FORE PROT Prior to the completion of the Share Exchange, BIG Token was an operating segment of SRAX. OnFebruary 4, 2021 we completed the Share Exchange. As a result, BIG Token became our wholly owned subsidiary, and we adopted BIG Token's business plan. We anticipate formally changing our name to BIG Token in the future. In connection with the Share Exchange, we also entered into certain agreements with SRAX including but not limited to theTSA and MSA, as more fully described in this Annual Report. The terms of these agreements may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. Company Overview
We are a data technology company offering a consumer-based application that allows consumers to own and earn from their digital identity and data. We generate revenue by providing this data, insights and the ability to connect with our users, to marketers. Our consumer-based platform and technologies offer tools and services to identify and reach their target consumers. Our technologies assist our clients in: (i) identifying their core consumers and such consumers' characteristics across various channels in order to discover new and measurable opportunities that amplify the performance of marketing campaign in order to maximize a return on marketing spend. 29 Our Relationship with SRAX
Arrangements Between SRAX and Our Company
Pursuant to the completion of the Share Exchange, we entered into:
? a master separation agreement, or MSA; ? a transition services agreement, orTSA ;
The agreements provide a framework for our relationship with SRAX after the separation and provide for the allocation between us and SRAX of SRAX's assets, employees, liabilities and obligations (including its investments, property and employee benefits assets and liabilities) attributable to periods prior to, at and after our separation from SRAX, specifically,
Arrangements Between SRAX and Our Company
SRAX currently owns 95% of the voting power of our capital stock. Notwithstanding, pursuant to the sale of our Series B Preferred Stock onMarch 12, 2021 , we are required to convert an aggregate of 57,748.27 shares of Series B Preferred Stock into approximately 82,343,910,015 shares of Common Stock subsequent to the effectiveness of the Company's amendment to its articles of incorporation decreasing the par value of the Company's Common Stock. Subsequent to such conversions, assuming no further issuances, SRAX will own approximately 64% of the voting power of our capital stock. For as long as SRAX continues to control more than 50% of our outstanding common stock, SRAX or its successor-in-interest will be able to direct the election of all the members of our board of directors. Similarly, SRAX will have the power to determine matters submitted to a vote of our stockholders without the consent of our other stockholders, will have the power to prevent a change in control of us and will have the power to take certain other actions that might be favorable to SRAX. In addition, the MSA provides that, as long as SRAX beneficially owns at least 50% of the total voting power of our outstanding capital stock entitled to vote in the election of our board of directors, we will not (without SRAX's prior written consent) take certain actions, such as incurring additional indebtedness and acquiring businesses or assets or disposing of assets in excess of certain amounts.
Components of Operating Results
Revenue Our revenues consist of the sale of consumer data obtained through the BIGtoken platform in conjunction with various marketing related services, such as the following:
? The use of BIGtoken user surveys and the sale of such information received
from surveys.
? The creation and management of targeted rewards and loyalty programs based on
information and buying trends ascertained by data captured on our BIGtoken
platform.
? The ability to assist our customers in conducting market research based on
analytics received from users of the BIGtoken platform
? The ability to identify specific audiences for our customers and to target
questions, surveys and data analytics geared toward our customers' products /
industries. Additionally, if we are unable to scale the needed information for
a customer's target audience, we may utilize our proprietary analytics to gain
insight to further focus and refine user segments that need to be targeted in
order to optimize data and media spend
? The use of Lightning Insights that allow our customers to conduct research
around specific audience groups through both long and short research studies
? The creation of customized loyalty programs that utilize rewards to drive
consumer purchasing habits.
Our revenue can vary based on a number of factors, including changes in the overall advertising and data markets, user adoption of the BIGtoken platform, the effectiveness of our audience targeting abilities; changes in technology; and adoption of our current and future BIGtoken product offerings. 30 Cost of Revenue
Cost of revenue consists of the costs of media and other third-party costs incurred in conjunction with the marketing related services we provide.
Our cost of revenue as a percentage of revenue can vary based upon a number of factors, including those that may affect our revenue set forth above and factors that may affect our cost of revenue, including, without limitation: the cost of media utilized to perform our marketing services, the volume of media or the effectiveness of our services. From time to time, however, we may experience fluctuations in our gross margin as a result of the factors discussed above. Employee related costs
Employee related costs consist of salaries other compensation and related costs paid to our employees and contractors. We expect these costs to increase in absolute dollars as we invest and expand our business.
Marketing and selling expenses
Marketing and selling expenses consist primarily of advertising, corporate communications and user acquisition related costs. We expect our sales and marketing expense to increase in absolute dollars for the foreseeable future as we continue to invest in brand marketing to strengthen our competitive position, to accelerate growth and to raise brand awareness. Platform costs
Platform costs consist the technology and content hosting of our BIGtoken platform. We expect these costs to increase in absolute dollars for the foreseeable future as we continue to expand our user base.
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 property and equipment and internally developed software.
General and Administrative General and administrative expense consists primarily of human resources, information technology, professional fees, IT and facility overhead, and other general corporate expense. We expect our general and administrative expense to increase in absolute dollars primarily as a result of the increased costs associated with being a stand-alone public company. 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 such expense. Covid-19 InDecember 2019 , an outbreak of a novel strain of coronavirus (COVID-19) originated inWuhan, China and has since spread to a number of other countries, including theU.S. OnMarch 11, 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. In addition, several states in theU.S. , includingCalifornia , where the Company is headquartered, have experienced an increase of new cases of COVID-19. It is uncertain if this trend will continue into the 2021, as shown by the recent uptick in reported cases. The COVID-19 outbreak is disrupting supply chains and affecting production and sales across a wide range of industries. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees and vendors all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain. Results of Operations We operate as one operating and reportable segment. The following table sets forth, for the periods presented, the combined statements of operations data, which we derived from the accompanying financial statements. For the Years Ended December 31, 2020 2019 $ CHG % CHG REVENUE Total Revenue$ 2,168,000 $ 3,228,000 (1,060,000 ) -33 % Cost of revenue 800,000 1,613,000 (813,000 ) -50 % GROSS PROFIT 1,368,000 1,615,000 (247,000 ) -15 % Gross profit margin 63 % 50 % OPERATING EXPENSES Employee related costs 4,786,000 8,123,000 (3,337,000 ) -41 %
Marketing and selling expenses 1,167,000 2,515,000 (1,348,000 ) -54 % Platform Costs 1,157,000 1,251,000 (94,000 ) -8 % Depreciation and amortization 920,000 929,000 (9,000 ) -1 % General and administrative 1,919,000 4,778,000 (2,859,000 ) -60 % Total operating expenses 9,949,000 17,596,000 (7,647,000 ) -43 % LOSS FROM OPERATIONS (8,581,000 ) (15,981,000 ) 7,400,000 -46 % Other income (expense) Financing Costs (7,421,000 ) (694,000 ) (6,727,000 ) 969 % Interest income - 8,000 (8,000 ) -100 % Gains from marketable securities 305,000 50,000
255,000 510 %
Unrealized loss on marketable
securities - (6,000 )
Change in fair value of
derivative liabilities 196,000 1,000,000 (804,000 ) -80 %
Exchange gain - 19,000
Total other income (loss) (6,920,000 ) 377,000 (7,297,000 ) -1936 %
Loss before provision for income
taxes (15,501,000 ) (15,604,000 ) 103,000 -1 %
Provision for income taxes (5,000 ) - (5,000 ) n/a
Net loss $ (15,506,000 ) $ (15,604,000 ) 98,000 -1 %
BIGtoken revenues
BIGtoken revenues for the year-ended December 31, 2020 decreased to $2,168,000
or 33% compared to $3,228,000 during the year ended December 31, 2019 . This
decrease is primarily driven by the suspension of several of our customer's
marketing campaigns during the end of the first quarter and through the second
quarter.
31
BIGtoken Profit Margin
BIGtoken's costs of revenue consist of media acquired from third parties to fulfill the media and advertising components of our revenues. Profit margin for the year-endedDecember 31, 2020 increased to 63% as compared to 50% in 2019. The increase is driven by enhanced operational execution. Operating Expenses BIGtoken Operating Expenses Our operating costs for the year-endedDecember 31, 2020 declined to$9,949,000 or by 43% as compared to$17,596,000 for the year-endedDecember 31, 2019 . The decrease in operating expenses were attributable to the following: to the reductions in staffing related and other general administrative expenses attributable to our legacy media verticals, and the reduction of our BIGtoken point liability.
Employee Related Costs. These are the costs we incur to employ our staff. For
the year-ended
from
a decrease of
a reduction in employees in our sales and operations departments.
Platform costs. Consist of the technology and content hosting. Platform costs
for the full year ending
dollars as we continue to grow our user database but expect that they continue
to decrease as a percentage of our revenues.
Marketing, data services and sales. These are the costs for the full year
ending
ended
year-ended
redemptions and accruals for future redemptions. This represents a decrease of
General and administrative. General and administrative expense consists
primarily of human resources, information technology, professional fees, IT and
facility overhead, and other general corporate expense. General and
Administrative expenses were
ending
$2,859,000 or 60%. The decrease in expense in driven by a decrease in the allocation of corporate overhead of approximately$2,800,000 .
Interest Expense and Financing Cost
Our financing cost for the year-endedDecember 31, 2020 increased to$7,421,000 compared to$694,000 for 2019 for an increase of approximately$6,727,000 or 969%. The increase is driven by cost incurred by our Parent in order to fund operations through the sale of convertible debentures in June of 2020 as compared to financing the operations of the business through the sale of assets and equity securities in 2019.
Change in the Fair Value our Warrant Liabilities
Income or loss associated with the changes in the fair value of warrant liabilities have been recorded in other income for the full years endedDecember 31, 2020 and 2019 and represent a proportionate allocation of the income / (loss) our Parent has incurred attributable to the changes in the calculated value of warrants it issued through various financing transactions in 2017
through 2020.
Summary of Cash Flows
Full Year Ended December 31,
2020 2019
Net cash used in operating activities
(175,000 ) (748,000 ) Net cash provided by financing activities 4,497,000 8,194,000
Cash flows from operating activities
Our largest source of operating cash is payments from customers. Our customers typically pay us from 60 to 120 days from the date we invoice them. The primary use of operating cash is to pay our media suppliers, employees and our users through point redemptions, and others for a wide range of services. Cash flows used in our operating activities decreased by$3,162,000 or 42% in 2020 primarily driven by a reduction in operating expenses. 32
Cash flows from investing activities
Our principal recurring investing activity is the funding of our internal software development. Expenditures for software development were$572,000 and$748,000 for the years ended 2020 and 2019, respectively. During the year-ended 2020, the Company generated$397,000 from the sale of marketable securities
it held in a customer.
Cash flows from financing activities
Cash provided by financing activities represents cash contributed by our Parent to fund our operations. We have accounted for these cash contributions initially asNet Parent Investment within the equity section of our Carve-Out Balance Sheets. Upon the Reverse Merger, theNet Parent Investment has been presented as the par value and additional paid-in capital for the common stock and series A preferred stock equivalent number of shares received by SRAX from the Reverse Merger.
Cash provided by financing activities for the year ended
Liquidity and Capital Resources
Historically, our operations have participated in cash management and funding arrangements managed by SRAX. Cash flows related to financing activities primarily reflect changes in Net parent investment. Other than those that are in BIGtoken designated legal entities, SRAX's cash has not been assigned to us for any of the periods presented because those cash balances are not directly attributable to us. Cash and cash equivalents presented in the combined balance sheets represent amounts pertaining to the BIGtoken legal entity only. Cash used in operations decreased from$7,484,000 for the year endedDecember 31, 2019 to$4,322,000 for the year endedDecember 31, 2020 due primarily to a reduction in operating expenses. Prior to the Share Exchange, we were dependent on SRAX for our continued support to fund our operations. Upon the close of our Share Exchange, we obtained access to approximately$1,000,000 in cash on hand and have raised an additional$4,500,000 through a private offering of our Series B Preferred Stock. Our capital structure and sources of liquidity will change significantly from our historical capital structure. Following the Share Exchange, we expect to use cash flows generated from operations, together with$1,000,000 in cash on-hand and the proceeds of$4,500,000 from the sale of preferred stock, as our primary sources of liquidity. Based on our current plans and market conditions, we believe that such sources of liquidity will be sufficient to satisfy our anticipated cash requirements for at least through the third quarter of 2021. We plan on embracing digital assets such as cryptocurrencies going forward. At present we have not finalized any operating plans and accordingly, do not yet have an estimate of the amount of additional capital that such initiatives will require or the impact of such initiatives on our cash burn rate. However, we may require or desire additional funds to support our operating expenses and capital requirements or for other purposes, such as acquisitions, and may seek to raise such additional funds through public or private equity or debt financing or from other sources. We cannot assure you that additional financing will be available at all or that, if available, such financing would be obtainable on terms favorable to us and would not be dilutive. Our future liquidity and cash requirements will depend on numerous factors, including the introduction of new products and potential acquisitions of related businesses or technology. Going Concern
The Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues to achieved profitable operations. In addition, the Company's operations will require significant additional financing. As of the closing of the Series B offering the Company had cash and cash equivalents of approximately$5 million which is not sufficient to fund the Company's planned operations through one year after the date the consolidated financial statements are issued, and accordingly, these factors create substantial doubt about the Company's ability to continue as a going concern within one year after the date that the consolidated 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 consolidated 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. In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flow and cash usage forecasts, and obligations and debts. Although our Parent Company's management has a long history of successful capital raises, the analysis used to determine the Company's ability to continue as a going concern does not include cash sources outside the Company's direct control that management expects to be available within the next 12 months. 33
Arrangements Between SRAX and Our Company
We have entered into certain agreements that will affect the separation of our business from SRAX, provide a framework for our relationship with SRAX after the separation and provide for the allocation between us and SRAX of SRAX's assets, employees, liabilities and obligations (including its investments, property and employee benefits assets and liabilities) attributable to periods prior to, at and after our separation from SRAX, specifically: ? the MSA; and ? theTSA .
The material terms of each of these agreements are summarized below. These summaries are qualified in their entirety by reference to the full text of such agreements, which are filed as exhibits to our public filings. When used in this section, "separation date" refers to the date on which SRAX will contribute the BIG Token business to us, which will occur prior to the completion of this
Share Exchange.
The Master Separation Agreement
The MSA identifies assets to be transferred, liabilities to be assumed and contracts to be assigned to each of us and SRAX as part of the separation of SRAX into two companies, and will provide for when and how these transfers, assumptions and assignments will occur. In particular, the MSA provides for, among other things, that, subject to certain exceptions and the terms and conditions contained therein:
? the assets exclusively related to the businesses and operations of SRAX's BIG
Token business as well as certain other assets mutually agreed upon by SRAX
and BIG Token, which we collectively refer to as the "BIG Token Assets," will
be transferred to FPVD or one of our subsidiaries;
? certain liabilities (including whether accrued, contingent or otherwise)
arising out of or resulting from the BIG Token Assets, and other liabilities
related to the businesses and operations of SRAX's BIG Token business, which
we collectively refer to as the "BIG Token Liabilities," will be retained by
or transferred to us or one of our subsidiaries;
? certain shared contracts will be assigned in part to us or our applicable
subsidiaries or be appropriately amended.
Except as may expressly be set forth in the MSA or any other transaction
agreements, all assets will be transferred on an "as is," "where is" basis, and
the respective transferees will bear the economic and legal risks that (1) any
conveyance will prove to be insufficient to vest in the transferee good title,
free and clear of any security interest, and (2) any necessary consents or
governmental approvals are not obtained or that any requirements of laws or
judgments are not complied with.
Claims
In general, each party to the MSA will assume liability for all pending, threatened and unasserted legal matters related to its own business or its assumed or retained liabilities and will indemnify the other party for any liability to the extent arising out of or resulting from such assumed or retained legal matters.
Intercompany Accounts The MSA provides that, subject to any provisions in the MSA or any other transaction agreement to the contrary, at or prior to the separation from SRAX, all intercompany accounts between SRAX and its subsidiaries, on the one hand, and BIG Token and its subsidiaries, on the other hand, will be settled. 34 Further Assurances To the extent that any transfers or assignments contemplated by the MSA have not been consummated on or prior to the date of the separation, the parties will agree to cooperate to effect such transfers as promptly as practicable following the date of the separation. In addition, each of the parties will agree to cooperate with the other party and use commercially reasonable efforts to take or to cause to be taken all actions, and to do, or to cause to be done, all things reasonably necessary under applicable law or contractual obligations to consummate and make effective the transactions contemplated by the MSA and the other transaction agreements.
Financial Covenants; Auditors and Audits; Annual Financial Statements and Accounting
We have agreed that, for so long as SRAX is required to consolidate our results of operations and financial position or account for its investment in our company under the equity method of accounting, we will, among other things:
? maintain disclosure controls and procedures and internal control over
financial reporting that will provide reasonable assurance that, among other
things, (1) our annual and quarterly financial statements are reliable and
timely prepared in accordance with GAAP and applicable law, (2) our
transactions are recorded as necessary to permit the preparation of our
financial statements, (3) receipts and expenditures are authorized at the
appropriate level within BIG Token and (4) unauthorized uses and dispositions
of assets that could have a material effect on our financial statements are
prevented or detected in a timely manner;
? maintain the same fiscal year as SRAX;
? establish a disclosure committee that will review our Forms 10-Q, 10-K and
other significant filings with the
selected by SRAX to attend such committee's meetings;
? not change our independent auditors without SRAX's prior written consent;
? use our reasonable best efforts to enable our independent auditors to complete
their audit of our financial statements in a timely manner so as to permit
timely filing of SRAX's financial statements;
? provide to SRAX and its independent auditors all information required for SRAX
to meet its schedule for the filing and distribution of its financial
statements and to make available to SRAX and its independent auditors all
documents necessary for the annual audit of our company as well as access to
the responsible company personnel so that SRAX and its independent auditors
may conduct their audits relating to our financial statements;
? adhere to certain specified SRAX accounting policies and notify and consult
with SRAX regarding any changes to our accounting principles and estimates
used in the preparation of our financial statements, and any deficiencies in,
or violations of law in connection with, our internal control over financial
reporting;
? coordinate with SRAX regarding the timing and content of our earnings releases
and cooperate fully (and cause our independent auditors to cooperate fully)
with SRAX in connection with any of its public filings; and
? promptly report in reasonable detail to SRAX the following events or
circumstances that we become aware of: (1) significant deficiencies and
material weaknesses which are reasonably likely to adversely affect our
ability to report financial information; (2) any fraud that involves
management or other employees
control over financial reporting; (3) illegal acts; and (4) any report of a
material violation of law made pursuant to the
35 Indemnification
In addition, the MSA provides for cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of SRAX's business with SRAX. Specifically, each party will indemnify, defend and hold harmless the other party, its affiliates and subsidiaries and their respective officers, directors, employees and agents (collectively, the "indemnified parties") for any losses arising out of or otherwise in connection with:
? the liabilities that each such party assumed or retained pursuant to the MSA
(which, in our case, would include the BIG Token Liabilities and, in the case
of SRAX, would include the SRAX Liabilities) and the other transaction
agreements;
? the failure of SRAX or us to pay, perform or otherwise promptly discharge any
of the SRAX Liabilities or the BIG Token Liabilities, respectively, in
accordance with their terms, whether prior to, at or after the separation;
? any breach by such party of the MSA or the other transaction agreements (other
than the intellectual property rights cross-license agreement, which specifies
the parties' obligations therein); and
? except to the extent relating to a BIG Token Liability, in the case of SRAX,
or a SRAX Liability, in our case, any guarantee, indemnification or
contribution obligation, surety bond or other credit support agreement or
arrangement for the benefit of SRAX or us, respectively.
We will also indemnify, defend and hold harmless the SRAX indemnified parties
for any losses arising out of or otherwise in connection with any untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, with respect to all information (1)
contained in any of our public filings with the SEC following the Share Exchange
or (3) provided by us to SRAX specifically for inclusion in SRAX's annual or
quarterly or current reports following the Share Exchange to the extent (A) such
information pertains to us or the BIG Token business or (B) SRAX has provided
prior written notice to us that such information will be included in one or more
annual or quarterly or current reports, specifying how such information will be
presented, and the information is included in such annual or quarterly or
current reports (except, in the case of clause (B), for liabilities arising out
of or resulting from, or in connection with, any action or inaction of any
member of SRAX, including as a result of any misstatement or omission of any
information by SRAX to us).
SRAX will also indemnify, defend and hold harmless the BIG Token indemnified
parties for any losses arising out of or otherwise in connection with any untrue
statement or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, with respect to all information (1)
contained in our registration statement on Form S-1, of which this Form 10 is a
part, or any Form 10 provided by SRAX specifically for inclusion therein to the
extent such information pertains to (A) SRAX or (B) SRAX's business (for the
avoidance of doubt, other than the BIG Token business) or (2) provided by SRAX
to us specifically for inclusion in our annual or quarterly or current reports
following the Share Exchange to the extent (A) such information pertains to (x)
SRAX or (y) SRAX's business (for the avoidance of doubt, other than the BIG
Token business) or (B) we have provided written notice to SRAX that such
information will be included in one or more annual or quarterly or current
reports, specifying how such information will be presented, and the information
is included in such annual or quarterly or current reports (except, in the case
of clause (B), for liabilities arising out of or resulting from, or in
connection with, any action or inaction of ours, including as a result of any
misstatement or omission of any information by us to SRAX.
The MSA also specifies procedures with respect to claims subject to indemnification and related matters.
Other Provisions The master separation agreement will also govern other matters related to the consummation of this Share Exchange and the distribution, the provision and retention of records, access to information, confidentiality, cooperation with respect to governmental filings and third-party consents and insurance. 36 Transition Services Agreement
In connection with the completion of this Share Exchange we entered into aTSA with SRAX pursuant to which SRAX will provide us with specified services for an indefinite period of limited time to help ensure an orderly transition following the separation. TheTSA specifies the calculation of our costs for these services. The cost of these services will be negotiated between us and SRAX. In general, the services will begin on the date of the closing of the Share Exchange and will cover a period generally not expected to exceed 12 months. We and SRAX have agreed to perform our respective services with substantially the same nature, quality, standard of care and service levels at which the same or similar services were performed by or on behalf of us or SRAX, as applicable, prior to the separation or, if not so previously provided, then substantially similar to those which are applicable to similar services provided to the affiliates or other business components of us or SRAX, as applicable. TheTSA generally provides that the applicable service recipient indemnifies the applicable service provider for liabilities that such service provider incurs arising from the provision of services other than liabilities arising from such service provider's gross negligence, bad faith or willful misconduct or material breach of theTSA , and that the applicable service provider indemnifies the applicable service recipient for liabilities that such service recipient incurs arising from such service provider's gross negligence, bad faith or willful misconduct or material breach of theTSA .
Employees and
As ofMarch 26, 2021 , we had 59 full-time employees. 2 are engaged in executive management such as our Chief Executive Officer, 33 in information technology including those participating in our research and development efforts, 15 in sales and marketing, 8 in integration and customer support and 1 in administration. All employees are employed "at will." We believe our relations with our employees are generally positive and we have no collective bargaining agreements with any labor unions. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new employees. The principal purposes of our equity and cash incentive plans are to attract, retain and reward personnel, whether existing employees or new hires, through the granting of stock-based and cash-based compensation awards. We believe that this increases value to our stockholders and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives.
As the success of our business is fundamentally connected to the well-being of our employees, we are committed to their health, safety and wellness. We provide our employees and their families with access to convenient health and wellness programs, including benefits that provide protection and security giving them peace of mind concerning events that may require time away from work or that impact their financial well-being; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees, as well as the community in which we operate, and which comply with government regulations, including working in a remote environment where appropriate or required.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount in our carve-out financial statements and related notes. On an ongoing basis, we evaluate estimates which are subject to significant judgment. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 1 to our carve-out financial statements for the years endedDecember 31, 2020 and 2019 appearing elsewhere in this report. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our carve-out financial statements. In addition, you should refer to our accompanying carve-out balance sheets as ofDecember 31, 2020 and 2019, and the carve-out statements of operations, changes in stockholders' equity and cash flows for the fiscal years endedDecember 31, 2020 and 2019, and the related notes thereto, for further discussion of our accounting policies. On an ongoing basis, we evaluate our estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
We believe the assumptions and estimates associated with the following have the greatest potential impact on our consolidated financial statements.
Use of Estimates The Carve-Out Financial Statements have been prepared in conformity withU.S. GAAP and requires management of the Company to make estimates and assumptions in the preparation of these Carve-Out Financial Statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the Carve-Out Financial Statements and the reported amounts of revenue and expenses during the reporting period. 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, provision for bad debts, BIGtoken point redemption liability, stock-based compensation, income taxes, goodwill and intangible assets.
As ofDecember 31, 2020 , the impact of COVID-19 continues to unfold and as a result, certain estimates and assumptions require increased judgment and carry a higher degree of variability and volatility that could result in material changes to our estimates in future periods.
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 Company's 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-Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
Level 2-Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and
Level 3-Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
37 The determination of fair value and the assessment of a measurement's placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management's assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.
The Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. AtDecember 31, 2020 and 2019, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments. The Company measures certain non-financial assets, liabilities, and equity issuances at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as long-lived assets and goodwill for impairment; allocating value to assets in an acquired asset group; and applying accounting for business combinations. MARKETABLE SECURITIES Shares received will be accounted for in accordance with ASC 320 - Investments - Debt and Equity Securities, as such the shares will be classified as available-for-sale securities and will be measured at each reporting period at fair value with the unrealized gain (loss) as a component of other income (expense). Upon the sale of the shares, the Company will record the gain (loss) in the carve-out statement of operations as a component of other income (expense). 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 year endedDecember 31, 2020 and 2019, respectively. 38 Intangible assets
Intangible assets consist of the Company's intellectual property of internally developed software and are stated at cost less accumulated amortization. Amortization is provided for on the straight-line basis over the estimated useful lives of the assets of five to nine years.
Costs incurred to develop computer software for internal use are capitalized once: (1) the preliminary project stage is completed, (2) management authorizes and commits to funding a specific software project, and (3) it is probable that the project will be completed and the software will be used to perform the function intended. Costs incurred prior to meeting the qualifications are expensed as incurred. Capitalization of costs ceases when the project is substantially complete and ready for its intended use. Post-implementation costs related to the internal use computer software, are expensed as incurred. Internal use software development costs are amortized using the straight-line method over its estimated useful life which ranges up to three years. Software development costs may become impaired in situations where development efforts are abandoned due to the viability of the planned project becoming doubtful or due to technological obsolescence of the planned software product.
During 2018, the Company began to capitalize the costs of developing internal-use computer software, including directly related payroll costs.
The Company capitalizes costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business process reengineering costs are expensed in the period in which they are incurred.Goodwill 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 tests goodwill for impairment for its reporting units on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit is below its carrying value. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that implied fair value of the goodwill within the reporting unit is less than its carrying value. The Company performed its most recent annual goodwill impairment test as ofDecember 31, 2020 using market data and discounted cash flow analysis. Based on this analysis, it was determined that the fair value exceeded the carrying
value of its reporting units. 39
The Company had historically performed its annual goodwill and impairment
assessment on
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 the impairment testing methodology primarily
using the income approach (discounted cash flow method).
We compare the carrying value of the goodwill, with its fair value, as
determined by a combination of the market approach and income approach, its
estimated discounted cash flows. If the carrying value of goodwill exceeds its
fair value, the excess amount will be recognized as an impairment charge. We
operate as one reporting unit.
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.
Revenue Recognition
BIGtoken applies Accounting Standards Codification ("ASC") Topic 606, Revenue
from Contracts with Customers ("ASC Topic 606"). The core principle of ASC 606
requires that an entity recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods or
services. ASC 606 defines a five-step process to achieve this core principle
and, in doing so, it is possible more judgment and estimates may be required
within the revenue recognition process than required under existing U.S. GAAP
including identifying performance obligations in the contract, estimating the
amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation.
The following five steps are applied to achieve that core principle:
? Step 1: Identify the contract with the customer; ? Step 2: Identify the performance obligations in the contract; ? Step 3: Determine the transaction price;
? Step 4: Allocate the transaction price to the performance obligations in the
contract; and
? Step 5: Recognize revenue when the company satisfies a performance obligation.
Under current and prior revenue guidance, revenues are recognized when control of the promised goods or services are transferred to the customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those good or services. 40 Stock-Based Compensation The Company's employees have historically participated in SRAX's stock-based compensation plans. Stock-based compensation expense has been allocated to the Company based on the awards and terms previously granted to the Company's employees as well as an allocation of SRAX's corporate and shared functional employee expenses. We account for our stock-based compensation under ASC 718 "Compensation - Stock Compensation" using the fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. 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. Income taxes
The Company's operations have historically been included in SRAX's combinedU.S. income tax returns. Income tax expense included in the Carve-Out Financial Statements has been calculated following the separate return method, as if the Company was a stand-alone enterprise and a separate taxpayer for the periods presented. The calculation of income taxes on a separate return basis requires considerable judgment and the use of both estimates and allocations that affect the calculation of certain tax liabilities and the determination of the recoverability of certain deferred tax assets, which arise from temporary differences between the tax and the Carve-Out Financial Statement recognition of revenues and expenses. As a result, the Company's deferred income tax rate and deferred tax balances may differ from those in SRAX's historical results. 41
The provision for income taxes is determined using the asset and liability approach. Deferred taxes represent the future tax consequences expected when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes result from differences between the Carve-Out Financial Statement and tax bases of the Company's assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In evaluating the Company's ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of operations. Any tax carryforwards reflected in the Carve-Out Financial Statements have also been determined using the separate return method. Tax carryforwards include net operating losses. The complexity of tax regulations requires assessments of uncertainties in estimating taxes the Company will ultimately pay. The Company recognizes liabilities for anticipated tax audit uncertainties based on its estimate of whether, and the extent to which additional taxes would be due on a separate return basis. Tax liabilities are presented net of any related tax loss carryforwards.
Recently Issued Accounting Pronouncements
For further information on recently issued accounting pronouncements, see Note 1-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 this Annual Report on Form 10-K.
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.
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