FORE PROT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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 "Cautionary Note Regarding Forward-Looking Statements" and under "Risk Factors" and elsewhere in this quarterly report. The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this quarterly report.
Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
OnFebruary 4, 2021 , we completed the Exchange Agreement to acquire the operations ofBIGtoken, Inc. ("BIGtoken") from SRAX, Inc. ("SRAX" or "Parent"). As a result, BIGtoken became our wholly owned subsidiary, and we adopted BIGtoken's business plan. We anticipate formally changing our name to BIGtoken in the future. In connection with the Exchange Agreement, we also entered into certain agreements which include but are not limited to a transition service agreement ("TSA") and a master separation agreement ("MSA"), as more fully described in this Quarterly 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 that generates revenue from providing enterprise customers with the opportunity to access consumers directly, with permission-based and authenticated data, for the purposes of more efficiently and effectively allocating marketing budgets and executing on related campaigns, conducting market research and building unique, valuable, first party, proprietary databases. We do this via our consumer-based application that allows consumers to own and earn from their digital identity and data. Acquisition Strategy The Company's current business plan includes an acquisition strategy to expand and augment our current product offerings and technologies. Our acquisition strategy consists of evaluating new companies and technologies in the ad-tech industry that could be synergistic to us with the goal of developing such technologies with our BIGtoken platform. We believe that this element of our corporate strategy could provide new opportunities for product development and diversify risks inherent in focusing solely on the BIGtoken platform. 4 Recent Business Highlights
During the quarter ended
? The Company evaluated data from a test of a change to its user payment policy
and continued weekly payouts to its users. This resulted in higher expenses,
but also higher number of users as well as user engagement.
? Between March and
accredited investors resulting in the issuance of 48,098 shares of Series B
Preferred Stock, which was subsequently converted into shares of Common Stock.
The Company invested in marketing tests for the purposes of user acquisition,
resulting in accelerated growth of users as well as intelligence about
optimization of marketing spend across channels.
? We advanced our proprietary fraud detection techniques to protect the
integrity of our user payouts? We expanded our sales force capabilities to include selling BIGtoken services
to new industry verticals and markets
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 ; These 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, Pursuant to the sale of our Series B Preferred Stock we converted an aggregate of 48,098 shares of Series B Preferred Stock into approximately 68,583,866,100 shares of Common Stock. Subsequent to such conversions, SRAX owns approximately 64% of the voting power of our capital stock. As of the date hereof, there are 10,500 shares of Series B Preferred Stock that have not been converted into shares of Common Stock as a result of beneficial ownership limitations. 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;
and
? The creation of customized loyalty programs that utilize rewards to drive
consumer purchasing habits.
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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. 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. Operating Expenses Employee related costs
Employee related costs consist of salaries and other compensation and related costs we incur to employ our staff. 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 as well as costs related to the redemption of BIG Token points from our users. We expect these costs to continue to increase in absolute dollars as we continue to grow our user database, invest in brand marketing to strengthen our competitive position and increase brand awareness, but expect that they continue to decrease as a percentage of our revenues. Platform costs
Platform costs consist of 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. 6 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. 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 statements of operations data, which we derived from the accompanying financial statements. Three Months ended Nine Months ended September 30, September 30, 2021 2020 2021 2020 Revenues$ 765,000 $ 576,000 $ 2,469,000 $ 1,146,000 Cost of revenues 207,000 229,000 715,000 491,000 Gross profit 558,000 347,000 1,754,000 655,000 Operating expenses Employee related costs 947,000 554,000 2,649,000 3,630,000
Marketing and selling expenses 372,000 261,000 861,000 725,000 Platform costs 78,000 592,000 245,000 844,000 Depreciation and amortization 131,000 208,000 411,000 714,000 General and administrative expenses 1,089,000 222,000
3,153,000 1,593,000 Total operating expenses 2,617,000 1,837,000 7,319,000 7,506,000 Loss from operations (2,059,000 ) (1,490,000 ) (5,565,000 ) (6,851,000 ) Other income (expense): Financing costs - (2,009,000 ) - (3,624,000 ) Change in fair value of derivative liabilities - (37,000 ) - 218,000 Exchange gain or loss - 31,000 - 333,000 Total other income (expense) - (2,015,000 ) - (3,073,000 ) Loss before provision for income taxes (2,059,000 ) (3,505,000 )
(5,565,000 ) (9,924,000 )
Provision for income taxes - - - - Net loss (2,059,000 ) (3,505,000 )
(5,565,000 ) (9,924,000 )
Deemed dividend on series B convertible preferred stock - - (5,860,000 ) - Loss attributable to common stockholders$ (2,059,000 ) (3,505,000 )$ (11,425,000 ) $ (9,924,000 ) Revenues
Our revenues for the three-month period endedSeptember 30, 2021 , increased to$765,000 from$576,000 in the comparable period in 2020, a 33% increase. Revenues for the nine-month period endedSeptember 30, 2021 , increased to$2,469,000 from$1,146,000 in the comparable period in 2020, a 115% increase. These increases are primarily driven by the increased adoption by large advertising clients of the Company's media sales services. 7 BIGtoken Profit Margin Our costs of revenue consisted of media acquired from third parties to fulfill the media and advertising components of our revenues, as well as data partners. Our profit margin for the three-month period-endedSeptember 30, 2021 , increased to 73% as compared to 60% in 2020. Our profit margin for the nine-month period-endedSeptember 30, 2021 , increased to 71% as compared to 57% in 2020. The increase is driven by optimized usage of third-party services. Operating Expenses Our operating costs for the three-month period endedSeptember 30, 2021 , increased to$2,617,000 , or by 42%, as compared to$1,837,000 for the comparable period in 2020. Our operating costs for the nine-month period-endedSeptember 30, 2021 , decreased to$7,319,000 , or by 3% as, compared to$7,506,000 for the comparable period in 2020. The overall 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. We experienced an increase in professional fees for legal and other services related to ourFebruary 2021 share exchange transaction, capital fundraising, and the recently announced merger aggregating to$1,100,000 and employment of several consultants. Employee related costs. For the three-month period endedSeptember 30, 2021 , employee related costs increased to$947,000 from$554,000 in the prior year period, representing an increase of$393,000 , or approximately 71%. For the nine-month period endedSeptember 30, 2021 , employee related costs decreased to$2,649,000 from$3,630,000 in the prior year period, representing a decrease of 27%. The decrease is primarily due to a reduction in overhead related expenses from SRAX and employment of consultants. Marketing and selling expenses. For the three-month period-endedSeptember 30, 2021 , marketing and selling expenses increased to$372,000 from$261,000 in the prior year period, representing an increase of$111,000 , or approximately 43%. For the nine-month period endedSeptember 30, 2021 , marketing and selling expenses increased to$861,000 from$725,000 in the prior year period, representing an increase of 19%. While we optimized our marketing personnel, we increased our user acquisition expense and our payments to users grew as result of increased user engagement. Platform costs. For the three-month period-endedSeptember 30, 2021 , platform costs decreased to$78,000 from$592,000 in the prior year period, representing a decrease of$514,000 , or approximately 87%. For the nine-month period endedSeptember 30, 2021 , platform costs decreased to$245,000 from$844,000 in the prior year period, representing a decrease of 71%. As user engagement grows our technology costs for hosting our platform increases. Going forward, we expect these costs to grow as our user database does but expect that they continue to decrease as a percentage of our revenues. General and administrative. For the three-month period-endedSeptember 30, 2021 , general and administrative expenses increased to$1,089,000 from$222,000 in the prior year period, representing an increase of$867,000 , or approximately 391%. For the nine-month period endedSeptember 30, 2021 , general and administrative expenses increased to$3,153,000 from$1,593,000 in the prior year period, representing an increase of 98%. We experienced an increase in professional fees for legal and other services related to ourFebruary 2021 share exchange transaction, capital fundraising, and the recently announced merger aggregating to$1,100,000 and employment of several consultants. Financing Cost
During the three and nine months ended
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Change in the Fair Value of our Warrant Liabilities
During the three and nine months endedSeptember 30, 2021 , we operated as a stand-alone company separate from our parent SRAX. As such, we were responsible for our own financing and operating activities; therefore, the changes in fair value of warrant liabilities of our Parent were not allocated to us during 2021.
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