Bright Mountain Media, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our consolidated financial condition and results of operations for the years ended December 31, 2021 and 2020 should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this prospectus. We use words such as “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could” and similar expressions to identify forward-looking statements. COVID-19 Update On January 30, 2020, the World Health Organization declared the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared COVID-19 a pandemic. The spread of COVID-19, a novel strain of coronavirus, has and continues to alter the behavior of business and people in a manner that is having negative effects on local, regional and global economies. The COVID-19 pandemic has caused disruptions in the services we provide. The COVID-19 pandemic has resulted in many states and countries imposing orders resulting in the closure of non-essential businesses, including many companies which advertise digitally. During 2021, we continued seeing lower advertising dollar spend in the first half of the year, but saw a rebound during the second half of 2021 as the health crisis improved supported by higher travel rates, national vaccination programs, higher vaccination rates for the general public and a broader age distribution of vaccines permitting lower aged children to obtain the vaccinations. The pandemic has continued into 2022, but the digital ad spend dollars appears to be on an uptrend which would be positive for our industry. Overview Bright Mountain Media, Inc. is engaged in operating a proprietary, end-to-end digital media and advertising services platform designed to connect brand advertisers with demographically-targeted consumers – both large audiences and more granular segments – across digital, social and connected television (“CTV”) publishing formats. We define “end-to-end” as our process for taking ad buying from beginning to end, delivering a complete functional solution, usually without requiring any involvement from a third party. Through acquisitions and organic software development initiatives, we have consolidated and plan to further condense key elements of the prevailing digital advertising supply chain through the elimination of industry “middlemen” and/or costly redundancy of services. Our aim is to enable and support a streamlined, end-to-end advertising model that addresses both demand (ad buy side) and supply (media sell side) for both direct sales teams and programmatic sales and publishing of digital advertisements that reach specific target audiences based on what, where, when and how that specific target audience elects to access certain web and/or streaming video content. Programmatic advertising relies on computer programs to use data and proprietary algorithms to select which ads to buy and for what price, while direct sales involves traditional interpersonal contact between ad buyers and advertising sales representative(s). By selling advertisements on our current portfolio of 20 owned and operated websites and 13 CTV apps, coupled with acquisition or development of other niche web properties in the future, we are building depth in specific demographic verticals that allow us to package audiences into targeted consumer categories valued by advertisers. 25 We currently own parenting and lifestyle domains CafeMom, Mom.com, LittleThings, Revelist, BabyNameWizard and MamasLatinas. Wild Sky Media’s diverse website portfolio averages more than 100 million page views per month. These particular web assets are the foundation of one of Bright Mountain Media’s audiences – women between the ages of 19-54, which we believe appeal to brands focused on marketing consumer products and providing products and services relating to parenting, insurance, mortgages, health, lifestyle and travel, among others. Major brands on our platform connecting with consumers using our parenting and lifestyle domains include Amazon, Target, Disney, Unilever, Clorox and Warner Brothers. When advertisers leverage our end-to-end platform for serving ads on web and CTV apps we own and operate, Bright Mountain Media retains 100% of the advertising dollars spent for the ads, also referred to as “advertising spend.” If advertisements are placed on our partner publishers’ websites through our platform, they, too, benefit, earning up to 50% of the advertising spend. This compares to a revenue yield of 30% or less of the advertising spend when ads are served through the conventional supply chain model. Results of Operations For the Year Ended December 31, 2021 2020 Revenues $ 12,924,569 $ 15,839,429 Cost of revenues 6,323,204 7,906,347 Gross profit 6,601,365 7,933,082 Selling, general and administrative expenses 18,508,316 22,092,352 Impairment expense – Intangible assets — 16,486,929 Impairment expense – Goodwill — 42,279,087 Loss from operations (11,906,951 ) (72,925,286 ) Total other income (expense) (93,286 ) (356,650 ) Net loss before tax (12,000,237 ) (73,281,936 ) Income tax benefit — 567,514 Net loss (12,000,237 ) (72,714,422 ) Total preferred stock dividends (241,903 ) (363,460 ) Net loss attributable to common stockholders $ (12,242,140 ) $ (73,077,882 ) Revenue Advertising revenues decreased approximately $2.9 million or 18% in 2021 over 2020. The main reason was softness in our Oceanside advertising display business year over year and the effect of the MediaHouse restructuring completed at the end of 2020. Cost of Revenue Cost of revenue as a percentage of revenues decreased approximately 1%, from approximately 50% in 2020 to approximately 49% in 2021 thereby increasing gross profit margins from 50% during 2020 to 51% in 2021, mainly due to the inclusion of the Wild Sky business, improving gross margins in our other ad network businesses and offset by the restructuring of the MediaHouse business which occurred at the end of 2020. 26 Impairment Expense During 2020, we recorded impairment expenses related to goodwill and intangible assets amounting to approximately $42.3 million and $16.5 million, respectively. These were non-recurring events in 2020 driven in part by the COVID-19 pandemic, that were not present in 2021. The year 2020 was marked by the COVID-19 Global pandemic when many companies in various industries were forced to restructure their advertising budgets and spending. This caused a significant contraction of economic activity at the beginning in the first months of the year and has continued. Although there are recent signs of improvement with significant GDP gains, many companies have yet to reinstate their advertising budgets and/or have changed the way they are spending these budgets. Many advertisers have moved away from direct ad buys in favor of programmatic distribution with its lower costs. The fair value of the respective reporting units was determined based on both the Income Approach (Discount Cash Flows) and the Market Multiples Approach. In September 2020, it was determined that the carrying value of the Goodwill associated with the Ad Network reporting unit exceeded the fair value of the Goodwill and in September 2020, the Company recorded an impairment charge of $42.3 million. No such adjustment was recorded for the Owned & Operated reporting unit as it was determined not to be impaired. Similarly, we performed an assessment of our finite-lived intangibles based on indicators of impairment noted by management, including decreased revenues. It was determined that the carrying values of the finite lived intangible assets associated with Oceanside did not exceed the respective fair values of the assets, therefore no impairment associated with these assets has been recognized. It was determined that the finite lived intangible assets associated with MediaHouse were deemed impaired based on an analysis of the carrying values and fair values of the assets. In September 2020, the Company recorded an impairment charge of $16.5 million. Selling, General and Administrative (“SG&A”) Expenses SG&A expenses decreased by approximately $3.6 million for 2021 compared to 2020. Our selling, general and administrative expenses were 143% of our total revenues for 2021 as compared to 139% for 2020. The increase was mainly due to the incremental five months of selling, general and administrative costs for the Wild Sky acquisition which occurred in June 2020. Selling, general and administrative expenses are expected to increase as we execute our planned growth strategy of launching and operating the Bright Mountain Media ad exchange network which will include additional administrative support. Subject to the availability of additional working capital, the Company also intends to add staff to its accounting department to improve controls over its accounting and reporting processes. As the Company expands the size of the accounting department, its use of consultants is expected to decrease. 27 Total other income (expense) Other income (expense) decreased by $263 thousand for 2021 compared to 2020. The main drivers of the decrease were PPP loan forgiveness in 2021 of $2.2 million offset by increased interest expense – related party of $1.9 million from 2021 to 2020: Proforma results of acquisitions The following table sets forth a summary of the unaudited pro forma results of the Company as if the acquisition of Wild Sky which closed in June 2020, respectively, had taken place on the first day of 2020. These combined results are not necessarily indicative of the results that may have been achieved had the business been acquired as of the first day of the period presented. Year ended December 31, 2020 Total revenue $ 21,336,887 Total operating expenses (90,365,754 ) Net loss attributable to common stockholders $ (79,476,397 ) Income Taxes For the year ended December 31, 2021, the Company’s tax provision was $0. For the year ended December 31, 2020, the Company had an income tax benefit of $567,514 and a deferred tax liability of $0 as a result of the reversal of the existing deferred tax liabilities associated with acquisitions from the impairment recorded. The Company’s net operating loss carry forwards may be subject to annual limitations if the Company experiences a change of ownership as defined in Section 382 of the Internal Revenue Code. The Company has not conducted a study to determine if a change of ownership has occurred. Preferred stock dividends Preferred stock dividends paid decreased by $122 thousand from 2021 to 2020. We paid stock dividends on our A-1 series of our preferred stock which was held by an unrelated third party, and cash dividends on E and F series of our preferred stock which are held by affiliates. 28 Non-GAAP Measures We report Adjusted EBITDA from continuing operations as a supplemental measure to U.S. generally accepted accounting principles (“GAAP”). This measure is one of the primary metrics by which we evaluate the performance of our business, on which our internal budgets are based. We believe that investors have access to, and we are obligated to provide, the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results. We endeavor to compensate for the limitations of the non-GAAP measure presented by providing the comparable GAAP measure with equal or greater prominence and description of the reconciling items, including quantifying such items to derive the non-GAAP measure. Our adjusted EBITDA from continuing operations is defined as operating income/loss excluding: ● non-cash stock option compensation expense; ● non-cash loss on note exchange transaction with our Chairman of the Board; ● depreciation; ● acquisition-related items consisting of amortization expense and impairment expense; ● interest; and ● amortization on debt discount. We believe this measure is useful for analysts and investors as this measure allows a more meaningful year-to-year comparison of our performance. Moreover, our management uses this measure internally to evaluate the performance of our business as a whole. The above items are excluded from adjusted EBITDA measure because these items are non-cash in nature, and we believe that by excluding these items, adjusted EBITDA corresponds more closely to the cash operating income/loss generated from our business. Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses. Adjusted EBITDA (used as described above) for the year ended December 31, 2021 was a loss of $7.0 million, compared to a loss of $7.0 million for the year ended December 31, 2020. The following is a reconciliation of loss before tax - continuing operations, the most directly comparable GAAP measure, to adjusted EBITDA: For the Year Ended December 31, 2021 2020 Loss before tax $ (12,000,237 ) $ (73,281,936 ) Adjusted for: Gain on forgiveness of PPP loan (2,171,535 ) - Bad debt expense 74,282 - Professional fees 1,765,786 - Severance 333,285 - Share-based compensation (a) 488,355 947,147 Depreciation and amortization (b) 2,210,417 3,700,473 Acquisition related expenses (c) - 1,281,801 Capital raise expenses (d) 1,569 319,979 Impairment expense (e) - 58,766,016 Interest expense, net (f) 2,266,966 630,725 Oceanside seller note expense (g) - 625,000 Adjusted EBITDA from continuing operations $ (7,031,112 ) $ (7,010,795 ) (a) Stock options and restricted stock awards were granted to employees and independent directors of the Company. (b) Includes depreciation, amortization of intangibles and amortization of the debt discount. (c) Acquisition expenses were incurred for the Wild Sky acquisition in 2020 (d) The Company incurred expenses in connection with raising capital from third parties in order to continue funding the Company. (e) The Company recorded impairment charges related to goodwill and other intangibles in 2020 driven by the COVID-19 pandemic. (f) Includes interest expense to related parties of $1,944,794 and 58,807 in 2021 and 2020, respectively. (g) Includes Oceanside seller note compensation expense of $625,000. This is a one-time, nonrecurring expense related to the Oceanside acceleration of the seller note accounting treatment. 29 Going concern These consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company’s management has evaluated whether there is substantial doubt about the Company’s ability to continue as a going concern and has determined that substantial doubt existed as of the date of the end of the period covered by this report. This determination was based on the following factors: (i) the Company used cash of approximately $5.9 million in operations in 2021; (ii) the Company’s available cash as of the date of this filing will not be sufficient to fund its anticipated level of operations for the next 12 months; (iii) the Company will require additional financing for the fiscal year ending December 31, 2022 to continue at its expected level of operations; and (iv) if the Company fails to obtain the needed capital, it will be forced to delay, scale back, or eliminate some or all of its development activities or perhaps cease operations. In the opinion of management, these factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern as of the date of the end of the period covered by this report and for one year from the issuance of these consolidated financial statements. The Company has sustained a net loss of $12.0 million, used cash outflows from of $5.9 million for the year ended December 31, 2021, and has an accumulated deficit of $106.1 million at December 31, 2021 that raise substantial doubt about its ability to continue as a going concern. We consider liquidity in terms of cash flows from operations and their sufficiency to fund business operations, including working capital needs, debt service, acquisitions, contractual obligations, and other commitments. In particular, to meet our payment service obligations at all times, we must have sufficient highly liquid assets and be able to move funds on a timely basis. Our principal sources of liquidity are our borrowing on our debt facilities along with capital raised through sale of our securities, supplemented with cash generated by operating activities. Our primary cash needs are for day to day operations, to pay interest and principal on our indebtedness, to fund working capital requirements and complete business acquisitions. As of December 31, 2021, we had a balance of cash and cash equivalents of $781 thousand and negative working capital of $17.8 million as compared to cash and cash equivalents of $736 thousand and negative working capital of $7.9 million as of December 31, 2020. The Company is in discussions with various vendors to settle balances due for common stock and/or common stock warrants as opposed to cash. Our current assets decreased approximately $2.9 million or 35% as of December 31, 2021 from December 31, 2020 which reflects the substantial decrease in our accounts receivable. Our current liabilities increased approximately $7.0 million as of December 31, 2021 from December 31, 2020 which primarily reflects an increase in the current portion of long-term debt. During 2020 we raised an additional $3,577,698 in net proceeds through the sale of our securities via a private placement memorandum which includes one share and one stock warrant. We issued 10,398,700 shares and 10,398,700 warrants in the transactions. During 2021, the Company entered into an amendment to their existing Credit Agreement with Centre Lane Partners to provide an additional $5.1 million of funding and liquidity. Pursuant to the terms of the Credit Agreement, the term loan is due and payable on or before June 30, 2023. 30 Cash flows For the Year Ended December 31, 2021 2020 Net cash used in operating activities $ (5,927,418 ) $ (6,508,935 ) Net cash (used in) provided by investing activities (237 ) 1,637,483 Net cash provided by financing activities 5,972,929 4,649,371 Net increase in cash and cash equivalents classified within assets related to discontinued operations - 1,114 Net increase (decrease) in cash and cash equivalents $ 45,274 $ (220,967 ) Net cash used in operating activities totaled $5.9 million and $6.5 million for 2021 and 2020, respectively. The decrease in cash used of $0.6 million is a result of an increase of $6.9 million of changes in working capital and a reduction of $6.3 million of cash generated by our operating results for the year ended December 31, 2021, which were positively impacted by the growth of the business and acquisitions during the year. Net cash used in investing activities totaled $237 in 2021 as a result of the purchase of property and equipment. Net cash provided by investing activities totaled $1.6 million in 2020 solely related to cash acquired as part of the Wild Sky Media acquisition. Net cash provided by financing activities totaled $6.0 million and $4.6 million for 2021 and 2020, respectively. Financing activities in 2021 were mainly cash provided debt financing of $5.1 million and proceeds from the PPP loan of $1.1 million, offset by repayments of debt of $285 thousand. Financing activities in 2020 were mainly cash provided from the sale of our securities, net of repayments of debt obligations and the payable of cash dividends on our Series A, E and F convertible preferred stock to related parties. Off balance sheet arrangements 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. Critical accounting policies The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events that affect the amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are discussed in Part II, Item 8, Financial Statements and Supplementary Data, Note 3, “Summary of Significant Accounting Policies.” 31 Critical accounting policies are those policies that management believes are very important to the portrayal of our financial position and results of operations, and that require management to make estimates that are difficult, subjective or otherwise complex. Based on these criteria, management has identified the following critical accounting policies: Revenue Recognition The Company recognizes revenue from its own advertising platform, ad network partners and websites (“Ad Network”) through its publishing advertiser impressions and pay-for-click services, our owned and operated sites, our ad network, or platforms. Invalid traffic on the Ad Network may impact the amount collected and adjusted by our Ad Network. The Company has one revenue stream generated directly from publishing advertisements, whether on our owned and operated sites, our ad network, or platforms. The revenue is earned when the users click on the published website advertisements. Specific revenue recognition criteria for the advertising revenue stream are as follows: ● Advertising revenues are generated by users “clicking” on or seeing website advertisements utilizing several ad networks partners. ● Revenues are recognized net of adjustments based on the traffic generated and is billed monthly. The Company subsequently settles these transactions with publishers at which time adjustments for invalid traffic may impact the amount collected. Accounts Receivable Accounts receivable represent receivables from customers in the ordinary course of business. These are recorded at invoiced amounts on the date revenue is recognized. Receivables are recorded net of the allowance for doubtful accounts in the accompanying consolidated balance sheets. The Company provides allowances for doubtful accounts for estimated losses resulting from the inability of its customers to repay their obligation. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to repay, additional allowances may be required. The Company provides for potential uncollectible accounts receivable based on specific customer identification and historical collection experience adjusted for existing market conditions. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense. The Company is also subject to adjustments from traffic settlements that are deducted from open invoices. The policy for determining past due status is based on the contractual payment terms of each customer, which are generally net 30 or net 60 days. Once collection efforts by the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made. 32 Goodwill, Net and Intangible Assets, Net Goodwill and Intangible assets result primarily from acquisitions. The Company categorizes Goodwill into two reporting units: “Owned & Operated” and “Ad Network”. Intangible assets include trade name, customer relationships, IP/technology and non-compete agreements. Upon the acquisition, the purchase price is first allocated to identifiable assets and liabilities, including the trade name and other intangibles, with any remaining purchase price recorded as goodwill. Goodwill is not amortized, rather, an impairment test is conducted on an annual basis, or more frequently if indicators of impairment are present, which are determined through a qualitative assessment. A qualitative assessment includes consideration of the economic, industry and market conditions in addition to the overall financial performance of the Company and these assets. If our qualitative assessment does not conclude that it is more likely than not that the estimated fair value of the reporting unit is greater than the carrying value, we perform a quantitative analysis. In a quantitative test, the fair value of a reporting unit is determined based on a discounted cash flow analysis and further analyzed using other methods of valuation. A discounted cash flow analysis requires us to make various assumptions, including assumptions about future cash flows, growth rates and discount rates. The assumptions about future cash flows and growth rates are based on our long-term projections. Assumptions used in our impairment testing are consistent with our internal forecasts and operating plans. Our discount rate is based on our debt structure, adjusted for current market conditions. If the fair value of the reporting unit exceeds its carrying amount, there is no impairment. If not, we compare the fair value with its carrying amount. To the extent the carrying amount exceeds its fair value, an impairment charge of the reporting unit’s goodwill would be necessary. The Company’s annual assessment date is September 30. The Company’s trade name, customer relationships and IP/technology are amortized on a straight-line basis over a useful life of 5 years. Non-compete agreements are amortized on a straight-line basis over the length of each agreement, typically between 3-5 years. The Company reviews for impairment indicators of finite-lived intangibles and other long-lived assets as described below in “Amortization and Impairment of Long-Lived Assets.” Amortization and Impairment of Long-Lived Assets The Company evaluates long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to forecasted undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on discounted cash flows, appraised values or management’s estimates, depending upon the nature of the assets. Income Taxes We use the asset and liability method to account for income taxes. Under this method, deferred income taxes are determined based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements which will result in taxable or deductible amounts in future years and are measured using the currently enacted tax rates and laws in the period those differences are expected to reverse. A valuation allowance is provided to reduce net deferred tax assets to the amount that, based on available evidence, is more likely than not to be realized. 33 The Company follows the provisions of ASC Topic 740-10, Income Taxes – Overall (“ASC 740-10”). When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax expenses are recognized as tax expenses in the Statement of Operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for a smaller reporting company.