Real-time Form 4 intelligence. Smarter insider tracking.
YoY shift: Neutral
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.07pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.02pp
Flat
Net-tone change vs last year's 10-K.
MD&A
-0.11pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
closing+4
negative+2
failure+2
adverse+1
adversely+1
Positive rising
able+2
satisfaction+2
effective+1
regain+1
best+1
Risk Factors (Item 1A)
8,484 words
ITEM 1A.
RISK FACTORS.
Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material adverse effect on our business, prospects, financial condition and results of operations, and the market price of our securities could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an adverse effect on our business or similar statements) mean that the event could or would have a material adverse effect on our business, prospects, financial condition and results of operations, which in turn could or would have a material adverse effect on the market price of our securities. Although we have organized the risk factors below under headings to make them easier to read, many of the risks we face involve more than one type of risk. Consequently, you should read all of the risk factors below carefully before making any decision to acquire or hold our securities.
Risks Related to our Business
We have a history of operating losses and there are no assurances we will report operations in the foreseeable future.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
loss+9
losses+8
deficit+3
impairments+2
doubt+1
Positive rising
gains+6
gain+3
better+2
enhance+2
premier+2
MD&A (Item 7)
4,996 words
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding our business development plans, timing, strategies, expectations, anticipated expenses levels, business prospects and positioning with respect to market, demographic and pricing trends, business outlook, technology spending and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations) and express our current intentions, beliefs, expectations, strategies or predictions. These forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Special Note Regarding Forward-Looking Statements” and under “Risk Factors” and elsewhere in this annual report. The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this annual report.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
Executive Overview
For the years ended December 31, 2022 and 2021, total revenue was $27,859,000 and $26,707,000, respectively. Revenues increased from the prior year by $1,152,000 or 4.31%.
For the years-ended December 31, 2022 and 2021, we reported income/(loss) from operations of $(31,373,000) and ($34,762,000), respectively, and accumulated deficit of ($61,728,000) and ($30,355,000), respectively. Our future success depends on our ability to continue to assimilate the planned DNA acquisition, grow our revenues, contain our operating expenses and generate profits. We do not have any long-term agreements with our customers. There are no assurances that we will be able to assimilate the proposed DNA acquisition, increase our revenues and cash flow to a level which supports profitable operations. We may continue to incur losses in future periods until such time, if ever, as we are successful in significantly increasing our revenues and cash flow beyond what is necessary to fund our ongoing operations and pay our obligations as they become due. If we significantly increase our revenues in future periods, the rapid growth may strain our organization and we may encounter difficulties in maintaining the quality of our operations. If we are not able to successfully increase our revenues, it is unlikely we will be able to generate sufficient cash from operations to pay our operating expenses and service our debt obligations or report profitable operations in future periods.
Our auditors have expressed substantial doubt about our ability to continue as a going concern.
Our auditors’ report on our December 31, 2022 consolidated financial statements expresses an opinion that our capital resources as of the date of their audit report were not sufficient to sustain operations or complete our planned activities for the upcoming year unless we raised additional funds. Based upon our cash position on December 31, 2022 as well as in August 2024, there is substantial doubt about our ability to continue as a going concern through December 31, 2024. Our ability to continue as a going concern is based on several factors; (i) our ability to sustain our current operating performance, and (ii) our ability to raise additional capital. If we are not successful with either of these, we may no longer be able to continue as a going concern and may cease operation or seek bankruptcy protection.
We may need to raise additional capital to pay our indebtedness as it comes due.
As of December 31, 2022, we presently have the following indebtedness outstanding: $1,216,000 in June 2020 Convertible Debentures and $6,200,000 pursuant to the Senior Secured Revolving Credit Facility, which as of June 30, 2024 remain outstanding. In addition, during year ended December 31, 2023 and during 2024, the Company incurred an additional $1,010,402 in indebtedness. The payment of the debentures and revolving credit facility are secured by substantially all the assets and the intellectual property of the Company. Further, in addition to payments required pursuant the revolving credit facility, the lender is also entitled to ten percent (10%) of the net proceeds of any sales of securities acquired from our customers during the term of the loan. As a result, this will further negatively impact our cash flows from operations and may require us to raise additional capital earlier than previously anticipated. Depending on our level of operations, we may not be able to generate sufficient cash flow to repay the debentures or revolving credit facility as they come due. If we are not able to generate enough cashflow through the operation of our business, we will need to raise additional capital through the sale of debt or equity or the sale of assets, in order to make the required payments. If we are unable to make the required payments, or if we fail to comply with the various requirements and covenants of the debentures and revolving credit facility, we would be in default, which would permit the holders of the debentures and lender in the revolving credit facility to accelerate the maturity and require immediate repayment and lead to potential foreclosure on the assets securing the debt. If we are unable to refinance or repay our indebtedness as it becomes due, including upon an event of default, we may become insolvent and be unable to continue operations.
Our outstanding loan obligations contain substantial covenants that may impact our business, our ability to secure additional debt financing, and our ability to pay our debts as they become due.
As of December 31, 2022, we presently have the following indebtedness outstanding: $1,216,000 in June 2020 Convertible Debentures and $6,200,000 pursuant to the Senior Secured Revolving Credit Facility, which as of June 30, 2024 remain outstanding. In addition, during year ended December 31, 2023 and during 2024, the Company incurred an additional $1,010,402 in indebtedness. Each of the debentures and revolving notes / credit facility contain a number of affirmative and negative covenants, including, but not limited to: reporting requirements, certain financial covenants related to our stock portfolio, collateral limitations, certain limitations on liens and indebtedness, dispositions, mergers and acquisitions, restricted payments and investments, corporate changes and limitations on waivers and amendments to certain agreements, our organizational documents, etc. Our failure to comply with the covenants in the credit agreement governing the credit facility and the debentures and associated transaction documents could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt and potential foreclosure on the assets pledged to secure the debt.
Further, we agreed to pay the lender in the credit facility, an amount equal to ten percent (10%) of the net proceeds actually received by us from the sale any securities of a customer that we acquired during the term of the revolving note(s). Given that we have not yet achievedprofitability, and we will additionally be required to make payments upon the sales of our customer’s securities to the lender, we may be unable to continue to meet our obligations as they become due. If we are unable to refinance or repay our indebtedness as it becomes due or upon an event of default, we may become insolvent and be unable to continue operations.
Additionally, the revolving loan obligations under our secured credit facility provide for variable repayment terms ranging from 10% to 30% of the net proceeds actually received upon the sale of our customer’s securities that we receive pursuant to the provision of services. This will further negatively impact our cash flows and may further accelerate the anticipated timeframe in which we need to raise additional capital.
We are not current in our SEC reporting obligations, which could have material adverse consequences for our company and shareholders.
We are not current in our filing obligations under the Securities Exchange Act of 1934. Specifically, we have not timely filed our Form 10-K for the year ended December 31, 2023 and our Form 10-Qs for the quarters ended March 31, 2023, June 30, 2023, September 30, 2023, March 31, 2024 and June 30, 2024. As a result of our failure to remain current in our SEC reporting obligations:
We are ineligible to use certain forms of registration statements, limiting our ability to access the capital markets.
We will not be able to apply to have our securities traded on a traditional exchange or to trade on a higher tier of the OTC Markets significantly reducing the liquidity of our common stock and likely cause its price to decline.
Investors lack current information about our financial condition and results of operations, impairing their ability to make informed investment decisions.
We may face enforcement action by the SEC, including potential monetary penalties and injunctions.
We are at heightened risk of securities litigation from shareholders.
Until we regain compliance with our SEC reporting obligations, we will continue to face these and other risks related to our filing delinquency. Even after becoming current, we may continue to experience negative impacts on investor confidence and our stock price. There can be no assurance as to when we will regain compliance or that we will be able to maintain compliance with SEC reporting requirements in the future.
Our proposed merger with DNA Holdings Venture, Inc. may not be completed, which could negatively impact our business, financial condition, results of operations, and stock price.
On May 7, 2024, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with DNA Holdings Venture, Inc., a Puerto Rico corporation (“DNA”), and DNA Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of SRAX (“Merger Sub”). Upon the terms and subject to the satisfaction of the conditions described in the Merger Agreement, Merger Sub will be merged with and into DNA (the “Merger”), with DNA surviving the Merger as a wholly-owned subsidiary of the Company. As consideration for the Merger, SRAX shall issue to the shareholders of DNA 1,000 shares of a newly created Series C Convertible Preferred Stock of the Company (the “Preferred Stock”), which shall be convertible into approximately 75.5% of the outstanding shares of Common Stock of the Company upon closing of the Merger, which includes the approximately 35% of the Company which DNA owned prior to the merger. Upon completion of the Merger, the Company will change its name to DNA Holdings Venture, Inc. Mr. Miglino, Chief Executive Officer and sole director of the Company, serves as the Chief Executive Officer of DNA. The closing is subject to satisfaction or waiver of certain conditions including, among other things, (i) the required approvals by the DNA’s shareholders, (ii) the accuracy of the representations and warranties, subject to certain materiality qualifications, (iii) compliance by the parties with their respective covenants, (iv) no law or order preventing the merger and related transactions, (iv) the Company getting current in its reporting obligations with the Securities and Exchange Commission (the “SEC”), (v) the Company obtaining all required third party consents, including the consents of its senior secured creditors and warrantholders, (vi) DNA entering into an exchange agreement agreeing to exchange its existing securities in the Company for the Preferred Stock to be issued upon closing of the Merger and (v) the DNA advancing the Company at least $500,000 on or prior to the closing of the Merger. The Merger Agreement also contains certain termination rights for both the Company and DNA. There is no assurance that these conditions will be met or that the proposed merger will be completed. If the merger is not consummated, we may be subject to several risks, including:
Negative perception by the market, customers, suppliers, and employees
Distraction of our management and employees from ongoing business operations
Difficulty in developing and executing alternative business strategies
Potential loss of key personnel
Significant costs incurred in connection with the proposed merger without realizing the anticipated benefits
Additionally, the current uncertainty surrounding the completion of the merger may cause or contribute to volatility in our stock price. The failure to complete the merger could materially and adversely affect our business, financial condition, results of operations, and stock price.Even if the merger is completed, we may not realize the anticipated benefits, and the integration process could result in significant costs and difficulties that may disrupt our business operations.
Having only one director, who is also the sole executive officer, limits our ability to establish effective independent corporate governance procedures and increases the control of our president/director.
We have only one director, who is also our sole executive officer. Accordingly, we cannot establish board committees comprised of independent members to oversee functions like compensation, governance or audit issues.
Until we have a larger board of directors that would include some independent members, if ever, there will be limited oversight of our CEO’s decisions and activities and little ability for minority shareholders to challenge or reverse those activities and decisions, even if they are not in the best interests of minority shareholders.
Our failure to maintain an effective system of internal control over financial reporting, has resulted in the need for us to restate previously issued financial statements. As a result, current and potential stockholders may lose confidence in our financial reporting, which could harm our business and value of our stock.
Or management has determined that, as of December 31, 2022, we did not maintain effective internal controls over financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework as a result of identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Natural disasters, epidemic or pandemic disease outbreaks, trade wars, political unrest or other events could disrupt our business or operations or those of our development partners, manufacturers, regulators or other third parties with whom we conduct business now or in the future.
A wide variety of events beyond our control, including natural disasters, epidemic or pandemic disease outbreaks (such as the recent novel coronavirus outbreak), trade wars, political unrest or other events could disrupt our business or operations or those of our manufacturers, regulatory authorities, or other third parties with whom we conduct business. These events may cause businesses and government agencies to be shut down, supply chains to be interrupted, slowed, or rendered inoperable, and individuals to become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. These limitations could negatively affect our business operations and continuity, and could negatively impact ability to timely perform basic business functions, including making SEC filings and preparing financial reports. If our operations or those of third parties with whom we have business are impaired or curtailed as a result of these events, the development and commercialization of our products and product candidates could be impaired or halted, which could have a material adverse impact on our business.
A pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or advisors could adversely impact our business.
If a pandemic, epidemic, or outbreak of an infectious disease including the recent outbreak of respiratory illness caused by a novel coronavirus (COVID-19) or other public health crisis were to affect our operations, facilities or those of our customers or suppliers, our business could be adversely affected. A pandemic typically results in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and professional advisors. These factors, in turn, may not only materially impact our operations, financial condition and demand for our services but our overall ability to react timely to mitigate the impact of this event. Also, it may hamper our efforts to comply with our filing obligations with the Commission
Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our business.
The United States and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict our ability to collect, process, use, transfer and pool data collected from and about consumers and devices. Trade associations and industry self-regulatory groups have also promulgated best practices and other industry standards relating to targeted advertising. Various U.S. and foreign governments, self-regulatory bodies and public advocacy groups have called for new regulations specifically directed at the digital advertising industry, and we expect to see an increase in legislation, regulation and self-regulation in this area. The legal, regulatory and judicial environment we face around privacy and other matters is constantly evolving and can be subject to significant change. Additionally, the interpretation and application of data protection laws in the U.S., Europe and elsewhere are often uncertain and in flux. Legislative and regulatory authorities around the world may decide to enact additional legislation or regulations, which could reduce the amount of data we can collect or process and, as a result, significantly impact our business. Similarly, clarifications of and changes to these existing and proposed laws, regulations, judicial interpretations and industry standards can be costly to comply with, and we may be unable to pass along those costs to our clients in the form of increased fees, which may negatively affect our operating results. Such changes can also delay or impede the development of new solutions, result in negative publicity and reputational harm, require significant incremental management time and attention, increase our risk of non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices, including our ability to charge per click or the scope of clicks for which we charge. Additionally, any perception of our practices or solutions as an invasion of privacy, whether or not such practices or solutions are consistent with current or future regulations and industry practices, may subject us to public criticism, private class actions, reputational harm or claims by regulators, which could disrupt our business and expose us to increased liability. Finally, our legal and financial exposure often depends in part on our clients’ or other third parties’ adherence to privacy laws and regulations and their use of our services in ways consistent with visitors’ expectations. We rely on representations made to us by clients that they will comply with all applicable laws, including all relevant privacy and data protection regulations. We make reasonable efforts to enforce such representations and contractual requirements, but we do not fully audit our clients’ compliance with our recommended disclosures or their adherence to privacy laws and regulations. If our clients fail to adhere to our contracts in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our own solutions, services and data collection, use and sharing practices in our own disclosures to consumers, then we and our clients may be subject to potentially adverse publicity, damages and related possible investigation or other regulatory activity in connection with our privacy practices or those of our clients.
Unfavorable media coverage could negatively affect our business.
Unfavorable publicity regarding, for example, our privacy practices, terms of service, regulatory activity, the actions of third parties, the use of our products or services for illicit, objectionable, or illegal ends or the actions of other companies that provide similar services to us, could adversely affect our reputation. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our customer base which could adversely affect our business and financial results.
Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, content, competition, consumer protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, such as privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation and securities law compliance. Expansion of our activities in certain jurisdictions, or other actions that we may take, may subject us to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be more restrictive than those in the United States.
Additionally, as we expand our product offerings, we may become subject to the European General Data Protection Regulation (GDPR), effective as of May 2018. The GDPR increases privacy rights for individuals in Europe, extends the scope of responsibilities for data controllers and data processors and imposes increased requirements and potential penalties on companies offering goods or services to individuals who are located in Europe or monitoring the behavior of such individuals (including by companies based outside of Europe). Noncompliance can result in penalties of up to the greater of €20 million, or 4% of global company revenues.
These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government authorities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the newer industry in which we operate, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.
These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede our international growth, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business.
Security breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our systems, could harm our reputation and adversely affect our business.
Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users’ data or to disrupt our ability to provide service. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data, including personal information, content, or payment information from or to users, or information from marketers, could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become more prevalent in our industry. As a result of recent attention and growth of, the size of our user base, and the types and volume of personal data on our systems, we believe that we are a particularly attractive target for such breaches and attacks. Our efforts to address undesirable activity may also increase the risk of retaliatory attacks. Such attacks may cause interruptions to the services we provide, degrade the user experience, cause users or marketers to lose confidence and trust in our products, impair our internal systems, or result in financial harm to us. Our efforts to protect our company data or the information we receive may also be unsuccessful due to software bugs or other technical malfunctions; employee, contractor, or vendor error or malfeasance; government surveillance; or other threats that evolve. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users’ data. Cyber-attacks continue to evolve in sophistication and volume, and inherently may be difficult to detect for long periods of time. Although we are currently in the process of developing systems and processes that are designed to protect our data and user data, to prevent data loss and to prevent or detect security breaches, we cannot assure you that such measures will ultimately become operational or provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.
Affected parties or government authorities could initiate legal or regulatory actions against us in connection with any actual or perceived security breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Such incidents or our efforts to remediate such incidents may also result in a decline in our active user base or engagement levels. Any of these events could have a material and adverse effect on our business, reputation, or financial results.
If we were to lose or have limited access to certain platforms or data sources, we will lose our existing revenue from these platform and sources.
The loss of access to any platforms or data sources could limit our ability to effectively grow a portion of our operations. Our business would be harmed if these platforms:
discontinues or limits access to its platform by us and other application developers;
modify terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers, or changes how the personal information of its users is made available to application developers;
establishes more favorable relationships with one or more of our competitors; or
develops its own competitive offerings.
We depend on the services of our executive officers and the loss of any of their services could harm our ability to operate our business in future periods.
Our success largely depends on the efforts and abilities of our sole executive officer, Christopher Miglino. We are a party to an employment agreement with Mr. Miglino. Although we do not expect to lose his services in the foreseeable future, the loss of any of them could materially harm our business and operations in future periods until such time as we were able to engage a suitable replacement.
Weak economic conditions may reduce consumer demand for products and services.
A weak economy in the United States could adversely affect demand for advertising products, and services. A substantial portion of our revenue is derived from businesses that are highly dependent on discretionary spending by individuals, which typically falls during times of economic instability. Accordingly, the ability of our advertisers to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments remain weak or decline further. We currently are unable to predict the extent of any of these potential adverse effects.
Certain of our business affiliates have operations outside of the United States that are subject to numerous operational risks.
Certain of our affiliates have operations in countries other than the United States. In many foreign countries, it is not uncommon to encounter business practices that are prohibited by certain regulations, such as the Foreign Corrupt Practices Act and similar laws. Although certain of our business affiliates have undertaken compliance efforts with respect to these laws, their respective employees, contractors and agents, as well as those companies to which they outsource certain of their business operations, may take actions in violation of their policies and procedures. Any such violation, even if prohibited by the policies and procedures of these business affiliates or the law, could have certain adverse effects on the financial condition of these business affiliates. Any failure by these affiliates to effectively manage the challenges associated with the international operation of their businesses could materially adversely affect their, and hence our, financial condition.
In the event that we are unable to conduct business with certain third-party providers of data and information integral to our operations, our revenue and business prospects may suffer.
We rely on access to certain third-party providers of data in the investment sector in order for the Sequire platform to function and provide meaningful data and insights for our customers. We have benefited from the data that these third-parties have provided to us on behalf of their customers. In the event that we lose access to these third-party providers, it would limit our ability to effectively market the Sequire platform and sell our services to our customers. In the event that these third-party providers change their terms or our ability to access their data on a cost-effective basis to us, our business may be materially harmed.
Competitors may create products that compete with the Sequire platform and there can be no assurances that we will be able to protect our intellectual property related to Sequire.
The Sequire platform’s success depends heavily on our intellectual property and the continued development and innovation of the platform. Notwithstanding, there may be competitors seeking to compete by creating similar platforms with more aggressive pricing or lower cost structures, greater functionality, and by emulating the services provided by the Sequire platform. Furthermore, certain of the information that we implement in our Sequire platform is either publicly available or ascertained through third-party service providers for which no barrier to entry exists. Companies with significantly more resources than us may attempt to create competing products at lower prices. Furthermore, there can be no assurances that we are able to adequatelydefend our trade secrets or intellectual property rights with respect to competitors.
Our insurance coverage strategy may not be adequate to protect us from all business risks.
We may be subject, in the ordinary course of business, to losses resulting from accidents, acts of God and other claimsagainst us, for which we may have no insurance coverage. As a general matter, we do not maintain as much insurance coverage as many other companies do, and in some cases, we do not maintain any at all. Additionally, the policies that we do have may include significant deductibles or self-insured retentions, policy limitations and exclusions, and we cannot be certain that our insurance coverage will be sufficient to cover all future losses or claimsagainst us. A loss that is uninsured or which exceeds policy limits may require us to pay substantial amounts, which may harm our financial condition and operating results.
Risks Related to receipt of Securities for Services
Many of the securities we receive for services do not have an active trading market, and we value these securities at fair value as determined in good faith under procedures adopted by our Board of Directors, which valuation is inherently subjective and may not reflect what we may actually realize for the sale of these securities.
The majority of securities comprising our stock portfolio are, and are expected to continue to be, in securities that have a limited market, limited liquidity, high volatility, and accordingly, their market price may not accurately reflect the true value in the event that they were traded on an active market. As of December 31, 2022, we had unrealized losses from our stock portfolio of approximately $3.8 million. The fair value of assets whose true values are not readily ascertainable are determined in good faith under procedures adopted by our Board of Directors. Our Board of Directors utilizes the services of independent third-party valuation firms in determining the fair value of a portion of the securities we hold. Investment professionals from our investment adviser also prepare valuations using sources and/or proprietary models depending on the availability of information on our assets and the type of asset being valued, all in accordance with our valuation policy. Accordingly, the actual value of the securities we received could be substantially less than we previously estimated.
Because fair valuations, and particularly fair valuations of securities without efficient markets are inherently uncertain, may fluctuate over short periods of time, and are often based to a large extent on estimates, comparisons and qualitative evaluations of information, it may be more difficult for investors to value accurately our securities and could lead to undervaluation or overvaluation of our Common Stock. In addition, the valuation of these types of securities may result in substantial write-downs and earnings volatility.
The value ascribed to our assets in our financial statements as of a particular date may be materially greater than or less than the value that would be realized if our assets were to be liquidated as of such date. For example, if we were required to sell a certain asset or all or a substantial portion of our assets on a particular date, the actual price that we would realize upon the disposition of such asset or assets could be materially less than the value of such asset or assets as reflected in our financial statements. Volatile market conditions could also cause reduced liquidity in the market for certain assets, which could result in liquidation values that are materially less than the values of such assets as reflected in our financial statements.
We run the risk of inadvertently being deemed to be an investment company that is required to register under the Investment Company Act of 1940.
We run the risk of inadvertently being deemed to be an investment company that is required to register under the Investment Company Act of 1940 (the “Investment Company Act”) because a significant portion of our assets consists of securities in companies in which we own less than a majority interest. The risk varies depending on events beyond our control, such as significant appreciation or depreciation in the market value of certain of our publicly traded holdings, adverse developments with respect to our ownership of certain of our subsidiaries, and transactions involving the sale of certain assets. If we are deemed to be an inadvertent investment company, we may seek to rely on a safe-harbor under the Investment Company Act that would provide us a one-year grace period to take steps to avoid being deemed to be an investment company. In order to ensure we avoid being deemed an investment company, we have taken, and may need to continue to take, steps to reduce the percentage of our assets that constitute investment assets under the Investment Company Act. These steps have included, among others, selling marketable securities that we might otherwise hold for the long-term and deploying our cash in non-investment assets. We have recently sold marketable securities, including at times at a loss, and we may be forced to sell our investment assets at unattractive prices or to sell assets that we otherwise believe benefit our business in the future to remain below the requisite threshold. We may also seek to acquire additional non-investment assets to maintain compliance with the Investment Company Act, and we may need to incur debt, issue additional equity or enter into other financing arrangements that are not otherwise attractive to our business. Any of these actions could have a material adverse effect on our results of operations and financial condition. Moreover, we can make no assurance that we would successfully be able to take the necessary steps to avoid being deemed to be an investment company in accordance with the safe harbor. If we were unsuccessful, then we would have to register as an investment company, and we would be unable to operate our business in its current form. We would be subject to extensive, restrictive, and potentially adverse statutory provisions and regulations relating to, among other things, operating methods, management, capital structure, indebtedness, dividends, and transactions with affiliates. If we were deemed to be an investment company and did not register as an investment company when required to do so, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, that we would be unable to enforce contracts with third parties, and/or that third parties could seek to obtain rescission of transactions with us undertaken during the period in which we were an unregistered investment company.
We are not, and do not intend to become, regulated as an investment company under the U.S. Investment Company Act of 1940 (and similar legislation in other jurisdictions) and if we are deemed an “investment company” under the U.S. Investment Company Act of 1940, applicable restrictions would make it impractical for us to operate as contemplated.
The Investment Company Act and the rules thereunder (and similar legislation in other jurisdictions) provide certain protections to investors and impose certain restrictions on companies that are registered as investment companies. Among other things, such rules limit or prohibit transactions with affiliates, impose limitations on the issuance of debt and equity securities and impose certain governance requirements. We have not been and do not intend to become regulated as an investment company and we intend to conduct our activities so that we will not be deemed to be an investment company under the Investment Company Act (and similar legislation in other jurisdictions). In order to ensure that we are not deemed to be an investment company, we may be required to materially restrict or limit the scope of our operations or plans related to Sequire, which may limit us in the types of acquisitions that we may make and we may need to modify our organizational structure or dispose of assets that we would not otherwise dispose of. Moreover, if anything were to happen which would potentially cause us to be deemed an investment company under the Investment Company Act, it would be impractical for us to operate as intended pursuant to the Sequire platform and our business, financial condition and results of operations would be materially adversely affected. Accordingly, we would be required to take extraordinary steps to address the situation, such as the modification and restructuring of our Sequire platform, which would materially adversely affect our ability to derive revenue.
Sequire’s services are primarily paid for in restricted shares of its customers’ stock, which are often smaller publicly traded companies with volatile stock prices, limited liquidity, riskier operations and whose securities are frequently quoted on the OTC Markets, which includes the OTCQX, OTCQB as well as the OTC Pink, which typically quotes securities with increased risk and less liquidity.
Payment related to our Sequire platform and services is often made through the equity securities of our customers instead of cash. Since larger companies typically pay in cash, the securities issued are often those of smaller public companies that often have limited operating histories, limited operating cash, and negative cash flows. Additionally, these securities are primarily restricted, and are subject to legal holding periods pursuant to Rule 144 or other applicable exemptions. As of December 31, 2022 approximately $11.4 million of our holdings are issued by companies whose securities trade on the OTC Markets Inc. with a significant portion of these securities trading on the OTC Pink. While our agreements for OTC issuers may contain certain provisions providing for the issuance of additional securities upon certain events, the value of such securities on the date of receipt compared to the date when we are able to legally sell the securities may decrease significantly, and the stock price of such issuers is often volatile, unpredictable, and with limited liquidity. Additionally, the OTC Pink has less stringent requirements for listing than even other OTC Markets, such as the OTCQB or OTCQX. Often, the OTC Pink lists companies that (i) may not be providing current information, (ii) may not have independent directors, (iii) may have little to no trading, and (iv) may be very volatile. As a result, the value of the equity received on the date of payment may be significantly greater than the actual revenue derived by us upon a sale of the securities. Furthermore, there is no guarantee that the companies that we receive securities from will remain solvent or maintain “current information”, or other required criteria during the legally required holding period under Rule 144, which would result in the loss of some or all of our anticipated revenue. These risks are significantly increased for OTC Pink issuers. As we are not experienced traders, there can be no assurances that our personnel responsible for selling the securities will do so at opportune times or be able to maximize profitability.
Our receipt of securities in lieu of cash may be negatively affected by a downturn in the U.S. and/or global securities markets and could significantly reduce our revenue.
General political and economic conditions and events such as U.S. fiscal and monetary policies, economic recessions, inflationary events, governmental shutdowns, trade tensions and disputes, global economic slowdowns, widespread health epidemics or pandemics, natural disasters, terrorist attacks, wars, changes in local and national economic and political conditions, regulatory changes or changes in the laws, or interest rate or currency rate fluctuations could create a downturn in the U.S. and/or global securities markets. As we often receive restricted securities of companies, a downturn in the U.S. or global markets may impact such companies and the value of the securities we receive for services pursuant to the Sequire platform.
Risks Related to Ownership of our Securities.
Conversions of our convertible debentures, notes issued under our revolving credit facility, and the exercise of our common stock warrants may dilute the ownership interest of existing stockholders or may otherwise depress the price of our common stock.
The conversion of some or all of the outstanding convertible debentures or the revolving note issued in our secured revolving credit facility would dilute the ownership interests of existing stockholders. Any sales in the public market of the common stock issuable upon such conversion or exercise of outstanding warrants could adversely affect their prevailing market prices. In addition, the existence of the convertible debentures, revolving note, and outstanding warrants may encourage short selling by market participants because the conversion of such notes could be used to satisfy short positions, or the anticipated conversion of such debentures into shares of our common stock could depress the price of our common stock.
The market price of our common stock may be volatile.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than those of a seasoned issuer. The volatility in our share price is attributable to a number of factors. Mainly however, we are a speculative or “risky” investment due to our limited operating history, lack of significant revenues to date, our continued operating losses and missed guidance. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Additionally, in the past, plaintiffs have often initiated securities class action litigationagainst a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
The trading price of the shares of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “ Risk Factors ” section and elsewhere in this quarterly report, these factors include:
the success of competitive products;
actual or anticipated changes in our growth rate relative to our competitors;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
regulatory or legal developments in the United States and other countries;
the recruitment or departure of key personnel;
the level of expenses;
actual or anticipated changes in estimates to financial results, development timelines or recommendations by securities analysts;
variations in our financial results or those of companies that are perceived to be similar to us;
fluctuations in the valuation of companies perceived by investors to be comparable to us
inconsistent trading volume levels of our shares;
announcement or expectation of additional financing efforts;
sales of our common stock by us, our insiders or our other stockholders;
additional issuances of securities upon the exercise of outstanding options and warrants;
market conditions in the technology sectors; and
general economic, industry and market conditions.
In addition, the stock market in general, and advertising technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. The realization of any of these risks could have a dramatic and material adverse impact on the market price of the shares of our common stock.
The Revolving Note issued under our senior secured revolving credit facility contains an adjustment to the price at which the note can be converted into our common stock, which may result in further dilution to our shareholders.
The revolving note issued in our August 2022 secured revolving credit facility, of which $6,2000,000 in principal is currently outstanding, is convertible into our common stock at a conversion price that is subject to adjustment upon certain enumerated events which includes the sale of our common stock or equivalents at a deemed price equal to or less than $5.00 per share. On August 15, 2024, the closing price of our common stock was $0.25 per share. In the event that we are required to raise additional capital through the sale of our equity or debt securities, given our current market price, it is likely that the Conversion Price would be adjusted, and we may be required to issue a significantly greater number of shares upon conversion, than currently anticipated, resulting in greater dilution to our existing shareholders.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of the shares of our common stock may be volatile, and in the past companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigationagainst us could result in substantial costs and divert our management’s attention from other business concerns, which could seriouslyharm our business. To the extent that any claims or suits are brought against us and successfully concluded, we could be materially adversely affected, jeopardizing our ability to operate successfully. Furthermore, our human and capital resources could be adversely affected by the need to defend any such actions, even if we are ultimately successful in our defense.
Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in a decline in our stock price.
We have previously provided, and may provide in the future, public guidance on our expected financial results for future periods. Although we believe that this guidance provides investors with a better understanding of management’s expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties. Our actual results may not always be in line with or exceed the guidance we have provided. For example, in the past, we have missed guidance a number of times. If our financial results for a particular period do not meet our guidance or if we reduce our guidance for future periods, the market price of our common stock may decline.
Delaware law contains anti-takeover provisions that could deter takeover attempts that could be beneficial to our stockholders.
Provisions of Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. Section 203 of the Delaware General Corporation Law may make the acquisition of our company and the removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring us, without our board of directors’ consent, for at least three years from the date they first hold 15% or more of the voting stock.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the trading price of our common stock and trading volume could decline.
The trading market for our shares of our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. A small number of securities and industry analysts currently publish research regarding our Company on a limited basis. In the event that one or more of the securities or industry analysts who have initiated coverage downgrade our securities or publish inaccurate or unfavorable research about our business, the price of our shares of common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our securities could decrease, which might cause the trading price of our shares of common stock and trading volume to decline.
The elimination of monetary liability against our directors and officers under Delaware law and the existence of indemnification rights held by our directors and officers may result in substantial expenditures by us and may discourage lawsuits against our directors and officers.
Our certificate of incorporation eliminates the personal liability of our directors and officers to our company and our stockholders for damages for breach of fiduciary duty as a director or officer to the extent permissible under Delaware law. Further, our bylaws provide that we are obligated to indemnify any of our directors or officers to the fullest extent authorized by Delaware law. We are also parties to separate indemnification agreements with certain of our directors and our officers which, subject to certain conditions, require us to advance the expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition. Those indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against our directors or officers, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even if such actions, if successful, might otherwise benefit us or our stockholders.
Cash, cash equivalents, and marketable securities at December 31, 2022 and 2021, were $9,193,000 and $16,965,000, respectively. Cash, cash equivalents and marketable securities decreased from the prior year by $7,772,000 or 45.81%. The Company continues to sell its marketable securities to meet working capital requirements.
Reportable Segments
We have a single operating and business segment, Sequire, which is comprised of two reporting units; Sequire and LD Micro.
Our Sequire segment includes the licensing of our SaaS based Sequire platform and related services, and our LD Micro, Inc. event and conference operations. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. All differences between our internal management reporting basis and accounting principles generally accepted in the United States of America (“GAAP”), along with certain corporate-level and other activity, are included in Corporate and Other. Our management, along with our Chief Executive Officer, who acts as our Chief Operating Decision Maker (as such term is defined accounting segment reporting guidance), review financial information presented on a consolidated basis for purposes of allocating resources and evaluating performance and do not evaluate using asset information.
Deconsolidation of BIGToken, Inc.
On December 29, 2021, we deconsolidated our majority owned subsidiary BIG Token, Inc. (“BIGToken”) (formerly known as Force Protection Video Equipment Corporation). After the deconsolidation, we did not beneficially own a controlling interest in BIGToken, and no longer consolidated BIGToken into our financial results for periods ending after December 31, 2021.
The financial results of BIGToken for the year ended December 31, 2021 are presented as income (loss) from discontinued operations, net of taxes on the consolidated statements of operations and its assets and liabilities as of December 31, 2021 are presented as assets and liabilities of discontinued operations on the consolidated balance sheets. The historical consolidated statement of cash flows reflects the effect of the deconsolidation.
Unless noted otherwise, discussion in the notes to the consolidated financial statements pertain to continuing operations.
See Note 4 – Discontinued Operations.
Business Focus
During 2022, we have focused on: (i) the continued growth of our Sequire platform’s functionality and user base and (ii) the expansion of LD Micro events and offerings. Subsequent to year end, we disposed of LD Micro.
Business
We are a technology firm focused on enhancing communications between public companies and their shareholders and investors. We currently have two distinct business units; however we operate in one business segment:
Our unique SaaS platform, Sequire, which allows issuers to track their shareholders’ behaviors and trends, then use data-driven insights to engage with shareholders across marketing channels. Through Sequire, we offer tools and related data and insight services to allow issuers of publicly traded securities to better understand their position in the market.
LD Micro, Inc. organizes and hosts investor conference for micro and small-cap companies. LD Micro, Inc. was disposed of on March 3, 2023. See the accompanying financial consolidated financial statements for additional information.
We derive our revenues from the following sources:
Licensing of our proprietary SaaS platform;
Sales of proprietary data;
Attendance and sponsorship fees from investor conferences and events; and
Sales of insight and consulting services.
Sequire
The Sequire platform is a central hub where companies can manage certain administrative functions, reach out and engage with shareholders as well as identify potential new investors. The platform utilizes machine learning and advanced analytics to bring our clients actionable information that we believe can be used to maximize ROI through better investor and stockholder communications. Clients then can engage with targeted shareholder groups across marketing channels including email, social media, programmatic, and hyperlocal.
When interpreting data, clients can see gains and losses over time, buying/selling trends, total outstanding shares, new shareholders, and shareholders broken out by percentage. Based on this data, we can assist our users in developing customized communications campaign utilizing targeted ads and messaging.
Among other features, the Sequire platform provides its users tools to monitor investor sentiment and activities and simplify back office administration such as:
real-time level-two trading data,
the ability to monitor the activities of competitive public companies of the user,
news alerts,
custom survey feature to enhance shareholder communications,
real-time and searchable warrant and option ledgers; and
integrated communication between investor relations programs and corporate communication firms.
Data Targeting
We help our clients build an investor base through targeted advertising and marketing campaigns, tailored to their needs. Using data-driven insights, we help clients meet their unique marketing objectives when messaging existing investors, new investors, or consumers.
Our team of experts takes a deep dive into each company, building out unique messaging to suit their target investors. Once media campaigns are built, they are run through the Sequire platform across multiple target segments. We then track performance and modify the campaign for the best possible results. Our clients have needs to target particular sectors and exchanges, and the value we deliver lies in the hyper-specific investor insights necessary for that kind of focused outreach.
We are maximizing the efficacy of our media campaigns by providing our clients with custom-built landing pages that are crafted to educate, engage, and convert new investors. When a new investor clicks through an ad, they will land on a story-driven page with data-tracking software embedded to collect analytics for later use.
Virtual Events and LD Micro
LD Micro is the premier event platform for micro-cap and small cap companies. We are currently planning to expand the number and subject matter of our conferences and events. Through the events platform, we have the ability to host a variety of virtual events and conferences including investor conferences, earnings calls, shareholder meetings, annual, investor/analyst days, corporate town halls, roadshows, and more. We believe that our ability to offer users a seamless, centrally managed virtual events solution that can be customized to any industry will help transform our platform into the premier investor event tool. LD Micro, Inc. was disposed of on March 3, 2023. See the accompanying financial consolidated financial statements for additional information.
Marketing and sales
We market our services through our in-house sales and marketing team. Our team focuses on social media, including Facebook, LinkedIn and Twitter, public relations (PR), industry events and the creation of white papers which assist in our marketing efforts and are used as lead generation tools.
Intellectual property
We currently rely on a combination of patents, trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary information. We currently have eight (8) US patent applications filed.
Financial Condition
Liquidity and Going Concern
As reflected in the accompanying consolidated financial statements, for the year ended December 31, 2022, the Company had:
Net loss of $31,638,000; and
Net cash used in operations was $12,327,000
Additionally, at December 31, 2022, the Company had:
Accumulated deficit of $61,993,000
Stockholders’ deficit of $9,294,000; and
Working capital deficit of $12,866,000
The Company anticipates that it will need to raise additional capital immediately in order to continue to fund its operations. The Company has relied on third parties for debt based funding of its operations. There is no assurance that the Company will be able to obtain additional funds on commercially acceptable terms, if at all. There is also no assurance that the amount of funds the Company might raise will enable the Company to complete its initiatives or attainprofitable operations.
The Company’s operating needs include the planned costs to operate its business, including amounts required to fund working capital and capital expenditures. The Company’s future capital requirements and the adequacy of its available funds will depend on many factors, including the Company’s ability to successfully expand to new markets, competition, and the need to enter into collaborations with other companies or acquire other companies to enhance or complement its product and service offerings.
There can be no assurances that financing will be available on terms which are favorable, or at all. If the Company is unable to raise additional funding to meet its working capital needs in the future, it will be forced to delay, reduce, or cease its operations.
The Company is heavily reliant on its ability to convert its marketable securities into cash. The ability to sell these investments have inherent limitations such as legal restrictions/holding periods and illiquid markets.
In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months ended December 31, 2023, and our current capital structure including equity-based instruments, obligations and debts. Additionally, this assessment was made as of the date of these consolidated financial statements.
We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company had cash on hand of $7,000 at December 31, 2022.
The Company has historically incurred significant losses since inception and has not demonstrated an ability to generate sufficient revenues from the sales of its products and services to achieveprofitable operations.
These factors create substantial doubt about the Company’s ability to continue as a going concern within the twelve-month period subsequent to the date that these financial statements are issued.
The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Cash, cash equivalents and marketable securities
Cash consist primarily of highly liquid investments such as money market funds and deposits held at major banks. Certain of such unused amounts are subject to satisfying specified conditions prior to draw-down (such as pledging to our lenders sufficient subscriptions and customer contracts).
Our cash, cash equivalents and marketable securities were as follows for the years ended December 31, 2022 and 2021 as follows:
For the Year Ended December 31,
Year over Year Changes
Cash, cash equivalents and marketable securities
Results of Operations
Revenues
Sequire Platform: We recognize revenue from the licensing of our Sequire platform, data, marketing and insight services performed in conjunction with the Sequire platform. We recognize revenue using the percentage of completion method based primarily on time.
Conference Revenue: We recognize revenue from hosting conferences and associated sponsorships. We receive payment from presenting companies and sponsors of the conferences.
The following table presents revenues by type for the years ended December 31, 2022 and 2021 as follows:
For the Year Ended December 31,
Year over Year Changes
Revenue
Revenue
% of Revenues
Revenue
% of Revenues
$ Amount
% Change
Sequire SaaS platform revenue
LD Micro - conference revenue
Total Revenues
Sequire SaaS platform revenues remained consistent year over year as operations for this portion of the business were relatively unchanged. Sequire’s customer base did not grow further in 2022, this primarily has to do with the Company switching to cash as compensation for services rendered as compared to accepting marketable securities, which was the more common form of payment earlier in 2022 and 2021.
LD Micro conference revenues increased primarily due to additional events in 2022.
Operating Costs and Expenses
Cost of revenue. Our cost of revenue consists primarily of expenses associated with the cost of media from third parties, such as costs we incur to market our products, data service fees and third-party selling costs as well as certain employee related and platform costs (salaries, technology and content hosting for Sequire). If the estimated consideration expected to be received under a revenue contract less than the estimated cost to fulfill our obligations under the contract, the Company will record a liability for the estimated cost in excess of estimated consideration in the period this is known.
Depreciation and Amortization. Depreciation and Amortization cost represent an allocation of the costs incurred to acquire the long-lived assets used in our business over their estimated useful lives. Our long-lived assets consist of computers, office equipment, and furniture.
General and administrative. General and administrative expense consists primarily of human resources, information technology, professional fees, IT and facility overhead, and other general corporate expenses. We expect our general and administrative expense to increase primarily as a result of the increased costs associated with being a stand-alone public company, specifically, our professional fees. However, we also expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of related expenses.
The following table represents our operating expenses for the years ended December 31, 2022 and 2021, respectively.
For the Year Ended December 31,
Year over Year Changes
Operating Expenses
Amount
% of Revenues
Amount
% of Revenues
$ Amount
% Change
Cost of revenues
Depreciation and amortization
General and administrative expenses
Total Operating Expenses
Cost of revenues increased in 2022 from 2021 primarily due to an increase in data and media costs required to support the Company’s growth and expected expansion.
Depreciation and amortization decreased in 2022 from 2021 primarily due to property and equipment having a lower net book value as well as an impairmentloss of $41,000 sustained in 2022.
General and administrative expenses decreased due to employee benefits, officer compensation, professional fees and advertising as well as other general corporate overhead expenses.
Other Income (Expense)
During the years ended December 31, 2022 and 2021, the Company incurred various one-time charges related to impairments, as well as changes to the Company’s marketable securities related to realized losses and changes in fair value (unrealized gains/losses).
The following table represents our operating expenses for the years ended December 31, 2022 and 2021, respectively.
For the Year Ended December 31,
Year over Year Changes
Other income (expense)
Amount
% of Revenues
Amount
% of Revenues
$ Amount
% Change
Interest expense
Impairment - goodwill
Impairment - intangibles
Impairment - property and equipment
Impairment - marketable securities
Loss on sale of note receivable
Realized gain (loss) - marketable securities
Unrealized gain (loss) - marketable securities
Change in fair value - contract assets
Realized gain (loss) - designated assets
Unrealized loss - designated assets
Change in fair value - preferred stock
Make-whole provision
Interest income
Other income (expense)
Total Operating Expenses
Interest expense decreased to ($4,391,000) in 2022 from ($10,295,000) in 2021 with less debt outstanding. Additionally, the majority of the change in interest costs related to a warrant inducement expense totalling $7,737,000.
Impairment of goodwill ($10,200,000) and intangible assets ($1,481,000) in 2022 related to the disposal and related discontinued operations of the Company’s legacy businesses Steel Media and Five Delta.
Impairment of property and equipment ($41,000) in 2022 related to certain items of equipment identified as no longer having any future economic benefit.
Impairment of marketable securities of $3,664,000 in 2022 relate to those securities whose fair value has declined on an other than temporary basis and deemed permanent. The Company analyzes all of its holdings at least annually, or sooner if circumstances require an assessment to ascertain fair value, and with the assistance of a third party independent valuation specialist concluded that there was sufficient evidence to support the impairmentloss.
Loss on note receivable of $47,000 in 2022 related to an investment that the Company elected to receive cash proceeds for, which were less than the carrying amount of the note receivable, in order to settle the outstanding amount due.
Realized gains and losses on marketable securities are determined by comparing the basis of these financial instruments to their exit price. The sale of these securities may be influenced by market timing as well as the Company’s need for additional capital.
Unrealized gains and losses on marketable securities is a measure of the change in fair value at each reporting period.
Contract assets represent securities that are due to the Company as payment for services to be rendered, but have not yet been sent to the Company for deposit. The value of these securities is known on the commitment date, and are subject to mark to market adjustments while held.
Realized gains and losses on designated assets for return of capital are determined by comparing the basis of these financial instruments to their exit price. The sale of these securities may be influenced by market timing as well as the Company’s need for additional capital. Additionally,
Unrealized gains and losses on designated assets for return of capital is a measure of the change in fair value at each reporting period.
Change in fair value of preferred stock is a measure of the change in fair value at each reporting period.
Make-whole provision of $240,000 in 2022 related to an additional amount due to a vendor in connection with an agreement requiring payment in the event certain conditions of that agreement were not satisfied timely.
Interest income for both 2022 and 2021 are insignificant.
Other income (expense) relates to items not otherwise classified above.
Net Loss
The following table represents our net loss (including non-controlling interest) for the years ended December 31, 2022 and 2021, respectively.
For the Year Ended December 31,
Year over Year Changes
Amount
Amount
$ Amount
% Change
Net Loss
As further discussed above, the net loss decreased by $9,589,000 or 23.26% from 2021 to 2022. The decrease primarily included significant amounts for impairment of goodwill, intangibles, property and equipment, and marketable securities aggregating $15,386,000, offset largely by a reduction of interest expense of $5,904,000. However, in 2022, the Company had income from operations of $4,003,000 compared to a loss from operations of ($85,000) in 2021.
Finally, in 2022, the Company had a net loss of $31,638,000. In 2021, and the largest component of the change from 2021 to 2022 was the Company reflected a net loss of $41,227,000, which included a loss from discontinued operations of $25,060,000 (See Note 2 to the consolidated financial statements). This loss was comprised of a loss on discontinued operations of $14,376,000 combined with a loss on disposal of subsidiary of $10,684,000.
Discontinued Operations represent the results from operations of BIGToken. Upon the deconsolidation of BIGToken, its operating results, assets, liabilities and cash flows for all periods presented have been classified as discontinued operations within the Consolidated Financial Statements.
Cash Flows
Our cash, cash equivalents and marketable securities on hand at December 31, 2022 and 2021 were as follows:
For the Year Ended December 31,
Year over Year Changes
Cash, cash equivalents and marketable securities
The Company actively liquidates its marketable securities to meet its current obligations.
The following table represents our net cash flows for the years ended December 31, 2022 and 2021, respectively.
For the Year Ended December 31,
Year over Year Changes
Increase (Decrease)
Net Cash Provided by (Used in)
Amount
Amount
$ Amount
% Change
Operating activities
Investing activities
Financing activities
Net change in cash and cash equivalents
Cash Flows from Operating Activities
The primary use of cash used in operations is to pay our media, data and platform vendors, employees, and others for a wide range of services. Cash flows used in continuing operating activities decreased by 11,108,000 in 2022 to $12,327,000 from 2021 net cash used in operations of $23,435,000.
Net cash used in operations decreased for one time charges related to impairments of goodwill, intangibles, property and equipment, and marketable securities aggregating $15,386,000.
Other significant changes include:
net increases in 2022 of realized and unrealized losses of marketable securities totaling $7,719,000,
net decrease in forgiveness of payroll protection loan of $1,106,000,
net decrease in stock based compensation of $1,162,000,
net decrease in depreciation and amortization of intangible assets of $502,000,
the net change in cash used in operations in 2022 was $12,327,000, a decrease of $2,990,000 from 2021 and consisted of changes affecting items previously mentioned as well as operating assets and liabilities as follows:
accounts receivable ($1,135,000),
contracts receivable (988,000),
due from related party ($263,000),
prepaid and other current assets of $1,219,000,
designated assets for return of capital of $684,000,
note receivable (accrued interest receivable) of $30,000,
accounts payable and accrued expenses of $2,815,000,
accounts payable and accrued expenses – related party of $159,000,
deferred revenue ($2,096,000),
deferred income tax liability of $131,000,
other current liabilities of $468,000; and
operating lease liability of $53,000.
In 2021, the Company had net cash used in discontinued operations of $8,118,000 as compared to $0 in 2022.
Total net cash used in operating activities for 2022 was $12,327,000 as compared to $23,435,000 in 2021.
The Company expects to continue to use cash in excess of receipts generated from operations for the foreseeable future as accepting cash in lieu of marketable securities for services rendered is lower, with no potential for capital appreciation.
Cash Flows from Investing Activities
For the year ended December 31, 2022, we generated $6,186,000 of net cash provided by investing activities as compared to $4,839,000 in 2021.
The primary driver of our investing activities relates to our proceeds from the sale of marketable securities of $5,221,000 in 2022 as compared to $8,666,000 in 2021. Additionally, in 2021 we purchased marketable securities of $1,450,000 as well as made our deferred payments in connection with the acquisition of LD Micro totaling $3,004,000. There were no such comparative amounts in 2022. In 2022, we received proceeds from the sale of a note receivable for $900,000 as compared to $0 in 2021.
Cash Flows from Financing Activities
For the year ended December 31, 2022 we generated net cash from financing activities of $4,800,000 as compared to $15,443,000 in 2021.
The primary reasons for the change were as follows:
In 2022, we received net proceeds of $5,450,000 from a senior secured revolving credit facility as compared to $0 in 2021.
In 2021, we received net proceeds of $15,952,000 from the exercise of commons stock warrants, as compared to $0 in 2022.
Off Balance Sheet Arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
Liquidity and Capital Resource Requirements
We believe that our current sources of funds will not provide us with adequate liquidity including the ability to repay our remaining debt obligations within one year from the issuance date of these consolidated financial statements.
Our future capital requirements will depend on many factors; however, the Company’s current primary source of capital is the sale of marketable securities it has received as consideration for the licensing of our Sequire platform and the associated services.
The Company’s sales of marketable securities are primarily through sale transactions that qualify for exemptions pursuant to Rule 144 of the Securities Act of 1933. The conditions required to be met to qualify for the exemptions under Rule 144 are often difficult to predict, making it difficult to predict the timing of the associated cash flows from the sales of these securities.
The Company’s holdings of marketable securities are subject to risks and uncertainties such as fluctuations in pricing in the primary market, and legal restrictions that create uncertainty around realization and timing of cash flows.
Additionally, other factors contribute to uncertainty of our cash flows, such as our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of Sequire.
The Company projects the sale of its marketable security holding will represent a substantial portion of the cash required for operations for the foreseeable future, consequently creating substantial doubt about the Company’s ability to continue as a going concern.
We continually evaluate our cash needs and may decide it is best to raise additional capital or seek alternative financing sources to fund our operations. However, due to our delisting from NASDAQ, raising capital through the sale of our equity or debt securities will be more challenging as investors are historically less likely to purchase securities that are not listed on a national exchange.
Financing Arrangements
See Notes 6, 12 and 20 in the accompanying consolidated financial statements for a discussion of relevant financing arrangements.
Capital Allocation Framework
As noted above, after cash utilization required for working capital, capital expenditures, and required debt service, we expect that our primary usage of cash will be for business combinations, repayment of outstanding indebtedness, and/or stock repurchases under repurchase programs that may be in place from time to time (subject to the terms of our 2020 Credit Agreement). For further information regarding our recent stock repurchase program, see above.
Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies during the year ended December 31, 2022. Critical accounting policies and the significant estimates in accordance with such policies are regularly discussed with our Audit Committee.
Those policies are discussed under Note 3—Summary of Significant Accounting Policies, in the notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K filed with the SEC on September 20, 2024 for the fiscal year ended December 31, 2022.
Recently Issued Accounting Pronouncements
For further information on recently issued accounting pronouncements, see Note 3—Summary of Significant Accounting Policies in the accompanying notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K filed with the SEC.
