UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017
OR
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER: 001-37916
SOCIAL REALITY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-2925231
(I.R.S. Employer Identification No.)
456 Seaton Street, Los Angeles, CA 90013
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (323) 694-9800
Securities registered under Section 12(b) of the Act:
Title of each class
Class A common stock, par value $0.001 per share
Name of each exchange on which registered
Nasdaq Capital Market
Securities registered under Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes ☑ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. o Yes ☑ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.4.05 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑ Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company:
Large accelerated filer
Non-accelerated filer
Emerging Growth Company
o
o
o
Accelerated filer
Smaller reporting company
o
☑
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes ☑ No
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the
price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day
of the registrant's most recently completed second fiscal quarter. Approximately $10,880,803 on June 30, 2017.
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
10,089,788 shares of Class A common stock are issued and outstanding as of March 31, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2018 annual meeting of shareholders (the “2018 Proxy
Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2018 Proxy
Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which
this report relates.
Business.
Risk Factors.
Unresolved Staff Comments.
Description of Property.
Legal Proceedings.
Mine Safety Disclosures.
TABLE OF CONTENTS
Part I
Part II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Selected Financial Data.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Part III
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accounting Fees and Services.
Item 15.
Exhibits, Financial Statement Schedules.
Part IV
i
Page No.
1
6
13
13
13
14
15
17
17
25
25
25
26
27
28
28
28
28
28
29
PART I
We urge you to read this entire Annual Report on Form 10-K, including the “Risk Factors” section, the financial statements and
the related notes included therein. As used in this Annual Report, unless context otherwise requires, the words “we,” “us,” “our,”
“the Company,” “SRAX,” “Social Reality,” and “Registrant” refer to Social Reality, Inc. and its subsidiaries. Also, any reference
to “common share” or “common stock,” refers to our $.001 par value Class A common stock. On September 20, 2016, we
completed a one-for-five reverse stock split of our common stock. All share and per share information in this report has been
adjusted to reflect the reverse stock split.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K that are not purely historical are considered to be "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include, but are not limited to: any projections of
revenues, earnings, or other financial items; any statements of the strategies, plans and objectives of management for future
operations; any statements concerning proposed new products or developments; any statements regarding future economic
conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-
looking statements may include the words "may," "will," "estimate," "intend," "continue," "believe," "expect" or "anticipate" and
any other similar words. These statements represent our expectations, beliefs, anticipations, commitments, intentions, and
strategies regarding the future and include, but are not limited to, the risks and uncertainties outlined in Item 1.A Risk Factors and
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and those discussed in other
documents we file with the Securities and Exchange Commission (SEC). Readers are cautioned that actual results could differ
materially from the anticipated results or other expectations that are expressed in forward-looking statements within this report.
The forward-looking statements included in this report speak only as of the date hereof, and we undertake no obligation to publicly
update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as
required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking
statements.
ITEM 1.
BUSINESS.
We are a digital marketing and data management platform delivering the tools to reach and reveal valuable audiences. Our
machine-learning technology analyzes marketing data to identify brands and content owners' core consumers and their
characteristics across marketing channels. Through an omnichannel approach that integrates all aspects of the advertising
experience into one platform, we discover new and measurable opportunities that amplify campaign performance and maximize
profits. We derive our revenues from:
·
·
·
·
sales of digital advertising campaigns to advertising agencies and brands;
sales of media inventory through real-time bidding, or “RTB”, exchanges;
sale and licensing of our SRAX Social platform and related media; and,
creation of custom platforms for buying media on SRAX for large brands.
The core elements of our business are:
·
Social Reality Ad Exchange or "SRAX" – Real Time Bidding sell side and buy side representation is our technology
which assists publishers in delivering their media inventory to the RTB exchanges. The SRAX platform integrates multiple market-
leading demand sources, including OpenX, Pubmatic and AppNexus. We also build custom platforms that allow our agency
partners to launch and manage their own RTB campaigns by enabling them to directly place advertising orders on the platform
dashboard and view and analyze results as they occur;
·
SRAXmd serves ads to both Healthcare Professionals and Patients using patent-pending process and technology.
Powerful first and third-party data allow us to reach more than 400,000 Healthcare Professionals and Patients with real-time ad
targeting, serving banner and video ads to personal devices. Advertising agencies and pharmaceutical clients contract with us
directly to secure ad space and to license the MOSEE ad targeting platform on an annual basis.
·
SRAX Social is a social media and loyalty platform that allows brands to launch and manage their social media
initiatives. Our team works with customers to identify their needs and then helps them in the creation, deployment and management
of their social media presence; and
1
·
SRAXfan tools enable brands and agencies to connect with sports fans at home, the stadium or out-of-home at gathering
locations, such as bars, restaurants, and universities, during live sporting events.
·
SRAXauto tools enable targeting and engagement with potential auto buyers at dealerships, auto shows, and at home
across desktop and mobile environments.
We offer our customers several pricing options including cost-per-thousand-impression, commonly referred to as CPM,
whereby our customers pay based on the number of times the target audience is exposed to the advertisement, and on a monthly
service fee.
Marketing and sales
We market our services through our in-house sales team, which is divided into two distinct activities. One group is
responsible for brand advertisers and advertising agencies, and the other is responsible for publisher acquisition and management.
Our in-house marketing is focused on social media, including Facebook, LinkedIn and Twitter, public relations (PR), industry
events and the creation of white papers which assist in our marketing efforts and are used as lead generation tools for our sales
team. We also attend industry specific events such as AdTech, AdExchanger, and Salesforce annual events and local events in Los
Angeles and New York.
We rely on our publishing partners to provide the media inventory that we sell and use to promote our marketing campaigns
as well as to assist in driving user traffic to these campaigns.
Intellectual property
We currently rely on a combination of trade secret laws and restrictions on disclosure to protect our intellectual property
rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without
infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our
employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other
proprietary information. Prior to our acquisition of Five Delta in December 2014, in October 2014 it filed a U.S. patent for a
method and system for bidding and performance tracking using online advertisements and provisional status has been granted
under 62/060,247. In addition, it claimed the benefit of a pending U.S. patent number 61/604,348 for online advertising scoring.
The provisional patent application has now been converted to a non-provisional patent application number 12/960,435 and is
awaiting examination by the U.S. Patent Office.
Competition
We operate in a highly competitive environment. Our competitors include companies who focus on the RTB market and
companies who are focused on providing social media applications on a managed and self-service basis. We believe we compete
based on both our ability to assist our customers to obtain the best available prices as well as our excellent customer service. The
barrier to entry to our industry is low. We believe that in the future we will face increased competition from these companies as
they expand their operations as well as new entrants to our industry. Most of the entities against which we compete, or may
compete, are larger and have greater financial resources than our company. Competition for advertising placements among current
and future suppliers of Internet navigational and informational services, high-traffic websites and Internet service providers, as well
as competition with other media for advertising placements, could result in significant price competition, declining margins and
reductions in advertising revenue. In addition, as we continue our efforts to expand the scope of our services, we may compete with
a greater number of publishers and other media companies across an increasing range of different services, including vertical
markets where competitors may have advantages in expertise, brand recognition and other areas. If existing or future competitors
develop or offer products or services that provide significant performance, price, creative or other advantages over those offered by
us, our business, results of operations and financial condition could be negatively affected. We also compete with traditional
advertising media, such as direct mail, television, radio, cable, and print, for a share of advertisers' total advertising budgets. Many
current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name
recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater financial,
technical, sales, and marketing resources. As a result, we may not be able to compete successfully. If we fail to compete
successfully, we could lose customers or media inventory and our revenue and results of operations could decline.
2
BIGToken, Inc.
During the third quarter of 2017, we also announced the launch of the BIGToken project (“BIGToken”), an advertising-
based platform initiative intended to reward consumers, by the issuance of a BIGToken who voluntarily opt-in to allow marketers
greater access to their personal information. During the first quarter of 2018 we completed the incorporation of Big Token, Inc. as a
wholly owned subsidiary in the state of Delaware. The core of the project is our blockchain identification graph platform or BIG.
The BIG platform and BIGToken is intended to generate higher quality marketing opportunities for advertisers that we believe will
pay a premium to have access to better, consumer self-generated data.
In March of 2018, we announced the Alpha launch of the BIG platform to a select group of individuals and entities. Users
participating in our BIGToken Alpha will be able to create an account, integrate third party accounts and answer serves in order to
create an initial data graph. Participants in the Alpha will be awarded points as opposed to a BIGToken. Although the Alpha launch
was a major milestone for the BIGToken project, there can be no assurance that we will complete final development of the
BIGToken project or if developed, that it will be successful.
Government regulation
Aspects of the digital marketing and advertising industry and how our business operates are highly regulated. We are
subject to a number of domestic and, to the extent our operations are conducted outside the U.S., foreign laws and regulations that
affect companies conducting business on the Internet and through other electronic means, many of which are still evolving and
could be interpreted in ways that could harm our business. In particular, we are subject to rules of the Federal Trade Commission,
or FTC, the Federal Communications Commission, or FCC, and potentially other federal agencies and state laws related to our
advertising content and methods, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-
SPAM Act, which establishes certain requirements for commercial electronic mail messages and specifies penalties for the
transmission of commercial electronic mail messages that follow a recipient's opt-out request or are intended to deceive the
recipient as to source or content, and federal and state regulations covering the treatment of member data that we collect from
endorsers.
U.S. and foreign regulations and laws potentially affecting our business are evolving. We have not yet developed an internal
compliance program nor do we have policies in place to monitor compliance. Instead, we rely on the policies of our publishing
partners and advertising clients. If we are unable to identify all regulations to which our business is subject and implement effective
means of compliance, we could be subject to enforcement actions, lawsuits and penalties including, but not limited to, fines and
other monetary liability or injunction that could prevent us from operating our business or certain aspects of our business. In
addition, compliance with the regulations to which we are subject now or in the future may require changes to our products or
services, restrict or impose additional costs upon the conduct of our business or cause users to abandon products or aspects of our
services. Any such action could have a material adverse effect on our business, results of operations and financial condition.
The FTC adopted Guides Concerning the Use of Endorsements and Testimonials in Advertising in October 2009. These
guides recommend that advertisers and publishers clearly disclose in third-party endorsements made online, such as in social
media, if compensation was received in exchange for said endorsements. Because some of our marketing campaigns entail the
engagement of consumers to refer other consumers in their social networks to view ads or take action, and both we and the
consumer may earn cash and other incentives, and any failure on our part to comply with these guides may be damaging to our
business. We currently do not take any steps to monitor compliance with these guides. In the event of a violation, the FTC could
potentially identify a violation of the guides, which could subject us to a financial penalty or loss of endorsers or advertisers.
In the area of information security and data protection, many states have passed laws requiring notification to users when
there is a security breach for personal data, such as the 2002 amendment to California's Information Practices Act, or requiring the
adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs
of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our
part to comply with these laws may subject us to significant liabilities.
3
We are also subject to federal, state, and foreign laws regarding privacy and protection of user data. Any failure by us to
comply with these privacy-related laws and regulations could result in proceedings against us by governmental authorities or
others, which could harm our business. In addition, the interpretation of data protection laws, and their application to the Internet is
unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways from state to state,
country to country, or region to region, and in a manner that is not consistent with our current data protection practices. Complying
with these varying requirements could cause us to incur additional costs and change our business practices. Further, any failure by
us to adequately protect users' privacy and data could result in a loss of confidence in our services and ultimately in a loss of
customers, which could adversely affect our business.
We generally only receive user data authorized through the Facebook user API. Access to such information, in addition to
being limited in scope by Facebook policies and procedures, requires the affirmative authorization of the participating user, as
stipulated by Facebook. In a campaign, we post a privacy policy and user agreement, which describe the practices concerning the
use, transmission and disclosure of member data in connection with such campaign. Any failure by us to comply with our privacy
policy and user agreement could result in proceedings against us by users, customers, governmental authorities or others, which
could harm our business.
Many states have passed laws requiring notification to subscribers when there is a security breach of personal data. There
are also a number of legislative proposals pending before the United States Congress, various state legislative bodies and foreign
governments concerning data protection. We partner with providers of data to acquire this data and we do not own this data. In
addition, data protection laws in Europe and other jurisdictions outside the United States may be more restrictive, and the
interpretation and application of these laws are still uncertain and in flux. It is possible that these laws may be interpreted and
applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an
order requiring that we change our data practices, which could have an adverse effect on our business. Furthermore, the Digital
Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, our liability for linking to third-party websites
that include materials that infringe copyrights or other rights, so long as we comply with the statutory requirements of this act.
Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a
manner adverse to our business.
Our users communicate across social and/or web-based channels. These communications are governed by a variety of U.S.
federal, state, and foreign laws and regulations. In the United States, the CAN-SPAM Act establishes certain requirements for the
distribution of "commercial" email messages for the primary purpose of advertising or promoting a commercial product, service, or
Internet website and provides for penalties for transmission of commercial email messages that are intended to deceive the recipient
as to source or content or that do not give opt-out control to the recipient. The FTC is primarily responsible for enforcing the CAN-
SPAM Act, and the U.S. Department of Justice, other federal agencies, state attorneys general, and Internet service providers also
have authority to enforce certain of its provisions.
The CAN-SPAM Act's main provisions include:
·
·
·
·
·
prohibiting false or misleading email header information;
prohibiting the use of deceptive subject lines;
ensuring that recipients may, for at least 30 days after an email is sent, opt out of receiving future commercial email messages from the sender,
with the opt-out effective within 10 days of the request;
requiring that commercial email be identified as a solicitation or advertisement unless the recipient affirmatively assented to receiving the
message; and
requiring that the sender include a valid postal address in the email message.
The CAN-SPAM Act preempts most state restrictions specific to email marketing. However, some states have passed laws
regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act,
particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited
commercial email that markets certain covered content, such as adult content or content regarding harmful products. Some portions
of these state laws may not be preempted by the CAN-SPAM Act.
Violations of the CAN-SPAM Act's provisions can result in criminal and civil penalties, including statutory penalties that
can be based in part upon the number of emails sent, with enhanced penalties for commercial email senders who harvest email
addresses, use dictionary attack patterns to generate email addresses, and/or relay emails through a network without permission.
4
With respect to text message campaigns, for example, the CAN-SPAM Act and regulations implemented by the FCC
pursuant to the CAN-SPAM Act, and the Telephone Consumer Protection Act, also known as the Federal Do-Not-Call law, among
other requirements, prohibit companies from sending specified types of commercial text messages unless the recipient has given his
or her prior express consent. We, our users and our advertisers may all be subject to various provisions of the CAN-SPAM Act. If
we are found to be subject to the CAN-SPAM Act, we may be required to change one or more aspects of the way we operate our
business.
If we were found to be in violation of the CAN-SPAM Act, other federal laws, applicable state laws not preempted by the
CAN-SPAM Act, or foreign laws regulating the distribution of commercial email, whether as a result of violations by our users or
any determination that we are directly subject to and in violation of these requirements, we could be required to pay penalties,
which would adversely affect our financial performance and significantly harm our reputation and our business.
In addition, because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to
comply with their laws, including in jurisdictions where we have no local entity, employees, or infrastructure.
Employees
At March 31, 2018, we had 49 full-time employees. We also contract for the services of an additional approximately 60
individuals from a third-party provider in Mexicali, Mexico. There are no collective bargaining agreements covering any of our
employees.
Our history
We were originally organized in August 2009 as a California limited liability company under the name Social Reality, LLC,
and we converted to a Delaware corporation effective January 1, 2012. Social Reality, LLC began business in May, 2010. Upon the
conversion, we changed our name to Social Reality, Inc.
Acquisition of Steel Media
On October 30, 2014, we acquired 100% of the capital stock of Steel Media from Mr. Richard Steel pursuant to the terms
and conditions of a Stock Purchase Agreement, dated October 30, 2014, by and among our company, Steel Media and Mr. Steel.
Additional information on the terms of our acquisition of Steel Media can be found in Note 2 to the notes to our audited
consolidated financial statements appearing elsewhere in this report.
Acquisition of Five Delta
On December 19, 2014, we acquired 100% of the outstanding capital stock of Five Delta pursuant to the terms and
conditions of the Share Acquisition and Exchange Agreement dated December 19, 2014 by and among Social Reality, Five Delta
and the stockholders of Five Delta. Additional information on the terms of our acquisition of Five Delta can be found in Note 2 to
the notes to our audited consolidated financial statements appearing elsewhere in this report.
Additional information
We file annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the
Securities and Exchange Commission (“SEC” or the “Commission”). The public may read and copy any materials that we file with
the Commission at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during
the hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. The Commission also maintains an Internet site at http://www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the Commission.
Other information about Social Reality can be found on our website www.socialreality.com. Reference in this document to
that website address does not constitute incorporation by reference of the information contained on the website.
5
ITEM 1.A
RISK FACTORS.
Please consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a
material adverse effect on our business, prospects, financial condition and results of operations, and the market price of our
securities could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an
adverse effect on our business or similar statements) mean that the event could or would have a material adverse effect on our
business, prospects, financial condition and results of operations, which in turn could or would have a material adverse effect on
the market price of our securities. Although we have organized the risk factors below under headings to make them easier to read,
many of the risks we face involve more than one type of risk. Consequently you should read all of the risk factors below carefully
before making any decision to acquire or hold our securities.
Any investment in our securities involves a high degree of risk. Investors should consider carefully the risks and
uncertainties described below, and all other information in this Form 10-K and in any reports we file with the SEC after we file this
Form 10-K, before deciding whether to purchase or hold our securities. Additional risks and uncertainties not currently known to
us or that we currently deem immaterial may also become important factors that may harm our business. The occurrence of any of
the risks described in this Form 10-K could harm our business. The trading price of our securities could decline due to any of these
risks and uncertainties, and investors may lose part or all of their investment.
Risks Related to our Business
We have a history of losses and there are no assurances we will report profitable operations in the foreseeable future.
We reported net losses of $6,658,882 and $4,248,233 for the years ended December 31, 2017 and 2016, respectively. At
December 31, 2017, we had an accumulated deficit of $21,148,706. Our future success depends upon our ability to continue to
grow our revenues, contain our operating expenses and generate profits. We do not have any long-term agreements with our
customers. There are no assurances that we will be able to increase our revenues and cash flow to a level which supports profitable
operations. In addition, our operating expenses increased 3.2% in 2017 from 2016. As described elsewhere herein, in 2017 we
made certain changes in our operations to limit growth of operating expenses and focus our resources in areas of our operations
which we believe have the greatest potential to increase our revenues. We may continue to incur losses in future periods until such
time, if ever, as we are successful in significantly increasing our revenues and cash flow beyond what is necessary to fund our
ongoing operations and pay our obligations as they become due. If we are able to significantly increase our revenues in future
periods, the rapid growth which we are pursuing will strain our organization and we may encounter difficulties in maintaining the
quality of our operations. If we are not able to grow successfully, it is unlikely we will be able to generate sufficient cash from
operations to pay our operating expenses and service our debt obligations, or report profitable operations in future periods.
Our independent registered public accounting firm has substantial doubts about our ability to continue as a going concern.
At December 31, 2017, we had an accumulated deficit of $21,148,706. Primarily as a result of our recurring losses from
operations, negative cash flows and our accumulated deficit, our independent registered public accounting firm has included in its
report for the year ended December 31, 2017, an explanatory paragraph expressing substantial doubt about our ability to continue
as a going concern. Our ability to continue as a going concern is contingent upon, among other factors, our ability to obtain
sufficient financing to support our operations.
Our operations rely on various third party vendors and if we lose these vendors it may adversely affect our financial position
and results of operations.
We rely on third party vendors to provide us with media inventory to facilitate sales of advertising, the majority of which
are engaged on a per order basis. Due to our lack of working capital, we are delinquent on payments to several of these media
suppliers. While we will attempt to negotiate payment terms and forbearance agreements with these vendors on a case by case
basis, many of these vendors may cease providing services to our company and may seek legal remedies against us. Any loss of
these vendors or ligation arising out of our failure to satisfy our obligations to any of these vendors could disrupt our business and
have a material negative effect on our operations.
6
Our success depends upon our ability to maintain our technology platforms and expand our product offerings. We do not have
any long-term contracts with our customers.
We derive our revenue from the core elements of our business which includes the SRAXmd platform. The SRAXmd platform
is a highly-specialized ad targeting and data platform specifically geared toward healthcare brands, agencies and medical content
publishers and relies on a limited number of customers. The loss of any one customer that uses the SRAXmd platform could
adversely impact the results of operations and cash flows in future periods from this platform.
Our success is dependent upon our ability to effectively expand and manage our relationships with our publishers. We do not
have any long-term contracts with our publishing partners.
We do not generate our own media inventory. Accordingly, we are dependent upon our publishing partners to provide the
media which we sell. We depend on these publishers to make their respective media inventories available to us to use in connection
with our campaigns that we manage, create or market. We are not a party to any long-term agreements with any of our publishing
partners and there are no assurances we will have continued access to the media. Our growth depends, in part, on our ability to
expand and maintain our publisher relationships within our network and to have access to new sources of media inventory such as
new partner websites and Facebook pages that offer attractive demographics, innovative and quality content and growing Web user
traffic volume. Our ability to attract new publishers to our networks and to retain Web publishers currently in our networks will
depend on various factors, some of which are beyond our control. These factors include, but are not limited to, our ability to
introduce new and innovative products and services, our pricing policies, and the cost-efficiency to Web publishers of outsourcing
their advertising sales. In addition, the number of competing intermediaries that purchase media inventory from Web publishers
continues to increase. In the event we are not able to maintain effective relationships with our publishers, our ability to distribute
our advertising campaigns will be greatly hindered which will reduce the value of our services and adversely impact our results of
operations in future periods.
If we were to lose access to the Facebook platform, our SRAX Social growth would be limited and we could lose our existing
revenue from these sources.
Facebook currently provides access to companies to build applications on their platform. We have built our SRAX Social
platform to use the Facebook application programming interface, or APIs. The loss of access to the Facebook platform would limit
our ability to effectively grow a portion of our operations. We are subject to Facebook's standard terms and conditions for
application developers, which govern the promotion, distribution and operation of applications on the Facebook platform.
Facebook reserves the right to change these terms and conditions at any time. Our business would be harmed if Facebook:
·
·
·
·
discontinues or limits access to its platform by us and other application developers;
modifies its terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers, or
changes how the personal information of its users is made available to application developers on the Facebook platform or shared by users;
establishes more favorable relationships with one or more of our competitors; or
develops its own competitive offerings.
We have benefited from Facebook's strong brand recognition and large user base. Facebook has broad discretion to change
its terms of service and other policies with respect to us and other developers, and any changes to those terms of service may be
unfavorable to us. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform,
change how the personal information of its users is made available to application developers on the Facebook platform or restrict
how Facebook users can share information with friends on their platform. In the event Facebook makes any changes in the future,
we may have to modify the structure of our campaigns which could impact the effectiveness of our campaigns and adversely
impact our results of operations in future periods.
7
If we lose access to RTB inventory buyers our business may suffer.
In an effort to reduce our dependency on any one provider of advertising demand, we created a platform that utilizes feeds
from a number of demand sources for our inventory. We believe that our proprietary technology assists us in aggregating this
demand, as well as providing the tools needed by our publishing partners to evaluate and track the effectiveness of the demand that
we are aggregating for them. In the event that we lose access to a majority of this demand, however, our revenues would be
impacted and our results of operations would be materially adversely impacted until such time, if ever, as we could secure
alternative sources of demand for our inventory.
We depend on the services of our executive officers and the loss of any of their services could harm our ability to operate our
business in future periods
Our success largely depends on the efforts and abilities of our executive officers, including Christopher Miglino, Kristoffer
Nelson and Joseph Hannan. We are a party to an employment agreement with each of Mr. Miglino, and Mr. Hannan, and an "at
will" agreement with Mr. Nelson. Although we do not expect to lose their services in the foreseeable future, the loss of any of them
could materially harm our business and operations in future periods until such time as we were able to engage a suitable
replacement.
If advertising on the Internet loses its appeal, our revenue could decline.
Our business model may not continue to be effective in the future for a number of reasons, including:
·
·
·
·
·
·
·
a decline in the rates that we can charge for advertising and promotional activities;
our inability to create applications for our customers;
Internet advertisements and promotions are, by their nature, limited in content relative to other media;
companies may be reluctant or slow to adopt online advertising and promotional activities that replace, limit or compete with their existing
direct marketing efforts;
companies may prefer other forms of Internet advertising and promotions that we do not offer;
the quality or placement of transactions, including the risk of non-screened, non-human inventory and traffic, could cause a loss in customers
or revenue; and
regulatory actions may negatively impact our business practices.
If the number of companies who purchase online advertising and promotional services from us does not grow, we may
experience difficulty in attracting publishers, and our revenue could decline.
Additional acquisitions may disrupt our business and adversely affect results of operations.
We may pursue acquisitions in an effort to increase revenue, expand our market position, add to our technological
capabilities, or for other purposes. However, any future acquisitions would likely involve risk, including the following:
·
·
·
·
the identification, acquisition and integration of acquired businesses requires substantial attention from management. The diversion of
management's attention and any difficulties encountered in the transition process could hurt our business;
the anticipated benefits from an acquisition may not be achieved, we may be unable to realize expected synergies from an acquisition or we
may experience negative culture effects arising from the integration of new personnel;
difficulties in integrating the technologies, solutions, operations, and existing contracts of the acquired business;
we may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company, technology, or solution;
8
·
·
to pay for future acquisitions, we could issue additional shares of our Class A common stock or pay cash, raised through equity sales or debt
issuance. The issuance of any additional shares of our Class A common stock would dilute the interests of our current stockholders, and debt
transactions would result in increased fixed obligations and would likely include covenants and restrictions that would impair our ability to
manage our operations; and
new business acquisitions can generate significant intangible assets that result in substantial related amortization charges and possible
impairments.
While our general growth strategy includes identifying and closing additional acquisitions, we are not presently a party of
any agreements or understandings. There are no assurances we will acquire any additional companies.
Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could
result in a decline in our stock price.
We have previously provided, and may provide in the future, public guidance on our expected financial results for future
periods. Although we believe that this guidance provides investors with a better understanding of management's expectations for
the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements
subject to the risks and uncertainties. Our actual results may not always be in line with or exceed the guidance we have provided.
For example, we did not meet our 2016 revenue guidance. If our financial results for a particular period do not meet our guidance
or if we reduce our guidance for future periods, the market price of our Class A common stock may decline.
Risks Related to Ownership of our Securities
We do not know whether an active, liquid and orderly trading market will develop for our offered securities or what the market
price of our offered securities will be and as a result it may be difficult for you to sell your shares of our Class A common stock.
Prior to October 13, 2016 our Class A common stock was quoted on the OTCQB Tier of the OTC Markets and it was thinly
traded. On October 13, 2016, our Class A common stock began trading on the Nasdaq Capital Market and since that date a trading
marketing in our stock has been developing. While an active trading market in our Class A common stock has developed since that
time, it may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell
them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares.
Further, an inactive market may also impair our ability to raise capital by selling shares of our Class A common stock and may
impair our ability to enter into collaborations or acquire companies or products by using our shares of Class A common stock as
consideration. The market price of our offered securities may be volatile, and you could lose all or part of your investment.
The trading price of the shares of our Class A common stock is likely to be highly volatile and could be subject to wide
fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk
Factors” section and elsewhere in this prospectus, these factors include:
·
·
·
·
·
·
·
the success of competitive products;
actual or anticipated changes in our growth rate relative to our competitors;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital
commitments;
regulatory or legal developments in the United States and other countries;
the recruitment or departure of key personnel;
the level of expenses;
actual or anticipated changes in estimates to financial results, development timelines or recommendations by securities analysts;
9
·
·
·
·
·
·
·
·
variations in our financial results or those of companies that are perceived to be similar to us;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
inconsistent trading volume levels of our shares;
announcement or expectation of additional financing efforts;
sales of our Class A common stock by us, our insiders or our other stockholders;
additional issuances of securities upon the exercise of outstanding options and warrants;
market conditions in the technology sectors; and
general economic, industry and market conditions.
In addition, the stock market in general, and advertising technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad
market and industry factors may negatively affect the market price of our Class A common stock, regardless of our actual operating
performance. The realization of any of these risks could have a dramatic and material adverse impact on the market price of the
shares of our Class A common stock.
We may be subject to securities litigation, which is expensive and could divert management attention.
The market price of the shares of our Class A common stock may be volatile, and in the past companies that have
experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the
target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our
management’s attention from other business concerns, which could seriously harm our business. To the extent that any claims or
suits are brought against us and successfully concluded, we could be materially adversely affected, jeopardizing our ability to
operate successfully. Furthermore, our human and capital resources could be adversely affected by the need to defend any such
actions, even if we are ultimately successful in our defense.
Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could
result in a decline in our stock price.
We have previously provided, and may provide in the future, public guidance on our expected financial results for future
periods. Although we believe that this guidance provides investors with a better understanding of management's expectations for
the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements
subject to the risks and uncertainties. Our actual results may not always be in line with or exceed the guidance we have provided.
For example, we did not meet our 2016 or 2017 revenue guidance. If our financial results for a particular period do not meet our
guidance or if we reduce our guidance for future periods, the market price of our Class A common stock may decline.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which
would harm our business and the trading price of our stock.
As described in our Annual Report on Form 10-K for the year ended December 31, 2016, our management has determined
that, as of December 31, 2016, we did not maintain effective internal controls over financial reporting based on criteria set forth by
the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework as a result of
identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material
misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. As of
December 31, 2017, management has determined that we have yet to fully remediate the previously identified material weaknesses.
While we have never been required to restate our consolidated financial statements, the existence of the continuing material
weaknesses in our internal control over financial reporting increases the risk that a future restatement of our consolidated financial
statements is possible.
10
Delaware law contains anti-takeover provisions that could deter takeover attempts that could be beneficial to our stockholders.
Provisions of Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial
to our stockholders. Section 203 of the Delaware General Corporation Law may make the acquisition of our company and the
removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding
voting stock from acquiring us, without our board of directors' consent, for at least three years from the date they first hold 15% or
more of the voting stock.
The two class structure of our Class A common stock could have the effect of concentrating voting control with a limited group.
Our authorized capital includes two classes of common stock which have different voting rights. Our Class B common
stock has 10 votes per share and our Class A common stock has one vote per share. The shares of our Class B common stock were
originally held by two of our executive officers who were the founders of our company, but these shares were converted into shares
of our Class A common stock in October 2013. While there are presently no shares of Class B common stock outstanding, in the
future our board could choose to issue shares to one or more individuals or entities. As a result of the voting rights associated with
the Class B common stock, those individuals or entities could have significant influence over the management and affairs of the
company and control over matters requiring stockholder approval, including the election of directors and significant corporate
transactions, such as a merger or other sale of our company or its assets, for the foreseeable future. This concentrated voting control
could limit your ability to influence corporate matters and could adversely affect the price of our Class A common stock.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the
trading price of our Class A common stock and trading volume could decline.
The trading market for our shares of our Class A common stock will depend in part on the research and reports that
securities or industry analysts publish about us or our business. A small number of securities and industry analysts currently publish
research regarding our Company on a limited basis. In the event that one or more of the securities or industry analysts who have
initiated coverage downgrade our securities or publish inaccurate or unfavorable research about our business, the price of our
shares of Class A common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to
publish reports on us regularly, demand for our securities could decrease, which might cause the trading price of our shares of Class
A common stock and trading volume to decline.
The elimination of monetary liability against our directors and officers under Delaware law and the existence of
indemnification rights held by our directors and officers may result in substantial expenditures by us and may discourage
lawsuits against our directors and officers.
Our certificate of incorporation eliminates the personal liability of our directors and officers to our company and our
stockholders for damages for breach of fiduciary duty as a director or officer to the extent permissible under Delaware law. Further,
our bylaws provide that we are obligated to indemnify any of our directors or officers to the fullest extent authorized by Delaware
law. We are also parties to separate indemnification agreements with certain of our directors and our officers which, subject to
certain conditions, require us to advance the expenses incurred by any director or officer in defending any action, suit or proceeding
prior to its final disposition. Those indemnification obligations could result in our company incurring substantial expenditures to
cover the cost of settlement or damage awards against our directors or officers, which we may be unable to recoup. These
provisions and resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or
officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders
against our directors and officers even if such actions, if successful, might otherwise benefit us or our stockholders.
Risks Related to the BIG Platform and BIGToken Project
There can be no assurance that BIGTokens will ever be issued.
The Company recently announced its intent to develop the BIG Platform as a means of securing higher quality user data.
The Company anticipates that a material part of the platform will be the issuance of BIGTokens to users. There can be no
assurance that it will do so. Should the Company fail to issue the BIGTokens, the attractiveness of the BIG Platform may be
materially affected and we will not recognize the benefits of the project.
11
There is currently no trading market for BIGTokens, and a trading market may never develop.
If the BIGTokens are ultimately issued, there is currently no trading market available for the BIGTokens, no Designated
Exchange and peer-to-peer transfers will not be permitted unless and until holders are notified otherwise by the Company and
informed of the requirements to and conditions do so. As a result of recent regulatory developments, conventional crypto
exchanges are currently unwilling to list securities tokens, such as the proposed BIGTokens. As a result, if and when issued and
they become transferable, BIGTokens may only be tradable on very limited range of venues, including U.S. registered exchanges or
regulated alternative trading systems for which a Form ATS has been properly submitted to the SEC. Currently, the Company is
unaware of any operational ATS or exchange capable of supporting secondary trading in BIGTokens, when issued. Additionally,
even if the BIGTokens are issued and become transferable, we may rely on technology, including smart contracts, to implement
certain restrictions on transferability in accordance with the federal securities laws. There can be no assurance that such technology
will function properly, which could result in technological limitations on transferability and expose the Company to legal and
regulatory issues. As a result of these technological, legal and regulatory considerations, a market for the BIGToken may never be
developed and, if developed, may, for a variety of technological, legal and regulatory reasons, never become operational or
efficient. In the event that a market for the BIGToken does not develop, the value of the BIGTokens would be materially adversely
affected which could also have a materially adverse affect on our BIG Platform and the anticipated benefits therefrom.
Regulatory authorities may never permit a trading system on which the BIGToken could trade to become operational.
Numerous regulatory authorities, including FINRA and the SEC, would need to permit the a trading system on which the
BIGToken could trade to become operational. If FINRA, the SEC or any other regulatory authority objected to such system or
exchange, such regulatory authorities could prevent the system or exchange from ever becoming operational. Any such regulatory
issues would have a material adverse impact on our BIG Platform project.
The potential application of U.S. laws regarding investment securities to the tokens is unclear.
Securities, such as the BIGToken are novel and the application of U.S. federal and state securities laws is unclear in many
respects. Because of the differences between the securities such as the BIGToken and traditional investment securities, there is a
risk that issues that might easily be resolved by existing law if traditional securities were involved may not be easily resolved for
securities such as the BIGToken. In addition, because of the novel risks posed by securities such as the BIGToken, it is possible that
securities regulators may interpret laws in a manner that adversely affects their value. For example, if applicable securities laws
restrict the ability for BIGTokens to be transferred, this would have a material adverse effect on the value of the BIGToken, which
could result in a material impact on the BIG Platform project.
The regulatory regime governing blockchain technologies, cryptocurrencies, digital assets, and offerings of digital assets, such
as the BIGToken, is uncertain, and new regulations or policies may materially adversely affect the development and the value of
the BIG Platform.
Regulation of digital assets, like the anticipated BIGTokens, cryptocurrencies, blockchain technologies and cryptocurrency
exchanges, is currently undeveloped and likely to rapidly evolve as government agencies take greater interest in them, varies
significantly among international, federal, state and local jurisdictions and is subject to significant uncertainty. Various legislative
and executive bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other
actions, which may severely impact the permissibility of securities such as the BIGToken, tokens generally and, in each case, the
technology behind them or the means of transaction in or transferring them. Our failure to comply with any laws, rules and
regulations, some of which may not exist yet or that are subject to interpretations that may be subject to change, could result in a
variety of adverse consequences, including civil penalties and fines.
Cryptocurrency networks, distributed ledger technologies, and coin and token offerings also face an uncertain regulatory
landscape in many foreign jurisdictions such as the European Union, China and Russia. Various foreign jurisdictions may, in the
near future, adopt laws, regulations or directives that affect securities such as the proposed BIGToken. Such laws, regulations or
directives may conflict with those of the United States or may directly and negatively impact our BIG Platform. The effect of any
future regulatory change is impossible to predict, but such change could be substantial and materially adverse to the adoption and
value of the BIGTokens, when and if issued, and the financial performance of our BIG Platform when and if developed.
12
The further development and acceptance of blockchain networks, which are part of a new and rapidly changing industry, are
subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of
blockchain networks and blockchain assets would have an adverse material effect on the successful development and adoption
of BIGTokens.
The growth of the blockchain industry in general, as well as the blockchain networks on which the BIG Platform and
BIGTokens will rely, are subject to a high degree of uncertainty. The factors affecting the further development of the
cryptocurrency and cryptosecurity industry, as well as blockchain networks, include, without limitation:
·
·
·
·
·
·
·
worldwide growth in the adoption and use of cryptocurrencies, cryptosecurities and other blockchain technologies;
government and quasi-government regulation of cryptocurrencies, cryptosecurities and other blockchain assets and
their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems;
the maintenance and development of the open-source software protocol of cryptocurrency or cryptosecurities networks;
changes in consumer demographics and public tastes and preferences;
the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets
including new means of using government-backed currencies or existing networks;
general economic conditions and the regulatory environment relating to cryptocurrencies and cryptosecurities; and
a decline in the popularity or acceptance of cryptocurrencies or other blockchain-based tokens would adversely affect
the BIGToken, when and if issued, and have a materially adverse affect on the BIG Platform.
The cryptocurrency and cryptosecurities industries as a whole have been characterized by rapid changes and innovations
and are constantly evolving. Although they have experienced significant growth in recent years, the slowing or stopping of the
development, general acceptance and adoption and usage of blockchain networks and blockchain assets may deter or delay the
acceptance and adoption of the Tokens.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.
ITEM 2.
DESCRIPTION OF PROPERTY.
We lease our principal executive offices from an unrelated third party on a month-to-month basis, subject to termination
with advance notice, at an amount of $5,626.25 per month. We also maintain offices in Mexicali, Mexico where we lease
approximately 3,400 square feet of office space from an unrelated third party under a lease agreement terminating in September
2021 at an initial annual rental of $77,580 plus a value-added tax (VAT) or its equivalent in the Mexican national currency and a
10% VAT for maintenance and certain overhead expenses.
ITEM 3.
LEGAL PROCEEDINGS.
On August 25, 2017 Social Reality, Inc. filed a lawsuit against Tronc, Inc. (formerly Tribune Publishing Company LLC)
and Tribune Content Agency, LLC for breach of contract, fraudulent concealment and deceptive business practices (case number
1:17-cv-05998, U.S. District Court for the Northern District of Illinois). We have alleged that Tronc, Inc. and Tribune Content
Agency, LLC refused to perform their contractual obligations and breached the terms of contract and insertion orders, causing us to
suffer close to $35 million in damages.
13
On December 4, 2017, Social Reality, Inc. entered into a settlement agreement (“Settlement Agreement”) in this matter.
Pursuant to the Settlement Agreement, neither party admitted any fault or liability and the parties entered into a mutual release
resolving the matter. Additionally, Tronc agreed to (i) pay the Company $2,250,000 representing amounts owed for advertisements
placed by the Company as well as accrued interest and related costs; and (ii) provide the Company with $300,000 in media to be
utilized within a twelve month period commencing on a date to be identified by the Company and agreed to by Tronc in exchange
for terminating certain licensing rights Tronc had previously granted to the Company.
The Company is not currently engaged in any other material legal proceedings.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable to our company.
14
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Since October 13, 2016 our Class A common stock has been listed on the Nasdaq Capital Market under the symbol
"SRAX." Prior thereto, our Class A common stock was quoted on the OTCQB Tier of the OTC Markets under the symbol “SCRI.”
The reported high and low last bid prices for the Class A common stock are shown below for the periods indicated. The quotations
reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
2016
First quarter ended March 31, 2016
Second quarter ended June 30, 2016
Third quarter ended September 30, 2016
Fourth quarter ended December 31, 2016
2017
First quarter ended March 31, 2017
Second quarter ended June 30, 2017
Third quarter ended September 30, 2017
Fourth quarter ended December 31, 2017
High
Low
$
$
$
$
$
$
$
$
9.40
9.10
7.85
7.05
$
$
$
$
6.14
1.93
5.75
7.95
$
$
$
$
6.00
6.65
6.00
5.75
1.58
1.14
1.11
2.12
The last sale price of our Class A common stock as reported on the Nasdaq Capital Market on March 22, 2018 was $3.90
per share. As of March 22, 2018, there were approximately 66 record owners of our Class A common stock.
Dividend policy
We have never paid cash dividends on either our Class A common stock or our Class B common stock. Under Delaware
law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Delaware statutes,
or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal
year. If, however, the capital of our company, computed in accordance with the relevant Delaware statutes, has been diminished by
depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited
from declaring and paying out of such net profits and dividends upon any shares of our capital stock until the deficiency in the
amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets
shall have been repaired.
Recent sales of unregistered securities
The following information is given with regard to unregistered securities sold since January 1, 2017. The following
securities were issued in private offerings pursuant to the exemption from registration contained in the Securities Act of 1933, as
amended (the “Securities Act”) and the rules promulgated thereunder in reliance on Section 4(2) thereof, relating to offers of
securities by an issuer not involving any public offering:
In November 2016, we entered into a strategic advisory agreement with kathy ireland® Worldwide LLC In January of 2017,
as compensation for the advisory services, we issued affiliates of kathy ireland® Worldwide LLC, 100,000 shares of our Class A
common stock valued at $678,000.
In January 2017, we issued 3,858 shares of our Class A common stock to Mr. Ferguson upon his appointment to our board
of directors and the audit committee of the board. The shares were issued pursuant to our 2016 equity compensation plan.
15
In January 2017, contemporaneously with our registered offering, we issued, in a private placement, for no additional
consideration, 380,953 Class A common stock purchase warrants with an exercise price of $6.70 per share. The warrants have a
term of five years commencing six months from the date of closing. The warrants are subject to adjustment in the event of stock
splits, dividends, and fundamental transactions. The warrants also contain anti-dilution price protection for subsequent equity
issuances with an exercise price floor of $1.20 per share.
In February 2017, we issued an individual 150,000 shares of our Class A common stock valued at $540,000 as
compensation for consulting services
In March 2017, we issued Robert Jordan 6,510 shares of our Class A common stock pursuant to his joining the board of
directors in accordance with our non-executive director compensation policy. The shares were issued pursuant to our 2016 equity
compensation plan.
In April 2017, we entered into securities purchase agreements to sell $5,000,000 of our 12.5% secured convertible
debentures and issued 833,337 Series A Common Stock Purchase Warrants. The debentures mature on 4/21/2020, bear interest at
an annual rate of 12.5%, payable quarterly on January 1, April 1, July 1, and October 1, beginning on July 1, 2017. The debentures
are convertible into shares of our Class A common stock at $3.00 per share, subject to adjustment, and contain anti-dilution
protection for subsequent financings and have a conversion price floor of $1.40 per share. The Series A common stock purchase
warrants have an exercise price of $3.00 per share, subject to adjustment and contain anti-dilution protection for subsequent
financings and have an exercise price floor of $1.40 per share. In connection with the sale of the debentures we issued Chardan
Capital Markets 100,000 placement agent warrants with an exercise price of $3.75, term of five and a half years (exercisable
beginning 6 months after issuance).
In August 2017, as consideration for our acquisition of Leapfrog Media Trading, we issued 200,000 shares of Class A
common stock and warrants to purchase 350,000 shares of Class A common stock. The warrants have a term of five years and an
exercise price of $3.00 per share and are subject to adjustment in the vent of stock splits, dividends, subsequent rights offerings,
and fundamental transactions. Additionally, the warrants contain anti-dilution price protection for subsequent equity sales .
Between September 2017 and January 2018, we issued an aggregate of 225,000 shares of Class A common stock valued at
$957,000 as consideration for media and marketing services.
In October 2017, we issued 70,409 shares of our Class A common stock to Joseph P. Hannan, our chief financial officer,
pursuant to his October 2017 employment agreement. The shares were issued pursuant to our 2016 equity compensation plan.
In October 2017, we entered into securities purchase agreements to sell an aggregate of $5,180,157.78 of our 12.5% secured
convertible debentures and issued 863,365 Series A Common Stock Purchase Warrants. The debentures mature on 4/21/2020, bear
interest at an annual rate of 12.5%, payable quarterly on January 1, April 1, July 1, and October 1, beginning on January 1, 2018.
Pursuant to the greenshoe provision contained in our April 2017 debenture offering, $2,000,000 of debentures were purchased
pursuant to the greenshoe provision and the remaining $3,180,157.78 were purchased separately. Of the 863,365 warrants issued, a
total of 333,335 were purchased pursuant to the greenshoe provision and 630,030 were purchased separately. The debentures are
convertible into shares of our Class A common stock at $3.00 per share, subject to adjustment, and contain anti-dilution protection
for subsequent financings and have a conversion price floor of $1.40 per share (pursuant to shareholder vote approving the offering
that occurred on December 29, 2017). The warrants have an exercise price of $3.00 per share, subject to adjustment and contain
anti-dilution protection for subsequent financings and have an exercise price floor of $1.40 per share. In connection with the
offering we issued Chardan Capital Markets 160,000 placement agent warrants, of which: (i) 129,176 have an exercise price of
$3.75 and (ii) 54,161 have an exercise price of $4.49. We also issued Aspenwood Capital 23,337 placement agent warrants with an
exercise price of $3.75. All placement agent warrants have a term of five and a half years (exercisable beginning 6 months after
issuance).
On January 18, 2018, we issued Colleen DiClaudio, a board member, 7,813 Class A common shares valued at $10,000 as
payment for 2017 services on our board of directors. The shares were issued from our 2016 equity compensation plan
In January 2018, we issued Hardy Thomas, a former board member, 7,195 Class A common shares valued at $10,000 as
payment for 2017 services on our board of directors. The shares were issued from our 2016 equity compensation plan.
16
In January 2018, we issued Marc Savas and Malcolm CasSelle each 3,774 Class A common shares valued at $10,000 as
payment for their respect 2017 service on our board of directors. The shares were issued from our 2016 equity compensation plan.
Purchases of equity securities by the issuer and affiliated purchasers
None.
ITEM 6.
SELECTED FINANCIAL DATA.
Not applicable to a smaller reporting company.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Overview
We are a digital marketing and data management platform delivering the tools to reach and reveal valuable audiences. Our
machine-learning technology analyzes marketing data to identify brands and content owners' core consumers and their
characteristics across marketing channels. Through an omnichannel approach that integrates all aspects of the advertising
experience into one platform, we discover new and measurable opportunities that amplify campaign performance and maximize
profits. We derive our revenues from:
·
·
·
·
sales of digital advertising campaigns to advertising agencies and brands;
sales of media inventory through real-time bidding, or “RTB”, exchanges;
sale and licensing of our SRAX Social platform and related media; and,
creation of custom platforms for buying media on SRAX for large brands.
The core elements of our business are:
·
Social Reality Ad Exchange or "SRAX" – Real Time Bidding sell side and buy side representation is our technology
which assists publishers in delivering their media inventory to the RTB exchanges. The SRAX platform integrates multiple market-
leading demand sources, including OpenX, Pubmatic and AppNexus. We also build custom platforms that allow our agency
partners to launch and manage their own RTB campaigns by enabling them to directly place advertising orders on the platform
dashboard and view and analyze results as they occur;
·
SRAXmd serves ads to both Healthcare Professionals and Patients using patent-pending process and technology.
Powerful first and third-party data allow us to reach more than 400,000 Healthcare Professionals and Patients with real-time ad
targeting, serving banner and video ads to personal devices. Advertising agencies and pharmaceutical clients contract with us
directly to secure ad space and to license the MOSEE ad targeting platform on an annual basis.
·
SRAX Social is a social media and loyalty platform that allows brands to launch and manage their social media
initiatives. Our team works with customers to identify their needs and then helps them in the creation, deployment and management
of their social media presence; and
·
SRAXfan tools enable brands and agencies to connect with sports fans at home, the stadium or out-of-home at gathering
locations, such as bars, restaurants, and universities, during live sporting events.
·
SRAXauto tools enable targeting and engagement with potential auto buyers at dealerships, auto shows, and at home
across desktop and mobile environments.
We offer our customers several pricing options including cost-per-thousand-impression, commonly referred to as CPM,
whereby our customers pay based on the number of times the target audience is exposed to the advertisement, and on a monthly
service fee.
17
During 2017, we launched a new SRAX Social tool for digital marketers and content owners to create posts and promote
them beyond their respective Facebook Page communities. This tool is the first of many planned monetization opportunities to be
developed and integrated into SRAX Social. We also released a new guide entitled “People-Based Advertising: How to Get Bigger
Results by Targeting the Most Precise Audience” which we believe will provide support for our expertise as an Internet advertising
resource. We also unveiled the Company’s new SRAX branding, designed to reflect the breadth and depth of the tools that we offer
to digital marketers and content owners.
In the third quarter of 2017, we announced several new product offerings designed to expand our reach for advertisers to
other large digital audiences. SRAX Fan is a buyside vertical focused on advertising to sports fans on their mobile devices in
stadiums and sports bars. SRAX Auto is another new buyside vertical launched to target car buyers. While SRAX Fan and SRAX
Auto have formally launched, they remain very early stage. As such, we do not believe these two new initiatives will be significant
contributors to revenue growth for the remainder of 2018.
During the third quarter of 2017, we also announced the launch of the BIGToken project. Presently we are developing
BIGToken as a wholly owned subsidiary of Social Reality and eventually anticipate spinning the company out to our shareholders.
In March of 2018, we announced the Alpha launch of the BIG platform to a select group of individuals and entities. Users
participating in our BIGToken Alpha will be able to create an account, integrate third party accounts and answer serves in order to
create an initial data graph. Participants in the Alpha will be awarded points as opposed to a BIGToken. Although the Alpha launch
was a major milestone for the BIGToken project, there can be no assurance that we will complete final development of the
BIGToken project or if developed, that it will be successful.
Results of operations
Year ended December 31, 2017 compared to year ended December 31, 2016
Selected Consolidated Financial Data
Revenue
Cost of revenue
Gross margin percentage
Operating expense
Operating loss
Gain from write-off of contingent consideration
Interest expense, net
Net loss
Revenue
Year ended December 31,
2016
2017
%
Change
$ 23,348,714 $ 35,763,047
23,226,995
35.1%
17,318,705
(4,782,653)
3,744,496
3,210,076
$ (6,658,882) $ (4,248,233)
9,328,893
60.1%
17,863,500
(3,843,679)
—
2,815,203
-34.7%
-59.8%
72.8%
3.2%
-19.6%
n/a
-12.3%
56.7%
The decrease in our revenue during year ended December 31, 2017 from 2016 reflects an decreases in revenue from our
SRAX sell-side and buy-side clients, partially offset by continued growth in SRAXmd.
18
Cost of revenue
Cost of revenue consists of certain labor costs, payments to website publishers and others that are directly related to a
revenue-generating event and project and application design costs. Approximately 99.2% of cost of revenue was attributable to
payments to website publishers and other media providers for the year ended December 31, 2017 as compared to 99.5% for the
year ended December 31, 2016. The balance was attributable to labor costs and project and application design costs. During the
year ended December 31, 2017, our gross margin increased substantially as a result of a decrease in our cost of revenue as a
percentage of our revenues. Cost of revenue as a percent of total revenue decreased to 39.9% for the year ended December 31, 2017
as compared to 64.9% for the year ended December 31, 2016. This decrease was due to our reduction in our overall lower-margin
revenues for both our buy-side and sell-side clientele.
Operating expense
Our operating expense is comprised of salaries, commissions, marketing, and general overhead expense. Additionally, we
also incurred an impairment in goodwill amounting to $670,000 during the year ended December 31, 2016. Overall, operating
expense increased approximately 3.2% for the year ended December 31, 2017 as compared to the year ended December 31, 2016.
This increase was primarily due to increased sales salaries and commissions resulting from the recruitment of additional sales
personnel earlier in the year, partially offset by other overhead reductions. In the first quarter of 2017 we made certain changes in
our operations to reduce expenses and focus our resources in areas of our operations which we believe have the greatest potential to
increase our revenues, including the closure of a redundant operations center in New York city that we inherited as part of the Steel
Media acquisition. The operations of this facility were consolidated into our existing Los Angeles office, and the office lease in
New York city was terminated. Additionally, during the third quarter of 2017 we launched the BIGToken project. To date, we have
not segregated the costs and expenses of BIGToken, we estimate that we have spent an aggregate of approximately $193,061 on the
project as of December 31, 2017.
In addition, we restructured several sales management roles and eliminated large sales override compensation structures to
now better align employee compensation with Company profitability.
During the fourth quarter of 2016 we completed the up-listing of our Class A common stock to the Nasdaq Capital Market.
As a result, our 2017 operating expense also increased due to expenditures associated with our status as an exchange listed public
company.
Write off of contingent consideration
During the year ended December 31, 2016, we wrote-off $3,744,496 which represented the reversal of the second earn out
consideration which Mr. Steel would have been entitled to receive as additional consideration for the purchase of Steel Media as
further described in Note 7 of the notes to our consolidated financial statements appearing elsewhere in this report. This non-cash
item is not considered part of normal operations.
Interest expense
Interest expense for the years December 31, 2017 and 2016 represents interest under notes issued pursuant to the Financing
Agreement and factoring fees, amortization of debt costs and the accretion of the put liability under the Financing Agreement. The
Financing Agreement is described in Note 3 of the notes to our consolidated financial statements appearing elsewhere in this report.
Interest expense, net of interest income for the year ended December 31, 2017 decreased 12.3% as compared to the year ended
December 31, 2016. This decrease in interest expense is attributable to the lower debt balance due to principal repayments and
debenture conversions made earlier in the year, as well as an overall reduced rate of borrowing. In 2017, we also received $262,684
of interest income related to the settlement with Tronc.
19
Quarterly results of operations data
The following table sets forth our unaudited quarterly statements of operations data for the three months ended December
31, 2017 and 2016. We have prepared the quarterly data on a consistent basis with the audited consolidated financial statements
included in this report. In the opinion of management, the unaudited quarterly financial information reflects all necessary
adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should
be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. The results of
historical periods are not necessarily indicative of the results of operations for a full year or any future period.
Revenue
Cost of revenue
Gross profit
Operating expense
Income (loss) from operations
Interest income (expense)
Net income (loss)
Net income (loss) per share, basic and diluted
Weighted average shares outstanding
Non-GAAP financial measures
Three months ended
December 31,
2017
(unaudited)
2016
(unaudited)
$
$
$
6,487,265 $ 11,513,459
950,647
6,796,791
5,536,618
4,716,668
5,603,335
5,566,124
(66,717)
(849,456
(494,478)
244,792
178,075 $ (1,343,934)
(0.22)
6,196,197
0.02 $
8,253,851
We use Adjusted net loss to measure our overall results because we believe it better reflects our net results by excluding the
impact of non-cash equity based compensation. We use Adjusted EBITDA to measure our operations by excluding interest and
certain additional non-cash expenses. We believe the presentation of Adjusted net loss and Adjusted EBITDA enhances our
investors' overall understanding of the financial performance of our business.
You should not consider Adjusted net loss and Adjusted EBITDA as an alternative to net income (loss), determined in
accordance with accounting principles generally accepted in the United States of America (“GAAP”), as an indicator of operating
performance. A directly comparable GAAP measure to Adjusted net loss and Adjusted EBITDA is net loss.
The following is a reconciliation of net loss to Adjusted net loss and Adjusted EBITDA for the periods presented:
Net loss
Plus:
Stock to be issued for services
Equity based compensation
Adjusted net loss
Interest (income) expense
Depreciation and amortization
Impairment of goodwill
Adjusted EBITDA
20
For the years ended
December 31,
2017
2016
$ (6,658,882) $ (4,248,233)
—
2,085,988
(4,572,894)
3,661,914
528,622
—
678,000
1,625,843
(1,944,390)
(249,312)
387,034
670,000
(382,358) $ (1,136,668)
$
Liquidity and capital resources
Liquidity generally refers to the ability to generate adequate amounts of cash to meet our cash needs. We require cash to
fund our operating expenses and working capital requirements, to make required payments of principal and interest under our
outstanding debt instruments and, to a lesser extent, to fund capital expenditures.
Working Capital
The following table presents working capital as of December 31, 2017 and 2016:
Current assets(1)
Current liabilities
Working capital
———————
(1) Includes cash and cash equivalents of $1.1 million and $1 million as of December 31, 2017 and 2016, respectively.
Our working capital increased by $9,400,122 in 2017.
December 31,
December 30,
2016
2017
6,134,838 $
9,798,772
(5,010,815) (18,074,871)
1,124,023 $ (8,276,099)
$
$
Our current assets decreased by $3,663,934 primarily from decreases in accounts receivable generated from lower gross
revenue from advertisers.
Our current liabilities decreased by $13,064,059 primarily from decreases in accounts payable as a result of payments made
to outstanding vendors utilizing proceeds from issuance of convertible debentures and warrant exercise proceeds.
Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. Our primary need for liquidity
is to fund working capital requirements of our business and other general corporate purposes, including debt repayment. At
December 31, 2017, we had an accumulated deficit of 21,148,706. As of December 31, 2017, we had $1,017,299 in cash and cash
equivalents and net working capital of $1,124,023 as compared to $1,048,762 in cash and cash equivalents and a deficit in net
working capital of $8,276,099 at December 31, 2016. We are currently experiencing a period of limited liquidity resulting from the
complete repayment of notes associated with a financing agreement previously held by Victory Park Management, LLC, the
repurchase of the Series B Warrants in April 2017, and the satisfaction of amounts due under the Financing Warrant.
During the third quarter of 2017 we launched the BIGToken project. To date, we have not segregated the costs and expenses
of BIGToken from our other Operating expenses. We estimate that we have spent an aggregate of approximately $193,061 on the
project as of December 31, 2017. We anticipate that BIGToken will be financed independently from Social Reality through the sale
of the subsidiary’s equity, debt, or equity-linked securities. Based on our current development plans, and assuming there is no
revenue for the first twelve months, we estimate that BIGToken will require approximately $5 million and $15 million for the
initial and subsequent 12-month periods of operations, respectively, provided however that such capital requirements may increase
or decrease based on the speed of development, user adoption rates and revenues. In the event that BIGToken is not able to secure
independent funding, we may nonetheless continue to develop the BIGToken project internally albeit on a reduced scope and
extended time frame. In such instance, we do not believe the project will initially result in a material increase to our operating
expenses as the majority of BIGToken’s initial expenses are either duplicative administrative expenses or related to customer
acquisition once the platform is successfully launched.
As previously disclosed in October 2017, we engaged outside advisors to review strategic alternatives for SRAXmd. As a
result, in late 2017, we commenced an auction process with regard to the SRAXmd assets. We believe that we are now entering the
final stages of the auction process. Although management is optimistic regarding the successful completion of the auction process,
there can be no assurances that the process will be completed, will be successful, or that if such process is completed, that it will be
on terms favorable to us.
21
During January 2017, we satisfied all outstanding obligations under a financing agreement utilizing proceeds from the
factoring of our receivables and sales of our securities. The repayment of these notes has adversely impacted our current liquidity.
To address the immediate impact of this decreased liquidity, we developed certain operating plans that focus on increased revenue
growth and cost reductions as further described herein. During April 2017, we raised $5,000,000 through the sale of 12.5%
convertible debentures. We utilized $2,500,000 of the proceeds of this sale to satisfy the put obligation of the Series B Warrants
issued to investors in the January 2017 offering. The balance of the debenture sales proceeds was used to satisfy the payment of
accounts payable and other working capital requirements. During October 2017, we raised an additional $5,180,157 through the
sale of similar 12.5% convertible debentures. We utilized $1,567,612 of the proceeds of this sale to satisfy obligations due under
the Financing Warrant. The balance of the October 2017 debenture sales proceeds were also used to satisfy the payment of accounts
payable and other working capital requirements.
As described in Part II, Item 1A. Risk Factors, the terms of both the April 2017 and October 2017 debentures could
materially impact our liquidity and results of operations in future periods. If our revenue increases throughout the next twelve
months as anticipated, additional liquidity is expected to be readily available under our accounts receivable factoring agreement
with FastPay which is now subject to a cap of $4,000,000 that we agreed to as part of the debentures in April 2017.
Cash flows from operating activities
Net cash used in operating activities was $4,367,078 during the twelve months ended December 31, 2017 compared to net
cash used by operating activities of $1,270,662 for the comparable period in 2016. During the twelve months ended December 31,
2017, the Company’s accounts receivable decreased by $4,261,574 which compares with an increase in accounts receivable of
$6,817,587 for the comparable period in 2016. Accounts payable and accrued liabilities during the twelve months ended December
31, 2017 decreased by $6,535,152 which compares to an increase in accounts payable and accrued liabilities of $8,020,903 for the
comparable period in 2016.
Cash flows from investing activities
During the twelve months ended December 31, 2017 net cash used in investing activities was $756,876 as compared to
$152,087 during the twelve months ended December 31, 2016. During the twelve months ended December 31, 2017, we also used
cash to acquire equipment and develop internally used software.
Cash flows from financing activities
Capital Resources
Our sources of cash have historically consisted of proceeds from issuances of equity and debt securities and revenues
generated from operations. We have also funded our operations with by factoring our receivables and, to a lesser extent, equipment
leasing arrangements.
2017 Offerings
In 2017, we completed several private placement offerings of equity and debt securities in the aggregate of approximately
$14 million, exclusive of placement agent fees and commissions and offering expenses paid by us.
Sufficiency of Cash Balances and Potential Sources of Additional Capital
Our capital requirements depend on many factors, including, among others: the acceptance of, and demand for, our products
and services; our levels of net product revenues and any other revenues we may receive; the extent and timing of any investments
in developing, marketing and launching new or enhanced products or technologies; the costs of developing, improving and
maintaining our internal design, testing and development processes; the costs associated with maintaining, defending and enforcing
our intellectual property rights; and the nature and timing of acquisitions and other strategic transactions or relationships in which
we engage, if any.
22
We believe our existing cash balance, together with cash provided by our operations and taking into account cash expected
to be used in our operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our
estimates of our operating revenues and expenses and working capital requirements could be incorrect and we may use our cash
resources faster than we anticipate. Further, some or all of our ongoing or planned investments may not be successful and could
further deplete our capital without immediate, or any, cash returns. Until we can generate sufficient revenues to finance our cash
requirements from our operations, which we may never do, we may need to increase our liquidity and capital resources by one or
more measures, which may include, among others, reducing operating expenses, restructuring our balance sheet by negotiating with
creditors and vendors, entering into strategic partnerships or alliances, raising additional financing through the issuance of debt,
equity or convertible securities or pursuing alternative sources of capital, such as through asset or technology sales or licenses or
other alternative financing arrangements. Further, even if our near-term liquidity expectations prove correct, we may still seek to
raise capital through one or more of these financing alternatives. However, we may not be able to obtain capital when needed or
desired, on terms acceptable to us or at all.
Inadequate working capital would have a material adverse effect on our business and operations and could cause us to fail to
execute our business plan, fail to take advantage of future opportunities or fail to respond to competitive pressures or customer
requirements. A lack of sufficient funding may also require us to significantly modify our business model and/or reduce or cease
our operations, which could include implementing cost-cutting measures or delaying, scaling back or eliminating some or all of our
ongoing and planned investments in corporate infrastructure, research and development projects, business development initiatives
and sales and marketing activities, among other activities. Modification of our business model and operations could result in an
impairment of assets, the effects of which cannot be determined. Furthermore, if we continue to issue equity or convertible debt
securities to raise additional funds, our existing stockholders may experience significant dilution, and the new equity or debt
securities may have rights, preferences and privileges that are superior to those of our existing stockholders.
Additionally, if we are not able to maintain the listing of our common stock on the Nasdaq Capital Market, the challenges
and risks of equity financings may significantly increase, including potentially increasing the dilution of any such financing or
decreasing our ability to effect such a financing at all. If we incur additional debt, it may increase our leverage relative to our
earnings or to our equity capitalization or have other material consequences. If we pursue asset or technology sales or licenses or
other alternative financing arrangements to obtain additional capital, our operational capacity may be limited and any revenue
streams or business plans that are dependent on the sold or licensed assets may be reduced or eliminated. Moreover, we may incur
substantial costs in pursuing any future capital-raising transactions, including investment banking, legal and accounting fees,
printing and distribution expenses and other similar costs, which would reduce the benefit of the capital received from the
transaction.
During the twelve months ended December 31, 2017 net cash provided by financing activities was $5,092,491 which
represented the net proceeds from the net issuance of common stock of $4,020,401, proceeds from exercise of warrants of
$1,085,004, and debentures of $8,566,406 offset by the complete repayment of our notes payable of $3,966,928, debt issuance
expense of $582,392, payment of put liability of $1,500,000, and the repurchase of the Series B warrants of $2,500,000 directly
paid by the debenture holder on behalf of the Company. During the comparable period in 2016, net cash in the amount of
$1,380,325 was provided by financing activities which primarily consisted of proceeds from the sale of common stock of
$4,643,799 and proceeds from notes payable of $2,100,000 offset by a $1,600,000 payment of contingent consideration and
$3,763,474 in repayments of notes payable.
Critical accounting policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts
of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue
recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates,
judgments and assumptions that are significant to understanding our results, which are described in Note 1 to our consolidated
financial statements for the years ended December 31, 2017 and 2016 appearing elsewhere in this report.
The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our
consolidated financial statements. In addition, you should refer to our accompanying consolidated balance sheets as of December
31, 2017 and 2016, and the consolidated statements of operations and comprehensive income (loss), changes in shareholders’
equity (deficiency) and cash flows for the fiscal years ended December 31, 2017 and 2016, and the related notes thereto, for further
discussion of our accounting policies.
23
Revenue Recognition
The Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition.
The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or
realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product
has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv)
collectability is reasonably assured.
The Company’s current payment terms on credits to its customers are ranging from 60 days to 9 months, depending on the
creditworthiness of its customers.
Accounts receivable and allowance for doubtful accounts
Accounts receivable represent customer accounts receivables. The Company provides an allowance for doubtful accounts
equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience, general
economic environment trends, and a review of the current status of trade accounts receivable. Management reviews its accounts
receivable each reporting period to determine if the allowance for doubtful accounts is adequate. Such allowances, if any, would be
recorded in the period the impairment is identified. It is reasonably possible that the Company’s estimate of the allowance for
doubtful accounts will change. Uncollectible accounts receivables are charged against the allowance for doubtful accounts when all
reasonable efforts to collect the amounts due have been exhausted.
Impairment of Long-Lived Assets
The Company’s long-lived assets consist of property and equipment. The Company evaluates its investment in long-lived
assets for recoverability whenever events or changes in circumstances indicate the net carrying amount may not be recoverable. It is
possible that these assets could become impaired as a result of legal factors, market conditions, operational performance indicators,
technological or other industry changes. If circumstances require a long-lived asset or asset group to be tested for possible
impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its
carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an
impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various
valuation techniques, including discounted cash flow models, quoted market values and third-party independent appraisals, as
considered necessary.
Debt Issuance Costs, Debt Discount and Detachable Debt-Related Warrants
Costs incurred to issue debt are deferred and recorded as a reduction to the debt balance in our consolidated balance sheets.
We amortize debt issuance costs over the expected term of the related debt using the effective interest method. Debt discounts relate
to the relative fair value of warrants issued in conjunction with the debt and are also recorded as a reduction to the debt balance and
accreted over the expected term of the debt to interest expense using the effective interest method.
Income Taxes
The Company accounts for income taxes under the provisions of FASB ASC Topic 740, “Income Tax,” which requires
recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Deferred tax assets and liabilities are recognized for the future tax consequence
attributable to the difference between the tax bases of assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date. The Company establishes a valuation when it is
more likely than not that the assets will not be recovered.
ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation
of a tax position as a two-step process. The first step is to determine whether it is more likely than not that a tax position will be
sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that
position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of
benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than
50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-
not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized
tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial
reporting period in which the threshold is no longer met. Penalties and interest incurred related to underpayment of income tax are
classified as income tax expense in the period incurred.
24
Going Concern Evaluation
In connection with preparing its consolidated financial statements, management evaluates whether there are conditions and
events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within
one year from the date that the financial statements are issued. See management’s going concern evaluation for the year ended
December 31, 2017 in the “Liquidity and Capital Resources” section above.
Stock-Based Compensation
The Company accounts for all stock-based payment awards made to employees and directors based on their fair values and
recognizes such awards as compensation expense over the vesting period using the straight-line method over the requisite service
period for each award as required by FASB ASC Topic No. 718, Compensation-Stock Compensation. If there are any modifications
or cancellations of the underlying vested or unvested stock-based awards, we may be required to accelerate, increase or cancel any
remaining unearned stock-based compensation expense, or record additional expense for vested stock-based awards. Future stock-
based compensation expense and unearned stock- based compensation may increase to the extent we grant additional stock options
or other stock-based awards.
Recent accounting pronouncements
See Note 2 — “Summary of Significant Accounting Policies” included in “Item 8 — Financial Statements and
Supplementary Data” in this Report regarding the impact of certain recent accounting pronouncements on our financial statements.
Off balance sheet arrangements
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally
means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under
which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or
contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support
for such assets.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see our consolidated financial statements beginning on page F-1 of this annual report.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
25
ITEM 9A.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. We are required to maintain “disclosure controls and procedures” as
such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based on their evaluation as of the end of the
period covered by this Annual Report on Form 10-K, our Chief Executive Officer and our Chief Financial Officer have concluded
that our disclosure controls and procedures were not effective to ensure that the information relating to our company, required to be
disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure as a result of material
weaknesses in our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our
internal control over financial reporting includes those policies and procedures that:
·
·
·
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control-Integrated Framework. Management's assessment included an evaluation of the design of our
internal control over financial reporting and testing of the operational effectiveness of these controls. Based on this assessment, our
management has concluded that while improvements were made in this area during 2016, our internal control over financial
reporting overall was not effective to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with GAAP as a result of material weaknesses.
These material weaknesses included:
·
·
·
·
·
·
a lack of qualified accounting staff;
inadequate controls and segregation of duties;
limited checks and balances in processing cash transactions;
substantial reliance on manual reporting processes and spreadsheets external to the accounting system;
lack of adequate controls in the delivery and procurement of intangible inventory, products and services; and
the existence of sophisticated, material financial transactions which are heavily dependent upon the use of estimates
and assumptions and our lack of experience in monitoring and administering a complex financing agreement with a
third-party lender.
26
The existence of the material weaknesses in our internal control over financial reporting increases the risk that a future
restatement of our financials is possible. We are committed to improving our financial organization. In 2016, we continued to
improve our financial organization through the establishment of an audit committee comprised of independent directors, and the
engagement of a full-time Chief Financial Officer. In 2017, we hired additional accounting staff to create additional segregation of
duties.
We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls
over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements
or improvements, as necessary, we do not expect, however, that the deficiencies in our disclosure controls will be remediated until
such time as we have remediated the material weaknesses in our internal control over financial reporting.
Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial
reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM 9B.
Other Information.
None.
27
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is set forth under the heading “Directors, Executive Officers and Corporate Governance” in
our 2018 Proxy Statement to be filed with the SEC in connection with the solicitation of proxies for our 2018 Annual Meeting of
Shareholders and is incorporated herein by reference. The 2018 Proxy Statement will be filed with the SEC within 120 days after
the end of the fiscal year to which this report relates. The information required by this item regarding delinquent filers pursuant to
Item 405 of Regulation S-K will be included under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in the
2018 Proxy Statement and is incorporated herein by reference.
EXECUTIVE COMPENSATION.
ITEM 11.
The information required by this Item is set forth under the headings “Director Compensation” and “Executive Compensation”
which will be contained in our 2018 Proxy Statement and is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information required by this Item is set forth under the headings “Beneficial Owners of Shares of Common Stock” and “Equity
Compensation Plan Information” which will be contained in our 2018 Proxy Statement and is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is set forth under the heading “Certain Relationships and Related Transactions” which will be
contained in our 2018 Proxy Statement and is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is set forth under the heading “Independent Registered Public Accounting Firm” of our 2018
Proxy Statement and is incorporated herein by reference.
28
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)
(1)
Financial statements.
PART IV
The consolidated financial statements and Report of Independent Registered Accounting Firm are listed in the “Index to
Financial Statements and Schedules” beginning on page F-1 and included on pages F-2 through F-37.
(2)
Financial statement schedules
All schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under
the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the
consolidated financial statements herein.
(3)
Exhibits.
The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index.
29
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
April 2, 2018
Social Reality, Inc.
By:
/s/ Chris Miglino
Chris Miglino, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints Christopher Miglino his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments (including post-effective amendments) and supplements to this report, and to file the
same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and
hereby grants to such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite
and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the dates indicated.
Name
Positions
Date
/s/ Christopher Miglino
Chairman of the Board of Directors, Chief Executive Officer; principal executive officer
April 2, 2018
Christopher Miglino
/s/ Kristoffer Nelson
Chief Operating Officer, Director
April 2, 2018
Kristoffer Nelson
/s/ Joseph P. Hannan
Chief Financial Officer, principal financial and accounting officer
April 2, 2018
Joseph P. Hannan
/s/ Marc Savas
Marc Savas
Director
/s/ Malcolm CasSelle
Director
Malcolm CasSelle
/s/ Colleen DiClaudio
Director
Colleen DiClaudio
/s/ Robert Jordan
Robert Jordan
Director
The foregoing represents a majority of the Board of Directors.
30
April 2, 2018
April 2, 2018
April 2, 2018
April 2, 2018
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets at December 31, 2017 and 2016
Consolidated statements of operations for the years ended December 31, 2017 and 2016
Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2017 and 2016
Consolidated statements of cash flows for the years ended December 31, 2017 and 2016
Notes to consolidated financial statements
Page
F-2
F-3
F-4
F-5
F-6
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Social Reality, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Social Reality, Inc. (the “Company”), as of December 31, 2017
and 2016, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in
the period ended December 31, 2017 and the related notes (collectively referred to as the “consolidated financial statements”). In
our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended
December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over
financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RBSM LLP
We have served as the Company’s auditor since 2011
New York, New York
April 2, 2018
F-2
SOCIAL REALITY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2017 AND 2016
2017
2016
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Prepaid expenses
Other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses
Notes payable, net of unamortized costs
Put liability
Total current liabilities
Secured convertible debentures, net
Total liabilities
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued or outstanding at December 31, 2017
and 2016, respectively
Class A common stock, authorized 250,000,000 shares, $0.001 par value, 9,910,565 and 6,951,077 shares issued and
outstanding at December 31, 2017 and 2016, respectively
Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued or outstanding at December 31,
2017 and 2016, respectively
Common stock to be issued
Additional paid in capital
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
$
1,017,299 $
4,348,305
468,336
300,898
6,134,838
154,546
1,048,762
8,411,019
332,503
6,488
9,798,772
55,492
15,644,957 15,644,957
1,365,241
34,659
$ 23,605,699 $ 26,899,121
1,642,760
28,598
5,010,815 13,156,083
3,418,788
1,500,000
5,010,815 18,074,871
1,711,146
—
6,721,961 18,074,871
—
—
9,911
6,951
—
879,500
—
678,000
37,143,033 22,529,303
(21,148,706) (14,390,004)
16,883,738
8,824,250
$ 23,605,699 $ 26,899,121
The accompanying footnotes are an integral part of these consolidated financial statements.
F-3
SOCIAL REALITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2017 AND 2016
Revenue
Cost of revenue
Gross profit
Operating expense:
General, selling and administrative expense
Impairment of goodwill
Write off of non-compete agreement
Restructuring Costs
Operating expense
Loss from operations
Other income (expense):
Write off of contingent consideration
Interest expense
Loss before provision for income taxes
Provision for income taxes
Net loss
Net loss per share, basic and diluted
Weighted average shares outstanding
2017
2016
$ 23,348,714 $ 35,763,047
9,328,893 23,226,995
14,019,821 12,536,052
17,016,789 16,648,705
670,000
—
—
17,863,500 17,318,705
(4,782,653
468,750
377,961
(3,843,679)
—
(2,815,203)
3,744,496
(3,210,076)
(6,658,882)
(4,248,233)
—
—
$ (6,658,882) $ (4,248,233)
$
(0.81) $
(0.69)
8,253,851
6,196,197
The accompanying footnotes are an integral part of these consolidated financial statements.
F-4
Balance,
December 31,
2015
Proceeds from
the sale of
common
stock units
Stock based
compensation
Vested stock
awards issued
Shares issued
for services
Shares to be
issued for
services
Common stock
issued as Earn
Out
Consideration
Rounding of
shares for
stock split
Warrant
modification
costs
Net loss
Balance,
December 31,
2016
SOCIAL REALITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2017 AND 2016
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Common stock to be issued
Amount
Shares
Additional
Paid-in Capital
Accumulated
Deficit
Stockholders'
Equity
— $
—
5,622,046 $
5,622
— $
— $
14,012,078 $ (10,141,771) $
3,864,685
—
—
—
—
—
1,042,392
1,042
—
—
—
10,000
—
19,862
—
10
20
—
—
—
—
—
4,642,757
—
4,643,799
—
1,062,621
—
1,062,621
—
(10)
—
—
—
137,480
—
137,500
—
—
—
—
100,000
678,000
—
—
678,000
—
—
256,754
257
—
—
2,399,743
—
2,400,000
—
—
23
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
274,634
—
—
(4,248,233)
274,634
(4,248,233)
— $
—
6,951,077 $
6,951
100,000 $
678,000 $
22,529,303 $ (14,390,004) $
8,824,250
(Continued)
The accompanying footnotes are an integral part of these consolidated financial statements.
F-5
Balance,
December 31,
2016
Sale of
common
stock and
warrants for
cash
Fair value of
put option
Cost of sale of
common
stock
Stock based
compensation
Vested shares
issued
Shares issued to
consultant
Common stock
issued for
services
Common stock
issued to
directors
Executive
Bonus Shares
Common stock
issued for
software asset
Shares to be
issued for
services
Conversion of
debentures
Exercise of
warrants
Warrants issued
for software
asset
April debenture
warrants
October
debenture
BCF
October
debenture
warrants
Placement
agent
warrants
Repricing of
warrants
Net loss
Balance,
December 31,
2017
SOCIAL REALITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2017 AND 2016
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Common stock to be issued
Amount
Shares
Additional
Paid-in Capital
Accumulated
Deficit
Stockholders'
Equity
— $
—
6,951,077 $
6,951
100,000 $
678,000 $
22,529,303 $ (14,390,004) $
8,824,250
—
—
—
—
—
—
—
761,905
762
—
—
—
—
—
—
—
—
51,667
—
75,000
—
—
52
75
—
—
—
—
—
—
—
3,979,239
—
3,980,001
—
(2,500,000)
—
(2,500,000)
—
(160,000)
—
(160,000)
—
444,051
—
444,051
—
(52)
—
—
—
97,425
—
97,500
—
—
300,000
300
(100,000)
(678,000)
1,197,700
—
520,000
—
—
—
10,368
—
20,409
10
20
—
—
—
44,977
—
44,987
—
99,980
—
100,000
—
—
200,000
200
—
—
279,800
—
280,000
—
—
—
—
—
—
—
—
150,000
879,500
—
—
879,500
—
1,111,670
1,112
—
428,469
429
—
—
—
—
—
—
—
—
—
—
—
3,333,888
—
3,335,000
—
1,284,975
—
1,285,404
—
337,069
—
337,069
—
866,182
—
866,182
—
—
—
—
—
—
3,166,567
—
3,166,567
—
—
—
—
—
—
1,093,591
—
1,093,591
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
948,518
—
948,518
—
—
99,820
—
(99,820)
(6,658,882)
—
(6,658,882)
— $
—
9,910,565 $
9,911
150,000 $
879,500 $
37,143,033 $ (21,148,706) $ 16,883,738
The accompanying footnotes are an integral part of these consolidated financial statements.
F-6
SOCIAL REALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2017 AND 2016
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Amortization of stock based prepaid fees
Stock to be issued for services
Stock based compensation
Amortization of debt issuance costs
Warrant modification costs
PIK interest expense accrued to principal
Amortization of debt discount
Impairment of goodwill
Write off of non-compete agreement
Accretion of contingent consideration, net of write-off
Accretion of put liability
Provision for bad debts
Depreciation expense
Amortization of intangibles
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses
Other current assets
Other assets
Accounts payable and accrued expenses
Unearned revenue
Net cash (used in) provided by operating activities
Cash flows from investing activities
Purchase of equipment
Development of software
Net cash used in investing activities
Cash flows from financing activities
Proceeds from the issuance of common stock units
Proceeds from exercise of warrants
Proceeds from secured convertible debentures, net
Proceeds from note payable
Repayments of notes payable
Payment of contingent consideration
Payment of Financing Warrant
Debt issuance costs
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents
Beginning of year
End of year
2017
2016
$ (6,658,882) $ (4,248,233)
—
—
2,085,988
1,082,830
—
—
1,018,548
—
468,751
—
—
(195,172)
22,908
505,712
4,261,574
(135,834)
—
(288,349)
(6,535,152)
—
(4,367,078)
373,567
678,000
1,200,121
1,076,634
274,695
511,261
—
670,000
—
(3,585,435)
63,718
119,434
21,304
365,728
(6,817,597)
(23,069)
29,602
—
8,020,903
(1,295)
(1,270,662
(121,962)
(634,914)
(756,876)
(32,862)
(119,225)
(152,087)
4,020,401
1,085,004
6,066,406
—
(3,996,928)
—
(1,500,000)
(582,392)
5,092,491
4,643,799
—
—
2,100,000
(3,763,474)
(1,600,000)
—
—
1,380,325
(31,463)
(42,424)
1,048,762
1,017,299 $
1,091,186
1,048,762
$
(Continued)
The accompanying footnotes are an integral part of these consolidated financial statements.
F-7
SOCIAL REALITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2017 AND 2016
Supplemental schedule of cash flow information
Cash paid for interest
Supplemental schedule of noncash financing activities
2017
2016
$
1,217,716 $
1,312,293
Common stock issued for the payment of contingent consideration
Proceeds paid by FastPay on behalf of the Company
Common stock issued for preferred stock conversion and vesting grants
Put liability on issuance of put warrants
Issuance of placement agent warrants
Common stock to be issued
Repurchase of series B warrants and accounts payable balances directly paid by debenture holder on behalf of Company
Shares issued for convertible note conversions
Repricing of warrants
Common stock and warrants issued for asset purchase arrangements
Debt and warrants discount on convertible debentures issuance
$
$
$
$
$
$
$
$
$
$
$
— $
— $
— $
2,500,000 $
948,518 $
678,000 $
4,113,753 $
3,335,000 $
99,820 $
617,069 $
5,126,340 $
2,400,000
5,507,468
—
—
—
—
—
—
—
—
—
The accompanying footnotes are an integral part of these consolidated financial statements.
F-8
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
Social Reality, Inc. ("Social Reality", "we", "us", “our” or the "Company") is a Delaware corporation formed on August 2, 2011.
Effective January 1, 2012 we acquired 100% of the member interests and operations of Social Reality, LLC, a California limited
liability company formed on August 14, 2009 which began business in May of 2010, in exchange for 2,465,753 shares of our Class
A common stock. The former members of Social Reality, LLC owned 100% of our Class A common stock after the acquisition.
At Social Reality, we sell digital advertising campaigns to advertising agencies and brands. We have developed technology that
allows brands to launch and manage digital advertising campaigns, and we provide the platform that allows website publishers to
sell their media inventory to many different digital advertising buyers. Our focus is to provide technology tools that enable both
publishers and advertisers to maximize their digital advertising initiatives. We derive our revenues from:
·
·
·
·
sales of digital advertising campaigns to advertising agencies and brands;
sales of media inventory owned by our publishing partners through real-time bidding (“RTB”) exchanges;
sale and licensing of our SRAX Social platform and related media; and,
creation of custom platforms for buying media on SRAX for large brands.
The core elements of this business are:
·
·
·
·
·
·
Social Reality Ad Exchange or "SRAX" – Real Time Bidding sell side and buy side representation is our technology which assists publishers in
delivering their media inventory to the RTB exchanges. The SRAX platform integrates multiple market-leading demand sources. We also build
custom platforms that allow our agency partners to launch and manage their own RTB campaigns by enabling them to directly place
advertising orders on the platform dashboard and view and analyze results as they occur;
SRAXmd is our ad targeting and data platform for healthcare brands, agencies and medical content publishers. Healthcare and pharmaceutical
publishers utilize the platform for yield optimization, audience extension campaigns and re-targeting of their healthcare professional audience.
Agencies and brands purchase targeted digital and mobile ad campaigns;
SRAX Social is a social media and loyalty platform that allows brands to launch and manage their social media initiatives. Our team works
with customers to identify their needs and then helps them in the creation, deployment and management of their social media presence; and.
SRAX app, a recently launched new product, is a platform that allows publishers and content owners to launch native mobile applications
through our SRAX platform.
SRAXfan tools enable brands and agencies to connect with sports fans at home, the stadium or out-of-home at gathering locations, such as bars,
restaurants, and universities, during live sporting events.
SRAXauto tools enable targeting and engagement with potential auto buyers at dealerships, auto shows, and at home across desktop and mobile
environments.
We offer our customers a variety of pricing options including cost-per-thousand-impression, or "CPM", whereby our customers pay
based on the number of times the target audience is exposed to the advertisement, and on a monthly service fee.
Social Reality is also an approved Facebook advertising partner. We sell targeted and measurable online advertising campaigns and
programs to brand advertisers and advertising agencies across large Facebook apps and websites, generating qualified Facebook
likes and quantifiable engagement for our clients, driving online sales and increased brand equity.
We are headquartered in Los Angeles, California.
F-9
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Presentation of Financial Statements – Going Concern
Going Concern Evaluation
In connection with preparing consolidated financial statements for the year ended December 31, 2017, management evaluated
whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to
continue as a going concern within one year from the date that the financial statements are issued.
The Company considered the following:
·
·
·
·
Net losses of $6,658,882 and $4,248,233 for the years ended December 31, 2017 and 2016, respectively.
Negative cash flow from operating activities for 2017 and 2016.
At December 31, 2017, the Company had an accumulated deficit of $21,148,706.
Revenue decline in 2017 of $12,414,333.
Ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the
entity’s ability to meet its obligations as they become due.
The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial
statements are issued by considering the following:
·
·
·
·
·
·
The Company raised $14.0 million via equity debt financing during the year ended December 31, 2017.
The Company has historically raised funds from debt and equity financings.
As a result of the Company’s restructurings that were implemented during the year ended December 31, 2017, the Company’s cost structure is
now in line with its future revenue projections.
In 2017, the Company is in compliance with NASDAQ Capital Markets listing requirements.
In 2017, the Company converted $3.3 million of long term debt, and repaid its short-term notes payable.
Revenue declines were largely the result of a strategic shift away from lower margin sales the produced little to no positive cash flow benefit
for the Company.
In addition to the recent capital raised 2017, management also believes that the Company will generate enough cash from
operations to satisfy its obligations for the next twelve months from the issuance date.
The Company will take the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections,
in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:
·
·
·
·
·
·
Raise additional capital through short-term loans.
Implement additional restructuring and cost reductions.
Raise additional capital through a private placement.
Secure a commercial bank line of credit.
Dispose of one or more product lines.
Sell or license intellectual property.
At December 31, 2017, the Company had $1.1 million in cash and cash equivalents and $1 million of working capital.
Effect of Reverse Stock Split on Presentation
On September 20, 2016, the Company completed a 1 for 5 reverse stock split of our Class A common stock. The principal reason
for the reverse stock split was to facilitate the up-listing of our Class A common stock to the NASDAQ Capital Market which has a
minimum market (bid) price requirement for new applicants of $4.00 per share. Refer to Note 4 regarding a further discussion of
the reverse stock split.
F-10
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
These consolidated financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise
specified.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation.
The consolidated financial statements include the accounts of the Company and its subsidiaries from the acquisition date of
majority voting control of the subsidiary.
Use of Estimates
The consolidated financial statements have been prepared in conformity with generally accepted accounting principles accepted in
the United States of America (“GAAP”) and requires management of the Company to make estimates and assumptions in the
preparation of these consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from these estimates and assumptions.
The most significant areas that require management judgment and which are susceptible to possible change in the near term include
the Company's revenue recognition, allowance for doubtful accounts and sales credits, stock-based compensation, income taxes,
purchase price for acquisition, goodwill, other intangible assets, put rights and valuation of liabilities.
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months
or less to be cash equivalents.
Revenue Recognition
The Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists; no
significant Company obligations remain; collection of the related receivable is reasonably assured; and the fees are fixed or
determinable. The Company acts as a principal in revenue transactions as the Company is the primary obligor in the transactions.
As such, revenue is recognized on a gross basis, and media and publisher expenses that are directly related to a revenue-generating
event are recorded as a component of cost of revenue.
Cost of Revenue
Cost of revenue consists of payments to media providers and website publishers that are directly related to a revenue-generating
event and project and application design costs. The Company becomes obligated to make payments related to media providers and
website publishers in the period the advertising impressions, click-throughs, actions or lead-based information are delivered or
occur. Such expenses are classified as cost of revenue in the corresponding period in which the revenue is recognized in the
accompanying consolidated statements of operations.
Accounts Receivable
Credit is extended to customers based on an evaluation of their financial condition and other factors. Management periodically
assesses the Company's accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts.
Accounts determined to be uncollectible are charged to operations when that determination is made. The Company usually does not
require collateral. Allowance for doubtful accounts was $59,703 and $254,875 at December 31, 2017 and 2016, respectively.
F-11
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Concentration of Credit Risk, Significant Customers and Supplier Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and
accounts receivable. Cash and cash equivalents are deposited with financial institutions within the United States. The balances
maintained at these financial institutions are generally more than the Federal Deposit Insurance Corporation insurance limits. The
uninsured cash bank balances were $767,299 at December 31, 2017. The Company has not experienced any loss on these accounts.
The balances are maintained in demand accounts to minimize risk.
At December 31, 2017, 4 customers accounted for more than 10% of the accounts receivable balance, for a total of 59.5%. For the
year ended December 31, 2016, two customers accounted for 48% of total revenue.
Fair Value of Financial Instruments
The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures
regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in
absence of a principal, most advantageous market for the specific asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a
recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial
measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of
unobservable inputs, when determining fair value. The three tiers are defined as follows:
·
·
·
Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for
identical or similar assets and liabilities; and
Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
The Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued
expenses, are carried at historical cost. At December 31, 2017 and 2016, the carrying amounts of these instruments approximated
their fair values because of the short-term nature of these instruments. Derivative instruments are carried at fair value, generally
estimated using the Black Scholes Merton model.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the
estimated useful lives of the assets of three to seven years.
Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to
operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are
removed from the respective accounts with the resulting gain or loss reflected in operations. Management periodically reviews the
carrying value of its property and equipment for impairment.
F-12
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Intangible assets
Intangible assets consist of intellectual property, a non-complete agreement, and internally developed software and are stated at cost
less accumulated amortization. Amortization is provided for on the straight-line basis over the estimated useful lives of the assets of
five to six years. During 2016, the Company began capitalizing the costs of developing internal-use computer software, including
directly related payroll costs. The Company amortizes costs associated with its internally developed software over periods up to
three years, beginning when the software is ready for its intended use.
The Company capitalizes costs incurred during the application development stage of internal-use software and amortize these costs
over the estimated useful life. Upgrades and enhancements are capitalized if they result in added functionality which enable the
software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business
process reengineering costs are expensed in the period in which they are incurred.
Business Combinations
For all business combinations (whether partial, full or step acquisitions), the Company records 100% of all assets and liabilities of
the acquired business, including goodwill, generally at their fair values; contingent consideration, if any, is recognized at its fair
value on the acquisition date and, for certain arrangements, changes in fair value are recognized in earnings until settlement and
acquisition-related transaction and restructuring costs are expensed rather than treated as part of the cost of the acquisition.
Goodwill and change to annual impairment testing period
Goodwill is comprised of the purchase price of business combinations in excess of the fair value assigned at acquisition to the net
tangible and identifiable intangible assets acquired. Goodwill is not amortized. The Company assesses goodwill for impairment at
least annually, or when events or changes in the business environment indicate the carrying value may not be fully recoverable. The
Company also has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads
the Company to determine that it is more likely than not (that is, a likelihood of more than 50%) that goodwill is impaired. If the
Company chooses to first assess qualitative factors and it is determined that it is not more likely than not goodwill is impaired, the
Company is not required to take further action to test for impairment. The Company also has the option to bypass the qualitative
assessment and perform only the quantitative impairment test, which the Company may choose to do in some periods but not in
others. The Company performs its annual impairment review as of December 31st.
The Company had historically performed its annual goodwill and impairment assessment on September 30th of each year; however,
due to the elimination of the need to internally maintain certain segregated accounting records of the Steel Media business that
occurred in the third quarter of 2016, following the determination that the second year Earn Out Consideration would not be
achieved (See Note 2), this was reevaluated by the Company. Further, given the seasonal and cyclical nature of advertising sales in
general, timing of the Company’s annual budgeting process, and the short-term nature of the Company’s advertising sales contracts,
it was determined that it would be more effective and efficient to conduct the annual impairment analysis instead at December
31st of each year. This would also better align the Company with other advertising sales companies who also generally conduct this
annual analysis in the fourth quarter. The Company does not believe this change will have any material impact on its consolidated
financial statements, and continues to evaluate potential interim impairment to goodwill consistent with its historical practices.
When evaluating the potential impairment of goodwill, management first assess a range of qualitative factors, including but not
limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company's
products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel,
and the overall financial performance for each of the Company's reporting units. If, after completing this assessment, it is
determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then proceed to a
two-step impairment testing methodology using the income approach (discounted cash flow method).
F-13
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
In the first step of the two-step testing methodology, we compare the carrying value of the reporting unit, including goodwill, with
its fair value, as determined by its estimated discounted cash flows. If the carrying value of a reporting unit exceeds its fair value,
we then complete the second step of the impairment test to determine the amount of impairment to be recognized. In the second
step, we estimate an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to 100% of
the assets and liabilities other than goodwill (including any unrecognized intangible assets). If the carrying value of a reporting
unit's goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference in that period.
When required, we arrive at our estimates of fair value using a discounted cash flow methodology which includes estimates of
future cash flows to be generated by specifically identified assets, as well as selecting a discount rate to measure the present value
of those anticipated cash flows. Estimating future cash flows requires significant judgment and includes making assumptions about
projected growth rates, industry-specific factors, working capital requirements, weighted average cost of capital, and current and
anticipated operating conditions. The use of different assumptions or estimates for future cash flows could produce different results.
Although the Company now operates within one business segment, it was determined that a portion of the goodwill originally
assigned to the Steel Media, a California corporation (“Steel Media”), acquisition had become impaired as of June 30, 2016.
Accordingly, we recorded a goodwill impairment charge of $670,000 during the year ended December 31, 2016. The impairment
charge represents the excess of the carrying amount of the goodwill recorded in the acquisition over the implied fair value of the
goodwill. The implied fair value of the goodwill is the residual fair value based on an income approach that utilized a discounted
cash flow model based on revenue and profit forecasts. The Company performed its annual impairment test as of December 31,
2017 and no further impairment was required.
Long-lived Assets
Management evaluates the recoverability of the Company's identifiable intangible assets and other long-lived assets when events or
circumstances indicate a potential impairment exists. Events and circumstances considered by the Company in determining whether
the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited
to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant
negative industry or economic trends; a significant decline in the Company's stock price for a sustained period of time; and changes
in the Company's business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be
generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets'
carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of
the assets exceeds the fair value of the assets. No impairments have been recorded regarding its identifiable intangible assets or
other long-lived assets during the years ended December 31, 2017 or 2016, respectively.
Derivatives
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480,
Distinguishing Liabilities From Equity and FASB ASC Topic No. 815, Derivatives and Hedging. Derivative liabilities are adjusted
to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as
adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for
in arriving at the overall fair value of the financial instruments.
Loss Per Share
We use ASC 260, "Earnings Per Share" for calculating the basic and diluted earnings (loss) per share. We compute basic earnings
(loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings
(loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential
common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include
outstanding stock options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share are the same,
in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share.
F-14
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
There were 5,246,692 common share equivalents at December 31, 2017 and 3,818,080 at December 31, 2016. For the years ended
December 31, 2017 and 2016, respectively, these potential shares were excluded from the shares used to calculate diluted earnings
per share as their inclusion would reduce net loss per share.
Income Taxes
We utilize ASC 740 “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities
and their financial reporting amounts at year-end based on enacted laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
The Company recognizes the impact of a tax position in the financial statements only if that position is more likely than not of
being sustained upon examination by taxing authorities, based on the technical merits of the position. Our practice is to recognize
interest and/or penalties related to income tax matters in income tax expense.
Stock-Based Compensation
We account for our stock-based compensation under ASC 718 "Compensation – Stock Compensation" using the fair value based
method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over
the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in
which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled
by the issuance of those equity instruments.
We use the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the
fair value of options. The stock based fair value compensation is determined as of the date of the grant or the date at which the
performance of the services is completed (measurement date) and is recognized over the vesting periods.
Common stock awards
The Company grants common stock awards to non-employees in exchange for services provided. The Company measures the fair
value of these awards using the fair value of the services provided or the fair value of the awards granted, whichever is more
reliably measurable. The fair value measurement date of these awards is generally the date the performance of services is complete.
The fair value of the awards is recognized on a straight-line basis as services are rendered. The share-based payments related to
common stock awards for the settlement of services provided by non-employees is recorded on the consolidated statement of
comprehensive loss in the same manner and charged to the same account as if such settlements had been made in cash.
Warrants
In connection with certain financing, consulting and collaboration arrangements, the Company has issued warrants to purchase
shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable
by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes
option pricing model as of the measurement date. Warrants issued in conjunction with the issuance of common stock are initially
recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants are recorded at fair
value as expense over the requisite service period or at the date of issuance, if there is not a service period. Warrants granted in
connection with ongoing arrangements are more fully described in Note 4, Stockholders’ Equity.
F-15
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Business Segments
The Company uses the "management approach" to identify its reportable segments. The management approach designates the
internal organization used by management for making operating decisions and assessing performance as the basis for identifying
the Company's reportable segments. Using the management approach, the Company determined that it has one operating segment
due to business similarities and similar economic characteristics.
Liquidity
In connection with preparing its consolidated financial statements, management evaluates whether there are conditions and events,
considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year
from the date that the financial statements are issued. The Company had an accumulated deficit at December 31, 2017 of
$21,148,706. As of December 31, 2017, the Company had $1,017,299 in cash and cash equivalents and net working capital of
$1,124,023 as compared to $1,048,762 in cash and cash equivalents and a deficit in working capital of $8,276,099 at December 31,
2016, respectively. While the Company believes it has established an ongoing source of revenue that is sufficient to cover its
operating costs over the next twelve months, the Company is currently experiencing a period of limited liquidity resulting from
recent activity related to the Financing Agreement.
Between September 2016 and January 2017, we satisfied all outstanding obligations under the Financing Agreement utilizing
proceeds from the factoring of our receivables and sales of our securities. While the satisfaction of the amounts owed under the
Financing Agreement resulted in overall savings to us in 2017 through the elimination of both the associated interest expense as
well as the internal costs related to the reporting obligations under its terms, the payment of these amounts adversely impacted our
current liquidity. To address the immediate impact of this decreased liquidity, we have recently made certain reductions in staffing,
delayed certain previously budgeted expenditures, eliminated certain legacy operating expenses associated with the Steel Media
acquisition, restructured sales management compensation structures, extended payments to certain vendors, and in October 2017
issued addition Debentures totaling $5,180,158. If our revenues continue to increase throughout the next twelve months as
anticipated, additional liquidity is also anticipated to be readily available under our accounts receivable factoring agreement with
FastPay Partners. As of March 31, 2018, we had approximately $1,346,670 of factored accounts receivable outstanding on a total
available line of $8,000,000.
Recently Issued Accounting Standards
In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers
(Topic 606), Leases (Topic 840), and Leases (Topic 842). The effective date for ASU 2017-13 is for fiscal years beginning after
December 15, 2018. The adoption of this ASU will not have a material impact to our consolidated financial statements.
In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-11, Earnings Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Part 1 – Accounting for Certain
Financial Instruments with Down Round Features and Part 2 – Replacement of the Indefinite Deferral for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests
with Scope Exception (“ASU No. 2017-11”). Part 1 of ASU No. 2017-11 addresses the complexity of accounting for certain
financial instruments with down round features. Down round features are provisions in certain equity-linked instruments (or
embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of
ASU No. 2017-11 addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence
of extensive pending content in the FASB Accounting Standards Codification®. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. For public business entities, the amendments in Part I of this update are effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We early adopted the proposed
guidance under ASU 2017-11 for the year end December 31, 2017, and recognized warrants issued in the fourth quarter of 2017
with a down round feature as equity. Adjustments were required for the retrospective application of this standard.
F-16
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment (“ASU No. 2017-04”). ASU No. 2017-04 simplifies the subsequent measurement of goodwill by eliminating
Step 2 from the goodwill impairment test. A public business entity that is a SEC filer should adopt the amendments of ASU No.
2017-04 for its annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is
permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not
expect any impact from the adoption of this standard on its consolidated financial statements.
In October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16 -
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 will require the tax effects of intercompany
transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current GAAP in which the
tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered
through use. The guidance will be effective for the first interim period of our 2019 fiscal year, with early adoption permitted.
In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-
15”). ASU 2016-15 provides guidance regarding the classification of certain items within the statements of cash flows. ASU 2016-
15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted.
In connection with its financial instruments project, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses:
Measurement of Credit Losses on Financial Instruments in June 2016 and ASU 2016-01 - Financial Instruments - Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities in January 2016.
·
·
ASU 2016-13 introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables,
held-to-maturity debt securities, loans and other instruments, entities will be required to use a forward-looking “expected loss” model that will
replace the current “incurred loss” model and generally will result in earlier recognition of allowances for losses. The guidance will be
effective for the first interim period of our 2021 fiscal year, with early adoption in fiscal year 2020 permitted.
ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other
provisions, the new guidance requires the fair value measurement of investments in certain equity securities. For investments without readily
determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable
prices minus impairment. All changes in measurement will be recognized in net income. The guidance will be effective for the first interim
period of our 2019 fiscal year. Early adoption is not permitted, except for certain provisions relating to financial liabilities.
In April 2016, the FASB issued Accounting Standards Update, or ASU, No. 2016-10, Identifying Performance Obligations and
Licensing (Topic 606), which amends certain aspects of the FASB’s new revenue standard, ASU 2014-09, Revenue from Contracts
with Customer (Topic 606). ASU 2016-10 identifies performance obligations and provides licensing implementation guidance. The
effective date for ASU 2016-10 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 (Revenue from Contracts
with Customers (Topic 606): Deferral of Effective Date) defers the effective date of ASU No. 2014-09 by one year, for fiscal years
beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of this standard on its
consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), which is part of the FASB's
Simplification Initiative. The updated guidance simplifies the accounting for share-based payment transactions. The amended
guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early
adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial
statements.
F-17
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customer (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net), or ASU 2016-08, that clarifies how to apply revenue recognition guidance
related to whether an entity is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has
control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the
control principle when services are provided and when goods or services are combined with other goods or services. The effective
date for ASU 2016-08 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 defers the effective date of ASU
No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company has performed an evaluation of the
impact of the adoption of this standard on its consolidated financial statements, and given its revenue recognition practices already
in place, it does not appear this will have a material impact on the Company’s future presentation of consolidated financial
statements. The Company will continue to evaluate new revenue streams as they develop from future new product launches.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for
lessees. The updated guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and
operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company is
currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-3, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-3”) which
changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related
debt liability rather than as an asset. ASU 2015-3 became effective for public companies during interim and annual reporting
periods beginning after December 15, 2015. The Company adopted ASU 2015-3 on January 1, 2016. The adoption of this ASU did
not have a material impact to our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements-Going Concern. The amendments in this
update apply to all reporting entities and require an entity’s management, in connection with preparing financial statements for each
annual and interim reporting period, to evaluate whether there are conditions or events, considered in the aggregate, that raise
substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements
are issued (or within one year after the date that the financial statements are available to be issued when applicable). This ASU is
effective for annual periods ending after December 15, 2016. We adopted this standard for the year ended December 31, 2016.
Based on the results of our analysis, we have determined that the disclosures were as required by ASU No. 2014-15.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would
have a material effect on the accompanying financial statements.
F-18
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE 2 – ACQUISITIONS
Acquisition of Steel Media
On October 30, 2014, we acquired 100% of the capital stock of Steel Media from Richard Steel pursuant to the terms and
conditions of a stock purchase agreement, dated October 30, 2014, by and among the Company, Steel Media and Mr. Steel (the
"Stock Purchase Agreement").
As consideration for the purchase of Steel Media, we agreed to pay Mr. Steel up to $20,000,000, consisting of: (i) a cash payment
at closing of $7,500,000; (ii) a cash payment of $2,000,000 which was held in escrow to satisfy certain indemnification obligations
to the extent such arise under the Stock Purchase Agreement; (iii) a one year secured subordinated promissory note in the principal
amount of $2,500,000 (the "Note") which was secured by 477,373 shares of our Class A common stock (the "Escrow Shares"); and
(iv) earn out payments of up to $8,000,000 (the "Earn Out Consideration").
The Earn Out Consideration target was achieved for the first earn out period ended October 31, 2015. As such, at December 31,
2015, we recorded $7,585,435 associated with the first and second portions of the earn out, and on January 29, 2016 we paid Mr.
Steel $4,000,000. Of this amount, $1,600,000 was paid in cash and the balance was paid through the issuance of 256,754 shares of
our Class A common stock in accordance with the terms of the Stock Purchase Agreement.
The Company determined the remaining Earn Out Consideration would not be achieved for the second earn out period ended
October 31, 2016 and reversed the second portion of the earn out liability of $3,585,435 in September 2016.
NOTE 3 – NOTES PAYABLE
Financing Agreement with Victory Park Management, LLC as agent for the lenders
On October 30, 2014 (the "Financing Agreement Closing Date"), the Company entered a financing agreement (the "Financing
Agreement") with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders and holders of notes
and warrants issued thereunder (the "Agent"). The initial and subsequent notes issued (the “Financing Notes”) bore interest at a rate
per annum equal to the sum of (1) cash interest at a rate of 10% per annum and (2) payment-in-kind (PIK) interest at a rate of 4%
per annum for the period commencing on the Financing Agreement Closing Date and extending through the last day of the calendar
month during which the Company's financial statements for December 31, 2014 are delivered, and which PIK interest rate
thereafter from time to time may be adjusted based on the ratio of the Company's consolidated indebtedness to its earnings before
interest, taxes, depreciation and amortization. If the Company achieved a reduction in the leverage ratio as described in the
Financing Agreement, the PIK interest rate declined on a sliding scale from 4% to 2%. The Financing Notes issued under the
Financing Agreement were scheduled to mature on October 30, 2017.
During the twelve months ended December 31, 2017, we completely repaid the Financing Notes and made principal and PIK
interest repayments in the amount of $3,996,928.
Notes payable consisted of the following at December 31, 2016:
Current portion of notes payable and PIK interest
Non-current portion of notes payable
Total notes payable and PIK interest
Less deferred financing costs
Notes payable and PIK interest, net of deferred costs
F-19
December 31,
2016
$
$
3,996,928
—
3,996,928
(578,140)
3,418,788
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
We incurred a total of $3,178,011 of costs related to the Financing Agreement. These costs were amortized to interest expense over
the life of the debt. During the twelve months ended December 31, 2017 and 2016, $2,101,377 and $1,076,634, respectively, of
debt issuance costs were amortized as interest expense. As of December 31, 2017, all deferred debt issuance costs have been
completely amortized.
During the twelve months ended December 31, 2017 and 2016, $67,612 and $510,859, respectively, were recorded as PIK interest
expense.
Pursuant to the Financing Agreement, the Company issued to the lender a five-year warrant to purchase 580,000 shares of its Class
A common stock at an exercise price of $5.00 per share (the "Financing Warrant"). The warrant holder was not, however, permitted
to exercise the Financing Warrant for shares of Class A common stock that would cause such holder to beneficially own shares of
Class A common stock that exceeds 4.99% of the Company's outstanding shares of Class A common stock following such exercise.
Pursuant to the Financing Warrant, the warrant holder had the right, at any time after the earlier of April 30, 2016 and the maturity
date of the Financing Notes issued, but prior to October 30, 2019, to exercise its put right under the terms of the Financing Warrant,
pursuant to which the warrant holder may sell to the Company, and the Company will purchase from the warrant holder, all or any
portion of the Financing Warrant that had not been previously exercised. In connection with any exercise of this put right, the
purchase price was to equal to an amount based upon the percentage of the Financing Warrant for which the put right is being
exercised, multiplied by the lesser of (a) 50% of the total consolidated revenue for the Company for the trailing 12-month period
ending with the Company's then-most recently completed fiscal quarter, and (b) $1,500,000. In May 2017, the Company was
notified by the warrant holder that it was exercising its put right. We had a period of 45 days from the date of notice to repay the
right or negotiate a settlement. If the right remained unpaid after the 45-day period, interest would accrue on the unpaid balance at a
rate of 14% per annum. On October 27, 2017, the Company paid the warrant holder $1,567,612, which was comprised of the
$1,500,000 warrant value and an additional $67,612 of accrued interest.
As contemplated under the Financing Agreement, the Company also entered a registration rights agreement on the Financing
Agreement Closing Date (the "Financing Registration Rights Agreement") with the holder of the Financing Warrant, pursuant to
which the Company granted to such holder certain "piggyback" rights to register the shares of the Company's Class A common
stock issuable upon exercise of the Financing Warrant. Specifically, the holder of the Financing Warrant had the right, subject to
certain allocation provisions set forth in the Financing Registration Rights Agreement, to include the shares underlying the
Financing Warrant in registration statements for offerings by the Company of its Class A common stock, as well as offerings of the
Company's Class A common stock held by third parties. The shares underlying the Financing Warrant were initially included in a
Post-Effective Amendment No. 1 to the registration statement on Form S-1 that was declared effective by the SEC in March 2016.
Financing and Security Agreement with FastPay
In September 2016, the Company executed a Financing and Security Agreement, as amended (collectively, the "FastPay
Agreement"), with FastPay creating an accounts receivable-based credit facility.
Under the terms of the FastPay Agreement, FastPay may, at its sole discretion, purchase the Company's eligible accounts
receivable. Upon any acquisition of accounts receivable, FastPay will advance the Company up to 80% of the gross value of the
purchased accounts, up to a maximum of $8,000,000 in advances. As a result of the Debentures that we issued in April 2017 as
further described in Note 10, the Company agreed to reduce the amount of receivables to be purchased to a maximum of
$4,000,000. Each account receivable purchased by FastPay will be subject to a factoring fee rate specified in the FastPay
Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding
over 30 days. The Company is subject to a concentration limitation on the percentage of debt from any single customer of 25% to
the total amount outstanding on its purchased accounts, subject to increase to 50% for its larger customer.
The Company is obligated to repurchase accounts remaining uncollected after a specified deadline, and FastPay will generally have
full recourse against the Company in the event of nonpayment of any purchased accounts. The Company's obligations under the
FastPay Agreement are secured by a first position security interest in its accounts receivable, deposit accounts and all proceeds
therefrom.
F-20
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
The FastPay Agreement contains covenants that are customary for agreements of this type and are primarily related to accounts
receivable and audit rights. The Company is also required to provide FastPay with 30-day notice of any transaction that result, or
would result in, a “change of control” as defined in the FastPay Agreement. The failure to satisfy covenants under the FastPay
Agreement or the occurrence of other specified events that constitute an event of default, as defined, could result in the termination
of the FastPay Agreement and/or the acceleration of the Company's obligations. The FastPay Agreement contains provisions
relating to events of default that are customary for agreements of this type.
The FastPay Agreement has an initial one-year term and automatically renews for successive one-year terms thereafter, subject to
earlier termination by written notice by the Company, provided all obligations are paid, including the payment of an early
termination fee.
At December 31, 2017, $2,082,822 of accounts receivable purchased by FastPay remain outstanding and are subject to repurchase
under the terms of the FastPay Agreement.
Secured Convertible Debentures, Net
In April 2017, the Company entered into definitive securities purchase agreements (the “Securities Purchase Agreements”) with
certain accredited investors (the “Purchasers”) for the purchase and sale of an aggregate of : (i) $5,000,000 principal amount of
12.5% secured convertible debentures (the “Debentures”); and (ii) five-year Series A warrants (the “Debenture Warrants”)
representing the right to acquire up to 833,337 shares of our Class A common stock in a transaction exempt from registration under
the Securities Act, in reliance on an exemption provided by Rule 506(b) of Regulation D and Section 4(a)(2) of the Securities Act.
The Debentures, which mature three years from the date of issuance, pay interest in cash at the rate of 12.5% per annum, payable
quarterly on January 1, April 1, July 1 and October 1, beginning on July 1, 2017. Our obligations under the Debentures are secured
by a second position security interest in our accounts receivable and a first position security interest in the balance of our assets,
and we are subject to continued compliance with certain financial covenants. The Debentures are convertible at the option of the
holder into shares of our Class A common stock at an initial conversion price of $3.00 per share, subject to adjustment as
hereinafter set forth. Subject to our compliance with certain equity conditions set forth in the Debentures, upon 20 trading days'
notice to the holders we have the right to redeem the Debentures in cash at a 120% premium during the first year and a 110%
premium during the remaining term of the Debentures. Upon any optional redemption, we are obligated to issue the holder five-
year warrant Series B warrants, the terms of which will be identical to the Debenture Warrants, to purchase a number of shares of
our Class A common stock as shall equal 50% of conversion shares issuable on an as-converted basis as if the principal amount of
the Debenture had been converted immediately prior to the optional redemption. In the event of future financings by us, subject to
certain exempt issuances, the holders have the right to cause us to allocate 20% of the proceeds we may receive as a mandatory
redemption of a portion of the principal amount then outstanding. We are also required to redeem the Debentures upon our failure
to maintain certain financial covenants which include a minimum monthly current ratio, a maximum quarterly corporate expense
ratio, and maintain minimum quarterly revenue and EBITDA related to SRAXmd. As of December 31, 2017, we are in compliance
with all financial covenants.
The Debenture also contains certain customary events of default (including, but not limited to, default in payment of principal or
interest thereunder, breaches of covenants, agreements, representations or warranties thereunder, the occurrence of an event of
default under certain material contracts of the Company, changes in control of the Company and the entering or filing of certain
monetary judgments against the Company). Upon the occurrence of any such event of default, the outstanding principal amount of
the Debenture, plus liquidated damages, interest and other amounts owing in respect thereof through the date of acceleration, shall
become, at the holder’s election, immediately due and payable in cash. The Company is also subject to certain customary non-
financial covenants under the Debenture. The Debenture holders were granted board observation rights so long as the lead investor
continues to hold the Debentures.
F-21
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
The Debenture Warrants are initially exercisable at $3.00 per share and, if at any time after the six-month anniversary of the
issuance the underlying shares of our Class A common stock are not covered by an effective resale registration statement, the
Debenture Warrants are exercisable on a cashless basis. The conversion price of the Debentures and the exercise price of the
Debenture Warrants are subject to adjustments upon certain events, including stock splits, stock dividends, subsequent equity
transactions (other than specified exempt issuances), subsequent rights offerings, and fundamental transactions, subject to a floor of
$1.40 per share. If we fail to timely deliver the shares of our Class A common stock upon any conversion of the Debentures or
exercise of the Debenture Warrants we will be subject to certain buy-in provisions. Pursuant to the terms of the Debentures and
Debenture Warrants, a holder will not have the right to convert any portion of the Debentures or exercise any portion of the
Debenture Warrants if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of
Class A common stock outstanding immediately after giving effect to such conversion or exercise, as such percentage ownership is
determined in accordance with the terms of the Debentures and the Debenture Warrants; provided that after the Shareholder
Approval Date, as defined below, at the election of a holder and notice to us such percentage ownership limitation may be increased
or decreased to any other percentage, not to exceed 9.99%; provided that any increase will not be effective until the 61st day after
such notice is delivered from the holder to us.
In accordance with the Nasdaq Marketplace Rules, until such time as our stockholders have approved the Securities Purchase
Agreements and the transactions thereunder (the "Shareholder Approval Date"), we were not obligated to issue any shares of our
Class A common stock upon any conversion of the Debentures and/or exercise of the Debenture Warrants, and the holders had no
right to receive upon conversion and/or exercise thereof any shares of our Class A common stock, to the extent the issuance of such
shares of Class A common stock would exceed 20% of our outstanding Class A common stock prior to the transaction. We held a
special meeting of the shareholders on June 23, 2017 whereby we obtained approval of the Securities Purchase Agreements and the
transactions thereunder.
We agreed to file a registration statement registering the resale of the shares of our Class A common stock underlying the
Debentures and the Debenture Warrants. Under the terms of the Securities Purchaser Agreements, we also granted the Purchasers
of the Debentures the right to purchase an additional $3,000,000 of Debentures upon the same terms and conditions for a period
beginning on the Shareholder Approval Date and expiring on earliest of the date that (a) the initial registration statement has been
declared effective by the SEC, (b) all of the underlying shares have been sold pursuant to Rule 144 or may be sold pursuant to Rule
144 without the requirement for our company to be in compliance with the current public information required under Rule 144 and
without volume or manner-of-sale restrictions, (c) following the one year anniversary of the closing date provided that a holder of
the underlying shares is not an affiliate of the Company or (d) all of the underlying shares may be sold pursuant to an exemption
from registration under Section 4(a)(1) of the Securities Act. The shares underlying the Debentures and Debenture Warrants were
included in a resale registration statement on Form S-3 that was declared effective by the SEC in June 2017.
Chardan Capital Markets, LLC (“Chardan Capital”), Noble Capital Markets, Inc. ("Noble") and Aspenwood Capital (an
independent branch of Colorado Financial Services Corporation) (“Aspenwood”), all broker-dealers and members of FINRA, acted
as either our placement agent or a finder in connection with the sale of the securities pursuant to the Securities Purchase
Agreements. In addition, an affiliate of Noble purchased Debentures amounting to $720,000 and was issued Debenture Warrants to
purchase 120,000 shares of our Class A common stock in this offering. We paid aggregate cash commissions amounting to
$276,700 to these broker-dealers in connection with the sale of the Debentures. Additionally, we issued Chardan Capital placement
agent warrants ("Chardan Placement Agent Warrants") to purchase 100,000 shares of our Class A common stock at an exercise
price of $3.75 per share which are exercisable for 5.5 years commencing six months from the issuance date. We issued Noble
placement agent warrants (“Noble Placement Agent Warrants”) to purchase up to 66,800 shares of our Class A common stock at an
exercise price of $3.00 per share which will become exercisable six months from the date of issuance. We also issued Colorado
Financial Service Corporation and its designees warrants (“Aspenwood Warrants”) to purchase 7,700 shares of our Class A
common stock at an exercise price of $3.75 per share which are exercisable for 5.5 years commencing six months from the issuance
date. We included the shares underlying the Chardan Placement Agent Warrants, the Noble Placement Agent Warrants, and the
Aspenwood Warrants in the afore-described resale registration statement that was declared effective by the SEC in June 2017.
The net proceeds to us from the offering, after deducting placement agent fees and estimated offering expenses, were
approximately $4,566,405. We utilized $2,500,000 of the net proceeds to satisfy a put obligation under the Series B Warrants issued
to investors in a registered direct offering that we conducted in January 2017 as described in Note 11. The balance of the net
proceeds was used to pay down accounts payable and satisfy other working capital requirements.
F-22
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
In October 2017, we entered into securities purchase agreements to sell an aggregate of $5,180,157.78 of our 12.5% secured
convertible debentures and issued 863,365 Series A Common Stock Purchase Warrants. The debentures mature on 4/21/2020, bear
interest at an annual rate of 12.5%, payable quarterly on January 1, April 1, July 1, and October 1, beginning on January 1, 2018.
Pursuant to the greenshoe provision contained in our April 2017 debenture offering, $2,000,000 of debentures were purchased
pursuant to the greenshoe provision and the remaining $3,180,157.78 were purchased separately. Of the 863,365 warrants issued, a
total of 333,335 were purchased pursuant to the greenshoe provision and 630,030 were purchased separately. The debentures are
convertible into shares of our Class A common stock at $3.00 per share, subject to adjustment, and contain anti-dilution protection
for subsequent financings and have a conversion price floor of $1.40 per share (pursuant to shareholder vote approving the offering
that occurred on December 29, 2017). The warrants have an exercise price of $3.00 per share, subject to adjustment and contain
anti-dilution protection for subsequent financings and have an exercise price floor of $1.40 per share.
In connection with the offering we issued Chardan Capital Markets 160,000 placement agent warrants, of which: (i) 129,176 have
an exercise price of $3.75 and (ii) 54,161 have an exercise price of $4.49. We also issued Aspenwood Capital 23,337 placement
agent warrants with an exercise price of $3.75. All placement agent warrants have a term of five and a half years (exercisable
beginning 6 months after issuance).
During the year ended December 31, 2017, the Company made no repayments on secured convertible debentures. During the year
ended December 31, 2017, certain holders of convertible debentures exercised their rights to convert amounts of principal totaling
$3,335,000 into 1,111,667 shares of the Company’s common equity.
During the year ended December 31, 2017, the Company recorded interest expense on the above convertible debenture totaling
$505,418.
Convertible Notes
Future minimum principal payments under senior secured convertible notes as of December 31, 2017, were as follows:
Year Ending December 31,
2018
2019
2020
Total minimum principal payments
Less: debt discount
Less: debt issuance costs
Convertible notes, net
NOTE 4 – STOCKHOLDERS' EQUITY
Preferred Stock
Convertible
Notes
$
—
—
6,845,157
6,845,157
(4,107,792)
(1,026,219)
$ 1,711,146
We are authorized to issue 50,000,000 of preferred stock, par value $0.001, of which 200,000 shares were designated as Series 1
Preferred Stock. Our board of directors, without further stockholder approval, may issue preferred stock in one or more series from
time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the
shares of each series. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with
respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund
provisions and other matters. Our board of directors may authorize the issuance of preferred stock, which ranks senior to our
common stock for the payment of dividends and the distribution of assets on liquidation. In addition, our board of directors can fix
limitations and restrictions, if any, upon the payment of dividends on both classes of our common stock to be effective while any
shares of preferred stock are outstanding.
F-23
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
On August 16, 2013, our Board of Directors approved a Certificate of Designations, Rights and Preferences pursuant to which it
designated a series consisting of 200,000 shares of its blank check preferred stock as Series 1 Preferred Stock. The designations,
rights and preferences of the Series 1 Preferred Stock are as follows:
·
·
·
·
·
each share has a stated and liquidation value of $0.001 per share,
the shares do not pay any dividends, except as may be declared by our Board of Directors, and are not redeemable,
the shares do not have any voting rights, except as may be provided under Delaware law,
each share is convertible into 10 shares of our Class A common stock, subject to customary anti-dilution provisions in the event of stock splits,
recapitalizations and similar corporate events, and
the number of shares of Series 1 Preferred Stock, as well as the number of shares of Class A common stock issued upon a conversion of shares
of Series 1 Preferred Stock, that a holder may sell, transfer, assign, hypothecate or otherwise dispose of (collectively or severally, a
"Disposition") at any one time shall be limited to an amount which is pari passu to any Disposition of Class A common stock by either
Christopher Miglino and/or Erin DeRuggiero, executive officers and directors of our company. Notwithstanding anything contained in the
designations, the holder of Series 1 Preferred Stock is not obligated to make any Dispositions of Series 1 Preferred Stock or Class A common
stock issued upon the conversion of Series 1 Preferred Stock.
Following the conversion of the remaining shares of our Series 1 Preferred Stock during 2015 into shares of our Class A common
stock, in February 2016, we filed a Certificate of Elimination with the Secretary of State of Delaware returning all shares of
previously designated Series 1 Preferred Stock to our blank check preferred stock. No shares of Series 1 Preferred Stock were
outstanding at December 31, 2016.
Common Stock
We are authorized to issue an aggregate of 259,000,000 shares of common stock. Our certificate of incorporation provides that we
will have two classes of common stock: Class A common stock (authorized 250,000,000 shares, par value $0.001), which has one
vote per share, and Class B common stock (authorized 9,000,000 shares, par value $0.001), which has ten votes per share. Any
holder of Class B common stock may convert his or her shares at any time into shares of Class A common stock on a share-for-
share basis. Otherwise the rights of the two classes of common stock are identical. There were no shares of Class B common stock
outstanding at December 31, 2017 or 2016, respectively.
On February 23, 2016, our Board of Directors approved the adoption of our 2016 Equity Compensation Plan (the “2016 Plan”) and
reserved 600,000 shares of our Class A common stock for grants under this plan. The terms of the 2016 Plan, which is administered
by our Board of Directors, are identical to those of our 2014 Equity Compensation Plan and 2012 Equity Compensation Plan. We
have reserved 600,000 shares of our Class A common stock for awards under the 2016 Plan.
During January 2016 and February 2016, we received aggregate proceeds of $500,000 from the sale of 100,000 shares of our Class
A common stock.
During January 2016, we issued 256,754 shares of Class A common stock, valued at $2,400,000, to Richard Steel as partial
payment of the first year Earn Out Consideration. Refer to Note 2 regarding a further description of the Earn Out Consideration.
During February 2016, we issued 6,786 shares of Class A common stock, valued at $47,500, to members of our board of directors
for services. We also issued 10,000 shares of Class A common stock, valued at $70,000, to an employee as compensation which we
expensed in 2014 and 2015.
On February 23, 2016, we issued an aggregate of 10,000 shares of our Class A common stock, valued at $70,000, as partial
compensation for services under the terms of a consulting agreement.
On August 16, 2016, we issued 3,077 shares of our Class A common stock, valued at $20,000, to a new member of our board of
directors for services.
On September 22, 2016, we issued 23 shares of our Class A common stock which resulted from rounding up to whole shares
related to the reverse stock split.
F-24
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
On September 30, 2016, we sold an aggregate of 665,000 units of our securities to fourteen accredited investors in a private
placement exempt from registration under the Securities Act of 1933, as amended, in reliance on exemptions provided by Section
4(a)(2) and Rule 506(b) of Regulation D. The units were sold at a purchase price of $5.00 per unit resulting in gross proceeds to us
of $3,325,000. Each unit consisted of one share of our Class A common stock and one three year Class A Common Stock Purchase
Warrant (“Purchase Warrants”) to purchase 0.5 shares of our Class A common stock at an exercise price of $7.50 per share. We
agreed to file a registration statement with the Securities and Exchange Commission within 90 days after the final closing in this
offering registering for resale the shares of our Class A common stock issuable upon the exercise of the Purchase Warrants included
in the units sold in this offering, together with the shares of our Class A common stock underlying the Purchase Warrants. If we fail
to timely file this resale registration, or at any time thereafter that the prospectus contained in the effective resale registration is not
available for the issuance of the shares to the holder upon the exercise of the Purchase Warrants for a period of at least 60 days
following the delivery by us of a suspension notice, then the Purchase Warrants are exercisable on a cashless basis. T.R. Winston &
Company, LLC, a broker-dealer, acted as placement agent for us in this offering. We paid the placement agent commissions totaling
$266,000 and agreed to issue it Purchase Warrants to purchase 53,200 shares of our Class A common stock at an exercise price of
$7.50 per share. We also paid compensation for services provided by Noble Financial Capital Markets in the amount of $180,000
regarding their assistance in this transaction. T.R. Winston & Company, LLC has reallocated a portion of the commissions and
Purchase Warrants to a selected dealer member of the selling group. We also agreed to pay T.R. Winston & Company, LLC a fee of
4% of the proceeds we may receive upon the exercise of the Purchase Warrants included in the units. We used $2,000,000 of the net
proceeds received by us in this offering to further reduce our obligations which were outstanding under the Financing Agreement,
as amended, with the Agent. We will use the balance of the proceeds for general working capital.
On October 31, 2016, the Company sold an aggregate of 255,000 units of its securities to nine accredited investors in a private
placement exempt from registration under the Securities Act of 1933, as amended, in reliance on exemptions provided by Section
4(a)(2) and Rule 506(b) of Regulation D. The units were sold at a purchase price of $5.00 per unit resulting in gross proceeds to us
of $1,275,000. This was the final closing of a private placement commenced in September 2016. Each unit consisted of one share
of our Class A common stock and one three year Class A Common Stock Purchase Warrant to purchase 0.5 shares of our Class A
common stock at an exercise price of $7.50 per share. We agreed to file a registration statement with the Securities and Exchange
Commission within 90 days after the final closing in this offering registering for resale the shares of our Class A common stock
issuable upon the exercise of the warrants included in the units sold in this offering, together with the shares of our Class A
common stock underlying the Placement Agent Warrants. If we fail to timely file this resale registration, or at any time thereafter
that the prospectus contained in the effective resale registration is not available for the issuance of the shares to the holder upon the
exercise of the warrant for a period of at least 60 days following the delivery by us of a suspension notice, then the warrants are
exercisable on a cashless basis. T.R. Winston & Company, LLC, a broker-dealer, acted as placement agent for us in this offering
and received 22,392 units in lieu of a cash placement agent commission totaling $109,956 and reimbursement of certain expenses.
We also agreed to issue it three year warrants (“Placement Agent Warrants”) to purchase 15,200 shares of our Class A common
stock at an exercise price of $7.50 per share. T.R. Winston & Company, LLC also reallocated a portion of the gross placement
agent commissions and Placement Agent Warrants to a selected dealer member of the selling group resulting in the payment by us
of a cash commission of $2,000 and the issuance of an additional 400 Placement Agent Warrants. We also agreed to pay T.R.
Winston & Company, LLC a fee of 4% of the proceeds we may receive upon the exercise of the warrants included in the units. We
are using the net proceeds for general working capital.
On January 4, 2017, the Company entered a definitive securities purchase agreement with two fundamental institutional investors
(the “Investors”) for the purchase and sale of an aggregate of: (i) 761,905 shares of the Company’s Class A common stock; and (ii)
five-year Series B Warrants (the “Series B Warrants”) representing the right to acquire up an additional 380,953 shares of our Class
A common stock at an exercise price of $7.00 per share. The shares of our Class A common stock and the Series B Warrants were
sold in a registered direct offering and we received gross proceeds of $3,980,001. Simultaneously we conducted a private
placement with the same Investors for no additional consideration of Series A Warrants (the “Series A Warrants”) representing the
right to acquire up to an additional 380,953 shares of our Class A common stock at an exercise price of $6.70 per share. The Series
A Warrants are exercisable for five years commencing 6 months from the date of closing of the private sale of the Series A
Warrants to the Investors.
F-25
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
The exercise price of the Series A Warrants is subject to full ratchet adjustment in certain circumstances, subject to a floor price of
$1.20 per share. The adjustment provisions under the terms of the Series A Warrants will be extinguished at such time as our Class
A common stock trades at or above $10.00 per share for 20 consecutive trading days, subject to the satisfaction of certain equity
conditions. In addition, if there is no effective registration statement covering the shares issuable upon the exercise of the Series A
Warrants, the warrants are exercisable on a cashless basis. If we fail to timely deliver the shares underlying the warrants, we will be
subject to certain buy-in provisions. As a result of the sale of the Debentures, the exercise price of the Series A Warrants issued to
investors in our January 2017 private offering were reset to $2.245 per share.
Beginning 100 days after the issuance date of the Series B Warrants, at any time the market price of our Class A common stock is
less than $5.25 per share, the holders had the right to exercise the Series B Warrants on a cashless basis for shares of our Class A
common stock calculated pursuant to a formula set forth in the Series B Warrants. We had the right, in lieu of delivery of such
shares of our Class A common stock, to pay the holder of the Series B Warrants being exercised on a cashless basis, a specified
amount in cash, with a maximum cash payment of $2,500,000. The holders of the Series B Warrants exercised their right in April
2017 and we repurchased the Series B Warrants for $2,500,000.
Pursuant to the terms of the warrants, a holder of a warrant will not have the right to exercise any portion of the warrant if the
holder (together with its affiliates) would beneficially own in excess of 9.99% of the number of shares of Class A common stock
outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the
terms of the warrants; provided that at the election of a holder and notice to us such percentage ownership limitation may be
increased or decreased to any other percentage, not to exceed 9.99%; provided that any increase will not be effective until the
61st day after such notice is delivered from the holder to the Company.
In the event of any extraordinary transaction, as described in the warrants and generally including any merger with or into another
entity, sale of all or substantially all of our assets, tender offer or exchange offer, or reclassification of our common stock, the
holder will have the right to have the warrants and all obligations and rights thereunder assumed by the successor or acquiring
corporation. Also, at the election of the holder of each warrant, in the event of an extraordinary transaction, we or any successor
entity may be required to repurchase such warrant for an amount of cash equal to the value of the warrant as determined in
accordance with the Black Scholes option pricing model and the terms of the warrants.
Pursuant to an engagement letter dated December 29, 2016 (the “Placement Agent Agreement”) by and between the Company and
Chardan Capital Markets, Chardan Capital agreed to act as the Company’s placement agent in connection with both the registered
direct offering and a concurrent private placement. Pursuant to the Placement Agent Agreement, the Company paid Chardan
Capital a cash fee equal to $160,000 (4% of the gross proceeds), as well as reimbursement of its expenses related to the offering in
the amount of $15,000. In addition, the Company granted Chardan Capital a warrant to purchase 76,190 shares of Class A common
stock (the “Placement Warrants”). The Placement Warrants have an exercise price of $6.50 per share and are exercisable for 5.5
years commencing six months from the issuance date. The shares underlying the Placement Warrants were included in a resale
registration statement on Form S-3 that was declared effective by the SEC in June 2017.
The net proceeds to the Company from the offering, after deducting placement agent fees and estimated offering expenses, were
$3,830,000. The proceeds of the offering were used to satisfy the outstanding notes issued under the terms of the Financing
Agreement. In connection with the January 2017 capital raise, Victory Park Management, LLC agreed not to exercise the put right
under the Financing Warrant prior to May 20, 2017. Victory Park Management, LLC exercised the put right on May 22, 2017. We
had had 45 days to satisfy this obligation which remains unpaid. On October 27, 2017, the Company satisfied this obligation in full
utilizing a portion of net proceeds from a second debenture financing.
The Class A shares of common stock and Series B Warrants were sold and issued pursuant to the Prospectus Supplement, dated
January 4, 2017, to the Prospectus included in the Company’s Registration Statement on Form S-3 (Registration No. 333-214644)
filed with the SEC on November 16, 2016 and declared effective on November 28, 2016.
In connection with an advisory agreement with kathy ireland Worldwide LLC ("kiWW"), the Company issued affiliates and
designees of kiWW 100,000 shares of its Class A common stock valued at $678,000 on January 2, 2017.
F-26
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
In January 2017, we issued 3,858 shares of our Class A common stock valued at $12,500 to Mr. Derek J. Ferguson upon his
appointment to our board of directors and the audit committee of the board. He is an accredited investor and the issuance was
exempt from registration under the Securities Act pursuant to an exemption provided by Section 4(a)(2) of that act.
In February 2017, the Company issued Mr. Steven Antebi 150,000 shares of our Class A common stock valued at $540,000 as
compensation for services under the terms of a consulting agreement. He is a principal stockholder of the Company.
In March 2017, we issued 51,667 shares of Class A common stock for vested stock awards.
In March 2017, we issued 6,510 shares of our Class A common stock valued at $12,500 to Mr. Robert Jordan upon his appointment
to our board of directors and the audit committee of the board. He is an accredited investor and the issuance was exempt from
registration under the Securities Act pursuant to an exemption provided by Section 4(a)(2) of that act.
In August 2017, we issued 200,000 shares in conjunction with our acquisition of certain intellectual property assets from Leapfrog
Media Trading, Inc.
In September 2017, we issued 7,813 shares to a new member of our board of directors.
Between September 2017 and January 2018, we issued an aggregate of 225,000 shares of Class A common stock valued at
$1,137,650 as consideration for media and marketing services.
In October 2017, we issued 70,409 shares of our Class A common stock to Joseph P. Hannan, our chief financial officer, pursuant
to his October 2017 employment agreement. The shares were issued pursuant to our 2016 equity compensation plan.
In October 2017, we entered into securities purchase agreements to sell an aggregate of $5,180,157.78 of our 12.5% secured
convertible debentures and issued 863,365 Series A Common Stock Purchase Warrants. The debentures mature on 4/21/2020, bear
interest at an annual rate of 12.5%, payable quarterly on January 1, April 1, July 1, and October 1, beginning on January 1, 2018.
Pursuant to the greenshoe provision contained in our April 2017 debenture offering, $2,000,000 of debentures were purchased
pursuant to the greenshoe provision and the remaining $3,180,157.78 were purchased separately. Of the 863,365 warrants issued, a
total of 333,335 were purchased pursuant to the greenshoe provision and 630,030 were purchased separately. The debentures are
convertible into shares of our Class A common stock at $3.00 per share, subject to adjustment, and contain anti-dilution protection
for subsequent financings and have a conversion price floor of $1.40 per share (pursuant to shareholder vote approving the offering
that occurred on December 29, 2017). The warrants have an exercise price of $3.00 per share, subject to adjustment and contain
anti-dilution protection for subsequent financings and have an exercise price floor of $1.40 per share. In connection with the
offering we issued Chardan Capital Markets 160,000 placement agent warrants, of which: (i) 129,176 have an exercise price of
$3.75 and (ii) 54,161 have an exercise price of $4.49 (. We also issued Aspenwood Capital 23,337 placement agent warrants with
an exercise price of $3.75. All placement agent warrants have a term of five and a half years (exercisable beginning 6 months after
issuance).
Stock Awards
On September 22, 2015, we granted an aggregate of 44,000 common stock awards to nine employees. The shares will vest ratably
over three years on each grant date anniversary. Compensation expense will be recognized over the vesting period.
In April 2016, we granted a total of 20,000 shares of our Class A common stock awards to an employee. The shares vest over a
two-year period. The fair value of this grant amounted to $166,000 and will be expensed over the vesting period as additional
compensation.
In October 2016, we granted a total of 100,000 shares of our Class A common stock awards to an employee. The shares vest over a
two-year period. The fair value of this grant amounted to $673,500 and will be expensed over the vesting period as additional
compensation.
F-27
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
On November 14, 2016, the Company entered an Advisory Agreement with kathy ireland Worldwide LLC ("kiWW"). Under the
terms of this agreement, which expires on December 31, 2018, the Company engaged kiWW to provide a variety of advisory and
consulting services to the Company, including (i) if the Company forms an Advisory Committee of independent, third party brand,
marketing and/or consumer product C-level executives, to serve on such committee on terms no less favorable than the highest
compensated person on such committee, (ii) as an advisor, hold the non-executive designation of Chief Branding Advisor, (iii)
provide reasonable input to the Company on various aspects of corporate branding, and (iv) use good faith efforts to introduce the
Company to potential business customers. As compensation for such services, the Company will issue kiWW 100,000 shares
valued at $678,000 of its Class A common stock on January 2, 2017 and reimburse kiWW for incurred expenses. Although the
shares to be issued are for future services over the term of the agreement, we have recognized the value of these services as an
expense during the year ended December 31, 2016. The agreement contains customary confidentiality and indemnification
provisions.
Awards in the amount of 0 and 35,500 common shares were forfeited during the years ended December 31, 2017 and 2016,
respectively.
Stock Options and Warrants
In February 2015, we granted 2,400 common stock options to a director. The options vest quarterly over one year. The options have
an exercise price of $6.00 per s hare and a term of five years. These options had a grant date fair value of $3.10 per option,
determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.50%; (2) dividend
yield of 0%; (3) volatility factor of the expected market price of our common stock of 99%; and (4) an expected life of the options
of 2 years.
In August 2015, we granted 40,000 common stock options to an employee. The options vest ratably over three years on each grant
date anniversary. Compensation expense will be recognized over the vesting period. The options have an exercise price of $8.25 per
s hare and expire three years following the vesting date. These options had a grant date fair value of $3.70 per option, determined
using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.625%; (2) dividend yield of 0
%; (3) volatility factor of the expected market price of our common stock of 85%; and (4) an expected life of the options of 2 years.
In September 2015, we granted 77,000 common stock options to employees. The options will vest ratably over three years on each
grant date anniversary. Compensation expense will be recognized over the vesting period. The options have an exercise price of
$8.65 per s hare and expire three years following the vesting date. These options had a grant date fair value of $3.95 per option,
determined using the Black-Scholes method based on the following assumptions: (1) risk free interest rate of 0.625 %; (2) dividend
yield of 0 %; (3) volatility factor of the expected market price of our common stock of 85%; and (4) an expected life of the options
of 2 years.
In October 2016, we granted an aggregate of 146,000 stock options to three employees. The options will vest over three years. The
options have an exercise price of $7.50 per share and a term of five years. These options had a grant date fair value of $4.98 per
option, determined using the Black Scholes method based on the following assumptions: (1) risk free interest rate of 1.125%; (2)
dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 112%; and (4) an expected life of
the options of 5 years.
During the years ended December 31, 2017 and 2016, we recorded compensation expense of $992,732 and $1,200,121,
respectively, related to stock based compensation. During the years ended December 31, 2017 and 2016, 161,500 options and
47,000 options were forfeited, respectively.
On September 19, 2016, the Company extended the expiration date of common stock purchase warrants issued and sold in 2013 to
purchase an aggregate of 642,000 shares of its Class A common stock at an exercise price of $5.00 per share from between October
8, 2016 and November 6, 2016 to March 31, 2017, for which, the Company applied ASC 718-20-35-3 modification of equity-
classified contracts and therefore the incremental fair value from the modification (the change in the fair value of the instrument
before and after the modification) of $274,634 is recognized as an expense in the consolidated statements of operations to the
extent the modified instrument has a higher fair value.
F-28
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
On November 16, 2016, the Company entered an Investor Relations and Consulting Agreement (“Consulting Agreement”) with
Market Street Investor Relations, LLC (“Consultant”). The Company engaged the Consultant to provide certain investor relations
and public relations services on behalf of the Company as are more fully described in the Consulting Agreement. The term of the
Consulting Agreement is for a period of six-months from the effective date and may be extended for an additional six-month term.
In lieu of cash payments for the services rendered by the Consultant, the Company issued the Consultant a three year Class A
common stock purchase warrant to purchase 400,000 shares of the Company’s Class A common stock at an exercise price of $7.50
per share. The warrants vest based on specific milestones described within the Consulting Agreement. The value of the warrants at
the date of grant was $1,390,264. At the direction of the Consultant, a warrant to purchase 200,000 shares was issued to the
Consultant and a warrant to purchase 200,000 shares was issued to Steve Antebi (a principal stockholder in the Company). The
Company also advanced the Consultant $100,000 on the effective date to cover anticipated expenses regarding the services to be
performed by the Consultant. The Company is recognizing the value of the services rendered over the term of the Consulting
Agreement.
Reverse Stock Split
On September 20, 2016, the Company completed a reverse stock split. The principal reason for the reverse stock split was to
facilitate the up-listing of our Class A common stock to the NASDAQ Capital Market which has a minimum market (bid) price
requirement for new applicants of $4.00 per share.
After giving effect to the reverse stock split, each five shares of the Company's Class A common stock issued and outstanding, or
held as treasury shares, immediately prior to the effective date of the reverse stock split became one share of its Class A common
stock on the effective date of the reverse stock split. No fractional shares of Class A common stock were issued to any stockholder
and all fractional shares which might otherwise be issuable because of the reverse stock split were rounded up to the nearest whole
share. On the effective date of the reverse stock split, all outstanding options and warrants to purchase shares of the Company's
Class A common stock were proportionally adjusted based upon the split ratio and became exercisable into one-fifth of the number
of shares of the Company's Class A common stock as it was prior to the reverse stock split at an exercise price which is five times
the exercise price prior to the reverse stock split.
After the effective date of the reverse stock split, each certificate representing shares of pre-reverse stock split Class A common
stock was deemed to represent one-fifth of a share of the post-reverse stock split Class A common stock, subject to rounding for
fractional shares, and the records of the Company's transfer agent, Transfer Online, Inc., were adjusted to give effect to the reverse
stock split. Following the effective date of the reverse stock split, the share certificates representing the pre-reverse stock split Class
A common stock continue to be valid for the appropriate number of shares of post-reverse stock split Class A common stock,
adjusted for rounding.
These consolidated financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise
specified.
On October 13, 2016, the Company's Class A common stock began trading on The NASDAQ Stock Market LLC under the symbol
"SRAX."
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
Office equipment
Accumulated depreciation
Property and equipment, net
2017
251,415
(96,869)
154,546
$
$
2016
119,091
(63,599)
55,492
Depreciation expense for the years ended December 31, 2017 and 2016 was $22,908 and $21,304, respectively.
F-29
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE 6 – INTANGIBLE ASSETS
Intangible assets consist of the following at December 31:
Non-compete agreement
Intellectual property
Acquired Software
Internally developed software
Total cost
Accumulated amortization
Intangible assets, net
2017
2016
$
$
1,250,000 $1,250,000
$756,000
—
119,225
2,125,225
759,984
1,365,241
756,000
617,069
754,140
3,377,209
1,734,449
1,642,760
Amortization expense was $151,200 for intellectual property, $677,083 for the non-compete agreement and $146,181 for internally
developed software for the year ended December 31, 2016. Amortization expense was $151,200 for intellectual property, $208,333
for the non-compete agreement, and $6,195 for internally developed software for the year ended December 31, 2016.
The estimated future amortization expense for the years ended December 31, are as follows:
2018
2019
2020
$
$
729,797
608,270
304,693
1,642,760
NOTE 7 – RELATED PARTY TRANSACTIONS
We were obligated to Mr. Steel for contingent Earn Out Consideration of up to $8,000,000 that occurred through the acquisition of
Steel Media, as described in Note 2 upon Steel Media meeting certain predefined measurements. The Company had initially
recorded the liability at its present value of $6,584,042. Additional changes in the value were recorded in the consolidated
statement of operations. The Earn Out Consideration target was achieved for the first earn out period ended October 31, 2015 and
on January 29, 2016 we paid Mr. Steel $4,000,000, of which $1,600,000 was paid in cash and the balance was paid through the
issuance of 256,754 shares of our Class A common stock in accordance with the terms of the Stock Purchase Agreement. As
discussed in Note 2, during the year ended December 31, 2016, the Company determined the Earn Out Consideration would not be
achieved for the second earn out period ended October 31, 2016. The Company determined the fair value of the second Earn Out
Consideration to be zero as of December 31, 2016 and recognized the write-off of the remaining Earn Out Consideration in the
consolidated statement of operations.
Activity for the contingent consideration payable at December 31, was:
Contingent consideration payable to related party, beginning of year
Accretion in value
Payment of Earn Out Consideration
Forfeiture of Earn Out Consideration
Contingent consideration payable to related party, end of year
2017
2016
$
$
—
—
—
—
—
7,585,435
159,061
(4,000,000)
(3,744,496)
—
Malcolm CasSelle, a member of our board of directors, is the former Chief Technology Officer and President of New Ventures of
Tronc, Inc., one of our major advertisers. Revenue from New Ventures of Tronc, Inc. amounted to $0 and $4,395,124 for the years
ended December 31, 2017 and 2016, respectively.
F-30
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Steve Antebi, a principal stockholder in the Company, serves as a consultant to the Company. We paid him $0 and $467,230 for
services provided to us during the years ended December 31, 2017 and 2016, respectively. Additionally, the Company entered a
Consulting Agreement with a Consultant that is controlled by Mr. Antebi. For further details regarding this arrangement, refer to
Note 4.
NOTE 8 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, are comprised of the following:
Accounts payable, trade
Accrued expenses
Accrued compensation
Accrued commissions
Accounts payable and accrued expenses
NOTE 9 – INCOME TAXES
2017
2016
$
$
2,858,871 11,745,026
260,818
1,800,621
319,246
256,164
830,993
95,159
5,010,815 13,156,083
Income tax (benefit) expense from continuing operations for the year ended December 31, 2017 consisted of the following:
Federal
State
Subtotal
Valuation allowance
Total
Current
Deferred
— $
—
—
—
— $
861,445 $
30,351
891,796
(891,796)
— $
$
$
Total
861,445
30,351
891,796
(891,796)
—
Income tax (benefit) expense from continuing operations for the year ended December 31, 2016 consisted of the following:
Federal
State
Subtotal
Valuation allowance
Total
Current
Deferred
— $ (1,785,238)
(257,877)
—
(2,043,115)
—
2,043,115
—
— $
— $
Total
(1,785,238)
(257,877)
(2,043,115)
2,043,115
—
$
$
A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Federal statutory income tax rate
State income taxes, net of federal tax benefit
Stock based compensation
Goodwill impairment
Permanent differences
Earn out accretion
Other
True-up to deferred tax rate
Provision to return
Warrant modification cost
Change in valuation allowance
Provision for income taxes
F-31
2017
2016
34.0%
2.8%
—
—
1.1%
—
-18.8%
-35.3%
2.5%
—
13.7%
—%
34.0%
4.1%
—
-5.5%
0.0%
26.6%
-1.1%
—
-6.6%
-2.3%
-49.2%
—%
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
The tax effects, rounded to thousands, of temporary differences that give rise to significant portions of the deferred tax assets and
liabilities at December 31, 2017 and 2016 are presented below:
Deferred tax assets
Net operating loss carryforwards
Fixed assets
Accrued interest
Intangibles
Stock based compensation
Other accruals
Total deferred tax assets
Deferred tax liabilities
Stock based compensation
Intangibles
Prepaid Expense
Total deferred tax liabilities
Net deferred tax assets
Valuation allowance
Net deferred tax liability
2017
2016
$ 3,958,665 $ 2,602,000
15,000
190,000
299,000
1,383,000
62,000
4,551,000
(11,004)
—
—
579,085
67,650
4,594,396
—
(920,142)
(14,623)
(934,765)
—
—
—
—
3,659,631
(3,659,631)
4,551,000
4,551,000
$
— $
—
Deferred tax assets and liabilities are computed by applying the federal and state income tax rates in effect to the gross amounts of
temporary differences and other tax attributes, such as net operating loss carry-forwards. In assessing if the deferred tax assets will
be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which
these deductible temporary differences reverse.
During the year ended December 31, 2017, the valuation allowance decreased by $891,370 to $3,659,639. All of this increase was
recorded to deferred tax expense with the remainder as an offset to deferred tax asset not previously recorded. The total valuation
allowance results from the Company’s estimate of its inability to recover its net deferred tax assets.
The Tax Cut and Jobs Act (“TCJA”) was enacted on December 22, 2017. Under ASC 740, the impact of changes in tax law must
be recorded in the financial statements in the reporting period that included the date of enactment. However, the SEC and the FASB
both recognize that the magnitude of this law change will require extensive analysis and calculations to conform to the new
provisions. The SEC issued Staff Accounting Bulletin (‘SAB”) on December 22, 2017. SAB 118 provides registrants with guidance
on when and how to report the impact of the law change when not all necessary information is available. Due to the Company’s
valuation allowance, the TCJA is not expected to have an impact on the Company’s financial statements – this conclusion
represents a provisional amount that will be finalized upon the filing of the Company’s federal income tax return for the year ended
December 31, 2017. The filing of this return will occur prior to the Company’s year ending December 31, 2018 which is within the
measurement period.
At December 31, 2017, the Company has federal and state net operating loss carry forwards, which are available to offset future
taxable income, of approximately $14,255,934 and $16,653,491, respectively, both of which begin to expire in 2033 and 2032
respectively. These carry forwards may be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code
of 1986, and similar state provisions if the Company experienced one or more ownership changes which would limit the amount of
NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership
change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups
in the stock of the corporation by more than 50 percentage points over a three-year period. The Company has not completed an IRC
Section 382/383 analysis. If a change in ownership were to have occurred, NOL and tax credit carryforwards could be eliminated
or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction
in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any,
will not impact the Company’s effective tax rate.
F-32
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
The Company files income tax returns in the United States and various state jurisdictions. Due to the Company’s net operating loss
posture all tax years are open and subject to income tax examination by tax authorities. The Company’s policy is to recognize
interest expense and penalties related to income tax matters as tax expense. At December 31, 2017, there are no unrecognized tax
benefits, and there are no significant accruals for interest related to unrecognized tax benefits or tax penalties.
NOTE 10 – STOCK OPTIONS, AWARDS AND WARRANTS
2012, 2014 and 2016 Equity Compensation Plans
In January 2012, our board of directors and stockholders authorized the 2012 Equity Compensation Plan, which we refer to as the
2012 Plan, covering 600,000 shares of our Class A common stock. On November 5, 2014, our board of directors approved the
adoption of our 2014 Equity Compensation Plan (the " 2014 Plan ") and reserved 600,000 shares of our Class A common stock for
grants under this plan. On February 23, 2016, our board of directors approved the adoption of our 2016 Equity Compensation Plan
(the “2016 Plan”) and reserved 600,000 shares of our Class A common stock for grants under this plan. The purpose of the 2012,
2014 and 2016 Plans is to attract and retain the best available personnel for positions of substantial responsibility, to provide
additional incentive to our employees, directors and consultants and to promote the success of our company's business. The 2012,
2014 and 2016 Plans are administered by our board of directors. Plan options may either be:
·
·
·
·
·
·
·
·
incentive stock options (ISOs),
non-qualified options (NSOs),
awards of our common stock,
stock appreciation rights (SARs),
restricted stock units (RSUs),
performance units,
performance shares, and
other stock-based awards.
Any option granted under the 2012, 2014 and 2016 Plans must provide for an exercise price of not less than 100% of the fair
market value of the underlying shares on the date of grant, but the exercise price of any ISO granted to an eligible employee
owning more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant.
The plans further provide that with respect to ISOs the aggregate fair market value of the common stock underlying the options
which are exercisable by any option holder during any calendar year cannot exceed $100,000. The exercise price of any NSO
granted under the 2012, 2014 or 2016 Plans is determined by the Board at the time of grant, but must be at least equal to fair market
value on the date of grant. The term of each plan option and the manner in which it may be exercised is determined by the board of
directors or the compensation committee, provided that no option may be exercisable more than 10 years after the date of its grant
and, in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than
five years after the date of the grant. The terms of grants of any other type of award under the 2012, 2014 or 2016 Plans is
determined by the Board at the time of grant. Subject to the limitation on the aggregate number of shares issuable under the plans,
there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person.
F-33
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Transactions involving our stock options for the years ended December 31, 2017 and 2016, respectively, are summarized as
follows:
Outstanding, beginning of the period
Granted during the period
Exercised during the period
Forfeited during the period
Outstanding, end of the period
Exercisable at the end of the period
2017
Weighted
Average
Exercise
Price
Number
2016
Weighted
Average
Exercise
Price
Number
575,800
—
—
(161,500)
409,300
$6.97
—
—
7.26
$6.97
476,800
146,000
—
(47,000)
575,800
288,630
6.65
189,960
$7.00
7.50
—
8.21
$7.03
$6.23
At December 31, 2017 options outstanding totaled 409,300 with a weighted average exercise price of $6.97. Of these options,
288,630 are exercisable at December 31, 2017, with an intrinsic value of $74,425 and a remaining weighted average contractual
term of 2.71years. Compensation cost related to the unvested options not yet recognized is approximately $583,412 at December
31, 2017. We have estimated that approximately $356,852 will be recognized during 2018.
The weighted average remaining life of the options is 3.1years.
Transactions involving our common stock awards for the years ended December 31, 2017 and 2016, respectively, are summarized
as follows:
Outstanding, beginning of the period
Granted during the period
Vested during the period
Forfeited during the period
Unvested at the end of the period
2017
Number
2016
Number
116,666
—
(55,998)
(6,000)
54,669
103,167
120,000
(71,001)
(35,500)
116,666
Unrecognized compensation cost related to our common stock awards is approximately $162,741 and $691,000 at December 31,
2017 and 2016, respectively. We have estimated that we will recognize future compensation expense approximating $162,741
during the year ended December 31, 2018.
Transactions involving our stock warrants for the years ended December 31, 2017 and 2016, respectively, are summarized as
follows:
Outstanding, beginning of the period
Granted during the period
Exercised during the period
Forfeited during the period
Outstanding, end of the period
Exercisable at the end of the period
The weighted average remaining life of the warrants is 3.2 years.
F-34
2017
Weighted
Average
Exercise
Price
2016
Weighted
Average
Exercise
Price
Number
2,976,863
2,121,433
(428,469)
(2,184,822)
2,485,005
$6.45
3.73
3.00
6.04
5.09
Number
2,030,276 $
946,587
—
—
2,976,863 $
2,485,005
5.09
2,976,863 $
5.95
7.50
—
—
6.45
6.45
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases offices under operating leases that have now expired and now operate on a month-to-month basis, with certain
notice of termination provisions. Future minimum lease payments required under the operating leases amount to $67,515 for the
year ended December 31, 2018.
Rent expense for office space amounted to $211,680 and $206,312 for the years ended December 31, 2017 and 2016, respectively.
Other Commitments
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors,
lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the
Company's breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims
made by third parties. In addition, the Company has entered indemnification agreements with its directors and certain of its officers
and employees that will require the Company to, among other things, indemnify them against certain liabilities that may arise due
to their status or service as directors, officers or employees. The Company has also agreed to indemnify certain former officers,
directors and employees of acquired companies in connection with the acquisition of such companies. The Company maintains
director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and certain
of its officers and employees, and former officers, directors and employees of acquired companies, in certain circumstances.
It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the
limited history of prior indemnification claims and the unique facts and circumstances involved in each agreement. Such
indemnification agreements may not be subject to maximum loss clauses.
Employment agreements
We have entered employment agreements with key employees. These agreements may include provisions for base salary,
guaranteed and discretionary bonuses and option grants. The agreements may contain severance provisions if the employees are
terminated without cause, as defined in the agreements.
Litigation
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of
business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The
Company is not currently a party to any material legal proceedings, nor is the Company aware of any pending or threatened
litigation that would have a material adverse effect on the Company's business, operating results, cash flows or financial condition
should such litigation be resolved unfavorably.
NOTE 12. – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash and accounts payable,
approximate their respective fair values due to the short-term nature of such instruments.
The fair value of the 2017 Senior Secured Convertible Notes was $6,845,147 as of December 31, 2017. All Convertible Notes fall
within Level 3 of the fair value hierarchy as their value is based on the credit worthiness of the Company, which is an unobservable
input. The Company used a Tsiveriotis-Fernandes model to value the 2017 Senior Convertible Notes as of December 31, 2017.
F-35
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the
appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made.
The following table summarizes the conclusions reached regarding fair value measurements as of December 31, 2017 and 2016 (in
thousands):
Put Warrant liability
Embedded Warrant Put Option
Embedded Derivatives in Convertible Notes
Total liabilities
Securities:
Certificates of deposit
Money Market funds
U.S. government-sponsored agency securities
Total assets
Put Option Liability
Contingent Consideration
Embedded Warrant Put Option
Embedded Derivatives
Total liabilities
Securities:
Certificates of deposit
Money Market Funds
U.S. government-sponsored agency securities
Total assets
Quoted Prices
in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Balance as of
December 31,
2017
Significant
Unobservable
Inputs
(Level 3)
$
$
$
— $
—
—
— $
— $
—
—
— $
—
31,604
3,004
34,608 $
—
31,604
—
31,604 $
— $
—
—
— $
—
—
3,004
3,004 $
—
—
—
—
—
—
—
—
Quoted Prices
in
Active Markets
for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
— $
—
—
—
— $
— $
—
—
—
— $
Balance as of
December 31,
2016
1,500,000 $
—
—
—
1,500,00 $
$
$
7,788
37,066
14,349
59,203 $
7,788
37,066
—
44,854 $
—
—
14,349
14,349 $
$
—
—
—
—
—
—
—
—
—
The Company’s Warrant liability, embedded Warrant Put Option and the contingent consideration payments as well as the
securities are measured at fair value on a recurring basis. As of December 31, 2017 and 2016, the Underwriter Warrant liability, and
embedded Warrant Put Option and the fundamental change and make-whole interest provisions embedded in the 2020 Notes are
reported on the balance sheets in derivative and warrant liability, while the trading securities are reported on the balance sheets in
marketable securities and long-term investments. As of December 31, 2016, the embedded Put Option is reported on the balance
sheet in derivative and warrant liability. The Company used the settlement value for liability, the Put Option at December 31, 2016.
The outstanding put option at December 31, 2016 was settled in October 2017. The Company incurred a warrant put option liability
as a result of warrants issued in the January 2017 equity financing. This warrant put option liability was settled in April 2017 as it
fair value of $2.5 million. Changes in the fair value of the Put Option liability in the 2016 was reflected in the statements of
operations as a change in value adjustment.
F-36
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
A reconciliation of the beginning and ending balances for the derivative and warrant liability measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) is as follows (in thousands):
Balance as of beginning of period
Payments
Adjustment to fair value
Balance as of end of period
NOTE 13 – SUBSEQUENT EVENTS
2017
1,500,000 $
(1,500,000)
—
— $
$
$
2016
1,500,000
—
—
1,500,000
In January 2018, we issued Colleen DiClaudio, a board member, 7,813 Class A common shares valued at $10,000 as payment for
2017 services on our board of directors. The shares were issued from our 2016 equity compensation plan
In January 2018, we issued Hardy Thomas, a former board member, 7,195 Class A common shares valued at $10,000 as payment
for 2017 services on our board of directors. The shares were issued from our 2016 equity compensation plan.
In January 2018, we issued Marc Savas and Malcolm CasSelle each 3,774 Class A common shares valued at $10,000 as payment
for their respect 2017 service on our board of directors. The shares were issued from our 2016 equity compensation plan.
F-37
INDEX TO EXHIBITS
Description
Filed/
Furnished
Herewith
Certificate of Incorporation, filed on 8/3/11
Certificate of Correction to Certificate of Incorporation, filed on
8/31/11
Exhibit
No.
3.01(i)
3.02(i)
3.03(i)
Certificate of Amendment to Certificate of Incorporation authorizing
1:5 reverse stock split
3.04(i)
3.05(ii)
4.01
4.02
Certificate of Designation of Series 1 Preferred Stock
Bylaws of Social Reality, Inc. adopted in August 2011
Specimen of Class A Common Stock Certificate
Class A Common Stock Purchase Warrant Issued to Investors in
October 2014
Class A Common Stock Purchase Warrant issued in Steel Media
Transaction dated October 30, 2014
Class A Common Stock Warrant issued in September 2016 Offering
Class A Common Stock Warrant issued to October 2013 Offering
Class A Common Stock Warrant issued to T.R. Winston & Company
issued 8/22/13
Class A Common Stock Warrant issued to Investors in January 2014
Offering
Class A Common Stock Warrant issued to Investors in September 2016
Class A Common Stock Warrant issued to Investors in January 2017
Offering
Class A Common Stock Warrant issued to Investors in January 2017
Offering (2nd Warrant)
Class A Common Stock Placement Agent Warrant issued in January
2017 Offering
Incorporated by Reference
Exhibit
No.
File No.
Filing
Date
3.01(i)
3.01(ii)
333-179151
333-179151
1/24/12
1/24/12
3.5
000-54996
9/19/16
3.4
3.03
4.1
4.7
000-54996
333-179151
001-37916
000-54996
8/22/13
1/24/12
10/12/16
11/4/14
4.8
4.6
4.7
4.5
4.6
4.6
4.1
4.2
000-54996
11/4/14
000-54996
000-54996
000-54996
10/6/16
10/24/13
11/13/13
000-54966
1/27/14
000-54966
001-37916
10/6/16
1/4/17
001-37916
1/4/17
4.3
001-37916
1/4/17
Form
S-1
S-1
8-K
8-K
S-1
8-A12B
8-K
8-K
8-K
8-K
10-Q
8-K
8-K
8-K
8-K
8-K
Class A Common Stock Placement Agent Warrant issued in October
10-K
4.12
001-37916
3/31/17
2016 Offering
Class A Common Stock Warrant issued in Leapfrog Media Trading
*
Acquisition
Form of 12.5% Secured Convertible Debenture issued in April 2017
Offering
Class A Common Stock Warrant issued in April 2017 Offering
8-K
8-K
4.2
4.1
001-33672
4/21/17
001-33672
4/21/17
4.03
4.04
4.05
4.06
4.07
4.08
4.09
4.10
4.11
4.12
4.13
4.14
4.15
4.16
Form of Class A Common Stock Placement Agent Warrant issued in
8-K
4.3
001-33672
4/21/17
April 2017 Offering
4.17**
4.18**
4.19
4.20
2016 Equity Compensation Plan
2014 Equity Compensation Plan
2012 Equity Compensation Plan
Form of Stock Option Agreement for 2012, 2014 and 2016 Equity
4.21
4.22
4.23
4.24
Compensation Plan
Form of Restricted Stock Unit Agreement for 2012, 2014 and 2016
Equity Compensation Plan
Form of Restricted Stock Award Agreement for 2012, 2014 and 2016
Equity Compensation Plan
Form of 12.5% Secured Convertible Debenture issued in October 2017
Offering
Class A Common Stock Warrant Issued to Investors and Placement
Agents in October 2017 Offering
10.01
Purchase Agreement among Richard Steel, Steel Media, and Social
Reality, dated 10/30/14
10.02
10.03
Asset Purchase Agreement with LeapFrog Media Trading dated 4/20/17
Amendment to Asset Purchase Agreement with Leapfrog Media Trading
dated 8/17/17
10.04
10.05
10.06
10.07
10.08
10.09
10.10
10.11**
10.12**
10.13**
10.14**
10.15**
10.16
10.17**
Transition Services Agreement in Leapfrog Media Trading Transaction
Sample Leakout Agreement in Leapfrog Media Trading Transaction
Form of Securities Purchase Agreement for April 2017 Offering
Form of Security Agreement for April 2017 Offering
Form of Registration Rights Agreement for April 2017 Offering
Form of Securities Purchase Agreement for October 2017 Offering
Form of Registration Rights Agreement for October 2017 Offering
Employment Agreement with Christopher Miglino dated 1/1/12
Employment Agreement with Erin DeRuggiero dated 10/19/15
Employment Agreement with Joseph P. Hannan dated 10/17/16
Employment Agreement with Richard Steel dated 10/30/14
Employment Agreement with Chad Holsinger dated 10/30/14
Employment Agreement with Adam Bigelow dated 10/30/14
Separation Agreement and Release with Richard Steel dated 1/25/17
*
*
*
*
1/20/17
8-K
S-1
S-1
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
S-1
10-K
10-Q
8-K
8-K
8-K
8-K
A-1
10.33
4.02
4.03
001-37916
000-54996
333-179151
333-179151
1/20/17
11/10/14
1/24/12
1/24/12
4.04
333-179151
1/24/12
4.05
333-179151
1/24/12
4.01
001-37916
10/27/17
4.02
001-37916
10/27/17
2.1
000-54996
11/4/14
10.1
10.2
10.3
10.01
10.02
10.01
10.3
10.48
10.27
10.28
10.29
10.1
4/21/17
001-37916
4/21/17
001-37916
4/21/17
001-37916
001-37916 10/27/17
001-37916 10/27/17
1/24/12
333-179151
000-54996
2/26/16
001-37916 11/14/16
11/4/14
000-54996
11/4/14
000-54996
11/4/14
000-54996
1/27/17
333-215791
10.18**
10.16**
Employment Agreement with Dustin Suchter dated 12/19/14
Form of Proprietary Information, Inventions and Confidentiality
Agreement
10.17**
10.18
10.19
10.20
Form of Indemnification Agreement with Officers and Directors
Indemnification Agreement with Richard Steel dated 10/30/14
Sublease for principal executive offices dated 8/12/12 with TrueCar, Inc.
Services Agreement with Servicios y Asesorias Planic, S.A. de cv dated
1/25/13
10.21
10.22
10.23
10.24
10.25
10.27
10.28
10.29
Sublease Agreement with Amarcore, LLC dated 1/1/15
Advisory Agreement with Kathy Ireland Worldwide, LLC dated
11/14/16
Financing and Security Agreement with FastPay Partners, LLC
Share Acquisition and Exchange Agreement with Five Delta, Inc.
Secured Subordinated Promissory Note to Richard Steel dated 10/30/14
Subordination Agreement with Richard Steel and Victory Park
Management, LLC dated 10/30/14
Securities Purchase Agreement for January 2017 Offering
Placement Agent Agreement for January 2017 Offering with Chardan
Capital Markets
10.30
Financing Agreement with certain Lenders and Victory Park
10.31
10.32
10.33
10.34
10.36
10.37
14.01
18.01
21.01
23.01
Management, LLC
First Amendment to Financing Agreement dated 5/14/15
Pledge and Security Agreement with Steel Media and Victory Park
Management, LLC dated 10/30/14
Registration Rights Agreement dated 10/30/14
Forbearance Agreement with Steel Media, Five Delta, Inc, Lenders and
Victory Park Management, LLC dated 8/22/16
Letter Agreement dated 1/5/17
Insider Trading Policy adopted as of 2/23/16
Social Reality Code of Conduct and Ethics
Preference Letter regarding Change in Accounting Principle
Subsidiaries of Registrant
Consent of RBSM, LLP
8-K
S-1
S-1
8-K
S-1
10-K
S-1
10-Q
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10-Q
8-K
8-K
8-K
10.36
10.03
000-54996 12/22/14
1/25/12
333-179151
10.04
10.30
10.16
10.9
333-179151
333-215791
333-193611
000-54996
1/25/12
11/4/14
1/28/14
3/31/15
10.17
10.49
333-206791
9/4/15
001-37916 11/14/16
10.41
10.34
10.18
10.22
000-54996
9/23/16
000-54996 12/22/14
11/4/14
000-54996
11/4/14
000-54996
10.1
10.2
001-37916
001-37916
1/4/17
1/4/17
10.23
000-54996
11/4/14
10.38
10.25
000-54996
000-54996
5/15/15
11/4/14
10.26
10.46
000-54996
000-54996
11/4/14
8/24/16
10-K
10-K
S-1/A
10-Q
10.35
10.36
99.1
18.1
001-37916
3/31/17
001-37916
3/31/17
6/4/12
333-179151
001-37916 11/14/16
*
*
31.1 / 31.2 Certification of the Principal Executive Officer and Principal Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 / 32.2 Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to 18 U.S.C. § 1350
101.INS
XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema
101.CAL XBRL Taxonomy Extension Calculation Linkbase
101.DEF
XBRL Taxonomy Extension Definition Linkbase
101.LAB XBRL Taxonomy Extension Label Linkbase
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
*
*
*
*
*
*
*
*
** Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to
participate.
EXHIBIT 4.13
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY AND THE
SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA
FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE WARRANT
SOCIAL REALITY, INC.
Warrant Shares: 350,000
Initial Exercise Date: August 17, 2017
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, DIP SPV1, LP with
an address of Craigmuir Chambers, P.O. Box 71, Road Town, Tortola VG1110, British Virgin Islands, or its assigns (the “Holder”)
is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after
the date hereof (the “Initial Exercise Date”) and on or prior to the close of business on the five (5) year anniversary of the Initial
Exercise Date (the “Termination Date”) but not thereafter, to subscribe for and purchase from Social Reality, Inc., a Delaware
corporation (the “Company”), up to Three hundred fifty thousand (350,000) shares (as subject to adjustment hereunder, the
“Warrant Shares”) of the Company’s Class A common stock, par value $0.001 per share (the “Common Stock”). This Warrant is
being issued to the Holder, as designee of Leapfrog Media Trading, Inc., a Delaware corporation (the "Seller") pursuant to the
terms and conditions of that certain Asset Purchase Agreement dated April 20, 2017 by and between the Seller and the Company,
as amended by Amendment No. 1 to the Asset Purchase Agreement dated August 17, 2017 (collectively, the "Asset Purchase
Agreement"). All terms not otherwise defined herein shall have the same meaning as in the Asset Purchase Agreement.
Section 1.
Definitions. In addition to the terms defined elsewhere in this Warrant, the following terms have the
meanings indicated in this Section 1:
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled
by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Bid Price” means, for any date, the price determined by the first of the following clauses that applies: (a) if the
Common Stock is then listed or quoted on a Trading Market, the
1
bid price of the Common Stock for the time in question (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City
time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is not a Trading Market, the volume weighted average price of
the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is
not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common Stock are then reported in the “Pink
Sheets” published by OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported, or (d) in all other cases, the fair market value of a share of
Common Stock as determined by an independent appraiser selected in good faith by the Holders of a majority in interest of the
Warrants then outstanding and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the
Company.
“Board of Directors” means the board of directors of the Company.
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the
United States or any day on which banking institutions in the State of New York are authorized or required by law or other
governmental action to close.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the
holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant
or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to
receive, Common Stock.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder.
“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to employees, consultants, officers
or directors of the Company pursuant to any stock or option plan duly adopted for such purpose, by a majority of the non-employee
members of the Board of Directors or a majority of the members of a committee of non-employee directors established for such
purpose for services rendered to the Company, provided, however, issuances to consultants shall be limited to up to 100,000 shares
of Common Stock or options (subject to adjustment for forward and reverse stock splits and the like) during any 12 month period,
(b) securities exercisable or exchangeable for or convertible into shares of Common Stock issued and outstanding on the Original
Issue Date (including adjustments of such securities), provided that such securities have not been amended since the Original Issue
Date to increase the number of such securities or to decrease the exercise price, exchange price or conversion price of such
securities (other than in connection with stock splits or combinations) or to extend the term of such securities, (c) securities issued
pursuant to acquisitions or strategic transactions approved by a majority of the disinterested directors of the Company, provided
that any such issuance shall only be to a Person (or to the equity holders of a Person) which is, itself or through its subsidiaries, an
operating company or an owner of an asset in a business synergistic with the
2
business of the Company and shall provide to the Company additional benefits in addition to the investment of funds, but shall not
include a transaction in which the Company is issuing securities primarily for the purpose of raising capital or to an entity whose
primary business is investing in securities, (d) securities issuable pursuant to any outstanding securities purchase agreement.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint
venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any
kind.
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be
amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same
effect as such Rule.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder.
“Trading Day” means a day on which the Common Stock is traded on a Trading Market.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global
Select Market, the New York Stock Exchange (or any successors to any of the foregoing.
“Transfer Agent” means Transfer Online, Inc., the current transfer agent of the Company, with a mailing address of
512 SE Salmon Street, Portland, OR 97214 and a facsimile number of (503) 227-6874, and any successor transfer agent of the
Company.
“Variable Rate Transaction” means a transaction in which the Company (i) issues or sells any debt or equity
securities that are convertible into, exchangeable or exercisable for, or include the right to receive, additional shares of Common
Stock either (A) at a conversion price, exercise price or exchange rate or other price that is based upon, and/or varies with, the
trading prices of or quotations for the shares of Common Stock at any time after the initial issuance of such debt or equity securities
or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of
such debt or equity security or upon the occurrence of specified or contingent events directly or indirectly related to the business of
the Company or the market for the Common Stock (other than customary anti-dilution provisions) or (ii) enters into, or effects a
transaction under, any agreement, including, but not limited to, an equity line of credit, whereby the Company may issue securities
at a future determined price.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the
Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by
Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB
or OTCQX is not a Trading Market, the
3
volume weighted average price of the Common Stock for such date (or the nearest preceding date) on OTCQB or OTCQX as
applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if prices for the Common
Stock are then reported in the “Pink Sheets” published by OTC Markets Group, Inc. (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported, or (d) in all
other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by
the holders of a majority in interest of the Warrants then outstanding and reasonably acceptable to the Company, the fees and
expenses of which shall be paid by the Company.
Section 2.
Exercise.
a.
Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in
part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company or
the Transfer Agent (or such other office or agency that the Company may designate by notice in writing to the registered Holder at
the address of the Holder appearing on the books of the Company), as applicable, of a duly executed facsimile copy or PDF copy
submitted by electronic (or e-mail attachment) of the Notice of Exercise in the form annexed hereto (“Notice of Exercise”). Within
the earlier of (i) three (3) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined
in Section 2(d)(i) herein) following the date of exercise as aforesaid, the Holder shall deliver the aggregate Exercise Price for the
shares specified in the applicable Notice of Exercise by wire transfer or cashier’s check drawn on a United States bank unless the
cashless exercise procedure specified in Section 2(c) below is specified in the applicable Notice of Exercise. No ink-original Notice
of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of
Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender
this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been
exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading
Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of
a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of
Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and
the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The
Company shall deliver any objection to any Notice of Exercise within one (1) Business Day of receipt of such notice. The Holder
and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph,
following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase
hereunder at any given time may be less than the amount stated on the face hereof.
b.
Exercise Price. The exercise price per share of the Common Stock under this Warrant shall be $3.00, subject
to adjustment hereunder (the “Exercise Price”).
c.
Cashless Exercise. If at any time after the six-month anniversary of the Closing Date, there is no effective
Registration Statement registering, or no current prospectus
4
available for, the resale of the Warrant Shares by the Holder, then this Warrant may also be exercised, in whole or in part, at such
time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the
quotient obtained by dividing [(A-B) (X)] by (A), where:
(A) = as applicable: (i) the VWAP on the Trading Day immediately preceding the date of the applicable Notice of Exercise
if such Notice of Exercise is (1) both executed and delivered pursuant to Section 2(a) hereof on a day that is not a
Trading Day or (2) both executed and delivered pursuant to Section 2(a) hereof on a Trading Day prior to the opening
of “regular trading hours” (as defined in Rule 600(b)(64) of Regulation NMS promulgated under the federal securities
laws) on such Trading Day, (ii) at the option of the Holder, either (y) the VWAP on the Trading Day immediately
preceding the date of the applicable Notice of Exercise or (z) the Bid Price of the Common Stock on the principal
Trading Market as reported by Bloomberg L.P. as of the time of the Holder’s execution of the applicable Notice of
Exercise if such Notice of Exercise is executed during “regular trading hours” on a Trading Day and is delivered within
two (2) hours thereafter pursuant to Section 2(a) hereof or (iii) the VWAP on the date of the applicable Notice of
Exercise if the date of such Notice of Exercise is a Trading Day and such Notice of Exercise is both executed and
delivered pursuant to Section 1(a) hereof after the close of “regular trading hours” on such Trading Day;
(B) = the Exercise Price of this Warrant, as adjusted hereunder; and
(X) = the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of
this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise.
If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with
Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the characteristics of the Warrants being exercised, and the
holding period of the Warrant Shares being issued may be tacked on to the holding period of this Warrant. The Company agrees not
to take any position contrary to this Section 2(c).
“Bid Price” means, for any date, the price determined by the first of the following clauses that applies: (a) if the
Common Stock is then listed or quoted on a Trading Market, the bid price of the Common Stock for the time in question (or the
nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P.
(based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB or OTCQX is
not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on
OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB or OTCQX and if
prices for the Common Stock are then reported in the “Pink Sheets” published by OTC Markets Group, Inc. (or a similar
organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so
reported, or (d) in
5
all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith
by the Company and Holder, the fees and expenses of which shall be paid by the Company.
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the
Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by
Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if OTCQB
or OTCQX is not a Trading Market, the volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on OTCQB or OTCQX as applicable, (c) if the Common Stock is not then listed or quoted for trading on OTCQB
or OTCQX and if prices for the Common Stock are then reported in the “Pink Sheets” published by OTC Markets Group, Inc. (or a
similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common
Stock so reported, or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent
appraiser selected in good faith by the Company and Holder, the fees and expenses of which shall be paid by the Company.
d.
Mechanics of Exercise.
Delivery of Warrant Shares Upon Exercise. Warrant Shares purchased hereunder shall be transmitted by the
i.
Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust
Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system
and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant
Shares by the Holder or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations
pursuant to Rule 144, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of
the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address
specified by the Holder in the Notice of Exercise by the date that is the earlier of (i) the earlier of (A) three (3) Trading Days after
the delivery to the Company of the Notice of Exercise and (B) one (1) Trading Day after delivery of the aggregate Exercise Price to
the Company and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of
the Notice of Exercise (such date, the “Warrant Share Delivery Date”). Upon delivery of the Notice of Exercise, the Holder shall be
deemed for all corporate purposes to have become the holder of record of the Warrant Shares with respect to which this Warrant has
been exercised, irrespective of the date of delivery of the Warrant Shares, provided that payment of the aggregate Exercise Price
(other than in the case of a cashless exercise) is received within the earlier of (i) three Trading Days and (ii) the number of Trading
Days comprising the Standard Settlement Period following delivery of the Notice of Exercise. If the Company fails for any reason
to deliver to the Holder the Warrant Shares subject to a Notice of Exercise by the Warrant Share Delivery Date, the Company shall
pay to the Holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of Warrant Shares subject to such exercise
(based on the VWAP of the Common Stock on the date of the applicable Notice of Exercise), $10 per Trading Day (increasing to
$20 per Trading Day on the fifth Trading Day after such liquidated damages
6
begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder
rescinds such exercise. The Company agrees to maintain a transfer agent that is a participant in the FAST program so long as this
Warrant remains outstanding and exercisable. As used herein, “Standard Settlement Period” means the standard settlement period,
expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect
on the date of delivery of the Notice of Exercise.
ii.
Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the
Company shall, at the request of a Holder and upon surrender of this Warrant certificate, at the time of delivery of the Warrant
Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called
for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the
Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such
exercise.
iii.
iv.
Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to
any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant
Shares in accordance with the provisions of Section 2(d)(i) above pursuant to an exercise on or before the Warrant Share Delivery
Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the
Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the
Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to
the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the
shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the
Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order
giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant
and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed
rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely
complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total
purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate
sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company
shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to
the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common
Stock upon exercise of the Warrant as required pursuant to the terms hereof.
7
v.
No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be
issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase
upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount
equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
vi.
Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder
for any issue or transfer tax or other incidental expense in respect of the issuance of such Warrant Shares, all of which taxes and
expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or
names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other
than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached
hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to
reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day
processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation
performing similar functions) required for same-day electronic delivery of the Warrant Shares.
prevents the timely exercise of this Warrant, pursuant to the terms hereof.
vii.
Closing of Books. The Company will not close its stockholder books or records in any manner which
e.
Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall
not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to
such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and
any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates (such Persons, “Attribution Parties”)),
would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates and Attribution Parties shall
include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is
being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining,
nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates or Attribution Parties and (ii) exercise
or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any
other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein
beneficially owned by the Holder or any of its Affiliates or Attribution Parties. Except as set forth in the preceding sentence, for
purposes of this Section 2(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and
the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the
Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any
schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 2(e) applies, the
determination of whether this Warrant is exercisable (in relation to other securities
8
owned by the Holder together with any Affiliates and Attribution Parties) and of which portion of this Warrant is exercisable shall
be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination
of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates and
Attribution Parties) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership
Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a
determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange
Act and the rules and regulations promulgated thereunder. For purposes of this Section 2(e), in determining the number of
outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A)
the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public
announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number
of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days
confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the
Company, including this Warrant, by the Holder or its Affiliates or Attribution Parties since the date as of which such number of
outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares
of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon
exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation
provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of
shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise
of this Warrant held by the Holder and the provisions of this Section 2(e) shall continue to apply. Any increase in the Beneficial
Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this
paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 2(e) to
correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership
Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation.
The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
Section 3.
Certain Adjustments.
a.
Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock
dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent
securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock
issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of
shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of
shares or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each
case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock
(excluding treasury shares, if any)
9
outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock
outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately
adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this
Section 3(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such
dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or
re-classification.
b.
Subsequent Equity Sales. If the Company or any Subsidiary thereof, as applicable, at any time while this
Warrant is outstanding, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of or
issue (or announce any offer, sale, grant or any option to purchase or other disposition) any Common Stock or Common Stock
Equivalents, at an effective price per share less than the Exercise Price then in effect (120% of such lower price, the “Base Share
Price” and such issuances collectively, a “Dilutive Issuance”) (it being understood and agreed that if the holder of the Common
Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are
issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is less
than the Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive
Issuance at such effective price), then simultaneously with the consummation of each Dilutive Issuance the Exercise Price shall be
reduced and only reduced to equal the Base Share Price, provided that the Base Share Price shall not be less than $1.40 (subject to
adjustment for forward and reverse splits and the like). Such adjustment shall be made whenever such Common Stock or Common
Stock Equivalents are issued. Notwithstanding the foregoing, no adjustments shall be made, paid or issued under this Section 3(b)
in respect of an Exempt Issuance. The Company shall notify the Holder, in writing, no later than the Trading Day following the
issuance or deemed issuance of any Common Stock or Common Stock Equivalents subject to this Section 3(b), indicating therein
the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the
“Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice
pursuant to this Section 3(b), upon the occurrence of any Dilutive Issuance and in the event of an exercise of this Warrant, the
Holder is entitled to receive a number of Warrant Shares based upon the Base Share Price regardless of whether the Holder
accurately refers to the Base Share Price in the Notice of Exercise. If the Company enters into a Variable Rate Transaction, the
Company shall be deemed to have issued Common Stock or Common Stock Equivalents at the lowest possible conversion or
exercise price at which such securities may be converted or exercised.
c.
Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 3(a) above, if at any time the
Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if
the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to
any limitations on exercise hereof, including without limitation, the Beneficial Ownership
10
Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no
such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or
sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right
would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in
such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to
such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right
thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
d.
Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make
any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of
return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options
by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a
“Distribution”), at any time after the issuance of this Warrant, then, in each such case, the Holder shall be entitled to participate in
such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of
Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including
without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such
Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined
for the participation in such Distribution (provided, however, to the extent that the Holder's right to participate in any such
Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to
participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such
Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such
time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
e.
Fundamental Transaction. If, at any time while this Warrant is outstanding, (i) the Company, directly or
indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii)
the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or
substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or
exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are
permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50%
or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any
reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the
Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or
indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination
(including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group
of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including
any shares of Common Stock held by the other Person
11
or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share
purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this
Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise
immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation
in Section 2(e) or Section 2(f) on the exercise of this Warrant), the number of shares of Common Stock of the successor or
acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the
“Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common
Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction (without regard to any limitation in
Section 2(e) or Section 2(f) on the exercise of this Warrant). For purposes of any such exercise, the determination of the Exercise
Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise
Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the
Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a
Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any
exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a
Fundamental Transaction, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any
time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, purchase this Warrant from the
Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this
Warrant on the date of the consummation of such Fundamental Transaction. “Black Scholes Value” means the value of this Warrant
based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”)
determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a
risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public
announcement of the applicable Fundamental Transaction and the Termination Date, (B) an expected volatility equal to the greater
of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the Trading Day immediately following
the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation
shall be the sum of the price per share being offered in cash, if any, plus the value of any non- cash consideration, if any, being
offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public
announcement of the applicable Fundamental Transaction and the Termination Date. The payment of the Black Scholes Value will
be made by wire transfer of immediately available funds within five Business Days of the Holder’s election (or, if later, on the
effective date of the Fundamental Transaction). The Company shall cause any successor entity in a Fundamental Transaction in
which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under
this Warrant in accordance with the provisions of this Section 3(e) pursuant to written agreements in form and substance reasonably
satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and
shall, at the option of the Holder, deliver to the Holder in exchange for this Warrant a security of the
12
Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable
for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of
Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this
Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such
shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental
Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for
the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental
Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such
Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such
Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity),
and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant
with the same effect as if such Successor Entity had been named as the Company herein.
f. Calculations. All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a
share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and
outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued
and outstanding.
g.
Notice to Holder.
Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this
i.
Section 3, the Company shall promptly deliver to the Holder by facsimile or email a notice setting forth the Exercise Price after
such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts
requiring such adjustment.
ii.
Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other
distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a
redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or
warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders
of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to
which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the
voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall
cause to be delivered by facsimile or email to the Holder at its last facsimile number or email address as it shall appear upon the
Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or
warrants, or if a record is not to be taken, the date as of which the holders of the Common
13
Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on
which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the
Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or
share exchange; provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the
validity of the corporate action required to be specified in such notice. To the extent that any notice provided in this Warrant
constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall
simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled
to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such
notice except as may otherwise be expressly set forth herein.
Section 4.
Transfer of Warrant.
a.
Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in
Section 4(d) hereof, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in
whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a
written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and
funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such
payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable,
and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything
herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has
assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days
of the date the Holder delivers an assignment form to the Company assigning this Warrant full. The Warrant, if properly assigned in
accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
b.
New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the
aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are
to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be
involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the
Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall
be dated the Initial Exercise Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable
pursuant thereto.
c.
Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company
for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and
treat the registered Holder
14
of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all
other purposes, absent actual notice to the contrary.
d.
Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this
Warrant or the sale of Warrant Shares, the transfer of this Warrant or the Warrant Shares, as applicable, shall not be either (i)
registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky
laws or (ii) eligible for resale without volume or manner-of-sale restrictions pursuant to Rule 144, the Company may require, as a
condition of allowing such transfer or sale, that the Holder provide to the Company an opinion of counsel selected by the Holder,
the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer or sale
does not require registration of such transferred security under the Securities Act.
e.
Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that (a) it is
acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own
account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities
Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act and (b) at the
time the Holder was offered this Warrant, it was, and as of the date hereof it is, and on each date on which it exercises this
Warrants, it will be an “accredited investor” as defined in Rule 501(a) under the Securities Act.
Section 5.
Miscellaneous.
a.
No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights,
dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as
expressly set forth in Section 3.
b.
Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the
Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate
relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which,
in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock
certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of such Warrant or stock certificate.
c.
Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of
any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on
the next succeeding Business Day.
d.
Authorized Shares.
The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase
rights under this Warrant. The
15
Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the
duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take
all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without
violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be
listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented
by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in
accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges
created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously
with such issue).
Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without
limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without
limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount
payable therefor upon such exercise immediately prior to such increase in par value,
(ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and
nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable
the Company to perform its obligations under this Warrant.
Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is
exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as
may be necessary from any public regulatory body or bodies having jurisdiction thereof.
e.
Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this
Warrant shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without
regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Warrant (whether brought against a party hereto or their
respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in
the state and federal courts sitting in the City of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of
the state and federal courts sitting in the City of New York, Borough of Manhattan for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees
not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such suit, action or proceeding by mailing
16
a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect
for notices to it under this Warrant and agrees that such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by
law. If either party shall commence an action, suit or proceeding to enforce any provisions of this Warrant, the prevailing party in
such action, suit or proceeding shall be reimbursed by the other party for their reasonable attorneys’ fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
f.
Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if
not registered and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal
securities laws.
g.
Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the
part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies,
notwithstanding the fact that all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails
to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the
Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees,
including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise
enforcing any of its rights, powers or remedies hereunder.
h.
Notices. Any notices, consents, waivers or other document or communications required or permitted to be
given or delivered under the terms of this Warrant must be in writing and will be deemed to have been delivered: (i) upon receipt, if
delivered personally; (ii) when sent, if sent by facsimile (provided confirmation of transmission is mechanically or electronically
generated and kept on file by the sending party); (iii) when sent, if sent by e-mail (provided that such sent e-mail is kept on file
(whether electronically or otherwise) by the sending party and the sending party does not receive an automatically generated
message from the recipient’s e-mail server that such e-mail could not be delivered to such recipient) and (iv) if sent by overnight
courier service, one (1) Trading Day after deposit with an overnight courier service with next day delivery specified, in each case,
properly addressed to the party to receive the same. If notice is given by facsimile or email, a copy of such notice shall be
dispatched no later than the next business day by first class mail, postage prepaid. The addresses, facsimile numbers and e-mail
addresses for such communications shall be:
If to the Company:
456 Seaton Avenue
Los Angeles, CA 90013
Attention: Christopher Miglino,
Chief Executive Officer
Email: chris@srax.com
With a copy (for informational purposes only) to:
17
200 South Andrews Avenue
Suite 901
Fort Lauderdale, FL 33301
Attention: Brian A. Pearlman, Esq.
Email: brian@pslawgroup.net
If to a Holder, to its address, facsimile number or e-mail address set forth herein or on the books and records of the
Company.
Or, in each of the above instances, to such other address, facsimile number or e-mail address and/or to the attention of such
other Person as the recipient party has specified by written notice given to each other party at least five (5) days prior to the
effectiveness of such change. Written confirmation of receipt (A) given by the recipient of such notice, consent, waiver or
other communication, (B) mechanically or electronically generated by the sender’s facsimile machine containing the time,
date and recipient facsimile number or (C) provided by an overnight courier service shall be rebuttable evidence of personal
service, receipt by facsimile or receipt from an overnight courier service in accordance with clause (i), (ii) or (iv) above,
respectively. A copy of the e-mail transmission containing the time, date and recipient e• mail address shall be rebuttable
evidence of receipt by e-mail in accordance with clause (iii) above.
i.
Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to
exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise
to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such
liability is asserted by the Company or by creditors of the Company.
j.
Remedies. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery
of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages
would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby
agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.
k.
Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations
evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the
successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from
time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
l.
Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written
consent of the Company and the Holder.
m.
Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision
18
of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
n.
Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any
purpose, be deemed a part of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as
of the date first above indicated.
SOCIAL REALITY, INC.
By:
/s/ Christopher Miglino
Christopher Miglino, Chief Executive Officer
19
TO:
SOCIAL REALITY, INC.
NOTICE OF EXERCISE
(1)
The undersigned hereby elects to purchase Warrant Shares of the Company pursuant to the terms of the
attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable
transfer taxes, if any.
(2)
Payment shall take the form of (check applicable box):
[ ] in lawful money of the United States; or
[ ] [if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with
the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of
Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).
(3)
Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
____________________________________
The Warrant Shares shall be delivered to the following DWAC Account Number:
____________________________________
____________________________________
____________________________________
(4)
Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated
under the Securities Act of 1933, as amended.
[SIGNATURE OF HOLDER]
Name of Investing Entity:
Signature of Authorized Signatory of Investing Entity:
Name of Authorized Signatory:
Title of Authorized Signatory:
Date:
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
EXHIBIT B
Name:
Address:
Phone Number:
Email Address:
_______________________________________
(Please Print)
_______________________________________
(Please Print)
_______________________________________
_______________________________________
Dated: _________________ __, _______
Holder’s Signature:________________________
Holder’s Address:_________________________
EXHIBIT 10.02
ASSET PURCHASE AGREEMENT
Dated April__, 2017
by and between
Social Reality, Inc.,
a Delaware corporation
(“Buyer”)
and
Leapfrog Media Trading, Inc.,
a Delaware corporation
("Seller")
TABLE OF CONTENTS
1.
2.
DEFINITIONS AND INTERPRETATION
SALE AND PURCHASE OF PURCHASED ASSETS; CLOSING
2.1
2.2
2.3
2.4
Sale and Purchase of Purchased Assets
Liabilities Excluded
Purchase Price
Closing
3.
REPRESENTATIONS AND WARRANTIES OF SELLER
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
3.14
3.15
3.16
Organization and Good Standing
Authority and Enforcement
No Conflicts or Defaults
Consents of Third Parties
Actions Pending
Title to Purchased Assets
No Undisclosed Liabilities
Contracts
Intellectual Property Rights
Compliance with Laws
Brokers
Investment Representations
Information on Buyer
Disclosure
Tax Allocation
Solvency
4.
REPRESENTATIONS AND WARRANTIES OF BUYER
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Organization and Good Standing
Authority and Enforcement
No Conflicts or Defaults
Consideration Shares
Actions Pending
SEC Reports
Disclosure
5.
COVENANTS; ADDITIONAL AGREEMENTS
5.1
5.2
Conduct of Business Prior to the Closing
Access and Information
Page
1
7
7
7
7
7
7
8
8
8
8
8
9
9
9
10
10
10
10
11
11
11
11
11
11
12
12
12
12
12
13
13
13
13
5.3
5.4
5.5
5.6
5.7
5.8
5.9
6.0
No Solicitation of Other Bids
Notice of Certain Events14
Confidentiality
Closing Conditions
Transfer Taxes
Further Assurances
Press Releases and Communications
Grant Back License
6.
CLOSING CONDITIONS
6.1
6.2
Conditions Precedent to Buyer's Obligations to Close
Conditions Precedent to Seller's Obligations to Close
7.
DOCUMENTS TO BE DELIVERED AT CLOSING
7.1
7.2
Documents to be Delivered by the Seller
Documents to be Delivered by the Buyer
8.
INDEMNIFICATION AND RELATED MATTERS
9.
10.
11.
8.1
8.2
8.4
8.5
Indemnification by Seller
Indemnification by Buyer
Procedure for Indemnification
Time for Assertion
COVENANT NOT TO COMPETE; NON-SOLICITATION
TERMINATION
MISCELLANEOUS
11.1
11.2
11.3
11.4
11.5
11.6
11.7
11.8
11.9
11.10
11.11
11.12
11.13
Expenses
Notices
Interpretation
Headings
Severability
Entire Agreement
Successors and Assigns
No Third-party Beneficiaries
Amendment and Modification; Waiver
Specific Performance
Counterparts
Jurisdiction and Governing Law
Role of Counsel
ii
13
14
15
15
15
15
15
16
16
17
17
17
18
19
19
19
19
20
20
21
22
22
22
23
23
23
23
24
24
24
24
24
24
25
Exhibits:
Exhibit A Transition Services Agreement
Exhibit B Leak Out Agreement
Exhibit C Grant Back License
Exhibit D Warrant
iii
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (“Agreement”) dated April , 2017, is between and between Social Reality, Inc. (the
“Buyer”), a corporation organized under the laws of the State of Delaware, having an office for the transaction of business at 456
Seaton Street, Los Angeles, CA 90013 and Leapfrog Media Trading, Inc. (the "Seller"), a corporation organized under the laws of
the State of Delaware.
WHEREAS, the Buyer is an Internet advertising and platform technology company that provides tools to automate the
digital advertising market (the "Buyer Business").
WHEREAS, the Seller desires to convey, sell and assign to Buyer all of each Seller’s right, title and interest in and to the
Purchased Assets, upon the terms and conditions contained in this Agreement.
WHEREAS, the Buyer desires to purchase the Purchased Assets upon the terms and conditions contained in this
Agreement.
NOW, THEREFORE, in consideration of the foregoing, and the mutual terms, covenants and conditions herein below set
forth, the parties agree, as follows:
1.
DEFINITIONS AND INTERPRETATION.
1.1.
In this Agreement:
“Action” means any claim, action, cause of action, demand, lawsuit, arbitration, audit, notice of violation,
proceeding, litigation, citation, summons, subpoena or investigation of any nature, civil, criminal, administrative, regulatory or
otherwise, whether at law or in equity;
“Affiliate” means, with respect to any Person, any other Person that, directly or indirectly, through one or
more intermediaries, controls, or is controlled by, or is under common control with, such Person, and the term “control” (including
the terms “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of such Person, whether through ownership of voting securities, by Contract or
otherwise.
"Business Activities" shall be deemed to include the Buyer Business, as it may be expanded during the
Restricted Period, including through the addition of the Purchased Assets, and during any portion of the twenty-four (24) months
subsequent to the expiration of the Restricted Period.
located in New York, New York are authorized or required by Law to be closed for business;
“Business Day” means any day except Saturday, Sunday or any other day on which commercial banks
“Buyer Common Stock” means the Class A common stock, $0.001 par value per share, of Buyer;
the conditions, of this Agreement;
“Closing” means the closing of the sale of the Purchased Assets in accordance with the terms, and subject to
in Section 6 herein or such other date as the Parties shall mutually agree upon in writing;
“Closing Date” means the first Business Day following the satisfaction of the closing conditions described
“Code” means the Internal Revenue Code of 1986, as amended;
“Commission” means the United States Securities and Exchange Commission;
“Consideration Shares” means Two Hundred Thousand (200,000) shares of Buyer Common Stock;
“Contracts” means all contracts, leases, deeds, mortgages, licenses, instruments, notes, commitments,
undertakings, indentures, joint ventures and all other legally binding agreements, commitments and legally binding arrangements in
writing;
“Exchange Act” means the United States Securities Exchange Act of 1934, as amended;
“Governmental Entity” means any federal, state, local or foreign government or political subdivision
thereof, or any agency or instrumentality of such government or political subdivision, or any self-regulated organization or
other non- governmental regulatory authority or quasi-governmental authority (to the extent that the rules, regulations or orders of
such organization or authority have the force of Law), or any arbitrator, court or tribunal of competent jurisdiction;
arbitration award of a Governmental Entity;
“Governmental Order” means any order, injunction, judgment, decree, ruling, writ, assessment or
“Intellectual Property” means all intellectual property and industrial property rights and assets, and all
rights, interests and protections that are associated with, similar to, or required for the exercise of, any of the foregoing, however
arising, pursuant to the Laws of any jurisdiction throughout the world, whether registered or unregistered, including any and all: (a)
trademarks, service marks, trade names, brand names, logos, trade dress, design rights and other similar designations of source,
sponsorship, association or origin, together with the goodwill connected with the use of and symbolized by, and all registrations,
applications and renewals for, any of the foregoing; (b) internet domain names, whether or not trademarks, registered in any top-
level domain by any authorized private registrar or Governmental Entity, web addresses, web pages, websites and related content,
accounts with Twitter, Facebook and other social media companies, and URLs; (c) works of authorship, expressions, designs and
2
design registrations, whether or not copyrightable, including copyrights, author, performer, moral and neighboring rights, and all
registrations, applications for registration and renewals of such copyrights; (d) inventions, discoveries, trade secrets, business and
technical information and know-how, databases, data collections and other confidential and proprietary information and all rights
therein; (e) patents (including all reissues, divisionals, provisionals, continuations and continuations-in-part, re-examinations,
renewals, substitutions and extensions thereof), patent applications, and other patent rights and any other Governmental Entity-
issued indicia of invention ownership (including inventor's certificates, petty patents and patent utility models); (f) software and
firmware, including data files, source code, object code, application programming interfaces, architecture, files, records,
schematics, computerized databases and other related specifications and documentation; (g) mask works; (h) royalties, fees,
income, payments and other proceeds now or hereafter due or payable with respect to any and all of the foregoing; and (i) all rights
to any Actions of any nature available to or being pursued by Seller to the extent related to the foregoing, whether accruing before,
on or after the date hereof, including all rights to and claims for damages, restitution and injunctive relief for infringement, dilution,
misappropriation, violation, misuse, breach or default, with the right but no obligation to sue for such legal and equitable relief, and
to collect, or otherwise recover, any such damages;
“Intellectual Property Agreements” means all licenses, sublicenses, consent to use agreements,
settlements, coexistence agreements, covenants not to sue, permissions and other Contracts (including any right to receive or
obligation to pay royalties or any other consideration), relating to any Intellectual Property which is part of the Purchased Assets
(excluding licenses for commercial off the shelf computer software that are generally available on nondiscriminatory pricing terms
and other licenses that are generally available to any requesting party on standard terms with nondiscriminatory pricing, “Off the
shelf software”);
judgment, decree or order in which the party in question is a named party, in each case of any Governmental Entity.
“Law” means any statute, law, ordinance, regulation, rule, code, executive order, or any injunction,
“Liability” or “Liabilities” mean any and all debts, liabilities, commitments and obligations, whether fixed,
contingent or absolute, matured or unmatured, liquidated or unliquidated, accrued or not accrued, known or unknown, whenever or
however arising (including whether arising out of any contract or tort based on negligence or strict liability) and whether or not the
same would be required by United States generally accepted accounting principles applied on a consistent basis to be reflected in
financial statements or disclosed in the notes thereto;
“Lien” means any right which (a) shall entitle any Person to terminate, amend, accelerate or cancel any
agreement, option, license or other instrument to which the Seller is a party by reason of the occurrence of (i) a violation, breach or
default thereunder by the Seller; or (ii) an event which with or without notice or lapse of time or both would become a default
thereunder; or (b) if exercised by the holder thereof, will (i) entitle such Person to accelerate the performance of any obligations or
the payment of any sums owed by the Seller under any agreement, option, license or other instrument, or (ii) result in any loss of
any benefit under, or the creation of any pledges, claims, equities, options, liens, charges, call rights, rights
3
of first refusal, “tag” or “drag” along rights, encumbrances and security interests of any kind or nature whatsoever on any of the
property or assets of the Seller;
“Losses” means losses, damages, liabilities, deficiencies, Actions, judgments, interest, awards, penalties,
fines, costs or expenses of whatever kind, including reasonable attorneys' fees and the cost of enforcing any right to indemnification
hereunder and the cost of pursuing any insurance providers; provided, however, that “Losses” shall not include (a) punitive
damages, except in the case of fraud or (b) any special, consequential, punitive, incidental, indirect or speculative damages, in each
case except to the extent actually awarded to a Governmental Authority or other third party;
“Material Adverse Effect” means any effect or change that would be materially adverse to the business,
assets, condition (financial or otherwise), operating results, operations, or business prospects of Buyer or Seller, as the case may be,
taken as a whole, or on the ability of any Party to consummate timely the transactions contemplated hereby;
“Parties” means collectively, the Buyer and the Seller;
“Party” means the Buyer or the Seller, individually;
organization;
“Person” means a natural person, company, corporation, partnership, association, trust or any unincorporated
"Purchased Assets" shall have the meaning set forth in Section 2.1 of this Agreement;
"Purchased Domain Name" means www.opendsp.com together with, without any limitation, any related
trademarks, service marks, copyrights, trade names, domain names, and other intellectual property rights throughout the world to
the domain name, whether such rights are registered or not, and all rights of priority therein, and the right to recover for damages
and profits and all other remedies for past infringements thereof, and any and all appurtenant goodwill associated therewith;
employees, consultants, financial advisors, counsel, accountants and other agents of such Person;
“Representative” means, with respect to any Person, any and all directors, officers, members, managers,
supplemented after the Closing Date including, but not limited to, as a result of the transactions herein contemplated;
“Restricted Business” means all Business Activities of the Buyer as may be expanded, modified or
“Restricted Period” shall be deemed to be twenty-four (24) months following the Closing;
“Restricted Area” shall be deemed to mean the United States;
4
“Rule 144” means Rule 144 promulgated by the Commission under the Securities Act;
“Securities Act” means the United States Securities Act of 1933, as amended;
securities of Seller obtained in accordance with the Delaware General Corporation Law.
"Stockholder Consent" shall mean the consent of the holders of a majority of the outstanding voting
“Subsidiary” means, with respect to any Person, any corporation, limited liability company, partnership,
association, or other business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled
(without regard to the occurrence of any contingency) to vote in the election of directors, managers, or trustees thereof is at the time
owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination
thereof or (ii) if a limited liability company, partnership, association, or other business entity (other than a corporation), a majority
of membership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by that Person or
one or more Subsidiaries of that Person or a combination thereof and for this purpose, a Person or Persons own a majority
ownership interest in such a business entity (other than a corporation) if such Person or Persons shall be allocated a majority of
such business entity's gains or losses or shall be or control any managing director or general partner of such business entity (other
than a corporation). The term “Subsidiary” shall include all Subsidiaries of such Subsidiary;
“Tax” or “Taxes” means any federal, state, local, or foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Code ss.59A),
customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property,
personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether disputed or not;
relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof; and
“Tax Return” means any return, declaration, report, claim for refund, or information return or statement
other agreements, instruments and documents required to be delivered at the Closing.
“Transaction Documents” means this Agreement, the Transition Services, the Leak Out Agreement and the
“Warrants” means 350,000 Series A Common Stock Purchase Warrants issued by the Buyer to the Seller, in
the form attached hereto as Exhibit D.
1.2.
Interpretation.
5
1.2.1.
As used in this Agreement, unless the context clearly indicates otherwise:
(a)
words used in the singular include the plural and words in the plural include the singular;
reference to any Person includes such person's successors and assigns, but only if such
successors and assigns are permitted by this Agreement, and reference to a Person in a particular capacity excludes such Person in
any other capacity;
(b)
(c)
reference to any gender includes the other gender;
shall be deemed to be followed by the words “without limitation” or “but not limited to” or words of similar import;
(d)
whenever the words “include,” “includes” or “including” are used in this Agreement, they
or definition to any clause means such clause of such Section or definition;
(e)
reference to any Section means such Section of this Agreement, and references in any Section
deemed references to this Agreement as a whole and not to any particular Section or other provision hereof;
(f)
the words “herein,” “hereunder,” “hereof,” “hereto” and words of similar import shall be
reference to any agreement, instrument or other document means such agreement, instrument
or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and
by this Agreement;
(g)
reference to any law (including statutes and ordinances) means such law (including all rules
and regulations promulgated thereunder) as amended, modified, codified or reenacted, in whole or in part, and in effect at the time
of determining compliance or applicability, and reference to any particular provision of any law shall be interpreted to include any
revision of or successor to that provision regardless of how numbered or classified;
(h)
means “to but excluding” and “through” means “through and including”; and
(i)
relative to the determination of any period of time, “from” means “from and including,” “to”
convenience of reference only and shall not be deemed to be a part of or to affect the meaning or interpretation of this Agreement.
(j)
the titles and headings of Sections contained in this Agreement have been inserted for
This Agreement was negotiated by the Parties with the benefit of legal representation, and no rule of
construction or interpretation otherwise requiring this Agreement to be construed or interpreted against any Party shall apply to any
construction or interpretation hereof. This Agreement shall be interpreted and construed to the maximum extent
1.2.2.
6
possible so as to uphold the enforceability of each of the terms and provisions hereof, it being understood and acknowledged that
this Agreement was entered into by the Parties after substantial negotiations and with full awareness by the parties of the terms and
provisions hereof and the consequences thereof.
1.2.3.
Where a statement in this Agreement is qualified by the expression “to the best of Buyer’s
knowledge,” “to the best of Seller’s knowledge,” “so far as Buyer is aware,” “so far as Seller is aware” or any similar expression
shall be deemed to include Buyer’s or Seller’s actual knowledge and what Buyer or Seller should have known after due inquiry of,
in the case of (i) the Buyer, the Chief Executive Officer and any relevant person(s) involved in the management of the business of
the Buyer, or (ii) in the case of Seller, the Chief Executive Officer.
2.
SALE AND PURCHASE OF PURCHASED ASSETS; CLOSING.
2.1.
Sale and Purchase of Purchased Assets. Subject to the terms and conditions of this Agreement, on the
Closing Date the Seller shall sell, assign, transfer, convey and deliver to Buyer, and Buyer shall purchase from the Seller, free and
clear of any encumbrances all of the right, title and interest, in, and to the Purchased Assets as set forth on Schedule 2.1 to this
Agreement.
2.2.
Liabilities Excluded. Buyer will not assume any Liabilities of Seller related to the Purchased Assets, either
directly or indirectly. All Liabilities related in any manner to the Purchased Assets will remain the exclusive responsibility of and
be retained, paid, performed and discharged exclusively by Seller, and Seller shall indemnify and hold Buyer harmless from and
against any claim therefore or liability arising therefrom pursuant to Section 8 of this Agreement.
2.3.
Purchase Price. The purchase price for the Purchased Assets is the Consideration Shares and the Warrants
(the “Purchase Price”). The Purchase Price shall be paid at Closing. The issuance of the Consideration Shares and Warrants
(collectively, the “Securities”) shall be exempt from registration under the Securities Act in reliance on an exemption provided by
Section 4(a)(2) of that act.
2.4.
Closing. The Closing shall take place at the offices of Pearlman Law Group LLP, counsel for the Buyer. All
actions taken at the Closing shall be deemed to have been taken simultaneously at the time the last of any such actions is taken or
completed. The Closing shall occur at 10:00 a.m., Eastern time, on the first Business Day following the satisfaction of the closing
conditions described in Section 6 herein (the “Closing Date”) or at such other place, and on such other date and/or time, as the
Parties may agree in writing.
3.
REPRESENTATIONS AND WARRANTIES OF SELLER.
Except as otherwise set forth in a disclosure schedule of even date herewith which is executed and delivered by Seller (the
“Disclosure Schedules”), to the best of Seller's knowledge the Seller hereby makes the following representations and warranties to
Buyer as of the date hereof and as of the Closing Date. Nothing in the Disclosure Schedules shall be deemed adequate to disclose
an exception to a representation or warranty made herein, however, unless
7
the Disclosure Schedules identify the exception with reasonable particularity and describes the relevant facts in reasonable detail.
The Disclosure Schedules will be arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this
Agreement.
3.1.
Organization and Good Standing. Seller is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its organization, with full corporate power and authority to own, lease and operate its
business and properties and to carry on business in the places and in the manner as presently conducted or proposed to be
conducted. Seller is in good standing as a foreign corporation in each jurisdiction in which the properties owned, leased or
operated, or the where business is conducted by it requires such qualification except where the failure to so qualify would not have
a Material Adverse Effect on the Purchased Assets or consummation of the transactions contemplated hereby.
3.2.
Authority and Enforcement. Seller has all requisite corporate power and authority to execute and deliver this
Agreement, and to consummate the transactions contemplated hereby. Seller has taken all corporate action necessary for the
execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, and this Agreement
constitutes the valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as may be
affected by bankruptcy, insolvency, moratoria or other similar laws affecting the enforcement of creditors’ rights generally and
subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any
proceeding therefor may be brought.
3.3.
No Conflicts or Defaults. The execution and delivery of this Agreement by Seller and the consummation of
the transactions contemplated hereby do not and shall not with or without the giving of notice or the passage of time (i) violate,
conflict with, or result in a breach of, or a default or loss of rights under, any covenant, agreement, mortgage, indenture, lease,
instrument, permit or license to which the Seller is a party or by which the Seller or the Purchased Assets are bound, or any
judgment, order or decree, or any law, rule or regulation to which the Seller is subject, (ii) result in the creation of, or give any party
the right to create, any Lien upon any of the Purchased Assets, (iii) terminate or give any party the right to terminate, amend,
abandon or refuse to perform, any material agreement, arrangement or commitment relating to the Purchased Assets, or (iv) have a
Material Adverse Effect on the Purchased Assets or consummation of the transactions contemplated hereby.
3.4.
Consents of Third Parties. The execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby by Seller does not require the consent of any Person, other than the Stockholder Consent
which shall be delivered by Seller to Buyer at Closing.
3.5.
Actions Pending. There is no Action, suit, claim, investigation or proceeding pending or, to the knowledge of
Seller, threatened against Seller, which questions the validity of this Agreement or the transactions contemplated hereby or any
action taken or to be taken pursuant hereto or thereto. There is no Action, suit, claim, investigation or proceeding pending or, to the
knowledge of Seller, threatened against or involving Seller or any of the
8
Purchased Assets. There are no outstanding orders, judgments, injunctions, awards or decrees of any court, arbitrator or
Governmental Entity against the Seller or any of the Purchased Assets.
3.6.
Title to Purchased Assets. Except as set forth in Section 3.6 of the Disclosure Schedules, the Seller has either
good and marketable title to, or valid and enforceable leasehold interest in the Purchased Assets, free and clear of all Liens (and any
Lien reflected on Section 3.6 of the Disclosure Schedule shall be satisfied on or prior to the Closing Date). No person or entity has
any right or option to acquire any of the Purchased Assets. The Seller has the right to operate its business, and the operation of its
business does not violate the material provisions of (a) any agreement to which Seller is a party, (b) the requirements of applicable
laws, rules or regulations, and/or (c) any order of any court or regulatory body of competent jurisdiction that is binding on Seller or
any of the Purchased Assets. Seller is the registrant listed in the records of the registrar as the owners of the registration of the
Purchased Domain Name. The Purchased Domain Name is in good standing with the registrar managing such Purchased Domain
Name and such registrar recognizes the Seller as the registrant for the Purchased Domain Name. In addition, Seller does not owe
any amounts to any domain name registration authority or to any other governmental entity relating to or on account of the
registration of the Purchased Domain Name or the registration of any copyright(s), trademark(s) or similar Intellectual Property
Rights included in the Purchased Assets. Seller has not licensed or otherwise allowed or enabled the use of any of the Purchased
Assets to any other Person, or granted any right with respect to the Purchased Assets to any other Person that may, in any manner,
restrict, impede or adversely affect Buyer's rights therein. Except as set forth in Schedule 3.6 the Disclosure Schedules, Seller has
not obtained a trademark registration or filed any application to register a trademark with the U.S. Patent and Trademark Office or
other agency (domestic or foreign) of any trademark(s), domain name(s) or any other mark confusingly similar to the trademark(s)
or the Purchased Domain Name. Following the Closing, Buyer will be the sole and exclusive registrant of the Purchased Domain
Name.
3.7.
No Undisclosed Liabilities. Except as set forth on Schedule 3.7 of the Disclosure Schedules, Seller has no
debts, Liabilities or obligations of any nature (whether accrued, absolute, contingent, direct, indirect, unliquidated or otherwise and
whether due or to become due) related to the Purchased Assets arising out of transactions entered into on or prior to the date hereof,
or any transaction, series of transactions, Action or inaction occurring on or prior to the date hereof, or any state of facts or
condition existing on or prior to the date hereof (regardless of when such liability or obligation is asserted).
3.8.
Contracts. Schedule 3.8 of the Disclosure Schedules identifies each Contract to which Seller is a party which
relate, directly or indirectly, to the Purchased Assets (the "Assigned Contracts"). Except as would have a material adverse effect
on the Purchased Assets, each such Contract is in full force and effect. To the knowledge of the Seller, no party to any such
agreement is in default of any material obligation thereunder and the Seller has not received notice of the termination of any such
agreement prior to its scheduled termination date. To the knowledge of the Seller, no event has occurred or circumstance exists that
(with or without notice or lapse of time) may contravene, conflict with, or result in a violation or breach of, or give the Seller or
other Person the right to declare a default or exercise any remedy under, or to accelerate the maturity or performance of, or to
cancel, terminate, or modify, any material agreement to which the Seller is a party. The Seller has not given nor received from any
other
9
Person, any notice or other communication (whether oral or written) regarding any actual, alleged, possible, or potential violation
or breach of, or default under, any material contract to which Seller is a party.
3.9.
Intellectual Property Rights. Schedule 3.9 of the Disclosure Schedules identifies each Intellectual Property
Right included in the Purchased Assets, which constitutes all of the Intellectual Property Rights necessary to operate the OpenDSP
platform. Such Intellectual Property Rights are owned by the Seller, free and clear of all Liens. To the best of Seller’s knowledge,
such Intellectual Property Rights do not infringe upon or otherwise violate the rights of any third person, and the Seller has not
received notice of any such infringement or violation. To the extent that any such Intellectual Property Rights are licensed to Seller
by any third party, the license is in full force and effect, no party to the license is in material breach or violation of the license
agreement and licensee is not using any such Intellectual Property Rights in violation of the license agreement.
3.10.
Compliance with Laws. The Seller is conducting its business and affairs in material compliance with
applicable law, ordinance, rule, regulation, court or administrative order, decree or process, or any requirement of insurance
carriers. The Seller has not received any notice of violation or claimed violation of any such law, ordinance, rule, regulation, order,
decree, process or requirement.
3.11.
Brokers. All negotiations relative to this Agreement and the transactions contemplated hereby have been
carried without the intervention of any person in such a manner as to give rise to any valid claim by any person against Seller for a
finder’s fee, brokerage commission or similar payment.
3.12.
Investment Representations. The Seller is acquiring the Securities for its own account with the present
intention of holding such securities for purposes of investment, and it has no intention of distributing such Securities, or selling,
transferring or otherwise disposing of such Securities in a public distribution, in any of such instances, in violation of the federal
securities laws of the United States of America. Seller understands that (a) the Securities are “restricted securities,” as defined in
Rule 144 promulgated under the Securities Act; (b) such Securities have not been registered under the Securities Act, and are being
issued in reliance on exemptions for private offerings contained in Section 4(a)(2) of the Securities Act; (c) the Buyer has no
obligation to so register the Securities (except as otherwise provided under the Warrant); (d) the Securities may not be distributed,
re-offered or resold except through a valid and effective registration statement or pursuant to a valid exemption from the
registration requirements under the Securities Act; and (e) until such time as the Securities become eligible for resale by the Seller,
either pursuant to the registration of such shares under the Securities Act, or pursuant to a valid exemption from such registration.
The certificate evidencing the Warrant has a legend affixed thereto and the Consideration Shares shall contain the following legend:
“The shares of Class A common stock evidenced by this certificate have not been registered
under the Securities Act of 1933, as amended (the “Act”). Such shares may not be sold,
transferred, pledged, hypothecated or otherwise disposed of unless they have been so registered
or Social
10
Reality, Inc. shall have received an opinion of counsel satisfactory to it to the effect that
registration thereof for purposes of transfer is not required under the Act or the securities laws
of any state.”
3.13.
Information on Buyer. The Seller has been provided access via the Commission's public website at
www.sec.gov/EDGAR with access to copies of Buyer's Annual Report on Form 10-K for the period ended December 31, 2016 and
its other filings with the Commission, and represents and warrants that it has read and reviewed these reports, together with Buyer's
other filings with the Commission. The Seller is a sophisticated investor who has such knowledge and experience in financial, tax
and other business matters as to enable it to evaluate the merits and risks of, and to make an informed investment decision with
respect to, the Consideration Shares and this Agreement. The Seller, either alone or together with its advisors, has such knowledge
and experience in financial, tax, and business matters, and, in particular, investments in securities, so as to enable it to utilize the
information made available to it in connection with the transactions contemplated hereby, to evaluate the merits and risks of an
investment in the Consideration Shares and to make an informed investment decision with respect thereto. The Seller understands
that its acquisition of the Consideration Shares is a speculative investment, and the Seller represents that it is able to bear the risk of
such investment for an indefinite period, and can afford a complete loss thereof.
3.14.
Disclosure. The representations, warranties and acknowledgments of Seller set forth herein are true, complete
and accurate in all material respects, do not omit to state any material fact, or omit any fact necessary to make such representations,
warranties and acknowledgments, in light of the circumstances under which they are made, not misleading.
3.15.
Tax Allocation. The parties shall agree to an allocation of the Purchase Price among the Purchased Assets.
Seller and Buyer shall file their respective Tax Returns prepared in accordance with such allocation.
3.16.
Solvency. The Purchased Assets do not represent all or substantially all of the Seller's assets. Immediately
after giving effect to the transactions contemplated by this Agreement, the Seller shall be able to pay its debts as they become due
and shall own property which has a fair saleable value greater than the amounts required to pay its debts. No transfer of property is
being made and no obligation is being incurred in connection with the transactions contemplated by this Agreement with the intent
to hinder, delay or defraud either present or future creditors of the Seller.
4.
REPRESENTATIONS AND WARRANTIES OF BUYER.
The Buyer hereby makes the following representations and warranties to the Seller as of the date hereof and as of the
Closing Date.
4.1.
Organization and Good Standing. The Buyer is an entity duly incorporated, validly existing and in good
standing under the laws of the State of Delaware, with full corporate power and authority to own, lease and operate its business and
properties and to carry on its business in the places and in the manner as presently conducted or proposed to be conducted. The
Buyer is in good standing as a foreign entity in each jurisdiction in which the
11
properties owned, leased or operated, or where the business is conducted by it requires such qualification, except where the failure
to so qualify would not have a Material Adverse Effect on its business, taken as a whole, or consummation of the transactions
contemplated hereby.
4.2.
Authority and Enforcement. The Buyer has all requisite corporate power and authority to execute and deliver
this Agreement, and to consummate the transactions contemplated hereby. The Buyer has taken all corporate action necessary for
the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby, and this Agreement
constitutes the valid and binding obligation of the Buyer, enforceable against it in accordance with its terms, except as may be
affected by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and
subject to the qualification that the availability of equitable remedies is subject to the discretion of the court before which any
proceeding therefor may be brought.
4.3.
No Conflicts or Defaults. The execution and delivery of this Agreement by the Buyer and the consummation
of the transactions contemplated hereby do not and shall not (a) contravene its certificate of incorporation or bylaws, or (b) with or
without the giving of notice or the passage of time (i) violate, conflict with, or result in a material breach of, or a material default or
loss of rights under, any covenant, agreement, mortgage, indenture, lease, instrument, Permit or license to which it is a party or by
which it is bound, or any judgment, order or decree, or any law, rule or regulation to which it is subject, (ii) result in the creation of,
or give any party the right to create, any Lien upon any assets or properties of the Buyer, (iii) terminate or give any party the right
to terminate, amend, abandon or refuse to perform, any material agreement, arrangement or commitment relating to which the
Buyer is a party, or (iv) result in a Material Adverse Effect.
4.4.
Consideration Shares. The Consideration Shares and Warrant have been duly authorized, and the
Consideration Shares upon issuance pursuant to the provisions hereof, will be validly issued, fully paid and non-assessable.
4.5.
Actions Pending. There is no Action, suit, claim, investigation or proceeding pending or, to the knowledge of
the Buyer, threatened against it which questions the validity of this Agreement or the transactions contemplated hereby or any
action taken or to be taken pursuant hereto or thereto. There is no Action, suit, claim, investigation or proceeding pending or, to the
knowledge of the Buyer, threatened against or involving the Buyer or any of its properties or assets. There are no outstanding
orders, judgments, injunctions, awards or decrees of any court, arbitrator or Governmental Entity against the Buyer or affecting its
assets.
4.6.
SEC Reports. The Buyer files annual, quarterly and current reports with the Commission, pursuant to Section
12(b) of the Exchange Act. The Buyer has filed all reports required to be filed by it under the Exchange Act since December 31,
2015 (the “SEC Reports”). The SEC Reports do not misrepresent a material fact, do not omit to state a material fact and do not
omit any fact necessary to make the statements made therein, in light of the circumstances under which they are made, not
misleading.
12
4.7.
Disclosure. The representations, warranties and acknowledgments of the Buyer set forth herein are true,
complete and accurate in all material respects and do not omit any fact necessary to make such representations, warranties and
acknowledgments not misleading.
5.
COVENANTS; ADDITIONAL AGREEMENTS.
5.1.
Conduct of Business Prior to the Closing. From the date hereof until the Closing Date, except as otherwise
provided in this Agreement or consented to in writing by the Buyer (which consent shall not be unreasonably withheld or delayed),
Seller shall (i) operate its business and conduct its affairs only in the usual and ordinary course consistent with past practices, and in
such manner as shall be consistent with all representations and warranties of Seller so that the same remain true and accurate as of
the Closing Date; and (ii) preserve substantially intact its business organization, maintain its rights and franchises, use its
reasonable efforts to retain the services of its officers and key employees and maintain its relationships with its customers and
suppliers.
5.2.
Access to Information. From the date hereof until the Closing, Seller shall (a) afford Buyer and its
Representatives full and free access to and the right to inspect all of the properties, assets, premises, books and records, Contracts
and other documents and data related to the Purchased Assets; (b) furnish Buyer and its Representatives with such financial,
operating and other data and information related to the Purchased Assets as Buyer or any of its Representatives may reasonably
request; and (c) instruct the Representatives of Seller to cooperate with Buyer in its investigation of Seller. Any investigation
pursuant to this Section 5.2 shall be conducted in such manner as not to interfere unreasonably with the conduct of the business
Seller. No investigation by Buyer or other information received by Buyer shall operate as a waiver or otherwise affect any
representation, warranty or agreement given or made by Seller in this Agreement.
5.3.
No Solicitation of Other Bids.
(a)
The Seller shall not, and shall not authorize or permit any of its or their Affiliates or any of its or their
Representatives to, directly or indirectly, (i) encourage, solicit, initiate, facilitate or continue inquiries regarding an Acquisition
Proposal; (ii) enter into discussions or negotiations with, or provide any information to, any Person concerning a possible
Acquisition Proposal; or (iii) enter into any agreements or other instruments (whether or not binding) regarding an Acquisition
Proposal. Seller shall each immediately cease and cause to be terminated, and shall cause its or their Affiliates and all of its or their
and their Representatives to immediately cease and cause to be terminated, all existing discussions or negotiations with any Persons
conducted heretofore with respect to, or that could lead to, an Acquisition Proposal. For purposes hereof, “Acquisition Proposal”
means any inquiry, proposal or offer from any Person (other than Buyer or any of its Affiliates) relating to the direct or indirect
disposition, whether by sale, merger or otherwise, of all or any portion of the Purchased Assets.
In addition to the other obligations under this Section 5.3, Seller shall promptly (and in any event
within three (3) Business Days after receipt thereof by Seller or any of its Representatives) advise Buyer orally and in writing of
any Acquisition Proposal, any request for information with respect to any Acquisition Proposal, or any inquiry with respect to
(b)
13
or which could reasonably be expected to result in an Acquisition Proposal, the material terms and conditions of such request,
Acquisition Proposal or inquiry, and the identity of the Person making the same.
(c)
Seller agree that the rights and remedies for noncompliance with this Section 5.3 shall include having
such provision specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such
breach or threatened breach shall cause irreparable injury to Buyer and that money damages would not provide an adequate remedy
to Buyer.
5.4.
Notice of Certain Events.
(a)
From the date hereof until the Closing, Seller shall promptly notify Buyer in writing of:
(i)
any fact, circumstance, event or Action the existence, occurrence or taking of which (A) has
had, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect, (B) has resulted in, or
could reasonably be expected to result in, any representation or warranty made by Seller hereunder not being true and correct or (C)
has resulted in, or could reasonably be expected to result in, the failure of any of the conditions set forth in Section 6.1 to be
satisfied;
or may be required in connection with the transactions contemplated by this Agreement;
(ii)
any notice or other communication from any Person alleging that the consent of such Person is
transactions contemplated by this Agreement; and
(iii)
any notice or other communication from any Governmental Entity in connection with the
any Actions commenced or, to the knowledge of Seller, threatened against, relating to or
involving or otherwise affecting Seller that, if pending on the date of this Agreement, would have been required to have been
disclosed pursuant to Section 3 or that relates to the consummation of the transactions contemplated by this Agreement.
(iv)
Buyer's receipt of information pursuant to this Section 5.4 shall not operate as a waiver or otherwise
affect any representation, warranty or agreement given or made by Seller in this Agreement and shall not be deemed to amend or
supplement the Seller's Disclosure Schedule.
(b)
5.5.
Confidentiality. From and after the Closing, Seller shall, and shall cause its Affiliates to, hold, and shall use
its or their reasonable best efforts to cause its or their respective Representatives to hold, in confidence any and all information,
whether written or oral, concerning the Buyer, except to the extent that Seller can show that such information (a) is generally
available to and known by the public through no fault of Seller, any of its Affiliates or Representatives; or (b) is lawfully acquired
by Seller, any of its Affiliates or Representatives from and after the Closing from sources which are not prohibited from disclosing
such information by a legal, contractual or fiduciary obligation. If Seller or any of its Affiliates or
14
Representatives are compelled to disclose any information by judicial or administrative process or by other requirements of Law,
Seller shall promptly notify Buyer in writing and shall disclose only that portion of such information which Seller is advised by its
counsel in writing is legally required to be disclosed, provided that Seller shall use reasonable best efforts to obtain an appropriate
protective order or other reasonable assurance that confidential treatment will be accorded such information.
5.6.
Closing Conditions. From the date hereof until the Closing, each Party hereto shall use reasonable best
efforts to take such actions as are necessary to expeditiously satisfy the closing conditions set forth in Section 6 hereof.
5.7.
Transfer Taxes. The Buyer shall (a) be responsible for (and shall indemnify and hold harmless the Seller
against) any and all liabilities for any sales, use, stamp, value added, documentary, filing, recording, transfer, stock transfer, gross
receipts, registration, duty, securities transactions or similar fees or taxes or governmental charges (together with any interest or
penalty, addition to tax or additional amount imposed) as levied by any Governmental Entity in connection with the transactions
contemplated by this Agreement (collectively, “Transfer Taxes”), regardless of the Person liable for such Transfer Taxes under
applicable Law and (b) timely file or caused to be filed all necessary documents (including all Tax Returns) with respect to Transfer
Taxes.
5.8.
Further Assurances. If, at any time after the Closing, the Parties shall consider or be advised that any further
deeds, assignments or assurances in law or that any other things are necessary, desirable or proper to complete the transactions
contemplated hereby in accordance with the terms of this Agreement or to vest, perfect or confirm, of record or otherwise, the title
to any property or rights of the Parties hereto, the Parties agree that their proper Representatives shall execute and deliver all such
proper deeds, assignments and assurances in law and do all things necessary, desirable or proper to vest, perfect or confirm title to
such property or rights and otherwise to carry out the purpose of this Agreement, and that the proper Representatives of the Parties
are fully authorized to take any and all such action.
5.9.
Press Releases and Communications. No press release or public announcement related to this Agreement or
the transactions contemplated herein, shall be issued or made by any party hereto without the prior written approval of the Buyer.
Seller shall not have any communications with any third party, other than its Representatives, without the prior written consent of
the Buyer. Nothing herein shall prevent Seller from notifying its employees, customers or suppliers of the transactions
contemplated hereby as is necessary or desirable to facilitate the consummation of such transactions; provided, however, that any
such communication shall be previously approved by the Buyer and shall constitute a “joint communication” if deemed appropriate
by the Buyer.
5.10.
Grant Back License. Buyer shall grant to Seller, in accordance with the terms and conditions of the Grant
Back License Agreement, in the form attached hereto as Exhibit C (the “Grant Back License”), (which for the sake of clarity is
subject to Seller’s obligations under Article 9 hereof), a non-exclusive and non-transferrable license to use, sell and, offer for sale
the Intellectual Property. Buyer shall be the sole and exclusive owner of all data
15
and other Intellectual Property generated by Seller or any other party under the Grant Back License.
5.11.
Seller’s Unilateral Right. Once the Closing Conditions provided for in Section 6.1 have been satisfied, Seller
shall have the unilateral right to terminate this Agreement prior to Closing without reason until April 28, 2017 (Seller’s “Unilateral
Right”). Following the satisfaction of the Closing Conditions, this Agreement will close upon the earlier of (a) Seller’s delivery to
Buyer of a written revocation of its Unilateral Right or (b) April 28, 2017.
6.
CLOSING CONDITIONS.
6.1.
Conditions Precedent to Buyer’s Obligation to Close. The obligation of Buyer to consummate the
transactions contemplated by this Agreement is subject to satisfaction of the following conditions on or prior to the Closing Date:
(a)
The representations and warranties of Seller set forth in Section 3 above shall be true and correct in
all material respects at and as of the Closing Date with the same effect as though made at and as of the date hereof (except those
representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that
specified date in all respects);
(c)
in all material respects through the Closing Date;
Seller shall have performed and complied in all material respects with all of its covenants hereunder
(d)
No Action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would (i) prevent or adversely affect the Seller's consummation of any of the transactions
contemplated by this Agreement or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect);
(e)
occurred that results in a Material Adverse Effect;
No material adverse change shall have taken place with respect to the Seller, and no event shall have
(f)
Seller shall have delivered to Buyer a certificate of the Secretary or an Assistant Secretary (or
equivalent officer) of Seller certifying that attached thereto are true and complete copies of all resolutions adopted by the board of
directors of Seller authorizing the execution, delivery and performance of this Agreement and the consummation of the transactions
contemplated hereby and thereby, and that all such resolutions are in full force and effect and are all the resolutions adopted in
connection with the transactions contemplated hereby and thereby. Buyer shall have received a certificate of the Secretary or an
Assistant Secretary (or equivalent officer) of Seller certifying the names and signatures of the officers of Seller authorized to sign
this Agreement, the Transaction Documents and the other documents to be delivered hereunder and thereunder (the “Seller Closing
Certificate”); and
(g)
Seller shall have received all third party consents necessary for the
16
sale of the Purchased Assets, including, but not limited to, the Stockholder Consent.
such other documents and deliveries set forth in Section 7.2.
(h)
Seller shall have delivered into Escrow duly executed counterparts to the Transaction Documents and
6.2.
Conditions Precedent to Seller's Obligation to Close. The obligation of the Seller to consummate the
transactions contemplated hereby is subject to satisfaction of the following conditions on or prior to the Closing Date:
(a)
The representations and warranties of Buyer set forth in Section 4 above shall be true and correct in
all material respects at and as of the Closing Date with the same effect as though made at and as of the date hereof (except those
representations and warranties that address matters only as of a specified date, the accuracy of which shall be determined as of that
specified date in all respects);
(b)
through the Closing Date;
Buyer shall have performed and complied with all of its covenants hereunder in all material respects
(c)
No Action, suit, or proceeding shall be pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction,
judgment, order, decree, ruling, or charge would (i) prevent or adversely affect the Buyer's consummation of any of the transactions
contemplated by this Agreement or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect);
(d)
occurred that results in a Material Adverse Effect;
No material adverse change shall have taken place with respect to the Buyer, and no event shall have
(e)
Buyer shall have delivered to Seller a certificate of the Secretary or an Assistant Secretary (or
equivalent officer) of Buyer certifying that attached thereto are true and complete copies of all resolutions adopted by the board of
directors of Buyer authorizing the execution, delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby and thereby, and that all such resolutions are in full force and effect and are all the resolutions
adopted in connection with the transactions contemplated hereby and thereby. Seller shall have received a certificate of the
Secretary or an Assistant Secretary (or equivalent officer) of Buyer certifying the names and signatures of the officers of Buyer
authorized to sign this Agreement, the Transaction Documents and the other documents to be delivered hereunder and thereunder
(the “Buyer Closing Certificate”);
All actions to be taken by Buyer in connection with consummation of the transactions contemplated
hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will
be reasonably satisfactory in form and substance to the Seller;
(f)
(g)
Buyer shall have delivered into Escrow the Purchase Price, duly
17
executed counterparts to the Transaction Documents and such other documents and deliveries set forth in Section 7.1 and;
(h)
Seller shall not have exercised its Unilateral Right prior to April 28, 2017 (after which Seller’s
Unilateral Right shall extinguish).
7.
DOCUMENTS TO BE DELIVERED AT CLOSING.
7.1.
Documents to be Delivered by the Seller. At Closing, the Seller shall deliver to Buyer the following:
(a)
the Seller's Closing Certificate;
Seller, transferring the tangible personal property included in the Purchased Assets to Buyer;
(b)
a bill of sale in form and substance satisfactory to Buyer (the “Bill of Sale”) and duly executed by
an assignment and assumption agreement in form and substance satisfactory to Buyer (the
“Assignment and Assumption Agreement”) and duly executed by Seller, effecting the assignment to and assumption by Buyer of
the Purchased Assets;
(c)
(d)
[intentionally omitted];
with respect to the Material Contracts, an Assignment and Assumption Agreements in a form and
substance satisfactory to Buyer and executed by such third parties are necessary in each case (each, an “Material Contract
Assignment and Assumption Agreement”);
(e)
(f)
the Transition Services Agreement in the form attached hereto as Exhibit A ("Transition Services
Agreement");
(g)
“Leak Out Agreement”);
(h)
(i)
the leak out agreement for the Consideration Shares in the form attached hereto as Exhibit B (the
the Grant Back License; and
such other customary instruments of transfer, assumption, filings or other documents, in form and
substance satisfactory to Buyer, as may be required to give effect to this Agreement.
7.2.
Documents to be Delivered by Buyer. At Closing, the Buyer shall deliver to the Seller the following:
(a)
certificates representing the Consideration Shares and the Warrant;
(b)
the Transition Services Agreement duly executed by the Buyer;
18
(c)
the Buyer's Closing Certificate; and
substance satisfactory to Seller, as may be required to give effect to this Agreement.
(d)
such other customary instruments of transfer, assumption, filings or other documents, in form and
8.
INDEMNIFICATION AND RELATED MATTERS.
8.1.
Subject to the limitations and other provisions of this Agreement, the representations and warranties
contained herein shall survive the Closing and shall remain in full force and effect until the date that is 6 years from the Closing
Date. None of the covenants or other agreements contained in this Agreement shall survive the Closing Date other than those which
by their terms contemplate performance after the Closing Date, and each such surviving covenant and agreement shall survive the
Closing for the period contemplated by its terms. Notwithstanding the foregoing, any claims asserted in good faith with reasonable
specificity (to the extent known at such time) and in writing by notice from the non-breaching party to the breaching party prior to
the expiration date of the applicable survival period shall not thereafter be barred by the expiration of such survival period and such
claims shall survive until finally resolved.
8.2.
Indemnification by Seller. The Seller hereby indemnifies and holds Buyer and its Affiliates and
Representatives (collectively, the “Buyer Indemnitees”) harmless from and against any and all damages, losses, Liabilities,
obligations, costs or expenses incurred by Buyer and arising out of the breach of any representation or warranty of Seller hereunder,
and/or Seller's failure to perform any covenant or obligation required to be performed by it or them hereunder.
8.3.
Indemnification by Buyer. The Buyer hereby indemnifies and holds the Seller and its Affiliates and
Representatives (collectively, the “Buyer Indemnitees”) harmless from and against any and all damages, losses, Liabilities,
obligations, costs or expenses incurred by the Seller arising out of the breach of any representation or warranty of Buyer hereunder,
and/or Buyer's failure to perform any covenant or obligation required to be performed by it hereunder.
8.4.
Certain Limitations. The party making a claim under this Section 8 is referred to as the "Indemnified
Party", and the party against whom such claims are asserted under this Section 8 is referred to as the "Indemnifying Party". The
indemnification provided for in Section 8.1 and Section 8.2 shall be subject to the following limitations:
8.4.1.
The Indemnifying Party shall not be liable to the Indemnified Party for indemnification under Section
8.2 or 8.3, as the case may be, until the aggregate amount of all Losses in respect of indemnification under Section 8.2 or 8.3
exceeds $50,000 (the "Deductible"), in which event the Indemnifying Party shall only be required to pay or be liable for Losses in
excess of the Deductible. With respect to any claim as to which the Indemnified Party may be entitled to indemnification 8.2 or 8.3,
as the case may be, the Indemnifying Party shall not be liable for any individual or series of related Losses which do not exceed
$10,000 (which Losses shall not be counted toward the Deductible).
19
Section 8.2 or 8.3, as the case may be, shall not exceed 150,000 Warrants.
8.4.2.
The aggregate amount of all Losses for which an Indemnifying Party shall be liable pursuant to
8.4.3.
Payments by an Indemnifying Party pursuant to Section 8.2 or 8.3 in respect of any Loss shall be
limited to the amount of any liability or damage that remains after deducting therefrom any insurance proceeds and any indemnity,
contribution or other similar payment received or reasonably expected to be received by the Indemnified Party in respect of any
such claim. The Indemnified Party shall use its commercially reasonable efforts to recover under insurance policies or indemnity,
contribution or other similar agreements for any Losses prior to seeking indemnification under this Agreement.
Payments by an Indemnifying Party pursuant to Section 8.2 or 8.3 in respect of any Loss shall be
reduced by an amount equal to any Tax benefit realized or reasonably expected to be realized as a result of such Loss by the
Indemnified Party.
8.4.4.
8.4.5.
In no event shall any Indemnifying Party be liable to any Indemnified Party for any punitive,
incidental, consequential, special or indirect damages, including loss of future revenue or income, loss of business reputation or
opportunity relating to the breach or alleged breach of this Agreement, or diminution of value or any damages based on any type of
multiple.
Each Indemnified Party shall take, and cause its Affiliates to take, all reasonable steps to mitigate any
Loss upon becoming aware of any event or circumstance that would be reasonably expected to, or does, give rise thereto, including
incurring costs only to the minimum extent necessary to remedy the breach that gives rise to such Loss.
8.4.6.
Seller shall not be liable under this Article 8 for any Losses based upon or arising out of any
inaccuracy in or breach of any of the representations or warranties of Seller contained in this Agreement if Buyer had knowledge of
such inaccuracy or breach prior to the Closing.
8.4.7.
8.5.
Procedure for Indemnification. Any Party entitled to indemnification under this Section 8 (an “Indemnified
Party”) will give written notice to the indemnifying party (“Indemnifying Party”) of any matters giving rise to a claim for
indemnification; provided, that the failure of any party entitled to indemnification hereunder to give notice as provided herein shall
not relieve the Indemnifying Party of its obligations under this Section 8 except to the extent that the Indemnifying Party is actually
prejudiced by such failure to give notice. In case any Action, proceeding or claim is brought against an Indemnified Party in respect
of which indemnification is sought hereunder, the Indemnifying Party shall be entitled to participate in and, unless in the reasonable
judgment of counsel to the Indemnified Party a conflict of interest between it and the Indemnifying Party may exist with respect of
such Action, proceeding or claim, to assume the defense thereof with counsel reasonably satisfactory to the Indemnified Party. In
the event that the Indemnifying Party advises an Indemnified Party that it will contest such a claim for indemnification hereunder,
or fails, within thirty (30) days of receipt of any indemnification notice to notify, in writing, such person of its election to defend,
settle or compromise, at its sole cost and expense, any Action, proceeding or claim (or discontinues its
20
defense at any time after it commences such defense), then the Indemnified Party may, at its option, defend, settle or otherwise
compromise or pay such Action or claim. In any event, unless and until the Indemnifying Party elects in writing to assume and does
so assume the defense of any such claim, proceeding or Action, the Indemnified Party's costs and expenses arising out of the
defense, settlement or compromise of any such Action, claim or proceeding shall be losses subject to indemnification hereunder.
The Indemnified Party shall cooperate fully with the Indemnifying Party in connection with any settlement negotiations or defense
of any such Action or claim by the Indemnifying Party and shall furnish to the Indemnifying Party all information reasonably
available to the Indemnified Party, which relates to such Action or claim. The Indemnifying Party shall keep the Indemnified Party
fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. If the Indemnifying
Party elects to defend any such Action or claim, then the Indemnified Party shall be entitled to participate in such defense with
counsel of its choice at its sole cost and expense. The Indemnifying Party shall not be liable for any settlement of any Action, claim
or proceeding affected without its prior written consent. Notwithstanding anything in this Section 8 to the contrary, the
Indemnifying Party shall not, without the Indemnified Party’s prior written consent, settle or compromise any claim or consent to
entry of any judgment in respect thereof which imposes any future obligation on the Indemnified Party or which does not include,
as an unconditional term thereof, the giving by the claimant or the plaintiff to the Indemnified Party of a release from all liability in
respect of such claim. The indemnity agreements contained herein shall be in addition to (a) any cause of Action or similar rights of
the Indemnified Party against the Indemnifying Party or others, and
(b) any liabilities the Indemnifying Party may be subject to.
8.6.
Time for Assertion. No Party to this Agreement shall have any liability (for indemnification or otherwise)
with respect to any representation, warranty or covenant or obligation to be performed and complied hereunder, unless notice of
any such liability is provided on or before twelve (12) months from the date hereof.
8.7.
Exclusive Remedies. Subject to Section 9.4, the parties acknowledge and agree that their sole and exclusive
remedy with respect to any and all claims (other than claims arising from intentional fraud on the part of a party hereto in
connection with the transactions contemplated by this Agreement) for any breach of any representation, warranty, covenant,
agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement, shall be pursuant to the
indemnification provisions set forth in this Article 8. In furtherance of the foregoing, each party hereby waives, to the fullest extent
permitted under Law, any and all rights, claims and causes of action for any breach of any representation, warranty, covenant,
agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement it may have against the other
parties hereto and their Affiliates and each of their respective Representatives arising under or based upon any Law, except
pursuant to the indemnification provisions set forth in this Article 8. Nothing in this 8.7 shall limit any Person's right to seek and
obtain any equitable relief to which any Person shall be entitled pursuant to
11.10 or to seek any remedy on account of any intentional fraud by any party hereto.
21
9.
COVENANT NOT TO COMPETE; NON-SOLICITATION. In consideration of the transactions contemplated
by this Agreement, and in order to protect and preserve the legitimate business interests of the Buyer, the Seller agrees as follows:
9.1.
During the Restricted Period, except as otherwise provided under the Grant Back License, the Seller shall
not, and shall not permit any of its Affiliates to, directly or indirectly, (i) engage in or assist others in engaging in the Restricted
Business in the Restricted Area; (ii) have an interest in any Person that engages directly or indirectly in the Restricted Business in
the Restricted Area in any capacity, including as a partner, shareholder, member, employee, principal, agent, trustee or consultant;
or (iii) cause, induce or encourage any material actual or prospective client, customer, supplier or licensor of (including any
existing or former client or customer of Seller and any Person that becomes a client or customer of the Buyer after the Closing), or
any other Person who has a material business relationship with the Buyer, to terminate or modify any such actual or prospective
relationship. Notwithstanding the foregoing, the Seller may own, directly or indirectly, solely as an investment, securities of any
Person traded on any national securities exchange if the Seller is not a controlling Person of, or a member of a group which
controls, such Person and does not, directly or indirectly, own 1% or more of any class of securities of such Person.
9.2.
During the Restricted Period, the Seller shall not, and shall not permit any of its Affiliates to, directly or
indirectly, hire or solicit any person who is offered employment by Buyer or is or was employed by the Buyer (including its
Affiliates) during the Restricted Period, or encourage any such employee to leave such employment or hire any such employee who
has left such employment, except pursuant to a general solicitation which is not directed specifically to any such employees;
provided, that nothing in this Section 9.2 shall prevent the Seller or any of its Affiliates from hiring (i) any employee whose
employment has been terminated by Buyer or (ii) after 180 days from the date of termination of employment, any employee whose
employment has been terminated by the employee.
9.3.
The Seller acknowledges that a breach or threatened breach of this Section 9 would give rise to irreparable
harm to Buyer, for which monetary damages would not be an adequate remedy, and hereby agrees that in the event of a breach or a
threatened breach by the Seller of any such obligations, Buyer shall, in addition to any and all other rights and remedies that may be
available to it in respect of such breach, be entitled to equitable relief, including a temporary restraining order, an injunction,
specific performance and any other relief that may be available from a court of competent jurisdiction (without any requirement to
post bond).
9.4.
The Seller acknowledges that the restrictions contained in this Section 9 are reasonable and necessary to
protect the legitimate interests of Buyer and constitute a material inducement to Buyer to enter into this Agreement and
consummate the transactions contemplated by this Agreement. In the event that any covenant contained in this Section 9 should
ever be adjudicated to exceed the time, geographic, product or service or other limitations permitted by applicable Law in any
jurisdiction, then any court is expressly empowered to reform such covenant, and such covenant shall be deemed reformed, in such
jurisdiction to the maximum time, geographic, product or service or other limitations permitted by applicable Law. The covenants
contained in this Section 9 and each provision hereof are severable and distinct covenants and provisions. The invalidity or
unenforceability of any such covenant or provision
22
as written shall not invalidate or render unenforceable the remaining covenants or provisions hereof, and any such invalidity or
unenforceability in any jurisdiction shall not invalidate or render unenforceable such covenant or provision in any other
jurisdiction.
10.
TERMINATION. This Agreement may be terminated at any time prior to the Closing:
(a)
by the mutual written consent of the Seller and Buyer;
(b)
by Buyer by written notice to the Seller if:
(i) there has been a breach by Seller, or an inaccuracy in or failure to perform any representation, warranty,
covenant or agreement made by Seller pursuant to this Agreement that would give rise to the failure of any of the conditions
specified in Section 6 and such breach, inaccuracy or failure has not been cured by Seller within ten (10) days of Seller's receipt of
written notice of such breach from Buyer; or
(ii) any of the conditions set forth in Section 6.1 or Section 6.2 shall not have been, or if it becomes apparent
that any of such conditions will not be, fulfilled by May 31, 2017, unless such failure shall be due to the failure of Buyer to perform
or comply with any of the covenants, agreements or conditions hereof to be performed or complied with by it prior to the Closing;
(c)
by Seller upon written notice to Buyer if:
(i)
there has been a breach by Buyer, or an inaccuracy in or failure to perform any representation,
warranty, covenant or agreement made by Buyer pursuant to this Agreement that would give rise to the failure of any of the
conditions specified in Section 6 and such breach, inaccuracy or failure has not been cured by Buyer within ten (10) days of Buyer's
receipt of written notice of such breach from the Seller; or
(ii)
any of the conditions set forth in Section 6.1 or Section 6.2 shall not have been, or if it becomes
apparent that any of such conditions will not be, fulfilled by May 31, 2017, unless such failure shall be due to the failure of the
Seller to perform or comply with any of the covenants, agreements or conditions hereof to be performed or complied with by them
prior to the Closing.
(d)
by Buyer or the Seller in the event that (i) there shall be any Law that makes consummation of the
transactions contemplated by this Agreement illegal or otherwise prohibited or (ii) any Governmental Entity shall have issued a
Governmental Order restraining or enjoining the transactions contemplated by this Agreement, and such Governmental Order shall
have become final and non-appealable.
(e)
In the event of the termination of this Agreement in accordance with this Section 10, this Agreement shall
forthwith become void and there shall be no liability on the part of any Party hereto except:
23
(i)
as set forth in this Section 10 and Section 5.5 and Section 11 hereof; and
(ii)
that nothing herein shall relieve any Party hereto from liability for any willful breach of any provision
hereof.
11.
MISCELLANEOUS.
11.1.
Expenses. Except as otherwise expressly provided herein, all costs and expenses, including, without
limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and
the transactions contemplated hereby shall be paid by the Party incurring such costs and expenses, whether or not the Closing shall
have occurred.
11.2.
Notices. All notices, requests, consents, claims, demands, waivers and other communications hereunder shall
be in writing and shall be deemed to have been given: (a) when delivered by hand (with written confirmation of receipt); (b) when
received by the addressee if sent by a nationally recognized overnight courier (receipt requested); (c) on the date sent by facsimile
or e-mail of a .PDF document (with confirmation of transmission) if sent during normal business hours of the recipient, and on the
next Business Day if sent after normal business hours of the recipient; or (d) on the third (3rd) day after the date mailed, by
certified or registered mail, return receipt requested, postage prepaid. Such communications must be sent to the respective parties at
the following addresses (or at such other address for a Party as shall be specified in a notice given in accordance with this Section
11.2):
If to Seller:
with a copy to:
If to Buyer:
with a copy to:
Constantine Goltsev
LeapFrog Media Trading Inc.
PO POX 38
Chappaqua, NY 10514
email: Constantine_goltsev@yahoo.com
Attention: CEO
RPCK Rastegar Panchal, P.C.
80 Broad Street, Suite 3101
New York, NY 10004
email: chintan@rpck.com
Attention: Chintan Panchal
456 Seaton Street
Los Angeles, CA 90013
E-mail: chris@srax.com
Attention: Christopher Miglino, Chief Executive Officer
Pearlman Law Group LLP
2200 Corporate Boulevard NW
Suite 210
24
Boca Raton, FL 33431
E-mail: brian@pslawgroup.net
Attention: Brian A. Pearlman, Esq.
11.3.
Interpretation. For purposes of this Agreement: (a) the words “include,” “includes” and “including” shall be
deemed to be followed by the words “without limitation”; (b) the word “or” is not exclusive; and (c) the words “herein,” “hereof,”
“hereby,” “hereto” and “hereunder” refer to this Agreement as a whole. Unless the context otherwise requires, references herein:
(x) to Articles, Sections, Disclosure Schedules and Exhibits mean the Articles and Sections of, and Disclosure Schedule and
Exhibits attached to, this Agreement; (y) to an agreement, instrument or other document means such agreement, instrument or other
document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof; and (z) to a
statute means such statute as amended from time to time and includes any successor legislation thereto and any regulations
promulgated thereunder. This Agreement shall be construed without regard to any presumption or rule requiring construction or
interpretation against the Party drafting an instrument or causing any instrument to be drafted. The Disclosure Schedule and
Exhibits referred to herein shall be construed with, and as an integral part of, this Agreement to the same extent as if they were set
forth verbatim herein.
11.4.
Headings. The headings in this Agreement are for reference only and shall not affect the interpretation of this
Agreement.
11.5.
Severability. If any term or provision of this Agreement is invalid, illegal or unenforceable in any
jurisdiction, such invalidity, illegality or unenforceability shall not affect any other term or provision of this Agreement or
invalidate or render unenforceable such term or provision in any other jurisdiction. Upon such determination that any term or other
provision is invalid, illegal or unenforceable, the parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions
contemplated hereby be consummated as originally contemplated to the greatest extent possible.
11.6.
Entire Agreement. This Agreement and the other Transaction Documents constitute the sole and entire
agreement of the parties to this Agreement with respect to the subject matter contained herein and therein, and supersede all prior
and contemporaneous understandings and agreements, both written and oral, with respect to such subject matter. In the event of any
inconsistency between the statements in the body of this Agreement and those in the other Transaction Documents, the Exhibits and
Disclosure Schedule (other than an exception expressly set forth as such in the Disclosure Schedule), the statements in the body of
this Agreement will control.
11.7.
Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Neither Party may assign its rights or obligations hereunder without
the prior written consent of the other Parties, which consent shall not be unreasonably withheld or delayed; provided, however, that
prior to the Closing Date, Buyer may, without the prior written consent of the Seller, assign all or any portion of its rights under this
Agreement to one or more of its direct or
25
indirect wholly-owned subsidiaries. No assignment shall relieve the assigning party of any of its obligations hereunder.
11.8.
No Third-party Beneficiaries. This Agreement is for the sole benefit of the Parties hereto and their respective
successors and permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other Person or
entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
11.9.
Amendment and Modification; Waiver. This Agreement may only be amended, modified or supplemented by
an agreement in writing signed by each Party hereto. No waiver by any Party of any of the provisions hereof shall be effective
unless explicitly set forth in writing and signed by the Party so waiving. No waiver by any Party shall operate or be construed as a
waiver in respect of any failure, breach or default not expressly identified by such written waiver, whether of a similar or different
character, and whether occurring before or after that waiver. No failure to exercise, or delay in exercising, any right, remedy, power
or privilege arising from this Agreement shall operate or be construed as a waiver thereof; nor shall any single or partial exercise of
any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right,
remedy, power or privilege.
11.10.
Specific Performance. The Parties agree that irreparable damage would occur if any provision of this
Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of
the terms hereof, in addition to any other remedy to which they are entitled at law or in equity.
11.11.
Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original,
but all of which together shall be deemed to be one and the same agreement. A signed copy of this Agreement delivered by
facsimile, e-mail or other means of electronic transmission shall be deemed to have the same legal effect as delivery of an original
signed copy of this Agreement.
11.12.
Jurisdiction and Governing Law. This Agreement shall be governed and construed under and in accordance
with the laws of the State of Delaware. Each of the Parties hereto expressly and irrevocably: (1) agree that any legal suit, Action or
proceeding arising out of or relating to this Agreement will be instituted exclusively in United States District Court for the Central
District of California, Los Angeles, California; (2) waive any objection they may have now or hereafter to the venue of any such
suit, Action or proceeding; and (3) consent to the in personam jurisdiction of the United States District Court for the Central
District of California, Los Angeles, California in any such suit, Action or proceeding. Each of the Parties hereto further agrees to
accept and acknowledge service of any and all process which may be served in any such suit, Action or proceeding in the United
States District Court for the Central District of California, Los Angeles, California and agree that service of process upon it mailed
by certified mail to its address will be deemed in every respect effective service of process upon it, in any such suit, Action or
proceeding. ANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT,
THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY MAY
BE INSTITUTED IN THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA LOCATED IN LOS ANGELES,
CALIFORNIA, AND EACH PARTY
26
IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR
PROCEEDING. SERVICE OF PROCESS, SUMMONS, NOTICE OR OTHER DOCUMENT BY MAIL TO SUCH PARTY'S
ADDRESS SET FORTH HEREIN SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY SUIT, ACTION OR OTHER
PROCEEDING BROUGHT IN ANY SUCH COURT. THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVE
ANY OBJECTION TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR ANY PROCEEDING IN SUCH COURTS AND
IRREVOCABLY WAIVE AND AGREE NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH SUIT,
ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS
AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS IS LIKELY TO INVOLVE COMPLICATED AND
DIFFICULT ISSUES AND, THEREFORE, EACH SUCH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LEGAL ACTION ARISING OUT OF OR RELATING
TO THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED
HEREBY OR THEREBY. EACH PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT (A) NO
REPRESENTATIVE OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER
PARTY WOULD NOT SEEK TO ENFORCE THE FOREGOING WAIVER IN THE EVENT OF A LEGAL ACTION, (B) SUCH
PARTY HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) SUCH PARTY MAKES THIS WAIVER
VOLUNTARILY, AND (D) SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 11.13.
11.13.
Role of Counsel. The Parties acknowledge their understandings that this Agreement was prepared at the
request of Buyer by Pearlman Law Group LLP, its counsel, and that such firm did not represent Seller in conjunction with this
Agreement or any of the related transactions. Seller, as further evidenced by its or his signature below, acknowledges that it has had
the opportunity to obtain the advice of independent counsel of its choosing prior to its execution of this Agreement and that it has
availed itself of this opportunity to the extent it deemed necessary and advisable.
(Signature Page to Follow)
27
Social Reality, Inc.
By:
/s/ Christopher Miglino
Christopher Miglino, Chief Executive
Officer
Leapfrog Media Trading, Inc.
By:
Name:
Its:
28
Schedule 2.1
Purchased Assets
1.
2.
all of the Intellectual Property which constitutes the OpenDSP Platform;
the Purchased Domain Name;
3.
all right, title and interest in and to the website content appearing on the Purchased Domain Name, together with, without
any limitation, any related Intellectual Property Rights to the website content, whether such rights are registered or not, and all
rights of priority therein, and the right to recover for damages and profits and all other remedies for past infringements thereof, and
any and all appurtenant goodwill associated therewith, all goodwill, customer lists;
4.
5.
6.
all other source codes and related assets which constitutes the OpenDSP platform;
all marketing materials, plans, and techniques for driving traffic to the Purchased Domain Name;
the Assigned Contracts;
all rights to any Actions of any nature available to or being pursued by Seller to the extent related to the Purchased Assets,
7.
whether arising by way of counterclaim or otherwise;
all of Seller's rights under warranties, indemnities and all similar rights against third parties to the extent related to any
8.
Purchased Assets;
9.
all insurance benefits, including rights and proceeds, arising from or relating to the Purchased Assets;
originals, or where not available, copies, of all books and records, including, but not limited to, books of account, ledgers
10.
and general, financial and accounting records, machinery and equipment maintenance files, customer lists, customer purchasing
histories, price lists, distribution lists, supplier lists, production data, quality control records and procedures, customer complaints
and inquiry files, research and development files, records and data (including all correspondence with any Governmental
Authority), sales material and records (including pricing history, total sales, terms and conditions of sale, sales and pricing policies
and practices), strategic plans, internal financial statements, marketing and promotional surveys, material and research and files
relating to the Purchased Assets (“Books and Records”); and
11.
all goodwill and the going concern value of the Purchased Assets.
EXHIBIT 10.03
AMENDMENT NO. 1 TO ASSET PURCHASE AGREEMENT
This Amendment No. 1 to the Asset Purchase Agreement (the "Amendment") dated August 17, 2017 is entered into by and
between Social Reality, Inc. (the “Buyer”), a corporation organized under the laws of the State of Delaware, and Leapfrog Media
Trading, Inc. (the "Seller"), a corporation organized under the laws of the State of Delaware.
WHEREAS, the Buyer and the Seller are parties to that certain Asset Purchase Agreement, dated April 20, 2017 (the
"Asset Purchase Agreement"), pursuant to which, among other things, the Buyer agreed, on the Closing Date, to acquire the
Purchase Assets from the Seller on the terms and subject to the conditions set forth in the Asset Purchase Agreement;
WHEREAS, capitalized terms used in this Amendment, but not otherwise defined herein, are used herein with the
respective meanings ascribed to such terms under the Asset Purchase Agreement;
WHEREAS, in expectation of the Closing of the Asset Purchase Agreement, Buyer and Seller wish to (i) amend the Asset
Purchase Agreement as set forth herein, and (ii) facilitate Buyer’s payment of the Purchase Price to Seller on the date hereof by
Buyer’s delivery of the Securities.
NOW, THEREFORE, in consideration of the foregoing, and the mutual terms, covenants and conditions herein below set
forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties
hereto, intending to be legally bound, hereby agree as follows:
1.
Amendments to the Asset Purchase Agreement. Buyer and Seller agree to the following amendments to the Asset
Purchase Agreements.
(a)
with the following:
Purchase Price. Section 2.3 of the Asset Purchase Agreement is hereby deleted in its entirety and replaced
“2.3
Purchase Price. The purchase price for the Purchased Assets is the Consideration Shares and the Warrants
(the “Purchase Price”). At the direction of the Seller, and as full and complete payment of the Purchase Price, the
Purchase Price shall be paid at Closing as follows:
No. of Consideration Shares
Recipient
184,000
16,000
200,000
DIP SVP1, LP
Gregory Goldberg
No. of Warrants Recipient
350,000
DIP SVP1, LP
The issuance of the Consideration Shares and Warrants (collectively, the “Securities”) shall be exempt from
registration under the Securities Act in reliance on an exemption provided by Section 4(a)(2) of that act.
(b)
Contracts. The term "Assigned Contracts" which appears in Section 3.8 of the Asset Purchase Agreement is
hereby changed to "Material Contracts."
(c)
Schedule 2.1. Schedule 2.1 attached to the Asset Purchase Agreement is hereby deleted in its entirety and
replaced with Schedule 2.1 attached to this Amendment.
(d)
Material Contract Assignment and Assumption Agreement.All references to a Material Contract
Assignment and Assumption Agreement to be entered into by the parties at the Closing of the
1
Asset Purchase Agreement is hereby deleted in its entirety, it being the understanding of the parties that the Buyer shall not assume
any contracts of the Seller, except as specifically provided on Schedule 2.1.
(e)
Documents to be Delivered by Seller. Section 7 of the Asset Purchase Agreement is hereby amended to add
the following:
Post-Closing Deliverables. As soon as practicable following the Closing the Seller shall deliver the
"7.3
following to the Buyer:
Administrator account and/or administrator access to all services required to operate the Open DSP
(i)
Platform and related technology, including, but not limited to, the Amazon Web Services;
Administrator access to any and all services, control panels, or other login systems including, but not
(ii)
limited to, Zoho.com, Amazon Web Services, Slack.com, Github, with verification for each; and
(iii)
Evidence of transfer of domain name OPenDSP.com to GoDaddy account number 26692570."
(f)
No Other Revisions. Except as specifically set forth herein, all other terms and conditions of the Asset
Purchase Agreement remain in full force and effect. .
2.
Disclosure Schedules. Seller hereby amends and restates the Disclosure Schedules in their entirety to read in the
form attached as Exhibit A to this Amendment, it being understood and acknowledged by Buyer that such amendment and
restatement is intended only to make certain clarifying and non-substantive changes requested by Buyer.
3.
Payment of Purchase Price.
(a)
Common Stock. On the Closing Date, Buyer shall deliver to Seller (on behalf of Sellers designees)
Irrevocable Transfer Agent Instructions, in substantially the form attached as Exhibit B to this Amendment, covering the issuance
of the Consideration Shares to DIP SVP1, LP and Gregory Goldberg as set forth in Section 1(a) hereof. Such Consideration Shares
have been duly authorized and upon issuance will be validly issued, fully-paid and non-assessable.
(b)
Warrants. On the Closing Date Buyer shall issue to DIP SVP1, LP, Seller’s designee, in partial satisfaction
of the Purchase Price under Section 2.3 of the Asset Purchase Agreement, a the Warrant, in the form attached as Exhibit D to Asset
Purchase Agreement. Such Warrant has been duly authorized and upon issuance will be validly issued, fully-paid and non-
assessable.
(c)
Leak Out Agreements. On the Closing Date, the Seller shall cause DIP SVP1, LP and Gregory Goldberg,
Seller’s designees, a Leak Out Agreements, with Buyer in the forms attached as Exhibit C-1 and Exhibit C-2, respectively, to this
Amendment. Further, the Leak Out Agreement, dated the Closing Date, between Buyer and Seller is hereby terminated and of no
further force and effect. ]
4.
Payoff of Debentures. Reference is made to the Senior Secured Convertible Debentures due June 3, 2018 (the
“Debentures”) with an original issue date of June 3, 2016, which Debentures were issued by Seller to certain purchasers pursuant
to that certain Securities Purchase Agreement, dated June 1, 2016, by and among Seller and the purchasers signatory thereto, and
which such Debentures were subsequently purchased from all such purchasers by DIP SPV1 LP. On the Closing Date, the Seller
shall deliver to Buyer a copy of a payoff letter, in substantially the form attached as Exhibit D hereto, being issued on such date by
DIP SPV1 LP to Seller. Such payoff letter, among other things, shall confirm that, upon receipt by DIP SPV1 LP the shares of
Buyer Common Stock and Warrants to purchase Buyer Common Stock issuable by Buyer to DIP SPV1 LP hereunder as Seller’s
designee, DIP SPV1 LP will deem all of Seller’s outstanding debts and obligations owing under the Debentures and the related
Security Agreement to have been paid-in-full and will deem all liens and encumbrances under such
2
Security Agreement to have been released, and the Debentures and the related Securities Purchase Agreement and Security
Agreement to be terminated.
5.
Post-Closing Delivery. Immediately following the Closing, the Seller shall deliver to Buyer the complete system
architecture diagram with system description and/or written operation manual.
6.
Miscellaneous. All terms not defined herein shall have the same meaning as in the Asset Purchase Agreement. This
Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall be deemed
to be one and the same agreement. A signed copy of this Amendment delivered by facsimile, e-mail or other means of electronic
transmission shall be deemed to have the same legal effect as delivery of an original signed copy of this Amendment. The headings
in this Amendment are for reference only and shall not affect the interpretation of this Amendment.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the day and date first above written.
Social Reality, Inc.
By:
/s/ Christopher Miglino
Christopher Miglino, Chief Executive Officer
Leapfrog Media Trading, Inc.
By:
/s/ Constantine Goltsev
Constantine Goltsev, Managing Director
3
SCHEDULE 2.1
Purchased Assets
1.
2.
all of the Intellectual Property which constitutes the OpenDSP Platform;
the Purchased Domain Name;
all right, title and interest in and to the website content appearing on the Purchased Domain Name, together with, without
3.
any limitation, any related Intellectual Property Rights to the website content, whether such rights are registered or not, and all
rights of priority therein, and the right to recover for damages and profits and all other remedies for past infringements thereof, and
any and all appurtenant goodwill associated therewith, all goodwill, customer lists;
4.
5.
6.
all other source codes and related assets which constitutes the OpenDSP platform;
all marketing materials, plans, and techniques for driving traffic to the Purchased Domain Name;
all right, title and interest in the following contracts:
Confidentiality/Non Solicitation/Non Circumvention Agreement dated on or about October 16, 2015 entered into by and
(i)
between 9.8 Group Inc. (together with its affiliates) and LeapFrog Media Trading, Inc.;
(ii)
Intellectual Property Contribution Agreement between LeapFrog Media Trading, Inc. and each of:
(a)
(b)
(c)
(d)
(e)
Cresco Group LLC dated December 19, 2014;
Cresco Group LLC dated May 8, 2014;
Constantine Goltsev dated May 8, 2014;
Constantine Goltsev dated December 19, 2014; and
Arthur Meyerovich dated May 8, 2014;
all rights to any Actions of any nature available to or being pursued by Seller to the extent related to the Purchased Assets,
7.
whether arising by way of counterclaim or otherwise;
all of Seller's rights under warranties, indemnities and all similar rights against third parties to the extent related to any
8.
Purchased Assets;
9.
all insurance benefits, including rights and proceeds, arising from or relating to the Purchased Assets;
10.
originals, or where not available, copies, of all books and records, including, but not limited to, books of account, ledgers
and general, financial and accounting records, machinery and equipment maintenance files, customer lists, customer purchasing
histories, price lists, distribution lists, supplier lists, production data, quality control records and procedures, customer complaints
and inquiry files, research and development files, records and data (including all correspondence with any Governmental
Authority), sales material and records (including pricing history, total sales, terms and conditions of sale, sales and pricing policies
and practices), strategic plans, internal financial statements, marketing and promotional surveys, material and research and files
relating to the Purchased Assets (“Books and Records”); and
11.
all goodwill and the going concern value of the Purchased Assets.
1
EXHIBIT A
Amended and Restated Disclosure Schedules
(Attached hereto)
1
EXHIBIT B
Form of Irrevocable Transfer Agent Instructions
(Attached hereto)
1
EXHIBIT C
Leak Out Agreement with DIP SPV1, LP
(Attached hereto)
1
EXHIBIT D
Leak Out Agreement with Gregory Goldberg
(Attached hereto)
1
EXHIBIT E
Form of Payoff Letter
(Attached hereto)
1
EXHIBIT 10.04
TRANSITION SERVICES AGREEMENT
This TRANSITION SERVICES AGREEMENT (“Agreement”), is made and entered into this 17th day of August, 2017, by
and among Leapfrog Media Trading, Inc., a Delaware corporation (the “Seller”) and Social Reality, Inc., a Delaware corporation
(the “Buyer”).
Recitals
WHEREAS, the Seller and the Buyer entered into that certain Asset Purchase Agreement dated April 20, 2017 as amended
by Amendment No. 1 to the Asset Purchase Agreement dated August 17, 2017 (collectively, the “Purchase Agreement”), pursuant
to which at the Closing Date the Buyer acquired the Purchased Assets.
WHEREAS, the Buyer desires that the Seller continue to provide certain services to the Buyer in connection with the
Purchased Assets following the Closing Date for the time periods set forth herein.
WHEREAS, the parties hereto agree, upon the terms and conditions set forth in this Agreement, to provide or cause to be
provided to the specified parties herein certain services on the terms and conditions set forth herein.
NOW, THEREFORE, the parties, intending to be legally bound, hereby agree as follows:
ARTICLE 1.
SERVICES
1.1.
Services. During the Term (as defined below), the Seller shall operate the Amazon Web Services, make Gregory
Goldberg available to assist in the operation of the Purchased Assets, provide general transition services and provide to the Buyer
the Vendor Services identified in Exhibit A hereof (as such Services are modified from time to time pursuant to this Agreement,
individually referred to hereinafter as a “Service” and collectively as the “Services”).
1.2.
Consistent with Past Practice. It is understood by the parties that the scope of Services to be provided by Seller
will be substantially consistent with historical practice to operate the Purchased Assets, and that the Seller will not provide Services
in excess of such scope except as mutually agreed to in writing by the Seller and the Buyer.
ARTICLE 2.
TERM AND TERMINATION
2.1.
Term. This Agreement shall be effective as of the Closing Date and shall, unless a shorter period is expressly
provided for with respect to a specific Service in the Exhibits hereto, continue until the date that is two (2) months after the Closing
Date (the “Term”), unless earlier terminated pursuant to Section 2.2 below. In the event that Buyer continues to request the
1
continuation of any Services beyond the Term, the Seller may cease providing the Services at any time without notice to the Buyer.
2.2.
Termination. Except as otherwise provided herein, prior to the expiration date set forth in Section 2.1 above, Buyer
may terminate any individual Service(s) provided hereunder by Seller, by providing at least ten (10) days’ advance written notice to
Seller, but such termination shall not be effective until the first day of the calendar month after such 10 day notice period; provided,
however, that if any individual Service(s) is terminated pursuant to this Section 2.2, and other Service(s) provided hereunder are
dependent upon such terminated Service(s), such other Service(s) will not be provided past the termination date of such terminated
Service(s).
ARTICLE 3.
FEES
Seller shall provide the Services to Buyer during the Term without consideration. Notwithstanding anything contained
herein to the contrary, in the event that the scope of any Service provided by Seller is in excess of the contemplated scope of such
Service, and the Seller has agreed to provide such Services pursuant to Section 1.2 above, the Buyer will pay Seller a fee(s) (the
"Fee") as is reasonable to compensate the Seller for such increased scope of Service in an amount mutually agreed by the parties at
such time. In addition, in the event that the Seller receives any fees or consideration from a third party for the Services, the Seller
agrees to immediately remit such fee or other consideration to the Buyer.
ARTICLE 4.
PAYMENT OF FEES
No later than the fifth (5th) day after receiving an invoice from Seller, which shall not be provided more frequently than one
time per month, Buyer shall pay to the Seller the total Fees for that month, if any.
ARTICLE 5.
WARRANTY, LIMITATION OF LIABILITY AND INDEMNITY
5.1.
Warranty. The Seller shall provide the Services in a manner substantially consistent with the manner in which such
Services were previously provided in recent historical practice, and where such Services were not recently provided by Seller, then
such Services shall be provided in a commercially reasonably and complete manner and with a comparable degree of skill,
attention and care as the Seller exercises in performing the same or similar services for itself.
5.2.
Indemnification. Subject to Section 5.1 of this Agreement, the indemnification procedures set forth in Article 8 of
the Purchase Agreement shall apply to this Agreement, and are incorporated by reference herein; provided, however, that Seller
shall have no liability or obligation to provide indemnification for Losses based upon, arising out of or otherwise related to this
Agreement or the applicable Services unless such Losses were solely a direct result of the
2
fraud or willful misconduct of Seller. The provisions of this Section 5.2 will survive the termination or expiration of this
Agreement.
ARTICLE 6.
COMPLIANCE WITH LAWS AND REGULATIONS; THIRD-PARTY CONSENTS
6.1.
Notices. Each party shall give all notices and obtain all licenses and permits required by applicable laws, rules,
ordinances, codes or regulations and shall comply with all applicable laws, rules, ordinances, codes and regulations of any
governmental entity or regulatory agency governing the Services to be provided hereunder.
6.2.
Violations of Law. If it is found that a particular Service being provided pursuant to this Agreement results in any
party being given notice that it is violation of a law or regulation by a third-party regulatory or governmental agency, the parties
will mutually cooperate to provide the Service in a way that is not in violation of such law or regulation; provided. Failing such
efforts to bring the provision of such Service into conformity with such laws or regulations, the Seller may cancel such Service, and
shall not be liable to the Buyer with respect to any violation.
6.3.
Third-Party Consents. Seller’s obligation to provide any Service is conditioned upon such Seller obtaining the
consent, where necessary, of any relevant third party provider; provided, however, that if such consent cannot be obtained, the
parties shall cooperate to arrange for alternative methods of such Service being provided to the Buyer. Failing such efforts to bring
the provision of such Service into conformity with any such obligations to a third party provider, Seller may cancel such Service,
and shall not be liable to the Buyer with respect thereto.
ARTICLE 7.
COOPERATION
7.1.
Seller and Buyer shall make available on a timely basis to the other party, at such other party’s cost, all information
and materials reasonably requested by such party to enable it to perform its obligations pursuant to this Agreement; provided,
however, that in no event will a party be required to make available any information which in that party’s reasonable opinion the
disclosure of which could jeopardize an attorney-client privilege or in the opinion of the non- requesting party would compromise
material proprietary information of such non-requesting party.
7.2.
The employees, consultants and representatives of Seller and its Affiliates shall not be deemed, for purposes of any
compensation and employee benefits matter (including, without limitation, withholding taxes, worker’s compensation insurance,
social security contributions or other applicable Taxes or similar costs related to their employment or retention), to be employees,
consultants or representatives of the Buyer solely on account of such Buyer receiving Services from the Seller.
3
7.3.
The employees, consultants and representatives of Buyer and its Affiliates shall not be deemed, for purposes of any
compensation and employee benefits matter (including, without limitation, any withholding taxes, worker’s compensation
insurance, social security contributions or other applicable Taxes or similar costs related to their employment or retention), to be
employees, consultants or representatives of the Seller solely on account of such Seller providing Services to the Buyer.
ARTICLE 8.
CONFIDENTIALITY
Each party shall keep confidential, and not disclose to any other person or use for its own benefit or the benefit of any other
person, any confidential or proprietary information obtained from the other party(ies) in connection with this Agreement. The
obligation of the parties under this Article 8 shall not apply to information which: (a) is or becomes generally available to the
public without breach of the commitment provided for in this Article 8, or (b) is required to be disclosed by law, order or regulation
of a court or tribunal or government authority; provided, however, that in any such case, the disclosing party shall notify the other
party(ies) as early as reasonably practicable prior to disclosure to allow such other party(ies) to take appropriate measures to
preserve the confidentiality of such information. The provisions of this Article 8 will survive the termination or expiration of this
Agreement.
ARTICLE 9.
FORCE MAJEURE
Neither party shall be liable to the other party for any loss, cost or damage for delay or non-performance of any of its
obligations hereunder resulting from any requirement or intervention of civil, naval or military authorities or other agencies of the
government, or by reason of any other causes whatsoever not reasonably within the control of such party, including, but not limited
to, acts of God, war, riot, insurrection, civil violence or disobedience, blockages, embargoes, sabotage, epidemics, fire, strikes,
lock-outs or other industrial or labor disturbances, lightning, hurricanes, other severe weather disturbances, explosions and delay of
carriers.
ARTICLE 10.
NO IMPLIED ASSIGNMENTS OR LICENSES
Nothing in this Agreement is to be construed as an assignment or grant of any right, title or interest in any trademark,
copyright, design or trade dress, patent right or other intellectual property right.
ARTICLE 11.
MISCELLANEOUS
11.1. Notices. All notices and other communications hereunder shall be in writing and shall be deemed duly given (a) on the
date of delivery if delivered personally, or if by facsimile, upon written confirmation of receipt by facsimile, e-mail or otherwise,
(b) on the first Business Day following the date of dispatch if delivered utilizing a next-day service by a recognized next-
4
day courier or (c) on the earlier of confirmed receipt or the fifth Business Day following the date of mailing if delivered by
registered or certified mail, return receipt requested, postage prepaid. All notices hereunder shall be delivered to the addresses set
forth in the Purchase Agreement, or pursuant to such other instructions as may be designated in writing by the party to receive such
notice.
11.2.
Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by
any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon a determination that any term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to effect their original intent as closely as possible in an
acceptable manner to the end that the transactions contemplated hereby are fulfilled to the maximum extent possible.
11.3.
Entire Agreement; No Third-Party Beneficiaries. This Agreement, together with the Transaction Documents,
constitutes the entire agreement and supersedes any and all other prior agreements and undertakings, both written and oral, among
the parties hereto, or any of them, with respect to the subject matter hereof and do not, and is not intended to, confer upon any
person other than the parties hereto, any rights whatsoever.
11.4.
Amendment; Waiver. This Agreement may be amended only in a writing signed by each of the parties hereto. Any
waiver of rights hereunder must be set forth in writing. A waiver of any breach or failure to enforce any of the terms or conditions
of this Agreement shall not in any way affect, limit or waive either party’s rights at any time to enforce strict compliance thereafter
with every term or condition of this Agreement.
11.5.
Binding Effect; Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective legal representatives and successors. Notwithstanding the foregoing, this Agreement shall not be assigned by
the Seller by operation of law or otherwise without the express written consent of the Buyer.
11.6.
Governing Law; Waiver of Jury Trial. This Agreement shall be governed by and construed in accordance with,
the laws of the State of Delaware without regard to the conflicts of laws provisions thereof. Each of the parties hereto hereby
irrevocably and unconditionally waives any right it may have to trial by jury in connection with any litigation arising out of or
relating to this agreement, the transactions contemplated hereby or any of the other transactions contemplated hereby.
11.7.
Construction. The headings of Articles and Sections in this Agreement are provided for convenience only and will
not affect its construction or interpretation. The language used in this Agreement is the language chosen by the parties to express
their mutual intent, and no rule of strict construction shall be applied against any party.
5
11.8.
Counterparts. This Agreement may be executed simultaneously in one or more counterparts (including by facsimile
or electronic .pdf submission), and by the different parties in separate counterparts, each of which when executed shall be deemed
to be an original, but all of which shall constitute one and the same agreement.
11.9.
Definitions. All capitalized terms not defined in this Agreement shall have the meaning provided in the Purchase
Agreement.
11.10. Independent Contractor. Seller is and shall remain at all times an independent contractor of the Buyer in the
performance of all Services hereunder, and all persons employed by Seller or under contract or agreement with Seller to perform
such Services shall be and remain employees or contractors solely of such Seller and subject only to the supervision and control of
the applicable Seller supervisory personnel.
[Signature Page Follows]
6
[signature page of Transition Services Agreement]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above
by their respective officers thereunto duly authorized.
LEAPFROG MEDIA TRADING, INC.
By:
/s/ Constantine Goltsev
Name: Constantine Goltsev
Title: Managing Partner
SOCIAL REALTY, INC.
By:
/s/ Christopher Miglino
Name: Christopher Miglino
Title: Chief Executive Officer
7
TRANSITION SERVICES AGREEMENT SIGNATURE PAGE
Exhibit A
I. Vendor Arrangements
Seller hereby agrees to make available to Buyer the services (the “Vendor Services”) from the vendors (the “Vendors”) set forth
on the schedule below as such Vendor Services are provided to Seller on the closing date pursuant to the terms of Seller’s
agreements with the applicable Vendor (the “Vendor Agreements”).
Seller will manage the provision of the Vendor Services in accordance with Buyer’s reasonable instructions (including, as
applicable, instructions to terminate a particular Vendor Service), provided such instructions are in accordance with the terms and
conditions of the underlying agreements with the applicable Vendor. Seller agrees not to, and will cause any of its affiliates that is a
party to a Vendor Service agreement not to, extend, renegotiate any term or otherwise modify any Vendor Service contract without
the express consent of Buyer, and Seller further agrees to promptly notify Buyer of any notice of termination of, proposed
amendment to or contemplated modification to (including any increase in fees assessed under) any Vendor Service contract that
Seller or its affiliate receives from a third party provider under a Vendor Service contract. If Seller agrees to modify or amend a
Vendor Service contract without the consent of Buyer, Buyer shall have a right to terminate its obligations hereunder with respect to
such Vendor Service agreement.
Seller shall manage performance of the Vendor Services in a commercially reasonable manner. In performing its obligations to
Buyer, Seller will be entitled to rely upon any instructions, authorizations, approvals or other information provided to Seller by
Buyer.
Seller shall promptly forward to a Buyer designated bank account all funds from the Purchased Assets that are transferred or
otherwise delivered by third parties to Seller following the Closing Date, including, but not limited to proceeds received from
Accounts Receivable and all other cash proceeds from refunds and deposits.
Buyer and Seller shall work together to facilitate payment of trade accounts payable transferred to Buyer. Such services may
include Buyer advancing funds to Seller for distribution to vendors.
Buyer and Seller shall use commercially reasonable efforts to seek consent to have all vendor agreements transferred directly to
Buyer and shall cooperate to accomplish this. To the extent any vendor agreement solely requires advance notice to assign, Buyer
and Seller shall work together in an expedient manner to provide such advance notice to the vendor and subsequently assign such
vendor agreement.
Buyer will cooperate with Seller and provide to Seller such resources, information and other input as are (i) reasonably requested
by Seller, (ii) necessary to perform or receive the benefit of the Vendor Services, and/or (iii) otherwise reasonably required in order
to enable Seller to fulfill its obligations under the respective Vendors. Buyer also agrees to comply with the terms and conditions of
the underlying Vendor Agreements as such terms and conditions are applicable to Seller. Seller shall not be responsible for, and
Buyer hereby agrees to indemnify, defend and hold Seller (and its affiliates, and the respective current, future and former officers,
directors,
1
employees, successors and assigns of each of the foregoing (the “Seller Indemnitees”)) harmless from and against, all liabilities,
losses, damages, costs and expenses (including reasonable attorneys’ fees) incurred by the Seller Indemnitees in connection with
any act or omission of Buyer (or its affiliates, subcontractors or agents) that prevents or delays Seller’s performance of its
obligations under, or otherwise causes Seller to be in breach of, a Vendor Agreement.
Seller shall, subject to the control and direction of Buyer and reimbursement of fees and expenses incurred by Seller as set forth
below, enforce on behalf of Buyer any rights under the Vendor Agreement relating to the services provided to Buyer thereunder,
including any rights relating to warranties or service levels provided or agreed to by the Vendor. Buyer shall receive and retain any
damages or other compensation received in connection with any efforts contemplated hereunder. Buyer shall reimburse Seller for
any attorneys' fees or similar out-of- pocket costs incurred by Seller with Buyer’s prior written approval in performing Seller's
obligations under this hereunder.
Buyer shall pay Seller those charges set forth in an invoice delivered by Seller for charges incurred by Seller under the Vendor
Agreements without mark-up by Seller and pro-rated for any shared services rendered to Seller. For avoidance of doubt, Buyer's
payment obligations hereunder shall not exceed the amount Seller is obligated under the Vendor Agreements to pay for services
provided by applicable Vendor, excluding any termination charges, penalties, interest or other amounts other than fees for services
provided.
Seller shall deliver an invoice or invoices in reasonable detail for the charges incurred on a weekly basis, which shall reflect the
charges invoiced by, and payable by Seller to, the Vendor for the Vendor Services in accordance with the terms of the Vendor
Agreement. All charges due from Buyer to Seller shall be due and payable within five (5) business days of receipt by Buyer of
Seller’s invoice therefor.
EXCEPT TO THE EXTENT SUCH DAMAGES ARE RELATED TO OR ARISE FROM (A) PERSONAL INJURY, DEATH, OR
DAMAGE TO PROPERTY; (B) GROSS NEGLIGENCE OR WILLFUL OR INTENTIONAL MISCONDUCT OR (C) A
PARTY’S BREACH OF ITS CONFIDENTIALITY OBLIGATIONS HEREUNDER: (I) IN NO EVENT SHALL EITHER PARTY
BE LIABLE, ONE TO THE OTHER, FOR INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES OF ANY KIND
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT; AND (II) IN NO EVENT SHALL EITHER PARTY’S
LIABILITY HEREUNDER EXCEED, IN THE AGGREGATE, THE AMOUNTS PAID BY BUYER TO SELLER HEREUNDER
DURING THE SIX (6) MONTH PERIOD PRECEDING THE LAST ACT OR OMISSION GIVING RISE TO SUCH
LIABILITY.
Vendors, which may be amended from time to time upon consent of the Buyer and Seller:
None.
None.
Agreement
Fee
2
Description of Services Provided
Amazon Web Services
II. Seller Consulting Services
Fee
None.
3
EXHIBIT 10.05
LEAK OUT AGREEMENT
THIS LEAK OUT AGREEMENT (the “Agreement”) is entered into as of this 17th day of August, 2017 (the “Effective
Date”) by and between DIP SPV1, LP, a British Virgin Islands limited partnership (the “Stockholder”) and Social Reality, Inc., a
Delaware corporation (the “Company”).
WHEREAS, Leapfrog Media Trading, Inc., a Delaware corporation ("Seller") and the Company are parties to that certain
Asset Purchase Agreement dated April 20, 2017, as amended by Amendment No. 1 dated August 17, 2017 (collectively, the
“Purchase Agreement”) pursuant to which the Company agreed, at the Closing thereunder, to acquire the Purchased Assets from
Seller in exchange for the Consideration Shares. Capitalized terms used but not otherwise defined herein are used herein with the
respective meanings given to them under the Purchase Agreement.
WHEREAS, as a closing condition of the Purchase Agreement, Seller agreed to restrict the disposition of the Consideration
Shares by Seller.
WHEREAS, pursuant to the terms and conditions of Purchase Agreement, Seller instructed the Company to issue to the
Stockholder at Closing, as Seller's designee, One Hundred Eighty-four Thousand (184,000) of the Consideration Shares.
WHEREAS, as Seller’s designee to receive Consideration Shares under the Purchase Agreement, the Stockholder is
required and has agreed to restrict the disposition of the Consideration Shares by it.
NOW THEREFORE, in consideration of the premises and of the terms and conditions contained herein and for other good
and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
1.
LEAK OUTS.
(a)
At such time as the Stockholder is able to resell the Consideration Shares in accordance with the provisions of Rule
144 of the Securities Act (the "Expiration of the Holding Period"), the Stockholder agrees to limit the resales of such Shares in
the public market as follows:
(i)
if the daily average trading volume on all trading markets on which the Buyer Common Stock is then quoted
or listed (i) is less than 30,000 shares of Common Stock, the Stockholder shall not sell more than 1,000 Shares per trading day; (ii)
is greater than 30,000 shares of Common Stock, but less than 100,000 shares, the Stockholder shall not sell more than 5,000 Shares
per trading day; and (iii) is greater than 100,000 shares, the Stockholder shall not sell more than 50,000 Shares; and
(ii)
any permitted resales by the Stockholder shall be at the then current bid price of the Common Stock.
TRANSFER; SUCCESSOR AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and
2.
be binding upon the respective successors and assigns of the parties. In the event of any sale, transfer, assignment, pledge or other
hypothecation of the Consideration Shares, other than the resale of such shares in the public market pursuant to this Agreement (a
"Transfer"), as a condition precedent to such Transfer the Stockholder will deliver a leak out agreement in form and substance
identical to this Agreement from the proposed transferee. Nothing in this Agreement, express or implied, is intended to confer upon
any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities
under or by reason of this Agreement, except as expressly provided in this Agreement.
3.
COMPLIANCE WITH SECURITIES LAWS. In the event of a Transfer, as a condition to the Company agreeing to such
Transfer, the Stockholder shall have furnished the Company with an opinion of counsel reasonably satisfactory to the Company, to
the effect that the Transfer is exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and that
the Transfer otherwise complies with the terms of this Agreement.
1
4.
LEGEND.
(a)
The Stockholder hereby agrees that each outstanding certificate representing the Consideration Shares shall, in
addition to any other legends as may be required in compliance with Federal securities laws or as contemplated by the Purchase
Agreement, bear a legend reading substantially as follows:
THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO
THE TERMS AND CONDITIONS OF A LEAK OUT AGREEMENT DATED AUGUST 17, 2017, BETWEEN
THE ISSUER AND THE STOCKHOLDER LISTED ON THE FACE HEREOF. A COPY OF SUCH
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE ISSUER AND WILL BE PROVIDED TO
THE HOLDER HEREOF UPON REQUEST. NO TRANSFER OF SUCH SECURITIES WILL BE MADE ON
THE BOOKS OF THE ISSUER UNLESS ACCOMPANIED BY EVIDENCE OF COMPLIANCE WITH THE
TERMS OF SUCH LOCK UP AGREEMENT.
(b)
A copy of this Agreement shall be filed with the corporate secretary of the Company, shall be kept with the records
of the Company. In addition, a copy of this Agreement shall be filed with the Company's transfer agent of record.
NO OTHER RIGHTS. The Stockholder understands and agrees that the Company is under no obligation to register the
5.
sale, transfer or other disposition of the Consideration Shares under the Securities Act or to take any other action necessary in order
to make compliance with an exemption from such registration available.
SPECIFIC PERFORMANCE. The Stockholder acknowledges that there would be no adequate remedy at law if the
6.
Stockholder fails to perform any of its obligations hereunder, and accordingly agrees that the Company, in addition to any other
remedy to which it may be entitled at law or in equity, shall be entitled to compel specific performance of the obligations of the
Stockholder under this Agreement in accordance with the terms and conditions of this Agreement. Any remedy under this Section 6
is subject to certain equitable defenses and to the discretion of the court before which any proceedings therefor may be brought.
NOTICES. All notices, statements, instructions or other documents required to be given hereunder shall be in writing and
7.
shall be given either personally or by mailing the same in a sealed envelope, first-class mail, postage prepaid and either certified or
registered, return receipt requested, or by telecopy, and shall be addressed to the Company at its principal offices and to the
Stockholder at the address last appearing on the books and records of the Company.
RECAPITALIZATIONS AND EXCHANGES AFFECTING CONSIDERATION SHARES. The provisions of this
8.
Agreement shall apply, to the full extent set forth herein with respect to the Consideration Shares, to any and all shares of capital
stock or equity securities of the Company which may be issued by reason of any stock dividend, stock split, reverse stock split,
combination, recapitalization, reclassification or otherwise.
GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of
9.
Delaware. Any suit, action or proceeding with respect to this Agreement shall be brought in the state or federal courts located in
Los Angeles County in the State of California. The parties hereto hereby accept the exclusive jurisdiction and venue of those courts
for the purpose of any such suit, action or proceeding. The parties hereto hereby irrevocably waive, to the fullest extent permitted
by law, any objection that any of them may now or hereafter have to the laying of venue of any suit, action or proceeding arising
out of or relating to this Agreement or any judgment entered by any court in respect thereof brought in Los Angeles County,
California, and hereby further irrevocably waive any claim that any suit, action or proceeding brought in Los Angeles County,
California has been brought in an inconvenient form.
COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an
10.
original, but all of which together shall constitute one and the same instrument.
ATTORNEYS' FEES. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms
11.
of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and
2
necessary disbursements in addition to any other relief to which such party may be entitled as determined by such court, equity or
arbitration proceeding.
12.
AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended with the written consent of the
Company and the Stockholder. No delay or failure on the part of the Company in exercising any power or right under this
Agreement shall operate as a waiver of any power or right.
SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, portions
13.
of such provisions, or such provisions in their entirety, to the extent necessary, shall be severed from this Agreement and the
balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its
terms.
CONSTRUCTION; TERMS. This Agreement has been entered into freely by each of the parties, following consultation
14.
with their respective counsel, and shall be interpreted fairly in accordance with its respective terms, without any construction in
favor of or against either party. All terms not otherwise defined herein shall have the same meaning as in the Purchase Agreement.
ENTIRE AGREEMENT. This Agreement and the documents referred to herein constitute the entire agreement between
15.
the parties hereto pertaining to the subject matter hereof, and any and all other written or oral agreements existing between the
parties hereto are expressly canceled.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.
COMPANY:
SOCIAL REALITY, INC.
By:
/s/ Christopher Miglino
Christopher Miglino,
Chief Executive Officer
STOCKHOLDER:
DIP SPV1, LP.
By:
/s/ Antonio Ruiz-Gimenez
Name: Antonio Ruiz-Gimenez
Its: Managing Partner
3
1.
BIG Token, Inc., a Delaware Corporation.
List of Subsidiaries
Exhibit 21.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our report dated April 2, 2018 on the 2017 and 2016 consolidated financial statements included in the Annual
Report of Social Reality, Inc. on Form 10-K for each of the years in the two-year period ended December 31, 2017. We hereby
consent to the incorporation by reference of said report in the Registration Statement of Social Reality, Inc. on Form S-3 (File No.
333-221970).
Exhibit 23.01
/s/ RBSM LLP
New York, New York
April 2, 2018
EXHIBIT 31.1
Rule 13a-14(a)/15d-14(a) Certification
I, Christopher Miglino, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 of Social Reality, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: April 2, 2018
/s/ Christopher Miglino
Christopher Miglino, Chief Executive Officer, principal
executive officer
EXHIBIT 31.2
Rule 13a-14(a)/15d-14(a) Certification
I, Joseph P. Hannan, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 of Social Reality, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over
financial reporting.
Dated: April 2, 2018
/s/ Joseph P. Hannan
Joseph P. Hannan, Chief Financial Officer, principal
financial and accounting officer
EXHIBIT 32.1
Section 1350 Certification
In connection with the Annual Report of Social Reality, Inc. (the “Company”) on Form 10-K for the year ended December
31, 2017 as filed with the Securities and Exchange Commission (the “Report”), I, Christopher Miglino, Chief Executive Officer,
and I, Joseph P. Hannan, the Chief Financial Officer, of the Company, do hereby certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
The information contained in the Report fairly presents, in all material respects, the financial conditions and results of operations of the Company.
April 2, 2018
April 2, 2018
/s/ Christopher Miglino
Christopher Miglino, Chief Executive Officer,
principal executive officer
/s/ Joseph P. Hannan
Joseph P. Hannan, Chief Financial Officer,
principal financial and accounting officer
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise
adopting the signatures that appear in typed form within the electronic version of this written statement has been provided to the
Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.