The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
a) Nature of operations
Quotemedia, Inc. (the “Company”) is a software developer and distributor of financial market data and related services to a global marketplace. The Company specializes in the collection, aggregation, and delivery of both delayed and real-time financial data content via the Internet. The Company develops software components that deliver dynamic content to banks, brokerage firms, financial institutions, mutual fund companies, online information and financial portals, media outlets, public companies, and corporate intranets.
b) Basis of consolidation
The consolidated financial statements include the operations of QuoteMedia, Ltd., a wholly owned Canadian subsidiary of the Company. All intercompany transactions and balances have been eliminated.
c) Foreign currency translation and transactions
The U.S. dollar is the functional currency of all the Company’s operations. Foreign currency asset and liability amounts are remeasured into U.S. dollars at end-of-period exchange rates, except for equipment and intangible assets, which are remeasured at historical rates. Foreign currency income and expenses are remeasured at average exchange rates in effect during the year, except for expenses related to balance sheet amounts remeasured at historical exchange rates. Because the U.S. dollar is the functional currency, exchange gains and losses arising from remeasurement of foreign currency-denominated monetary assets and liabilities are included in income in the period in which they occur.
d) Cash and cash equivalents
Cash equivalents include money market investments that have an original maturity of three months or less and are redeemable on demand. The Company maintains its accounts primarily at one financial institution. At times throughout the year, the Company’s cash and cash equivalents balances may exceed amounts insured by the Federal Deposit Insurance Corporation.
e) Allowance for doubtful accounts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company determines the allowance by reviewing the age of the receivables and assessing the anticipated ability of customers to pay. No collateral is required for any of the receivables and the Company does not usually apply financing charges to outstanding accounts receivable balances. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. The allowance for doubtful accounts was $200,000 and $150,000 at December 31, 2022 and 2021, respectively. Bad debt expense for the years ended December 31, 2022 and 2021 were $135,969 and $38,061, respectively.
f) Property and equipment
Property and equipment are recorded at cost less accumulated depreciation. Furniture and equipment are depreciated using the straight-line method over their estimated useful lives of five years. Leasehold improvements are amortized using the straight-line method over the terms of the respective leases or useful lives, whichever is shorter. Retirements, sales, and disposals of assets are recorded by removing the cost and accumulated depreciation from the asset and accumulated depreciation accounts with the resulting gain or loss reflected in income. There were no fixed assets retired during the years ended December 31, 2022 and 2021.
Capitalized software development includes costs incurred in connection with the internal development of software. These costs relate to software used by subscribers to access, manage and analyze information in the Company’s databases. The majority of the capitalized costs relate to a portion of the salaries and other related costs for the Company’s software engineers. Capitalized costs associated with internally developed software are amortized over three years which is their estimated economic life.
Depreciable and amortizable assets are evaluated for impairment upon a significant change in the operating environment. In these circumstances, if an evaluation of the undiscounted cash flows indicates impairment, the asset is written down to its estimated fair value, which is based on discounted future cash flows. Useful lives are periodically evaluated to determine whether events or circumstances have occurred which indicate the need for revision. There were no impairments recorded for the years ended December 31, 2022 and 2021.
g) Earnings per share
Basic earnings per share are computed by dividing income by the weighted average number of shares outstanding during the year. Diluted earnings per share considers shares outstanding (computed under basic earnings per share) and potentially dilutive common shares (such as stock options and redeemable convertible preferred stock outstanding). The effect of a stock split or reverse split is applied retroactively to preceding periods.
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
h) Income taxes
Income taxes are provided in accordance with Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. A deferred tax asset or liability is recorded for all temporary differences between income for financial statement purposes and income for tax purposes as well as operating loss carry-forward. Deferred tax expenses or recovery result from the net change during the year of deferred tax assets and liabilities. Any interest and penalties are recorded as part of income tax expense.
Deferred tax assets are reduced by a valuation allowance, when, in the opinion of management, it is likely that some portion of the deferred tax asset will not be realized. Deferred taxes are adjusted for the effects of changes in tax laws and rates. Interest and penalties, if applicable, would be recorded in operations. The Company recorded Canadian income tax expense of $3,056 and $3,184 for the years ended December 31, 2022 and 2021, respectively (see Note 8).
i) Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities as of the year end and the reported amount of revenue and expenses during the year. Such estimates include (i) fair values used to test goodwill and capitalized development costs for impairment; (ii) the amount of allowance for doubtful accounts, (iii) the capitalization of software development costs, (iv) income taxes, (v) the incremental borrowing rate for operating leases, (vi) the useful life of property and equipment, and (vii) stock-based compensation. Actual results and outcomes may differ from management’s estimates and assumptions.
j) Software development expenses
Software development expenses consist primarily of costs incurred to maintain the Company’s software applications. The Company expensed $2,096,404 and $1,712,558 in software development costs during the years ended December 31, 2022 and 2021, respectively (see Note 6).
k) Revenue
The Company generates substantially all of its revenue from subscriptions for access to its software products and related support. The Company licenses financial market data information on a monthly, quarterly, or annual basis. The Company’s products and services are divided into two main categories:
Interactive Content and Data Applications
| · | Proprietary financial software applications and streaming market data feeds |
| · | Subscriptions are typically sold for a fixed fee and revenue is recognized ratably over the term of the subscription. |
Portfolio Management and Real-Time Quote Systems
| 1. | Corporate Quotestream (Business-to-Business) |
| | o | Web-delivered, embedded applications providing real-time, streaming market quotes and research information targeted to both professionals and non-professional users. |
| | o | Revenue is typically earned based on customer usage. |
| 2. | Individual Quotestream (Business-to-Consumer) |
| | o | Web-delivered, embedded applications providing real-time, streaming market quotes and research information targeted to non-professional users. |
| | o | Subscriptions are typically sold for a fixed fee and revenue is recognized ratably over the term of the subscription. |
The Company does not provide its customers with the right to take possession of its software products at any time.
The Company determines revenue recognition through the following steps:
| · | Identification of the contract, or contracts, with a customer |
| | |
| · | Identification of the performance obligations in the contract |
| | |
| · | Determination of the transaction price |
| | |
| · | Allocation of the transaction price to the performance obligations in the contract |
| | |
| · | Recognition of revenue when, or as, the Company satisfies a performance obligation |
The Company executes a signed contract with the customer that specifies services to be provided, the payment amounts and terms, and the period of service, among other terms.
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contract Balances
Timing of revenue recognition may differ from the timing of invoicing to customers. The Company records a receivable when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Upfront set-up or development fees are deferred and recognized over the service term of the contract, as set-up and development fees are not distinct from the market data service contracts to which they relate.
The Company considers the following factors when determining if collection of a fee is reasonably assured: customer creditworthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. If these factors do not indicate collection is reasonably assured, revenue is deferred until collection becomes reasonably assured, which is generally upon receipt of cash.
Cost of revenue
Cost of revenue primarily consists of customer support personnel-related compensation expenses, including salaries, bonuses, benefits, payroll taxes, and stock-based compensation expense, as well as expenses related to third-party hosting costs, software license fees, amortization of capitalized software development costs, amortization of acquired technology intangible assets, and allocated overhead.
l) Financial instruments
Financial instruments consist principally of cash and cash equivalents, accounts receivable, accounts payable and notes payable. The Company believes that the fair value of financial instruments approximates the recorded book value of those instruments due to the short-term nature of the instruments or stated interest rates that approximate market interest rates.
m) Stock-Based Compensation
Stock-based compensation awards are measured at their fair value on the date of grant with the expense recognized, net of estimated forfeitures, over the related service or performance period on a straight-line basis . The Company used the Black-Scholes valuation model to calculate the fair value of common stock options and warrants.
n) Recent Accounting Pronouncements
Recently Adopted
There are no new recently adopted accounting pronouncements for the year ended December 31, 2022.
Not Yet Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments-Credit Losses (Topic 326), which changes the impairment model for most financial assets, including accounts receivable, and replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. The guidance is effective for the Company for interim and annual periods beginning after December 15, 2022. Early adoption is permitted. The Company does not expect that the adoption of ASU 2016-13 will have a significant impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the complexity associated with applying Generally Accepted Accounting Principles in the United States of America (“US GAAP”) for certain financial instruments with characteristics of liabilities and equity. More specifically, the amendments focus on the guidance for convertible instruments and derivative scope exception for contracts in an entity’s own equity. The new standard is effective for the Company for fiscal years beginning after December 15, 2023. The Company does not expect that the adoption of ASU 2020-06 will have a significant impact on the Company’s consolidated financial statements.
Other accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
2. PRIOR PERIOD ERROR
Subsequent to the filing of its Quarterly Report for the quarterly period ended March 31, 2022, the Company reassessed its classification of warrants to purchase shares of Series A Redeemable Convertible Preferred Stock (“Compensation Preferred Stock Warrants” – see Financial Statement Note 9 “Redeemable Convertible Preferred Stock and Stockholders’ Deficit”). The Company concluded that its original classification of the Preferred Stock Warrants as equity was incorrect and that the Preferred Stock Warrants should have been classified as a liability in accordance with Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities From Equity. The error resulted in the following revision for the comparative December 31, 2021 Balance Sheet:
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| · | Additional Paid-in Capital was reduced by $750,000 |
| · | Preferred Stock Warrant Liability was increased by $513,750 |
| · | Accumulated Deficit was reduced by $236,250 |
In addition, Additional Paid-in Capital was reduced by $750,000 and Accumulated Deficit was reduced by $513,750 for the comparative stockholders’ equity balances as of December 31, 2020.
3. REVENUE
Disaggregated Revenue
The Company provides market data, financial web content solutions and cloud-based applications. The Company’s revenue by type of service consists of the following for the years ended December 31,
| | 2022 | | | 2021 | |
Portfolio Management Systems | | | | | | |
Corporate Quotestream | | $ | 6,906,499 | | | $ | 6,399,618 | |
Individual Quotestream | | | 2,092,778 | | | | 2,281,966 | |
Interactive Content & Data APIs | | | 8,528,328 | | | | 6,492,788 | |
Total revenue | | $ | 17,527,605 | | | $ | 15,174,372 | |
Deferred Revenue
Changes in deferred revenue were as follows for the years ending December 31,
| | 2022 | | | 2021 | |
| | | | | | |
Beginning balance | | $ | 622,497 | | | $ | 544,902 | |
Revenue recognized in the current period from the amounts in the beginning balance | | | (568,001 | ) | | | (422,118 | ) |
New deferrals, net of amounts recognized in the current period | | | 1,112,431 | | | | 500,936 | |
Effects of foreign currency translation | | | (79 | ) | | | (1,223 | ) |
Total deferred revenue | | $ | 1,166,848 | | | $ | 622,497 | |
4. RELATED PARTIES
The Company entered into a five-year office lease with 410734 B.C. Ltd. effective May 1, 2021 for approximately $6,500 per month. David M. Shworan, CEO of Quotemedia Ltd., is a control person of 410734 B.C. Ltd. At December 31, 2022, there was $13,343 due to 410734 B.C. Ltd.
The Company entered into a marketing agreement with Bravenet Web Services, Inc. (“Bravenet”) effective November 28, 2019. The Company agreed to pay Bravenet an upfront setup fee of $7,000 upon signing the agreement and a monthly service fee of $2,500 starting February 2020. For the years ended December 31, 2022 and 2021, there was $12,500 and $11,970 due to Bravenet related to this agreement, respectively. David M. Shworan is a control person of Bravenet. At December 31, 2022, there were $70,100 in unreimbursed expenses owed to Keith Randall, CEO of Quotemedia, Inc. As a matter of policy all significant related party transactions are subject to review and approval by the Company’s Board of Directors.
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LEASES
The Company has operating leases for corporate offices. The Company’s leases have remaining lease terms of 1 year to 4 years. Management determines if an arrangement is a lease at inception. Operating lease assets and liabilities are included in operating lease right-of-use assets and operating lease liabilities, respectively, on the Company’s consolidated balance sheets. Finance lease assets and liabilities are included in property and equipment and finance lease liabilities, respectively, on the Company’s consolidated balance sheets. The Company renewed its lease for office space in Parksville, Canada as of May 1, 2021 for an additional 5 years resulting in a right of use asset and an offsetting lease liability of $233,978.
Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. The Company elected the short-term lease exception and therefore only recognize right-of-use assets and lease liabilities for leases with a term greater than one year. When determining lease terms, the Company factors in options to extend or terminate leases when it is reasonably certain that the Company will exercise that option. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For certain leases the Company accounts for the lease and non-lease components as a single lease component.
Supplemental balance sheet information related to leases at December 31, was as follows:
| | 2022 | | | 2021 | |
Operating Leases | | | | | | |
| | | | | | |
Operating lease right-of-use assets, net | | $ | 506,219 | | | $ | 829,960 | |
| | | | | | | | |
Current portion of operating lease liability | | $ | 174,166 | | | $ | 180,544 | |
Long-term portion of operating lease liability | | | 323,685 | | | | 532,782 | |
Total operating lease liability | | $ | 497,851 | | | $ | 713,326 | |
| | | | | | | | |
Finance Leases | | | | | | | | |
| | | | | | | | |
Computer equipment on financing lease | | $ | - | | | $ | 11,929 | |
Less: accumulated depreciation | | | - | | | | 11,929 | |
Computer equipment on financing lease, net | | $ | - | | | $ | - | |
| | | | | | | | |
Current portion of finance lease liability | | | - | | | | 2,094 | |
Total finance lease liability | | $ | - | | | $ | 2,094 | |
| | 2022 | | | 2021 | |
Weighted Average Remaining Lease Term | | | | | | |
Operating leases | | 2.7 years | | | 3.6 years | |
Finance leases | | | - | | | 0.8 years | |
| | | | | | | |
Weighted Average Discount Rate | | | | | | | |
Operating leases | | | 9.9 | % | | | 9.8 | % |
Finance leases | | | 7.5 | % | | | 7.5 | % |
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease liabilities were as follows:
| | Operating Leases | |
Year ending December 31, | | | |
| | | |
2023 | | | 215,349 | |
2024 | | | 201,420 | |
2025 | | | 134,941 | |
2026 | | | 19,109 | |
Total lease payments | | | 570,819 | |
Less imputed interest | | | (72,968 | ) |
Total | | $ | 497,851 | |
The components of lease expense for the years ended December 31, were as follows:
| | 2022 | | | 2021 | |
Operating lease costs: | | | | | | |
Operating lease costs | | $ | 236,737 | | | $ | 259,191 | |
Short-term lease costs | | | 98,570 | | | | 89,634 | |
Total operating lease costs | | $ | 335,307 | | | $ | 348,825 | |
| | | | | | | | |
Finance lease costs: | | | | | | | | |
Amortization | | $ | - | | | $ | 15,113 | |
Interest | | | 64 | | | | 422 | |
Total finance lease cost | | $ | 64 | | | $ | 15,535 | |
Supplemental cash flow information related to leases was as follows:
| | 2022 | | | 2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from operating leases | | $ | 224,741 | | | $ | 262,060 | |
Operating cash flows from finance leases | | | 64 | | | | 422 | |
Financing cash flows from finance leases | | | 2,087 | | | | 11,965 | |
| | | | | | | | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | | |
Operating leases | | | - | | | | 233,978 | |
6. PROPERTY AND EQUIPMENT
At December 31:
| | 2022 | | | 2021 | |
| | | | | | |
Computer equipment | | $ | 1,493,705 | | | $ | 1,330,548 | |
Office furniture and equipment | | | 27,783 | | | | 26,719 | |
Leasehold improvements | | | 13,573 | | | | 13,573 | |
Capitalized application software | | | 16,214,697 | | | | 13,475,108 | |
Total property and equipment | | | 17,749,758 | | | | 14,845,948 | |
Less: accumulated depreciation and amortization | | | (13,541,508 | ) | | | (11,427,971 | ) |
Property and equipment, net | | $ | 4,208,250 | | | $ | 3,417,977 | |
Property and Equipment are recorded at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the assets’ estimated useful lives as follows:
Computer equipment | 5 years |
Office furniture and equipment | 5 years |
Leasehold improvements | Shorter of useful life or the term of lease |
Capitalized application software | 3 years |
For the years ended December 31, 2022 and 2021, the Company capitalized $2,739,590 and $2,201,222 of costs, respectively, related to upgrades and enhancements made to existing software applications. Software applications are used by the Company’s subscribers to access, manage and analyze information in the Company’s databases. For the years ended December 31, 2022 and 2021, amortization expenses associated with the internally developed application software was $1,943,292 and $1,462,039, respectively. At December 31, 2022, the remaining book value of the capitalized application software was $3,798,374.
Depreciation expense for equipment and leaseholds for the years ended December 31, 2022 and 2021 was $170,245 and $171,149, respectively.
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INTANGIBLE ASSETS AND GOODWILL
| | 2022 | | | 2021 | |
| | | | | | |
Intangible assets: | | | | | | |
Software licenses & intellectual property | | $ | 138,159 | | | $ | 121,845 | |
Domain names | | | 20,569 | | | | 20,569 | |
| | | 158,728 | | | | 142,414 | |
Less: accumulated amortization | | | (85,156 | ) | | | (77,558 | ) |
Total intangible assets, net | | $ | 73,572 | | | $ | 64,856 | |
| | | | | | | | |
Goodwill: | | | | | | | | |
Purchase of business unit | | $ | 110,000 | | | $ | 110,000 | |
Amortization for amortized intangible assets is calculated on a straight-line basis over the assets’ estimated useful lives. The useful life of the software licenses and domain names is estimated to be 20 years. The useful life of intellectual property is 5 years. Amortization expense for amortized intangible assets was $7,596 and $7,057 for the years ended December 31, 2022 and 2021, respectively.
The estimated amortization expense of definite-lived intangible assets is as follows:
Year ending December 31, | | | |
| | | |
2023 | | $ | 7,936 | |
2024 | | | 7,936 | |
2025 | | | 7,936 | |
2026 | | | 7,936 | |
2027 | | | 7,936 | |
Thereafter | | | 33,892 | |
Total | | $ | 73,572 | |
Goodwill is reported as an indefinite life intangible asset. The Company evaluates goodwill for impairment on an annual basis in accordance with FASB ASC 350-20, Goodwill. Through December 31, 2022 the Company has not had any goodwill impairment.
8. INCOME TAXES
The Company accounts for income taxes according to the provisions of FASB ASC 740, Income Taxes, which prescribes an asset and liability approach for computing deferred income taxes.
Reconciliations of income taxes computed at the statutory federal rate to income tax expense (benefit) for the years ended December 31, 2022 and 2021 are as follows:
| | 2022 | | | 2021 | |
| | | | | | |
Net income before income tax | | $ | 447,526 | | | $ | 215,556 | |
| | | | | | | | |
Tax provision (benefit) at the statutory rate of 21% | | | 110,544 | | | | 43,916 | |
State income taxes, net of federal income tax | | | (16,440 | ) | | | 8,095 | |
Stock-based compensation and other non-deductible expenses | | | 47,040 | | | | 6,694 | |
Change in federal NOL | | | - | | | | 2,703 | |
Adjustment in respect of prior periods | | | 99,660 | | | | - | |
Change in other items | | | 86,042 | | | | (70,472 | ) |
State income tax expense | | | - | | | | 64 | |
Canadian income tax expense | | | 3,070 | | | | 3,184 | |
Change in valuation | | | (326,860 | ) | | | 9,000 | |
Income tax expense (recovery) | | $ | 3,056 | | | $ | 3,184 | |
In 2022, the Company recorded a Canadian income tax expense of $3,056. The Company does not have any material Canadian deferred tax assets or deferred tax liabilities.
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2022, net operating loss carry-forward for federal and state income tax reporting purposes amounted to approximately $8,047,000 and $3,430,000 of which $6,968,000 of federal net operating loss carry-forwards will expire in varying amounts through the year 2037. The remaining federal net operating loss of approximately $1,079,000 are available for carry-forward indefinitely.
The components of the Company’s deferred tax asset (liabilities) at December 31, 2022 and 2021 are as follows:
| | 2022 | | | 2021 | |
Tax effect of net operating loss carry-forward – U.S. | | $ | 1,822,760 | | | $ | 2,703,000 | |
Tax effect of net operating loss carry-forward – Canada | | | 141,340 | | | | - | |
Property & equipment | | | (3,610 | ) | | | 4,000 | |
Right-of-use asset | | | (133,860 | ) | | | - | |
Capital lease obligation | | | 131,700 | | | | - | |
Intangibles | | | (321,970 | ) | | | (730,000 | ) |
Other | | | 49,740 | | | | 36,000 | |
Less valuation allowance | | | (1,686,100 | ) | | | (2,013,000 | ) |
Net deferred tax asset | | $ | - | | | $ | - | |
A valuation allowance has been recognized to offset the entire effect of the Company’s net deferred tax asset as the realization of this deferred tax benefit is uncertain. The valuation allowance decreased $326,900 for the year ended December 31, 2022. This is primarily due to the increase of federal and state net operating losses.
The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years (2018-2022) in these jurisdictions. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse effect on the Company’s financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain income tax positions have been recorded.
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
a) Redeemable convertible preferred shares
The Company is authorized to issue up to 10,000,000 non-designated preferred shares at the Board of Directors’ discretion.
A total of 550,000 shares of the Company’s Preferred Stock were designated as “Series A Redeemable Convertible Preferred Stock.” The Series A Redeemable Convertible Preferred Stock has no dividend or voting rights.
At December 31, 2022, 123,685 shares of Series A Redeemable Convertible Preferred Stock were outstanding. No shares of Series A Redeemable Convertible Preferred Stock were issued or redeemed during the years ended December 31, 2022 and 2021.
Redemption Rights
Holders of Series A Redeemable Convertible Preferred Stock shall have the right to convert their shares into shares of common stock at the rate of 83.33 shares of common stock for one share of Series A Redeemable Convertible Preferred Stock, at any time following the date the closing price of a share of common stock on a securities exchange or actively traded over-the-counter market has exceeded $0.30 for ninety (90) consecutive trading days. The conversion rights are subject to the availability of authorized but unissued shares of common stock.
In addition, 1,000 Series A Redeemable Convertible Preferred Stock may be redeemed at the holder’s option at the liquidation value of $25 per share if the cash balance of the Company as reported at the end of each fiscal quarter exceeds $400,000.
In accordance with ASC 480-10-S99, because a limited amount of Series A Redeemable Convertible Preferred Stock may be redeemed at the holder’s option if the above criteria are met, it was classified as mezzanine equity and not permanent equity.
In the event of any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment is made to any holders of any shares of common stock, the holders of shares of Series A Redeemable Convertible Preferred Stock shall be entitled to be paid first out of the assets of the Corporation available for distribution to holders of the Company’s capital stock whether such assets are capital, surplus, or earnings, an amount equal to $25.00 per share of Series A Redeemable Convertible Preferred Stock.
b) Common stock
No shares of common stock were issued during the years ended December 31, 2022 and 2021.
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c) Stock Options and Warrants
1999 Stock Option Plan
During March 1999, the Company adopted, and the Company’s stockholders approved, the 1999 Stock Option Plan to advance the interests of the Company by encouraging and enabling key employees to acquire a financial interest in the Company and link their interests and efforts to the long-term interests of the Company’s stockholders. A total of 400,000 shares of common stock were initially reserved for issuance under the 1999 plan. In September 1999, this number was increased to 2,500,000. As of December 31, 2022, 1,144,817 shares of the Company’s common stock had been issued upon exercise of options granted under the 1999 plan, and there were outstanding options to acquire 1,355,183 shares of the Company’s common stock under the 1999 plan.
2003 Equity Incentive Compensation Plan
The Company’s Board of Directors has approved the 2003 Equity Incentive Compensation Plan, or the 2003 plan, approved by the Company’s stockholders at the annual meeting held on February 14, 2003. The purpose of the 2003 plan is to assist the Company in attracting, motivating, retaining, and rewarding high-quality executives and other employees, directors, officers, and independent contractors by enabling such persons to acquire or increase a proprietary interest in the Company in order to strengthen the mutuality of interests between such persons and the Company’s stockholders, and providing such persons with annual and long-term performance incentives to expend their maximum efforts in the creation of stockholder value.
FASB ASC 718, Stock Compensation, requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized.
At December 31, 2022, there are 15,000,000 shares of common stock authorized for issuance pursuant to the 2003 plan. As of December 31, 2022, 2,350,372 shares of common stock had been issued upon exercise of options granted under the 2003 plan, and there were 4,720,000 options outstanding under the 2003 plan.
Total estimated stock-based compensation expense, related to all the Company’s stock-based awards was comprised as follows:
| | 2022 | | | 2021 | |
| | | | | | |
Sales and marketing | | $ | 131,858 | | | $ | 16,956 | |
General and administrative | | | - | | | | 14,920 | |
Stock based compensation expense | | $ | 131,858 | | | $ | 31,876 | |
Common Stock Options and Warrants
The following table summarizes the Company’s common stock option and warrant activity for the years ended December 31, 2022 and 2021:
| | Common Stock Options and Warrants | | | Weighted-Average Grant Date Exercise Price | |
| | | | | | |
Outstanding at January 1, 2021 | | | 26,372,803 | | | $ | 0.06 | |
Granted during the period | | | 1,030,000 | | | $ | 0.04 | |
Forfeited during the period | | | (1,630,000 | ) | | $ | 0.04 | |
Outstanding at December 31, 2021 | | | 25,772,803 | | | $ | 0.06 | |
Outstanding at December 31, 2022 | | | 25,772,803 | | | $ | 0.06 | |
The following table summarizes the Company’s non-vested common stock option and warrant activity for the years ended December 31, 2022 and 2021:
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | Common Stock Options and Warrants | | | Weighted-Average Grant Date Exercise Price | |
| | | | | | |
Non-vested at January 1, 2021 | | | 3,700,000 | | | $ | 0.08 | |
Vested during the period | | | (1,675,000 | ) | | $ | 0.08 | |
Non-vested at December 31, 2021 | | | 2,025,000 | | | $ | 0.08 | |
Vested during the period | | | (2,025,000 | ) | | $ | 0.08 | |
Non-vested at December 31, 2022 | | | - | | | $ | 0.08 | |
The following table summarizes the weighted average remaining contractual life and exercise price of common stock options and warrants outstanding at December 31, 2022:
| | Common Stock Options and Warrants Outstanding | | | Common Stock Options and Warrants Exercisable | |
| | | | | Weighted | | | | | | | | | | |
| | Number | | | Average | | | Weighted | | | Number | | | Weighted | |
| | Outstanding at | | | Remaining | | | Average | | | Exercisable at | | | Average | |
| | December 31, | | | Contractual | | | Exercise | | | December 31, | | | Exercise | |
| | 2022 | | | Life (Years) | | | Price | | | 2022 | | | Price | |
| | | | | | | | | | | | | | | |
$0.03-0.10 | | | 25,772,803 | | | | 6.56 | | | $ | 0.06 | | | | 25,772,803 | | | $ | 0.06 | |
At December 31, 2022, there was no unrecognized compensation cost related to non-vested options granted to purchase common stock.
We calculate the fair value of stock options and warrants granted to purchase common stock under the provisions of FASB ASC 718 using the Black-Scholes valuation model with the following assumptions:
| | 2022 | | | 2021 | |
Expected dividend yield | | | N/A | | | | - | |
Expected stock price volatility | | | N/A | | | | 103 | % |
Risk-free interest rate | | | N/A | | | | 4 | % |
Expected life of options (years) | | | N/A | | | | 1.0 | |
Weighted average fair value of options and warrants granted | | | N/A | | | $ | 0.13 | |
All stock options and warrants to purchase common stock have been granted with exercise prices equal to or greater than the market value of the underlying common shares on the date of grant. At December 31, 2022, the aggregate intrinsic value of options and warrants outstanding and exercisable was $3,921,022. The intrinsic value of stock options and warrants are calculated as the amount by which the market price of the Company’s common stock exceeds the exercise price of the option or warrant.
Preferred Stock Warrants
Pursuant to the December 28, 2017 Compensation Agreement with David M. Shworan, the President and Chief Executive Officer of QuoteMedia, Ltd., a wholly owned subsidiary of Quotemedia, Inc., the Company issued Mr. Shworan warrants to purchase shares of Series A Redeemable Convertible Preferred Stock (“Compensation Preferred Stock Warrants”) in lieu of a cash salary. From the period December 28, 2017 to December 31, 2019 the Company issued a total of 31,250 Compensation Preferred Stock Warrants at an exercise price equal to $1.00 per share.
Also pursuant to the Compensation Agreement with Mr. Shworan, on December 28, 2017 the Company issued Mr. Shworan warrants to purchase up to 382,243 shares of Series A Redeemable Convertible Preferred Stock at an exercise price equal to $1.00 per share (“Liquidity Preferred Stock Warrant”). The Liquidity Preferred Stock Warrants only vest and become exercisable on the consummation of a Liquidity Event as defined in the Company’s Certificate of Designation of Series A Redeemable Convertible Preferred Stock. The probability of the liquidity event performance condition is not currently determinable or probable; therefore, no compensation expense has been recognized as of December 31, 2022. The probability is re-evaluated each reporting period. As of December 31, 2022, there was $9,173,832 in unrecognized stock-based compensation expense related to these Liquidity Preferred Stock Warrants. Since the Liquidity Preferred Stock Warrants only vest and become exercisable on the consummation of a Liquidity Event which is currently determined not to be probable, the Company is also unable to determine the weighted-average period over which the unrecognized compensation cost will be recognized.
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2022 and 2021, there were a total of 413,493 preferred stock warrants outstanding with a weighted average remaining contractual life of 25 years. As of December 31, 2022, 31,250 preferred stock warrants were exercisable. No preferred stock warrants were exercised for the years ended December 31, 2022 and 2021.
Fair Value Measurement of Compensation Preferred Stock Warrants
The Company adheres to ASC 820, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.
ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
| · | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company could access. |
| | |
| · | Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. |
| | |
| · | Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity. |
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
The estimated fair value of the Preferred Stock Warrant liability is determined using Level 3 inputs. As of December 31, 2022 and 2021, the fair value of the Preferred Stock Warrant Liability was $629,375 and $513,750, respectively. The Preferred Stock Warrants were valued using a bond plus option framework reflecting the cash flow of the Preferred Stock Warrants and used a probability weighted sum of the value in each potential year before expiration to estimate the fair value of the Preferred Stock Warrants. Volatility was based on public peer companies, adjusted for size and leverage. Risk-free rate was selected based on term matched Treasury securities. Bond repayment depends on the Company’s timely access to the required cash and as such, is discounted at the Company’s assumed borrowing rate. This model was run based on the Management’s expected term and probabilities of a liquidity event. The key inputs for the framework were as follows as of December 31, 2022 and 2021:
Valuation Inputs | | December 31, 2022 | | | December 31, 2021 | |
Expected Time to Expiration (years) | | | 25.05 | | | | 26.05 | |
Stock Price on Valuation Date | | $ | 0.21 | | | $ | 0.16 | |
Peer Volatility | | | 52.31 | % | | | 48.79 | % |
Cash Flow Discount Rate | | | 12.93 | % | | | 14.56 | % |
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth a summary of the changes in the fair value of the Level 3 Preferred Stock Warrant Liability for the years ended December 31, 2022 and December 31,2021:
| | Preferred Stock Warrant Liability | |
Fair value as of December 31, 2021 | | | 513,750 | |
Change in fair value | | | 115,625 | |
Fair value as of December 31, 2022 | | $ | 629,375 | |
The changes in fair value attributable to the Preferred Stock Warrants are recorded as an adjustment to stock compensation expense and reported in Sales and Marketing expense on the Statements of Operations.
10. EARNINGS PER SHARE
Basic net income per share is computed by dividing net income during the period by the weighted-average number of common shares outstanding, excluding the dilutive effects of common stock equivalents. Common stock equivalents include redeemable convertible preferred stock, stock options and warrants. Diluted net income per share is computed by dividing net income by the weighted-average number of dilutive common shares outstanding during the period. Diluted shares outstanding is calculated using the treasury stock method by adding to the weighted shares outstanding any potential shares of common stock from stock options and warrants that are in-the-money. For outstanding redeemable convertible preferred stock, potential common shares are determined using the if-converted method. The calculations for basic and diluted net income per share for the year ended December 31, 2022 and 2021 are as follows:
| | 2022 | | | 2021 | |
| | | | | | |
Net income | | $ | 444,470 | | | $ | 212,372 | |
| | | | | | | | |
Weighted average common shares used to calculate net income per share | | | 90,477,798 | | | | 90,477,798 | |
Warrants to purchase redeemable convertible preferred stock | | | 2,499,900 | | | | 2,499,900 | |
Redeemable convertible preferred stock | | | 10,306,671 | | | | 10,306,671 | |
Stock options and warrants to purchase common stock | | | 16,089,121 | | | | 16,029,293 | |
Weighted average common shares used to calculate diluted net income per share | | | 119,373,490 | | | | 119,313,662 | |
| | | | | | | | |
Net income per share – basic | | $ | 0.00 | | | $ | 0.00 | |
Net income per share – diluted | | $ | 0.00 | | | $ | 0.00 | |
11. SUPPLEMENTARY CASH FLOW INFORMATION
| | 2022 | | | 2021 | |
Cash paid for | | | | | | |
Interest | | $ | 3,356 | | | $ | 2,641 | |
| | | | | | | | |
The non-cash amounts related to right-of-use assets obtained in exchange for lease obligations are noted below for the years ended December 31,2022 and 2021:
| | 2022 | | | 2021 | |
| | | | | | |
Right-of-use assets obtained in exchange for lease obligations | | $ | - | | | $ | 233,978 | |
There were no non-cash amounts related to the purchase of fixed assets under finance leases for the years ended December 31, 2022 and 2021.
Cash and cash equivalents consists entirely of cash at December 31, 2022.
QUOTEMEDIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. PAYCHECK PROTECTION PROGRAM
On May 4, 2020, the Company received a $133,257 loan under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides qualifying businesses with these proceeds for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The proceeds and accrued interest are forgivable after twenty-four weeks, known as the covered period, as long as the borrower uses the proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The PPP loan was forgiven in its entirety on February 19, 2021. In accordance with ASC 470, Debt,the forgiveness of the loan was recognized as other income on the Company’s consolidated statements of operations.
13. REVENUE CONCENTRATION
A significant portion of the Company’s revenue has historically been derived from customers outside of the United States, primarily in Canada. For the years ended December 31, 2022 and 2021, revenue from Canada accounted for approximately 35% and 28%, respectively, of total revenue.
14. SUBSEQUENT EVENTS
The Company has evaluated events up to the filing date of these consolidated financial statements and determined there are no other subsequent event activity required disclosure.