UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2019
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
SRAX, 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. [ ] Yes [X] 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. [ ] Yes [X] 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 [X] 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 [X] 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
[ ]
[X]
Accelerated filer
Smaller reporting company
Emerging Growth Company
[ ]
[X]
[ ]
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. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) [ ] Yes [X] 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. $57,710,013 based on the closing price of $4.66 on June 28, 2019
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. 14,034,152 shares of Class A
common stock are outstanding as of April 24, 2020.
None
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Page No.
Business.
Item 1.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2.
Item 3.
Item 4.
Description of Property.
Legal Proceedings.
Mine Safety Disclosures.
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.
Item 5.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8.
Item 9.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Financial Statements and Supplementary Data.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11.
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Principal Accounting Fees and Services.
Part III
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,” “Registrant” refer to
SRAX, Inc. and its subsidiaries. Additionally, and reference to “BIGToken”and “BIGToken, Inc.”, or the “BIGToken Project” refer to the Company’s
wholly owned subsidiary, BIGToken, Inc. and the assets used in its operations. Also, any reference to “common share” or “common stock,” refers to our
$.001 par value Class A common stock.
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 data technology company offering tools and services to identify and reach consumers for the purpose of marketing and advertising
communication. Our technologies assist our clients in: (i) identifying their core consumers and such consumers’ characteristics across various channels in
order to discover new and measurable opportunities maximize profits associated with advertising campaigns and (ii) gaining insight into the activities of
their customers.
We derive our revenues from the:
● Sale and licensing of our proprietary SaaS platform; and
● Sales of proprietary consumer data; and
● Sales of digital advertising campaigns.
Sales of Advertising Campaigns.
We provide services and data to allow our customers to utilize our proprietary data to enhance their data analytics and marketing needs. Our products and
services support and assist our customers with data management, audience optimization and recognition, multi-channel and omnichannel media, and
marketing services. These tools also assist our customers in driving online and traditional retail sales.
Our solutions allow for the analysis of multiple layers of data to build and scale audience profiles that can be analyzed and targeted with digital media. Our
capabilities allow the leveraging of data from our proprietary platforms to achieve more effective analysis and marketing campaigns.
Key features of our platforms:
● Access to consumers who have joined our proprietary platforms who have opted to be marketed to. We provide proprietary information on these
consumers and have their consent to market to them, providing marketers safe and reliable data.
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● The discovery of new avenues through which customers are able to reach the higher-performing audiences / customers by leveraging machine
learning capabilities.
● The use of our proprietary platform in order to allow marketers to unlock shopper profiles built from location, web browsing, purchase history,
social behavior and other analytics.
● The use of customized audience creation tools.
Sale and licensing of SaaS platform
Our software as a service (“SaaS”) solution, SRAX IR, enables companies to understand their shareholder base through the tracking of holdings, the
management of investor contact information and identification of trends in the purchase and sale of issuer’s securities, if applicable. Once the investors are
identified, our platform provides tools to communicate with these investors.
SRAX IR provides the following:
● Insight into investor sentiment by analyzing buying and selling trends of an issuer’s shareholder base.
● Communication points with an issuer’s investors, such as emails, phone number, social media accounts and address of record.
● Engaging current and potential shareholders through real-time targeted cross-device omni-channel informational campaigns regarding an issuer’s
products and services.
● Assisting issuers in managing and monitoring the return of investment achieved from investor relations and corporate communication initiatives.
Sales of proprietary consumer data.
In 2019 we launched our BIGToken consumer data management platform, where consumers are rewarded for providing and verifying their data and
completing activities within the platform. Our business is currently based on a platform of registered users, developed as a direct to consumer data
marketplace, providing advertisers and marketers highly accurate, informed consent-based research and ad targeting data. We believe that the information
gathered through the BIGToken platform will, upon reaching critical mass, be significantly more valuable than information that is gathered and validated
through other means without the specific knowledge and consent of the data provider.
Our strategy is to develop an opt-in first party data set (CCPA and GDPR compliant) which we believe will uniquely position SRAX to capitalize on the
rapidly evolving data marketplace. We are currently focused on executing on our plans to increase registered users on the platform, and effectively
segment, and eventually monetize on the data our users provide and the insight we derive therefrom. As part of this strategy, we continue to explore
partnership opportunities that would allow us to leverage the capabilities of the BIGToken platform to effectively grow the platform and increase and
enhance our user experience and user rewards / compensation.
Examples of how we plan to use BIGToken and the proprietary consumer data derived therefrom include:
● The use of BIGToken user surveys and the sale of such information received from surveys.
● The creation and management of targeted rewards and loyalty programs based on information and buying trends ascertained by data captured on
our BIGToken platform.
● The ability to assist our customers in conducting market research based on analytics received from users of the BIGToken platform.
● The ability to identify specific audiences for our customers and to target questions, surveys and data analytics geared toward our customers’
products / industries. Additionally, if we are unable to scale the needed information for a customer’s target audience, we may utilize our
proprietary analytics to gain insight to further focus and refine user segments that need to be targeted in order to optimize data and media spend.
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● The use of Lightning Insights that allow our customers to conduct research around specific audience groups through both long and short research
studies.
● The creation of customized loyalty programs that utilize rewards to drive consumer purchasing habits.
Marketing and sales
We market our services through our in-house sales team, which is divided into three distinct groups. The First group is responsible for national brand
advertisers and advertising agencies; the second group is responsible for selling our SaaS solutions to issuers of public securities; and the third group is
focused on mid-market agencies and brands. 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.
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.
Competition
We operate in a highly competitive digital media and ad tech environment. We compete based on our ability to: assist our customers in obtaining the best
available prices, data, and analytics, our customer service and, the quality and accessibility of our innovative products and service offerings. We believe our
product and services associated with BIGToken and our SaaS solution, SRAX IR, are both unique and provide for a competitive advantage. Should other
companies create similar software and acquire the customers that we currently have, then in the future we could face increased competition. 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.
Government regulation
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business. Many of these laws and
regulations are still evolving and being tested in courts and could be interpreted in ways that could harm our business. These may involve privacy, data
protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and
deletion, electronic contracts and other communications, competition, protection of minors, consumer protection, product liability, taxation, economic or
other trade prohibitions or sanctions, anti-corruption law compliance, securities law compliance, and online payment services. In particular, we are subject
to federal, state, and foreign laws regarding privacy and protection of people’s data. Foreign data protection, privacy, content, competition, and other laws
and regulations can impose different obligations or be more restrictive than those in the United States. U.S. federal and state and foreign laws and
regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to
significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and
rapidly evolving industry in which we operate, and may be interpreted and applied inconsistently from country to country and inconsistently with our
current policies and practices.
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Proposed or new legislation and regulations could also significantly affect our business. For example, the European General Data Protection Regulation
(GDPR) took effect in May 2018 and applies to all of our products and services used by people in Europe. The GDPR includes operational requirements for
companies that receive or process personal data of residents of the European Union that are different from those previously in place in the European Union
and includes significant penalties for non-compliance. The California Consumer Privacy Act, which took effect in January 2020, also establishes certain
transparency rules and creates new data privacy rights for users. Similarly, there are a number of legislative proposals in the European Union, the United
States, at both the federal and state level, as well as other jurisdictions that could impose new obligations or limitations in areas affecting our business, such
as liability for copyright infringement. In addition, some countries are considering or have passed legislation implementing data protection requirements or
requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.
We may become the subject of investigations, inquiries, data requests, requests for information, actions, and audits by government authorities and
regulators in the United States, Europe, and around the world, particularly in the areas of privacy, data protection, law enforcement, consumer protection,
and competition, as we continue to grow and expand our operations. We are currently, and may in the future be, subject to regulatory orders or consent
decrees, including the modified consent order we entered into in July 2019 with the U.S. Federal Trade Commission (FTC) which is pending federal court
approval and which, among other matters, will require us to implement a comprehensive expansion of our privacy program. Orders issued by, or inquiries
or enforcement actions initiated by, government or regulatory authorities could cause us to incur substantial costs, expose us to unanticipated civil and
criminal liability or penalties (including substantial monetary remedies), interrupt or require us to change our business practices in a manner materially
adverse to our business, divert resources and the attention of management from our business, or subject us to other remedies that adversely affect our
business.
Employees
At April 24, 2020, we had 35 full-time employees. We also contract for the services of an additional approximately 100 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. On August 15, 2019 we formally changed our Name to SRAX, Inc.
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 SRAX can be found on our website www.srax.com. Reference in this document to that website address does not constitute
incorporation by reference of the information contained on the website.
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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 and BIGToken
We have a history of operating losses and there are no assurances we will report profitable operations in the foreseeable future.
For the year-ended December 31, 2019 we reported losses from operations of $16,859,000. At December 31, 2019, we had an accumulated deficit of
$35,637,000. 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 7.2% in 2019 from 2018. As described elsewhere herein, in 2019 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.
A pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities or advisors could
adversely impact our business.
If a pandemic, epidemic, or outbreak of an infectious disease including the recent outbreak of respiratory illness caused by a novel coronavirus (COVID-
19) or other public health crisis were to affect the our operations, facilities or those of our customers or suppliers, our business could be adversely affected.
A pandemic typically results in social distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support
staff and professional advisors. These factors, in turn, may not only materially impact our operations, financial condition and demand for our services but
our overall ability to react timely to mitigate the impact of this event. Also, it may hamper our efforts to comply with our filing obligations with the
Securities and Exchange Commission.
Our auditors have expressed substantial doubt about our ability to continue as a going concern.
Our auditors’ report on our December 31, 2019 consolidated financial statements expresses an opinion that our capital resources as of the date of their audit
report were not sufficient to sustain operations or complete our planned activities for the upcoming year unless we raised additional funds. Our current cash
level raises substantial doubt about our ability to continue as a going concern past the beginning of the second quarter of 2020. If we do not obtain
additional capital by such time, we may no longer be able to continue as a going concern and may cease operation or seek bankruptcy protection.
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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.
Our management has determined that, as of December 31, 2019, 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.
We believe our failure to maintain effective systems of internal controls over financial reporting 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.
Our management and audit committee determined we needed 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, 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, 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, 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.
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 our restatements of previously issued quarterly and year-to-date unaudited consolidated financial statements for March 31, 2017, June 30,
2017, September 30, 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.
We will need to raise additional capital to pay our indebtedness as it comes due.
In February of 2020 we entered into a term loan and security agreement with BRF Finance Co., LLC, an affiliate of B. Riley Financial, Inc. Pursuant to the
loan agreement, we can borrow up to $5,000,000, subject to certain terms and conditions. The loan is secured by substantially all of the assets and the
intellectual property of the Company. Beginning on August 1, 2020, and continuing on the first day of each month thereafter until March 22, 2022, the
Company will be required to make monthly payments of principal and interest. Based upon our current financial results, we will need to raise additional
capital through the sale of debt or equity or the sale of assets, in order to make the required loan payments. If we are unable to make the required payments,
or if we fail to comply with the various requirements and covenants of our indebtedness, we would be in default, which would permit the holders of our
indebtedness to accelerate the maturity and require immediate repayment and lead to potential foreclosure on the assets securing the debt. If we are unable
to refinance or repay our indebtedness as it becomes due, including upon an event of default, we may become insolvent and be unable to continue
operations.
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We may be required to expend significant capital to redeem BIGToken Points which will negatively impact our ability to fund our core operations.
Users of BIGToken receive points for undertaking certain actions on the platform that may be redeemed directly for cash from us, with such value as
determined by management. Accordingly, we are currently obligated to redeem users’ points which are earned on BIGToken. We are currently redeeming
each point for $0.01, subject to the user meeting certain conditions. As of December 31, 2019, we recorded a contingent liability for future point
redemptions equal to $446,000 and we have redeemed an aggregate amount of $525,000. In March of 2019, we experienced a surge in the number of users
of our BIGToken platform. As of December 31, 2019, we had approximately 16.5 million users. Notwithstanding the foregoing, if our users continue to
increase, we will be required to have enough cash reserves to redeem points held by our qualified users for cash. There can be no assurance that we will
have enough cash reserves, or if we do have sufficient cash, if we will be able to continue to fund our other business obligations and operational expenses.
If our efforts to attract and retain BIGToken users are not successful, our number of users and the amount of data collected could fail to reach critical
mass, grow or decline and our potential for BIGToken to earn revenues may be materially affected.
We will be dependent on advertisers to pay us for access to user data. We must attract users to grow the amount of accessible data and make it attractive to
these third parties. If the public does not perceive our mission or our services to be reliable, valuable or of high quality, we may not be able to attract or
retain users and create a critical mass of data which will impact our ability to earn revenues which could have a materially adversely affected on SRAX.
Natural disasters, epidemic or pandemic disease outbreaks, trade wars, political unrest or other events could disrupt our business or operations or those
of our development partners, manufacturers, regulators or other third parties with whom we conduct business now or in the future.
A wide variety of events beyond our control, including natural disasters, epidemic or pandemic disease outbreaks (such as the recent novel coronavirus
outbreak), trade wars, political unrest or other events could disrupt our business or operations or those of our manufacturers, regulatory authorities, or other
third parties with whom we conduct business. These events may cause businesses and government agencies to be shut down, supply chains to be
interrupted, slowed, or rendered inoperable, and individuals to become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or
governmental restrictions. For example, California recently ordered most businesses closed, mandating work-from-home arrangements, where feasible, in
response to the coronavirus pandemic. These limitations could negatively affect our business operations and continuity, and could negatively impact ability
to timely perform basic business functions, including making SEC filings and preparing financial reports. If our operations or those of third parties with
whom we have business are impaired or curtailed as a result of these events, the development and commercialization of our products and product
candidates could be impaired or halted, which could have a material adverse impact on our business.
Challenges in acquiring user data could materially adversely affect our ability to retain and expand BIGToken, and therefore could materially affect
our business, financial condition and results of operations.
In order to expand BIGToken, we must continue to expend resources to make the submission of user data as user-friendly as possible. We, and our users,
may face legal, logistical, cultural and commercial challenges in procuring user data. Additionally, once such data is obtained, if the process for validation
and collection of Rewards may be perceived as too cumbersome and discourage potential users from submission. We may need to expend significant
resources on user interfaces for evolving platforms, such as mobile devices. Inconveniences to our users or potential users at any stage of the process may
materially challenge our growth.
If we fail to ensure that the user data derived from BIGToken is of high quality, our ability to attract customers or monetize the data may be materially
impaired.
The reliability of our user data depends upon the integrity and the quality of the process of accepting user data into BIGToken. We will take certain
measures to validate user data submitted by our users and potential users to assure a high quality of data in BIGToken and generally confirming that data is
submitted in accordance with our terms for such data. We must continue to invest in our quality control measures relating to BIGToken in order to provide
a high-quality product to potential customers.
If BIGToken experiences an excessive rate of user attrition, our ability to attract customers could fail.
Users may elect to have their data deleted from BIGToken at any time. We must continually add new users both to replace users who choose to delete their
data and to increase our user base. Users may choose to delete their data for many reasons. If users are concerned about privacy and security and do not
perceive BIGToken to be reliable, if we fail to keep users engaged and interested in our application, or if we simply lose our users’ attention, we could fail
to gather sufficient user data and our ability to earn revenues may be materially affected.
7
If we are unable to manage our marketing and advertising expenses, it could materially harm our results of operations and growth.
We plan to rely in part on our marketing and advertising efforts to attract new members. Our future growth and profitability, as well as the maintenance and
enhancement of our brand, will depend in large part on the effectiveness and efficiency of our marketing and advertising strategies and expenditures. If we
are unable to maintain our marketing and advertising channels on cost-effective terms, our marketing and advertising expenses could increase substantially,
and our business, financial condition and results of operations may suffer. In addition, we may be required to incur significantly higher marketing and
advertising expenses than we currently anticipate if excessive numbers of members withdraw their member data from our Database.
Failure to comply with federal, state and local laws and regulations or our contractual obligations relating to data privacy, protection and security of
BIGToken user data, and civil liabilities relating to breaches of privacy and security of user data, could damage our reputation and harm our business.
A variety of federal, state and local laws and regulations govern the collection, use, retention, sharing and security of user data. We will collect BIGToken
user data from and about our members when they redeem Rewards and maintain that date in our BIGToken Application. Claims or allegations that we have
violated applicable laws or regulations related to privacy, data protection or data security could in the future result in negative publicity and a loss of
confidence in us by our users and potential new users, and may subject us to fines and penalties by regulatory authorities. In addition, we have privacy
policies and practices concerning the collection, use and disclosure of user data as part of our agreements with our members, including ones posted on our
website. Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices. In
addition, our use and retention of user data could lead to civil liability exposure in the event of any disclosure of such information due to hacking, malware,
phishing, inadvertent action or other unauthorized use or disclosure. Several companies have been subject to civil actions, including class actions, relating
to this exposure.
We have incurred, and will continue to incur, expenses to comply with data privacy, protection and security standards and protocols for BIGToken user data
imposed by law, regulation, self-regulatory bodies, industry standards and contractual obligations. Such laws, standards and regulations, however, are
evolving and subject to potentially differing interpretations, and federal, state and provincial legislative and regulatory bodies may expand current or enact
new laws or regulations regarding privacy matters. Additionally, we accept user from foreign countries which subjects us to the personal and other data
privacy, protection and security laws of those countries, We are unable to predict what additional legislation, standards or regulation in the area of privacy
and security of personal information could be enacted or its effect on our operations and business.
If we are unable to satisfy data privacy, protection, security, and other government- and industry-specific requirements, our growth could be harmed.
We need or may in the future need to comply with a number of data protection, security, privacy and other government- and industry-specific requirements,
including those that require companies to notify individuals of data security incidents involving certain types of personal data. Security compromises could
harm our reputation, erode user confidence in the effectiveness of our security measures, negatively impact our ability to attract new members, or cause
existing users to withdraw their data from BIGToken.
8
Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our business.
The United States and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict our ability
to collect, process, use, transfer and pool data collected from and about consumers and devices. Trade associations and industry self-regulatory groups have
also promulgated best practices and other industry standards relating to targeted advertising. Various U.S. and foreign governments, self-regulatory bodies
and public advocacy groups have called for new regulations specifically directed at the digital advertising industry, and we expect to see an increase in
legislation, regulation and self-regulation in this area. The legal, regulatory and judicial environment we face around privacy and other matters is constantly
evolving and can be subject to significant change. For example, the General Data Protection Regulation, or GDPR, which was agreed by E.U. institutions
in 2016 and came into effect after a two year transition period on May 25, 2018, updated and modernized the principles of the 1995 Data Protection
Directive and significantly increases the level of sanctions for non-compliance. Data Protection Authorities will have the power to impose administrative
fines of up to a maximum of €20 million or 4% of the data controller’s or data processor’s total worldwide turnover of the preceding financial year.
Similarly, the E-Privacy Regulation, which was launched by the European Parliament in October 2016, could result in, once enacted, new rules and
mechanisms for “cookie” consent. In addition, the interpretation and application of data protection laws in the U.S., Europe and elsewhere are often
uncertain and in flux. Legislative and regulatory authorities around the world may decide to enact additional legislation or regulations, which could reduce
the amount of data we can collect or process and, as a result, significantly impact our business. Similarly, clarifications of and changes to these existing and
proposed laws, regulations, judicial interpretations and industry standards can be costly to comply with, and we may be unable to pass along those costs to
our clients in the form of increased fees, which may negatively affect our operating results. Such changes can also delay or impede the development of new
solutions, result in negative publicity and reputational harm, require significant incremental management time and attention, increase our risk of non-
compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices, including our ability
to charge per click or the scope of clicks for which we charge. Additionally, any perception of our practices or solutions as an invasion of privacy, whether
or not such practices or solutions are consistent with current or future regulations and industry practices, may subject us to public criticism, private class
actions, reputational harm or claims by regulators, which could disrupt our business and expose us to increased liability. Finally, our legal and financial
exposure often depends in part on our clients’ or other third parties’ adherence to privacy laws and regulations and their use of our services in ways
consistent with visitors’ expectations. We rely on representations made to us by clients that they will comply with all applicable laws, including all relevant
privacy and data protection regulations. We make reasonable efforts to enforce such representations and contractual requirements, but we do not fully audit
our clients’ compliance with our recommended disclosures or their adherence to privacy laws and regulations. If our clients fail to adhere to our contracts
in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our own solutions, services
and data collection, use and sharing practices in our own disclosures to consumers, then we and our clients may be subject to potentially adverse publicity,
damages and related possible investigation or other regulatory activity in connection with our privacy practices or those of our clients.
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.
Privacy concerns could damage our reputation and deter current and potential users from contributing additional data through our BIGToken
Application. If our security measures are breached resulting in the improper use and disclosure of user data, BIGToken may be perceived as not being
secure, users and customers may curtail or stop using BIGToken, and we may incur significant legal and financial exposure.
Concerns about our practices with regard to the collection, use, disclosure, or security of user data or other privacy related matters, even if unfounded,
could damage our reputation and adversely affect our operating results. Our services will involve the purchase, storage, transmission and sale of user data,
and theft and security breaches expose us to a risk of loss of this information, improper use and disclosure of such information, litigation, and potential
liability. Any systems failure or compromise of our security that results in the release of user data, or in our or our users’ ability to access such data, could
seriously harm our reputation and brand and, therefore, our business, and impair our ability to attract and retain users. Additionally, if user data is somehow
made public or made available through a security breach, it may be used to identify our users and people related thereto. We may experience cyber attacks
of varying degrees. Our security measures may also be breached due to employee error, malfeasance, system errors or vulnerabilities, including
vulnerabilities of our vendors, suppliers, their products, or otherwise. Such breach or unauthorized access, increased government surveillance, or attempts
by outside parties to fraudulently induce employees, users, or customers to disclose sensitive information in order to gain access to user data could result in
significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of BIGToken that could potentially have an
adverse effect on our business. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change
frequently, become more sophisticated, and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to
implement adequate preventative measures. Additionally, cyber attacks could also compromise trade secrets and other sensitive information and result in
such information being disclosed to others and becoming less valuable, which could negatively affect our business. If an actual or perceived breach of our
security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose members and customers.
9
Certain user data must be provided on a recurring basis in order to provide full value.
Certain types of user data will need to be contributed by users recurrently for such data to provide full value to our potential customers. If users fail to
provide us with sufficient recurring data, the value of the user data may substantially decrease and our ability to earn revenues may be materially affected.
Unfavorable media coverage could negatively affect our business.
Unfavorable publicity regarding, for example, our privacy practices, terms of service, regulatory activity, the actions of third parties, the use of our products
or services for illicit, objectionable, or illegal ends or the actions of other companies that provide similar services to us, could adversely affect our
reputation. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our user base and result in user attrition which
could adversely affect our business and financial results.
Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, content, competition,
consumer protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in
claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise
harm our business.
We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, such as privacy, data
protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and
deletion, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation and securities law compliance.
Expansion of our activities in certain jurisdictions, or other actions that we may take, may subject us to additional laws, regulations, or other government
scrutiny. In addition, foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be more
restrictive than those in the United States.
Additionally, as we allow European users, we are subject to the European General Data Protection Regulation (GDPR), effective as of May 2018. The
GDPR increases privacy rights for individuals in Europe, extends the scope of responsibilities for data controllers and data processors and imposes
increased requirements and potential penalties on companies offering goods or services to individuals who are located in Europe or monitoring the behavior
of such individuals (including by companies based outside of Europe). Noncompliance can result in penalties of up to the greater of €20 million, or 4% of
global company revenues.
These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government authorities,
are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations
are often uncertain, particularly in the newer industry in which we operate, and may be interpreted and applied inconsistently from country to country and
inconsistently with our current policies and practices.
These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may
delay or impede our international growth, result in negative publicity, increase our operating costs, require significant management time and attention, and
subject us to remedies that may harm our business.
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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.
We are delinquent in pays to various third-party vendors on which we rely.
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.
If we were to lose or have limited access to certain platforms or data sources, we will lose our existing revenue from these platform and sources.
The loss of access to any platforms or data sources could limit our ability to effectively grow a portion of our operations. Our business would be harmed if
these platforms:
● discontinues or limits access to its platform by us and other application developers;
11
● modify 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;
● 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;
● 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.
12
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.
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.
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.
13
Risks Related to Ownership of our Securities
The market price of our common stock may be adversely affected by sales of substantial amounts of our common stock pursuant to our at the market
sales agreement.
In February of 2020 we entered into a term loan and security agreement with BRF Finance Co., LLC, an affiliate of B. Riley Financial, Inc. Pursuant to the
loan agreement, we are required to enter into an at-the-market sales agreement pursuant to which we will sell our common shares directly into the market in
order to payback the loans. If we are required to sell a substantial number of shares, or the public perceives that these sales may occur, it could cause the
market price of our common stock to decline. In addition, the sale of these shares in the public market, or the possibility of such sales, could impair our
ability to raise capital through the sale of additional equity 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:
● the success of competitive products;
● actual or anticipated changes in our growth rate relative to our competitors;
● announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital
commitments;
● regulatory or legal developments in the United States and other countries;
● the recruitment or departure of key personnel;
● the level of expenses;
● actual or anticipated changes in estimates to financial results, development timelines or recommendations by securities analysts;
● variations in our financial results or those of companies that are perceived to be similar to us;
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● 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.
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.
15
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.
ITEM 2. DESCRIPTION OF PROPERTY.
We lease our principal executive offices, located in Los Angeles, California and consisting of approximately 3,000 square feet on a month-to-month basis at
a rate 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. We believe both locations are suitability and adequacy for
our currently levels of operations and anticipate growth.
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.
16
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
PART II
EQUITY SECURITIES.
Market for Our Common Equity
Our Class A common stock is listed on the Nasdaq Capital Market under the symbol “SRAX.”
As of April 24, 2020, there were approximately 53 holders of record of our common stock. Because many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial holders represented by these record
holders, but it is well in excess of the number of record holders.
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
See information contained in Part III Item 12 of Annual Report entitled “Equity Compensation Plan Information.”
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:
● 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. As part of settlement of the Company’s obligation under the receivable purchase agreement 161,899 of these shares were cancelled
and the remaining 58,101 shares were issued.
● On May 13, 2019, the Company entered into a securities purchase agreement with an accredited investor whereby the investor purchased 200,000
shares of the Company’s Class A common stock at a price per share of $5.00. The Company received aggregate gross proceeds of $1,000,000.
Pursuant to the terms of the securities purchase agreement, the investor has piggyback registration rights with respect to the shares.
● On May 13, 2019 the Company entered into a consulting agreement with a consultant for BIGtoken. As part of this agreement the Company
agreed to issue 75,000 shares of common stock for services to be provided over the following twelve months. The shares were valued at $374,000.
● On August 12, 2019, concurrent with a registered direct offering of our securities, we conducted a simultaneous private placement of our
securities. Pursuant to the terms of the private placement, we issued to the investors in the registered offering: (i) Series B warrants to purchase an
aggregate of 1,525,000 shares of Common Stock and (ii) Series C warrants to purchase an aggregate of 965,500 shares of Common Stock
(collectively, the Series B Warrants and Series C Warrants are referred to herein as the “Private Warrants”).
17
The Series A Warrants are immediately exercisable upon issuance, have a term of ninety (90) days from the date of issuance, and have an exercise
price of $3.60 per share. The Series B Warrants and Series C Warrants are not exercisable for a period of six (6) months following the issuance
date, have an exercise price of $4.00 per share, and expire on October 1, 2022. Additionally, the Series C Warrants vest ratably from time to time
in proportion to such Investor’s exercise of the Series A Warrants. Neither the Private Warrants nor the shares of Common Stock underlying the
Private Warrants have been registered.
In connection with the offering, we issued our placement agent warrants to purchase up to 59,668 shares of Common Stock. The placement agent
warrants have substantially the same terms as the Series B Warrants, except that the exercise price of the placement agent warrants is $4.50 per
share and has a four (4) year term beginning one (1) year after issuance.
The Private Warrants and the Placement Agent Warrants (as defined below) were sold and issued without registration under the Securities Act of
1933, as amended (the “Securities Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act as transactions not
involving a public offering and Rule 506 promulgated under the Securities Act as sales to accredited investors, and in reliance on similar
exemptions under applicable state laws.
● On February 28, 2020, we entered into a term loan and security agreement with BRF Finance Co., LLC, an affiliate of B. Riley Financial, Inc.
Pursuant to the loan agreement, we issued BRF Finance Co., LLC 500,000 Common Stock purchase warrants on origination date. We also agreed
to issue the lender an additional 500,000 Common Stock purchase warrants on the second draw-down date. The warrants have an exercise price
equal to 125% of the closing price of the Common Stock on their respective issuance dates (provided that the exercise price of the Warrants cannot
be less than $2.50 per share, subject to adjustment contained therein). The initial 500,000 warrants have an exercise price of $3.60. The warrants
will all expire on October 31, 2022 and allow for cashless exercise in the event that they are not subject to a registration statement on the six (6)
month anniversary of their respective issuances. The warrants do not contain any price protection provisions.
● On April 9, 2020 the Company entered into an agreement to amend the January 22 and 30 Accounts receivable agreements. The Purchaser agreed
to amend the payment of the Put Price to June 23, 2020 and June 30, 2020 for the receivable sale originating on January 22, 2020 and January 30,
2020, respectively. As consideration for the extension the Company agreed to issue the purchaser 32,668 and 4,032 shares of Class A common
stock for the receivable sale originating on January 22, 2020 and January 30, 2020, respectively.
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.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding our
business development plans, timing, strategies, expectations, anticipated expenses levels, business prospects and positioning with respect to market,
demographic and pricing trends, business outlook, technology spending and various other matters (including contingent liabilities and obligations and
changes in accounting policies, standards and interpretations) and express our current intentions, beliefs, expectations, strategies or predictions. These
forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and
uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including
those set forth under “Special Note Regarding Forward-Looking Statements” and under “Risk Factors” and elsewhere in this annual report. The following
discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this annual report.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying
financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as
follows:
● Company Overview – Provides an overview of our business and items that we deemed material in order to provide context for the remainder of
MD&A.
18
● Results of Operations - Analysis of our financial results comparing the year ended December 31, 2019 to the year ended December 31, 2018.
● Liquidity, Going Concern and BIGToken Liability - Liquidity discussion of our financial condition and potential sources of liquidity.
● Critical Accounting Policies - Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in
our reported financial results and forecasts.
Company Overview
We are a digital marketing and data technology company offering tools and services to identify and reach consumers for the purpose of marketing and
advertising communication. Our technologies assist our clients in: (i) identifying their core consumers and such consumers’ characteristics across various
channels in order to discover new and measurable opportunities that amplify the performance of marketing campaign in order to maximize profits or (ii)
gaining insight into the activities of their targeted stakeholders.
We derive our revenues from the:
● Sale and licensing of our proprietary SaaS platform; and
● Sales of proprietary consumer data; and
● Sales of digital advertising campaigns.
Sale of SRAX MD Business Unit
During the third quarter of 2018, we sold our SRAX MD business unit for a gain of approximately $22,108,000. Of our 2018 financial results, the SRAX
MD business unit represented approximately $6,874,000 or 69.6% of gross revenues with approximately $4,059,000, or 21.9% of our operating expenses.
The reader should keep this in mind when comparing year over year operating results.
Going Concern
In connection with preparing consolidated financial statements for the year ended December 31, 2019, management evaluated whether there were
conditions and events, considered in the aggregate, that could raise substantial doubt about the Company’s ability to continue as a going concern within one
year from the date that the financial statements are issued. Based on its evaluation, management concluded that without raising significant capital, there is
substantial doubt that the Company will continue as a going concern past the beginning of the second quarter of 2020.
BIGToken
On February 1, 2019, BIGToken became generally available to the public. Users of BIGToken receive points for undertaking certain actions on the
platform. These points are then redeemable from us pursuant to our Rewards Program. Our Rewards Program allows the user to redeem points for: (i) cash,
(ii) gift cards and (iii) donations to non-profit organizations. We also anticipate that in the future, users will be able to redeem the points for goods and/or
services offered by our sponsors and advertisers.
Since commencing the BIGToken Project, we have spent approximately $6.3 million in the development and management of BIGToken and have incurred
liabilities of approximately $500,000. For a further discussion, see the section of this Annual Report entitled “Liquidity, Going Concern and BIGToken
Liability” contained in this Item 7.
Recent Market Conditions
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of
coronavirus (“COVID-19”).
19
The pandemic has significantly impacted the economic conditions in the United States, with accelerated effects in February and March, as federal, state and
local governments react to the public health crisis, creating significant uncertainties in the United States economy. In the interest of public health and safety,
jurisdictions (international, national, state and local) where we have operations, required mandatory office closures. As of the date of this report, all of our
facilities are closed. As a result of these developments, the Company expects a material adverse impact on its revenues, results of operations and cash
flows. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether,
when or the manner in which the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or office closure
requirements.
The full extent of COVID-19’s impact on our operations and financial performance depends on future developments that are uncertain and unpredictable,
including the duration and spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the
severity of the virus, its spread to other regions as well as the actions taken to contain it, among others.
Results of operations
Year ended December 31, 2019 compared to year ended December 31, 2018 (in 000s)
Selected Consolidated Financial Data
Revenue
Cost of revenue
Gross Profit
Operating expense
Operating loss
Gain from sale of SRAX MD
Interest expense, net
Change in fair value of derivative liabilities
Other income (loss)
Net income (loss)
Year ended December 31,
2018
2019
$
Change
%
Change
$
3,584 $
1,680
1,904
19,762
(17,858)
658
(725)
1,045
21
(16,859)
9,881 $
3,157
6,724
18,443
(11,719)
22,108
(3,056)
8,954
(7,543)
8,744
(6,297)
(1,477)
(4,820)
1,319
(6,139)
22,108
(2,331)
(7,910)
8,223
(25,603)
(63.7)%
(46.8)%
(71.6)%
7.1%
52.4%
100.0%
(72.9)%
(88.3)%
(109.0)%
(292.8)%
Selected Consolidated Financial Data
Pro forma to exclude SRAX MD
For the Year Ended December 31, 2019 and 2018
As Reported for the Year
Ended December 31,
2019
2018
SRAX MD for the Year
Ended December 31,
2019
2018
Excluding
SRAX MD for the Year Ended
December 31,
2019
2018
Revenue
Cost of revenue
Gross profit
Operating expense
Operating income(loss)
$
$
3,584
1,680
1,904
19,762
(17,858)
$
$
9,881
3,157
6,724
18,443
(11,719)
$
$
$
40
(40)
26
(66) $
6,307 $
1,101
5,206
2,896
2,310 $
3,584 $
1,640
1,944
19,736
(17,792) $
3,574
2,056
1,518
15,547
(14,029)
20
Revenue
Our pro forma revenues were flat for the years ended December 31, 2019 and 2018 at approximately $3.6 million. However, revenue composition from
2018 to 2019 changed. In the year ended December 31, 2019, as a result of a greater focus on our SaaS solution and BIGToken, the revenue of SaaS and
BIGToken were approximately $87,000, and $456,000, respectively, with comparable revenue in 2018 of $0, and $0, respectively; while revenue from our
discontinued sell side business was approximately $540,000 in 2018 compared to $0 in 2019.
Cost of revenue
Cost of revenue consists of costs, that are directly related to a revenue-generating event and project and application design costs. On a pro forma basis
during the year ended December 31, 2019, our gross margin increased substantially as a result of an increase in higher margin business from our services,
including BIGToken product offerings.
Operating expense
Our operating expense is comprised of salaries, commissions, marketing, and general overhead expense. Overall, operating expense on a pro forma basis
increased to approximately $19.74 million for the year ended December 31, 2019 compared to $15.6 million for the year ended December 31, 2018. This
increase was primarily due to BIGToken operating expenses of $4.6 million during the period ending December 31, 2019, which represented an increase of
approximately $2.7 million from the year ended December 31, 2018. The remaining increase in operating expense of $1.4 million is related to increases in
sales, marketing, and general and administrative expenses.
Financing costs
Financing costs for the years December 31, 2019 and 2018 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, 2019 decreased to $716,000 as compared to
$3.1 million for the year ended December 31, 2018. This decrease in interest expense is attributable to the redemption of the Company’s 12.5% senior
secured convertible debentures in November 2018.
Working Capital
The following table presents working capital as of December 31, 2019 (in 000s):
Current assets
Current liabilities
Working capital
2019
2018
$
$
1,858 $
7,376
(5,518) $
5,468
9,017
(3,549)
Our current assets include cash and cash equivalents of $32,000 as of December 31, 2019. Current assets decreased by $3.6 million driven by a decrease in
cash of $2.8 million and accounts receivable of $1.02 million generated from lower gross revenue from advertisers and increase in operating expenses.
Our current liabilities include warrant and derivative liabilities of $4.4 million as of December 31, 2019. Current liabilities decreased by $1.6 million from
December 31, 2018, primarily from decreases in accounts payable and derivative warrant liabilities.
Cash flows from operating activities
Net cash used in operating activities was $15.4 million during the twelve months ended December 31, 2019 compared to $13.7 million for the comparable
period in 2018. This increase resulted primarily from an increase in our operating expenses during the year ended 2019.
21
Cash flows from investing activities
During the twelve months ended December 31, 2019 net cash used in investing activities was $0.8 million compared to $21.9 million of cash provided by
investing activities during the comparable period in 2018. The decrease was driven by the proceeds received from the sales of SRAX MD during 2018.
Cash flows from financing activities
During the twelve months ended December 31, 2019, net cash provided from financing activities was $13.4 million consisting of payments of proceeds
from the sales of common stock in the amount totaling $12.2 million and the proceeds from the exercise of warrants in the amount of $1.2 million. During
the twelve months ended December 31, 2018 net cash used in financing activities was $6.5 million for the redemption of convertible debentures and
proceeds from exercise of warrants of $0.1 million.
Liquidity, Going Concern and BIGToken Liability
Cash on hand at December 31, 2019 was $32,000. Based upon our cash at December 31, 2019 and the proceeds from our term loan (as discussed below),
we anticipate we will be able to meet our cash needs until the beginning of the second quarter of 2020.
The Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from the sales of its
goods and services to achieved profitable operations. There can be no assurance that profitable operations will ever be achieved, or if achieved, could be
sustained on a continuing basis. In addition, the Company’s operations and specifically, the development of BIGToken will require significant additional
financing. These factors create substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the
consolidated financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will
continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of
business.
Liquidity
During 2019, our principal sources of liquidity have been proceeds from various debt and equity offerings as well as the sale of our receivables. Cash
consists of cash on deposit with banks.
In February of 2020 we entered into a term loan and security agreement with BRF Finance Co., LLC, an affiliate of B. Riley Financial, Inc. Pursuant to the
loan agreement, we can borrow up to $5,000,000, subject to certain terms and conditions. The loan is secured by substantially all of our assets and
intellectual property. Our initial draw-down resulted in proceeds net of fees and commission of $2.1 million. Under the terms of the loan, we can draw-
down an additional $2.5 million upon the filing of an At-the-Market sales agreement (“ATM”). It is intended that the majority of proceeds received from
the sale of Common Stock under the ATM will be used for the repayment of the loan. Beginning on August 1, 2020 and continuing on the first day of each
month thereafter until March 1, 2022, we will be required to make monthly payments of principal and interest in the amount of approximately $153,000, or
if we are able to drawn down the additional $2.5 million, then payments of approximately $306,000.
Historically, we have financed our operations primarily from the sale of debt and equity securities. There can be no assurance that profitable operations will
ever be achieved, or if achieved, could be sustained on a continuing basis. Based upon our current revenues, expenses and liabilities, we anticipate having
to raise additional capital through the private and public sales of our equity or debt securities, or a combination thereof. Although management believes that
such capital sources will be available, there can be no assurance that financing will be available to us when needed in order to allow us to continue our
operations, or if available, on terms acceptable to us. If we do not raise enough capital in a timely manner, among other things, we may be forced scale back
our operations or cease operations all together.
We monitor our cash flow, assess our business plan, and make expenditure adjustments accordingly. If appropriate, we may pursue limited financing
including issuing additional equity and/or incurring additional debt. Although we have successfully funded our past operations through additional issuances
of equity, there is no assurance that our capital raising efforts will be able to attract additional necessary capital at prices attractive to the Company. If we
are unable to obtain additional funding for operations at any time in the future, we may not be able to continue operations as proposed. This would require
us to modify our business plan, which could curtail various aspects of our operations.
22
BIGToken Operations
As of December 31, 2019, we had approximately 16.5 million users on the BIGToken platform. We anticipate that we will need to reach a user base of
approximately 26 million prior to BIGToken generating revenues at a level sufficient to cover operating expenses, excluding the allocation of any corporate
overhead. Based on our current development plan, we estimate that we will need to invest an additional $5.6 million of capital, prior to BIGToken
becoming cash flow positive in the four quarter of 2022. Built into the model are many variable expenses that could be adjusted should our user acquisition
or our user monetization rates vary from the model. Although management believes that it will be able to secure such needed capital through the offering of
its securities, there can be no assurance that financing will be available to us when needed in order to allow us to continue with the development of
BIGToken, or if available, on terms acceptable to us. If we do not raise enough capital in a timely manner, among other things, we may be forced to scale
back our operations or cease operations all together.
BIGToken Liabilities
As of December 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 $5.3 million in the development and management of BIGToken. Additionally, we are currently
obligated to redeem users’ points which are earned on our BIGToken platform. We are currently redeeming each point for $0.001 to $.01, subject to the
user meeting certain conditions. As of December 31, 2019, we recorded a contingent liability for future point redemptions equal to $446,000 and we have
redeemed an aggregate of $525,000. As of December 31, 2019, we had approximately 16.5 million registered users.
Going Concern
In connection with preparing consolidated financial statements for the year ended December 31, 2019, management evaluated whether there were
conditions and events, considered in the aggregate, that could raise substantial doubt about the Company’s ability to continue as a going concern within one
year from the date that the financial statements are issued. Based on its evaluation, management concluded that without raising significant capital, there is
substantial doubt that the Company will continue as a going concern past the beginning of the second quarter of 2020. In making this assessment we
performed a comprehensive analysis of our current circumstances including: our financial position at December 31, 2019, our cash flow and cash usage
forecasts for the period covering one-year from the issuance date of this Annual Report filed on Form 10-K and our current capital structure including
outstanding warrants and other equity-based instruments and our obligations and debts.
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, 2019 and 2018 appearing elsewhere in this report.
The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial
statements. In addition, you should refer to our accompanying consolidated balance sheets as of December 31, 2019 and 2018, and the consolidated
statements of operations, changes in shareholders’ equity (deficiency) and cash flows for the fiscal years ended December 31, 2019 and 2018, 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.
23
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 77% of our total assets as of December 31, 2019, 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.
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.
24
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, 2019 and 2018.
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.
Leases
Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. We have operating leases primarily consisting of
facilities with remaining lease terms of approximately two to four years. Leases with an initial term of twelve months or less are not recorded on the
balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, we have combined the lease and non-lease components in
determining the lease liabilities and right of use assets.
Income Taxes
The Company accounts for income taxes under the provisions of FASB ASC Topic 740, “Income Tax,” which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred
tax assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and liabilities are measured using the enacted tax rate expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. The Company establishes a valuation when it is more likely than not that the
assets will not be recovered.
ASC Topic 740-10, “Accounting for Uncertainty in Income Taxes,” defines uncertainty in income taxes and the evaluation of a tax position as a two-step
process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of
any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-
not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit
that is greater than 50 percent likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer
meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met.
Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred.
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.
25
Recent accounting pronouncements
Our company considers the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not discussed below were assessed and
determined to be either not applicable or are expected to have minimal impact on our balance sheets or statements of operations.
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees
to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01,
Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11,
Targeted Improvements; and ASU No. 2018-20, Narrow-Scope Improvements for Lessors. The new standard establishes a right-of-use model (“ROU”) that
requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified
as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard was effective for our company on January 1, 2019. A modified retrospective transition approach is required, applying the new
standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest
comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements
for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative
period financial statements and provide the disclosures required by the new standard for the comparative periods. We adopted the new standard on January
1, 2019 and used the effective date as our date of initial application. Consequently, financial information will not be updated, and the disclosures required
under the new standard will not be provided for dates and periods before January 1, 2019.
The new standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us
not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for
all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU
assets or lease liabilities for existing short-term leases of those assets in transition. We did not elect the practical expedient to not separate lease and non-
lease components for any of our leases.
The adoption of the standard resulted in a effect on our financial statements with a balance sheet recognition of additional lease assets of $456,000
and lease liabilities of approximately $443,000.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) Measurement of Credit Losses on Financial
Instruments. The amendments in this Update require a new topic to be added (Topic 326) to the Accounting Standards Codification (“ASC”) and removes
the thresholds that entities apply to measure credit losses on financial instruments measured at amortized cost, such as loans, trade receivables, reinsurance
recoverables, and off-balance-sheet credit exposures, and held-to-maturity securities. Under current U.S. GAAP, entities generally recognize credit losses
when it is probable that the loss has been incurred. The guidance under ASU 2016-13 will remove all current recognition thresholds and will require
entities under the new current expected credit loss (“CECL”) model to recognize an allowance for credit losses for the difference between the amortized
cost basis of a financial instrument and the amount of amortized cost that an entity expects to collect over the instrument’s contractual life. The new CECL
model is based upon expected losses rather than incurred losses. The ASU is effective for fiscal years beginning after December 15, 2022, including interim
periods within those fiscal years. We are currently evaluating the effect that this new guidance will have on our financial statements and related disclosures.
26
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.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, consisting of our Principal Executive Officer and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2019. This evaluation included consideration of the
controls, processes and procedures that are designed to ensure that information required to be disclosed by the Company in the reports the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to
provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management has identified material weaknesses
in the Company’s internal control over financial reporting. Based on that evaluation, management concluded that our disclosure controls and procedures as
of December 31, 2019 were ineffective.
Inherent Limitations over Internal Controls
The Company’s 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 U.S. generally accepted accounting principles (“GAAP”). The Company’s
internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s
assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and
directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets
that could have a material effect on the financial statements.
(iv) 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.
27
Management’s Annual Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act). Internal control over financial reporting is a process designed by, or under the supervision of the Chief Executive Officer and
Chief Financial Officer and effected by our board of directors, management and other personnel, 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.
Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the criteria set forth in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013).
Based on the Company’s assessment, management has concluded that, our internal control over financial reporting was ineffective as of December 31,
2019 because of the following material weaknesses in internal controls over financial reporting:
● a lack of sufficient in-house qualified accounting staff;
● inadequate controls and segregation of duties due to limited resources and number of employees;
● limited checks and balances in processing cash transactions;
● substantial reliance on manual reporting processes and spreadsheets external to the accounting system for financial reporting;
● lack of adequate controls in the accounting for internally developed software costs.,
● products and services; and the recording of sophisticated, material financing transactions which are heavily dependent upon the use of estimates
and assumptions and require us using consultants;
● and our lack of experience in monitoring and administering, the Company’s internal control over financial reporting
To mitigate the items identified in the assessment, we rely heavily on direct management oversight of transactions, along with the use of legal and
accounting professionals/consultants. As we grow, we expect to increase the number of employees, which would enable us to implement adequate
segregation of duties within the internal control framework.
Remediation
We are continuing to seek ways to remediate these weaknesses, which stem from our small workforce and limited resources.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended December 31, 2019 that materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual report.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
PART III
The names of our directors and executive officers and their ages, positions, and biographies as of April 1, 2020 are set forth below. Our executive officers
are appointed by and serve at the discretion of the Board. There are no family relationships among any of our directors or executive officers. All directors
hold office until the next annual meeting of shareholders or until their respective successors are elected, except in the case of death, resignation, or removal.
Name
Christopher Miglino
Kristoffer Nelson
Michael Malone
Mark Savas
Malcolm CasSelle
Robert Jordan
Colleen DiClaudio
Age
51
41
38
50
49
51
42
Positions
Chairman of the Board, Chief Executive Officer, President
Chief Operating Officer, Director
Chief Financial Officer
Director
Director
Director
Director
Director Since
2010
2014
—
2012
2013
2017
2017
Christopher Miglino. Since co-founding our company in April 2010, Mr. Miglino has served as our Chief Executive Officer and a member of our board of
directors. He was appointed President of our company in January 2017. He also served as our Chief Financial Officer from April 2010 until November
2014, and as our principal financial and accounting officer since August 2015. Mr. Miglino, who has over 15 years of experience running various
advertising companies, oversees all of our affairs. Some of the companies Mr. Miglino has helped launch programs for include Diet Coke, Bank of
America, Nestle, General Mills, HBO, National Geographic, Target, Aflac, and Bayer. In addition, from August 2008 until March 2010, Mr. Miglino was
CEO of the Lime Ad Network, a subsidiary of Gaiam, Inc. (Nasdaq: GAIA), where his responsibilities included management of interactive and innovative
advertising programs for 250 green and socially conscious websites. Prior to that, from June 2004 until August 2008, Mr. Miglino was CEO of Conscious
Enlightenment, where he oversaw their day to day operations in the publishing and advertising industry. From 2004 until 2008, Mr. Miglino served as a
board member for Golden Bridge Yoga in Los Angeles, a studio that encompasses over 20,000 square feet of yoga spaces including a restaurant. Mr.
Miglino’s role as a co-founder of our company, his operational experience in our company as well as his professional experience in our business sector
were factors considered by the Corporate Governance and Nominating Committee in determining Mr. Miglino should serve on our Board.
28
Kristoffer Nelson. Mr. Nelson has served as an executive officer of our company since June 2012 and a member of our board of directors since September
2014. He has been employed by our company since September 2011, serving as Director of Business Development (September 2011 until January 2012),
Executive Vice President Publisher Relations (January 2012 until June 2016) and President and Chief Revenue Officer, until being named to his current
position in October 2014. Prior to joining our company, Mr. Nelson served as a project manager for Living Full Blast, Inc. from August 2009 until
December 2010 and President of Krama Consulting & Development from January 2004 until August 2009. Mr. Nelson attended Kings College and
Seminary, Van Nuys, California from 1998 until 2000 and West Los Angeles College from 2000 until 2003. He also attended the Leadership Institute of
Seattle through Pacific Integral from 2006 until 2008. Mr. Nelson’s significant operational experience in multiple aspects of our company coupled with his
experience at Living Full Blast, Inc. and Krama Consulting & Development were factors considered by the Corporate Governance and Nominating
Committee in determining Mr. Nelson should serve on our Board.
Michael Malone. Mr. Malone has served as our chief financial officer since January 2019. Mr. Malone has over fourteen (14) years of experience in
corporate finance in public and private companies. From 2014 until December 2018, he served as Vice President Finance of Westwood One, LLC, a
subsidiary of Cumulus Media, Inc. (NYSE: CMLS”), an audio broadcast network in New York. Prior to that, from January 2013 through June 2014, he
served as Finance Director / Controller for Cumulus Media Network’, audio broadcast network in Georgia, until its merger with Westwood One, LLC. Prior
to that from 2012 to 2013, he worked as Director of Internal Auditing of Cumulus Media from. He holds a BA in accounting from Monmouth College.
Marc Savas. Mr. Savas has been a member of our board of directors since January 2012. Mr. Savas has over 24 years of experience in senior leadership and
consulting. Since January 2007 he has served as CEO of Living Full Blast, Inc., overseeing business development and consulting for numerous companies
and putting together sales teams for such companies. In addition, from January 1998 until January 2006, Mr. Savas was also CEO for Unfair Advantage
Inc., where he conducted 118 management consulting projects, many of which were created using programs that his company had designed. Additionally,
from February 2012 until present, Mr. Savas is the President of Refuse Specialists, one of the largest waste and recycling brokers / consultants in the US.
He built a technology stack and workflow management system, ProRefuse™, allowing Refuse Specialists to experience rapid growth. Mr. Savas’
management consulting and operational experience were factors considered by the Corporate Governance and Nominating Committee in determining Mr.
Savas should serve on our Board.
Malcolm CasSelle. Mr. CasSelle has been a member of our board of directors since August 2013. Mr. CasSelle is an entrepreneur and since August 2017
has served as President of Worldwide Asset eXchange (WAX), a utility token designed with functionalities to simplify digital item trading, which is
operated by Norris Services, LLC. Since August 2017 he has also served as Chief Information Officer of OPSkins, a marketplace for buying and selling
digital items, including e-Sports digital merchandise, which is managed by Norris Services, LLC. From February 2016 until August 2017 Mr. CasSelle was
Chief Technology Officer and President of New Ventures at tronc, Inc. where he oversaw all digital operations and was responsible for leveraging data and
technology to accelerate digital growth. Prior to tronc, Inc., he was Senior Vice President and General Manager, Digital Media of SeaChange International.
He joined SeaChange International in 2015 as part of the company’s acquisition of Timeline Labs, where he served as CEO. Previously, Mr. CasSelle led
startups in the digital industry, including MediaPass, Xfire and Groupon’s joint venture with Tencent in China. He has also been an active early stage
investor in companies including Facebook, Zynga, and most recently Bitcoin-related companies. Mr. CasSelle received a B.S. in Computer Science from
the Massachusetts Institute of Technology in 1991 and an M.S. in Computer Science from Stanford University in 1994. Mr. CasSelle’s entrepreneurial
background, knowledge of our market segment and experience as a Board member for other companies were factors considered the Corporate Governance
and Nominating Committee in determining Mr. CasSelle should serve on our Board
Robert Jordan. Mr. Jordan has been a member of our board of directors since March 2017 and chairs the Audit Committee. A serial entrepreneur with a
passion for building world class companies, he has spent the last 25 years transforming originations across a spectrum of industries. Currently, Mr. Jordan
serves as CEO of Tribeca Capital Partners, a private investment holding company focused on building lower middle market companies. During the 17 years
prior to Tribeca, Mr. Jordan served in chief executive officer roles for a broad range of companies focused in business services, technology, logistics,
distribution and retail. Prior to his entrepreneurial endeavors, Mr. Jordan held senior management positions at both The Walt Disney Company and Pepsi-
Cola Bottling Company. He is a recognized authority and thought leader on corporate transformations, restructuring, strategy implementation and revenue
growth and is frequently called upon to provide advice and council to industry groups, corporate boards and management teams. Mr. Jordan received a
BSBA from Northern Arizona University and attended Executive Education programs at both Harvard Business School and UCLA School of Business. Mr.
Jordan’s executive level and senior management business experience coupled by his private investment company experience were factors considered by the
Corporate Governance and Nominating Committee in determining Mr. Jordan should serve on our Board
29
Colleen DiClaudio. Ms. DiClaudio has been a member of our board of directors since September 2017. She currently serves as president of 340B
Technologies, a 340B software solutions healthcare technology company she co-founded in August 2014. From June 2009 through August 2014 she served
as vice president of business development of CompleteCare Health Network, located in New Jersey. Ms. DiClaudio has received a Master’s Degree of
Public Health from the University of Medicine and Dentistry of New Jersey and a Bachelor’s Degree in Public Health from Stockton University. Ms.
DiClaudio’s experience in the healthcare technology sector and entrepreneurial background were factors considered by the Corporate Governance and
Nominating Committee in determining Ms. DiClaudio should serve on our Board.
Section 16(A) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers, directors, and stockholders owning more than ten percent of our common stock, to file reports of
ownership and changes in ownership with the SEC and to furnish us with copies of such reports. Based solely on our review of Form 3, 4 and 5’s, the
following table provides information regarding any of the reports which were filed late during the fiscal year ended December 31, 2019:
None for year ended December 31, 2019
Code of Ethics
We are committed to maintaining the highest standards of honest and ethical conduct in running our business efficiently, serving our stockholders interests
and maintaining our integrity in the marketplace. To further this commitment, we have adopted our Code of Conduct and Business Code of Ethics, which
applies to all our directors, officers and employees. To assist in its governance, our Board has formed three standing committees composed entirely of
independent directors, Audit, Compensation and Corporate Governance and Nominating committees. A discussion of each committee’s function is set forth
below.
Bylaws
Our bylaws, the charters of each Board committee, the independent status of a majority of our board of directors, our Code of Conduct and Business Code
of Ethics provide the framework for our corporate governance. Copies of our bylaws, committee charters, Code of Conduct and Business Code of Ethics
may be found on our website at www.SRAX.com under the Leadership & Governance section of the “Investors” tab. Copies of these materials also are
available without charge upon written request to our Corporate Secretary at 456 Seaton St., Los Angeles, California 90013.
Board of directors
The board of directors oversees our business affairs and monitors the performance of management. In accordance with our corporate governance principles,
the board of directors does not involve itself in day-to-day operations. The directors keep themselves informed through discussions with the Chairman and
Chief Executive Officer and our Chief Financial Officer and by reading the reports and other materials that we send them and by participating in board of
directors and committee meetings. Directors are elected for a term of one year. Our directors hold office until their successors have been elected and duly
qualified unless the director resigns or by reason of death or other cause is unable to serve in the capacity of director. If any director resigns, dies or is
otherwise unable to serve out his or her term, or if the Board increases the number of directors, the Board may fill any vacancy by a vote of a majority of
the directors then in office, although less than a quorum exists. A director appointed to fill a vacancy shall serve for the unexpired term of his or her
predecessor. Vacancies occurring by reason of the removal of directors without cause may only be filled by vote of the stockholders.
Independence
Our common stock is listed on the NASDAQ Capital Market. As such, we are subject to the NASDAQ Stock Market LLC (“NASDAQ”) director
independence standards. In accordance with these standards, in determining independence the Board affirmatively determines whether a director has a
“material relationship” with SRAX that would compromise his or her independence from management or would cause him or her to fail to meet the
NASDAQ’s specific independence criteria. When assessing the “materiality” of a director’s relationship with SRAX, the Board considers all relevant facts
and circumstances, not merely from the director’s standpoint, but from that of the persons or organizations with which the director has an affiliation, and,
where applicable, the frequency and regularity of the services, and whether the services are being carried out at arm’s length in the ordinary course of
business. Material relationships can include commercial, consulting, charitable, familial and other relationships. A relationship is not material if, in the
Board’s judgment, it is not inconsistent with the NASDAQ’S director independence standards and it does not compromise a director’s independence from
management.
30
Applying the NASDAQ’s standards, the Board has determined that Messrs. Savas, CasSelle, Jordan and Ms. DiClaudio are each “independent” as that term
is defined by the NASDAQ’s standards.
Family Relationships
There are no family relationships between any director, executive officer, or person nominated or chosen by the registrant to become a director or executive
officer.
Board leadership structure and Board’s role in risk oversight
Mr. Miglino serves as both the Chairman of our Board of Directors and our Chief Executive Officer. We do not have a lead independent director. Given the
small size of the Board and limited number of executive officers, the Board has determined that a lead independent director is currently not necessary.
Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including
credit risk, liquidity risk, operational risk, strategic risk and reputation risk. Management is responsible for the day-to-day management of the risks we face,
while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the board of
directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning
as designed. To do this, the board of directors meets regularly to review Social Reality’s risks. Our Chief Financial Officer generally attends the Board
meetings and is available to address any questions or concerns raised by any member of the Board on risk management and any other matter. The
independent members of the Board work together to provide strong, independent oversight of our management and affairs through the Board’s standing
committees and, when necessary, special meetings of independent directors. Our independent directors may meet at any time in their sole discretion without
any other directors or representatives of management present. Each independent director has access to the members of our management team or other
employees as well as full access to our books and records. We have no policy limiting, and exert no control over, meetings of our independent directors.
Board committees
The Board of Directors has standing Audit, Compensation, and Corporate Governance and Nominating committees. Each committee has a written charter.
The charters are available on our website at www.SRAX.com under the Leadership & Governance section of the “Investors” tab. All committee members
are independent directors. Information concerning the current membership and function of each committee is as follows:
Audit Committee
Member
Compensation
Committee Member
and Nominating
Committee Member
Corporate Governance
(1)
(1)
(1)
Director
Marc Savas
Malcolm CasSelle
Robert Jordan
(1) Denotes chairperson.
Audit Committee
We have a designated an audit committee in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The Audit
Committee assists the board in fulfilling its oversight responsibility relating to:
● the integrity of our financial statements;
31
● our compliance with legal and regulatory requirements; and
● the qualifications and independence of our independent registered public accountants.
The Audit Committee has the ultimate authority to select, evaluate and, where appropriate, replace the independent auditor, approve all audit engagement
fees and terms, and engage outside advisors, including its own counsel, as it deems necessary to carry out its duties. The Audit Committee is also
responsible for performing other related responsibilities set forth in its charter.
The Audit Committee currently consists of Robert Jordan (chairperson), Malcolm CasSelle, and Marc Savas.
The Board has determined that Robert Jordan qualifies as an “audit committee financial expert” within the meaning of SEC rules. An audit committee
financial expert is a person who can demonstrate the following attributes: (1) an understanding of generally accepted accounting principles and financial
statements; (2) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; (3)
experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are
generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, or
experience actively supervising one or more persons engaged in such activities; (4) an understanding of internal controls and procedures for financial
reporting; and (5) an understanding of audit committee functions. Mr. Jordan has also been determined to be “independent” by the board of directors as
such term is defined in the NASDAQ listing standards. Additionally, Mr. Jordan meets the independence standards for audit committees under the
NASDAQ rules.
Compensation Committee
The Compensation Committee assists the Board in:
● Recommending, in executive session at which our chief executive officer is not present, the compensation and awards / bonuses for our CEO or
president, if such person is acting as the CEO, as well as other executive officers;
● discharging its responsibilities for approving and evaluating our officer compensation plans, policies and programs;
● reviewing and recommending to the Board, compensation to be provided to our employees and directors; and
● administering our equity compensation plan(s).
The Compensation Committee is charged with ensuring that our compensation programs are competitive, designed to attract and retain highly qualified
directors, officers and employees, encourage high performance, promote accountability and assure that employee interests are aligned with the interests of
our stockholders. The Compensation Committee is composed of two directors, each of whom has been determined by the Board to be independent within
the meaning of Rule 5605 of the NASDAQ Marketplace Rules.
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee:
● assists the Board in selecting nominees for election to the Board;
● monitor the composition of the Board;
● develops and recommends to the Board, and annually reviews, a set of effective corporate governance policies and procedures applicable to our
company; and
● regularly review the overall corporate governance of the Company and recommends improvements to the Board as necessary.
32
The purpose of the Corporate Governance and Nominating Committee is to assess the performance of the Board and to make recommendations to the
Board from time to time, or whenever it shall be called upon to do so, regarding nominees for the Board and to ensure our compliance with appropriate
corporate governance policies and procedures. The Corporate Governance and Nominating Committee is composed of two directors, each of whom has
been determined by the Board to be independent within the meaning of Rule 5605 of the NASDAQ Marketplace Rules
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table summarizes all compensation recorded by us in each of the last two completed years ended December 31, for:
● all individuals serving as our principal executive officer or acting in a similar capacity;
● our two most highly compensated named executive officers, whose annual compensation exceeded $100,000; and
● up to two additional individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as a
named executive officer of our company, at December 31, 2019.
The value attributable to any option awards is computed in accordance with FASB ASC Topic 718. The assumptions made in the valuations of the option
awards are included in Note 11 of the Notes to our Consolidated Financial Statements for the year ended December 31, 2019.
Name and principal
position
Christopher Miglino,
Chief Executive
Officer (2)
Michael Malone
Chief Financial
Officer (5)
Kristoffer Nelson
Chief Operating
Officer
Joseph Hannan
Chief Financial
Officer (10)
Year
2019
2018
2019
2018
2019
2018
2019
2018
Salary ($)
Bonus ($)
Stock
Awards
($)
Option
Awards ($) (1)
No equity
incentive plan
compensation
($)
Non-qualified
deferred
compensation
earnings
($)
All other
compensation
($)
Total
($)
340,000
291,250
199,242
275,000
242,500
540,000(3)
75,000
43,750
167,798(5)
220,900(7)
398,675(8)
24,455(4)
364,455
437,392(2)
1,268,642
28,722(6)
470,762
27,205
25,892(9)
523,105
710,817
191,667
250,000
488,107(11)
34,615(12)
964,389
(1)
(2)
The amounts included in the “Option Awards” column represent the aggregate grant date fair value of the stock options, compute din accordance
with ASC Topic 718. The assumptions made in the valuations of the option awards are included in Note 12 of the notes to our consolidated
financial statements appearing in the 10-K for the year end December 31, 2019 for options awarded in 2019 or prior.
Mr. Miglino’s contracted base salary is $340,000 annually. Prior to March 16, 2017, Mr. Miglino had been voluntarily reducing his base salary to
$114,000. In September 2018, all of Mr. Miglino’s previously deferred salary was paid in full. Additionally, Mr. Miglino received a cash bonus of
$540,000 and $23,142 of Company paid health benefits.
33
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Mr. Miglino received a cash bonus for successfully completing the sale of the SRAX MD business division.
Mr. Miglino received $24,455 in Company paid benefits.
Mr. Malone joined the Company as Chief Financial Officer, effective January 2, 2019. Mr. Malone’s stock option award consisted of 100,000
options to purchase Class A common stock at $2.56.
Mr. Malone received $28,722 in Company benefits, which included $20,000 in relocation reimbursements.
Mr. Nelson’s options award represents options to purchase 100,000 shares of our Class A Common stock at $3.42 options to purchase.
Mr. Nelson’s Stock award represents consists of options to purchase 100,000 shares of our Class A Common stock at $5.78 options to purchase
The Company paid $25,892 for insurance and benefit premiums on behalf of Mr. Nelson.
Mr. Hannan joined the Company as Chief Financial Officer, effective October 17, 2016. On December 31, 2018, Mr. Hannan resigned from the
Company.
Mr. Hannan’s stock option award consisted of 250,000 options to purchase Class A common stock at $4.20. Upon Mr. Hannan’s termination
20,833 of the options were cancelled.
Mr. Hannan received payment for his accrued and unused vacation at the time of his termination.
Employment agreements and how the executive’s compensation is determined
We are a party to an employment agreement with each of Messrs. Miglino and Malone which provide the compensation arrangements with these
individuals. We have not engaged a compensation consultant or other consultant performing similar functions to advise our company on compensation
arrangements for our executive officers and directors.
Employment Agreement with Mr. Miglino
We employ Christopher Miglino as our Chief Executive Officer for a term of four years pursuant to an employment agreement entered into on January 1,
2012. The employment agreement automatically renews for successive two-year terms unless either party provides notice of non-renewal not later than
three (3) months before the conclusion of the then current term. As compensation for his services, Mr. Miglino was entitled to receive a base salary of
$192,000 which is subject to an annual review. During 2012, in an effort to conserve our cash resources, Mr. Miglino agreed to a temporary reduction in his
annual base salary to $60,000, which was increased to $90,000 during the fourth quarter of 2013. Mr. Miglino’s annual base salary for the 2015 was
$114,000. On March 16, 2017, his salary deferral ended and he returned his compensation to $192,000 per annum. On September 18, 2018, the board of
directors agreed to pay Mr. Miglino an aggregate of $414,250 in salary deferred between 2012 and March 15, 2017. Additionally, effective October 1,
2018, Mr. Miglino’s salary was increased to $340,000 per annum. In addition, he is eligible to receive an annual bonus based upon the achievement of
certain to-be-established goals fixed by the Board, which is payable in cash or non-cash compensation as determined by the Board, as well as a
discretionary bonus as determined by the Board. Mr. Miglino is entitled to participate in all benefit plans we may offer, up to 45 days of paid vacation
annually and reimbursement for out-of-pocket expenses incurred in furtherance of our business.
In addition to accrued obligations (including but not limited to, reimbursements, unpaid salary, unused vacation days, etc.), the following table sets forth the
payments that would be made to Mr. Miglino in accordance with his employment agreement had he been terminated by us without cause or by Mr. Miglino
for Good Reason, or termination as a result of disability on December 31, 2019.
Name
Christopher Miglino
Salary (1)
Accelerated Vesting of Awards
Health Care
Total:
Terminated
Without Cause /
For Good Reason
Termination as a
result of Disability
$
$
680,000 $
—
43,074
723,074 $
680,000
—
—
680,000
(1) Amount equal to twenty-four (24) months of Base Salary. Amount is to be paid over a twenty-four (24) month period.
34
Employment Agreement with Michael Malone
On December 15, 2018 we entered into an Employment Agreement with Mr. Malone pursuant to which he was engaged to serve as Chief Financial Officer
to be effective January 2, 2019. Under the terms of the employment agreement, Mr. Malone’s compensation includes:
● an annual base salary of $200,000;
● an annual bonus of $100,000, payable in equal quarterly installments beginning on April 1, and subject to the timely filings of our periodic reports;
● a one-time option grant to purchase 100,000 shares of Class A Common Stock with a grant date of December 15, 2018, an exercise price of $2.56
per share, a term of three (3) years that vests quarterly over a three (3) year period subject to continued employment;
● the reimbursement of up to $20,000 in expenses incurred in moving and temporary living arrangements within the first sixty (60) days following
the effective date; and
● annual paid time off of 30 days per year.
Mr. Malone is entitled to participate in all benefit programs we offer our other executive officers and expense reimbursement. The employment agreement
with Malone contains customary confidentiality, non-disclosure and noninterference provisions.
The following table sets forth the payments that would be made to Malone in accordance with his employment agreement had he been terminated by us
“without cause” on December 31, 2019.
Name
Michael Malone
Salary (1)
Total:
Employment Agreement with Mr. Hannan
Terminated
Without Cause
Termination as a
result of Disability
$
$
33,667 $
33,667 $
—
—
On October 14, 2016 we entered into an Employment Agreement with Mr. Hannan pursuant to which he was engaged to serve as Chief Financial Officer.
Mr. Hannan resigned from the Company effective December 16, 2018. Under the terms of the employment agreement, Mr. Hannan’s compensation
included:
● an annual base salary of $200,000;
● an annual bonus of $100,000, payable in equal quarterly installments beginning on April 1, and subject to the timely filings of our periodic reports;
● an annual bonus of a restricted stock grant of $100,000 in value of shares of our Class A common stock on each annual anniversary date of the
employment agreement, also subject to the timely filings of our periodic reports, subject to continued employment;
● a one-time restricted stock award of 100,000 shares of our Class A common stock, which completed vesting on October 17, 2018, subject to
continued employment; and
● annual paid time off of 30 days per year.
Mr. Hannan was entitled to participate in all benefit programs we offer our other executive officers and expense reimbursement. Upon termination of the
agreement by either party, regardless of the reason, he is not entitled to any additional compensation. The employment agreement with Mr. Hannan contains
customary confidentiality, non-disclosure and noninterference provisions.
35
Employment with Kristoffer Nelson
Mr. Nelson is not a party to a written employment agreement, but his compensation is determined by the Compensation committee of the board of directors
in consultation with the Company’s CEO. Effective October 1, 2018, Mr. Nelson’s annual salary was set to $275,000.
Equity Compensation Plans
We currently have the following equity compensation plans outstanding as of the date hereof: (i) 2012 Equity Compensation Plan, (ii) 2014 Equity
Compensation Plan, and (iii) 2016 Equity Compensation Plan.
For information related to our equity compensation plans for which our officers and directors are issued securities from, please see Item 12 entitled “Equity
Compensation Plans” contained below in this Form 10-K.
Outstanding Equity Awards Value at Fiscal Year-End
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named
executive officer outstanding as of December 31, 2019.
OPTION AWARDS
Number of
securities
underlying
unexercised
options
(#)
exercisable
Number of
securities
underlying
unexercised
options
(#)
unexercisable
Name
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options
(#)
Option
exercise
price
($)
Option
expiration
date
Number
of shares
or units of
stock that
have not
vested
(#)
STOCK AWARDS
Equity
incentive
plan
awards:
Number of
unearned
shares,
units or
other
rights that
have not
vested
(#)
Market
value of
shares or
units of
stock that
have not
vested
($)
Equity
incentive
plan awards:
Market or
payout value
of unearned
shares, units
or other
rights that
have not
vested
(#)
Kristoffer Nelson
Michael Malone
33,333
33,333
33,333
66,667
-
33,333
-
-
-
33,333
100,000
66,667
-
-
-
-
-
7.50
7.50
7.50
5.78
3.42
2.56
10/10/2020
10/10/2021
10/10/2022
1/2/2021
3/27/2022
1/2/2022
Director Compensation
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Below are descriptions of the Company’s previous legacy compensation policy for non-executive director compensation and its current policy, which is in
effect beginning April 15, 2018.
Legacy Policy
● an annual cash retainer of $10,000, payable quarterly;
● a restricted stock award of a number of shares of our Class A common stock equal to $10,000 on the date such director joined the board if he or
she joined in 2017, or on the one-year anniversary of he or she joining the board if prior to 2017.
● a per meeting fee of $2,000, with a maximum annual payment of $10,000.
36
Current Director Compensation Policy
Effective April 15, 2018, each non-employee director will receive $30,000 as an annual board fee payable as follows:
● Up to $15,000 in cash paid quarterly over the grant year; and
● The balance in Class A common stock purchase options issued on April 15 of each year and vesting quarterly over the grant year and have a term
of seven (7) years. The stock options will be valued using the Black-Scholes option pricing model and are subject to customary assumptions used
in the preparation of financial statements.
All elections of compensation will be made by April 1 of each year by incumbent directors and newly elected or appointed directors will have their
compensation pro-rated and made on the fifth (5th) day following their election or appointment to the board.
The following table provides information concerning the compensation paid to our non-executive directors for their services as members of our board of
directors for the year ended December 31, 2019. The information in the following table excludes any reimbursement of out-of-pocket travel and lodging
expenses which we may have paid.
Fees earned
or paid in
cash ($)
Stock
awards
($)
Option
awards ($)
Non-equity
incentive
plan
compensation
($)
Nonqualified
deferred
compensation
earnings
($)
All other
compensation
($)
15,000(1)
15,000(1)
15,000(1)
15,000(1)
15,000(2)
15,000(2)
15,000(2)
15,000(2)
—
—
—
—
—
—
—
—
—
—
—
—
Total
($)
30,000
30,000
30,000
30,000
Name
Colleen DiClaudio
Marc Savas
Malcolm CasSelle
Robert Jordan
(1) Compensation includes (i) one half (1/2) of cash payment for Board year beginning 4/15/18 and (ii) one half (1/2) cash payment for Board year
beginning 4/15/19.
(2) Compensation includes $15,000 from the vesting of 3,936 total Class A common stock purchase options. Of these options, (i) 1,406 have an
issuance date of 4/15/2018, an exercise price per share of $4.92, a term of seven (7) years and vested quarterly on 7/15/18, 10/15/18, 1/15/19, and
4/15/19, and (ii) 2,530 options have an issuance date of 4/15/19, an exercise price per share of $5.49, a term of seven (7) years, and vest quarterly
on 7/15/19, 10/15/19, 1/15/20, and 4/15/20.
37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
Equity Compensation Plan Information
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity
compensation plans not approved by our stockholders as of December 31, 2019:
Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights(a)
Weighted average
exercise price of
outstanding options,
warrants
and rights ($)
Number of
securities remaining
available for future
issuance under
equity
compensation plans
(excluding securities
reflected in column
(a)
205,962 $
734,069 $
252,488 $
—
4.38
3.76
5.05
—
390,471
448,773
88,455
—
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
2012 Equity Compensation Plan
Our 2012 Equity Compensation Plan (“2012 Plan”) is administered by our board or any of its committees. The purposes of the 2012 Plan are to attract and
retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants, and
to promote the success of our business. The issuance of awards under our 2012 Plan is at the discretion of the administrator, which has the authority to
determine the persons to whom any awards shall be granted and the terms, conditions and restrictions applicable to any award. Under our 2012 Plan, we
may grant stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock-based
awards. Our 2012 Plan authorizes the issuance of up to 600,000 shares of Class A common stock for the foregoing awards. As of December 31, 2019, we
have granted awards under the 2012 Plan equal to approximately 695,758 shares of our common stock, and 354,938 shares have been cancelled or
forfeited. Accordingly, there are 390,471 shares of common stock available for future awards under the 2012 Plan. In the event of a change in control,
awards under the 2012 Plan will become fully vested unless such awards are assumed or substituted by the successor corporation.
2014 Equity Compensation Plan
Our 2014 Equity Compensation Plan (“2014 Plan”) is administered by our board or any of its committees. The purposes of the 2014 Plan are to attract and
retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants, and
to promote the success of our business. The issuance of awards under our 2014 Plan is at the discretion of the administrator, which has the authority to
determine the persons to whom any awards shall be granted and the terms, conditions and restrictions applicable to any award. Under our 2014 Plan, we
may grant stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock-based
awards. Our 2014 Plan authorizes the issuance of up to 1,600,000 shares of Class A common stock for the foregoing awards. As of December 31, 2019, we
have granted awards under the 2014 Plan equal to approximately 1,174,558 shares of our common stock, and 23,331 shares have been cancelled or
forfeited. Accordingly, there are 448,773 shares of common stock available for future awards under the 2014 Plan. In the event of a change in control,
awards under the 2014 Plan will become fully vested unless such awards are assumed or substituted by the successor corporation.
2016 Equity Compensation Plan
Our 2016 Equity Compensation Plan (“2016 Plan”) is administered by our board or any of its committees. The purposes of the 2016 Plan are to attract and
retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants, and
to promote the success of our business. The issuance of awards under our 2016 Plan is at the discretion of the administrator, which has the authority to
determine the persons to whom any awards shall be granted and the terms, conditions and restrictions applicable to any award. Under our 2016 Plan, we
may grant stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock-based
awards. Our 2016 Plan authorizes the issuance of up to 600,000 shares of Class A common stock for the foregoing awards. As of December 31, 2019, we
have granted awards under the 2016 Plan equal to approximately 751,545 shares of our common stock, and 40,000 shares have been cancelled or forfeited.
Accordingly, there are 88,455 shares of common stock available for future awards under the 2016 Plan. In the event of a change in control, awards under
the 2016 Plan will become fully vested unless such awards are assumed or substituted by the successor corporation.
38
Security Ownership of Certain Beneficial Owners and Management
At April 24, 2020, we had 14,752,700 shares of Class A common stock issued and 14,034,152 outstanding. The following table sets forth information
known to us as of April 1, 2020 relating to the beneficial ownership of shares of our Class A common stock by:
● each person who is known by us to be the beneficial owner of 5% or more of any class of our voting securities;
● Each of our current directors and nominees;
● each of our current named executive officers; and
● all current named executive officers and directors as a group.
Beneficial ownership is determined according to the rules of the SEC. Beneficial ownership means that a person has or shares voting or investment power
of a security and includes any securities that person or group has the right to acquire within 60 days after the measurement date. This table is based on
information supplied by officers, directors and principal shareholders. Except as otherwise indicated, we believe that each of the beneficial owners of the
common stock listed below, based on the information such beneficial owner has given to us, has sole investment and voting power with respect to such
beneficial owner’s shares, except where community property laws may apply.
Name and Address of Beneficial Owner(1)
Directors and named Executive Officers
Christopher Miglino
Kristoffer Nelson
Marc Savas
Malcolm CasSelle
Robert Jordan
Colleen DiClaudio
Michael Malone
All directors and executive officers as a group (7 persons)
Beneficial Owners of 5% or more
Anson Funds Management LP
* Less than one percent.
Common Stock
Shares
Underlying
Convertible
Securities (2)
Shares
Total
Percent of
Class (2)
887,575
135,001
11,945
65,946
6,510
7,813
1,292
1,116,082
—
200,000
7,872
7,872
7,872
7,872
41,667
273,155
887,575
335,001
19,817
73,818
14,382
15,685
42,959
1,389,237
6.32%
2.35%
*
*
*
*
*
9.71%
735,157
—
735,157
5.00%
(1) Except as otherwise indicated, the persons named in this table have sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to community property laws where applicable and to the information contained in the footnotes to
this table. Unless otherwise indicated, the address of the beneficial owner is 456 Seaton St., Los Angeles, CA 90013.
(2) Pursuant to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership includes any shares as to which a shareholder has sole or shared
voting power or investment power, and also any shares which the shareholder has the right to acquire within 60 days, including upon exercise of
common shares purchase options or warrants. There are 14,752,700 shares of Class A common stock issued and 14,034,152 outstanding as of
April 24, 2020.
(3) Based on a Schedule 13(g) filed with the SEC on February 14, 2020. The Address of holder is 5950 Berkshire Lane, Suite 2010, Dallas, Texas
75225. Bruce R Winston, Amin Nathoo and Moez Kassam have voting and investment power with respect to the common stock beneficially
owned
39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Related Party Transactions Procedure
We review all known relationships and transactions in which SRAX and our directors, executive officers, and significant stockholders or their immediate
family members are participants to determine whether such persons have a direct or indirect interest. Our management, in consultation with our outside
legal consultants, determines based on specific fact and circumstances whether SRAX or a related party has a direct or indirect interest in these
transactions. In addition, our directors and executive officers are required to notify us of any potential related party transactions and provide us with the
information regarding such transactions.
If it is determined that a transaction is a related party transaction, the Audit Committee must review the transaction and either approve or disapprove it. In
determining whether to approve or ratify a transaction with a related party, the Audit Committee will take into account all of the relevant facts and
circumstances available to it, including, among any other factors it deems appropriate:
● the benefits to us of the transaction;
● the nature of the related party’s interest in the transaction;
● whether the transaction would impair the judgment of a director or executive officer to act in the best interests of SRAX and our shareholders;
● the potential impact of the transaction on a director’s independence; and
● whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar
circumstances.
Any member of the Audit Committee who is a related party with respect to a transaction under review may not participate in the deliberations or vote on
the approval of the transaction.
Related Party Transactions
Summarized below are certain transactions and business relationships between SRAX and persons who are or were an executive officer, director or holder
of more than five percent of any class of our securities since January 1, 2018.
Information regarding disclosure of an employment relationship or transaction involving an executive officer and any related compensation solely resulting
from that employment relationship or transaction is included in Part III, Item 11 of this Annual Report entitled “Executive Compensation.”
Information regarding disclosure of compensation to a director for the year end December 31, 2019 is included in Part III, Item 11 of this Annual Report
entitled “Director Compensation.”
Information regarding the identification of each independent director is included in Part III, Item 10 of this Annual Report entitled “Directors, Executive
Officers and Corporate Governance.”
All of our directors and officers enter into our standard indemnification agreement.
● On January 2, 2018, we issued a common stock purchase option 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.
40
● On March 20, 2018, as we began to formally review potential strategic options for SRAX MD, we entered into certain agreements with Erin
DeRuggiero, our former chief innovations officer. Pursuant to the terms of the agreements, Ms. DeRuggiero employment agreement was
terminated, and she became a consultant of the Company. The term of the consultancy expires in the second quarter of 2018, or upon the sale of
the assets comprising SRAX MD, but may be extended by the parties. The terms of the consultancy were substantially similar to her prior
employment agreement except that in the event of a sale of the SRAX MD business unit or substantially all of the assets thereof within 120 days
from March 20, 2018, (i) we (or our assignee) have the right and the obligation to purchase all of Ms. DeRuggiero’s outstanding Class A common
shares (514,667) at a price of $5.80 per share, or an aggregate of $2,985,068.60 and (ii) we will pay Ms. DeRuggiero, an amount equal to five
percent (5%) of the cash consideration received from the sale of the SRAX MD business unit. The Company and Ms. DeRuggiero agreed to a
customary release from any claims that may have arisen during her employment. In August 2018, SRAX MD was sold to Halyard MD Opco,
LLC, an affiliate of Halyard Capital, a private equity firm. Pursuant to the sale, all of the aforementioned Class A common stock of Erin
DeRuggiero was repurchased and Ms. DeRuggiero received such compensation described herein.
● Due to certain provisions of our insider trading policy, on April 2, 2018, we agreed to extend certain outstanding Class A common stock purchase
options of varying expiration dates to an extended expiration date of December 31, 2018. Included in these options were the following options
held by Kristoffer Nelson, our Chief operating officer and Board member and Marc Savas, a board member:
o
o
o
10,000 Class A common stock purchase options issued to Kristoffer Nelson on 1/1/2013 with an exercise price per share of $5.00 and an
original expiration date of 1/1/2018;
2,400 Class A common stock purchase options issued to Marc Savas on 2/1/2013 with an exercise price per share of $5.00 and an
original expiration date of 2/1/2018; and
10,000 Class A common stock purchase options issued to Marc Savas on 4/1/2013 with an exercise price per share of $5.00 and an
original expiration date of 4/1/2018.
● In August 2018, pursuant to our sale of the SRAX MD product line, we paid out an aggregate of $2,191,338.04 in stay bonuses, which amount
includes $1,507,302.89 paid to Erin DeRuggiero, our former chief innovations officer and Board member.
● On September 18, 2018, the Board agreed to pay Christopher Miglino, our chief executive officer, an aggregate of $414,250 in salary previously
deferred from 2012 through March 15, 2017.
● On September 18, 2018, as partial consideration for the successful sale of the SRAX MD product line, the Company paid the following transaction
bonuses: (i) Christopher Miglino, our chief executive officer received $548,416.67, (ii) Joseph P. Hannan, our former chief financial officer
received $50,000 and (iii) Kristoffer Nelson, our chief operating officer, received $43,750.
● On September 18, 2018, we issued a common stock purchase option to Joseph P. Hannan, our former Chief Financial Officer. The option entitles
Mr. Hannan to purchase 250,000 shares of Class A Common Stock at a price per share of $4.20, has a term of three years and vests quarterly over
a three (3) year period.
● On October 15, 2018, the Compensation Committee agreed to pay Joseph P. Hannan, our former chief financial officer, a lump sum of $100,000 in
lieu of a bonus of the same amount of restricted stock units, to which he was entitled to under his employment agreement.
● On December 15, 2018, the we issued a common stock purchase option to Michael Malone, our Chief Financial Officer. The option entitles Mr.
Malone to purchase 100,000 shares of Class A Common stock at a price per share of $2.56, has a term of three years and vests quarterly over a
three-year period.
● Our Chief Executive Officer was on the board of directors of one of our advertising customers, YayYo, Inc. which purchases advertising at market
rates. As of January 22, 2020 our Chief Executive Officer was no longer a member of the board of directors of YayYo, Inc.
● During the fiscal year of January 1, 2018 through December 31, 2018, we paid the following compensation to our non-employee board members:
o
o
an aggregate of $60,000 in cash payable quarterly from April 15, 2018 through April 15, 2019, subject to our board members continuing
to be service providers to the Company; and
an aggregate of 20,116 Class A common stock purchase options valued at $60,000 that vest quarterly from April 15, 2018 through April
15, 2019, each having an exercise price of $4.92 per share, and a term of seven (7) years.
● On March 24, 2019, the we issued a common stock purchase option to Kristoffer Nelson, our Chief Operating Officer. The option entitles Mr.
Nelson to purchase 100,000 shares of Class A Common stock at a price per share of $3.42, has a term of three years and vests quarterly over a
three-year period.
41
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table summarizes the aggregate fees billed to us by our independent auditor for 2019 and 2018. All fees were paid to RBSM LLP.
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
2019
2018
215,000 $
20,000
25,000
260,000 $
125,000
52,500
0
30,000
207,500
$
$
Audit Fees — This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form
10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years.
This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial
statements.
Audit-Related Fees — This category consists of assurance and related services by the independent registered public accounting firm that are reasonably
related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees
disclosed under this category include consultation regarding our correspondence with the Securities and Exchange Commission and other accounting
consulting.
Tax Fees — This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax
advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
Pre-Approval of Independent Auditor Services and Fees
Our Board has adopted a procedure for pre-approval of all fees charged by our independent registered public accounting firm. Under the procedure, the
Audit Committee of the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the
Audit Committee. The audit and tax fees, and all other fees paid to the auditors with respect to 2019 were pre-approved by the Audit Committee. RBSM
LLP did not provide any other services during 2019 except those listed above.
42
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) Exhibits
Description
Filed/
Furnished
Herewith
Incorporated by Reference
Form
Exhibit
No.
File No.
Filing
Date
Exhibit
No.
3.01(i)
3.02(i)
Certificate of Incorporation, filed on 8/3/11
Certificate of Correction to Certificate of Incorporation,
filed on 8/31/11
3.03(i)
Certificate of Amendment to Certificate of
3.04(i)
3.05(i)
3.06(i)
Incorporation authorizing 1:5 reverse stock split
Certificate of Designation of Series 1 Preferred Stock
Certificate of Amendment to Certificate of
Incorporation as Amended, effective 8/25/19
Certificate of Designation of BIGToken Preferred
Tracking Stock
S-1
S-1
8-K
8-K
8-K
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
3.01(i)
000-54996
001-37916
8/22/13
8/15/19
S-1/A
3.05(i)
333-229606
10/16/19
3.07(ii)
Amended and Restated Bylaws of Social Reality, Inc.
8-K
3.01(ii)
001-37916
4/2/19
4.01
4.02
4.03
4.04
4.05
4.06
4.07
adopted March 27, 2019
Specimen of Class A Common Stock Certificate
Class A Common Stock Purchase Warrant Issued to
Investors in October 2014
Class A Common Stock Purchase Warrant issued in
Steel Media Transaction dated October 30, 2014
Class A Common Stock Warrant issued in September
2016 Offering
Class A Common Stock Warrant issued to October
2013 Offering
Class A Common Stock Warrant issued to T.R. Winston
& Company issued 8/22/13
Class A Common Stock Warrant issued to Investors in
January 2014 Offering
43
8-A12B
8-K
8-K
8-K
8-K
10-Q
8-K
4.1
4.7
4.8
4.6
4.7
4.5
4.6
001-37916
000-54996
10/12/16
11/4/14
000-54996
11/4/14
000-54996
10/6/16
000-54996
10/24/13
000-54996
11/13/13
000-54966
1/27/14
4.08
4.09
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17**
4.18**
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
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
Form of Class A Common Stock Placement Agent
Warrant issued in April 2017 Offering
2016 Equity Compensation Plan
2014 Equity Compensation Plan
2012 Equity Compensation Plan
Form of Stock Option Agreement for 2012, 2014 and
2016 Equity 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
Form of Placement Agent Warrant from April 2019
Offering
Form of Series A Common Stock Warrant from August
2019 Offering
Form of Series B and Series C Common Stock Warrant
from August 2019 Offering
Form of Placement Agent Warrant from August 2019
Offering
44
8-K
8-K
8-K
8-K
10-K
10-K
8-K
8-K
8-K
14A
8-K
S-1
S-1
S-1
S-1
8-K
8-K
8-K
8-K
8-K
8-K
4.6
4.1
4.2
4.3
000-54966
10/6/16
001-37916
1/4/17
001-37916
1/4/17
001-37916
1/4/17
4.12
001-37916
3/31/17
4.13
001-37916
4/2/18
4.2
4.1
4.3
001-33672
4/21/17
001-33672
4/21/17
001-33672
4/21/17
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
4.01
001-37916
4/10/19
4.01
001-37916
8/14/19
4.02
001-37916
8/14/19
4.03
001-37916
8/14/19
4.29
10.01
10.02
10.03
10.04
10.05
10.06
10.07
10.08
10.09
10.10
Form of Class A common stock purchase warrant
issued in February 2020 Offering
Purchase Agreement among Richard Steel, Steel Media,
and Social Reality, dated 10/30/14
Asset Purchase Agreement with LeapFrog Media
Trading dated 4/20/17
Amendment to Asset Purchase Agreement with
Leapfrog Media 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
10.11**
Employment Agreement with Christopher Miglino
dated 1/1/12
10.12**
Employment Agreement with Erin DeRuggiero dated
10/19/15
10.13**
Employment Agreement with Joseph P. Hannan dated
10.14**
Employment Agreement with Richard Steel dated
10/17/16
10.15**
Employment Agreement with Chad Holsinger dated
10/30/14
10/30/14
10.16
Employment Agreement with Adam Bigelow dated
10/30/14
10.17**
Separation Agreement and Release with Richard Steel
10.18**
Employment Agreement with Dustin Suchter dated
dated 1/25/17
12/19/14
10.19**
Form of Proprietary Information, Inventions and
Confidentiality Agreement
10.20**
Form of Indemnification Agreement with Officers and
Directors
45
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
8-K
S-1
S-1
4.01
001-37916
3/5/20
2.1
000-54996
11/4/14
10.02
001-37916
4/2/18
10.03
001-37916
4/2/18
10.04
001-37916
4/2/18
10.05
001-37916
4/2/18
10.1
001-37916
4/21/17
10.2
10.3
001-37916
001-37916
4/21/17
4/21/17
10.01
001-37916
10/27/17
10.02
001-37916
10/27/17
10.01
333-179151
1/24/12
10.3
000-54996
2/26/16
10.48
001-37916
11/14/16
10.27
000-54996
11/4/14
10.28
000-54996
11/4/14
10.29
000-54996
11/4/14
10.1
333-215791
1/27/17
10.36
000-54996
12/22/14
10.03
333-179151
1/25/12
10.04
333-179151
1/25/12
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
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
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
Financing Agreement with certain Lenders and Victory
Park Management, LLC
8-K
S-1
10-K
S-1
10-Q
8-K
8-K
8-K
8-K
8-K
8-K
8-K
10.30
333-215791
11/4/14
10.16
333-193611
1/28/14
10.9
000-54996
3/31/15
10.17
10.49
333-206791
001-37916
9/4/15
11/14/16
10.41
000-54996
9/23/16
10.34
000-54996
12/22/14
10.18
000-54996
11/4/14
10.22
000-54996
11/4/14
10.1
001-37916
1/4/17
10.2
001-37916
1/4/17
10.23
000-54996
11/4/14
First Amendment to Financing Agreement dated
10-Q
10.38
000-54996
5/15/15
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
Form of Securities Purchase Agreement for April 2019
Offering
Form of Placement Agent Agreement from April 2019
Offering
46
8-K
8-K
8-K
10-K
10-K
8-K
8-K
10.25
000-54996
11/4/14
10.26
10.46
000-54996
000-54996
11/4/14
8/24/16
10.35
10.36
10.01
001-37916
001-37916
001-37916
3/31/17
3/31/17
4/10/19
10.02
001-37916
4/10/19
8-K
8-K
8-K
8-K
8-K
10.01
001-37916
8/14/19
10.02
001-37916
8/14/19
10.03
001-37916
8/14/19
10.01
001-37916
3/5/20
10.01
001-37916
3/5/20
S-1/A
10-Q
99.1
18.1
333-179151
001-37916
6/4/12
11/14/16
10-K
21.01
001-37916
4/16/19
10.41
10.42
10.43
10.44
10.45
14.01
18.01
Form of Securities Purchase Agreement from August
2019 Offering
Form of First Placement Agent Agreement from August
2019 Offering
Form of Second Placement Agent Agreement from
August 2019 Offering
Form of Term Loan and Security Agreement from
February 2020 Offering
Form of Intellectual Property Security Agreement from
February 2020 Offering
Code of Conduct and Ethics
Preference Letter regarding Change in Accounting
Principle
21.01
23.01
31.1 / 31.2
Subsidiaries of Registrant
Consent of RBSM, LLP
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
XBRL Instance Document
XBRL Taxonomy Extension Schema
XBRL Taxonomy Extension Calculation Linkbase
XBRL Taxonomy Extension Definition Linkbase
XBRL Taxonomy Extension Label Linkbase
XBRL Taxonomy Extension Presentation Linkbase
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
*
*
*
*
*
*
*
*
*
* Filed herein
** Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate.
ITEM 16. FORM 10-K SUMMARY.
None.
47
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
May 1, 2020
SRAX, 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
Christopher Miglino
/s/ Kristoffer Nelson
Kristoffer Nelson
/s/ Michael Malone
Michael Malone
/s/ Marc Savas
Marc Savas
/s/ Malcolm CasSelle
Malcolm CasSelle
/s/ Colleen DiClaudio
Colleen DiClaudio
/s/ Robert Jordan
Robert Jordan
Chairman of the Board of Directors, Chief Executive Officer; principal
May 1, 2020
executive officer
Chief Operating Officer, Director
May 1, 2020
Chief Financial Officer, principal financial and accounting officer
May 1, 2020
Director
Director
Director
Director
48
May 1, 2020
May 1, 2020
May 1, 2020
May 1, 2020
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated balance sheets at December 31, 2019 and 2018
Consolidated statements of operations for the years ended December 31, 2019 and 2018
Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2019 and 2018
Consolidated statements of cash flows for the years ended December 31, 2019 and 2018
Notes to consolidated financial statements
F-1
Page
F-2
F-3
F-4
F-5
F-7
F-9
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
SRAX, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SRAX, Inc. (the “Company”) as of December 31, 2019 and 2018, and the related
consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2019 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, 2019 and 2018, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company has recurring losses from operations, limited cash flow, and an accumulated deficit. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also
described in Note 1. The consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. Our
opinion is not modified with respect to that matter.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to
the adoption of the Accounting Standards Codification Topic 842, Leases.
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.
We have served as the Company’s auditor since 2011
New York, NY
May 1, 2020
F-2
SRAX, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net of valuation allowance of $530,000 and $48,000
Prepaid expenses
Other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Right to use assets
Other assets
Total assets
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and accrued expenses
Warrant derivative liability
Other current liabilities
Total current liabilities
Lease obligation – long-term
Total liabilities
Commitments and contingencies (Note 10)
Stockholders’ equity:
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued or outstanding at
December 31, 2019 and 2018, respectively
Class A common stock, authorized 250,000,000 shares, $0.001 par value, 13,997,452 and 10,109,530
shares issued and outstanding as of December 31, 2019 and 2018
Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued or outstanding
at December 31, 2019 and 2018
Additional paid in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
2019
2018
32,000 $
805,000
715,000
306,000
1,858,000
191,000
15,645,000
1,966,000
456,000
118,000
20,234,000 $
2,442,000 $
4,397,000
537,000
7,376,000
352,000
7,728,000
—
—
2,784,000
1,829,000
467,000
388,000
5,468,000
192,000
15,645,000
1,763,000
-
51,000
23,119,000
3,575,000
5,442,000
-
9,017,000
—
9,017,000
—
—
14,000
10,000
—
48,129,000
(35,637,000)
12,506,000
20,234,000 $
—
32,870,000
(18,778,000)
14,102,000
23,119,000
$
$
$
$
The accompanying footnotes are an integral part of these consolidated financial statements.
F-3
SRAX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
Revenues
Cost of revenue
Gross profit
Operating expense
Employee related costs
Marketing and selling expenses
Platform costs
Depreciation and amortization
General and administrative expenses
Total operating expense
Loss from operations
Other income (expense)
Financing costs
Interest income
Gain on sale of SRAX MD, net
Exchange gain (loss)
Amortization of debt discount
Loss on settlement
Change in fair value of derivative liabilities
Total other income (expense)
Income (loss) before provision for income taxes
Provision for income taxes
Net income (loss)
Net (loss) income per share, basic and diluted
2019
2018
$
3,584,000 $
1,680,000
9,881,000
3,157,000
1,904,000
6,724,000
8,656,000
2,454,000
1,738,000
1,164,000
5,750,000
19,762,000
8,866,000
1,315,000
1,113,000
768,000
6,381,000
18,443,000
(17,858,000)
(11,719,000)
(725,000)
9,000
658,000
12,000
-
-
1,045,000
999,000
(3,056,000)
-
22,108,000
(8,000)
(4,295,000)
(3,240,000)
8,954,000
20,463,000
(16,859,000)
8,744,000
—
—
(16,859,000) $
8,744,000
(1.36) $
0.86
$
$
Weighted average shares outstanding, basic and diluted
12,377,851
10,121,408
The accompanying footnotes are an integral part of these consolidated financial statements.
F-4
SRAX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEAR ENDED DECEMBER 31, 2018
Preferred Stock
Common Stock
Common stock to be issued
Shares
Amount
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Stockholders’
Equity
Balance, December 31, 2017
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
$
10,000
150,000
$
880,000
$ 32,547,000
$ (27,522,000) $
5,915,000
—
79,534
6,667
422,950
26,330
78,149
—
—
—
—
—
—
(514,667)
100,002
—
10,109,530
$
—
—
—
10,000
—
—
—
(150,000)
—
—
—
—
—
—
$
—
—
—
(860,000)
(20,000)
—
989,000
—
1,869,000
50,000
100,000
—
—
—
—
—
—
—
989,000
—
1,009,000
30,000
100,000
—
—
—
—
—
(2,985,000)
300,000
—
$ 32,870,000
—
—
8,744,000
(2,985,000)
300,000
8,744,000
$ (18,778,000) $ 14,102,000
The accompanying footnotes are an integral part of these consolidated financial statements.
F-5
SRAX, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
YEAR ENDED DECEMBER 31, 2019
Preferred Stock
Common Stock
Common stock to be issued
Shares
Amount
Shares
Amount
Shares
Amount
Balance, December 31, 2018
Share based compensation, related to
employees
Sale of common stock and warrants
for cash
Common stock issued for exercise of
warrants
Loss on repricing of warrants
Common stock issued for services
Shares issued for settlement of
original issue discount
Net loss
Balance, December 31, 2019
—
$
—
—
—
—
—
—
—
—
$
—
—
—
—
—
—
—
—
—
$
10,109,530
—
3,412,821
342,000
—
75,000
58,101
—
13,997,452
$
10,000
—
3,000
1,000
—
—
—
—
14,000
—
$
—
—
—
—
—
—
—
—
$
—
—
Additional
Paid-in
Capital
Accumulated
Deficit
Stockholders’
Equity
$ 32,870,000
$ (18,778,000) $ 14,102,000
935,000
—
12,194,000
—
—
—
1,195,000
342,000
374,000
—
—
—
219,000
—
$ 48,129,000
—
—
—
—
—
935,000
12,197,000
1,196,000
342,000
374,000
—
(16,859,000)
219,000
(16,859,000)
$ (35,637,000) $ 12,506,000
The accompanying footnotes are an integral part of these consolidated financial statements.
F-6
SRAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
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 SRAX MD
Gain on valuation of warrant derivatives
Loss on settlement of debt
Loss on fair value of investments
Fair value of common stock issued for settlement of original issue discount
Amortization of debt discount
Loss on repricing of warrants
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
Other current liabilities
Net cash used in operating activities
Cash flows from investing activities
Proceeds from sale of SRAX MD
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
Repayments of notes payable
Proceeds from the exercise of warrants
Net cash (used in) provided by financing activities
2019
2018
$
(16,859,000) $
8,744,000
1,167,000
—
(658,000)
(1,045,000)
—
6,000
219,000
—
342,000
—
482,000
74,000
1,089,000
1,638,000
(106,000)
81,000
(2,214,000)
434,000
(15,350,000)
570,000
(73,000)
—
(1,292,000)
(795,000)
12,197,000
—
—
1,196,000
13,393,000
1,879,000
1,026,000
(22,108,000)
(8,954,000)
3,240,000
—
—
4,294,000
—
32,000
(12,000)
44,000
724,000
960,000
(215,000)
(214,000)
(3,103,000)
—
(13,663,000)
22,981,000
(82,000)
(63,000)
(961,000)
21,875,000
—
100,000
(6,545,000)
—
(6,445,000)
Net increase / (decrease) in cash and cash equivalents
Cash and cash equivalents
Beginning of year
End of year
(2,752,000)
1,767,000
2,784,000
32,000 $
1,017,000
2,784,000
$
The accompanying footnotes are an integral part of these consolidated financial statements.
F-7
SRAX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31,
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
Common stock received in lieu of cash for account received
Common stock issued to settle liabilities
Record right to use assets
Record operating lease liability
2019
2018
$
$
$
$
$
$
$
$
$
136,000 $
— $
1,531,000
—
— $
— $
— $
50,000 $
219,000 $
(526,000) $
526,000 $
150,000
880,000
300,000
—
—
—
—
The accompanying footnotes are an integral part of these consolidated financial statements.
F-8
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Presentation
SRAX, Inc. (formally known as “Social Reality, Inc.”, (“SRAX”, “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.
We are a data technology company offering tools and services to identify and reach consumers for the purpose of marketing and advertising
communication. Our technologies assist our clients in: (i) identifying their core consumers and such consumers’ characteristics across various channels in
order to discover new and measurable opportunities maximize profits associated with advertising campaigns and (ii) gaining insight into the activities of
their customers.
We derive our revenues from the:
● Sale and licensing of our proprietary SaaS platform; and
● Sales of proprietary consumer data; and
● Sales of digital advertising campaigns.
We are headquartered in Los Angeles, California.
Liquidity and Going Concern
The Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from the sales of its
goods and services to achieved profitable operations. There can be no assurance that profitable operations will ever be achieved, or if achieved, could be
sustained on a continuing basis. In addition, the Company’s operations and specifically, the development of BIGToken will require significant additional
financing. These factors create substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the
consolidated financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will
continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of
business.
In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position at December 31, 2019,
our cash flow and cash usage forecasts for the period covering one-year from the issuance date of this Annual Report filed on Form 10-K and our current
capital structure including outstanding warrants and other equity-based instruments and our obligations and debts.
We expect that our existing cash and cash equivalents as of December 31, 2019, along with the proceeds will be sufficient to enable us to fund our
anticipated level of operations based on our current operating plans, until beginning of the second quarter of 2020. Accordingly, we will require additional
capital to fund our operations and the development of BIGToken. We anticipate raising additional capital through the private and public sales of our equity
or debt securities, or a combination thereof. Although management believes that such capital sources will be available, there can be no assurance that
financing will be available to us when needed in order to allow us to continue our operations, or if available, on terms acceptable to us. At December 31,
2019, the Company had $32,000 in cash and cash equivalents. If we do not raise sufficient capital in a timely manner, among other things, we may be
forced scale back our operations or cease operations all together.
During the first quarter of 2020, the Company was able to raise $3.5 million in debt investments. The Company’s capital-raising efforts are ongoing and the
Company has taken the following steps to increase the likelihood of a successful financing: 1) Applied to the Small Business Administration for funding
under the Payroll Protection Program, 2) additional agreements are in place for an additional $2.5 million in debt financing, contingent on certain factors,
and 3) Monthly operating expenses are scrutinized and controlled. If sufficient capital cannot be raised during 2020, the Company will continue its plans of
curtailing operations by reducing discretionary spending and staffing levels and attempting to operate by only pursuing activities for which it has external
financial support. However, there can be no assurance that such external financial support will be sufficient to maintain even limited operations or that the
Company will be able to raise additional funds on acceptable terms, or at all. In such a case, the Company might be required to enter into unfavorable
agreements or, if that is not possible, be unable to continue operations, and to the extent practicable.
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.
F-9
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.
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.
Accounting for discontinued operations
We regularly review underperforming assets (product offerings) 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 receivable 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 SRAX MD product 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 SRAX MD product line. The Company
decided to monetize the SRAX MD product line via a sale rather than continue to offer the SRAX MD product to its customers. We have retained an
approximately 30% interest in the purchaser of the SRAX MD product line, however, based on the operating agreement covering our ownership we have
no ongoing or further involvement in the operations of the purchaser of SRAX MD. The sale of the SRAX MD product line is not considered to be
discontinued operations pursuant to the guidance in ASC 205-20.
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, BigToken point redemption liability, stock-based compensation, income taxes, warrant liabilities, embedded
conversion options, goodwill, other intangible assets, put rights and free standing warrants.
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-10
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as
assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the
Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined
as follows:
● Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
● Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for
identical or similar assets and liabilities; and
● Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
The 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, 2019 and 2018, 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, 2019 and 2018 the Company had none and $2,723,264, respectively, of United States Treasury bills with maturities less than 90 days
within cash and cash equivalents.
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.
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 approximately
$530,000 and $49,000 at December 31, 2019 and 2018, 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.
As of December 31, 2019, the Company had three customers with accounts receivable balances of approximately 23.7%, 15.0%, and 13.7%. At December
31, 2018, the Company had two customers with accounts receivable balances of approximately 57.7% and 17.3%.
For the year ended December 31, 2019, the Company had two customers that account for approximately 17.7% and 12.9% of total revenue. For the year
ended December 31, 2018, the Company had two customers that accounted for 19.4% and 14.9%.
As of December 31, 2019, the Company had two suppliers with accounts payable balances of approximately 17.9% and 12.7%. At December 31, 2018, the
Company had three suppliers with accounts payable balances of approximately 36.6%, 26.0%, and 13.9%.
For the year ended December 31, 2019, the Company had two suppliers that account for approximately 29.7% and 14.9% of total
expense. For the year ended December 31, 2018, the Company had two suppliers that accounted for 21.9% and 15.9% of total
expense.
F-11
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,
2019 or 2018, respectively.
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.
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, 2019, and 2018 there has been no
impairment associated with internal use software. For the years ended December 31, 2019, and 2018, the Company capitalized software development costs
of $1,292,000 and $961,000, 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.
Right of Use Assets and Lease Obligations
The Right of Use Asset and Lease Liability reflect the present value of the Company’s estimated future minimum lease payments over the lease term,
which may include options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.
Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements
exceed that of the initial lease term, and the sales performance of the restaurant remains strong. Therefore, the Right of Use Asset and Lease Liability may
include an assumption on renewal options that have not yet been exercised by the Company.
As the rate implicit in leases are not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an
estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment.
F-12
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, 2019 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, 2019 and 2018.
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).
We compare the carrying value of the goodwill, with its fair value, as determined by a combination of the market approach and income approach, its
estimated discounted cash flows. If the carrying value of goodwill exceeds its fair value, then the amount of impairment to be recognized. We operate as
one reporting unit.
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.
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.
F-13
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.
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.
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 clause, 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 was $0 as of
December 31, 2019 and 2018.
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
offerings 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.
F-14
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.
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.
Practical Expedients and Exemptions
We have elected certain practical expedients and policy elections as permitted under ASC Topic 606 as follows:
● 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;
F-15
● 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-through, 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.
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 11, Stockholders’ Equity.
Income Taxes
We utilize ASC 740 “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events
that have been included in the consolidated financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at year-end based on enacted
laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
The Company recognizes the impact of a tax position in the financial statements only if that position is more likely than not of being sustained upon
examination by taxing authorities, based on the technical merits of the position. Our practice is to recognize interest and/or penalties related to income tax
matters in income tax expense.
F-16
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 7,429,949 common share equivalents at December 31, 2019 and 4,853,085 at December 31, 2018. 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.
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.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02 (with amendments issued in 2018), which changes the accounting for leases and requires expanded
disclosures about leasing activities. This new guidance also requires lessees to recognize a ROU asset and a lease liability at the commencement date for all
leases with terms greater than twelve months. Accounting by lessors is largely unchanged. ASU 2016-02 is effective for fiscal periods beginning after
December 15, 2018. We adopted ASU 2016-02 on January 1, 2019 using the modified retrospective optional transition method. Thus, the standard was
applied starting January 1, 2019 and prior periods were not restated.
We applied the package of practical expedients permitted under the transition guidance. As a result, we did not reassess the identification, classification and
initial direct costs of leases commencing before the effective date. We also applied the practical expedient to not separate lease and non-lease components
to all new leases as well as leases commencing before the effective date. See Note 5 for additional information.
In June 2018, the FASB issued ASU 2018-07, “Improvements to Non-employee Share-Based Payment Accounting.” This guidance expands the scope of
Topic 718 “Compensation - Stock Compensation” to include share-based payment transactions for acquiring goods and services from non-employees, but
excludes awards granted in conjunction with selling goods or services to a customer as part of a contract accounted for under ASC 606, “Revenue from
Contracts with Customers.” The adoption of ASU 2018-07 did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a
Service Contract,” which amends ASC 350-40, “Intangibles - Goodwill and Other - Internal-Use Software.” The ASU 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 and requires the capitalized implementation costs to be expensed over the term of the hosting
arrangement. The accounting for the service element of a hosting arrangement that is a service contract is not affected. ASU 2018-15 is effective for fiscal
periods beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of ASU 2018-15, effective January 1, 2019, did not
have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” This guidance simplifies how an entity is required to
test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair
value, an impairment loss will be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to the reporting unit. ASU
2017-04 is effective for fiscal periods beginning after December 31, 2019. Early adoption is permitted. We adopted ASU 2017-04 and it did not have a
material impact on our consolidated financial statements.
Recent Accounting Updates Not Yet Effective
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other provisions, eliminates
certain exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim
period and the recognition of deferred tax liabilities for outside basis differences. This guidance also requires an entity to reflect the effect of an enacted
change in tax laws or rates in its effective income tax rate in the first interim period that includes the enactment date of the new legislation, aligning the
timing of recognition of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and
liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax rate in the period that
includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, with early adoption
permitted. We are currently evaluating the impact of this guidance.
F-17
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This guidance updates existing guidance for
measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model.
Accordingly, these financial assets will be presented at the net amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after
December 15, 2019. Early adoption is permitted. We do not expect the adoption of ASU 2016-13 will have a material impact on our consolidated financial
statements.
NOTE 2 – ACQUISITIONS AND DIVESTITURES
Sale of SRAX MD:
On August 6, 2018, we completed the sale of substantially all of the assets related to our SRAX MD 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 SRAX MD assets and (iii) an earn-out of up to
$9,000,000 upon the SRAX MD 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. During the year ended December 31, 2019, the Company received the escrow funds of approximately
$658,000, net of expense of $105,000.
Given the Company will retain an ongoing equity interest in the purchaser of SRAX MD, 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.
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 SRAX MD 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 during 2018:
GAIN ON SALE OF SRAX MD:
Cash Proceeds
Fair Value of Interest Retained
Carrying amount of Assets Sold
Fixed Assets
Working Capital
Transactions Fees & Sales Commissions
Gain on Sale
F-18
$
$
32,966,303
—
(117,000)
(3,228,803)
(7,512,472)
22,108,028
Components of operating results for the SRAX MD product group have not been classified as discontinued operations. Pursuant to guidance in ASC 205-
20, Discontinued Operations, we noted that the SRAX MD 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 SRAX MD product line did not
qualify under ASC Topic 360-10-35 to 45 for determination of the gain or loss. The sale of the SRAX MD 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. SRAX Md 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 SRAX MD.
SRAX MD, 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, SRAX MD also had no separately capitalized assets.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31:
Office equipment
Accumulated depreciation
Property and equipment, net
2019
2018
$
$
406,000
(215,000)
191,000
333,000
(141,000)
192,000
Depreciation expense for the years ended December 31, 2019 and 2018 was $74,000 and $44,000, respectively.
NOTE 4 – 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
2019
2018
$
$
1,250,000 $
756,000
617,000
2,856,000
5,479,000
(3,513,000)
1,966,000 $
1,250,000
756,000
617,000
1,564,000
4,187,000
(2,424,000)
1,763,000
Amortization expense was $151,000 for intellectual property, $733,000 for internally developed software and $206,000 acquired software for the year
ended December 31, 2019. Amortization expense was $51,000 for intellectual property, $122,000 for the non-compete agreement, $365,000 for internally
developed software and $151,000 acquired software for the year ended December 31, 2018.
The estimated future amortization expense for the years ended December 31, are as follows:
2020
2021
2022
$
$
1,019,000
732,000
215,000
1,966,000
As of December 31, 2019 and 2018, goodwill was $15,645,000 and there were no additions or impairments during the years ended December 31, 2019 and
2018.
F-19
NOTE 5 – RIGHT TO USE ASSETS
In February 2016, the FASB issued ASU No. 2016-02 (“ASC 842”), Leases, to require lessees to recognize all leases, with certain exceptions, on the
balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. Subsequently, the FASB issued ASU
No.2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20, Narrow-Scope
Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and amend the guidance in ASU No. 2016-02. ASC 842 eliminates
real estate-specific provisions and modifies certain aspects of lessor accounting. This standard is effective for interim and annual periods beginning after
December 15, 2018, with early adoption permitted.
We are using a modified retrospective adoption approach, is required to recognize and measure leases existing at the beginning of the adoption period, with
certain practical expedients available.
We adopted the standard effective January 1, 2019. The standard allows a number of optional practical expedients to use for transition. The Company
choose the certain practical expedients allowed under the transition guidance which permitted us to not to reassess any existing or expired contracts to
determine if they contain embedded leases, to not to reassess our lease classification on existing leases, to account for lease and non-lease components as a
single lease component for equipment leases, and whether initial direct costs previously capitalized would qualify for capitalization under FASB ASC 842.
The new standard also provides practical expedients and recognition exemptions for an entity’s ongoing accounting policy elections. The Company has
elected the short-term lease recognition for all leases that qualify, which means that we do not recognize a ROU asset and lease liability for any lease with a
term of twelve months or less. The most significant impact of adopting the standard was the recognition of ROU assets and lease liabilities for operating
leases on the Company’s consolidated balance sheet but it did not have an impact on the Company’s consolidated statements of operations or consolidated
statements of cash flows. We recorded a ROU and the related operating lease liability for our long-term facilities lease.
The below table summarizes these lease asset and liability accounts presented on our accompanying Consolidated Balance Sheets:
Operating Leases*
Operating lease right-of-use assets - non-current
Consolidated Balance Sheet Caption
Right of Use Asset
Operating lease liabilities - current
Operating lease liabilities - non-current
Total operating lease liabilities
Accrued liabilities
Lease Obligation – Long-Term
* As of December 31, 2019, we have no “finance leases” as defined in ASC 842.
Components of Lease Expense
Balance as of
December 31,
2019
$
$
$
$
456,000
91,000
352,000
443,000
We recognize lease expense on a straight-line basis over the term of our operating leases, as reported within “selling, general and administrative” expense
on the accompanying Consolidated Statement of Operations.
The components of our aggregate lease expense summarized below for the year ended December 31, 2019:
Operating lease cost
Variable lease cost
Short-term lease cost
Total lease cost
163,000
—
—
163,000
F-20
Weighted Average Remaining Lease Term and Applied Discount Rate
Operating leases as of December 31, 2019
3.75 years
18%
Future Contractual Lease Payments as of December 31, 2019
The below table summarizes our (i) minimum lease payments over the next five years, (ii) lease arrangement implied interest, and (iii) present value of
future lease payments for the years ending December 31:
Weighted
Average
Remaining
Lease Term
Weighted
Average
Discount Rate
Operating Leases - future payments
2020
2021
2022
2023
Total future lease payments, undiscounted
Less: Implied interest
Present value of operating lease payments
163,000
163,000
163,000
123,000
612,000
(169,000)
443,000
NOTE 6 – 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 7 – OTHER CURRENT LIABILITIES
BIGToken Point liability
2019
2018
$
$
1,708,000 $
335,000
270,000
129,000
2,442,000 $
2,518,000
256,000
722,000
79,000
3,575,000
In 2019, the Company launched the BIGToken consumer data management platform, where registered users are rewarded for undertaking actions and
sharing data within the platform. The business is currently based on a platform of registered users, developed as a direct to consumer data marketplace
where users are paid for their data.
During the year ended December 31, 2019 the Company instituted a policy that allows BIGToken users to redeem outstanding BIGToken points for cash if
their account and point balances meet certain criteria. As of December 31, 2019, the Company has estimated the future liability for point redemptions to be
$446,000. The Company considered the total number of points outstanding, the conversion rate in which points are redeemable for cash, and each user’s
redemption eligibility
The Company utilizes an account scoring system that evaluates a number of factors in determining an account’s redemption eligibility. These factors
include an evaluation of the following: the infrastructure utilized by the user when engaging with BIGToken’s systems, the user’s geographical
associations, consistency, and verifiability of the user’s data.
F-21
NOTE 8 – SECURED CONVERTIBLE DEBENTURES, NET
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 B1 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 B1 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.
As of December 31, 2019 and 2018, there was zero principle balance of secured convertible debentures.
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 B1
Warrants: (i) 277,500 have an expiration date of April 21, 2022, and (ii) 813,362 have an expiration date of October 27, 2022.
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 9 – Warrant Liabilities for further information for the fair value of
the Series B1 Warrants.
NOTE 9 – DERIVATIVE LIABILITIES
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 Derivative Warrant Instruments 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 derivative as of the inception date of the instrument and to adjust the fair value of the
instrument as of each subsequent balance sheet dates.
The Warrant derivative liability is comprised of the following warrant instruments (collectively, the “Derivative Liabilities”):
1.
2.
In January 2017, the Company issued Series A Warrants in Our registered direct and concurrent private placement;
In April and October 2017, the Company issued the Series A1 Warrants and Series A2 Warrants in connection with the private placement of
secured convertible debentures; and
F-22
3.
In November 2018, the Company issued the Series B1 Warrants upon redemption of the outstanding convertible debentures issued in April and
October 2017, pursuant to the terms of such debentures.
Series
Series A warrants
Series A1 warrants
Series A2 warrants
Series B1 warrants
Leapfrog warrants
Total
Series A Warrants
Number of Warrants
267,535
471,667
813,364
1,090,863
350,000
2,993,429
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.
The Series A Warrants fair value as of December 31, 2019 and 2018 was estimated to be $368,000 and $496,000, respectively, based on a risk-free interest
rates of 1.62 and 2.46 respectively, an expected term of 2 and 3 years, respectively, an expected volatility of 100% and 164%, respectively and a 0%
dividend yield.
Series A1 Warrant
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.
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.
F-23
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.
The Series A1 Warrants fair value as of December 31, 2019 and 2018 was estimated to be $618,000 and $868,000, respectively based on a risk-free interest
rate ranging from 1.62% to 2.46%, an expected term ranging from 2.38 to 3.38, an expected volatility ranging from 100% to 164% and a 0% dividend
yield. During the years ended December 31, 2019 and 2018, we recorded a decrease in the fair value of the warrant derivative liability of $284,000 and
$1,774,000, respectively. This was recorded as a gain on change in fair value of derivative liability.
Series A2 Warrants
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.
The Series A2 Warrants fair value as of December 31, 2019 and 2018 was estimated to be $1,142,000 and $1,446,000, respectively based on a risk-free
interest rate ranging from 1.62 to 2.46, an expected term ranging from 2.88 to 3.88 years, an expected volatility ranging from 100% to 158% and a 0%
dividend yield. During the years ended December 31, 2019 and 2018, we recorded the decrease in the fair value of the warrant derivative liability of
$303,000 and $3,170,000, respectively. This was recorded as a gain on change in fair value of derivative liability.
Series B1 Warrants
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 B1
Warrants: (i) 277,500 have an expiration date of April 21, 2022, and (ii) 813,362 have an expiration date of October 27, 2022.
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 Series B1 Warrants fair value at December 31, 2019 and 2018 was estimated to be $1,786,000 and $2,010,000, respectively, based on a risk-free
interest rate of 1.62 and 2.46, respectively, an expected term of 3.91 and 4.91 an expected volatility of 100% and a 155%, respectively, and a 0% dividend
yield. During the years ended December 31, 2019 and 2018, we recorded a decrease, in the fair value of the warrant derivative liability of $224,000 and
$1,230,000, respectively. This was recorded as a loss on change in fair value of derivative liability.
Leapfrog Warrants
The Leapfrog Warrants fair value at December 31, 2019 and 2018 was estimated to be $480,000 and $622,000, respectively, based on a risk-free interest
rate of 1.62 and 2.46, an expected term of 2.63 and 3.63, respectively, expected volatility of 100% and 167%, respectively and a 0% dividend yield. During
the years ended December 31, 2019 and 2018, we recorded a decrease, in the fair value of the warrant derivative liability of $142,000 and $1,251,000,
respectively. This was recorded as a loss on change in fair value of derivative liability.
F-24
The Warrant liabilities are comprised of the following at December 31:
Debenture Warrant
Liabilities
Leapfrog Warrant
Liability
Derivative
Liability
Balance December 31, 2017
Issuance of derivate instruments
Adjustment to outstanding instruments
Adjustment to fair value
Balance December 31, 2018
Adjustment to fair value
Balance December 31, 2019
$
$
7,257,000
3,240,000
2,000
(6,175,000)
4,324,000
(775,000)
3,549,000
$
$
1,873,000 $
-
-
(1,251,000)
622,000
(142,000)
480,000 $
2,026,000 $
-
(329,000)
(1,201,000)
496,000
(128,000)
368,000 $
Total
11,156,000
3,240,000
(327,000)
(8,627,000)
5,442,000
(1,045,000)
4,397,000
NOTE 10 – COMMITMENTS AND CONTINGENCIES
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.
Business Interruption
The Company may be impacted by public health crises beyond its control. This could disrupt its operations and negatively impact
sales of its products. The Company’s customer and, suppliers may experience similar disruption. In December 2019, a novel
strain of the Coronavirus, COVID-19, was reported to have surfaced in Wuhan, China, which has evolved into a pandemic. This
situation and preventative or protective actions that governments have taken to counter the effects of the pandemic have resulted
in a period of business disruption, including delays in shipments of products and raw materials. COVID-19 has spread to over
175 countries, including the United States, and efforts to contain the spread of COVID-19 have intensified. To the extent the
impact of COVID-19 continues or worsens, the demand for the Company’s products may be negatively impacted. COVID-19 has
also impacted the Company’s sales efforts as its ability to make sales calls is constrained. The Company’s ability to promote sales
through promotional activities has also been constrained. Trade shows and sales conferences, major events used to introduce and
sell the Company’s products, have been postponed indefinitely. The length and severity of the pandemic could also affect the
Company’s regular sales, which could in turn result in reduced sales and a lower gross margin.
F-25
NOTE 11 – 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.
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.
F-26
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.
In April 2019, the Company sold 1,687,825 shares of the Company’s common stock for gross proceeds of $6,751,300, or $4.00 per share. The net proceeds
after the placement agent fees, of approximately $523,000, was approximately $6,229,000.
In conjunction with this offering, the Company entered into a placement agent agreement, which provided for the placement agent to receive a cash fee
equal to 7.0% of the gross proceeds received by the Company from the sale of the shares of common stock, warrants to purchase up to 101,270 shares of
Common Stock at an exercise price of $5.00 per share and reimbursement of up to $50,000 for offering related expense.
In July 2019, we issued a 75,000 share of the Company’s common stock as compensation. On the date of grant the fair value of the shares was $374,000.
The fair value is be expensed over a one-year service period. For the twelve months ended December 31, 2019, the compensation expense was $235,000.
In August 2019, the Company entered into a settlement agreement with a lender. Based on the settlement agreement, the lender and the Company agreed to
cancel the 220,000 shares of common stock issued as collateral. As of the settlement date, the Company owed the lender $150,000 for the original issue
discount. The Company issued 58,101 shares of the Company’s common stock as payment for the original issue discount issue. The fair value of the shares
on the date of issuance was $219,000.
On August 12, 2019, the Company sold 1,525,000 shares of the Company’s Class A common stock, par value $0.001 per share (the “Common Stock”) and
Series A warrants (“Series A Warrants”) to purchase 965,500 shares of Common Stock at a purchase price per share of $3.60 (the “Registered Direct
Offering”) resulting in gross proceeds to the Company of $5,490,000 and net proceeds of $4,968,000 after cash payments to the placement agents and legal
fees.
Concurrently with the offering the Company also issued the Investors in a private placement (“Private Placement”) (i) Series B warrants (“Series B
Warrants”) to purchase an aggregate of 1,525,000 shares of Common Stock and (ii) Series C warrants (“Series C Warrants”) to purchase an aggregate of
965,500 shares of Common Stock (collectively, the Series B Warrants and Series C Warrants are referred to herein as the “Private Warrants”).
The Series A Warrants are immediately exercisable upon issuance, have a term of ninety (90) days from the date of issuance, and have an exercise price of
$3.60 per share. The Series B Warrants and Series C Warrants are not exercisable for a period of six (6) months following the issuance date, have an
exercise price of $4.00 per share, and expire on October 1, 2022. Additionally, the Series C Warrants vest ratably from time to time in proportion to such
Investor’s exercise of the Series A Warrants.
The 1,525,000 shares of Common Stock and Series A Warrants to purchase 965,500 shares of Common Stock sold in the Registered Direct Offering were
offered and sold by the Company pursuant to an effective “shelf” registration statement on Form S-3 (File No. 333-214644), which was declared effective
on November 28, 2016.
The Private Warrants and the Placement Agent Warrants (as defined below) were sold and issued without registration under the Securities Act of 1933, as
amended (the “Securities Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act as transactions not involving a public
offering and Rule 506 promulgated under the Securities Act as sales to accredited investors, and in reliance on similar exemptions under applicable state
laws.
F-27
In connection with the Registered Direct Offering and the Private Placement, the Company entered into engagement agreements (the “PA Agreements”)
with The Special Equities Group, LLC, a division of Bradley Woods & Co. Ltd., and WestPark Capital, Inc. (the “Placement Agents”) on August 11, 2019
and August 9, 2019, respectively. Pursuant to the PA Agreements, the Placement Agents received (i) aggregate cash fees of 7.0% for one Placement Agent
or 8.0% for the other Placement Agent, of their respective portions of the gross proceeds received by the Company from the sale of the securities, (ii)
approximately $60,000 for certain expenses, and (iii) warrants to purchase up to 59,668 shares of Common Stock (the “Placement Agent Warrants”),
representing 6.0% of the Common Stock and Series B Warrants sold by one of the Placement Agents in the Registered Direct Offering. The Placement
Agent Warrants have substantially the same terms as the Series B Warrants, except that the exercise price of the Placement Agent Warrants is $4.50 per
share and has a four (4) year term beginning one (1) year after issuance. Additionally, upon the exercise of up to 1,027,778 Series A Warrants, 650,701
Series B Warrants, and 1,027,778 Series C Warrants sold Registered Direct Offering and Private Placement, we have agreed to pay one of the Placement
Agents a cash fee of 8% of proceeds from the exercise of such warrants exercised within 120 days following the closing of this offering or a cash fee of 5%
of the proceeds from the exercise of such warrants after such 120 day period following the closing of this offering. One of the Placement Agents will be
entitled to the foregoing cash commission and fee in the previous sentence with respect to certain investors if such investors provide capital to us in any
future private or public offering, or other financing or capital-raising transaction during the six (6) months following the expiration or termination of our
engagement of such Placement Agent.
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.
Transactions involving our stock options for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:
In September 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.
In December 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.
F-28
In March 2019, 685,000 common stock options having an exercise price of $3.42 per share with an option value as of the grant date of $1,513,137
calculated using the Black-Scholes option pricing model were granted to several employees and members of our management team. This expense
associated with this option award will be recognized in operating expenses ratably over the vesting period.
In April 2019 the Company issued 11,252 options to purchase the Company’s common stock at a price of $5.49 to our non-executive directors. Each of our
four non-executive directors received 2,813 options that vest 1/4th quarterly over the next year with an expiration date of April 15, 2026. The options were
valued using the Black Scholes option pricing model at a total of $60,000 based on the seven-year term, implied volatility of 102% and a risk-free
equivalent yield of 2.46%, stock price of $5.49.
Number of
Shares
Weighted
Average Strike
Price/Share
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value(1)
Weighted
Average Grant
Date Fair Value
Outstanding — December 31, 2017
Granted
Exercised
Forfeited
Outstanding — December 31, 2018
Vested and exercisable - December 31. 2018
Unvested and non-exercisable - December 31,
2018
Outstanding — December 31, 2018
Granted
Exercised
Forfeited
Outstanding — December 31, 2019
Vested and exercisable — December 31, 2019
Unvested and non-exercisable - December 31,
2019
$
424,300
480,236
-
(356,874)
547,662
331,993
205,669
547,662
696,252
-
(51,395)
1,192,519
355,083
837,436
$
6.65
3.57
—
4.84
5.94
6.80
4.36
5.94
3.45
—
6.92
4.14
5.63
3.49
3.10 $
1.41
—
—
2.73
2.86
2.62
2.73
2.34
—
—
2.17
2.22
105,425 $
—
—
—
—
—
—
—
—
—
—
—
—
2.15 $
— $
2.74
—
2.91
4.24
2.97
2.25
—
3.37
3.98
2.29
During the years ended December 31, 2019 and 2018, we recorded compensation expense of $1,168,000 and $668,000, respectively, related to stock-based
compensation.
As of December 31, 2019, compensation cost related to the unvested options not yet recognized was approximately $2,070,000. The weighted average
period over which the $2,070,000 will vest is estimated to be 2.2 years.
F-29
Transactions involving our common stock awards for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:
On May 13, 2019 the Company entered into a consulting agreement with a contractor for services related to BIGToken. The agreement provides for
300,000 warrants with vesting conditions based on BIGToken user growth in Asia. The warrants were valued using the Black Scholes option pricing model
at a total of $1,138,332 based on the five-year term, implied volatility of 101%, a risk-free equivalent yield of 1.8% and stock price of $4.99.
Number of
Shares
Weighted
Average Strike
Price/Share
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value(1)
Weighted
Average Grant
Date Fair Value
7,201,286 $
Outstanding — December 31, 2017
Granted
Exercised
Forfeited
Outstanding — December 31, 2018
Vested and exercisable - December 31. 2018
Unvested and non-exercisable - December 31,
2018
Outstanding — December 31, 2018
Granted
Exercised
Forfeited
Outstanding — December 31, 2019
Vested and exercisable — December 31, 2019
Unvested and non-exercisable - December 31,
2019
$
2,485,005
2,162,058
(95,238)
(226,402)
4,325,423
4,325,423
—
4,325,423
3,885,442
(342,000)
(1,631,435)
6,237,430
5,937,430
300,000
$
NOTE 13 – RELATED PARTY TRANSACTIONS
5.09
3.00
2.25
6.95
5.05
5.05
—
5.05
3.99
3.50
5.14
3.57
3.51
4.75
2.19 $
3.82
—
—
2.85
2.85
—
2.85
2.21
—
—
2.68
2.60
—
—
—
—
—
—
—
94,910
—
—
—
—
4.43 $
— $
2.97
4.48
4.52
3.08
—
1.60
4.79
1.97
2.34
3.88
On March 20, 2018, we entered into certain retention and bonus agreements with SRAX MD 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 SRAX MD. 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 in 2018.
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.
F-30
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 served on the board of directors for some months in 2018 of one of our advertising customers which purchases advertising at
market rates.
NOTE 14 – INCOME TAXES
Income tax (benefit) expense from continuing operations for the year ended December 31, 2019 consisted of the following:
Federal
State
Subtotal
Valuation allowance
Total
Current
Deferred
$
$
— $
—
—
—
— $
(3,198,000) $
(920,000)
(4,118,000)
4,118,000
— $
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
$
$
— $
—
—
—
— $
(1,302,000)
(701,000)
(2,003,000)
2,003,000
— $
A reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
Total
(3,198,000)
(920,000)
(4,118,000)
4,118,000
—
Total
(1,302,000)
(701,000)
(2,003,000)
2,003,000
—
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
2019
2018
21.0%
-%
(1.4)%
-%
(23.7)%
1.3%
3.0%
-%
(0.2)%
—%
21.0%
(1.9)%
1.4%
1.0)%
13.9%
(21.5)%
(14.9)%
—%
1.0%
—%
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, are presented below:
Deferred Tax Assets
Net operating loss carryforwards
Bad debt expense
Accrued interest
Stock based compensation
Other accruals
Total Deferred Tax Assets
Deferred Tax Liabilities
Fixed assets
Stock based compensation
Intangibles
Prepaid expenses
Total Deferred Tax Liabilities
Net Deferred Tax Assets
Valuation Allowance
Net deferred tax / (liabilities)
2019
2018
$
6,621,000 $
111,000
492,000
431,000
84,000
7,739,000
2,915,000
—
—
431,000
25,000
3,371,000
(39,000)
(38,000)
(327,000)
(20,000)
(386,000)
7,353,000
(7,353,000)
(250,000)
(13,000)
(301,000)
3,070,000
(3,070,000)
$
— $
—
F-31
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 years ended December 31, 2019 and 2018, the valuation allowance increased (decreased) by $4,283,000 and $(1,221,226), respectively. The
increase (decrease) for both years was attributable to the increase (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.
At December 31, 2019, the Company has federal and state net operating loss carry forwards, which are available to offset future taxable income, of
approximately $29,511,000 and $23,447,000, 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, 2019 and 2018, there are no unrecognized tax benefits, and there are no significant accruals for interest related to
unrecognized tax benefits or tax penalties.
The Company is in the process of analyzing their NOL and has not determined if the company has had any change of control issues that could limit the
future use of NOL. NOL carryforwards that were generated after 2017 of approximately $20.1 million may only be used to offset 80% of taxable income
and are carried forward indefinitely.
NOTE 15 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash and accounts payable and accrued expenses,
approximate their respective fair values due to the short-term nature of such instruments.
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, 2019 and 2018:
Debenture warrant liability
Leapfrog warrant liability
Derivative liability
Total liabilities
Securities:
Certificates of deposit
Money Market funds
Total assets
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
—
—
—
—
—
—
$
$
—
—
—
—
—
—
—
$
$
3,549,000
480,000
368,000
4,397,000
—
—
—
Balance as of
December 31,
2019
3,549,000
480,000
368,000
4,397,000
—
—
—
F-32
$
$
$
$
$
$
Balance as of
December 31,
2018
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Debenture warrant liability
Leapfrog warrant liability
Derivative liability
Total liabilities
Securities:
U.S. government-sponsored agency securities
Total assets
$
$
$
4,324,000
622,000
496,000
5,442,000
2,723,000
2,723,000
$
$
$
—
—
—
—
2,723,000
2,723,000
$
$
—
—
—
—
—
—
$
$
4,324,000
622,000
496,000
5,442,000
—
—
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 for the years ended December 31:
Outstanding, beginning of the period
Initial derivative liability on issuance of warrants
Change in fair value
Warrant liabilities
2019
5,442,000 $
-
(1,045,000)
4,397,000 $
2018
11,156,000
3,240,000
(8,954,000)
5,442,000
$
$
Equity investments include the Company’s retention of an approximately 30% membership interest in the purchaser of SRAX MD 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 SRAX MD. The operating agreement designates a different managing member for that
entity. Accordingly, the value at December 31, 2019 and 2018 is nil and is a level 3 asset.
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.
NOTE 16 – SUBSEQUENT EVENTS
Loans and Security Agreements
On February 28, 2020, SRAX, Inc. (the “Company”) entered into a term loan and security agreement (the “Loan Agreement”) with BRF Finance Co., LLC,
an affiliate of B. Riley Financial, Inc. (“Lender). Pursuant to the Loan Agreement, the Company will borrow up to $5,000,000, subject to the conditions
contained below (the “Loan”).
F-33
The Loan is secured by substantially all of the assets of the Company pursuant to the Loan Agreement and the intellectual property security agreement
(“Security Agreement”) entered into in connection with the transaction.
The Loan bears interest at ten percent (10%) per annum, and has a maturity date of March 1, 2022 (“Maturity Date”). Beginning on August 1, 2020, and
continuing on the first day of each month thereafter until the Maturity Date, the Company will make monthly payments of principal and interest on an
eighteen (18) month straight line amortization schedule, based on the principal outstanding on July 31, 2020. Additionally, the Company will have the
option of a one (1) time payment-in-kind payment (“PIK Payment”) for a monthly required payment of principal and interest, which will defer such
payments and result in a recalculation of the amortization schedule. In the event that the Company is late on any payments under the Loan, a late charge of
three percent (3%) of the amount of the payment due will be assessed.
Upon the Initial Loan, the Company paid Lender: (i) an origination fee of $300,000, (ii) $35,000 in attorneys’ fees reimbursement, and (iii) certain other
costs and expenses associated with the completion of the Loan, including but not limited to escrow fees and recording fees. Accordingly, the Company
received net proceeds of approximately $2,163,800 from the Initial Loan.
The occurrence of an event of default under the Loan Agreement (“Event of Default”) will accelerate all amounts due under the Loan. Events of Default
include, but are not limited to: (i) failure to make payments on principal or interest due after Lender providing five (5) days notice, (ii) failure by the
Company to timely perform its obligations, or abide by its covenants, or agreements in the Loan Agreement, subject to applicable cure periods, (ii) certain
breaches of representations and warranties, or (iv) the initiation of bankruptcy proceedings. Upon an Event of Default, the interest rate will be increased by
an additional five percent (5%) on all amounts owed under the Loan.
Under the Loan: (i) an initial draw of $2,500,000 on February 28, 2020 (the “Initial Loan”) and (ii) the remaining $2,500,000 (“Second Loan”) within (30)
days of the Company entering into an at the market sales agreement (“ATM Agreement”) with the Lender and the filing of an at the market offering on
Form S-3 with the Securities and Exchange Commission (“SEC”) registering the shares to be sold pursuant to the ATM Agreement (the “ATM”). The
Company agreed to file the ATM by May 1, 2020. Additionally, the Company will be required to increase the dollar amount authorized under the ATM
each time additional capacity of at least $1,000,000 is available under federal securities laws.
The Loan may be prepaid in whole or in part at any time at the discretion of the Company. The Loan also provides for mandatory prepayments of all of the
net cash received upon (i) a sale of the company’ assets, (ii) raising additional capital through the issuance of equity or debt securities, or (iii) sales under
the ATM described above.
Pursuant to the Loan Agreement, the Company agreed to issue to Lender: (i) 500,000 Common Stock purchase warrants on the date of the Initial Loan
(“Initial Warrant”) and (ii) 500,000 Common Stock purchase warrants on the date of the Second Loan (“Second Warrant”) (collectively, the “Warrants”).
The Warrants have an exercise price equal to a 25% premium of the closing price of the Common Stock on their respective date of issue (provided that the
exercise price of the Warrants cannot be less than $2.50 per share, subject to adjustment contained therein). The Initial Warrant has an exercise price of
$3.60. The Warrants will expire on October 31, 2022. The Warrants allow for cashless exercise in the event that they are not subject to a registration
statement on the six (6) month anniversary of their respective issuances. The Warrants do not contain any price protection / anti-dilution provisions.
During the three months ended March 31, 2020, the Company sold a series of short-term notes with a total principal amount of $450,000. These short-term
notes have maturities of 90 days from the date of sale. The notes are redeemable by the Company at any time prior to maturity at face value plus a fee
determined by the number of days the notes are outstanding. These fees range from 10% to 36% of the face value. The notes are collateralized by 450,000
shares of the Company’s stock, subject to certain adjustments.
On January 22, 2020 and January 30, 2020, the Company entered into agreements to sell, with recourse, certain accounts receivable with a face value of
$453,753 and $74,843, respectively (the “Receivables”) $453,753 and $56,000, respectively. Also, the Company has granted the purchaser a security
interest in 268,548 shares of the Company’s common stock. The shares have been issued and held by the Company’s stock transfer agent as treasury shares.
Commencing on March 24, 2020 and March 30, 2020, the purchaser may, at its sole option exercise an option (the “Put Option”), cause Company to
purchase from Purchaser, any outstanding portion of the Receivables. The purchase price payable by Company to Purchaser for the Receivables upon
exercise of the Put Option shall be equal to one hundred and thirty six percent (136%) of the then remaining outstanding balance of the Receivables (“Put
Price”). For all Receivables, not subject to a Put Option, the Company pay a true up amount (“True UP Amounts”), as follows (“True UP Triggers”):
January 22, 2020 Purchase
a.
b.
c.
ten percent (10%) of the portion of the Receivables which are paid on or before February 21, 2020;
twenty percent (20%) of the portion of the Receivables which are paid after February 21, 2020 and but on or before March 24, 2020; and
thirty six percent (36%) of the portion of the Receivables which are paid after March 24, 2020
January 30, 2020 Purchase
a.
b.
c.
ten percent (10%) of the portion of the Receivables which are paid on or before February 28, 2020;
twenty percent (20%) of the portion of the Receivables which are paid after February 28, 2020 but on or before March 30, 2020; and
thirty six percent (36%) of the portion of the Receivables which are paid after March 30, 2020
On April 9, 2020 the Company entered into an agreement to amend the January 22 and 30 Accounts receivable agreements. The Purchaser agreed to amend
the payment of the Put Price to June 23, 2020 and June 30, 2020 for the receivable sale originating on January 22, 2020 and January 30, 2020, respectively.
As consideration for the extension the Company agreed to issue the purchaser 32,668 and 4,032 shares of Class A common stock for the receivable sale
originating on January 22, 2020 and January 30, 2020, respectively.
F-34
Exhibit 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statement of SRAX, Inc. on Form S-8 (File No. 333-206792) and its Registration
Statements on Form S-3 (File Nos. 333-229604, 333-235298, 333-225725, 333-215791, 333-221970, 333-218131, and 333-214646 of our report dated
May 1, 2020, with respect to our audits of the consolidated financial statements of SRAX, Inc., as of December 31, 2019 and 2018, which is included in
this Annual Report on Form 10-K of SRAX, Inc.
Our report on the financial statements refers to a change in the method of accounting for leases effective January 1, 2019.
/s/ RBSM LLP
RBSM LLP
New York, NY
May 1, 2020
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, 2019 of SRAX, 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: May 1, 2020
/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, 2019 of SRAX, 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: May 1, 2020
/s/ Michael Malone
Michael Malone, Chief Financial Officer, principal financial and accounting
officer
EXHIBIT 32.1
EXHIBIT 32.2
Section 1350 Certification
In connection with the Annual Report of SRAX, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019 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. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
2. The information contained in the Report fairly presents, in all material respects, the financial conditions and results of operations of the Company.
May 1, 2020
May 1, 2020
/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.