10-K 1 form10-k.htm

 

 

 

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   45-2925231

(State or other jurisdiction of

incorporation or organization)

 

(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 Name of each exchange on which registered
Class A common stock, par value $0.001 per share 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 [  ] Accelerated filer [  ]
Non-accelerated filer [X] Smaller reporting company [X]
    Emerging Growth Company [  ]

 

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.

 

DOCUMENTS INCORPORATED BY REFERENCE

None

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page No.
  Part I  
     
Item 1. Business. 1
Item 1A. Risk Factors. 5
Item 1B. Unresolved Staff Comments. 16
Item 2. Description of Property. 16
Item 3. Legal Proceedings. 16
Item 4. Mine Safety Disclosures. 16
     
  Part II  
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 17
Item 6. Selected Financial Data. 18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 27
Item 8. Financial Statements and Supplementary Data. 27
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 27
Item 9A. Controls and Procedures. 27
Item 9B. Other Information. 28
     
  Part III  
     
Item 10. Directors, Executive Officers and Corporate Governance. 28
Item 11. Executive Compensation. 33
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 38
Item 13. Certain Relationships and Related Transactions, and Director Independence. 40
Item 14. Principal Accounting Fees and Services. 42
   
  Part IV  
     
Item 15. Exhibits, Financial Statement Schedules.  43
Item 16. Form 10-K Summary. 47

 

iv

 

 

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.

 

5

 

 

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.

 

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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.

 

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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.

 

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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;

 

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  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.

 

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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.

 

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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.

 

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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.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF 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”).

 

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    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.

 

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  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”).

 

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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

 

   Year ended December 31,   $   % 
   2019   2018   Change   Change 
                 
Revenue  $3,584   $9,881   $(6,297)   (63.7)%
Cost of revenue   1,680    3,157    (1,477)   (46.8)%
Gross Profit   1,904    6,724    (4,820)   (71.6)%
Operating expense   19,762    18,443    1,319    7.1%
Operating loss   (17,858)   (11,719)   (6,139)   52.4%
Gain from sale of SRAX MD   658    22,108    22,108    100.0%
Interest expense, net   (725)   (3,056)   (2,331)   (72.9)%
Change in fair value of derivative liabilities   1,045    8,954    (7,910)   (88.3)%
Other income (loss)   

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    (7,543)   8,223    (109.0)%
Net income (loss)   (16,859)   8,744    (25,603)   (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,

  

SRAX MD for the Year

Ended December 31,

  

Excluding  

SRAX MD for the Year Ended

December 31,

 
   2019   2018   2019   2018   2019   2018 
Revenue  $3,584   $9,881   $   $6,307   $3,584   $3,574 
Cost of revenue   1,680    3,157    40    1,101    1,640    2,056 
Gross profit   1,904    6,724    (40)   5,206    1,944    1,518 
Operating expense   19,762    18,443    26    2,896    19,736    15,547 
Operating income(loss)  $(17,858)  $(11,719)  $(66)  $2,310   $(17,792)  $(14,029)

 

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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):

 

   2019   2018 
         
Current assets  $1,858   $5,468 
Current liabilities   7,376    9,017 
Working capital  $(5,518)  $(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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

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   Age   Positions   Director Since
Christopher Miglino   51   Chairman of the Board, Chief Executive Officer, President   2010
Kristoffer Nelson   41   Chief Operating Officer, Director   2014
Michael Malone   38   Chief Financial Officer  
Mark Savas   50   Director   2012
Malcolm CasSelle   49   Director   2013
Robert Jordan   51   Director   2017
Colleen DiClaudio   42   Director   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.

 

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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

 

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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.

 

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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:

 

Director   Audit Committee Member     Compensation Committee Member     Corporate Governance and Nominating Committee Member  
Marc Savas          (1)    
Malcolm CasSelle              (1)
Robert Jordan      (1)            

 

 

  (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;

 

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  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.

 

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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  Year  Salary ($)   Bonus ($)  

Stock

Awards

($)

   Option Awards ($) (1)  

No equity

incentive plan

compensation

($)

  

Non-qualified

deferred

compensation

earnings

($)

   All other compensation ($)  

Total

($)

 
                                    
Christopher Miglino,  2019   340,000                          24,455(4)   364,455 
Chief Executive Officer (2)  2018   291,250    540,000(3)                       437,392(2)   1,268,642 
                                            
Michael Malone  2019   199,242    75,000         167,798(5)             28,722(6)   470,762 
Chief Financial Officer (5)  2018                                        
                                            
Kristoffer Nelson  2019   275,000              220,900(7)             27,205    523,105 
Chief Operating Officer  2018   242,500    43,750         398,675(8)             25,892(9)   710,817 
                                            
Joseph Hannan  2019                                        
Chief Financial Officer (10)  2018   191,667    250,000         488,107(11)             34,615(12)   964,389 

 

 

(1) 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.
(2) 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.

 

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(3) Mr. Miglino received a cash bonus for successfully completing the sale of the SRAX MD business division.
(4) Mr. Miglino received $24,455 in Company paid benefits.
(5) 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.
(6) Mr. Malone received $28,722 in Company benefits, which included $20,000 in relocation reimbursements.
(7) Mr. Nelson’s options award represents options to purchase 100,000 shares of our Class A Common stock at $3.42 options to purchase.
(8) 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
(9) The Company paid $25,892 for insurance and benefit premiums on behalf of Mr. Nelson.
(10) Mr. Hannan joined the Company as Chief Financial Officer, effective October 17, 2016. On December 31, 2018, Mr. Hannan resigned from the Company.
(11) 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.
(12) 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 

Terminated
Without Cause /

For Good Reason

   Termination as a
result of Disability
 
         
Christopher Miglino          
Salary (1)  $680,000   $680,000 
Accelerated Vesting of Awards        
Health Care   43,074     
Total:  $723,074   $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.

 

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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  Terminated
Without Cause
   Termination as a
result of Disability
 
         
Michael Malone          
Salary (1)  $33,667   $ 
Total:  $33,667   $ 

 

Employment Agreement with Mr. Hannan

 

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.

 

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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     STOCK AWARDS  
Name  

Number of securities underlying unexercised options

(#)

exercisable

   

Number of securities underlying unexercised options

(#)

unexercisable

   

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

(#)

   

Market value of shares or units of stock that have not vested

($)

   

Equity incentive

plan awards: Number of unearned shares, units or other rights 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     33,333       -       -       7.50       10/10/2020       -       -       -       -  
    33,333       -       -       7.50       10/10/2021       -       -       -       -  
      33,333       -       -       7.50       10/10/2022       -       -       -       -  
     

66,667

     

33,333

      -      

5.78

     

1/2/2021

                            -  
      -       100,000       -       3.42       3/27/2022       -             -          
Michael Malone     33,333       66,667               2.56       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.

 

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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.

 

Name  Fees earned or paid in cash ($)  

Stock

awards

($)

   Option awards ($)   Non-equity incentive plan compensation ($)  

Nonqualified deferred compensation earnings

($)

   All other compensation ($)  

Total

($)

 
Colleen DiClaudio   15,000(1)       15,000(2)               30,000 
Marc Savas   15,000(1)        15,000(2)               30,000 
Malcolm CasSelle   15,000(1)        15,000(2)               30,000 
Robert Jordan   15,000(1)        15,000(2)               30,000 

 

 

  (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.

 

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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:

 

Plan category   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)  
                         
Plans approved by our stockholders:                        
2012 Equity Compensation Plan     205,962     $ 4.38       390,471  
2014 Equity Compensation Plan (1)     734,069     $ 3.76       448,773  
2016 Equity Compensation Plan     252,488     $ 5.05       88,455  
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.

 

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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)  Shares  

Common Stock

Shares Underlying Convertible Securities (2)

   Total   Percent of
Class (2)
 
Directors and named Executive Officers                    
Christopher Miglino   887,575        887,575    6.32%
Kristoffer Nelson   135,001    200,000    335,001    2.35%
Marc Savas   11,945    7,872    19,817    * 
Malcolm CasSelle   65,946    7,872    73,818    * 
Robert Jordan   6,510    7,872    14,382    * 
Colleen DiClaudio   7,813    7,872    15,685    * 
Michael Malone   1,292    41,667    42,959    * 
All directors and executive officers as a group (7 persons)   1,116,082    273,155    1,389,237    9.71%
                     
Beneficial Owners of 5% or more                    
Anson Funds Management LP   735,157        735,157    5.00%

 

* Less than one percent.

 

  (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

 

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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 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;
     
  o 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
     
  o 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 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
     
  o 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.

 

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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.

 

   2019   2018 
Audit Fees  $215,000   $125,000 
Audit-Related Fees        52,500 
Tax Fees   20,000    0 
All Other Fees   25,000    30,000 
Total  $260,000   $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.

 

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PART IV

 

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

Documents filed as part of this report:

 

(1)Financial Statements. See Index to Consolidated Financial Statements appearing on page F-1.
   
(2)Exhibits

 

        Filed/   Incorporated by Reference
Exhibit       Furnished       Exhibit       Filing
No.   Description   Herewith   Form   No.   File No.   Date
                         
3.01(i)   Certificate of Incorporation, filed on 8/3/11       S-1   3.01(i)   333-179151   1/24/12
3.02(i)   Certificate of Correction to Certificate of Incorporation, filed on 8/31/11       S-1   3.01(ii)   333-179151   1/24/12
3.03(i)   Certificate of Amendment to Certificate of Incorporation authorizing 1:5 reverse stock split       8-K   3.5   000-54996   9/19/16
3.04(i)   Certificate of Designation of Series 1 Preferred Stock       8-K   3.4   000-54996   8/22/13
3.05(i)   Certificate of Amendment to Certificate of Incorporation as Amended, effective 8/25/19       8-K   3.01(i)   001-37916   8/15/19
3.06(i)   Certificate of Designation of BIGToken Preferred Tracking Stock       S-1/A   3.05(i)   333-229606   10/16/19
3.07(ii)   Amended and Restated Bylaws of Social Reality, Inc. adopted March 27, 2019       8-K   3.01(ii)   001-37916   4/2/19
4.01   Specimen of Class A Common Stock Certificate       8-A12B   4.1   001-37916   10/12/16
4.02   Class A Common Stock Purchase Warrant Issued to Investors in October 2014       8-K   4.7   000-54996   11/4/14
4.03   Class A Common Stock Purchase Warrant issued in Steel Media Transaction dated October 30, 2014       8-K   4.8   000-54996   11/4/14
4.04   Class A Common Stock Warrant issued in September 2016 Offering       8-K   4.6   000-54996   10/6/16
4.05  

Class A Common Stock Warrant issued to October 2013 Offering

      8-K   4.7   000-54996   10/24/13
4.06   Class A Common Stock Warrant issued to T.R. Winston & Company issued 8/22/13       10-Q   4.5   000-54996   11/13/13
4.07   Class A Common Stock Warrant issued to Investors in January 2014 Offering       8-K   4.6   000-54966   1/27/14

 

43

 

 

4.08   Class A Common Stock Warrant issued to Investors in September 2016       8-K   4.6   000-54966   10/6/16
4.09   Class A Common Stock Warrant issued to Investors in January 2017 Offering       8-K   4.1   001-37916   1/4/17
4.10   Class A Common Stock Warrant issued to Investors in January 2017 Offering (2nd Warrant)       8-K   4.2   001-37916   1/4/17
4.11   Class A Common Stock Placement Agent Warrant issued in January 2017 Offering       8-K   4.3   001-37916   1/4/17
4.12   Class A Common Stock Placement Agent Warrant issued in October 2016 Offering       10-K   4.12   001-37916   3/31/17
4.13   Class A Common Stock Warrant issued in Leapfrog Media Trading Acquisition       10-K   4.13   001-37916   4/2/18
4.14   Form of 12.5% Secured Convertible Debenture issued in April 2017 Offering       8-K   4.2   001-33672   4/21/17
4.15   Class A Common Stock Warrant issued in April 2017 Offering       8-K   4.1   001-33672   4/21/17
4.16   Form of Class A Common Stock Placement Agent Warrant issued in April 2017 Offering       8-K   4.3   001-33672   4/21/17
4.17**   2016 Equity Compensation Plan       14A   A-1   001-37916   1/20/17
4.18**   2014 Equity Compensation Plan       8-K   10.33   000-54996   11/10/14
4.19   2012 Equity Compensation Plan       S-1   4.02   333-179151   1/24/12
4.20   Form of Stock Option Agreement for 2012, 2014 and 2016 Equity Compensation Plan       S-1   4.03   333-179151   1/24/12
4.21   Form of Restricted Stock Unit Agreement for 2012, 2014 and 2016 Equity Compensation Plan       S-1   4.04   333-179151   1/24/12
4.22   Form of Restricted Stock Award Agreement for 2012, 2014 and 2016 Equity Compensation Plan       S-1   4.05   333-179151   1/24/12
4.23   Form of 12.5% Secured Convertible Debenture issued in October 2017 Offering       8-K   4.01   001-37916   10/27/17
4.24   Class A Common Stock Warrant Issued to Investors and Placement Agents in October 2017 Offering       8-K   4.02   001-37916   10/27/17
4.25   Form of Placement Agent Warrant from April 2019 Offering       8-K   4.01   001-37916   4/10/19
4.26   Form of Series A Common Stock Warrant from August 2019 Offering       8-K   4.01   001-37916   8/14/19
4.27   Form of Series B and Series C Common Stock Warrant from August 2019 Offering       8-K   4.02   001-37916   8/14/19
4.28   Form of Placement Agent Warrant from August 2019 Offering       8-K   4.03   001-37916   8/14/19

 

44

 

 

4.29   Form of Class A common stock purchase warrant issued in February 2020 Offering       8-K   4.01   001-37916   3/5/20
10.01   Purchase Agreement among Richard Steel, Steel Media, and Social Reality, dated 10/30/14       8-K   2.1   000-54996   11/4/14
10.02   Asset Purchase Agreement with LeapFrog Media Trading dated 4/20/17       10-K   10.02   001-37916   4/2/18
10.03   Amendment to Asset Purchase Agreement with Leapfrog Media Trading dated 8/17/17       10-K   10.03   001-37916   4/2/18
10.04   Transition Services Agreement in Leapfrog Media Trading Transaction       10-K   10.04   001-37916   4/2/18
10.05   Sample Leakout Agreement in Leapfrog Media Trading Transaction       10-K   10.05   001-37916   4/2/18
10.06   Form of Securities Purchase Agreement for April 2017 Offering       8-K   10.1   001-37916   4/21/17
10.07   Form of Security Agreement for April 2017 Offering       8-K   10.2   001-37916   4/21/17
10.08   Form of Registration Rights Agreement for April 2017 Offering       8-K   10.3   001-37916   4/21/17
10.09   Form of Securities Purchase Agreement for October 2017 Offering       8-K   10.01   001-37916   10/27/17
10.10   Form of Registration Rights Agreement for October 2017 Offering       8-K   10.02   001-37916   10/27/17
10.11**   Employment Agreement with Christopher Miglino dated 1/1/12       S-1   10.01   333-179151   1/24/12
10.12**   Employment Agreement with Erin DeRuggiero dated 10/19/15       10-K   10.3   000-54996   2/26/16
10.13**   Employment Agreement with Joseph P. Hannan dated 10/17/16       10-Q   10.48   001-37916   11/14/16
10.14**   Employment Agreement with Richard Steel dated 10/30/14       8-K   10.27   000-54996   11/4/14
10.15**   Employment Agreement with Chad Holsinger dated 10/30/14       8-K   10.28   000-54996   11/4/14
10.16   Employment Agreement with Adam Bigelow dated 10/30/14       8-K   10.29   000-54996   11/4/14
10.17**   Separation Agreement and Release with Richard Steel dated 1/25/17       8-K   10.1   333-215791   1/27/17
10.18**   Employment Agreement with Dustin Suchter dated 12/19/14       8-K   10.36   000-54996   12/22/14
10.19**   Form of Proprietary Information, Inventions and Confidentiality Agreement       S-1   10.03   333-179151   1/25/12
10.20**   Form of Indemnification Agreement with Officers and Directors       S-1   10.04   333-179151   1/25/12

 

45

 

 

10.21   Indemnification Agreement with Richard Steel dated 10/30/14       8-K   10.30   333-215791   11/4/14
10.22   Sublease for principal executive offices dated 8/12/12 with TrueCar, Inc.       S-1   10.16   333-193611   1/28/14
10.23   Services Agreement with Servicios y Asesorias Planic, S.A. de cv dated 1/25/13       10-K   10.9   000-54996   3/31/15
10.24   Sublease Agreement with Amarcore, LLC dated 1/1/15       S-1   10.17   333-206791   9/4/15
10.25   Advisory Agreement with Kathy Ireland Worldwide, LLC dated 11/14/16       10-Q   10.49   001-37916   11/14/16
10.26   Financing and Security Agreement with FastPay Partners, LLC       8-K   10.41   000-54996   9/23/16
10.27   Share Acquisition and Exchange Agreement with Five Delta, Inc.       8-K   10.34   000-54996   12/22/14
10.28   Secured Subordinated Promissory Note to Richard Steel dated 10/30/14       8-K   10.18   000-54996   11/4/14
10.29   Subordination Agreement with Richard Steel and Victory Park Management, LLC dated 10/30/14       8-K   10.22   000-54996   11/4/14
10.30   Securities Purchase Agreement for January 2017 Offering