FORE PROT The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding our business development plans, timing, strategies, expectations, anticipated expenses levels, business prospects and positioning with respect to market, demographic and pricing trends, business outlook, technology spending and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations) and express our current intentions, beliefs, expectations, strategies or predictions. These forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Special Note Regarding Forward-Looking Statements" and under "Risk Factors" and elsewhere in this 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:
Prior to the completion of the Share Exchange, BIGtoken was an operating segment
of SRAX. On
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.
Business Highlights
During the quarter ending
? Completed a share exchange transaction whereby we acquired 100% of the
outstanding capital stock of BIGtoken, and we adopted BIGtoken's business
plan.
? Between March and April 2021 , we sold $4,809,827 of equity securities to
accredited investors resulting in the issuance of 48,098 shares of Series B
Preferred Stock, which were subsequently converted into Common Stock.
? Augmented senior management with the appointment of George Stella , our Chief
Revenue Officer, to the additional position of President.
? Completed restructuring sales department to better serve existing clients and
expand capabilities.
? Adjusted platform matrix, which has initially resulted in enhanced user
engagement.
? Realigned BIGtoken platform to increase and better focus on domestic markets
until platform is ready for expansion.
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,
Arrangements Between SRAX and Our Company
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.
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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.
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 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 as well as costs related to the redemption of BIG Token points from our users. 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 increase brand awareness.
5 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.
Covid-19
In
Comparisons Used Herein
All of the below comparisons to periods prior to the completion of the Share Exchange are based on carve-out financials and allocation of expenses agreed upon by the Company and SRAX and may not be indicative of any future financial performance of the Company.
Results of Operations
We operate as one operating and reportable segment. The following table sets
forth, for the periods presented, the unaudited condensed consolidated
statements of operations data, which we derived from the accompanying financial
statements.
For the Three Months Ended
March 31,
2021 2020 $ CHG % CHG
REVENUE
Total Revenue $ 855,000 $ 193,000 $ 662,000 343 %
Cost of revenue 273,000 98,000 175,000 179 %
GROSS PROFIT 582,000 95,000 487,000 513 %
Gross profit margin 68 % 49 %
OPERATING EXPENSES
Employee related costs 565,000 1,714,000 (1,149,000 ) -67 %
Marketing and selling
expenses 166,000 267,000 (101,000 ) -38 %
Platform Costs 287,000 293,000 (6,000 ) -2 %
Depreciation and
amortization 142,000 269,000 (127,000 ) -47 %
General and
administrative 943,000 603,000 340,000 56 %
Total operating expenses 2,103,000 3,146,000 (1,043,000 ) -33 %
LOSS FROM OPERATIONS (1,521,000 ) (3,051,000 ) 1,530,000 -50 %
Other income (expense)
Financing Costs - (315,000 ) 315,000 -100 %
Loss from marketable
securities - (71,000 ) 71,000 -100 %
Interest expense - (15,000 ) 15,000 -100 %
Change in fair value of
derivative liabilities - 1,190,000 (1,190,000 ) -100 %
Total other income (loss) - 789,000 (789,000 ) -100 %
Loss before provision for
income taxes (1,521,000 ) (2,262,000 ) 741,000 -33 %
Provision for income
taxes - - - - %
Net loss (1,521,000 ) (2,262,000 ) 741,000 33 %
Beneficial conversion
feature of series B
convertible preferred
stock (5,775,000 ) - (5,775,000 ) 100 %
Loss attributable to
common stockholders $ (7,296,000 ) $ (2,262,000 ) $ (5,034,000 ) 223 %
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BIGtoken revenues
BIGtoken revenues for the three months-ended
BIGtoken Profit Margin
BIGtoken's costs of revenue consist of media acquired from third parties that we
sell to our customers. Profit margin for the three months ended
Operating Expenses BIGtoken Operating Expenses
Our operating costs for the three months ended
Employee Related Costs were $565,000 and $1,714,000 for the three months
ended March 31, 2021 and 2020, respectively. This represents a decrease of
$1,149,000 or approximately 67% for the three months ended March 31, 2021
compared to the comparable period of 2020. The decrease is primarily due to
a reduction in head count in our sales and operations departments.
Marketing, data services and sales costs were $166,000 and $267,000 for the
three months ended March 31, 2021 and 2020, respectively. This represents a
decrease of $101,000 or 38% for the three months ended March 31, 2021
compared to the comparable period of 2020. For the three months ended March
31, 2021 and 2020, the Company incurred $189,000 and $38,000 , respectively,
in expenses related to payments to users for point redemptions and accruals
for future redemptions. This represents an increase of $151,000 or 397%. We
expect these costs to continue to grow in nominal dollars as we continue to
grow but expect that they continue to decrease as a percentage of our
revenues.
Platform costs were $287,000 and $293,000 for the three months ended March
31, 2021 and 2020, respectively. We expect these costs to increase in
absolute dollars as we continue to grow our user database but expect that
they continue to decrease as a percentage of our revenues.
General and administrative expenses were $943,000 and $603,000 for the
three months ended March 31, 2021 and 2020, respectively. This represents
an increase of $340,000 or 56% for the three months ended March 31, 2021
over the comparable period of 2020. Inclusive of this increase is
approximately $330,000 of allocated corporate overhead. We expect our
general and administrative expense to fluctuate as a percentage of our
revenue in future periods.
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Interest Expense and Financing Cost
Our financing costs were
Change in the Fair Value our Warrant Liabilities
Income associated with the changes in the fair value of warrant liabilities have
been recorded in other income for the three months ended
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