance condition escrow. Each quarter the Company reevaluates
the number of shares expected to be released from the performance condition escrow until the final determination is made as of
December 31, 2017.
The fair value of fully vested stock awards
is estimated using the quoted price of our common stock on the date of the grant. The fair value of stock option awards is estimated
at grant date using the Black-Scholes option pricing model that requires various highly judgmental assumptions including expected
volatility and option life.
The Company accounts for stock issued to non-employees
in accordance with provisions of FASB ASC 505-50, “Equity Based Payments to Non-Employees.” FASB ASC 505-50 states
that equity instruments that are issued in exchange for the receipt of goods or services should be measured at the fair value of
the consideration received or the fair value of the equity instruments issued, whichever is more reliability measurable. The measurement
date occurs as of the earlier of (a) the date at which a performance commitment is reached or (b) absent a performance commitment,
the date at which the performance necessary to earn the equity instruments is complete (that is, the vesting date). Equity grants
with performance conditions that do not have sufficiently large disincentive for non-performance may be measured at fair value
that is not fixed until performance is complete. The fair value of common stock warrants is estimated at grant date using the Black-Scholes
option pricing model that requires various highly judgmental assumptions including expected volatility and option life. The Company
recognizes expense for equity based payments to non-employees as the services are received. The Company has specific objective
criteria, such as the date of launch of a Channel on the Company’s platform, for determination of the period over which services
are received and expense is recognized.
The Company uses a Monte Carlo simulation model
to determine the number of shares expected to be earned by Channel Partners based on performance obligations to be satisfied over
a defined period which will commence at the launch of a Channel on the Company’s platform.
The Company issues common stock upon exercise
of equity awards and warrants.
Income Taxes
The Company recognizes the tax effects of transactions
in the year in which such transactions enter into the determination of net income regardless of when reported for tax purposes.
Deferred taxes are provided in the financial statements to give effect to the temporary differences which may arise from differences
in the bases of fixed assets, depreciation methods and allowances based on the income taxes expected to be payable in future years.
Deferred tax assets arising primarily as a result of net operating loss carry-forwards, and research and development credit have
been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods.
The Company recognizes interest accrued relative
to unrecognized tax benefits in interest expense and penalties in operating expense. During the three and six months ended June
30, 2017, the Company recognized no income tax related interest and penalties. The Company had no accruals for income tax related
interest and penalties at June 30, 2017.
Basic and Diluted Loss per Common Share
Basic income or loss per share is computed
using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common stock
equivalent shares, such as options, restricted stock, and warrants. Restricted stock is considered outstanding and included in
the computation of basic income or loss per share when underlying restrictions expire and the shares are no longer forfeitable.
Diluted income per share is computed using the weighted average number of common shares outstanding and common stock equivalent
shares outstanding during the period using the treasury stock method. Common stock equivalent shares are excluded from the computation
if their effect is anti-dilutive. Unvested but outstanding restricted stock (which are forfeitable) are included in the diluted
income per share calculation. In a period where there is a net loss, the diluted loss per share is computed using the basic share
count. At June 30, 2017, potentially dilutive shares outstanding amounted to 18,847,613, of which 17,502,943 are not currently
registered and/or subject to future vesting conditions. Included in these totals are 6,198,307 common stock equivalents that must
be exercised which would result in aggregate proceeds from the sale of stock to the Company of $6,675,000.
Risks and Uncertainties
The Company has a limited operating history
and has not generated revenue to date. The Company’s business and operations are sensitive to general business and economic
conditions in the U.S. and worldwide. These conditions include short-term and long-term interest rates, inflation, fluctuations
in debt and equity capital markets and the general condition of the U.S. and world economies. A host of factors beyond the Company’s
control could cause fluctuations in these conditions. Adverse developments in these general business and economic conditions could
have a material adverse effect on the Company’s financial condition and the results of its operations.
In addition, the Company will compete with
many companies that currently have extensive and well-funded projects, marketing and sales operations as well as extensive human
capital. The Company may be unable to compete successfully against these companies. The Company’s industry is characterized
by rapid changes in technology and market demands. As a result, the Company’s products, services, and/or expertise may become
obsolete and/or unmarketable. The Company’s future success will depend on its ability to adapt to technological advances,
anticipate customer and market demands, and enhance its current technology under development.
Recently Adopted Standards
In November 2015, the FASB issued Accounting
Standards Update No. 2015-17 (ASU 2015-17), Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU
2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. The adoption of ASU 2015-17 did not have any impact on Company’s financial statement
presentation or disclosures.
Recent Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC Topic 840. ASU 2016-02 is intended
to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities
on the balance sheet. ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting
the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 is
required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical
expedients. The Company is currently assessing the potential impact of adopting ASU 2016-02 on its financial statements and related
disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 refines how companies
classify certain aspects of the cash flow statement in regards to debt prepayment, settlement of debt instruments, contingent consideration
payments, proceeds from insurance claims and life insurance policies, distribution from equity method investees, beneficial interests
in securitization transactions and separately identifiable cash flows. ASU 2016-15 is effective for annual periods beginning
after December 15, 2017, and interim periods within those fiscal years. No early adoption is permitted. Management
is currently assessing the potential impact of adopting ASU 2016-15 on the financial statements and related disclosures.
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (ASC 606) - Revenue from Contracts
with Customers (“ASU 2014-09”), which provides guidance for revenue recognition. This ASU will supersede the revenue
recognition requirements in Topic 605, and most industry specific guidance. The standard’s core principle is that revenue
is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply
the following steps:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations
in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the
performance obligations in the contract.
Step 5: Recognize revenue when (or as) the
entity satisfies a performance obligation.
The guidance in ASU 2014-09 also specifies
the accounting for some costs to obtain or fulfill a contract with a customer. ASC 606 requires the Company to make significant
judgments and estimates. ASC 606 also requires more extensive disclosures regarding the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers.
The FASB has also issued several additional
ASUs which amend ASU 2014-09. The amendments do not change the core principle of the guidance in ASC 606.
Public business entities are required to apply
the guidance of ASC 606 to annual reporting periods beginning after December 15, 2017 (2018 for calendar year end reporting companies),
including interim reporting periods within that reporting period. Early adoption is permitted.
The Company has not yet estimated the financial
statement impact of the expected changes. The Company will continue to assess the impact of ASC 606 as it works through the adoption
in 2017.
Management believes
that any other recently issued, but not yet effective, authoritative guidance, if currently adopted, would not have a material
impact on the Company’s consolidated financial statement presentation or disclosures.
5. Fixed Assets
At June 30, 2017 and December 31, 2016, fixed
assets, net consisted of the following:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Office equipment and computers
|
|
$
|
22,241
|
|
|
$
|
8,048
|
|
Furniture and Equipment
|
|
|
20,621
|
|
|
|
0
|
|
Website development costs
|
|
|
1,898,951
|
|
|
|
540,146
|
|
|
|
|
1,941,813
|
|
|
|
548,194
|
|
Accumulated depreciation and amortization
|
|
|
(56,726
|
)
|
|
|
(390
|
)
|
Fixed assets, net
|
|
$
|
1,885,087
|
|
|
$
|
547,804
|
|
In June 2017, the Company launched certain
elements of its website, and accordingly, $53,000 of amortization expense, representing one month of amortization of capitalized
website development costs, was recorded during the three and six months ended June 30, 2017.
6. Investments in Available-for-Sale
Securities
The Company maintained an investment portfolio
consisting of available-for-sale-securities during the period ended December 31, 2016, which it had acquired through the Recapitalization.
All available-for-sale-securities either matured or were liquidated prior to December 31, 2016.
7. Redeemable Convertible Preferred
Stock
The Company’s Certificate of Incorporation
authorized 1,000,000 shares of undesignated, serial preferred stock. Preferred stock may be issued from time to time in one or
more series. The Board of Directors is authorized to determine the rights, preferences, privileges, and restrictions granted to
and imposed upon any wholly unissued series of preferred stock and designation of any such series without any further vote or action
by the Company’s stockholders.
As of June 30, 2017, the Company’s only
outstanding series of convertible preferred stock is the Series G Convertible Preferred Stock (“Series G”).
The Series G stock has a stated value of $1,000
per share, and is convertible into common stock at a conversion price equal to 85% of the lowest sale price of the common stock
on its listed market over the five trading days preceding the date of conversion (“Beneficial Conversion Feature”),
subject to a maximum conversion price. The number of shares of common stock that may be converted is determined by dividing the
stated value of the number of shares of Series G to be converted by the conversion price. The Company may elect to pay the Series
G holder in cash at the current market price multiplied by the number of shares of common stock issuable upon conversion.
For the three and six months ended June 30,
2017, no shares of Series G were converted into shares of common stock. At June 30, 2017, the outstanding Series G shares
were convertible into a minimum of 132,154 shares of common stock.
Upon a change in control, sale or similar
transaction, as defined in the Certificate of Designation for the Series G, each holder of the Series G has the option to deem
such transaction as a liquidation and may redeem his or her shares at the liquidation value of $1,000, per share, for an aggregate
amount of $168,496. The sale of all the assets on June 28, 2007 triggered the preferred stockholders’ redemption
option. As such redemption is not in the control of the Company, the Series G stock has been accounted for as if it
was redeemable preferred stock and is classified on the balance sheet between liabilities and stockholders’ equity.
The conversion feature of the preferred stock
is considered a derivative according to ASC 815 “Derivatives and Hedging”, therefore, the fair value of the derivative
is reflected in the financial statements as a liability, which was determined to be $126,927 and $137,177 as of June 30, 2017 and
December 31, 2016, respectively and has been included as “conversion feature liability” on the accompanying balance
sheets.
The fair value of the conversion feature liability
is calculated under a Black-Scholes Model, using the market price of the Company’s common stock on each of the balance sheet
dates presented, the expected dividend yield, the expected life of the redemption and the expected volatility of the Company’s
common stock.
The Company’s assessment of the significance
of a particular input to the fair value measurement requires judgment and considering factors specific to the conversion feature
liability. Since some of the assumptions used by the Company are unobservable, the conversion feature liability is classified within
the level 3 hierarchy in the fair value measurement.
The expected volatility of the conversion feature
liability was based on the historical volatility of the Company’s common stock. The expected life assumption was based on
the expected remaining life of the underlying preferred stock redemption. The risk-free interest rate for the expected term of
the conversion feature liability was based on the average market rate on U.S. treasury securities in effect during the applicable
quarter. The dividend yield reflected historical experience as well as future expectations over the expected term of the underlying
preferred stock redemption. Therefore, the fair value of the conversion feature liability is sensitive to changes in above assumptions
and changes of the Company’s common stock price.
The table below shows the quantitative information
about the significant unobservable inputs used in the fair value measurement of level 3 conversion feature liability at June 30,
2017:
Expected life of the redemption in years
|
|
|
1.0
|
|
Risk free interest rate
|
|
|
1.24
|
%
|
Expected annual volatility
|
|
|
170.64
|
%
|
Annual rate of dividends
|
|
|
0
|
%
|
The changes in the fair value of the derivative
are as follows:
Beginning as of January 1, 2017
|
|
$
|
137,177
|
|
Decrease in fair value
|
|
|
(10,250
|
)
|
|
|
|
|
|
Ending balance as of June 30, 2017
|
|
$
|
126,927
|
|
8. Recapitalization
As described in Note 2 Basis of Presentation,
the Company has accounted for the Recapitalization, which closed on November 4, 2016, as a reverse recapitalization. Because Integrated
was a non-operating public shell corporation the transaction is considered to be a capital transaction in substance rather than
a business combination. The transaction is equivalent to the issuance of stock by the Subsidiary for the net monetary assets of
the Parent accompanied by a recapitalization.
Prior to the Recapitalization, Integrated had
9,530,379 issued and outstanding shares of common stock. In the Recapitalization, holders of Subsidiary’s common stock received
4.13607 shares of Parent common stock for each Subsidiary share, totaling 12,517,152 shares. After the Recapitalization a total
of 22,047,531 shares of Parent common stock were outstanding.
As of June 30, 2017, as a result of other equity
transactions described in Note 9 Stockholders’ Equity, a total of 25,983,461 shares of Parent common stock are issued and
outstanding.
Integrated and Subsidiary agreed to the terms
of Recapitalization to reflect the arms-length negotiated fair value of the Subsidiary as $2.5 million relative to the fair value
of Integrated’s cash and available for sale investment securities. This resulted in the former shareholders of Subsidiary
obtaining 56.7% voting control of the Company’s issued and outstanding common stock. The intent of the Recapitalization
was to provide funding for Subsidiary’s operations initially under a loan that was canceled upon closing of the Recapitalization.
In determining the accounting treatment for
the Share Exchange Agreement the primary factor was determining which party, directly or indirectly, held greater than 50 percent
of the voting shares has control and is considered to be the acquirer. Because the former shareholders of the Subsidiary received
56.7 percent voting control of the issued and outstanding shares of the Company after the transaction, the transaction was considered
to be a reverse recapitalization for accounting purposes. Other factors that indicated that the former stockholders of the Subsidiary
had control of the Company after the transaction included, (1) fully diluted equity interests, (2) composition of senior management,
(3) former officers of the Parent ceded day-to-day responsibilities to officers of the Subsidiary, and (4) composition of Board
of Directors. On a fully diluted basis, the former shareholders of the Subsidiary received 53.5 percent of the equity interests
in the Company. All the members of senior management of the Company, other than the part-time Chief Financial Officer, were former
shareholders of the Subsidiary. The former officers of the non-active shell ceded day-to-day management to officers of the Subsidiary.
The Board of Directors, immediately after the Recapitalization included three members from the Parent and two members from the
Subsidiary. Because the former shareholders of the Subsidiary could vote to make changes in the Board composition, the conclusion
was that control of the Board, in substance, was vested in the former shareholders of the Subsidiary.
The following table summarizes the calculation
of the relative voting control at the time of the Recapitalization:
|
|
Shares
|
|
|
Per Share
|
|
|
Fair Value
|
|
|
Voting %
|
|
Integrated shareholders pre-Recapitalization
|
|
|
9,530,379
|
|
|
$
|
0.20
|
|
|
$
|
1,903,464
|
|
|
|
43.3
|
%
|
Integrated options pre-Recapitalization
|
|
|
175,000
|
|
|
|
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Warrant issued to MDB Capital Group
|
|
|
1,169,607
|
|
|
|
|
|
|
|
-
|
|
|
|
0.0
|
%
|
TheMaven Network, Inc. shareholders
|
|
|
12,517,152
|
|
|
$
|
0.20
|
|
|
|
2,500,000
|
|
|
|
56.7
|
%
|
Total fully diluted shares
|
|
|
23,392,138
|
|
|
|
|
|
|
$
|
4,403,464
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued and outstanding as of Closing
|
|
|
22,047,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with the Investment Banking
Advisory Agreement more fully described in Note 11 Related Parties, Integrated issued warrants to MDB Capital Group, LLC (“MDB”)
to purchase 1,169,607 shares of Parent common stock. The warrants have an exercise price of $0.20 per share and expire on November
4, 2021. Integrated incurred transaction costs of $921,698 consisting of $744,105 for the fair value of warrants issued to MDB
and $177,593 in cash for legal and related transaction costs. The costs incurred by Integrated were recorded in financial statements
of the Parent prior to Recapitalization and reduced the net monetary assets acquired. The aggregate intrinsic value of the warrants
issued to MDB at June 30, 2017 is $1,520,000.
The Recapitalization resulted in the acquisition
of gross assets of $1,447,000 consisting primarily of cash and available for sale investment securities and the assumption of $470,000
of liabilities. Included in the total liabilities assumed was 168 shares of Class G Preferred Stock, which is reported as a liability
at aggregated liquidation value of $168,496 because it is a redeemable instrument at the option of the holder (see Note 7 Redeemable
Convertible Preferred Stock).
Prior to the closing of the Recapitalization,
the Subsidiary had received $735,099 in multiple borrowings from Integrated on a note payable beginning on August 11, 2016 and
ending on November 4, 2016. Integrated’s Board of Directors structured the loan to the Subsidiary as a loan that was fully
secured so that Integrated would receive cash at maturity of the loan if the negotiations did not result in the consummated Recapitalization
transaction. If the loan was not repaid then the remedies in the event of default were to pursue (a) the personal guarantee and/or
(b) the mortgaged real estate collateral. The loan was not secured by the intellectual property of theMaven, but there was a covenant
that theMaven would not, without prior written consent, sell or assign the business or intellectual property. This negative covenant
did not give Integrated control or rights other than as a creditor. The loan did not provide Integrated with an equity interest
or other ownership or control rights in theMaven. The Note did not have any rights to conversion into equity in theMaven. The note
payable was cancelled as part of the Recapitalization and the proceeds from the borrowing from Integrated is considered as cash
received due to the Recapitalization in addition to the net assets acquired. Legal and transaction costs incurred by Subsidiary
of $50,000 related to the capital transaction were expensed and charged to General and Administrative expense in 2016.
9. Stockholders’ Equity
The Company has authorized 100,000,000 shares
of common stock, $0.01 par value, of which 25,983,461 shares were issued and outstanding as of June 30, 2017. The Company’s
Directors and Officers hold 11,290,768 or 43.5% of the issued and outstanding shares.
Restricted Stock Awards
On August 11, 2016, management and employees
of Subsidiary in conjunction with the incorporation on July 22, 2016, received 12,209,677 shares of common stock as adjusted for
the Recapitalization exchange ratio of 4.13607. These shares are subject to a Company option to buy back the shares at the original
cash consideration paid, which totaled $2,952 or approximately $0.0002 per share. A total of 7,966,070 shares were subject to the
Company buy back right as of August 1, 2016, and 4,094,708 were made subject to the Company buy back right on November 4, 2016,
in conjunction with the Recapitalization. The employees vest their ownership in these shares over a three-year period beginning
August 1, 2016, with one-third vesting on August 1, 2017, and the balance monthly over the remaining two years. The fair value
of these shares of Subsidiary stock was estimated on the date of the award using the exchange value used by Integrated and the
Subsidiary to establish the relative voting control ratio in the Recapitalization (See Note 8 Recapitalization). Because these
shares require continued service to the Company the estimated fair value is recognized as compensation expense over the vesting
period of the award.
On October 13, 2016, Subsidiary granted
62,041 shares of common stock to an employee. On October 16, 2016, an additional 245,434 shares of Subsidiary common stock were
granted to a director. The fair value of these shares of Subsidiary stock was estimated on the date of the awards based on the
quoted closing stock price on November 4, 2016, since the Recapitalization was pending. These shares are subject to a Company option
to buy back the shares at the original cash consideration paid.
As a condition of the Recapitalization,
a total of 4,094,708 shares were required to be placed into an escrow arrangement for purposes of enforcement of the Company option
to buy back shares for the balance of the three-year service period. A total of 4,381,003 shares, which includes 35% of the 4,094,708
shares added to the buyback option, are escrowed and subject to a performance condition requiring the Company to achieve certain
operating metrics regarding monthly unique users by December 31, 2017. Pursuant to a negotiated schedule the performance condition
can be satisfied in partial increments up to the full number of shares escrowed. The Company uses a Monte Carlo simulation model
to determine the number of shares expected to be released from the performance condition escrow.
Pursuant to FASB ASC 718, escrowed share
arrangements in a capital raising transaction are considered to be compensatory, as such, the shares subject to these escrow provisions
were re-measured as of November 4, 2016, the date of the Recapitalization. The estimated fair value of these shares was determined
based on the quoted closing stock price on November 4, 2016. Because these shares require continued service to the Company the
estimated fair value is recognized as compensation expense over the vesting period of the award.
At December 31, 2016, it was estimated that
72.5% of the shares subject to the performance condition will be released. At June 30, 2017, the expected achievement of the performance
condition was reevaluated and it was determined that the shares estimated to be released had increased to 100%.
Restricted stock award activity for the period
from July 22, 2016 (Inception) to June 30, 2017, including the reevaluation of the shares estimated to be release, was as follows:
|
|
Shares
|
|
|
Shares
Remeasured
|
|
|
Weighted-
Average
Price
|
|
Stock awards granted at Inception
|
|
|
12,209,677
|
|
|
|
|
|
|
$
|
0.20
|
|
Granted October 13, 2016
|
|
|
62,041
|
|
|
|
|
|
|
|
0.70
|
|
Granted October 16, 2016
|
|
|
245,434
|
|
|
|
|
|
|
|
0.70
|
|
Remeasurement at November 4, 2016
|
|
|
-
|
|
|
|
5,837,788
|
*
|
|
|
0.43
|
|
Vested
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Reevaluation of shares expected to be released as of March 31, 2017
|
|
|
-
|
|
|
|
1,007,633
|
*
|
|
|
0.06
|
|
Reevaluation of shares expected to be released as of June 30, 2017
|
|
|
-
|
|
|
|
197,145
|
*
|
|
|
0.01
|
|
Unvested at June 30, 2017
|
|
|
12,517,152
|
|
|
|
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected to vest after June 30, 2017
|
|
|
12,517,152
|
|
|
|
|
|
|
$
|
0.48
|
|
|
*
|
The number of shares Remeasured
as of November 4, 2016, March 31, 2017 and June 30, 2017 reflect the effect of the Monte Carlo simulation determination of the
estimated number of shares expected to be released from the performance condition escrow. This estimate will be reevaluated at
each quarter end until the final outcome of the performance condition is satisfied on December 31, 2017.
|
At June 30, 2017, total compensation cost related
to restricted stock awards but not yet recognized was $3,835,000. This cost will be amortized on a straight-line method over a
period of approximately 2.1 years.
Stock Options
On December 19, 2016, the Company’s
Board of Directors approved the 2016 Stock Incentive Plan (“Plan”) and reserved 1,670,867 shares of common stock for
issuance under the Plan, including options and restricted performance stock awards. On June 28, 2017, the Board of Directors approved
an increase in the total number of shares reserved from 1,670,867 to 3,000,000. The Plan is administered by the Board of Directors,
and there were no grants prior to the formation of the Plan. Shares of common stock that are issued under the Plan or subject to
outstanding incentive awards will be applied to reduce the maximum number of shares of common stock remaining available for issuance
under the Plan, provided, however, that that shares subject to an incentive award that expire will automatically become available
for issuance. Options issued under the Plan may have a term of up to ten years and may have variable vesting provisions.
The estimated fair value of stock-based awards
is recognized as compensation expense over the vesting period of the award. The fair value of restricted stock awards is determined
based on the number of shares granted and the quoted price of the Company’s common stock on the date of grant. The fair value
of stock option awards are estimated at the grant date as calculated using the Black-Scholes option-pricing model. The Black-Scholes
model requires various highly judgmental assumptions including expected volatility and option life. The fair values of our stock
option grants were estimated with the following average assumptions:
The fair value of stock options granted
during the period ended June 30, 2017 were estimated with the following assumptions:
|
|
First
Quarter
|
|
|
Second Quarter
|
|
Expected life in years
|
|
|
6.0
|
|
|
|
5.9
|
|
Risk-free interest rate
|
|
|
2.13
|
%
|
|
|
1.97
|
%
|
Expected annual volatility
|
|
|
114.20
|
%
|
|
|
117.87
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
For the six months ended June 30, 2017 stock option activity was
as follows:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Average
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
275,137
|
|
|
$
|
0.48
|
|
|
|
5.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.
|
|
|
|
|
|
Granted
|
|
|
1,779,000
|
|
|
|
1.37
|
|
|
|
9.79
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(50,000
|
)
|
|
|
(1.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
2,004,137
|
|
|
$
|
1.25
|
|
|
|
9.16
|
|
|
$
|
498,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2017
|
|
|
2,0044,137
|
|
|
$
|
1.25
|
|
|
|
9.16
|
|
|
$
|
498,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
|
195,000
|
|
|
$
|
0.28
|
|
|
|
2
.70
|
|
|
$
|
238,750
|
|
The Company has granted 1,879,137
options under the Plan. None of these options are yet vested. In the three and six months ended June 30, 2017, the Company
recorded stock-based compensation of $200,014 and $217,292, respectively related to the grants. Of the total stock-based
compensation in the three months, $176,017 was expensed in General and Administrative expenses and $23,998 was capitalized as
Website Development Costs. Of the total stock-based compensation in the six months, $191,513 was expensed in General and
Administrative expenses and $25,779 was capitalized as Website Development Costs.
At June 30, 2017, total compensation cost
related to stock options granted under the Plan but not yet recognized was $1,699,000. This cost will be amortized on a straight-line
method over a period of approximately 2.41 years. The aggregate intrinsic value represents the difference between the exercise
price of the underlying options and the quoted price of our common stock for the number of options that were in-the-money at June
30, 2017.
In addition, the Company assumed 175,000 fully-vested
options in connection with the Recapitalization with an exercise price of $0.17 per share which expire on May 15, 2019.
The following table summarizes certain information
about stock options for the six months ended June 30, 2017:
Weighted average grant-date fair value for options granted during the year
|
|
$
|
1.37
|
|
|
|
|
|
|
Vested options in-the-money at June 30, 2017
|
|
|
175,000
|
|
|
|
|
|
|
Aggregate intrinsic value of options exercised during the year
|
|
$
|
-
|
|
The following table summarizes the common shares
reserved for future issuance under the Plan:
Stock options outstanding under the Plan
|
|
|
1,829,137
|
|
Stock options available for future grant
|
|
|
1,170,863
|
|
|
|
|
3,000,000
|
|
Common Stock Warrants – Channel Partner Program
On December 19, 2016, the Company’s Board
of Directors approved a program to be administered by management that authorized the Company to issue up to 5,000,000 common stock
warrants to provide equity incentive to its Channel Partners to motivate and reward them for their services to the Company and
to align the interests of the Channel Partners with those of stockholders of the Company.
The following table summarizes the activity
in Channel Partner Warrants during the six months ended June 30, 2017:
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Average
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2017
|
|
|
350,000
|
|
|
$
|
1.05
|
|
|
|
4.75
|
|
|
|
|
|
Granted
|
|
|
2,674,500
|
|
|
|
1.33
|
|
|
|
4.72
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
|
3,024,500
|
|
|
$
|
1.30
|
|
|
|
4.70
|
|
|
$
|
817,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2017
|
|
|
1,319,000
|
|
|
$
|
1.30
|
|
|
|
4.70
|
|
|
$
|
361,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2017
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
In the six months ended June 30, 2017,
the Company issued 2,674,500 common stock warrants to Channel Partners. The warrants have a performance condition and vest over
three years and expire in five years from issuance. The exercise prices range from $1.05 to $1.90 with a weighted average of $1.33.
The performance conditions are generally based on the average number of unique visitors on the Channel operated by the Channel
Partner generated during the period from July 1, 2017, to December 31, 2017, or the revenue generated during the period from issuance
date through June 30, 2019. Equity grants with performance conditions that do not have sufficiently large disincentive for non-performance
may be measured at fair value that is not fixed until performance is complete. The Company recognizes expense for equity based
payments to non-employees as the services are received. The Company has specific objective criteria, such as the date of launch
of a Channel on the Company’s platform, for determination of the period over which services are received and expense is recognized.
The Company uses a Monte Carlo simulation
model to determine the number of shares expected to be earned by Channel Partners based on performance obligations to be satisfied
over a defined period which will commence at the launch of a Channel on the Company’s platform. As of June 30, 2017, the
Company has estimated that 1,319,000 of Channel Partner Warrants will be earned. The Company recorded in Service Costs a total
of $80,000 of stock-based compensation related to Channel Partner warrants in the three and six months ended June 30, 2017.
Other Warrants
In accordance with the Investment Banking
Advisory Agreement more fully described in Note 11 Related Parties, Integrated issued warrants to MDB Capital Group, LLC to purchase
1,169,607 shares of Parent common stock. The warrants have an exercise price of $0.20 per share and expire on November 4, 2021.
The aggregate intrinsic value of the warrants at June 30, 2017, is $1,520,000.
Common Stock – Private Placement of Common Stock
On April 4, 2017, the Company completed a
private placement of its common stock, selling 3,765,000 shares at $1.00 per share, for total gross proceeds of $3,765,000.
In connection with the offering, the Company paid $188,250 and issued 162,000 shares of common stock to MDB Capital Group LLC,
which acted as placement agent. The transaction costs of $446,000, including $201,000 of non-cash expenses, have been recorded
as a reduction in paid-in capital.
Stock-based Compensation
The impact on our results of operations of
recording stock-based compensation expense for the three months ended June 30, 2017 was as follows:
|
|
Restricted
|
|
|
|
|
|
Channel
|
|
|
|
|
|
|
|
|
|
Stock at
|
|
|
Stock
|
|
|
Partner
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
Options
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Total
|
|
Service Costs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
80,000
|
|
|
$
|
-
|
|
|
$
|
80,000
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
269,341
|
|
|
|
176,016
|
|
|
|
-
|
|
|
|
32,335
|
|
|
|
477,692
|
|
|
|
$
|
269,341
|
|
|
$
|
176,016
|
|
|
$
|
80,000
|
|
|
$
|
32,335
|
|
|
$
|
557,692
|
|
In addition, during the three months ended
June 30, 2017, stock-based compensation totaling $232,622 during the application and development stage was capitalized for website
development.
The impact on our results of operations
of recording stock-based compensation expense for the six months ended June 30, 2017, was as follows:
|
|
Restricted
|
|
|
|
|
|
Channel
|
|
|
|
|
|
|
|
|
|
Stock at
|
|
|
Stock
|
|
|
Partner
|
|
|
|
|
|
|
|
|
|
Inception
|
|
|
Options
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Total
|
|
Service Costs
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
80,000
|
|
|
$
|
-
|
|
|
$
|
80,000
|
|
Research and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
539,994
|
|
|
|
191,512
|
|
|
|
-
|
|
|
|
32,335
|
|
|
|
763,841
|
|
|
|
$
|
539,994
|
|
|
$
|
191,512
|
|
|
$
|
80,000
|
|
|
$
|
32,335
|
|
|
$
|
843,841
|
|
In addition, during the six months ended
June 30, 2017, stock-based compensation totaling $444,818 during the application and development stage was capitalized for website
development.
10. Income Taxes
The Company accounts for income taxes under
FASB ASC 740 “Accounting for Income Taxes.” Deferred tax assets are recognized for deductible temporary
differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the Company’s
financial statements and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Parent’s net operating loss carryforwards
(NOL) and credit carryforwards are subject to limitations on the use of the NOLs by the Company in consolidated tax returns after
the Reverse Recapitalization. Where there is a “change in ownership” within the meaning of Section 382 of the Internal
Revenue Code, the Parent’s net operating loss carryforwards and credit carryforwards are subject to an annual limitation.
The Company believes that such an ownership change occurred because the shareholders of the Subsidiary acquired 56.7 percent of
the Parent’s stock. Because the Parent’s value at the date of recapitalization was attributable solely to non-business
assets, the utilization of the carryforwards is limited such that the majority of the carryforwards will never be available. Accordingly,
the Company has not recorded those NOL carryforwards and credit carryforwards in its deferred tax assets.
The Parent is no longer subject to U.S. federal
and state income tax examinations by tax authorities for years before 2012. The Company currently is not under examination by any
tax authority.
As of June 30, 2017, the Company had deferred
tax assets primarily consisting of net operating losses, stock-based compensation and accrued liabilities not currently deductible.
However, because of the current loss since Inception, the Company has recorded a full valuation allowance such that its net deferred
tax asset is zero.
Deferred tax assets consist of the following
components:
|
|
June 30,
2017
|
|
Deferred tax assets:
|
|
|
|
|
Accrued liabilities not currently deductible
|
|
$
|
71,211
|
|
Stock-based compensation
|
|
|
76,995
|
|
Net operating loss and capital loss carryforwards
|
|
|
1,386,186
|
|
Gross deferred tax assets
|
|
|
1,534,392
|
|
Valuation allowance
|
|
|
(1,088,770
|
)
|
Gross deferred tax assets net of valuation allowance
|
|
|
445,622
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
Stock-based compensation
|
|
|
16,625
|
|
Website development costs and fixed assets
|
|
|
428,997
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
-
|
|
The Company must make judgments as to whether
the deferred tax assets will be recovered from future taxable income. To the extent that the Company believes that recovery is
not likely, it must establish a valuation allowance. A valuation allowance has been established for deferred tax assets
which the Company does not believe meet the “more likely than not” criteria. The Company’s judgments
regarding future taxable income may change due to changes in market conditions, changes in tax laws, tax planning strategies or
other factors. If the Company’s assumptions and consequently its estimates change in the future, the valuation
allowances it has established may be increased or decreased, resulting in a respective increase or decrease in income tax expense.
At June 30, 2017, the Company had net operating
loss carryforwards of approximately $4.1 million for federal income tax purposes. The NOL carryforward may be used to
reduce taxable income, if any, in future years through their expiration in 2036 and 2037.
The provision for income taxes on the consolidated
statement of operations differs from the amount computed by applying the statutory Federal income tax rate to income before the
provision for income taxes for the six months ended, as follows:
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
|
|
|
Federal expense (benefit) expected at statutory rate
|
|
$
|
(881,686
|
)
|
|
|
34.0
|
%
|
Permanent differences
|
|
|
215,816
|
|
|
|
-8.3
|
%
|
Change in valuation allowance
|
|
|
665,870
|
|
|
|
-25.7
|
%
|
|
|
|
|
|
|
|
|
|
Tax benefit and effective tax rate
|
|
$
|
-
|
|
|
|
0
|
%
|
The Company recognizes tax benefits from an
uncertain position only if it is “more likely than not” that the position is sustainable, based on its technical merits.
The Company’s policy is to include interest and penalties in general and administrative expenses. There were
no interest and penalties recorded for the six months ended June 30, 2017. The Company has evaluated and concluded
that there are no uncertain tax positions requiring recognition in the Company’s financial statements for the six months
ended June 30, 2017.
11. Related Party Transactions
On April 4, 2017, the Company completed a
private placement of its common stock, selling 3,765,000 shares at $1.00 per share, for total gross proceeds of $3,765,000. In
connection with the offering, the Company paid $188,250 and issued 162,000 shares of common stock, valued at $201,000, to MDB
Capital Group LLC, which acted as placement agent.
Mr. Christopher Marlett, a director of the
Company, is also the Chief Executive Officer of MDB. Mr. Gary Schuman, who was the Chief Financial Officer of the Company until
May 15, 2017, is also the Chief Financial Officer and Chief Compliance Officer of MDB. The Company compensated Mr. Schuman for
his services at the rate of $3,000 per month totaling $18,000 until June 30, 2017.
12. Commitments and Contingencies
From time to time, the Company may be subject
to claims and litigation arising in the ordinary course of business. The Company is not currently a party to any legal
proceedings that it believes would reasonably be expected to have a material adverse effect on the Company’s business, financial
condition or results of operations.
On a select basis, the Company has provided
revenue share guarantees to certain publishers that transition their publishing operations from another platform to theMaven.net.
These arrangements generally guarantee the publisher a monthly amount of income for a period of 24 months from inception of the
publisher contract that is the greater of (a) fixed monthly minimum, or (b) the calculated earned revenue share. To the extent
that the fixed monthly minimum paid exceeds the earned revenue share (defined as an Over Advance) in any month during the first
24 months, then the Company may recoup the aggregate Over Advance that was expensed in the first 24 months during months 25 to
36 of the publisher contract to the extent that the earned revenue share exceeds the monthly minimum in those future months. As
of June 30, 2017, the aggregate commitment is $862,000 and the Over Advance contingent amount that the Company may recoup is $98,000.
The following table shows the aggregate commitment by year:
|
|
Commitment
|
|
2017
|
|
$
|
240,000
|
|
2018
|
|
|
480,000
|
|
2019
|
|
|
142,000
|
|
|
|
$
|
862,000
|
|
The Company may have a liability for additional
state franchise taxes in the amount of approximately $44,000, plus interest at 18% per annum for certain annual periods prior to
2014. Because of state statutory provisions, the underpaid amount will only be due once assessed and demanded by the state.
The tax liability and associated interest has not been included as an accrued liability because management has determined that
the likelihood of the state making the assessment is low. Depending on circumstances, management may change its estimate
of the probability of an assessment and establish either an accrual or record a payment for the tax liability if assessed.
13. Subsequent Events
From July 1, 2017, to August 12, 2017,
the Company has granted 17,959 options under the Stock Incentive Plan with exercise price $1.50 per share. The Plan has not been
approved by the shareholders of the Company at this time.
Item 2.
Management’s Discussion
and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should
be read in conjunction with the Company’s financial statements, including the notes thereto, appearing elsewhere in this
report. This discussion may contain certain forward-looking statements based on current expectations that involve risks
and uncertainties. Actual results and timing of certain events may differ significantly from those projected in such
forward-looking statements due to a number of factors, including those set forth elsewhere in this Report.
Overview
The Company was incorporated under the
name of Integrated Surgical Systems, Inc. (“Integrated”) in Delaware in 1990. It was founded to design, manufacture,
sell and service image-directed, computer-controlled robotic software and hardware products for use in orthopedic surgical procedures.
On June 28, 2007, Integrated sold substantially all of its operating assets, and Integrated no longer engaged in any business activities
other than seeking to locate a suitable acquisition target to complete a business combination. From June 2007 until the closing
of the Recapitalization (as defined in Note 2 Basis of Presentation of Item 1. Financial Statements) on November 4, 2016, Integrated
was a non-active “shell company” as defined by regulations of the SEC. As a result of the Recapitalization, on a going
forward basis, the Company continued to file its public reports with the SEC on an operating company basis. On December 2, 2016,
the corporate name was changed from “Integrated Surgical Systems, Inc.” to “theMaven, Inc.”
In making the accounting conclusion the
primary factor was determining which party, directly or indirectly, holds greater than 50 percent of the voting shares has control
and is considered to be the acquirer. Because the former shareholders of the Subsidiary received 56.7 percent voting control of
the issued and outstanding shares of the Company after the transaction, the transaction was considered to be a reverse recapitalization
for accounting purposes. Other factors that indicated that the control of the Company after the transaction included, (1) fully
diluted equity interests, (2) composition of senior management, (3) former officers of the Parent ceded day-to-day responsibilities
to officers of the Subsidiary, and (4) composition of Board of Directors. On a fully diluted basis, the former shareholders of
the Subsidiary received 53.5 percent of the equity interests in the Company. All the members of senior management of the Company,
other than the part-time Chief Financial Officer, were former shareholders of the Subsidiary. The former officers of the non-active
shell ceded day-to-day management to officers of the Subsidiary. The Board of Directors, immediately after the Recapitalization
included three members from the Parent and two members from the Subsidiary. Because the former shareholders of the Subsidiary could
vote to make changes in the Board composition, the conclusion was that control of the Board, in substance, was vested in the former
shareholders of the Subsidiary.
theMaven Network, Inc. was incorporated in
Nevada on July 22, 2016, under the name “Amplify Media, Inc.” On July 27, 2016, the corporate name was amended to “Amplify
Media Network, Inc.” and on October 14, 2016, the corporate name was changed to “theMaven Network, Inc.” theMaven
Network, Inc. is a 100% owned subsidiary of the theMaven, Inc.
Going Concern
The Company’s consolidated financial
statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. The Company’s activities are subject to significant risks and uncertainties,
including the need for additional capital.
The Company has not generated any operating
revenues since July 22, 2016 (Inception) and has financed its operations through (a) the Recapitalization transaction with Parent,
(b) a loan from Parent that was cancelled upon closing of the Recapitalization, and (c) a private placement of common stock in
April 2017. The Company has incurred operating losses and negative operating cash flows since July 22, 2016 (Inception), and it
expects to continue to incur operating losses and negative operating cash flows for at least the next few years. As a result, management
has concluded that there is substantial doubt about the Company’s ability to continue as a going concern, and the Company’s
independent registered public accounting firm, in its report on the Company’s 2016 consolidated financial statements, has
raised substantial doubt about the Company’s ability to continue as a going concern.
In April 2017, the Company completed a
private placement of its common stock, raising proceeds of $3,765,000 in gross proceeds. The Company believes that it does not
have sufficient funds to support its operations through the end of the third quarter of 2017. In order to continue business operations
past that point, the Company currently anticipates that it will need to raise additional debt and/or equity capital prior to the
end of September 2017. There can be no assurances that the Company will be able to secure any additional financing on acceptable
terms and conditions, or at all. If cash resources become insufficient to satisfy the Company’s ongoing cash requirements,
the Company would be required to scale back or discontinue its technology development programs, or obtain funds, if available (although
there can be no certainty), or to discontinue its operations entirely.
Results of Operations
For the three and six months ended June
30, 2017, total net loss was approximately:
|
|
Three Months
|
|
|
Six Months
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
Service Costs
|
|
$
|
192,039
|
|
|
$
|
192,039
|
|
Research and development expenses
|
|
$
|
9,297
|
|
|
$
|
73,319
|
|
General and administrative expenses
|
|
$
|
1,390,467
|
|
|
$
|
2,338,437
|
|
Loss from operations
|
|
$
|
(1,591,803
|
)
|
|
$
|
(2,603,795
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.23
|
)
|
Service Costs
During the quarter ended June 30, 2017,
the Company’s platform and media channel operations were launched in beta stage with ten initial channel partners. Service
costs are the costs incurred to operate and maintain the Company’s platform and exclusive network of professionally managed
online media channels. Service costs include hosting and bandwidth, amortization of website development costs, revenue share or
guaranteed minimum payments to publishers for licensed content, advertising platform costs and other operational costs. During
the three and six months ended June 30, 2017, the Company incurred $192,039 of Service Costs.
Research and development expenses
Research and development
costs are charged to operations in the period incurred and amounted to $9,297 and $73,319 for the three and six months ended June
30, 2017.
General and administrative expenses
General and administrative expenses for
the three and six months ended June 30, 2017, were $1,390,467 and $2,338,437, respectively. Included in general and administrative
expenses is stock based compensation of $477,692 and $763,841 for the three and six-month periods, respectively. Our expenses are
due to our general administrative expenses of carrying on a business, including administrative compensation of approximately $387,000
and $627,000 in the three and six-month periods, and legal, professional and accounting expenses of approximately $116,000 and
$291,000 in the three and six-month periods; and other administrative expenses including travel, meals, insurance, rent and independent
contractors.
Liquidity and Capital Resources
Working Capital
The Company had working capital of approximately
$1.25 million as of June 30, 2017. This was an increase of approximately $878,000 due to the receipt of net proceeds of $3.5 million
received during the year from the private placement, net of stock issuance costs and cash used in operations and for investment
during the six months ended June 30, 2017.
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
1,545,225
|
|
|
$
|
719,881
|
|
Current Liabilities
|
|
$
|
(293,946
|
)
|
|
$
|
(346,327
|
)
|
Working Capital
|
|
$
|
1,251,279
|
|
|
$
|
373,554
|
|
The following table summarizes the Company’s cash flows during
the six months ended June 30, 2017:
|
|
June 30,
2017
|
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
$
|
(1,738,072
|
)
|
Net Cash Used in Investing Activities
|
|
|
(948,800
|
)
|
Net Cash Provided by Financing Activities
|
|
|
3,537,052
|
|
Increase in Cash during the Period
|
|
$
|
850,180
|
|
|
|
|
|
|
Cash at Beginning of Period
|
|
|
598,294
|
|
|
|
|
|
|
Cash at End of Period
|
|
$
|
1,448,474
|
|
For the six months ended June 30, 2017,
net cash used in operating activities was $1,738,072 which was primarily due to the net loss of $2,593,195 reduced by non-cash
expenses for stock-based compensation of approximately $844,000 and amortization and depreciation of $56,000 and increased by working
capital changes of approximately $35,000.
We anticipate needing a substantial amount
of additional capital to sustain our current operations and implement the current business plan of the Company as now budgeted.
We do not believe that the proceeds of the private placement of common stock completed on April 4, 2017, will be sufficient to
allow us to implement our business plan to the point where our revenues will cover our operating costs and the expansion of our
business offerings. Without additional funding, we will have to modify our longer-term business plan. The funds that we will need
may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership
of our shares. We anticipate thereafter that we will need additional capital prior to the end of September 2017 as we expand our
operations, and do not anticipate that our income will cover our full operating expenses for the foreseeable future. We have no
contracts or arrangements for any additional funding at this time. There can be no assurance that we will be able to raise any
funding or will be able to meet our accrued obligations. If we are not able to obtain the additional financing on a timely basis,
we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as they become due.
In such event, we will be forced to scale down or perhaps even cease our operations. These estimates may change significantly depending
on the nature of our business activities and our ability to raise capital from our shareholders or other sources.
There are no assurances that we will be able
to obtain further funds required for our continued operations. We will pursue various financing alternatives to meet our immediate
and long-term financial requirements. There can be no assurance that additional financing will be available to us when needed or,
if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on
a timely basis, we will be unable to conduct our operations as planned, and we will not be able to meet our other obligations as
they become due. In such event, we will be forced to scale down or perhaps even cease our operations.
Contractual Obligations
As a “smaller reporting company”,
we are not required to provide tabular disclosure obligations.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet
arrangements, including any outstanding derivative financial instruments, off-balance sheet guarantees, interest rate swap transactions
or foreign currency contracts. We do not engage in trading activities involving non-exchange traded contracts.
Seasonality
Once we are actively providing services to
our customer base, we expect to experience typical media company ad and sponsorship sales seasonality, which is strong in the fourth
quarter and slower in the first quarter.
Effects of Inflation
To date inflation has not had a material impact
on our business or operating results.
Significant Accounting Policies and Estimates
The Company’s discussion and analysis
of the financial condition and results of operations is based upon the Company’s audited financial statements included elsewhere
in this Report, which have been prepared in accordance with generally accepted accounting principles in the United States of America
(“GAAP”). The Company believes the following critical accounting policies affect the Company’s more significant
judgments and estimates used in the preparation of the financial statements. Actual results may differ from these estimates
under different assumptions or conditions.
Principles of Consolidation
The accompanying consolidated financial statements
include the financial position, results of operations and cash flows for the three and six months ended June 30, 2017. All intercompany
transactions and balances have been eliminated in consolidation. Because the Company was incorporated July 22, 2016, there is
no comparable quarterly period as of June 30, 2016.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses for the reporting period. Actual results could materially
differ from those estimates.
Digital Media Content
The Company intends to operate a network
of online media channels and will provide digital media (text, audio and video) over the Internet that users may access on demand.
As a broadcaster that transmits third party content owned by our channel partners via digital media, the Company applies ASC 920,
“Entertainment – Broadcasters”. The channel partners generally receive variable amounts of consideration that
are dependent upon the calculation of revenue earned by the channel in a given month, referred to as a “revenue share”,
that are payable in arrears. In certain circumstances, there is a monthly fixed fee minimum or a fixed yield (“revenue per
1000 impressions”) based on the volume of advertising impressions served. We disclose fixed dollar commitments for channel
content licenses in Note 12 Commitments and Contingencies. Channel partner agreements that include fixed yield based on the volume
of impressions served are not included in Note 12 because they cannot be quantified, but are expected to be significant. The expense
related to channel partner agreements are reported in “Service Costs” in the Statement of Operations. The cash payments
related to channel partner agreements are classified within “Net cash used in operating activities” on the Statement
of Cash Flows. Also under ASC 920, if channel partner agreements are structured such that the fee paid precedes the right to use
the content because the broadcasts will occur in future periods, the Company will record a Content Asset and a related Content
Obligation when all of the following conditions are met, (1) the cost of the content is known or reasonably determinable, (2) the
content has been accepted and (3) the content is available for broadcasting under the terms of the channel partner agreement. Capitalized
content cost will be amortized on a systematic basis over the agreement term on a straight-line method or an accelerated method
depending on the economic and agreement terms. Capitalized content costs will be evaluated for impairment at least annually or
whenever circumstances indicate that Content Assets may be impaired.
Fixed Assets
Fixed assets are recorded at cost. Major improvements
are capitalized, while maintenance and repairs are charged to expense as incurred. Gains and losses from disposition of property
and equipment are included in income and expense when realized. Depreciation and amortization are provided using the straight-line
method over the following estimated useful lives:
Office equipment and computers
|
|
|
3-5 years
|
Furniture and fixtures
|
|
|
5-8 years
|
Website development costs
|
|
|
3 years
|
Intangible Assets
The intangible assets consist of the cost of
a purchased website domain name with an indefinite useful life.
Impairment of Long-Lived Assets
The long-lived assets, consisting of fixed
assets and intangible assets, held and used by the Company are reviewed for impairment no less frequently than annually or whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the event that facts
and circumstances indicate that the cost of any long-lived assets may be impaired, an evaluation of recoverability is performed.
Management has determined that there was no impairment in the value of long-lived assets during the period ended June 30, 2017.
Website Development Costs
In accordance with authoritative guidance,
the Company begins to capitalize website and software development costs for internal use when planning and design efforts are
successfully completed and development is ready to commence. Costs incurred during planning and design, together with costs incurred
for training and maintenance, are expensed as incurred and recorded in research and development expense within the consolidated
statement of comprehensive loss. The Company places capitalized website and software development assets into service and commences
depreciation/amortization when the applicable project or asset is substantially complete and ready for its intended use. Once
placed into service, the Company capitalizes qualifying costs of specified upgrades or enhancements to capitalized website and
software development assets when the upgrade or enhancement will result in new or additional functionality. Certain website and
software development assets are placed into service and amortized and the Company continues to capitalize costs associated with
other website and software development assets that are still in the development stage.
The Company capitalizes internal labor costs,
including compensation, benefits and payroll taxes, incurred for certain capitalized website and software development projects
related to the Company’s technology platform. The Company’s policy with respect to capitalized internal labor stipulates
that labor costs for employees working on eligible internal use capital projects are capitalized as part of the historical cost
of the project when the impact, as compared to expensing such labor costs, is material.
Research and Development Expenses
Research and development costs are charged
to operations in the period incurred and amounted to $9,297 and $73,319 for the three and six months ended June 30, 2017.
Fair Value Measurements
Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 820
“Fair Value Measurements and Disclosures”
clarifies that fair value
is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based measurement that is determined based on assumptions
that market participants would use in pricing an asset or a liability. As a basis for considering such assumptions, FASB ASC 820
establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
|
·
|
Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
·
|
Level 2 - Include other inputs that are directly or indirectly observable in the marketplace.
|
|
·
|
Level 3 - Unobservable inputs which are supported by little or no market activity.
|
The fair value hierarchy also requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
In accordance with FASB ASC 820, the Company
measures its derivative liability at fair value. The Company’s derivative liability is classified within Level 3.
The carrying value of other current assets
and liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments.
Concentrations of Credit Risk
Cash
The Company maintains cash at a bank where
amounts on deposit may exceed the Federal Deposit Insurance Corporation limit throughout the year. The Company has not experienced
losses in such accounts and believes it is not exposed to significant credit risk regarding its cash.
Stock-based Compensation
The Company provides stock-based compensation
in the form of (a) restricted stock awards to employees, (b) vested stock grants to directors, (c) stock option grants to employees,
directors and independent contractors, and (d) common stock warrants to Channel Partners and other independent contractors.
The Company applies FASB ASC 718, “Stock
Compensation,” when recording stock based compensation to employees and directors. The estimated fair value of stock based
awards is recognized as compensation expense over the vesting period of the award. We have adopted ASU 2016-09 in 2016 with early
application and account for actual forfeitures of awards as they occur.
The fair value of restricted stock awards by
Subsidiary at Inception was estimated on the date of the award using the exchange value used by Integrated and the Subsidiary to
establish the relative voting control ratio in the Recapitalization.
Restricted stock that was subject to an escrow
arrangement and/or a performance condition in conjunction with the Recapitalization was remeasured and fair value was estimated
using the quoted price of our common stock on the date of the Recapitalization. The Company uses a Monte Carlo simulation model
to determine the number of shares expected to be released from the performance condition escrow.
The fair value of fully vested stock awards
is estimated using the quoted price of our common stock on the date of the grant. The fair value of stock option awards is estimated
at grant date using the Black-Scholes option pricing model that requires various highly judgmental assumptions including expected
volatility and option life.
The Company accounts for stock issued to non-employees
in accordance with provisions of FASB ASC 505-50, “Equity Based Payments to Non-Employees.” FASB ASC 505 -50 states
that equity instruments that are issued in exchange for the receipt of goods or services should be measured at the fair value of
the consideration received or the fair value of the equity instruments issued, whichever is more reliability measurable. The measurement
date occurs as of the earlier of (a) the date at which a performance commitment is reached or (b) absent a performance commitment,
the date at which the performance necessary to earn the equity instruments is complete (that is, the vesting date). Equity grants
with performance conditions that do not have sufficiently large disincentive for non-performance may be measured at fair value
that is not fixed until performance is complete. The fair value of common stock warrants is estimated at grant date using the Black-Scholes
option pricing model that requires various highly judgmental assumptions including expected volatility and option life. The Company
recognizes expense for equity based payments to non-employees as the services are received. The Company has specific objective
criteria, such as the date of launch of a Channel on the Company’s platform, for determination of the period over which services
are received and expense is recognized.
The Company uses a Monte Carlo simulation model
to determine the number of shares expected to be earned by Channel Partners based on performance obligations to be satisfied over
a defined period which will commence at the launch of a Channel on the Company’s platform.
The Company issues common stock upon exercise
of equity awards and warrants.
Income Taxes
The Company recognizes the tax effects of transactions
in the year in which such transactions enter into the determination of net income regardless of when reported for tax purposes.
Deferred taxes are provided in the financial statements to give effect to the temporary differences which may arise from differences
in the bases of fixed assets, depreciation methods and allowances based on the income taxes expected to be payable in future years.
Deferred tax assets arising primarily as a result of net operating loss carry-forwards, and research and development credit have
been offset completely by a valuation allowance due to the uncertainty of their utilization in future periods.
The Company recognizes interest accrued relative
to unrecognized tax benefits in interest expense and penalties in operating expense. During the three and six months ended June
30, 2017, the Company recognized no income tax related interest and penalties. The Company had no accruals for income tax related
interest and penalties at June 30, 2017.
Basic and Diluted Loss per Common Share
Basic income or loss per share is computed
using the weighted average number of common shares outstanding during the period, and excludes any dilutive effects of common
stock equivalent shares, such as options, restricted stock, and warrants. Restricted stock is considered outstanding and included
in the computation of basic income or loss per share when underlying restrictions expire and the shares are no longer forfeitable.
Diluted income per share is computed using the weighted average number of common shares outstanding and common stock equivalent
shares outstanding during the period using the treasury stock method. Common stock equivalent shares are excluded from the computation
if their effect is anti-dilutive. Unvested but outstanding restricted stock (which are forfeitable) are included in the diluted
income per share calculation. In a period where there is a net loss, the diluted loss per share is computed using the basic share
count. At June 30, 2017, potentially dilutive shares outstanding amounted to 18,847,613, of which 17,502,943 are not currently
registered and/or subject to future vesting conditions. Included in these totals are 6,198,307 common stock equivalents that must
be exercised which would result in proceeds from the sale of stock to the Company of $6,675,000.
Risks and Uncertainties
The Company has a limited operating history
and has not generated revenue to date. The Company’s business and operations are sensitive to general business and economic
conditions in the U.S. and worldwide. These conditions include short-term and long-term interest rates, inflation, fluctuations
in debt and equity capital markets and the general condition of the U.S. and world 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.
Recently Adopted Standards
In November 2015, the FASB issued Accounting
Standards Update No. 2015-17 (ASU 2015-17), Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU
2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. The adoption of ASU 2015-17 did not have any impact on Company’s financial statement
presentation or disclosures.
Recent Issued Accounting Pronouncements
In November 2015, the FASB issued Accounting
Standards Update No. 2015-17 (ASU 2015-17), Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU
2015-17 requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period.
The adoption of ASU 2015-17 is not expected to have any impact on Company’s financial statement presentation or disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842), which supersedes all existing guidance on accounting for leases in ASC Topic 840. ASU 2016-02 is intended
to provide enhanced transparency and comparability by requiring lessees to record right-of-use assets and corresponding lease liabilities
on the balance sheet. ASU 2016-02 will continue to classify leases as either finance or operating, with classification affecting
the pattern of expense recognition in the statement of income. ASU 2016-02 is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. ASU 2016-02 is
required to be applied with a modified retrospective approach to each prior reporting period presented with various optional practical
expedients. The Company is currently assessing the potential impact of adopting ASU 2016-02 on its financial statements and
related disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 refines how companies
classify certain aspects of the cash flow statement in regards to debt prepayment, settlement of debt instruments, contingent consideration
payments, proceeds from insurance claims and life insurance policies, distribution from equity method investees, beneficial interests
in securitization transactions and separately identifiable cash flows. ASU 2016-15 is effective for annual periods beginning after
December 15, 2017, and interim periods within those fiscal years. No early adoption is permitted. Management is currently
assessing the potential impact of adopting ASU 2016-15 on the financial statements and related disclosures.
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (ASC 606) - Revenue from Contracts
with Customers (“ASU 2014-09”), which provides guidance for revenue recognition. This ASU will supersede the revenue
recognition requirements in Topic 605, and most industry specific guidance. The standard’s core principle is that revenue
is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply
the following steps:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations
in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the
performance obligations in the contract.
Step 5: Recognize revenue when (or as) the
entity satisfies a performance obligation.
The guidance in ASU 2014-09 also specifies
the accounting for some costs to obtain or fulfill a contract with a customer. ASC 606 requires the Company to make significant
judgments and estimates. ASC 606 also requires more extensive disclosures regarding the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers.
The FASB has also issued several additional
ASUs which amend ASU 2014-09. The amendments do not change the core principle of the guidance in ASC 606.
Public business entities are required to apply
the guidance of ASC 606 to annual reporting periods beginning after December 15, 2017 (2018 for calendar year end reporting companies),
including interim reporting periods within that reporting period. Early adoption is permitted.
The Company has not yet estimated the financial
statement impact of the expected changes. The Company will continue to assess the impact of ASC 606 as it works through the adoption
in 2017.
Management believes that any other recently
issued, but not yet effective, authoritative guidance, if currently adopted, would not have a material impact on the Company’s
consolidated financial statement presentation or disclosures.