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, 2018
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)
45-2925231
(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
o
☑
Accelerated filer
Smaller reporting company
Emerging Growth Company
o
☑
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. 40,406,989 based on the closing price of $4.57 on June 29, 2018
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.
11,714,092 shares of Class A common stock are issued and outstanding as of April 16, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement relating to its 2019 annual meeting of shareholders (the “2019 Proxy
Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2019 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.
EXPLANATORY NOTE
This Annual Report on Form 10-K (“Form 10-K”) for the year ended December 31, 2018 includes restated audited financial
statements (and related disclosures) for the year ended December 31, 2017. The restated unaudited financial information for each of
the first three quarterly periods in 2018 will be filed separately. Financial information included in our previously filed Form 10-K
as filed for the year ended December 31, 2017 and all earnings press releases and similar communications issued by us, for such
period, should not be relied upon and is superseded in their entirety by this Form 10-K. We will be filing our amended Form 10-Q
for the quarters ended March 31, 2018, June 30, 2018 and September 30, 2018, subsequent to the filing of this Form 10-K, which
were delayed due to the restatement.
Accordingly, this Form 10-K includes changes to: (1) our Consolidated Balance Sheet as of December 31, 2017, Consolidated
Statements of Operations, Consolidated Statements of Stockholders’ Equity and Consolidated Statements of Cash Flows for each of
the year ended December 31, 2017; (2) our Management’s Discussion and Analysis of Financial Condition and Results of
Operations, as of, and for our year ended December 31, 2017, in Part II, Item 7 of this Form 10-K; (3) our Risk Factors, in Item 1A
of this Form 10-K; and (4) our disclosures and conclusions regarding Controls and Procedures in Part II, Item 9A of this Form 10-
K. See below and Note 16 - Restatement of Previously Issued Consolidated Financial Statements of the Notes to Consolidated
Financial Statements in Part II, Item 8 of this Form 10-K for a detailed discussion of the changes made as a result of the
restatement.
The individual restatement matters that underlie the restatement adjustments are described below.
Classification of Warrants
The Company has concluded that the certain Warrants issued in 2017 were required to be classified as liabilities pursuant to the
provisions of ASC 815-10 since all of the characteristics of a derivative instrument were met and the Warrants do not qualify for
the equity classification scope exception in ASC 815-40-25-10 from derivative accounting, primarily because the Company may be
required to cash settle the warrants in circumstances where holders of the Company’s common stock would not be entitled to cash,
which is inconsistent with ASC 815-40-55-2 through 55-6. The warrant agreements include a fundamental transaction clause
whereby, in the unlikely event that another person becomes the beneficial owner of 50% of the outstanding shares of the
Company’s common stock, and if other conditions are met, the Company may be required to purchase the warrants from the
holders by paying cash in an amount equal to the Black Scholes value of the remaining unexercised portion of the warrants on the
date of such fundamental transaction.
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.
Item 16.
Exhibits, Financial Statement Schedules.
Form 10-K Summary.
Part IV
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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 technology company with tools to reach and reveal valuable audiences with marketing
and advertising communication. 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. In addition to our business services and technologies, we also operate a direct to consumer platform,
BIGToken, which enables consumers to own, manage and sell access to their digital identity and data. This provides us with a
direct consumer relationship and gives us valuable proprietary data. We derive our revenues from:
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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;
Sales of proprietary consumer data.
The core elements of our business are:
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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;
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
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SRAXauto tools enable targeting and engagement with potential auto buyers at dealerships, auto shows, and at home
across desktop and mobile environments.
SRAXcore is our generalized services and technologies supporting brands and agencies in data management, audience
optimization, and multi-channel and omnichannel media and marketing services;
SRAXshopper tools enable brands and agencies to connect with shoppers driving in store an online sales; and
SRAXir tools to assist public companies in analyzing and marketing to their shareholder population; and
BIGToken which is a platform that allows consumers to manage and participate in the sales of their digital data.
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.
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 our ability to: (i) assist our customers in obtaining the best available prices, (ii) our excellent customer service and (iii) our
innovative products and service offerings. 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 Platform
On February 1, 2019, our BIGToken platform (“BIGToken Platform”), an advertising-based platform initiative intended to
reward consumers, become generally available. Users of the BIGToken Platform receive points for undertaking certain actions on
the platform. These points are redeemable for cash directly from us. We also anticipate that users will be able to redeem the points
for goods and/or services offered by our sponsors. The value each point being redeemed is at the discretion of management with
regard to cash payments and we anticipate at the discretion of our sponsors with regard to goods and/or services. Since the
BIGToken Platform become generally available, approximately 11,000,000 user accounts have been registered on the BIGToken
Platform.
In February of 2019, we filed a registration statement with the United States Securities and Exchange Commission (“SEC”)
in order to register shares of our BIGToken preferred tracking stock (“BIGToken”). Subsequently, we received comments from the
SEC and are currently reviewing such comments. In the event the registration statement is declared effective by the SEC, we also
anticipate allowing our users to convert the points earned after the registration becomes effective into BIGTokens. As of the date
hereof, we have not issued any BIGTokens.
Notwithstanding the foregoing, we believe that in order to fully launch the BIGToken Platform and recognize all the
benefits therefrom, not only will we be required to further increase the functionally of the platform (the development of blockchain
technology that has yet to be developed and implemented regarding the tracking of brand transactions) but we will also need to
comply with both state and federal securities laws and regulations with regard to certain aspects of the platform and specifically,
BIGToken. There is no assurance that we will be able to successfully develop and/or scale the BIGToken Platform, including
BIGToken, or that we will be able to comply with any applicable state or federal laws or regulations on a timely basis, if at all. Our
failure to successfully develop and/or scale the BIGToken Platform, including BIGToken, or comply with state and federal laws
and regulations, could greatly impact the value and utility of the BIGToken Platform and could materially impact our operations
and business.
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.
3
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.
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:
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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.
4
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.
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 15, 2019, we had 61 full-time employees. We also contract for the services of an additional approximately 75
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.
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
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 operating losses and there are no assurances we will report profitable operations in the foreseeable future.
Although we reported Net Income for the year-ended December 31, 2018 we reported losses from operations of 11,719,151. At
December 31, 2018, we had an accumulated deficit of $18,778,348. 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 3.1% in 2018 from 2017. 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 management and audit committee have determined the need to restate certain of our consolidated financial statements for
the year ending December 31, 2017 and quarters ending March 31, 2017, June 30, 2017, September 30, 2017, December 31,
2017, March 31, 2018, June 30, 2018 and September 30, 2018 as a result of the improper accounting treatment of certain
warrants.
On April 7, 2019, management and the audit committee of our board of directors determined that our previously issued
quarterly and year-to-date unaudited consolidated financial statements for March 31, 2017, June 30, 2017, September 30, 2017,
December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 and our audited consolidated financial statements for
the year ending December 31, 2017 should no longer be relied upon. In addition, we determined that related press releases,
earnings releases, and investor communications describing our financial statements for these periods should no longer be relied
upon. The errors identified are all non-cash and primarily related to our classification of certain outstanding warrants with
provisions that allow the warrant holder to force cash redemption under certain circumstances. Accordingly, we plan to restate the
annual, quarterly and year-to-date audited and unaudited consolidated financial statements for the foregoing periods.
Accordingly, although we previously disclosed that we had ineffective controls, investors in our securities may lose
confidence in our financial statements and management, which could result in a decrease in our stock price and negative sentiment
in the investment community.
6
The restatement of certain of our financial statements may subject us to additional risks and uncertainties, including the
increased possibility of legal proceedings and shareholder litigation.
As a result of the plan to restate our previously issued quarterly and year-to-date unaudited consolidated financial
statements for March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017, March 31, 2018, June 30, 2018 and
September 30, 2018 and our audited consolidated financial statements for the year ending December 31, 2017, we may become
subject to additional risks and uncertainties, including, among others, the increased possibility of legal proceedings, shareholder
lawsuits or a review by the SEC and other regulatory bodies, which could cause investors to lose confidence in our reported
financial information and could subject us to civil or criminal penalties, shareholder class actions or derivative actions. We could
face monetary judgments, penalties or other sanctions that could have a material adverse effect on our business, financial condition
and results of operations and could cause our stock price to decline.
Our failure to maintain an effective system of internal control over financial reporting, has resulted in the need for us to restate
previously issued financial statements. As a result, current and potential stockholders may lose confidence in our financial
reporting, which could harm our business and value of our stock.
As described in our Annual Report on Form 10-K for the year ended December 31, 2018, our management has determined
that, as of December 31, 2018, 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, 2018, management has determined that we have yet to fully remediate the previously identified material weaknesses.
We believe our failure to maintain effective systems of internal controls over financial reporting have resulted in our need to
restate the following previously issued quarterly and year-to-date unaudited consolidated financial statements for March 31, 2017,
June 30, 2017, September 30, 2017, December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 and our audited
consolidated financial statements for the year ending December 31, 2017
We have concluded that certain of our previously issued financial statements should not be relied upon and have restated
certain of our previously issued financial statements, which may lead to, among other things, shareholder litigation, loss of
investor confidence, negative impact on our stock price and certain other risks.
As discussed in the Explanatory Note, 16, “Restatement of Previously Reported Consolidated Annual Financial Statements”
and in Note 14, “Quarterly Financial Information (unaudited)” under Item 8 of this Form 10-K/A, we have concluded that our
previously issued financial statements as of December 31, 2017 and for each of the quarterly and year-to-date periods in 2017, and
the quarterly periods through September 30, 2018 should no longer be relied upon. The determination that the applicable financial
statements should no longer be relied upon and that certain financial statements would be restated was made following the
identification of misstatements. As a result of these misstatements, we have become subject to a number of additional risks and
uncertainties, including unanticipated costs for accounting and legal fees in connection with or related to the restatement,
shareholder litigation and government investigations. Any such proceeding could result in substantial defense costs regardless of
the outcome of the litigation or investigation. If we do not prevail in any such litigation, we could be required to pay substantial
damages or settlement costs.
We are remediating certain internal controls and procedures, which, if not successful, could result in additional misstatements
in our financial statements negatively affecting our results of operations.
We are in the process of implementing certain remediation actions. See Item 9A. “Controls and Procedures” of this Form
10-K for a description of these remediation measures. To the extent these steps are not successful, not sufficient to correct our
material weakness in internal control over financial reporting or are not completed in a timely manner, future financial statements
may contain material misstatements and we could be required to restate our financial results. Any of these matters could adversely
affect our business, reputation, revenues, results of operations, financial condition and stock price and limit our ability to access the
capital markets through equity or debt issuances.
7
Security breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our
systems, could harm our reputation and adversely affect our business.
Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users’ data or to disrupt
our ability to provide service. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data
or user data, including personal information, content, or payment information from or to users, or information from marketers,
could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive
position. In addition, computer malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking
have become more prevalent in our industry. Our BIGToken platform has experienced an increase in the occurrence of such
attempts and we cannot be assured that we will be able to prevent a successful attack on our systems in the future. We also
regularly encounter attempts to create false or undesirable user accounts or take other actions on our BIGToken Platform for
purposes such as spreading misinformation, attempting to have us improperly purchase user data or other objectionable ends. As a
result of recent attention and growth of our BIGToken Platform, the size of our user base, and the types and volume of personal
data on our systems, we believe that we are a particularly attractive target for such breaches and attacks. Our efforts to address
undesirable activity may also increase the risk of retaliatory attacks. Such attacks may cause interruptions to the services we
provide, degrade the user experience, cause users or marketers to lose confidence and trust in our products, impair our internal
systems, or result in financial harm to us. Our efforts to protect our company data or the information we receive may also be
unsuccessful due to software bugs or other technical malfunctions; employee, contractor, or vendor error or malfeasance;
government surveillance; or other threats that evolve. In addition, third parties may attempt to fraudulently induce employees or
users to disclose information in order to gain access to our data or our users' data. Cyber-attacks continue to evolve in sophistication
and volume, and inherently may be difficult to detect for long periods of time. Although we are currently in the process of
developing systems and processes that are designed to protect our data and user data, to prevent data loss, to disable undesirable
accounts and activities on our BIGToken Platform, and to prevent or detect security breaches, we cannot assure you that such
measures will ultimately become operational or provide absolute security, and we may incur significant costs in protecting against
or remediating cyber-attacks.
Affected users or government authorities could initiate legal or regulatory actions against us in connection with any actual or
perceived security breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result
in orders or consent decrees forcing us to modify our business practices, especially with regard to the BIGToken Platform. Such
incidents or our efforts to remediate such incidents may also result in a decline in our active user base or engagement levels. Any of
these events could have a material and adverse effect on our business, reputation, or financial results.
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.
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.
8
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:
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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.
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 Michael Malone. We are a party to an employment agreement with each of Mr. Miglino, and Mr. Malone, 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;
9
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·
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:
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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;
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. 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.
10
Weak economic conditions may reduce consumer demand for products and services.
A weak economy in the United States could adversely affect demand for advertising products, and services. A substantial
portion of our revenue is derived from businesses that are highly dependent on discretionary spending by individuals, which
typically falls during times of economic instability. Accordingly, the ability of our advertisers to increase or maintain revenue and
earnings could be adversely affected to the extent that relevant economic environments remain weak or decline further. We
currently are unable to predict the extent of any of these potential adverse effects.
Certain of our subsidiaries and business affiliates have operations outside of the United States that are subject to numerous
operational risks.
Certain of our subsidiaries and business affiliates have operations in countries other than the United States. In many foreign
countries, it is not uncommon to encounter business practices that are prohibited by certain regulations, such as the Foreign Corrupt
Practices Act and similar laws. Although certain of our subsidiaries and business affiliates have undertaken compliance efforts with
respect to these laws, their respective employees, contractors and agents, as well as those companies to which they outsource
certain of their business operations, may take actions in violation of their policies and procedures. Any such violation, even if
prohibited by the policies and procedures of these subsidiaries and business affiliates or the law, could have certain adverse effects
on the financial condition of these subsidiaries and business affiliates. Any failure by these subsidiaries and business affiliates to
effectively manage the challenges associated with the international operation of their businesses could materially adversely affect
their, and hence our, financial condition.
Risks Related to Ownership of our Securities
We do not know whether an active and liquid trading market will develop for our Class A common stock.
The trading of our Class A common stock may be viewed as relatively sporadic and with limited liquidity. The lack of an
active and liquid 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 market price of our Class A common stock may be volatile.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and
we expect that our share price will continue to be more volatile than those of a seasoned issuer. The volatility in our share price is
attributable to a number of factors. Mainly however, we are a speculative or “risky” investment due to our limited operating history,
lack of significant revenues to date, our continued operating losses and missed guidance. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of
progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the
stock of a seasoned issuer. Additionally, in the past, plaintiffs have often initiated securities class action litigation against a
company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
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 annual report, these factors include:
·
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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;
11
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·
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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;
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, in the past, we have missed guidance a number of times. 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.
12
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. 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 BIGToken will ever be issued.
The Company recently launched the BIG Platform as a means of securing higher quality user data. In February of 2019, we
filed a registration statement with the SEC in order to register shares of our BIGToken. Subsequently, we received comments from
the SEC and are in the process of reviewing such comments. Should our registration statement not be declared effective, the
attractiveness of the BIG Platform may be materially affected and we may only recognize a limited benefits from the project, if any.
13
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 BIGToken Platform. Notwithstanding the foregoing, BIGToken could seek to utilize alternative technologies to operate its
platform.
The growth of the blockchain industry in general, as well as the blockchain networks on which brand data will be stored on
the BIG Platform, is subject to a high degree of uncertainty. The factors affecting the further development of blockchain networks,
include, without limitation:
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worldwide growth in the adoption and use of blockchain technologies;
government and quasi-government regulation of blockchain assets and their use, or restrictions on or regulation of
access to and operation of blockchain networks or similar systems;
changes in consumer demographics and public tastes and preferences; or
the availability and popularity of other forms or methods of buying and selling goods and services, including new
means of using existing networks
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 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.
As of the date of this Annual Report, there are no material pending legal or governmental proceedings relating to our
company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our
directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
14
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
PART II
Market for Our Common Equity
Our Class A common stock has been listed on the Nasdaq Capital Market under the symbol "SRAX."
As of April 15, 2019, there were approximately 53 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.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our
shareholders as well as any equity compensation plans not approved by our stockholders as of December 31, 2018:
Plan category
Plans approved by our stockholders:
2012 Equity Compensation Plan
2014 Equity Compensation Plan (1)
2016 Equity Compensation Plan
Plans not approved by stockholders
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights(a)
Weighted
average
exercise price
of outstanding
options,
warrants and
rights ($)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a)
219,026 $
72,400 $
246,236 $
—
4.56
7.49
6.44
—
262,932
1,465,933
37,707
—
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(1)
Our 2014 Equity Compensation Plan was amended on 12/31/18 to increase the number of authorized share issuable under the
plan from 600,000 to 1,600,000.
Recent sales of unregistered securities
The following information is given with regard to unregistered securities sold since January 1, 2018. 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:
·
During January 2018, we issued an aggregate of 150,000 shares of Class A common stock valued at $957,000 as
consideration for media and marketing services.
15
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In January 2018, we issued 150,000 shares of our Class A common stock valued at $859,500 in exchange for media
consulting services.
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.
In January 2018, we issued Marc Savas, Malcolm CasSelle, and William Packer 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.
On April 14, 2018, we issued Marc Savas, Malcolm CasSelle, and Colleen DiClaudio each 5,059 Class A common stock
purchase options as partial payment for 2018 services on our board of directors. The options have an exercise price of
$4.92 per share, a term of seven (7) years, and vest quarterly over the grant year. The options were issued as partial
payment for their respective 2018 services on our board of directors. Each option grant is valued at $15,000 and were
issued from our 2016 equity compensation plan.
In April 2018, we issued 122,950 shares of Class A common stock as an award to one employee for sales performance
achievements from our 2016 equity compensation plan. The shares were valued at $150,000.
In August 2018, we issued 150,000 shares of our Class A common stock for consulting services. The shares were valued at
$859,500.
On November 29, 2018, pursuant to the redemption of outstanding 12.5% senior secured convertible debentures, we issued
1,090,862 Class A common stock purchase warrants. We received no additional consideration for the issuance of the
warrants. The warrants expire as follows: (i) 277,500 warrants expire on April 21, 2022, and (ii) 813,362 warrants expire
on October 27, 2022. The Warrants are initially exercisable at $3.00 per share and contain anti-dilution protection for
subsequent equity sales with a floor of $1.40.
On April 1, 2019, we sold a non-performing receivable in the amount of $567,977, (such amount includes a mutually agreed
upon gross-up with our customer of $150,000) for $417,977. In connection with the sale, we agreed to repurchase the
receivable if the purchaser was not able to collect on the amounts owed by June 30, 2019. As security for our repurchase
obligation, we issued and pledged 220,000 shares of our Class A common stock.
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 technology company. 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; and
sales of proprietary consumer data.
16
BIGToken Platform
On February 1, 2019, the BIGToken Platform became generally available to the public. Users of the BIGToken Platform
receive points for undertaking certain actions on the platform. These points are then redeemable for cash directly from us. We also
anticipate that users will be able to redeem the points for goods and/or services offered by our sponsors. The value each point being
redeemed is at the discretion of management with regard to cash payments and we anticipate at the discretion of our sponsors with
regard to goods and/or services. As of March 31, 2019, we have not generated any revenue through the sale of data gathered from
users of the BIGToken Platform. Since commencing the BIGToken project, we have spent approximately $2.2 million in the
development and management of the BIGToken Platform, of which we spent $0.2 million in 2017 and $2.0 million.
In February of 2019, we filed a registration statement with the SEC in order to register shares of our BIGToken.
Subsequently, we received comments from the SEC and are currently in the process of reviewing and responding to such
comments. In the event the registration statement is declared effective by the SEC, we also anticipate allowing our users to convert
the points into shares of our Preferred Tracking Stock. As of the date hereof, we have not issued any.
Notwithstanding the foregoing, we believe that in order to fully launch the BIGToken Platform and recognize all the
benefits therefrom, not only will we be required to further increase the functionally of the platform (the development of blockchain
technology that has yet to be developed and implemented regarding the tracking of brand transactions) but we will also need to
comply with both state and federal securities laws and regulations with regard to certain aspects of the platform and specifically,
BIGToken. There can be no assurances that we will successfully develop the blockchain portion of the BIGToken Platform or that
we will be able to comply with any applicable laws or regulations on a timely basis, if at all. Our failure successfully complete the
development of the BIGToken Platform or to adequately comply with applicable laws and regulations, or comply with them on a
timely basis, will greatly impact the value and utility of the BIGToken Platform and could materially impact the operations of our
company.
Classification of Warrants
The Company has concluded that the certain Warrants issued in 2017 were required to be classified as liabilities pursuant to the
provisions of ASC 815-10 since all of the characteristics of a derivative instrument were met and the Warrants do not qualify for
the equity classification scope exception in ASC 815-40-25-10 from derivative accounting, primarily because the Company may be
required to cash settle the warrants in circumstances where holders of the Company’s common stock would not be entitled to cash,
which is inconsistent with ASC 815-40-55-2 through 55-6. The warrant agreements include a fundamental transaction clause
whereby, in the unlikely event that another person becomes the beneficial owner of 50% of the outstanding shares of the
Company’s common stock, and if other conditions are met, the Company may be required to purchase the warrants from the
holders by paying cash in an amount equal to the Black-Scholes value of the remaining unexercised portion of the warrants on the
date of such fundamental transaction.
See discussion below Other income (loss) for the effects of this on the results operations.
Results of operations
Year ended December 31, 2018 compared to year ended December 31, 2017
Selected Consolidated Financial Data
Revenue
Cost of revenue
Operating expense
Operating loss
Gain from sale of SRAX md
Interest expense, net
Other income (loss)
Net income (loss)
Year ended December 31,
2017
2018
As Restated
$
Change
%
Change
$
9,880,608
3,156,920
$
23,348,714
9,328,893
$
(13,468,106)
(6,171,973)
(136.3)%
(195.5)%
18,442,839
(11,719,151 )
22,108,028
(3,056,541)
1,427,665
8,743,593
$
$
17,863,500
(3,843,679)
579,339
(7,875,472)
—
(3,864,876)
(5,323,562)
(13,032,117)
808,335
6,734,819
21,775,710
3.1%
67.2%
n/a
(26.5)%
477.2%
249.0%
17
Revenue
The decrease in our revenue during the year ended December 31, 2018 compared to the same period of 2017 is the result of
a decrease in revenue from our SRAX sell-side and buy-side clients, partially offset by revenue from our SRAXmd business unit
which we sold in August of 2018.
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. During the year ended December 31, 2018, 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 31.9% for the year ended December 31, 2018 as compared to 39.9% for the year ended December 31,
2017. This decrease was primarily 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. Overall, operating
expense increased approximately 3.1% for the year ended December 31, 2018 as compared to the year ended December 31, 2017.
This increase was primarily due to increased expense related to our BIGToken subsidiary partially offset by lower expenses
resulting from the sale of the SRAX md business unit. During the third quarter of 2017 we launched the BIGToken. During the year
ended December 31, 2018 operating expenses relating to the BIGToken project was approximately $2.0 million.
Interest expense
Interest expense for the years December 31, 2018 and 2017 represents interest under notes and debentures issued in our
financings as well as factoring fees, and the amortization of debt costs. Interest expense, net of interest income for the year ended
December 31, 2018 decreased 26.5% as compared to the year ended December 31, 2017. This decrease in interest expense is
attributable to the redemption of the Company’s 12.5% secured debentures on November 29, 2018. Additionally, in 2017, we also
recognized of $262,684 of interest income related to a legal settlement.
Non-GAAP financial measures
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 and the accretion of warrants. We use Adjusted EBITDA to measure our operations
by excluding interest and certain additional non-cash expenses and gain or loss on sale of assets and changes in the valuation of
derivatives. 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.
18
The following is a reconciliation of net loss to Adjusted net loss and Adjusted EBITDA for the periods presented:
Net income (loss)
Plus:
Equity based compensation
Accretion of beneficial conversion feature
Accretion of debenture discount and warrants
Adjusted net income (loss)
Interest expense
Depreciation and amortization
Change in Fair Value of Warrant Liability
Restructuring Costs
Write-off of non-compete agreement
Gain on Sale
Other income
Loss on settlement
Adjusted EBITDA
Liquidity and capital resources
For the years ended
December 31,
2018
2017
As Restated
$
8,743,593 $
(13,032,117)
2,089,301
3,085,822
1,208,524
15,127,240
3,056,541
767,821
(8,953,933)
—
—
(22,099,824)
8,204
3,240,126
(8,862,029) $
2,085,988
925,748
263,648
(9,756,733)
3,864,876
528,622
4,134,166
377,961
468,750
—
—
—
(382,358)
$
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, 2018 and 2017:
Current assets
Current liabilities
Working capital
December 31,
2018
December 31,
2017
As Restated
$
$
5,467,713 $
(9,017,121)
(3,549,408) $
6,134,838
(16,166,818)
(10,031,980)
Our current assets include cash and cash equivalents of $2.8 million and $1 million as of December 31, 2018 and 2017,
respectively. Current assets decreased by $667,776 driven by a decrease in accounts receivable of $2,520,016 generated from lower
gross revenue from advertisers, partially offset by an increase in cash of $1,766,566 generated from the sale SRAX Md.
Our current liabilities include warrant and derivative liabilities of $5.4 million and $11.2 million as of December 31, 2018
and 2017, respectively. Current liabilities decreased by $7,149,697 primarily from decreases in derivative liabilities driven
decreases in the valuation of these derivatives and payments made to outstanding vendors utilizing proceeds from the sale of SRAX
Md.
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, 2018, we had an accumulated deficit of $18,778,348. As of December 31, 2018, we had $2,784,865 in cash and cash
equivalents and net working capital of negative $3,549,408 as compared to $1,017,299 in cash and cash equivalents and net
working capital of negative $10,031,979 at December 31, 2017.
19
On February 1, 2019 the BIGToken Platform became generally available to the public. To date, we have not generated any
revenue from the platform. We anticipate that once the BIGToken Platform begins generating revenue, we will be able to finance it
independently from Social Reality through the sale of the subsidiary’s equity, debt, or equity-linked securities. Until such time, we
anticipate we will continue funding the BIGToken Platform internally. Based on our current development plans, and assuming there
is no revenue for the first twelve months, we estimate that the BIGToken Platform 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 once it commencing generating revenue, 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.
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 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 proceeds from the debenture sales 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 certain
repurchase obligations. The balance of the proceeds were also used to satisfy the payment of accounts payable and other working
capital requirements.
Cash flows from operating activities
Net cash used in operating activities was $13,662,595 during the twelve months ended December 31, 2018 compared to
$4,367,078 for the comparable period in 2017. During the twelve months ended December 31, 2018, the Company’s accounts
receivable increased by $959,848 compared to an increase of $4,261,574 for the comparable period in 2017. Accounts payable and
accrued liabilities during the twelve months ended December 31, 2018 decreased by $3,102,439 compared to a decrease of
$6,535,152 for the comparable period in 2017.
Cash flows from investing activities
During the twelve months ended December 31, 2018 net cash provided by investing activities was $21,875,318 compared to
$756,876 for the twelve months ended December 31, 2017. During the twelve months ended December 31, 2018, we also used cash
to acquire equipment and develop internally used software.
Cash flows from financing activities
During the twelve months ended December 31, 2018 net cash used in financing activities was $6,445,157 consisting of
payments of $6,545,157 for redemptions of convertible debentures and proceeds from exercise of warrants of $100,000. 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 gross
debenture proceeds of $8,566,406 offset by the complete repayment of our notes payable of $3,996,928, 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.
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 offerings of equity and debt securities resulting in approximately $14 million, exclusive of
placement agent fees and commissions and offering expenses paid by us.
20
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.
Based on our cash and cash equivalents as of December 31, 2018, together with cash provided by our operations and
investing activities and taking into account cash expected to be used in our operations, we had sufficient cash to meet our
anticipated cash needs for at least the next four months. Subsequently, in April 2019, we received: (i) $417,000 from the sale of
receivables, (ii) $6.2 million from the direct registered offering of our Class A common stock and (iii) $1.1 million from the
exercise of outstanding warrants resulting in aggregate net proceeds of approximately $7.8 million. Based upon the capital raised in
April, and the anticipate cash generated from our operations, we anticipate we will be able to meet our cash needs for at least the
following 12 months or until the second quarter of 2020. 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, or 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 affect 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.
Critical Accounting Policies and Estimates
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, 2018 and 2017 appearing elsewhere in this report.
21
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, 2018 and 2017, and the consolidated statements of operations, changes in shareholders’ equity (deficiency) and cash flows for
the fiscal years ended December 31, 2018 and 2017, and the related notes thereto, for further discussion of our accounting policies.
Revenue Recognition
On January 1, 2018, the Company adopted ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606”). The
core principle of ASC 606 requires that an entity recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or
services. ASC 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and
estimates may be required within the revenue recognition process than required under existing U.S. GAAP including identifying
performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation.
The following five steps are applied to achieve that core principle:
·
·
·
·
·
Step 1: Identify the contract with the customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price;
Step 4: Allocate the transaction price to the performance obligations in the contract; and
Step 5: Recognize revenue when the company satisfies a performance obligation.
On January 1, 2018 the Company adopted ASC 606 using the modified retrospective method. Results for reporting periods
beginning after January 1, 2018 are presented in accordance with ASC 606, while prior period amounts have not been adjusted and
continue to be reported in accordance with the Company's historic accounting under ASC 605 - Revenue Recognition ("ASC 605").
Under current and prior revenue guidance, revenues are recognized when control of the promised goods or services are transferred
to the customer, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those
good or services.
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.
Goodwill and other indefinite-lived intangible assets
We account for goodwill and other indefinite-lived intangible assets in accordance with FASB ASC Topic 350 “Intangibles
—Goodwill and Other.” Approximately 68% of our total assets as of December 31, 2018, consist of indefinite-lived intangible
assets, such goodwill, the value of which depends significantly upon the operating results of our businesses. We believe that our
estimate of the value of our goodwill is a critical accounting estimate as the value is significant in relation to our total assets, and
our estimates incorporate variables and assumptions that are based on experiences and judgment about future operating
performance of our markets and product offerings.
22
We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment annually or more
frequently if events or circumstances indicate that an asset may be impaired. We complete our annual impairment tests in the fourth
quarter of each year. The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that
reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions
about risk. The unobservable inputs are defined in FASB ASC Topic 820 “Fair Value Measurements and Disclosures” as Level 3
inputs.
We have the option to assess whether it is more likely than not that an indefinite-lived intangible asset is impaired. If it is
more likely than not that impairment exists, we are required to perform a quantitative analysis to estimate the fair value of the
assets. The qualitative assessment requires significant judgment in considering events and circumstances that may affect the
estimated fair value of our indefinite-lived intangible assets and to weigh these events and circumstances by what we believe to be
the strongest to weakest indicator of potential impairment. Our annual test is conducted on December 31st.
The FASB guidance provides examples of events and circumstances that could affect the estimated fair value of indefinite-
lived intangible assets; however, the examples are not all-inclusive and are not by themselves indicators of impairment. We
considered these events and circumstances, as well as other external and internal considerations. Our analysis, in order of what we
consider to be the strongest to weakest indicators of impairment include: (1) the difference between any recent fair value
calculations and the carrying value; (2) financial performance, such as operating revenue, including performance as compared to
projected results used in prior estimates of fair value; (3) macroeconomic economic conditions, including limitations on accessing
capital that could affect the discount rates used in prior estimates of fair value; (4) industry and market considerations such as a
declines in market-dependent multiples or metrics, a change in demand, competition, or other economic factors; (5) operating cost
factors, such as increases in labor, that could have a negative effect on future expected earnings and cash flows; (6) legal,
regulatory, contractual, political, business, or other factors; (7) other relevant entity-specific events such as changes in management
or customers; and (8) any changes to the carrying amount of the indefinite-lived intangible asset.
We engage an independent third-party appraisal and valuation firm to assist us with determining the enterprise value. Noble
Financial Capital Markets prepared the valuations for the testing period ending December 31, 2018 and 2017.
We performed a sensitivity analysis of certain key assumptions including reducing the long-term revenue growth rate to
determine that such changes would have no incremental impact to the carrying value of goodwill associated with our Company.
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.
23
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.
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 1 — “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.
24
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, 2018. 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 2017, 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 financing transactions which are heavily dependent upon the use of estimates
and assumptions and our lack of experience in monitoring and administering.
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.
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.
25
Changes in Internal Control over Financial Reporting. During the preparation of the Company’s financial statements for
the year ended December 31st, 2018 management engaged the services of a technical accounting expert to assist with the valuation
and accounting for certain derivatives. Due to the material weaknesses present and the recent restatement of prior financial
statements the Company believes this enhancement to the financial close and reporting process will enhance the effectiveness of its
internal control over financial reporting.
ITEM 9B.
Other Information.
None.
26
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item will be contained in our 2019 Proxy Statement and is incorporated herein by
reference.
ITEM 11.
EXECUTIVE COMPENSATION.
The information required by this Item will be contained in our 2019 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 will be contained in our 2019 Proxy Statement and is incorporated herein by
reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item will be contained in our 2019 Proxy Statement and is incorporated herein by
reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item will be contained in our 2019 Proxy Statement and is incorporated herein by
reference.
.
27
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Documents filed as part of this report:
PART IV
(1)
Financial Statements. See Index to Consolidated Financial Statements appearing on page F-1.
(2)
Financial Statement Schedules. See Index to Consolidated Financial Statements appearing on page F-1.
(3)
Exhibits. See Exhibit Index, which is incorporated herein by reference.
ITEM 16.
FORM 10-K SUMMARY.
None.
28
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 16, 2019
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 16, 2019
Christopher Miglino
/s/ Kristoffer Nelson
Chief Operating Officer, Director
April 16, 2019
Kristoffer Nelson
/s/ Michael Malone
Chief Financial Officer, principal financial and accounting officer
April 16, 2019
Michael Malone
/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.
29
April 16, 2019
April 16, 2019
April 16, 2019
April 16, 2019
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets at December 31, 2018 and 2017
Consolidated statements of operations for the years ended December 31, 2018 and 2017
Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2018 and 2017
Consolidated statements of cash flows for the years ended December 31, 2018 and 2017
Notes to consolidated financial statements
Page
F-2
F-3
F-4
F-5
F-7
F-9
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, 2018
and 2017, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in
the period ended December 31, 2018 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, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended
December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Restatement of Previously Issued Financial Statements
As discussed in Note 16 to the consolidated financial statements, the consolidated financial statements for the year ended December
31, 2017 have been restated to reflect (1) corrections related to the accounting for certain warrants,
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 16, 2019
F-2
SOCIAL REALITY, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 AND 2017
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
Debenture warrant liability
Leapfrog warrant liability
Derivative liability
Total current liabilities
Secured convertible debentures, net
Total liabilities
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued or outstanding at December 31,
2018 and 2017, respectively
Class A common stock, authorized 250,000,000 shares, $0.001 par value, 10,109,530 and 9,910,565 shares issued and
outstanding at December 31, 2018 and 2017, respectively
Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued or outstanding at December
31, 2018 and 2017, respectively
Common stock to be issued
Additional paid in capital
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
2018
2017
As Restated
2,784,865 $
1,828,940
466,823
387,085
5,467,713
192,065
15,644,957
1,762,605
51,153
23,118,493 $
1,017,299
4,348,305
468,336
300,898
6,134,838
154,546
15,644,957
1,642,760
28,598
23,605,699
3,574,926 $
4,323,499
622,436
496,260
9,017,121
—
9,017,121
5,010,815
7,256,864
1,873,107
2,026,031
16,166,817
1,524,592
17,691,409
—
—
—
—
10,109
9,911
—
—
32,869,611
(18,778,348)
14,101,372
23,118,493 $
—
879,500
32,546,820
(27,521,941)
5,914,290
23,605,699
$
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, 2018 AND 2017
Revenues
Cost of revenue
Gross profit
Operating expense
General, selling and administrative expense
Write-off of non-compete agreement
Restructuring costs
Total operating expense
Loss from operations
Other income (expense)
Interest income (expense)
Amortization of debt issuance costs
Total interest expense
Gain on sale of SRAXmd, net
Accretion of conversion feature
Accretion of debt discount and warrants
Gain (loss) on settlement
Other Income
Change in fair value of warrant liability
Total other income (expense)
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Net (loss) income per share, basic
Net (loss) income per share, diluted
Weighted average shares outstanding, basic
Weighted average shares outstanding, diluted
2018
2017
As Restated
$
9,880,608 $
3,156,920
23,348,714
9,328,893
6,723,688
14,019,821
18,442,839
—
—
18,442,839
17,016,789
468,750
377,961
17,863,500
(11,719,151)
(3,843,679)
(2,030,321)
(1,026,220)
(3,056,541)
22,108,028
(3,085,822)
(1,208,524)
(3,240,126)
(8,204)
8,953,933
20,462,744
(2,782,047)
(1,082,829)
(3,864,876)
—
(925,748)
(263,648)
—
—
(4,134,166)
(9,188,438)
8,743,593
(13,032,117)
—
—
8,743,593 $
(13,032,117)
0.86 $
0.86 $
(1.58)
(1.58)
10,121,408
10,121,408
8,253,851
8,253,851
$
$
$
The accompanying footnotes are an integral part of these consolidated financial statements.
F-4
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
October
debenture
BCF
Placement
agent
warrants
Repricing of
warrants
Net loss
Balance,
December 31,
2017 (As
Restated)
SOCIAL REALITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2018 AND 2017
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Common stock to be issued
Amount
Shares
Additional
Paid-in
Capital
Accumulated Stockholders'
Deficit
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
—
(3,038,344)
—
(3,038,344)
—
(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
99,980
—
44,987
—
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
—
—
—
—
—
—
1,405,540
—
1,405,540
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
948,518
—
948,518
—
—
99,800
—
(99,820)
(13,032,117)
—
(13,032,117)
— $
—
9,910,565 $
9,911
150,000 $
879,500 $
32,546,820 $
(27,521,941) $
5,914,290
The accompanying footnotes are an integral part of these consolidated financial statements.
F-5
SOCIAL REALITY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2018 AND 2017
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Common stock to be issued
Amount
Shares
Additional
Paid-in
Capital
Accumulated Stockholders'
Deficit
Equity
Balance,
December 31,
2017 (As
Restated)
Proceeds from
the sale of
common
stock units
Stock based
compensation
Vested stock
awards issued
Shares issued
for services
Common stock
issued to
directors
Exercise of
warrants
Common stock
repurchase
with SRAX
Md sale
Conversion of
debentures
Net Income
Balance,
December 31,
2018
— $
—
9,910,565 $
9,911
150,000 $
879,500 $
32,546,820 $
(27,521,941) $
5,914,290
—
—
—
—
—
—
—
—
—
—
—
—
79,534
—
6,667
—
79
6
—
—
—
—
—
—
—
—
988,979
—
989,058
—
(6)
—
—
—
422,950
423
(150,000)
(859,500)
1,868,577
—
1,009,500
—
26,330
—
78,149
27
78
—
(20,000)
49,973
—
30,000
—
—
99,922
—
100,000
—
(514,667)
(515)
—
—
100,002
—
100
—
—
—
—
—
(2,984,554)
—
(2,985,069)
—
—
299,900
—
—
8,743,593
300,000
8,743,593
— $
—
10,109,530 $
10,109
— $
— $
32,869,611 $
(18,778,348) $
14,101,372
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, 2018 AND 2017
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation
Amortization of debt issuance costs
Gain on sale of SRAXmd
(Gain) loss on valuation of warrant derivatives
Loss on settlement of debt
Non-cash financing costs
Amortization of debt discount
Write off of non-compete agreement
Digital currency assets impairment loss
Provision for bad debts
Depreciation expense
Amortization of intangibles
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses
Other assets
Accounts payable and accrued expenses
Net cash used in operating activities
Cash flows from investing activities
Proceeds from sale of SRAXmd
Purchase of equipment
Digital currency assets
Development of software
Net cash provided by (used in) investing activities
Cash flows from financing activities
Proceeds from the issuance of common stock units
Proceeds from the issuance of common stock in conjunction with warrant exercised
Proceeds from secured convertible debentures, net
Repayments of notes payable
Payment of Financing Warrant
Debt issuance costs
Net cash (used in) provided by financing activities
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents
Beginning of year
End of year
2018
2017
As Restated
$
8,743,593 $
(13,032,117)
1,878,611
1,026,219
(22,108,028)
(8,953,933)
3,240,126
—
4,294,346
—
31,861
(11,611)
43,999
723,823
959,848
(214,968)
(214,042)
(3,102,439)
(13,662,595)
2,085,988
1,082,830
—
4,134,166
—
2,068,221
1,189,396
468,751
—
(195,172)
22,908
505,712
4,261,574
(135,834)
(288,349)
(6,535,152)
(4,367,078)
22,980,824
(81,518)
(63,000)
(960,988)
21,875,318
—
(121,962)
—
(634,914)
(756,876)
—
100,000
—
(6,545,157)
—
—
(6,445,157)
4,020,401
1,085,004
6,066,406
(3,996,928)
(1,500,000)
(582,392)
5,092,491
1,767,566
(31,463)
1,017,299
2,784,865 $
1,048,762
1,017,299
$
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, 2018 AND 2017
Supplemental schedule of cash flow information
Cash paid for interest
Cash paid for taxes
Supplemental schedule of noncash financing activities
Common stock issued for preferred stock conversion and vesting grants
Issuance of common stock to be issued
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
Repurchase of series B warrants and accounts payable balances directly paid by debenture holder on behalf of
Company
2018
2017
As Restated
1,530,479 $
— $
1,217,716
—
150,000 $
879,500 $
300,000 $
— $
— $
— $
—
—
3,335,000
99,820
617,069
5,126,340
— $
4,113,753
$
$
$
$
$
$
$
$
$
The accompanying footnotes are an integral part of these consolidated financial statements.
F-8
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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;
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.
SRAXshopper tools enable brands and agencies to connect with shoppers driving in store an online sales; and
SRAXauto tools enable targeting and engagement with potential auto buyers at dealerships, auto shows, and at home across desktop and mobile
environments.
We are headquartered in Los Angeles, California.
Presentation of Financial Statements – Going Concern
Going Concern Evaluation
In connection with preparing consolidated financial statements for the year ended December 31, 2018, 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 Income of $8.7 million for the year-ended December 31, 2018
Negative cash flow from operating activities for 2018 and 2017.
At December 31, 2018, the Company had an accumulated deficit of $18,778,348.
Revenue decline in 2018 of $13,468,106.
F-9
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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 has no debt as of December 31, 2018
On April 10, 2019 the Company raised $6.2 million through the sale of common stock in a direct shelf offering.
The Company’s sale of the SRAXmd vertical for $33.5 million in cash consideration.
In 2018, the Company is in compliance with NASDAQ Capital Markets listing requirements.
In 2018, the Company redeemed $6.5 million of convertible debentures.
Revenue declines were largely the result of a sale of a lower margin sales the produced little to no positive cash flow benefit for the Company.
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:
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Raise additional capital through short-term loans.
Implement restructuring and cost reductions.
Raise additional capital through a private placement of equity.
Secure a commercial bank line of credit.
Dispose of one or more product lines.
Sell or license intellectual property.
At December 31, 2018, the Company had $2,784,865 in cash and cash equivalents. In April 2019 the Company concluded a private
placement sale of its common stock for approximately $6.5 million. We believe we have sufficient working capital to pay our
expenses for the next twelve months.
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 other assets and liabilities.
F-10
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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 adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC
Topic 606”) on January 1, 2018 using the modified retrospective method. Our operating results for reporting periods beginning
after January 1, 2018 are presented under ASC Topic 606, while prior period amounts continue to be reported in accordance with
our historic accounting under Topic 605. The timing and measurement of our revenues under ASC Topic 606 is similar to that
recognized under previous guidance, accordingly, the adoption of ASC Topic 606 did not have a material impact on our financial
position, results of operations, cash flows, or presentation thereof at adoption or in the current period. There were no changes in our
opening retained earnings balance as a result of the adoption of ASC Topic 606.
ASC Topic 606 is a comprehensive revenue recognition model that requires revenue to be recognized when control of the promised
goods or services are transferred to our customers at an amount that reflects the consideration that we expect to receive. Application
of ASC Topic 606 requires us to use more judgment and make more estimates than under former guidance. Application of ASC
Topic 606 requires a five-step model applicable to all product offereing revenue streams as follows:
Identification of the contract, or contracts, with a customer
A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights
regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract
has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are
transferred is probable based on the customer’s intent and ability to pay the promised consideration.
We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the
customer’s historical payment experience or, in the case of a new customer, published credit or financial information pertaining to
the customer.
Identification of the performance obligations in the contract
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer
that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together
with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby
the transfer of the goods or services is separately identifiable from other promises in the contract.
When a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or
services are capable of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised
goods or services are accounted for as a combined performance obligation.
Determination of the transaction price
The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring
goods or services to our customer. We estimate any variable consideration included in the transaction price using the expected value
method that requires the use of significant estimates for discounts, cancellation periods, refunds and returns. Variable consideration
is described in detail below.
F-11
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Allocation of the transaction price to the performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance
obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each
performance obligation based on a relative Stand-Alone Selling Price (“SSP,”) basis. We determine SSP based on the price at which
the performance obligation would be sold separately. If the SSP is not observable, we estimate the SSP based on available
information, including market conditions and any applicable internally approved pricing guidelines.
Recognition of revenue when, or as, we satisfy a performance obligation
We recognize revenue at the point in time that the related performance obligation is satisfied by transferring the promised goods or
services to our customer.
Principal versus Agent Considerations
When another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in
ASC Topic 606 to determine if we are the principal or an agent to the transaction. When we control the specified goods or services
before they are transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services before
they are transferred to our customer, revenue is reported net of the fees paid to the other party, as agent. Our evaluation to
determine if we control the goods or services within ASC Topic 606 includes the following indicators:
We are primarily responsible for fulfilling the promise to provide the specified good or service.
When we are primarily responsible for providing the goods and services, such as when the other party is acting on our behalf, we
have indication that we are the principal to the transaction. We consider if we may terminate our relationship with the other party at
any time without penalty or without permission from our customer.
We have risk before the specified good or service have been transferred to a customer or after transfer of control to the customer.
We may commit to obtaining the services of another party with or without an existing contract with our customer. In these
situations, we have risk of loss as principal for any amount due to the other party regardless of the amount(s) we earn as revenue
from our customer.
The entity has discretion in establishing the price for the specified good or service.
We have discretion in establishing the price our customer pays for the specified goods or services.
Contract Liabilities
Contract liabilities consist of customer advance payments and billings in excess of revenue recognized. We may receive payments
from our customers in advance of completing our performance obligations. We record contract liabilities equal to the amount of
payments received in excess of revenue recognized, including payments that are refundable if the customer cancels the contract
according to the contract terms. Contract liabilities have been historically low historically recorded as current liabilities on our
consolidated financial statements when the time to fulfill the performance obligations under terms of our contracts is less than one
year. We have no Long-term contract liabilities which would represent the amount of payments received in excess of revenue
earned, including those that are refundable, when the time to fulfill the performance obligation is greater than one year.
F-12
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Practical Expedients and Exemptions
We have elected certain practical expedients and policy elections as permitted under ASC Topic 606 as follows:
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We applied the transitional guidance to contracts that were not complete at the date of our initial application of ASC Topic 606 on January 1,
2018.
We adopted the practical expedient related to not adjusting the promised amount of consideration for the effects of a significant financing
component if the period between transfer of product and customer payment is expected to be less than one year at the time of contract
inception;
We made the accounting policy election to not assess promised goods or services as performance obligations if they are immaterial in the
context of the contract with the customer;
We made the accounting policy election to exclude any sales and similar taxes from the transaction price; and
We adopted the practical expedient not to disclose the value of unsatisfied performance obligations for contracts with an original expected
length of one year or less.
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 $48,741 and $59,703 at December 31, 2018 and 2017, respectively.
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
Company has not experienced any loss on these accounts.
At December 31, 2018, two customers accounted for more than 10% of the accounts receivable balance, for a total of 75.1%. At
December 31, 2017, four customers accounted for more than 10% of the accounts receivable balance, for a total of 59.5%.
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.
F-13
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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:
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·
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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 determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3
valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost,
market, or income valuation methodologies applied to unobservable management estimates and assumptions. Management’s
assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include:
estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods.
The Company may also engage external advisors to assist us in determining fair value, as appropriate.
Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be
indicative of net realizable value or reflective of future fair values.
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, 2018 and 2017, the carrying amounts of these instruments approximated
their fair values because of the short-term nature of these instruments. The Company measures certain non-financial assets,
liabilities, and equity issuances at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such
as long-lived assets and goodwill for impairment; allocating value to assets in an acquired asset group; and applying accounting for
business combinations. Derivative instruments are carried at fair value, generally estimated using the Black-Scholes Merton model.
As of December 31, 2018 the Company included $2,723,264 of United States Treasury bills with maturities less than 90 days
within cash and cash equivalents.
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.
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.
F-14
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Costs Incurred to Develop Software for Internal Use
Costs incurred to develop computer software for internal use are capitalized once: (1) the preliminary project stage is completed,
(2) management authorizes and commits to funding a specific software project, and (3) it is probable that the project will be
completed and the software will be used to perform the function intended. Costs incurred prior to meeting the qualifications are
expensed as incurred. Capitalization of costs ceases when the project is substantially complete and ready for its intended use. Post-
implementation costs related to the internal use computer software, are expensed as incurred. Internal use software development
costs are amortized using the straight-line method over its estimated useful life which ranges up to three years. Software
development costs may become impaired in situations where development efforts are abandoned due to the viability of the planned
project becoming doubtful or due to technological obsolescence of the planned software product. For the years ended December 31,
2018, and 2017 there has been no impairment associated with internal use software. For the years ended December 31, 2018, and
2017, the Company capitalized software development costs of $960,157 and $694,914 respectively.
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
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 tests goodwill for impairment for its
reporting units on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit is below its
carrying value. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that
implied fair value of the goodwill within the reporting unit is less than its carrying value. The Company performed its most recent
annual goodwill impairment test as of December 31, 2018 using market data and discounted cash flow analysis. Based on this
analysis, it was determined that the fair value exceeded the carrying value of its reporting units. The Company concluded the fair
value of the goodwill exceed the carrying value accordingly there were no indicators of impairment for the years ended December
31, 2018 and 2017.
The Company had historically performed its annual goodwill and impairment assessment on December 31st of each year. This
aligns the Company with other advertising sales companies who also generally conduct this annual analysis in the fourth quarter.
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 the
impairment testing methodology primarily using the income approach (discounted cash flow method).
F-15
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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, then the amount of impairment to be
recognized.
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.
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, 2018 or 2017, respectively.
Accounting for discontinued operations
We regularly review underperforming assets (product offereings) to determine if a sale or disposal might be a better way to
monetize the assets. When a product line or other asset group is considered for sale or disposal, we review the transaction to
determine if or when the entity qualifies as a discontinued operation in accordance with the criteria of FASB ASC Topic 205-20
“Discontinued Operations.” The FASB has issued authoritative guidance that raises the threshold for disposals to qualify as
discontinued operations. Under the this guidance, a discontinued operation is (1) a component of an entity or group of components
that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an
entity's operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date.
We operate as a single reporting unit that has multiple product offerings. All our product offerings are in the same geographic
market, sharing the same building, equipment, and managed by a single general manager. The product level is the lowest level for
which discrete financial information related solely to revenue and related accounts recievalbe is available and the level reviewed by
management to analyze operating results. Our senior management is compensated based on the results of all the product offerings
as a whole, not the results of any individual product line We have determined that the sale of the SRAXmd prodcut line did not
qualify for as a discontinued operation pursuant to guidance in ASC 205-20.
During 2018, based on revenue results management and board decided to accept the offer for the sale of the SRAXmd product line.
The Company decided to monetize the SRAXmd product line via a sale rather than continue to offer the SRAXmd product to its
customers. We have retained an approximatley 30% interest in the purchaser of the SRAXmd product line, however, based on the
operating agreement covering our ownerhisp we have no ongoing or further involvement in the operations of the purschaser of
SRAXmd. The sale of the SRAXmd product line is not considered to be discontinued operations pursuant to the guidance in ASC
205-20.
F-16
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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.
The Company has adopted ASU 2017-11, Earnings per share (Topic 260), provided that when determining whether certain
financial instruments should be classified as liability or equity instruments, a down round feature no longer precludes equity
classification when assessing whether the instrument is indexed to an entity’s own stock. If a down round feature on the conversion
option embedded in the note is triggered, the Company will evaluate whether a beneficial conversion feature exists, the Company
will record the amount as a debt discount and will amortize it over the remaining term of the debt.
If the down round feature in the warrants that are classified as equity is triggered, the Company will recognize the effect of the
down round as a deemed dividend, which will reduce the income available to common stockholders.
Warrant Liability
The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair
value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change
in fair value is recognized in the Company's consolidated statements of operations. The fair value of the warrants issued by the
Company has been estimated using a Black-Scholes option pricing model, at each measurement date.
Debt Discounts
The Company accounts for debt discounts originating in connection with conversion features that remain embedded in the related
notes in accordance with ASC 470-20, Debt with Conversion and Other Options. These costs are classified on the consolidated
balance sheet as a direct deduction from the debt liability. The Company amortizes these costs over the term of its debt agreements
as interest expense-debt discount in the consolidated statement of operations.
Earnings 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.
There were 4,853,085 common share equivalents at December 31, 2018 and 5,246,692 at December 31, 2017. For the year ended
December 31, 2018 these potential shares were excluded from the shares used to calculate diluted. These securities were not
included in the computation of diluted net earnings per share as their effect would have been antidilutive.
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.
F-17
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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 in accordance with ASC 505-50 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.
Registration Rights
The Company accounts for registration rights agreements in accordance with the Accounting Standards Codification subtopic 825-
20, Registration Payment Arraignments ("ASC 825-20"). Under ASC 825-20, the Company is required to disclose the nature and
terms of the arraignment, the maximum potential amount and to assess each reporting period the probable liability under these
arraignments and, if exists, to record or adjust the liability to current period operations.
F-18
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On November 29, 2018, the Company invoked the early redemption clause in certain of its convertible notes payable pursuant to
which the Company redeemed early these convertible notes payable by cash and issuing warrant to purchase shares of common
stock (the "Redemption Penalty Warrants"). In connection with the early retirement of these notes payable, the warrants issued to
these investors included a registration rights agreement clauses, pursuant to which the Company agreed to provide certain
registration rights with respect to the warrants issued. The registration rights agreements require the Company to file a registration
statement within 90 calendar days from the final closing under the retirement transaction and to be effective 60 calendar days
thereafter. The final closing under the retirement transaction of the debentures occurred on November 29, 2018. On February 11,
2019, the Company filed the required registration statement, as of this filing, it has yet to be declared effective. If the registration
statement is not declared effective, the Company is subject to a 2% penalty of investors’ subscription amount. The Company has
estimated the liability under the registration rights agreement at $0 as of December 31, 2018.
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.
Recently Issued Accounting Standards
Changes to accounting principles are established by the FASB in the form of ASUs to the FASB’s Codification. We consider the
applicability and impact of all ASUs on our financial position, results of operations, cash flows, or presentation thereof. Described
below are ASUs that are not yet effective, but may be applicable to our financial position, results of operations, cash flows, or
presentation thereof. ASUs not listed below were assessed and determined to not be applicable to our financial position, results of
operations, cash flows, or presentation thereof.
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842) Codification Improvements, which provides clarification on
implementation issues associated with adopting ASU 2016-02. The implementation issues noted in ASU 2019-01 include
determining the fair value of the underlying asset by lessors that are not manufacturers or dealers, presentation on the statement of
cash flows for sales-type and direct financing leases, and transition disclosures related to Topic 250, Accounting Changes and Error
Corrections. We will apply the guidance, if applicable, as of January 1, 2019, the date we adopted ASU 2016-02. Refer to the
discussion of ASU 2016-02 below for the impact on our financial position, results of operations, cash flows, or presentation
thereof.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Tope 818): Clarifying the Interaction Between
Topic 808 and Topic 606, which clarifies when transactions between participants in a collaborative arrangement are within the
scope of the FASB’s revenue standard, Topic 606. The standard is effective for fiscal years beginning after December 15, 2019 and
interim periods within those fiscal years, with early adoption permitted. We will adopt this standard on its effective date of
January 1, 2020. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position,
results of operations, cash flows, or presentation thereof.
In October 2018, the FASB issued ASU 2018-17, Targeted Improvements to Related Party Guidance for Variable Interest Entities,
that changes the guidance for determining whether a decision-making fee paid to a decision makers and service providers are
variable interests. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those
fiscal years, with early adoption permitted. We will adopt this standard on its effective date of January 1, 2020. We do not expect
the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, cash flows, or
presentation thereof.
F-19
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40):
Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU
2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is
effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early
adoption permitted. We will adopt this standard on its effective date of January 1, 2020. We are currently evaluating the impact of
this ASU on our financial position, results of operations, cash flows, or presentation thereof.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the
Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes or modifies certain disclosures and in certain
instances requires additional disclosures. The standard is effective for fiscal years beginning after December 15, 2019, including
interim periods within those fiscal years, with early adoption permitted. We will adopt this standard on its effective date of
January 1, 2020. We do not expect the adoption of this ASU to have a material impact on our financial position, results of
operations, cash flows, or presentation thereof.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements which provides a new transition
method and a practical expedient for separating components of a lease contract. ASU 2018-11 is intended to reduce the costs and
ease the implementation of the new leasing standard for financial statement preparers. The effective date and transition
requirements for the amendments related to separating components of a contract are the same as the effective date and transition
requirements in ASU 2016-02. We adopted this ASU on its effective date of January 1, 2019. Refer to the discussion of ASU 2016-
02 below for the impact on our financial position, results of operations, cash flows, or presentation thereof.
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. ASU 2018-10 affects narrow
aspects of the guidance issued in ASU 2016-02. ASU 2018-10 does not prescribe any new accounting guidance, but instead makes
minor improvements and clarifications based on comments and suggestions made by various stakeholders. ASU 2018-10 makes
improvements to the following aspects of the guidance in ASC 842: residual value guarantees, rate implicit in the lease, lessee’s
reassessment of lease classification, lessor’s reassessment of lease term and purchase option, variable lease payments that depend
on an index or a rate, investment tax credits, lease term and purchase option, transition guidance related to amounts previously
recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital
leases under ASC 840, transition guidance related to modifications to leases previously classified as direct financing or sale-type
leases under ASC 840, transition guidance related to sale-and-leaseback transactions, impairment of net investment in the lease,
unguaranteed residual assets, effect of initial direct costs on rate implicit in the lease and failed sale-and-leaseback transaction.
Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year
beginning after December 15, 2018. We adopted this ASU on its effective date of January 1, 2019. Refer to the discussion of ASU
2016-02 below for the impact on our financial position, results of operations, cash flows, or presentation thereof.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements. ASU 2018-09 provides minor corrections and
clarifications that affect a variety of topics in the Codification. Several updates are effective upon issuance of the update while
others have transition guidance for effective dates in the future. We do not expect the adoption of this ASU to have a material
impact on our financial position, results of operations, cash flows, or presentation thereof.
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment. ASU 2018-07 aligns the accounting for share based payments granted to non-employees with that of share
based payments granted to employees. We adopted this ASU on its effective date of January 1, 2019. The adoption of this ASU did
not have a material impact on our financial position, results of operations, cash flows, or presentation thereof.
F-20
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220)—
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows a reclassification
from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs
Act of 2017 (“The Act”). Consequently, the amendments eliminate the stranded tax effects resulting from the Act to improve the
usefulness of information reported to financial statement users. However, because the amendments only relate to the
reclassification of the income tax effects of the Act, the underlying guidance that requires that the effect of a change in tax laws or
rates be included in income from continuing operations is not affected. We adopted this ASU on its effective date of January 1,
2019. The adoption of this ASU did not have a material impact on our financial position, results of operations, cash flows, or
presentation thereof.
In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842) Land Easement Practical Expedient for Transition to Topic
842. ASU 2018-01 provides an optional transition practical expedient to not evaluate under Topic 842 existing or expired land
easements that were not previously accounted for as leases under the current leases guidance in Topic 840. We adopted this ASU on
its effective date of January 1, 2019. Refer to the discussion of ASU 2016-02 below for the impact on our financial position, results
of operations, cash flows, or presentation thereof.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), (“ASC 842”) which requires that lessees recognize a right-
of-use asset and a lease liability for all leases with lease terms greater than twelve months in the balance sheet. ASC 842
distinguishes leases as either a finance lease or an operating lease that affects how the leases are measured and presented in the
statement of operations and statement of cash flows. ASC 842 requires additional disclosures including the significant judgments
made by management to provide insight into the revenue and expense to be recognized from existing contracts and the timing and
uncertainty of cash flows arising from leases. We adopted the new guidance on January 1, 2019. We elected the practical expedients
upon transition to retain the existing lease classification and retain the original accounting treatment for any initial direct costs for
leases in existence prior to December 31, 2018. We adopted the optional transition method allowing entities to recognize a
cumulative effect adjustment to the opening balance of stockholders’ equity in the period of adoption, with no restatement of
comparative prior years. We have conducted a review of our existing lease contracts, conducted a review of other agreements that
may contain embedded leases, established the necessary changes to our systems, and we are implementing a new procedures
designed to account for leases under ASC 842. We will record right-of-use assets and related lease liabilities for operating leases
that will have a material impact on our consolidated balance sheet, with no impact to our results of operations, cash flows or
presentation thereof. As of December 31, 2018, we had one long term lease with for. We have no current capital leases portfolio,
which will be titled “finance leases” under ASC 842.
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.
NOTE 2 – ACQUISITIONS AND DIVESTITURES
Sale of SRAXmd:
On August 6, 2018, we completed the sale of substantially all of the assets related to our SRAXmd product line for aggregate
consideration of up to $52,500,000. The purchase price consists of (i) $33,000,000 in cash, (ii) 30% interest in the purchaser of
SRAXmd assets and (iii) an earn-out of up to $9,000,000 upon the SRAXmd product line achieving certain gross profit thresholds
(the “Earn-Out”). A total of $762,500 of the purchase price was placed into escrow accounts subject to future release.
Given the Company will retain an ongoing equity interest in the purchaser of SRAXmd, the Company evaluated the potential
existence of variable interest entity accounting treatment under ASC 810. Given the Company had no input into the design of the
purchasing entity, is not a primary beneficiary of the purchaser entity and has no ongoing role in management or governance other
than that of a passive, minority investor, the Company determined that the presence of a variable interest entity was not present.
F-21
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Assets transferred to the purchaser in the transaction included $3,536,503 of accounts receivable and $216,479 of prepaid expense
items. The purchaser also assumed $191,164 of accounts payable obligations and $333,014 of additional accrued expense items.
The Company received a credit to the purchase price of $196,055 for over-delivery of working capital beyond a contractual $3
million working capital target. The Company has recorded a zero value for the interest retained in the purchaser of SRAXmd assets.
The Company paid $1,709,500 of advisory fees and $351,089 of legal fees at closing. An additional $164,028 was also paid by the
Company at closing for insurance premiums and escrow related fees.
During the fourth quarter of 2018, the Company recognized an additional $1,870,361 in costs associated with the transaction.
The Company recorded a gain on sale of assets totaling $22,108,028. Less escrow holdbacks and other reimbursements, the
Company received net proceeds from the transaction totaling $22,980,824.
Below are the major components of the gain we recorded on the sale of the SRAX md assets:
GAIN ON SALE OF SRAXmd:
Cash Proceeds
Fair Value of Interest Retained
Carrying amount of Assets Sold
Fixed Assets
Working Capital
Transactions Fees & Sales Commissions
Gain on Sale
$
32,966,303
—
(117,000)
(3,228,803)
(7,512,472)
22,108,028
$
Components of operating results for the SRAXmd product group have not been classified as discontinued operations. Pursuant to
guidance in ASC 205-20, Discontinued Operations, we noted that the SRAXmd product line was not a reportable segment or a
separate operating segment and nor was it deemed to be a strategic shift. Under this guidance, an entity presents a disposal as a
discontinued operation if it “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial
results.” ASC Topic 205-20-45 does not clearly define on a quantitative basis as to how an entity would establish whether a
component, business activity is individually significant. Additionally, the sale of the SRAXmd product line did not qualify under
ASC Topic 360-10-35 to 45 for determination of the gain or loss. The sale of the SRAXmd product group does not constitute a shift
in our corporate strategy or purpose as we continue to operate a diversified product group of digital advertising tools, as we have
done since inception in 2010. The core technology and other key elements of the SRAX advertising platform will remain owned by
us, with certain license agreements for use of our software granted to the purchaser as part of the transaction. SRAXmd was a
product developed from our core technology. In addition to the assets, 12 of our existing employees also transferred. The Company
have not assigned any goodwill upon disposal of a SRAXmd.
SRAXmd, like each of the remaining SRAX product groups/offerings, has not historically operated as a discrete business entity or
division within our company. As such, it along with the other product groups rely upon shared employees and a shared technology
platform to operate. Furthermore, certain advertisers may also purchase advertising across multiple product lines, making
individual product financial statements more difficult to segregate. Due to its in-house organic development, SRAXmd also has no
separately capitalized assets that may be presented as held for sale on our balance sheet.
F-22
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Based on management’s best estimates, for the three and twelve month periods ended December 31, 2018 and 2017, the unaudited
results for revenue and cost of sales attributable to the SRAXmd product group are estimated below:
Three Months ended
December 31,
2018
2017
Full Year
December 31,
2018
2017
Revenue
Cost of Sales
Gross Profit
Gross Margin
General, Sales & Administrative expense
Operating Income
$
$
$
$
$
—
—
0
0.00%
—
—
$ 4,603,366
$ 1,082,389
$ 3,520,977
$ 6,306,613
$ 1,101,080
$ 5,205,533
$ 11,077,503
$ 1,998,395
$ 9,079,108
76.49%
82.54%
81.96%
$ 1,438,957
$ 2,082,020
$ 2,896,193
$ 2,309,340
$ 2,028,407
$ 7,050,702
There is no specific depreciation and amortization, or interest expense specifically attributable to the SRAXmd product line.
NOTE 3 – NOTES PAYABLE
Financing Agreement with Victory Park Management, LLC as agent for the lenders
On October 30, 2014, the Company entered a 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 initial and subsequent notes issued
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 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
transaction documents, the PIK interest rate declined on a sliding scale from 4% to 2%. The notes issued under the transaction
documents were scheduled to mature on October 30, 2017.
During the twelve months ended December 31, 2017, we completely repaid the notes and made principal and PIK interest
repayments in the amount of $3,996,928.
We incurred a total of $3,178,011 of costs related to the transaction. These costs were amortized to interest expense over the life of
the debt. During the twelve months ended December 31, 2017 $2,101,377 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 $67,612 were recorded as PIK interest expense.
Pursuant to the transaction documents, 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. Pursuant to the warrant, the warrant holder had the right, at any time after
the earlier of April 30, 2016 and the maturity date, but prior to October 30, 2019, to exercise its put right under the terms of the
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 warrant that had not been previously exercised. In connection with any exercise of this put right, the
purchase price was equal to an amount based upon the percentage of the 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. 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.
F-23
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Financing and Security Agreement with FastPay
In September 2016, we executed a Financing and Security Agreement, as amended (collectively, the "FastPay Agreement"). with
FastPay Partners, LLC to create an accounts receivable-based credit facility. The FastPay Agreement was further amended in April
2018.
Under the April 2018 amended terms of the FastPay Agreement, FastPay may, at its sole discretion, purchase our eligible accounts
receivable. Upon any acquisition of accounts receivable, FastPay will advance us up to 80% of the gross value of the purchased
accounts, up to a maximum of $4,000,000 in advances. 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. We are 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 an increase to 30% for one specific large
customer.
We are obligated to repurchase accounts remaining uncollected after a specified deadline, and FastPay will generally have full
recourse against us in the event of nonpayment of any purchased accounts. Our obligations under the FastPay Agreement are
secured by a first position security interest in its accounts receivable, deposit accounts and all proceeds therefrom.
The FastPay Agreement contains covenants that are customary for agreements of this type and are primarily related to accounts
receivable and audit rights. We are 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 our obligations. The FastPay Agreement contains provisions relating to events of
default that are customary for agreements of this type.
The current FastPay Agreement has a term of 18 months and automatically renews thereafter for successive one-year terms, 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, 2018 $106,920 of accounts receivable purchased by FastPay remain outstanding and are subject to repurchase
under the terms of the FastPay Agreement.
F-24
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 4 – SECURED CONVERTIBLE DEBENTURES, NET
In April 2017, the Company entered into definitive securities purchase agreements (the “Series A1 Securities Purchase
Agreements”) with certain accredited investors (the “A1 Purchasers”) for the purchase and sale of an aggregate of : (i) $5,000,000
principal amount of 12.5% secured convertible debentures (the “Series A1 Debentures”); and (ii) five-year warrants (the “Series A1
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 Series A1 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 Series A1
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 A1 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 Series A1
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 Series A1 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 Series A1 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.
The Series A1 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 Series A1 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.
The Series A1 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 Series
A1 Warrants are exercisable on a cashless basis. The conversion price of the Debentures and the exercise price of the Series A1
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 Series A1 Debentures or
exercise of the Series A1 Warrants we will be subject to certain buy-in provisions. Pursuant to the terms of the Series A1
Debentures and Series A1 Warrants, a holder will not have the right to convert any portion of the Series A1 Debentures or exercise
any portion of the Series A1 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 Series A1 Debentures and the Series A1 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.
F-25
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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 Series A1 Debentures and/or exercise of the Series A1 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 Series A1
Debentures and the Series A1 Warrants. Under the terms of the Securities Purchaser Agreements, we also granted the Purchasers of
the Series A1Debentures the right to purchase an additional $3,000,000 of Series A1 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
Series A1 Debentures and Series 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 Series A1 Debentures amounting to $720,000 and was issued Series A1
Warrants (“Placement Agent 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 Series A1
Debentures. Additionally, we issued Chardan Capital 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 5.0 years commencing six months from the issuance
date. We issued 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 Placement Agent 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 5.0 years commencing six months from the issuance date. We included
the shares underlying the Placement Agent Warrants in the aforedescribed 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 $4,636,629. 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.
The Series A1 Warrants have been accounted for utilizing ASC 815 “Derivatives and Hedging”. The Company has determined that
the Series A1 Warrants have an embedded feature that cause the Series A1 Warrants to be treated as a derivative liability. The
Company has estimated the fair value of the Series A1 Warrant instruments using the Black-Scholes Model with key input
variables provided by management, as of the date of issuance, with the fair value treated as a discount to the Series A1 Debenture
liability, and at each reporting date, with the changes in fair value of the Series A1 Warrants recorded as gains or losses on
revaluation in other income (expense). See Note 5 for further information for the fair value of the Series A1 Warrants.
The Company accounted for the Series A1 Debentures in accordance with ASC 470-20 Debt with Conversion and other options.
The net proceeds of $4,639,629 from the issuance of the Series A1 Debentures was allocated between the Series A1 Debentures
and the fair value of the Series A1 Warrants. The values allocated to the Series A1 Debentures and Series A1Warrant was
$3,408,629 and $1,288,000 respectively. After the allocation between the Series A1 Debentures and Series A1 Warrants, the
effective conversion feature was greater than the fair market value of the Company’s common stock on the date of issuance, so the
adjusted proceeds were not allocated to the conversion feature.
F-26
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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 (“Series A2 Debentures”) and issued 863,365 Series A2 Warrants. The Series A2 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 Series A1 Debentures, $2,000,000 of Series A2 Debentures
were purchased pursuant to the greenshoe provision and the remaining $3,180,157.78 were purchased separately. Of the 863,365
Series A2 Warrants issued, a total of 333,335 were purchased pursuant to the greenshoe provision and 630,030 were purchased
separately. The Series A2 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 Series A2 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).
The Company identified embedded derivatives related to the Series A2 Warrants issued. These embedded derivatives included the
right for the holders to request for the Company to purchase the Series A2 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 the Series A2 Warrant on the date of the
consummation of a fundamental transaction.
The Series A2 Warrants have been accounted for utilizing ASC 815 “Derivatives and Hedging”. The Company has determined that
the Series A2 Warrants have an embedded feature that cause the Series A2 Warrants to be treated as a derivative liability. The
Company has estimated the fair value of the Series A2 Warrant instruments using the Black-Scholes Model with key input
variables provided by management, as of the date of issuance, with the fair value treated as a discount to the Series A2 Debenture
liability, and at each reporting date, with the changes in fair value of the Series A2 Warrants recorded as gains or losses on
revaluation in other income (expense). See Note 5 for further information for the fair value of the Series A2 Warrants.
The Company accounted for the Series A2 Debentures in accordance with ASC 470-20 Debt with Conversion and other options.
The net proceeds of $4,261,684 from the issuance of the Series A2 Debentures was allocated between the Series A2 Debentures
and the fair value of the Series A2 Warrants. The values allocated to the Series A2 Debentures and Series A2Warrant was
$1,405,540 and $2,856,108 respectively. After the allocation between the Series A2 Debentures and the Series A2 Warrants, the
adjusted value assigned to Series A2 Debenture created the effected conversion feature to be a rate lower than the current market
price for the Company’s common stock on the date of the issuance. The value assigned to the conversion feature was $1,405,540.
On November 29, 2018, the Company redeemed the outstanding principal balance of the Series A1 and A2 Debentures
(collectively the “Debentures”) with the repayment of the Debentures face value or $6,545,157, a 10% prepayment penalty of
$654,517 and the issuance of Series B warrants for a total of 50% of the of the 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.. Also, the Company
issued warrants to purchase 1,090,862 shares of its Class A common stock (“Series B1 Warrants”). The Series B1 Warrants were
issued pursuant to the redemption terms of the Company’s Debentures. The Company received no additional consideration for the
issuance. The Series B Warrants were issued in a transaction exempt from registration under the Securities Act of 1933, as amended
(the Securities Act), in reliance on the exemption provided by Rule 506(b) of Regulation D and Section 4(a)(2) of the Securities
Act.
The Series B1 warrants have a term of five (5) years from the date in which each of the redeemed Debenture were issued.
Accordingly, of the Series B Warrants: (i) 277,500 have an expiration date of April 21, 2022, and (ii) 813,362 have an expiration
date of October 27, 2022.
F-27
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
The Series B1 Warrants are initially exercisable at $3.00 per share and, are subject to cashless exercise after six (6) months from the
issuance date if the shares underlying the warrants are not subject to an effective registration statement. The Series B Warrants also
contain anti- dilution protection for subsequent equity sales for a price lower than the then applicable exercise price, with a floor of
$1.40.
The exercise price of the Series B1 Warrants is subject to adjustment upon certain events, including stock splits, stock dividends,
subsequent equity transactions (other than specified exempt issuances), subsequent rights offerings, and fundamental transactions,
subject to the $1.40 floor described above. If we fail to timely deliver the shares of our Class A common stock (“Common Stock”)
upon any exercise of the Series B Warrants, we will be subject to certain buy-in provisions. Additionally, the Series B Warrants
contained certain beneficial ownership limitations.
The Company identified embedded derivatives related to the Series B Warrants issued. These embedded derivatives included the
right for the holders to request for the Company to purchase the Series B 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 the Series A2 Warrant on the date of the
consummation of a fundamental transaction.
The Series B1 Warrants have been accounted for utilizing ASC 815 “Derivatives and Hedging”. The Company has determined that
the Series B1 Warrants have an embedded feature that cause the Series B1 Warrants to be treated as a derivative liability. The
Company has estimated the fair value of the Series B1 Warrant instruments using the Black-Scholes Model with key input variables
provided by management, as of the date of issuance, with the fair value treated as an additional expense related to the
extinguishment of the Debentures, and at each reporting date, with the changes in fair value of the Series B Warrants recorded as
gains or losses on revaluation in other income (expense). See Note 5 for further information for the fair value of the Series B1
Warrants.
The secured convertible debentures are comprised of the following at December 31:
Principal Balance
Debt discount
Debt issuance costs
Convertible notes, net
NOTE 5 – WARRANT LIABILITIES
$
$
2018
— $
—
—
— $
2017
6,845,157
(4,107,792)
(1,026,219)
1,711,146
As more fully described in Notes 4 and 6, the Company issued Series A and B Warrants, Series A1 and A2 Debenture Warrants and
Series B1 Warrants (collectively the “Derivative Warrant Instruments”). The Derivative Warrant Instruments have been accounted
for utilizing ASC 815 “Derivatives and Hedging”. The Company has incurred a liability for the estimated fair value of Derivative
Warrant Instruments. The estimated fair value of the Derivative Warrant Instruments has been calculated using the Black-Scholes
fair value option-pricing model with key input variables provided by management, as of the date of issuance, with the valuation
offset against additional paid in capital, and at each reporting date, with changes in fair value recorded as gains or losses on
revaluation in other income (expense).
The Company identified embedded features in the warrants which caused the warrants to be classified as a liability. These
embedded features included the right for the holders to request for the Company to cash settle the Warrant Instruments from the
Holder by paying to the Holder an amount of cash equal to the black scholes value of the remaining unexercised portion of the
Derivative Warrant Instruments on the date of the consummation of a fundamental transaction. The accounting treatment of
derivative financial instruments requires that the Company treat the whole instrument as liability and record the fair value of the
instrument as a derivatives as of the inception date of the instrument and to adjust the fair value of the instrument as of each
subsequent balance sheet dates.
On the date of inception, the fair value of the Series A and B Warrants of $3,038,344 was determined using the Black-Scholes
Model based on a risk-free interest rate of 2% for both the Series A Warrants and the Series B Warrants, an expected term of 5.5
years for the Series A Warrants and 5 years for the Series B Warrants, an expected volatility of 110% for the Series A Warrants and
the Series B Warrants and a 0% dividend yield for the Series A Warrants and the Series B Warrants, respectively.
F-28
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
In April 2017, the Company repurchased the Series B Warrants for $2,500,000 and recognized a loss on the repurchase amounting
to $2,053,975.
The Series A Warrants fair value as of December 31, 2018 and 2017 was estimated to be $496,000 and $2,026,000, respectively,
based on a risk-free interest rates of 2.46 and 2.20, respectively, an expected term of 3 and 4 years, respectively, an expected
volatility of 167% and 164%, respectively and a 0% dividend yield.
On January 4, 2017, the date of inception, the fair value of the Series A and B Warrants of $3,038,344 was determined using the
Black-Scholes Model based on a risk-free interest rate of 2% for both the Series A Warrants and the Series B Warrants, an expected
term of 5.5 years for the Series A Warrants and 5 years for the Series B Warrants, an expected volatility of 110% for the Series A
Warrants and the Series B Warrants and a 0% dividend yield for the Series A Warrants and the Series B Warrants, respectively.
At the inception of the Series A1 Warrants, the Company determined a fair value of $1,228,000 of the Series A1 Warrants. On
April 21 and April 28, 2017, the dates of inception, the fair value of the Series A1 Warrants was determined using the Black-
Scholes Model based on a risk-free interest rate of 1.875%, an expected term of 5.5 years, an expected volatility of 109% and a 0%
dividend yield for each respective date.
Fair value at December 31, 2018 and 2017 of the Series A1 Warrants was estimated to be $868,000 and $2,641,000, respectively
based on a risk-free interest rate ranging from 2.73 to 2.73, an expected term ranging from 3.375 to 4.375 years, an expected
volatility ranging from 164% to 167% and a 0% dividend yield. During the years ended December 31, 2018 and 2017, we recorded
a decrease and increase, respectively, in the fair value of the warrant derivative liability of $(1,774,000) and $1,419,000,
respectively. This was recorded as a loss on change in fair value of derivative liability.
At the inception of the Series A2 Warrants, the Company determined a fair value of $2,856,000 of the Series A2 Warrants. On the
date of inception, the fair value of the Series A2 Warrants was determined using the Black-Scholes Model based on a risk-free
interest rate of 2.03%, an expected term of 5.5 years, an expected volatility of 122% and a 0% dividend yield.
Fair value at December 31, 2018 and 2017 of the Series A2 Warrants was estimated to be $1,446,000 and $4,615,000, respectively
based on a risk-free interest rate ranging from 2.20 to 2.46, an expected term ranging from 3.875 to 4.875 years, an expected
volatility ranging from 158% to 161% and a 0% dividend yield. During the years ended December 31, 2018 and 2017, we recorded
the decrease and increase, respectively, in the fair value of the warrant derivative liability of $(3,170,000) and $1,759,000,
respectively. This was recorded as a loss on change in fair value of derivative liability.
At the inception of the Series B1 Warrant, the Company determined a fair value of $3,240,000 of the Series B1 Warrants. On the
date of inception, the fair value of the Series B1 was determined using the Black-Scholes Model based on a risk-free interest rate of
2.9%, an expected term of 5.0 years, an expected volatility of 162% and a 0% dividend yield.
Fair value at December 31, 2018 of the Series B Warrants was estimated to be $1,201,000 based on a risk-free interest rate of 2.5,
an expected term of 3.92, an expected volatility of 155% and a 0% dividend yield. During the years ended December 31, 2018, we
recorded a decrease, in the fair value of the warrant derivative liability of $1,529,771. This was recorded as a loss on change in fair
value of derivative liability.
The Warrant liabilities are comprised of the following at December 31:
Outstanding, beginning of the period
Initial derivative liability on issuance of warrants
Change in fair value
Less accretion and conversion of debenture warrants
Warrant liabilities
2018
11,156,003 $
3,240,127
(8,953,933)
—
5,442,195 $
$
$
2017
—
7,453,615
4,134,166
(431,780)
11,156,001
F-29
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 6 – STOCKHOLDERS' EQUITY
Preferred Stock
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.
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, 2018 or 2017, respectively.
On January 4, 2017, we sold an aggregate of: (i) 761,905 shares of Class A common stock; and (ii) five-year 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 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. 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 in April 2017, 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 an engagement letter dated December 29, 2016 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 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. The warrants have an exercise price of $6.50 per
share and are exercisable for 5.5 years commencing nine months from the issuance date. The shares underlying the warrants were
included in a resale registration statement that was declared effective by the SEC in September 2017.
F-30
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 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
prior to May 20, 2017. Victory Park Management, LLC exercised the put right on May 22, 2017. 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 January 2017, 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.
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.
On September 15, 2017, the Company entered an Investor Relations and Consulting Agreement. The Company engaged the
consultant to provide certain consulting services on behalf of the Company. Under the terms of this agreement, which expired on
December 15, 2017, the Company engaged consultant to provide a variety of advisory and consulting services to the Company,
including introducing the Company to potential sources of media, marketing agreement(s) and/or other strategic alliances which
may benefit the Company in the performance of implementing its business plan(s), including but not limited to radio and television
media spots; various media publications; and internet podcasts. As compensation for such services, the Company issued consultant
75,000 shares of its Class A common stock, valued at $97,500, on September 15, 2017.
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 former 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 $5,180,158 of our 12.5% secured
convertible debentures and issued 863,365 Series A common stock purchase warrants. 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).
F-31
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
In October 2017, certain debenture holders converted an aggregate of $655,000 of debentures into 218,334 shares of Class A
common stock.
In October 2017, 83,334 Series A common stock purchase warrants were exercised at a price of $3.00 per share, resulting in gross
proceeds to the Company of $250,002.
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 respective 2017 service on our board of directors. The shares were issued from our 2016 equity compensation plan.
In January 2018, we issued a consultant an additional 150,000 shares for media consulting services. In August 2018, we issued the
consultant an additional 150,000 shares pursuant to this same agreement.
In March 2018, we issued 6,667 shares of Class A common stock to one employee for vested stock awards.
In March 2018, 122,950 shares of Class A common stock were awarded to one employee for sales performance achievement
pursuant to our 2016 equity compensation plan.
In July 2018, 16,667 Series A common stock purchase warrants were exercised at a price of $3.00 per share, resulting in gross
proceeds to the Company of $50,000.
In August 2018, we issued William Packer 3,774 shares of 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 June 2018, we issued 44,815 Series A common stock purchase warrants at an exercise price of $2.245 per share, on a cashless
basis.
In September 2018, one investor in the Company’s October 2017 debenture financing exercised 16,667 Series A common stock
purchase warrants were exercised at a price of $3.00 per share, resulting in gross proceeds to the Company of $50,000.
In September 2018, we issued 100,000 shares of our Class A common stock for legal services rendered.
In September 2018, we issued 50,000 shares of our Class A common stock to Joseph P. Hannan, our former chief financial officer,
pursuant to his October 2017 employment agreement. The shares were issued pursuant to our 2016 equity compensation plan, and
subject to vesting at issue.
In September 2018, we issued 3,334 shares of Class A common stock to one employee for vested stock awards.
During September 30, 2018, certain debenture holders converted an aggregate of $300,000 in principal into 100,000 shares of the
Company’s Class A common stock.
On August 6, 2018, we repurchased 514,000 shares of our Class A common stock from Erin DeRuggiero as contracted under the
terms of her separation agreement with the Company.
In October 2018, 50,000 shares of our Class A common stock were retired in lieu of cash tax withholding from a vesting on shares
previously issued to Joseph P. Hannan, our former chief financial officer.
In October 2018, 23,800 shares of our Class A common stock were retired in lieu of cash tax withholding from a vesting on shares
previously issued to Joseph P. Hannan, our former chief financial officer.
F-32
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Stock Awards
During the years ended December 31, 2018 and December 31, 2017, respectively, there were no new grants of restricted stock
awards made nor were any previously issued grants forfeited.
Stock Options and Warrants
During the years ended December 31, 2018 and December 31, 2017, respectively, there were no new grants of restricted stock
awards made nor were any previously issued grants forfeited.
Stock Options and Warrants
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, 2018 and 2017, we recorded compensation expense of $667,749 and $992,732, respectively,
related to stock based compensation. During the years ended December 31, 2018 and 2017, 72,498 and 161,500 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.
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.
During the years ended December 31, 2018 and December 31, 2017, respectively, an aggregate of 226,402 and 1,223,874 common
stock purchase warrants, having exercise prices of between $5.00 and $10.00, per share, expired.
On January 24, 2018, 176,400 common stock purchase warrants, having exercise prices of $7.50, per share, expired.
On September 11, 2018, 250,000 common stock purchase warrants, having an exercise price of $4.20 per share with an option
value as of the grant date of $488,106 calculated using the black-scholes option pricing model were granted to Joseph P. Hannan,
our former chief financial officer. The options vested one third annually and expire three years after the vesting date. Upon Mr.
Hannan’s termination in December of 2018, 229,166 option terminated.
F-33
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On December 16, 2018, 100,000 common stock purchase warrants, having an exercise price of $2.56 per share with an option value
as of the grant date of $220,832 calculated using the black-scholes option pricing model were granted to Michael Malone, our chief
financial officer. This expense associated with this option award will be recognized in operating expenses ratably over the vesting
period.
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
Office equipment
Accumulated depreciation
Property and equipment, net
2018
332,932
(140,867)
192,065
$
$
2017
251,415
(96,869)
154,546
Depreciation expense for the years ended December 31, 2018 and 2017 was $43,998 and $22,908, respectively.
NOTE 8 – 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
2018
2017
$
$
1,250,000 $
756,000
617,069
1,563,401
4,186,170
(2,423,865)
1,762,605 $
1,250,000
756,000
617,069
754,140
3,377,209
(1,734,449)
1,642,760
Amortization expense was $51,422 for intellectual property, $121,527 for the non-compete agreement and $365,266 for internally
developed software and 151,200 acquired software for the year ended December 31, 2018. 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, 2017.
The estimated future amortization expense for the years ended December 31, are as follows:
2019
2020
2021
$
$
858,041
737,648
166,916
1,762,605
NOTE 9 – RELATED PARTY TRANSACTIONS
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.
On March 20, 2018, we entered into certain retention and bonus agreements with SRAXMD employees, including Erin
DeRuggiero, our chief innovations officer. Pursuant to the terms of the agreements with Ms. DeRuggiero, her employment
agreement was terminated, and she became a consultant to the Company. The term of the consultancy expired upon the sale of the
assets comprising SRAXmd. Pursuant to the terms of the agreement, we paid Ms. DeRuggiero a total of $5.2 million at closing
which also included repurchase of 514,000 shares of our Class A common stock.
F-34
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
On April 2, 2018, we issued a common stock purchase warrant to Kristoffer Nelson, our Chief Operating Officer and a member of
our board of directors. The option entitles Mr. Nelson to purchase 100,000 shares of Class A Common Stock at a price per share of
$5.78, has a term of three years and vests quarterly over a three (3) year period.
On September 11, 2018, we issued a common stock purchase warrant to Joseph P. Hannan, our former Chief Financial Officer. The
option entitled Mr. Hannan to purchase 250,000 shares of Class A Common Stock at a price per share of $4.20, had a term of three
years and vested quarterly over a three (3) year period. Upon Mr. Hannan’s termination in December 2018, 234,375 of these
options expired.
Our Chief Executive Officer joined the board of directors of one of our advertising customers which purchases advertising at
market rates during the first quarter of 2018.
NOTE 10 – 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 11 – INCOME TAXES
2018
2017
$
$
2,517,749 $
256,008
722,010
79,158
3,574,926 $
2,858,871
1,800,621
256,164
95,159
5,010,815
Income tax (benefit) expense from continuing operations for the year ended December 31, 2018 consisted of the following:
Federal
State
Subtotal
Valuation allowance
Total
Current
Deferred
— $
—
—
—
— $
(1,301,486) $
(700,900)
(2,002,386)
2,002,386
— $
$
$
Total
(1,301,486)
(700,900)
(2,002,386)
2,002,386
—
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
Total
— $
—
—
—
— $
543,682
(287,649)
256,033
(256,033)
— $
543,682
(287,649)
256,033
(256,033)
—
$
$
F-35
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Taxes calculated at federal rate
State income tax, net of federal benefit
Stock based compensation
Permanent Differences
Change in Valuation Allowance
Fair market adjustment derivatives
Prior year True-ups
True-up to deferred tax rate
Other adjustments
Provision for income taxes
2018
2017
21.0%
(1.9)%
1.4%
1.0%
13.9%
(21.5)%
(14.9)%
—%
1.0%
—%
34.0%
1.4%
—%
(5.0)%
2.0%
(10.8)%
1.3%
(17.9)%
(5.0)%
—%
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, 2018 and 2017 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 expenses
Total Deferred Tax Liabilities
Net Deferred Tax Assets
Valuation Allowance
Net deferred tax / (liabilities)
$
2018
2017
2,914,731 $
(37,801)
—
—
430,907
24,390
3,332,227
(249,530)
(12,620)
(262,150)
4,156,406
—
—
579,085
53,185
4,788,677
—
(482,121)
(14,623)
(496,744)
3,070,707
(3,070,707)
4,291,933
(4,291,933)
$
— $
—
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, 2018, the valuation allowance decreased by $1,221,226 to $3,070,707. All of this decrease
attributable to the decrease in our net operating loss carryforwards. The total valuation allowance results from the Company’s
estimate of its inability to recover its net deferred tax assets.
F-36
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
At December 31, 2018, the Company has federal and state net operating loss carry forwards, which are available to offset future
taxable income, of approximately $12,806,705 and $15,752,351, respectively, both of which begin to expire in 2032 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.
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, 2018, there are no unrecognized tax
benefits, and there are no significant accruals for interest related to unrecognized tax benefits or tax penalties.
NOTE 12 – 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-37
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Transactions involving our stock options for the years ended December 31, 2018 and 2017, 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
2018
Weighted
Average
Exercise
Price
Number
2017
Weighted
Average
Exercise
Price
Number
414,300 $
480,236
—
(366,874)
537,662 $
6.65
3.57
—
4.84
5.94
575,800 $
—
—
(161,500)
414,300 $
331,993
6.8
288,630
6.97
—
—
7.26
6.97
6.65
At December 31, 2018 options outstanding totaled 532,662 with a weighted average exercise price of $5.94. Of these options,
331,993 are exercisable at December 31, 2018, with an intrinsic value of $74,425 and a remaining weighted average contractual
term of 2.9 years. 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 2.8 years.
Transactions involving our common stock awards for the years ended December 31, 2018 and 2017, 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
2018
Number
2017
Number
54,669
—
(53,334)
(1,335)
—
116,666
—
(55,998)
(6,000)
54,669
Unrecognized compensation cost related to our common stock awards is approximately $0 and $162,741 at December 31, 2018 and
2017, respectively. We have estimated that we will recognize future compensation expense approximating $0 during the year ended
December 31, 2018.
Transactions involving our stock warrants for the years ended December 31, 2018 and 2017, 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-38
2018
Weighted
Average
Exercise
Price
2017
Weighted
Average
Exercise
Price
Number
2,485,005 $
2,162,058
(95,238)
(226,402)
4,325,423
5.09
3.00
2.25
6.95
5.05
Number
2,976,863 $
2,121,433
(428,469)
(2,184,822)
2,485,005
4,325,423
5.05
2,485,005
6.45
3.73
3
6.04
5.09
5.09
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 13 – 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 lease for the Mexico facility
amounts to $786,168 as of December 31, 2018.
Future minimum lease payments under this rental agreement are approximately as follows:
For the year ended:
12/31/2019
12/31/2020
12/31/2021
12/31/2022
12/31/2023
$
$
$
$
$
$
163,218
163,218
163,218
163,218
133,295
786,167
Rent expense for office space amounted to $277,801 and $211,680 for the years ended December 31, 2018 and 2017, 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.
F-39
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
NOTE 14. – 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.
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 Company had no financial assets or liabilities as of December 31, 2018 and 2017:
Debenture warrant liability
Leapfrog warrant liability
Derivative liability
Put liability
Total liabilities
Securities:
Certificates of deposit
Money Market funds
U.S. government-sponsored agency securities
Total assets
$
$
$
Quoted Prices in Significant Other
Active Markets for
Identical Assets
Observable
Inputs
(Level 2)
Balance as of
December 31,
2018
4,323,499 $
622,436
496,260
—
5,442,195 $
(Level 1)
—
—
—
—
— $
—
—
2,723,264
2,723,264 $
—
—
2,723,264
2,723,264 $
Significant
Unobservable
Inputs
(Level 3)
4,323,499
622,436
496,260
—
5,442,195
—
—
—
—
—
—
—
—
— $
—
—
—
— $
The Company received an equity position representing approximately 30% in the LLC that purchased the assets in the SRAX Md
transaction. As there is no readily available fair market value for the LLC we carry the investment on our books at our basis for the
assets sold, which was $0. Additionally, the Company has no significant influence over the entity even though the Company has an
approximately 30% ownership interest.
Debenture warrant liability
Leapfrog warrant liability
Derivative liability
Put liability
Total liabilities
Securities:
Certificates of deposit
Money Market funds
U.S. government-sponsored agency securities
Total assets
$
$
$
F-40
Quoted Prices in Significant Other
Active Markets for
Identical Assets
Observable
Inputs
(Level 2)
Balance as of
December 31,
2017
7,256,863 $
1,873,107
2,026,031
—
11,156,001 $
—
—
—
— $
(Level 1)
—
—
—
—
— $
—
—
—
— $
Significant
Unobservable
Inputs
(Level 3)
7,256,863
1,873,107
2,026,031
—
11,156,001
—
—
—
—
—
—
—
—
— $
—
—
—
— $
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
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):
Outstanding, beginning of the period
Initial derivative liability on issuance of warrants
Change in fair value
Less accretion and conversion of debenture warrants
Warrant liabilities
$
$
11,156,003 $
3,240,127
(8,953,933)
—
5,442,195 $
—
7,453,615
4,134,166
(431,780)
11,156,001
The Company accounts for its investments in equity securities in accordance with ASC 321-10 Investments - Equity Securities. The
equity securities may be classified into two categories and accounted for as follows:
·
·
Equity securities with a readily determinable fair value are reported at fair value, with unrealized gains and losses included
in earnings. Any dividends received are recorded in interest income, the fair value of equity investments with fair values is
primarily obtained from third-party pricing services.
Equity securities without a readily determinable fair value are reported at their cost minus impairment, if any, plus or minus
changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same
issuer and their impact on fair value. Any dividends received are recorded in interest income. For equity investments
without readily determinable fair values, when an orderly transaction for the identical or similar investment of the same
issuer is identified, we use the valuation techniques permitted under ASC 820 Fair Value Measurement to evaluate the
observed transaction(s) and adjust the fair value of the equity investment.
Equity investments include the Company’s retention of an approximately 30% membership interest in the purchaser of SRAXmd
group of assets (a limited liability company). The investment was valued initially at its cost basis which was nil. The Company has
limited access to operating results and information and has no significant influence over the purchaser of SRAXmd. The operating
agreement designates a different managing member for that entity. Accordingly, the value at December 31, 2018 is nil and is a level
3 asset.
NOTE 15 – SUBSEQUENT EVENTS
On April 10, 2019 we completed a registered direct offering of 1,687,825 shares our Class A common stock. The offering resulted
in gross proceeds to the company of approximately $6.75 million.
On April 8, 2019, we accepted proposals from certain holders of outstanding Class A common stock purchase warrants. Pursuant to
the proposal, the holders agreed to exercise their outstanding warrants to purchase an aggregate of 310,487 shares of our common
stock, for cash, by April 10, 2019, in exchange for the Company reducing the exercise price of the Warrants from $7.50 to $3.56.
As a result of the transaction, we expect to receive gross proceeds in the amount of $1,105,333.
On April 1, 2019, we sold a non-performing receivable in the amount of $567,977, (such amount includes a mutually agreed upon
gross-up with our customer of $150,000) for $417,977. In connection with the sale, we agreed to repurchase the receivable if the
purchaser was not able to collect on the amounts owed by June 30, 2019. As security for our repurchase obligation, we issued and
pledged 220,000 shares of our Class A common stock.
NOTE 16 – Restatement
Financial Information (As Restated)
·
·
As further described in the Explanatory Note, in lieu of filing an amended Form 10-K the Company has presented restated
2017 financials attached here.
In addition to the restatement of the financial statements, certain information within the following notes to the financial
statements and financial statement schedule has been restated to reflect the corrections of misstatements discussed
previously.
F-41
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Impact of the Restatement
Below we’ve presented the 2017 Financial Statements as previously reported with a reconciliation to the restated financials:
Summary of Restatement Consolidated Balance Sheet
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
Debenture warrant liability
Leapfrog warrant liability
Derivative liability
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, 2018 and 2017, respectively
Class A common stock, authorized 250,000,000 shares, $0.001 par value, 10,109,530 and
9,910,565 shares issued and outstanding at December 31, 2018 and 2017, respectively
Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued or
outstanding at December 31, 2018 and 2017, respectively
Common stock to be issued
Additional paid in capital
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
2017
Adjustments
2017
As Restated
$
$
1,017,299 $
4,348,305
468,336
300,898
6,134,838
154,546
15,644,957
1,642,760
28,598
23,605,699 $
— $
—
—
—
—
—
—
—
—
— $
1,017,299
4,348,305
468,336
300,898
6,134,838
154,546
15,644,957
1,642,760
28,598
23,605,699
5,010,815
—
—
—
—
5,010,815
1,711,146
6,721,961
—
7,256,864
1,873,107
2,026,031
—
11,156,002
(186,554)
10,969,448
5,010,815
7,256,864
1,873,107
2,026,031
—
16,166,817
1,524,592
17,691,409
—
9,911
—
—
—
9,911
—
879,500
37,143,033
(21,148,706)
16,883,738
23,605,699 $
—
—
(4,596,213)
(6,373,235)
(10,969,448)
— $
—
879,500
32,546,820
(27,521,941)
5,914,290
23,605,699
$
The adjustments to the consolidated balance sheet reflect the effect of adjusting certain warrants from equity reporting to liability
reporting.
F-42
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Summary of Restatement Consolidated Statement of Operations Adjustments
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):
Interest expense
Amortization of debt issuance costs
Total Interest Expense
Gain on sale of Assets
Accretion of beneficial conversion feature
Accretion of debenture discount and warrants
Change in Fair Value of Warrant Liability
Other non-operating income / (expense)
Total other income / (expense)
Income / (Loss) before provision for income taxes
Provision for income taxes
Net income / (loss)
Net income / (loss) per share, basic and diluted
Weighted average shares outstanding
Basic
Diluted
2017
Adjustments
2017
As Restated
$
23,348,714 $
9,328,893
14,019,821
— $
—
—
23,348,714
9,328,893
14,019,821
17,016,789
—
17,016,789
468,750
377,961
17,863,500
(3,843,679)
—
—
—
—
468,750
377,961
17,863,500
(3,843,679)
(713,826)
(2,101,377)
(2,815,203)
(2,068,221)
1,018,548
(1,049,673)
(2,782,047)
(1,082,829)
(3,864,876)
—
—
—
—
(2,815,203)
(6,658,882)
(925,748)
(263,648)
(4,134,166)
(5,323,562)
(6,373,235)
(6,373,235)
(925,748)
(263,648)
(4,134,166)
(5,323,562)
(9,188,438)
(13,032,117)
—
(6,658,882) $
—
(6,373,235) $
—
(13,032,117)
(0.81)
(0.77) $
(1.58)
$
$
8,253,851
8,253,851
8,253,851
8,253,851
8,253,851
8,253,851
The adjustments to the consolidated statement of operations reflect the changes in fair the value from the date of issuance or 1/1/17,
whichever is later, through December 31, 2017 for certain warrants that had previously been reported as equity.
F-43
SOCIAL REALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
Summary of Restatement Consolidated Statement of Cash Flows
There was no net impact of the 2017 restatement adjustments on net cash provided by operating activities, net cash provided by
investing activities or net cash used in financing activities in the Consolidated Statement of Cash Flows. The adjustments only had
an impact on certain captions within cash from operating activities.
Subsequent to the filing of the Annual Report on Form 10-K for the year ended December 31, 2017 (the “Annual Report”), the
Company reviewed its accounting methodology relating to its warrant reclassification as equity in December 2017. The description
has been revised on the face of the consolidated balance sheets to indicate that the warrant related liabilities.
The foregoing restatement is being made in accordance with ASC 250, “Accounting Changes and Error Corrections.” The
disclosure provision of ASC 250 requires a company that corrects an error to disclose that its previously issued financial statements
have been restated, to provide a description of the nature of the error, the effect of the correction on each financial statement line
item and any per share amount affected for each prior period presented, and the cumulative effect on retained earnings in the
statement of financial position as of the beginning of each period presented.
The restatement pertains to all the quarters for the year ended December 31, 2017 and first three quarters of 2018, and accordingly
will have effect on these previously filed quarterly reports.
F-44
EXHIBIT INDEX
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
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
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
Class A Common Stock Placement Agent Warrant issued in October
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
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
4.12
001-37916
3/31/17
4.13
001-37916
4/2/18
4.2
4.1
001-33672
4/21/17
001-33672
4/21/17
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
10-K
10-K
8-K
8-K
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
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**
Trading dated 8/17/17
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
10-K
10-K
10-K
10-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
10.02
10.03
001-37916
001-37916
4/2/18
4/2/18
10.04
10.05
10.1
10.2
10.3
10.01
10.02
10.01
10.3
10.48
10.27
10.28
10.29
10.1
001-37916
001-37916
001-37916
001-37916
001-37916
001-37916
001-37916
333-179151
000-54996
001-37916
000-54996
000-54996
000-54996
333-215791
4/2/18
4/2/18
4/21/17
4/21/17
4/21/17
10/27/17
10/27/17
1/24/12
2/26/16
11/14/16
11/4/14
11/4/14
11/4/14
1/27/17
10.18**
10.19**
Employment Agreement with Dustin Suchter dated 12/19/14
Form of Proprietary Information, Inventions and Confidentiality
Agreement
10.20**
10.21
10.22
10.23
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
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
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
10.32
Financing Agreement with certain Lenders and Victory Park
10.33
10.34
10.35
10.36
10.37
10.38
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
333-179151
12/22/14
1/25/12
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
001-37916
9/4/15
11/14/16
10.41
10.34
10.18
10.22
000-54996
000-54996
000-54996
000-54996
9/23/16
12/22/14
11/4/14
11/4/14
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
001-37916
333-179151
001-37916
3/31/17
3/31/17
6/4/12
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.
Social Reality Inc. subsidiaries as December 31, 2018
·
·
·
BIGToken Inc.
Steel Media Inc.
Five Delta Inc.
EXHIBIT 21.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.01
We have issued our report dated April 16, 2019 on the 2018 and 2017 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, 2018. We hereby
consent to the incorporation by reference of said report in the Registration Statements of Social Reality, Inc. on Form S-8 (File No.
333-206792) and its Registration Statements on Form S-3, (File Nos. 333-225725). 333-221970, 333-218131, 333-215791, 333-
214644, and 333-214646).
//s// RBSM, LLP
New York, New York
April 16, 2019
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, 2018 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 16, 2019
/s/ Christopher Miglino
Christopher Miglino, Chief Executive Officer, principal
executive officer
EXHIBIT 31.2
Rule 13a-14(a)/15d-14(a) Certification
I, Michael Malone, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 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 16, 2019
/s/ Michael Malone
Michael Malone, 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, 2018 as filed with the Securities and Exchange Commission (the “Report”), I, Christopher Miglino, Chief Executive Officer,
and I, Michael Malone, 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 16, 2019
April 16, 2019
/s/ Christopher Miglino
Christopher Miglino, Chief Executive Officer,
principal executive officer
/s/ Michael Malone
Michael Malone, 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.