| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Uses and Sources of Liquidity Our primary need for liquidity is to fund working capital requirements of our business, development of internally used software and for general corporate purposes, including debt repayment. Our general, selling and administrative expenses increased from $3,344,445 for the three months ended June 30, 2017 to $5,414,790 for the three months ended June 30, 2018. Our general, selling and administrative expenses increased from $7,754,252 for the six months ended June 30, 2017 to $9,545,048 for the six months ended June 30, 2018. We incurred a loss of $2,997,846 for the three months ended June 30, 2018 compared to a net loss of $393,800 for the three months ended June 30, 2017. We incurred a loss of $6,607,466 for the six months ended June 30, 2018 compared to a net loss of $4,314,720 for the six months ended June 30, 2017. At June 30, 2018, we had an accumulated deficit of $27,756,172. As of June 30, 2018, we had $41,036 in cash and cash equivalents and a deficit in working capital of $3,420,869 as compared to $1,017,299 in cash and cash equivalents and a surplus in working capital of $1,124,023 at December 31, 2017. We continue to experience a period of limited liquidity resulting from the complete repayment of senior secured notes associated with a financing agreement previously held by Victory Park Management, LLC and the repurchase of the Series B Warrants, both in April 2017. Additionally, in October 2017 we satisfied all amounts outstanding to Victory Park Management, LLC related to its put right for the repurchase of the Financing Warrant (as defined in Note 8), amounting to $1,500,000 plus accrued interest. See Note 8 for a further discussion of this obligation. We acknowledge that we continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported losses and have historically funded our operations and investing activities with cash provided by financing activities. In late 2017, we announced several new initiatives that could provide additional revenue growth opportunities which are anticipated to launch in the second half of 2018. On August 6, 2018, we announced the completion of the sale of our SRAXmd product group in a transaction valued at up to $52.5 million. Although we believe that the foregoing actions will assist with our liquidity needs during the 12 months following the issuance of the financial statements, we cannot predict, with certainty, the outcome of our actions will generate liquidity or whether such actions would generate the expected liquidity as currently planned. If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, we may not be able to access additional funds and we might need to secure additional sources of funds, which may or may not be available to us under terms and conditions that are favorable to our success. Additionally, a failure to generate additional liquidity could negatively impact our access to services that are important to the operation of our business. Effect of ASU No. 2017-11 on Previously Issued Financial Statements In July 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Part 1 Accounting for Certain Financial Instruments with Down Round Features and Part 2 Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with Scope Exception Topic 480, Distinguishing Liabilities from Equity, FASB Accounting Standards Codification The Company early adopted the guidance under ASU 2017-11 for the year end December 31, 2017, and recognized warrants issued in 2017 with a down round feature as equity. Adjustments to the Companys previously issued financial statements were required for the retrospective application of this standard. As such the financial statements for three month and six month periods ended June 30, 2017 have been reclassified to reflect the adoption of ASU 2017-11. June 30, 2017 June 30, 2017 As Reported Adjustments As Adjusted Assets Current assets: Cash and cash equivalents $ 396,560 $ $ 396,560 Accounts receivable, net 7,597,427 7,597,427 Prepaid expenses 324,060 324,060 Other current assets 898 898 Total current assets 8,318,945 8,318,945 Property and equipment, net 63,545 63,545 Goodwill 15,644,957 15,644,957 Intangibles assets, net 940,613 940,613 Other assets 39,135 39,135 Total assets $ 25,007,195 $ $ 25,007,195 Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued expenses $ 12,097,107 $ $ 12,097,107 Note payable, net of unamortized costs Deferred revenue 135,032 135,032 Put warrant liability 338,414 (338,414 ) Debenture warrant liability 723,036 (723,036 ) Debenture conversion liability 689,942 (689,942 ) Put Liability 1,500,000 1,500,000 Total current liabilities 15,483,531 (1,751,392 ) 13,732,139 Secured convertible debentures, net 1,811,446 1,678,789 3,490,235 Total liabilities 17,294,977 (72,603 ) 17,222,374 Commitments and contingencies (Note 11) Stockholders' equity: Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued or outstanding at June 30, 2017 and December 31, 2016, respectively Class A common stock, authorized 50,000,000 shares, $0.001 par value, 8,025,017 and 6,951,077 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively 8,025 8,025 Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued or outstanding at June 30, 2017 and December 31, 2016, respectively Common stock to be issued Additional paid in capital 24,858,241 1,624,346 26,482,587 Accumulated deficit (17,154,048 ) (1,551,743 ) (18,705,791 ) Total stockholders' equity 7,712,218 72,603 7,784,821 Total liabilities and stockholders' equity $ 25,007,195 $ $ 25,007,195 Three Month Period ended Three Month Period ended June 30, 2017 June 30, 2017 As Reported Adjustments As Adjusted Revenue $ 5,979,688 $ $ 5,979,688 Cost of revenue 2,644,208 2,644,208 Gross profit 3,335,480 3,335,480 Operating expense General, selling and administrative expense 3,344,445 3,344,445 Write-off of non-compete agreement Restructuring costs Total operating expense, net 3,344,445 3,344,445 Loss from operations (8,965 ) (8,965 ) Other income (expense): Interest expense: Interest expense (197,267 ) (197,267 ) Amortization of debt issuance costs (187,568 ) (187,568 ) Total interest expense (384,835 ) (384,835 ) Loss on repurchase of Series B warrants (2,053,975 ) 2,053,975 Loss on repricing of Series A warrants (99,820 ) 99,820 Accretion of put warrants 459,162 (459,162 ) Accretion of debenture discount and warrants 1,350,746 (1,350,746 ) Total other income (expense) (728,722 ) 343,887 (384,835 ) Loss before provision for income taxes (737,687 ) 343,887 (393,800 ) Provision for income taxes Net loss $ (737,687 ) $ 343,887 $ (393,800 ) Net loss per share, basic and diluted $ (0.09 ) $ 0.04 $ (0.05 ) Weighted average shares outstanding, basic and diluted 8,025,017 8,025,017 Six Month Period ended Six Month Period ended June 30, 2017 June 30, 2017 As Reported Adjustments As Adjusted Revenue $ 11,305,852 $ $ 11,305,852 Cost of revenue 5,923,327 5,923,327 Gross profit 5,382,327 5,382,327 Operating expense General, selling and administrative expense 7,754,252 7,754,252 Write-off of non-compete agreement 468,751 468,751 Restructuring costs 377,961 377,961 Total operating expense, net 8,600,964 8,600,964 Loss from operations (3,218,439 ) (3,218,439 ) Other income (expense): Interest expense: Interest expense (330,573 ) (330,573 ) Amortization of debt issuance costs (765,708 ) (765,708 ) Total interest expense (1,096,281 ) (1,096,281 ) Loss on repurchase of Series B warrants (2,053,975 ) 2,053,975 Loss on repricing of Series A warrants (99,820 ) 99,820 Accretion of put warrants 2,353,725 (2,353,725 ) Accretion of debenture discount and warrants 1,350,746 (1,350,746 ) Total other income (expense) 454,395 (1,550,676 ) (1,096,281 ) Loss before provision for income taxes (2,764,044 ) (1,550,676 ) (4,314,720 ) Provision for income taxes Net loss $ (2,764,044 ) $ (1,550,676 ) $ (4,314,720 ) Net loss per share, basic and diluted $ (0.35 ) $ (0.19 ) $ (0.54 ) Weighted average shares outstanding, basic and diluted 7,954,294 7,954,294 Six Month Period Ended Six Month Period ended June 30, 2017 June 30, 2017 As Reported Adjustments As Adjusted Cash flows from operating activities Net loss $ (2,764,044 ) $ (1,550,676 ) $ (4,314,720 ) Adjustments to reconcile net loss to net cash used in operating activities: Stock based compensation 621,327 621,327 Amortization of debt issuance costs 612,168 612,168 Loss on repurchase of Series B warrants 2,053,975 (2,053,975 ) Loss on repricing of Series A warrants 99,820 (99,820 ) Accretion of put warrants (2,353,725 ) 2,353,725 Accretion of debenture discount and warrants (1,350,746 ) 1,350,746 Write-off of non-compete agreement 468,751 468,751 Amortization of debt discount 153,540 153,540 Provision for bad debts (21,433 ) (21,433 ) Depreciation expense 6,182 6,182 Amortization of intangibles 226,205 226,205 Changes in operating assets and liabilities: Accounts receivable 835,025 835,025 Prepaid expenses 8,443 8,443 Other current assets 1,115 1,115 Accounts payable and accrued expenses (1,058,976 ) (1,058,976 ) Unearned revenue 135,032 135,032 Net cash used in operating activities (2,327,341 ) (2,327,341 ) Cash flows from investing activities Purchase of equipment (14,235 ) (14,235 ) Development of software (270,328 ) (270,328 ) Net cash used in investing activities (284,563 ) (284,563 ) Cash flows from financing activities Proceeds from the issuance of common stock 3,820,001 3,820,001 Proceeds from secured convertible debentures, net 2,136,629 2,136,629 Repayments of note payable and PIK interest (3,996,928 ) (3,996,928 ) Net cash (used in) provided by financing activities 1,959,702 1,959,702 Net (decrease) increase in cash and cash equivalents (652,202 ) (652,202 ) Cash and cash equivalents, beginning of period 1,048,762 1,048,762 Cash and cash equivalents, end of period $ 396,560 $ $ 396,560 Supplemental schedule of cash flow information Cash paid for interest $ 649,199 $ $ 649,199 Cash paid for taxes $ $ $ Principles of Consolidation The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All material intercompany transactions and balances have been eliminated in consolidation. Use of Estimates The unaudited condensed consolidated financial statements have been prepared in conformity with GAAP and requires management of the Company to make estimates and assumptions in the preparation of these unaudited condensed consolidated financial statements 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 the reported amounts of revenue and expense during the reporting periods. Actual results could differ from these estimates and assumptions. The most significant areas that require management judgment and which are susceptible to possible change in the near term include the Company's revenue recognition, allowance for doubtful accounts and sales credits, stock-based compensation, income taxes, goodwill, other intangible assets, put rights and valuation of liabilities. Cash and Cash Equivalents The Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents. Revenue Recognition The Company has adopted the new revenue recognition guidelines in accordance with ASC 606, Revenue from Contracts with Customers The Company acts as a principal in revenue transactions as the Company is the primary obligor in the transactions. As such, revenue is recognized on a gross basis, and media and publisher expenses that are directly related to a revenue-generating event are recorded as a component of cost of revenue. Cost of Revenue Cost of revenue consists of payments to media providers and website publishers that are directly related to either a revenue-generating event or project and application design costs. The Company becomes obligated to make payments related to media providers and website publishers in the period the advertising impressions, click-through, actions or lead-based information are delivered or occur. Such expenses are classified as cost of revenue in the corresponding period in which the revenue is recognized in the accompanying unaudited condensed consolidated statements of operations. Accounts Receivable Credit is extended to customers based on an evaluation of their financial condition and other factors. Management periodically assesses the Company's accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company does not require collateral. Allowance for doubtful accounts was $54,277 and $59,703 at June 30, 2018 and December 31, 2017, respectively. Concentration of Credit Risk, Significant Customers and Supplier Risk Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions within the United States. The Company has not experienced any loss on these accounts. The balances are maintained in demand accounts to minimize risk. At June 30, 2018, three customers accounted for more than 10% of the accounts receivable balance for a total of 58.2%. At December 31, 2017, four customers accounted for more than 10% of the accounts receivable balance for a total of 59.5%. Fair Value of Financial Instruments The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Companys principal or, in absence of a principal, most advantageous market for the specific asset or liability. The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows: ● Level 1 — ● Level 2 — ● Level 3 — The Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At June 30, 2018 and December 31, 2017, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments. Derivative instruments are carried at fair value, generally estimated using the Black Scholes Merton model. Goodwill and annual impairment testing period Goodwill is comprised of the purchase price of business combinations in excess of the fair value assigned at acquisition to the net tangible and identifiable intangible assets acquired. Goodwill is not amortized. The Company assesses goodwill for impairment at least annually, or when events or changes in the business environment indicate the carrying value may not be fully recoverable. The Company also has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the Company to determine that it is more likely than not (that is, a likelihood of more than 50%) that goodwill is impaired. If the Company chooses to first assess qualitative factors and it is determined that it is not more likely than not goodwill is impaired, the Company is not required to take further action to test for impairment. The Company also has the option to bypass the qualitative assessment and perform only the quantitative impairment test, which the Company may choose to do in some periods but not in others. The Company performs its annual impairment review as of December 31 st The Company had historically performed its annual goodwill and impairment assessment on September 30 th st When evaluating the potential impairment of goodwill, management first assess a range of qualitative factors, including but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company's products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and the overall financial performance for each of the Company's reporting units. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then proceed to a two-step impairment testing methodology using the income approach (discounted cash flow method). In the first step of the two-step testing methodology, we compare the carrying value of the reporting unit, including goodwill, with its fair value, as determined by its estimated discounted cash flows. If the carrying value of a reporting unit exceeds its fair value, we then complete the second step of the impairment test to determine the amount of impairment to be recognized. In the second step, we estimate an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to 100% of the assets and liabilities other than goodwill (including any unrecognized intangible assets). If the carrying value of a reporting unit's goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference in that period. When required, we arrive at our estimates of fair value using a discounted cash flow methodology which includes estimates of future cash flows to be generated by specifically identified assets, as well as selecting a discount rate to measure the present value of those anticipated cash flows. Estimating future cash flows requires significant judgment and includes making assumptions about projected growth rates, industry-specific factors, working capital requirements, weighted average cost of capital, and current and anticipated operating conditions. The use of different assumptions or estimates for future cash flows could produce different results. The impairment charge represents the excess of the carrying amount of the goodwill recorded in the acquisition over the implied fair value of the goodwill. The implied fair value of the goodwill is the residual fair value based on an income approach that utilized a discounted cash flow model based on revenue and profit forecasts. The Company performed its annual impairment test and no impairment of goodwill was recorded for the twelve month period ended December 31, 2017. No interim impairments have been recorded regarding its goodwill during the three months ended June 30, 2018 or 2017, respectively. Long-lived Assets Management evaluates the recoverability of the Company's identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company's stock price for a sustained period of time; and changes in the Company's business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets' carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairments have been recorded regarding its identifiable intangible assets or other long-lived assets during the three months ended June 30, 2018 or 2017, respectively. Loss Per Share We use Accounting Standards Codification (ASC) 260, " Earnings Per Share There were 4,911,353 common share equivalents at June 30, 2018 and 5,913,372 common share equivalents at June 30, 2017. For the three months ended June 30, 2018 and 2017, respectively, these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share. Stock-Based Compensation We account for our stock-based compensation under ASC 718 " Compensation Stock Compensation We use the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. Common stock awards The Company grants common stock awards to non-employees in exchange for services provided. The Company measures the fair value of these awards using the fair value of the services provided or the fair value of the awards granted, whichever is more reliably measurable. The fair value measurement date of these awards is generally the date the performance of services is complete. The fair value of the awards is recognized on a straight-line basis as services are rendered. The share-based payments related to common stock awards for the settlement of services provided by non-employees is recorded on the consolidated statement of comprehensive loss in the same manner and charged to the same account as if such settlements had been made in cash. Warrants In connection with certain financing, consulting and collaboration arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date. Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants are recorded at fair value as expense over the requisite service period or at the date of issuance, if there is not a service period. Warrants granted in connection with ongoing arrangements are more fully described in Note 11, Stockholders Equity . Business Segments The Company uses the "management approach" to identify its reportable segments. The management approach designates the internal organization used by management for making operating decisions and assessing performance as the basis for identifying the Company's reportable segments. Using the management approach, the Company determined that it has one operating segment due to business similarities and similar economic characteristics. |
