S-1 1 srax_s1.htm REGISTRATION STATEMENT Registration Statement

 


As filed with the Securities and Exchange Commission on February 11, 2019

Registration No. 333-________

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


SOCIAL REALITY, INC.

(Exact name of registrant as specified in its charter)


Delaware

 

7311

 

45-2925231

(State or jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer Identification No.)


456 Seaton Street

Los Angeles, CA 90013

telephone (323) 694-9800

(Address, including zip code, and telephone number,

including area code, of registrant's principal executive offices)


Paracorp Incorporated

2140 S Dupont Hwy

Camden, DE  19934

Telephone: (302) 697-4590

 (Name, address, including zip code, and telephone number,

including area code, of agent for service)

———————

Copy to:

Raul Silvestre

Silvestre Law Group, P.C.

31200 Via Colinas, Suite 200

Westlake Village, CA 91362

(818) 597-7552

Fax (805) 553-9783


Approximate date of commencement of proposed sale to the public: From time to time after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box: þ


If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨


If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨


If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company:


Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

þ

Smaller reporting company

þ

 

 

Emerging growth company

o


If any emerging growth company, indicate by check mark if the registrant has elected to extend the transition period for complying with any new or revised financial accounting standards provided in Section 7(a)(2)(b) of the Securities Act. o

 

 




 




CALCULATION OF REGISTRATION FEE


Title of Each Class of Securities to be Registered

 

Amount to be Registered (1)

 

 

Proposed

Offering

Price

Per Share

 

 

Proposed

Aggregate

Offering

Price

 

 

Amount of

Registration

Fee

 

 

    

                       

  

  

                       

  

  

                       

  

  

                       

  

Big Token Preferred Tracking Stock

 

 

20,000,000

 

 

$

0.20

(2)

 

$

4,000,000

 

 

$

484.80

 

Total

 

 

20,000,000

 

 

 

 

 

 

 

4,000,000

 

 

 

 

 

———————

(1)

Pursuant to SEC Rule 416, also covers additional common shares that may be offered to prevent dilution as a result of stock splits or stock dividends.


(2)

We will receive user data instead of cash as consideration for the issuance of the shares. We have set the Purchase Price of shares for data based on our management’s evaluation of the fair value of the data to be received.


THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.






 


The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION

February 11, 2019


[srax_s1001.jpg]

Social Reality, Inc.


20,000,000 Shares of BIGToken Preferred Tracking Stock

——————————————

This prospectus relates to the offer of up to 20,000,000 shares of our BIGToken Preferred Tracking Stock, par value $0.001 per share (“Preferred Tracking Stock”), by Social Reality, Inc. (the “Company”). The shares of Preferred Tracking Stock will be issued to users of the BIGToken application (“BIGToken Application”), our wholly owned subsidiary’s consumer data management and distribution system pursuant to such users’ interactions and use with the BIGToken Application and the completion of tasks thereunder.

 

The shares of the Preferred Tracking Stock will be subject to the BIGToken Preferred Tracking Stock Policy (“Tracking Stock Policy”). See “Synopsis of BIGToken Application,” “Plan of Distribution,” “BIGToken Application,” and “Description of Securities” sections contained in this Prospectus for more information. The shares of Preferred Tracking Stock will be issued for no monetary consideration and can be issued in fractional shares in amounts as small as 0.000001 of a share. No underwriter or person has been engaged to facilitate the sale or distribution of the Preferred Tracking Stock in this prospectus. The shares will be distributed directly by Social Reality.

 

Currently, the Company’s Class A Common Stock is traded on the NASDAQ Capital Market under the symbol “SRAX.” The Company’s Preferred Tracking Stock is not presently traded on any market or securities exchange and we have not applied for listing or quotation on any public market. No assurances can be given that a public market for the Preferred Tracking Stock will ever materialize. Additionally, even if a public market for the Preferred Tracking Stock develops and the shares become traded, the trading volume may be limited, making it difficult to sell such shares.


Our principal executive offices are located at 456 Seaton Street, Los Angeles, CA 90013, telephone 323-694-9800.


Recipients of the Preferred Tracking Stock must consent to electronic delivery of this Prospectus, the accompanying, all prospectus amendments and supplements, confirmations and other information relating to this offering. This consent may not be revoked. Upon receipt of Preferred Tracking Stock pursuant to the redemption of points in the BIGToken Application, you must also consent to electronic delivery of annual reports, proxy statements, communications and other materials provided generally to our stockholders from time to time.


The BIGToken Application and redemptions of points thereunder may be suspended, modified, terminated at any time. The terms and conditions of the BIGToken Application and the Tracking Stock Policy may be changed, limited, modified or eliminated at any time.


As described in more detail in the “BIGToken Application” section of this Prospectus, you will be required to agree to certain rules, regulations, and policies of the BIGToken Application.


The Shares of Preferred Tracking Stock will be issued in book-entry form through our transfer agent, Transfer Online.

——————————————

Investing in our Class A Common Stock and Preferred Tracking Stock is highly speculative and involves a high degree of risk. You should consider carefully the risks and uncertainties in the section entitled “Risk Factors” on page 8 of this prospectus.

——————————————

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

The date of this Prospectus is [_________], 2019





 


TABLE OF CONTENTS


 

Page

PROSPECTUS SUMMARY

1

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

7

RISK FACTORS

8

USE OF PROCEEDS

19

PLAN OF DISTRIBUTION

21

DESCRIPTION OF SECURITIES TO BE REGISTERED

22

OUR BUSINESS

28

PROPERTIES

33

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

34

EQUITY COMPENSATION PLANS

35

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

36

DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

46

CORPORATE GOVERNANCE

48

EXECUTIVE COMPENSATION

51

DIRECTOR COMPENSATION

56

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

57

TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS

58

EXPERTS

61

INTEREST OF NAMED EXPERTS AND COUNSEL

61

LEGAL PROCEEDINGS

61

WHERE YOU CAN FIND MORE INFORMATION

61

FINANCIAL STATEMENTS

F-1

 

 


Please read this prospectus carefully. It describes our business, our financial condition and our results of operations. We have prepared this prospectus so that you will have the information necessary to make an informed investment decision.


You may rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide information or to make representations not contained in this prospectus. This prospectus is neither an offer to sell, nor a solicitation of an offer to buy, these securities in any jurisdiction where an offer or solicitation would be unlawful. Neither the delivery of this prospectus, nor any sale made under this prospectus, means that the information contained in this prospectus is correct as of any time after the date of this prospectus. This prospectus may be used only where it is legal to offer and sell these securities.


For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.






i



 


PROSPECTUS SUMMARY


This summary highlights information contained throughout this prospectus and is qualified in its entirety by reference to the more detailed information and financial statements in this prospectus and related notes included elsewhere herein. This prospectus contains forward-looking statements, which involves risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Cautionary Note Regarding Forward-Looking Statements” and under “Risk Factors” and elsewhere in this prospectus. Since this is only a summary, it does not contain all of the information that may be important to you in making your investment decision. You should carefully read the more detailed information contained in this prospectus, including our financial statements in this prospectus and related notes. Our business involves significant risks. You should carefully consider the information under the heading “Risk Factors” beginning on page 8 of this prospectus.


As used in this prospectus, unless context otherwise requires, the words “we,” “us,” “our,” the “Company” and “Social Reality” refer to Social Reality, Inc. Also, any reference to “common stock” refers to our Class A common stock, $0.001 par value per share. Any references to “preferred tracking stock” refers to our BIGToken Preferred Tracking Stock, $0.001 par value, being registered hereunder.


Our Company


We are a digital marketing and data technology company with tools to reach and reveal valuable audiences with marketing and advertising communication. Our machine-learning technology analyzes marketing data to identify brands and content owners' core consumers and their characteristics across marketing channels. Through an omnichannel approach that integrates all aspects of the advertising experience into one platform, we discover new and measurable opportunities that amplify campaign performance and maximize profits. In addition to our business services and technologies, we also operate a direct to consumer platform, BIGToken, that enables consumers to own, manage and sell access to their digital identity and data. This provides us with a direct consumer relationship and gives us valuable proprietary data. We derive our revenues from:


·

sales of digital advertising campaigns to advertising agencies and brands;

·

sales of media inventory through real-time bidding, or RTB, exchanges;

·

sale and licensing of our SRAX Social platform and related media;

·

creation of custom platforms for buying media on SRAX for large brands; and

·

sales of proprietary consumer data.


The core elements of our business as of are:


·

SRAXcore is our generalized services and technologies supporting brands and agencies in data management, audience optimization, and multi-channel and omnichannel media and marketing services;


·

SRAX Social is a social media and loyalty platform that allows brands to launch and manage their social media initiatives. Our team works with customers to identify their needs and then helps them in the creation, deployment and management of their social media presence;


·

SRAXshopper tools enable brands and agencies to connect with shoppers driving in store an online sales; and


·

SRAXauto tools enable targeting and engagement with potential auto buyers at dealerships, auto shows, and at home across desktop and mobile environments; and


·

SRAXir tools to assist public companies in analyzing and marketing to their shareholder population; and


·

BIGtoken which is a platform for consumers to own, manage and participate in the sales of their digital data, which provides SRAX proprietary audiences and data.





1



 


BIGTOKEN

Summary


We have formed a wholly-owned subsidiary, BIG Token, Inc. (“BIGToken Sub”). Social Reality, Inc. will be the issuer of our Preferred Tracking Stock which is intended to track the financial performance of our BIGToken Sub and BIGToken Application (“BIGToken”). Our Preferred Tracking Stock is intended to be a rewards system for using and interacting our BIGToken whereby users receive points convertible into shares of our Preferred Tracking Stock in exchange for their information. We have developed BIGToken as a way for consumers to benefit off of the use of their data in the online world. In BIGToken, users will have the ability to earn points that are convertible into shares of Preferred Tracking Stock through the completion of tasks. The shares of Preferred Tracking Stock will have such rights as further described herein.


We currently anticipate that our products and technologies will be enhanced through the creation of BIGToken, and that users in the application will fall into three basic categories:


·

Manufacturers, consumer product companies, marketing firms, brands and other sellers of goods and services;

·

Individuals that provide personally identifiable information to us and our customers; and

·

Application developers that will include the BIGToken software into their applications.


As specified herein, these categories will allow users will earn shares of Preferred Tracking Stock by performing certain tasks in BIGToken, including but not limited to:


·

Users will earn points that will be redeemable for shares of Preferred Tracking Stock by signing up for an account with BIGToken, provided they meet all of the eligibility rules, and agree to the terms of service contained therein;

·

Users will earn points redeemable for shares of shares of Preferred Tracking Stock through answering questions, taking surveys, enabling location tracking, integrating social media accounts, uploading data from retailers and banking systems, and a variety of other methods to be updated from time to time (collectively Actions);

·

Users will earn points redeemable for shares of Preferred Tracking Stock when they refer new users that sign up for BIGToken;

·

Users will earn points redeemable for shares of Preferred Tracking Stock from the Actions that their referred network complete; and

·

Users will earn points redeemable for shares of Preferred Tracking Stock when businesses and third parties purchase access to their data.


BIGToken is designed for consumers to own, manage, and earn from their digital identity and data. Consumers are rewarded for providing their data and completing other activities in the BIGToken platform through the receipt of points that are redeemable for the Preferred Tracking Stock. Any eligible consumer can participate. Each participating consumer is subject to the following:

 

 

·

Simple Sign-up. Eligible users will be able to sign up for an account on BIGToken by downloading the application at the App Store and Google Player, or at https://bigtoken.com and creating an account. A list of the terms, conditions, and agreements are available at https://www.bigtoken.com.

 

·

No Fees to Sign-up. Users will be able to use BIGToken at no cost.

 

·

Fully Electronic Stockholder Communications. To use BIGToken and receive shares of Preferred Tracking Stock, users must agree, subject to applicable law, to receive all stockholder communications from BIGToken and the Company electronically.

 

·

Review Positions Online. Users can access their account on BIGToken and stock rewards earned by visiting https://bigtoken.com.

 

·

No Control over Exact Timing of Transactions. Users will not have complete control over the exact timing of certain transactions or the value of the shares of Preferred Tracking Stock at the time they are earned or eventually sold or otherwise disposed of.

 

·

Right to Suspend. BIGToken, and the shares of Preferred Tracking Stock to be issued thereunder, may be suspended, modified, or terminated at any time.

 

·

Access to Features. Users of BIGtoken will have access to platform features that are essential for earning points and the preferred tracking stock such as Actions, Team, Stream, and other features like Friends, Messaging, and Wallet.

 



2



 


The Offer


Eligible users will be able to earn shares of Preferred Tracking Stock for completing certain tasks enumerated in BIGToken and as further governed by the rules and terms as updated and amended from time to time and contained at https://bigtoken.com.


Any questions regarding BIGToken or the terms, conditions and rules governing BIGToken should be referred to https://bigtoken.com.


Applicable Restrictions


Must be eighteen (18) years or older to participate.


Referral Offer Program Rules


Stream is a feature in the application that supports referral incentivization. For each referred user, the referring user receives an immediate point award for a signed up and verified referred user. The referring user earns from each Action that the referred user completes and the Actions of their network for 14 referral levels below the original referring user.


Source of the Shares of Preferred Tracking Stock


Shares of our Preferred Tracking Stock, or such fractional shares thereof, will be issued as stipulated in our Preferred Tracking Stock Policy. Please see the section of this prospectus entitled “BIGToken Preferred Tracking Stock Policy.”


Timing of Receipt of Shares of Preferred Tracking Stock


Eligible users that have earned points will be eligible to receive shares or fractional shares of Preferred Tracking Stock in exchange for their points. The shares will be issued by Transfer Online, our transfer agent, pursuant to the terms of the BIGToken Preferred Tracking Stock Policy.


Electronic Book-Entry of Shares


Shares earned from BIGToken will be issued in your name in book-entry form. Physical certificates are not available.


Communications and Reports to Participants


By becoming a user of the BIGToken Application, you agree, for so long as you continue as a user or hold shares of Preferred Tracking Stock, to receive all communications from the Company electronically either via email or email notification to access online information (except when the Company is required to provide the option for non-electronic communication or documentation by law or regulation upon your request). Electronic communication will include, but will not be limited to, confirmations of transactions, account statements, proxy materials and stockholder communications, notices of modifications of BIGToken and the Preferred Tracking Stock Policy as well as other basic communications. Any communications electronically delivered to you, will be deemed to have been received by you at the time notice by email is sent to your email address, and any communications delivered by email when sent to your email address. You agree to advise the Company promptly of any change of your email and/or residential address. You also agree to notify the Company promptly of any errors or omissions in any transaction or in the handling of your use of BIGToken.

 

You will also consent to electronically receive U.S. tax reporting documents (such as an IRS Form 1099-B) upon your receipt of shares of Preferred Tracking Stock unless you affirmatively opt to receive them in paper form by writing to the Company at Corporate Secretary of Social Reality, 456 Seaton St. Los Angeles, CA 90013.


Termination of Plan Participation


You may discontinue your membership and use of BIGToken at any time by deleting your data in the application and then terminating your account in the application.




3



 


Cost to Participants


Applicable fees are as follows:

 

BIGToken Sign up:

 

No charge

Receive earned shares of Preferred Tracking Stock:

 

No charge


The fees specified above may be changed at any time. The Company will provide you with advance notice of the imposition of any change to such fees. Furthermore, the Company reserves the right to terminate any account that the Company, in its sole discretion, deems to violate the terms of use or that engages in suspicious activity.


Additional Information about BIGToken


Responsibilities. The shares of Preferred Tracking Stock may never have any value. The Company, nor any of its affiliates will be liable for any act done in good faith, or as required by applicable law, or for any good faith omission to act. This includes, without limitation, any claims for liability relating to the prices at which shares of our Preferred Tracking Stock are disposed of or sold for you, the dates of redemption or sales, or any change in the value of the Preferred Tracking Stock.


Your ownership of the Preferred Tracking Stock earned through BIGtoken represents an investment in our securities. You are responsible for the investment decisions regarding your shares of Preferred Tracking Stock, subject to the terms of the Preferred Tracking Stocks. We will not provide any investment advice. You must make independent investment decisions regarding your shares of Preferred Tracking Stock earned pursuant to BIGToken based upon your own judgment and research.


You are responsible for all costs that you separately incur in connection with your use of BIGToken or your earning of shares of the Preferred Tracking Stock, such as the cost of your Internet service provider or any fees that your bank, or brokers may charge you. You are responsible for providing notice of any change in your email address, or other personal or payment information on in BIGToken.


BIGToken Changes or Interpretations. This prospectus (including any supplements or revisions that may be distributed in the future) sets forth the material terms of BIGToken. We reserve the right to add to, suspend, modify, or terminate BIGToken or the earning of any rewards thereunder at any time. You will receive notice of any significant addition, suspension, modification, or termination. The Company also reserves the right to change any administrative procedures of BIGToken without notice.


We will determine any question of interpretation arising under the BIGToken Application, and any such determination will be final. Any action taken by us to effectuate the BIGToken Application in the good faith exercise of our or its respective judgment will be binding on all parties.


BIGTOKEN PREFERED TRACKING STOCK POLICY


The Shares of BIGToken Preferred Tracking Stock being registered hereunder are subject to our Tracking Stock Policy.


Corporate Information

We were incorporated in the state of Delaware in 2011. Our principal executive offices are located at 456 Seaton Avenue, Los Angeles, CA 90013, telephone number 323-694-9800. We maintain a website at www.srax.com. The reference to our web address does not constitute incorporation by reference of the information contained at this site into this prospectus.




4



 


The Offering


Securities offered

 

Up to 20,000,000 share(s) of Preferred Tracking Stock.         

 

 

 

Offering price

 

The Preferred Tracking Stock is being issued pursuant to the redemption of points derived from interactions of users with BIGToken.  The shares of Preferred Tracking Stock are not being issued for monetary consideration.

 

 

 

Use of proceeds

 

We will not receive any proceeds pursuant to the issuance of the Preferred Tracking Stock.

 

 

 

Description of the Preferred Tracking Stock

 

A brief outline of the terms of the Preferred Tracking Stock is contained herein.  For a more complete description, please see Description of Securities, beginning on page 22 of this Prospectus.

 

 

 

Dividends

 

Holders of the Preferred Tracking Stock may receive dividends at the discretion of the Board of Directors – See “Dividends” in the Description of Securities section.

 

 

 

Voting Rights:

 

None

 

 

 

Liquidation

 

Holders of the Preferred Tracking Stock shall have rights to a percentage of the liquidation of assets of the BIGToken Group (as defined below) and / or Social Reality – See “Liquidation” in the Description of Securities section.

 

 

 

Redemption/Exchange/Conversion

 

(1)

The Preferred Tracking Stock may be redeemed by The Company in exchange for (i) cash or (ii) common stock of a subsidiary owning the BIGToken Group – See “Redemption/Exchange of Preferred Tracking Stock by the Company” in the Description of Securities section.

 

(2)

Upon the sale / disposition of some or all of the assets of the BIGToken Group, the Company may (i) pay a dividend, (ii) redeem the shares, (iii) convert the shares into shares of Common Stock of Social Reality, or (iv) a combination of the foregoing – See “Dividend, Redemption or Conversion in Case of BIGToken Group Disposition” in the Description of Securities section.

 

(3)

Upon meeting certain ownership conditions, a holder of Preferred Tracking Stock may elect to redeem some or all of its shares for cash – See “Redemption for Cash at the Election of Holder” in the Description of Securities section.

 

(4)

Upon certain conditions being met, the Company may, in its sole discretion, convert all of the outstanding shares of Preferred Tracking Stock into Common Stock of Social Reality – See “Conversion of Preferred Tracking Stock into Common Stock” in the Description of Securities section.

 

 

 

U.S. federal income tax consequences

 

For material U.S. federal income tax consequences of the ownership, disposition, redemption, exchange, and conversion of the Preferred Tracking Stock, please see Material U.S. Federal Income Tax Considerations section.

 

 

 



5



 





Electronic Form and Transferability

 

Preferred Tracking Stock will be issued in electronic form only and will be available exclusively through our transfer agent. Shares of our Preferred Tracking Stock are new securities; there are currently none issued and there is currently no established market. We do not intend to apply for a listing of our Preferred Tracking Stock on any securities exchange or for their inclusion in any established automated dealer quotation system. Accordingly, we cannot assure you as to the development or liquidity of any market for our Preferred Tracking Stock. The Preferred Tracking Stock will not be listed on any exchange and will not be transferable except through our transfer agent and subject further to applicable federal and state securities laws. There can be no assurance that an active trading market for the Preferred Tracking Stock will develop, or that you will be able to resell shares of our Preferred Tracking Stock at a price that would reflect their fundamental value, if at all.

 

 

 

Risk Factors

 

You should read the “Risk Factors” section of this Prospectus beginning on page 8 for a discussion of factors you should consider carefully before deciding whether to purchase our securities or participate and use BIGToken.

 



6



 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS


The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the "Securities Act", and Section 21E of the Securities Exchange Act of 1934, as amended, or the "Exchange Act".

 

Such statements in connection with any discussion of future operations or financial performance are identified by the use of words such as “may,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. Forward-looking statements include, but are not limited to, statements about: our business, operations, financial performance and condition, earnings, our prospects, our ability to raise capital to fund our operations and business plan, the continued listing of our securities on the NASDAQ Capital Market, our ability to protect intellectual property rights as well as regarding our industry generally. Forward–looking statements are not guarantees of performance. Such statements are based on management’s expectations and are subject to certain factors, risks and uncertainties that may cause actual results, outcome of events, timing and performance to differ materially from those expressed or implied by such statements. For a summary of such factors, please refer to the section entitled “Risk Factors” in this prospectus, as updated and supplemented by the discussion of risks and uncertainties in our most recent annual report on Form 10-K, as revised or supplemented by our subsequent quarterly reports on Form 10-Q or our current reports on Form 8-K, as well as any amendments thereto, as filed with the SEC and which are incorporated herein by reference. The information contained in this document is believed to be current as of the date of this document. We do not intend to update any of the forward-looking statements after the date of this document to conform these statements to actual results or to changes in our expectations, except as required by law.

 

In light of these assumptions, risks and uncertainties, the results and events discussed in the forward-looking statements contained in this prospectus or in any document incorporated herein by reference might not occur. Investors are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this prospectus or the date of the document incorporated by reference in this prospectus. We are not under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. All subsequent forward-looking statements attributable to us or to any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.






7



 


RISK FACTORS


Investing in our Class A common stock or our Preferred Tracking Stock offered pursuant to this prospectus involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this prospectus before purchasing our securities. If any of the following events were to occur, our business, financial condition or results of operations could be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you could lose some or all of your investment


Risks Related to our Business


We have a history of losses and there are no assurances we will report profitable operations in the foreseeable future.


We reported net losses of $6,658,882 and $4,248,233 for the years ended December 31, 2017 and 2016, respectively. At December 31, 2017, we had an accumulated deficit of $21,148,706. For the nine months ended September 30, 2018, we reported net income of $12,717,573. As of September 30, 2018, we had an accumulated deficit of $8,431,134. Our future success depends upon our ability to continue to grow our revenues, contain our operating expenses and generate profits. We do not have any long-term agreements with our customers. There are no assurances that we will be able to increase our revenues and cash flow to a level which supports profitable operations. In addition, our operating expenses increased 3.2% in 2017 from 2016. As described elsewhere herein, in 2017 we made certain changes in our operations to limit growth of operating expenses and focus our resources in areas of our operations which we believe have the greatest potential to increase our revenues. We additionally sold the SRAXmd product line in August 2018, which accounted for a substantial portion of our revenue. We may continue to incur losses in future periods until such time, if ever, as we are successful in significantly increasing our revenues and cash flow beyond what is necessary to fund our ongoing operations and pay our obligations as they become due. If we are able to significantly increase our revenues in future periods, the rapid growth which we are pursuing will strain our organization and we may encounter difficulties in maintaining the quality of our operations. If we are not able to grow successfully, it is unlikely we will be able to generate sufficient cash from operations to pay our operating expenses and service our debt obligations, or report profitable operations in future periods.


Our independent registered public accounting firm has substantial doubts about our ability to continue as a going concern.


At December 31, 2017, we had an accumulated deficit of $21,148,706 and at September 30, 2018, we had an accumulated deficit of $8,431,134. Primarily as a result of our recurring losses from operations, negative cash flows and our accumulated deficit, our independent registered public accounting firm has included in its report for the year ended December 31, 2017, an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is contingent upon, among other factors, our ability to obtain sufficient financing to support our operations.


Our operations rely on various third party vendors and if we lose these vendors it may adversely affect our financial position and results of operations.


We rely on third party vendors to provide us with media inventory to facilitate sales of advertising, the majority of which are engaged on a per order basis. Any loss of these vendors or ligation arising out of our failure to satisfy our obligations to any of these vendors could disrupt our business and have a material negative effect on our operations.


Our success is dependent upon our ability to effectively expand and manage our relationships with our publishers. We do not have any long-term contracts with our publishing partners.


We do not generate our own media inventory. Accordingly, we are dependent upon our publishing partners to provide the media which we sell. We depend on these publishers to make their respective media inventories available to us to use in connection with our campaigns that we manage, create or market. We are not a party to any long-term agreements with any of our publishing partners and there are no assurances we will have continued access to the media. Our growth depends, in part, on our ability to expand and maintain our publisher relationships within our network and to have access to new sources of media inventory such as new partner websites and Facebook pages that offer attractive demographics, innovative and quality content and growing Web user traffic volume. Our ability to attract new publishers to our networks and to retain Web publishers currently in our networks will depend on various factors, some of which are beyond our control. These factors include, but are not limited to, our ability to introduce new and innovative products and services, our pricing policies, and the cost-efficiency to Web publishers of outsourcing their advertising sales. In addition, the number of competing intermediaries that purchase media inventory from Web publishers continues to increase. In the event we are not able to maintain effective relationships with our publishers, our ability to distribute our advertising campaigns will be greatly hindered which will reduce the value of our services and adversely impact our results of operations in future periods.




8



 


If we were to lose access to the Facebook platform, our SRAX Social growth would be limited and we could lose our existing revenue from these sources.


Facebook currently provides access to companies to build applications on their platform. We have built our SRAX Social platform to use the Facebook application programming interface, or APIs. The loss of access to the Facebook platform would limit our ability to effectively grow a portion of our operations. We are subject to Facebook's standard terms and conditions for application developers, which govern the promotion, distribution and operation of applications on the Facebook platform. Facebook reserves the right to change these terms and conditions at any time. Our business would be harmed if Facebook:

  

 

·

discontinues or limits access to its platform by us and other application developers;

 

 

 

 

·

modifies its terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers, or changes how the personal information of its users is made available to application developers on the Facebook platform or shared by users;

 

 

 

 

·

establishes more favorable relationships with one or more of our competitors; or

 

 

 

 

·

develops its own competitive offerings.


We have benefited from Facebook's strong brand recognition and large user base. Facebook has broad discretion to change its terms of service and other policies with respect to us and other developers, and any changes to those terms of service may be unfavorable to us. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform, change how the personal information of its users is made available to application developers on the Facebook platform or restrict how Facebook users can share information with friends on their platform. In the event Facebook makes any changes in the future, we may have to modify the structure of our campaigns which could impact the effectiveness of our campaigns and adversely impact our results of operations in future periods.


If we lose access to RTB inventory buyers our business may suffer.


In an effort to reduce our dependency on any one provider of advertising demand, we created a platform that utilizes feeds from a number of demand sources for our inventory. We believe that our proprietary technology assists us in aggregating this demand, as well as providing the tools needed by our publishing partners to evaluate and track the effectiveness of the demand that we are aggregating for them. In the event that we lose access to a majority of this demand, however, our revenues would be impacted and our results of operations would be materially adversely impacted until such time, if ever, as we could secure alternative sources of demand for our inventory.


We depend on the services of our executive officers and the loss of any of their services could harm our ability to operate our business in future periods


Our success largely depends on the efforts and abilities of our executive officers, including Christopher Miglino and Kristoffer Nelson. We are a party to an employment agreement with Mr. Miglino 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 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;



9



 


·

the quality or placement of transactions, including the risk of non-screened, non-human inventory and traffic, could cause a loss in customers or revenue; and


·

regulatory actions may negatively impact our business practices.


If the number of companies who purchase online advertising and promotional services from us does not grow, we may experience difficulty in attracting publishers, and our revenue could decline.


Additional acquisitions may disrupt our business and adversely affect results of operations.


We may pursue acquisitions in an effort to increase revenue, expand our market position, add to our technological capabilities, or for other purposes. However, any future acquisitions would likely involve risk, including the following:


·

the identification, acquisition and integration of acquired businesses requires substantial attention from management. The diversion of management's attention and any difficulties encountered in the transition process could hurt our business;


·

the anticipated benefits from an acquisition may not be achieved, we may be unable to realize expected synergies from an acquisition or we may experience negative culture effects arising from the integration of new personnel;


·

difficulties in integrating the technologies, solutions, operations, and existing contracts of the acquired business;


·

we may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company, technology, or solution;


·

to pay for future acquisitions, we could issue additional shares of our Class A common stock or pay cash, raised through equity sales or debt issuance. The issuance of any additional shares of our Class A common stock would dilute the interests of our current stockholders, and debt transactions would result in increased fixed obligations and would likely include covenants and restrictions that would impair our ability to manage our operations; and


·

new business acquisitions can generate significant intangible assets that result in substantial related amortization charges and possible impairments.


While our general growth strategy includes identifying and closing additional acquisitions, we are not presently a party of any agreements or understandings. There are no assurances we will acquire any additional companies.


Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in a decline in our stock price.


We have previously provided, and may provide in the future, public guidance on our expected financial results for future periods. Although we believe that this guidance provides investors with a better understanding of management's expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties. Our actual results may not always be in line with or exceed the guidance we have provided.


Risks Related to the Ownership of our BIGToken Preferred Tracking Stock


Your ownership of the BIGToken Preferred Tracking Stock will subject you to the risks associated with an investment in Social Reality as a whole.

 

Holders of the Preferred Tracking Stock will be subject to risks associated with an investment in Social Reality whole, even if a holder only owns the Preferred Tracking Stock, and not any Common Stock of Social Reality. Except as expressly stated in the Description of Securities section of this Prospectus, holders of the Preferred Tracking Stock will not have any legal rights related to specific assets attributed to BIGToken Group. Rather, Social Reality will retain and any future stockholders of the BIGToken subsidiary will retain legal title to all of its assets, and, in any liquidation, holders of the Preferred Tracking Stock will, together with holders of our Common Stock, be entitled to each receive certain percentages of our available net assets available for distribution to stockholders after we satisfy our creditors and other obligations. See "Description of Securities" for a further discussion of the liquidation rights.



10



 


The shares of Preferred Tracking Stock may be redeemed, converted, or exchanged by the Company without your consent, which may diminish your ability to dispose of your shares when you determine is most advantageous.


Once you have received shares of Preferred Tracking Stock, the Company, upon meeting certain conditions and events, may (i) declare dividends, (ii) force a redemption for cash or securities, or (iii) convert your shares into Common Stock of the Company. As such, you may not be able to dispose of your shares of Preferred Tracking Stock at a time that you determine to be most advantageous to you financially. A further discussion of these features is contained in the Description of Securities section of this Prospectus.


If you decide to redeem your shares of Preferred Tracking Stock, you will be required to do so during certain predetermined times contained in the terms of the Preferred Tracking Stock.


Upon a voluntary redemption of the Preferred Tracking Stock by a holder, you will be required to provide certain notices and will only receive your monetary payments on certain dates as described in the Company’s Tracking Stock Policy. Accordingly, you may not be able to access your capital for numerous weeks or months, pursuant to compliance with the applicable notice and voluntary redemption requirements contained in the Tracking Stock Policy.


The Preferred Tracking Stock’s value is determined and dependent on the revenue and success of the BIGToken Application, which may never be completed, successful, or profitable.


The BIGToken Application is currently in open beta and as such has never generated any revenue. The value of the Preferred Tracking Stock is dependent on the BIGToken Application achieving profitability, or your ownership of any Preferred Tracking Stock may not have any value at all. There can be no assurances that the BIGToken Application will ever be completed, will ever derive revenue, or will ever achieve profitability. Furthermore, even if the BIGToken Application becomes profitable, it may be discontinued by the board of directors of BIGToken at any time without your input.


Any awards of Preferred Tracking Stock received may have adverse tax consequences to you.


You will be subject to U.S. federal income tax on the value of your awards of Preferred Tracking Stock upon redemption of points earned in the BIGToken Application. Your participation in the BIGToken Application may also increase the complexity of your tax filings and may cause you to be ineligible to file Internal Revenue Service Form 1040-EZ, if you would otherwise be eligible to file such form. See “Certain U.S. Federal Income Tax Considerations,” contained in this Prospectus for more information on the U.S. federal income tax consequences of participation in the BIGToken Application.


There is no public market for the Company’s Preferred Tracking Stock and no assurance can be given that one will ever develop.

 

The Preferred Tracking Stock is not traded on an exchange or on the OTC Bulletin Board. Without a market for the Preferred Tracking Stock, there is only a limited ability of a security holder to sell their securities, if any, as those transfers or sales would be made privately. Therefore, unless redeemed, converted, or exchanged pursuant to the terms of the Preferred Tracking Stock, your ownership of the Preferred Tracking Stock should be considered as totally illiquid, and investors are cautioned that they may not be able to liquidate their investment readily, or at all, when the need or desire to sell arises. Moreover, no assurances can be given that a public market for the Preferred Tracking Stock will ever materialize. Additionally, even if a public market for the Preferred Tracking Stock develops and become traded, the trading volume may be limited, making it difficult to sell such shares.


The Preferred Tracking Stock has no voting rights and Social Reality, Inc., as a holder of all of the outstanding common stock of BIGToken, Inc., will have control over key decision making as a result of their control over a majority of our voting stock.


The Preferred Tracking Stock will not have any voting rights and thus the holders will not have any say in the decision making of BIGToken, Inc. and its assets, including the BIGToken Application. As of the date hereof, 100% of the issued and outstanding voting capital stock of BIGToken, Inc. is owned by the Company and thus, until additional shares of voting stock are issued, the Company will have voting control.




11



 


Our board of directors has the ability to change our Tracking Stock Policy as well as the rules, regulations and suitability requirements of the BIGToken Application at any time without a vote of our stockholders, and to issue additional shares of preferred stock that may have rights, preferences and privileges superior to the Preferred Tracking Stock, which may adversely affect the market value of the Preferred Tracking Stock.


We are authorized under our Certificate of Incorporation to issue up to 30,000,000 additional shares of preferred stock in addition to the outstanding shares of Preferred Tracking Stock being offered in this prospectus. These “blank check” preferred shares, give our Board of Directors the ability, without shareholder approval, to issue one or more series of preferred stock having rights, preferences, privileges and restrictions that may be superior to the Preferred Tracking Stock and may adversely affect the market value of the Preferred Tracking Stock.


Additionally, the Board of Directors has the sole authority to modify, amend, or terminate the Tracking Stock Policy and the eligibility and suitability requirements of the BIGToken Application. Any changes thereto may be made without your consent and may adversely affect the market value of the Preferred Tracking Stock.


There is no public market for the Preferred Tracking Stock no assurances can be given that one will ever develop.


Ownership of our Preferred Tracking should be considered as totally illiquid, and investors are cautioned that they may not be able to liquidate their investment readily or at all when the need or desire to sell arises. Moreover, no assurances can be given that a public market for the Preferred Tracking Stock will ever materialize. Additionally, even if a public market develops and our Preferred Tracking Stock become listed, the trading volume may be limited, making it difficult for an investor to sell shares.


The market price of the Preferred Tracking Stock may not reflect the performance of BIGToken as we intend.


The market price of the Preferred Tracking Stock may not reflect the performance of the BIGToken Group. Holders of Preferred Tracking Stock are stockholders of Social Reality as a whole and, as such, are subject to all risks associated with an investment in Social Reality and all of its businesses, assets, and liabilities. As a result of the characteristics of tracking stocks, tracking stocks often trade at a discount to the estimated value of the assets or businesses they are intended to track.

 

The market price of the Preferred Tracking Stock may be volatile, could fluctuate substantially, and could be affected by factors that do not affect traditional capital stock.


The market price of the Preferred Tracking Stock may be materially affected by, among other factors:


·

Actual or anticipated fluctuations in the BIGToken Groups operating results;

·

Issuances of additional securities in BIGToken, Inc. or additional issuances classes of preferred stock in Social Reality that relate to the performance of BIGToken;

·

Changes in market valuations of other companies in similar types of businesses;

·

The complex nature and potential difficulties investors may have in understanding the terms of the Preferred Tracking Stock and the blockchain technology utilized in the BIGToken Application, as well as concerns regarding the possible effect of those terms on an investment in Social Reality’s stock; and

·

General market conditions.


The market price of Preferred Tracking Stock may fluctuate significantly as a result of these and other factors. The market price of the Preferred Tracking Stock may decline from time to time and you may not be able to sell your shares of Preferred Tracking Stock at an attractive price or at all.


We may not pay dividends equally or at all on the Preferred Tracking Stock.


Social Reality does not presently intend to pay cash dividends on the Preferred Tracking Stock. Social Reality has the right to pay dividends to its shares of Common Stock and Preferred Tracking Stock in equal or unequal amounts, and Social Reality may pay dividends on the shares of common stock and not pay dividends on shares of Preferred Tracking Stock. In addition, any dividends or distributions on, or repurchases of, shares of Common Stock only, will reduce Social Reality' assets legally available to be paid as dividends on the shares relating to the Preferred Tracking Stock.


While no cash dividends have ever been paid by Social Reality, to the extent that Social Reality determines in the future to pay dividends on the Preferred Tracking Stock, the terms of certain agreements or governing may impose requirements that may restrict Social Reality's ability to pay dividends to holders of its Common Stock or Preferred Tracking Stock.



12



 


The creation of the Preferred Tracking Stock could create conflicts of interest, and the Social Reality board of directors might make decisions that could adversely affect only the Preferred Tracking Stock holders.

 

The Preferred Tracking capital structure could give rise to circumstances in which the interests of holders of the Preferred Tracking Stock might diverge or appear to diverge from the interests of holders of Common Stock or another group or series of stock. In addition, given the nature of their businesses, there may be inherent conflicts of interests between BIGToken and Social Reality. While BIGToken is a separate entity, currently one hundred percent (100%) of its common stock is owned by Social Reality and as such it has unilateral control over BIGToken. As a result, Social Reality’s officers and directors owe fiduciary duties to Social Reality as a whole and all of their stockholders as opposed to only holders of the Preferred Tracking Stock. Decisions deemed to be in the best interest of Social Reality and all of its stockholders may not be in the best interest of the Preferred Tracking Stock when considered independently, such as:


·

decisions as to the terms of any business relationships that may be created between the BIGToken Group and Social Reality, or the terms of any reallocations of assets between the groups;


·

decisions as to the allocation of corporate opportunities between the BIGToken and Social Reality, especially where the opportunities might meet the strategic business objectives of both;


·

decisions as to operational and financial matters that could be considered detrimental to either Social Reality or BIGToken, but beneficial to the other;


·

decisions as to the conversion, redemption, dividends of, or other transactions related to the Preferred Tracking Stock as defined in the Certificate of Designation of the Preferred Tracking Stock, which, subject to certain requirements thereunder, Social Reality’s Board of Directors may make in its sole discretion;


·

Decisions regarding the increase or decrease of measurable values contained in the terms of the Tracking Stock Policy, such as the Allocation Percentage (as defined below) of proceeds generated by the BIGToken Application;


·

Decisions regarding internal or external financing attributable to businesses or assets attributed to either BIGToken or Social Reality; and


·

Decisions as to the dispositions of certain assets of Social Reality or BIGToken


The board of directors of Social Reality may change the tracking stock policy without the approval of the holders of the Preferred Tracking Stock.


The Board of Directors have adopted the Preferred Tracking Stock Policy described in this prospectus to serve as guidelines in making decisions regarding matters such as tax liabilities and benefits, allocation and reallocation of assets, financing alternatives, corporate opportunities, payment of dividends, and similar items. These policies also set forth the initial allocation of BIGToken Group business, assets, and liabilities. These policies are not included in the Social Reality certificate of incorporation and Certificate of Designation of the Preferred Tracking Stock. The Board of Directors may change or make exceptions to these policies without the approval of the holders of the Preferred Tracking Stock because these policies relate to matters concerning the day-to-day management of BIGToken, and the BIGToken Applications, no stockholder approval is required, and you will have no say regarding these policies.

 



13



 


Holders of shares of the Preferred Tracking Stock may not have any remedies if any action by Social Reality’s directors or officers has an adverse effect on the Preferred Tracking stock.


Principles of Delaware law and the provisions of the Company’s certificate of incorporation may protect decisions of the Board of Directors that have a disparate impact upon holders of the shares of Preferred Tracking Stock. Under Delaware law, the Board of Directors has a duty to act with due care and in the best interests of all stockholders. Principles of Delaware law established in cases involving differing treatment of multiple classes or series of stock provide that, subject to any applicable provisions of the corporation's certificate of incorporation, a board of directors owes an equal duty to all stockholders and does not have separate or additional duties to holders of any class or series of stock. Judicial opinions in Delaware involving tracking stocks have established that decisions by directors or officers involving differing treatment of holders of tracking stocks may be judged under the business judgment rule. In some circumstances, Social Reality’s directors or officers may be required to make a decision that is viewed as adverse to the holders of shares relating to a particular group. Under the principles of Delaware law and the business judgment rule referred to above, Preferred Tracking Stock holders may not be able to successfully challenge decisions they believe have a disparate impact upon them if a majority of the Board of Directors is disinterested and independent with respect to the action taken, is adequately informed with respect to the action taken, and acts in good faith and in the honest belief that the Board of Directors is acting in the best interests of Social Reality and all of Social Reality's stockholders.


Social Reality and may dispose of assets of the Preferred Tracking Stock without the approval of holders of the Preferred Tracking Stock.


Delaware law requires stockholder approval only for a sale or other disposition of all or substantially all of the assets of BIGToken. Currently, Social Reality owns 100% of the voting capital stock of BIGToken, and as such, Social Reality may approve sales and other dispositions of any amount of the assets of BIGToken without approval of the holders of the Preferred Tracking Stock. Notwithstanding, upon the sale of substantially all of the assets of BIGToken, pursuant to the Certificate of Designation of the Preferred Tracking Stock, the Board of Directors would be required to choose one or more of the following three alternatives:


·

declare and pay a dividend on the Preferred Tracking Stock;

·

redeem shares of Preferred Tracking Stock in exchange for cash, securities, or other property; or

·

so long as the Common Stock of Social Reality is then traded on a U.S. securities exchange, convert all or a portion of the outstanding Preferred Tracking Stock into Common Stock.


In this type of a transaction, holders of the Preferred Tracking Stock may receive less value than the value that a third-party buyer might pay for all or substantially all of the assets of the Preferred Tracking Stock. The Board of Directors will decide, in its sole discretion, how to proceed and is not required to select the option that would result in the highest value to holders of the Preferred Tracking Stock.

 

In the event of a liquidation of Social Reality, holders of Preferred Tracking Stock will not have a priority with respect to the assets attributed to the BIGToken Group remaining for distribution to stockholders.


Under the Social Reality certificate of incorporation, upon Social Reality’s liquidation, dissolution, or winding-up, holders of the Preferred Tracking Stock will be entitled to receive, in respect of their shares of such stock, an interest based on the then outstanding Allocation Percentage (as defined below) of the Preferred Tracking Stock as modified from time to time by the Board of Directors.

 

The Social Reality Board of Directors in its sole discretion may elect to convert the Preferred Tracking Stock into Class A Common Stock of Social Reality, thereby changing the nature of the security.


The Social Reality certificate of incorporation permits the Board of Directors, in its sole discretion, to convert all of the outstanding shares of Preferred Tracking Stock into Common Stock at such time as the Common Stock is already traded on a U.S. securities exchange and the shares are converted at a ratio that provides the holders of the Preferred Tracking Stock with the applicable conversion amount as set forth in the Certificate of Designation of the Preferred Tracking Stock and as more fully described in the Description of Securities section herein. A conversion would preclude the holders of Preferred Tracking Stock from retaining their ownership in a security that is intended to reflect separately the performance of the BIGToken Group. Social Reality cannot predict the impact on the market value of the Preferred Tracking Stock pursuant to the right of Board of Directors to effect any such conversion or the exercise of this conversion right by Social Reality.




14



 


If Social Reality exercises its option to convert all outstanding shares of Preferred Tracking Stock into shares of Common Stock, such conversion would effectively eliminate Social Reality's tracking stock structure because, upon conversion, the holders of the Preferred Tracking Stock would hold only Common Stock, which does not track the performance of any distinct program, application, business unit, or product line. Upon any such conversion, for example, holders would no longer have certain redemption or conversion provisions related to the Preferred Tracking Stock. In addition, there would no longer be a tracking stock policy.


Risks Related to Ownership of our Common Stock


We do not know whether an active, liquid and orderly trading market will develop for our offered securities or what the market price of our offered securities will be and as a result it may be difficult for you to sell your shares of our Class A common stock.


Prior to October 13, 2016 our Class A common stock was quoted on the OTCQB Tier of the OTC Markets and it was thinly traded. On October 13, 2016, our Class A common stock began trading on the Nasdaq Capital Market and since that date a trading marketing in our stock has been developing. While an active trading market in our Class A common stock has developed since that time, it may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. Further, an inactive market may also impair our ability to raise capital by selling shares of our Class A common stock and may impair our ability to enter into collaborations or acquire companies or products by using our shares of Class A common stock as consideration. The market price of our offered securities may be volatile, and you could lose all or part of your investment.


The trading price of the shares of our Class A common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:


 

·

the success of competitive products;

 

 

 

 

·

actual or anticipated changes in our growth rate relative to our competitors;

 

 

 

 

·

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;

 

 

 

 

·

regulatory or legal developments in the United States and other countries;

 

 

 

 

·

the recruitment or departure of key personnel;

 

 

 

 

·

the level of expenses;

 

 

 

 

·

actual or anticipated changes in estimates to financial results, development timelines or recommendations by securities analysts;

 

 

 

 

·

variations in our financial results or those of companies that are perceived to be similar to us;

 

 

 

 

·

fluctuations in the valuation of companies perceived by investors to be comparable to us;

 

 

 

 

·

inconsistent trading volume levels of our shares;

 

 

 

 

·

announcement or expectation of additional financing efforts;

 

 

 

 

·

sales of our Class A common stock by us, our insiders or our other stockholders;

 

 

 

 

·

additional issuances of securities upon the exercise of outstanding options and warrants;

 

 

 

 

·

market conditions in the technology sectors; and

 

 

 

 

·

general economic, industry and market conditions.




15



 


In addition, the stock market in general, and advertising technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our Class A common stock, regardless of our actual operating performance. The realization of any of these risks could have a dramatic and material adverse impact on the market price of the shares of our Class A common stock.


We may be subject to securities litigation, which is expensive and could divert management attention.


The market price of the shares of our Class A common stock may be volatile, and in the past companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business. To the extent that any claims or suits are brought against us and successfully concluded, we could be materially adversely affected, jeopardizing our ability to operate successfully. Furthermore, our human and capital resources could be adversely affected by the need to defend any such actions, even if we are ultimately successful in our defense.


Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in a decline in our stock price.


We have previously provided, and may provide in the future, public guidance on our expected financial results for future periods. Although we believe that this guidance provides investors with a better understanding of management's expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties. Our actual results may not always be in line with or exceed the guidance we have provided. For example, we did not meet our 2016 or 2017 revenue guidance. If our financial results for a particular period do not meet our guidance or if we reduce our guidance for future periods, the market price of our Class A common stock may decline.


If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.


As described in our Annual Report on Form 10-K for the year ended December 31, 2017, our management has determined that, as of December 31, 2016, we did not maintain effective internal controls over financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework as a result of identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. As of December 31, 2017, management has determined that we have yet to fully remediate the previously identified material weaknesses. While we have never been required to restate our consolidated financial statements, the existence of the continuing material weaknesses in our internal control over financial reporting increases the risk that a future restatement of our consolidated financial statements is possible.


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.




16



 


The two class structure of our Class A common stock could have the effect of concentrating voting control with a limited group.


Our authorized capital includes two classes of common stock which have different voting rights. Our Class B common stock has 10 votes per share and our Class A common stock has one vote per share. The shares of our Class B common stock were originally held by two of our executive officers who were the founders of our company, but these shares were converted into shares of our Class A common stock in October 2013. While there are presently no shares of Class B common stock outstanding, in the future our board could choose to issue shares to one or more individuals or entities. As a result of the voting rights associated with the Class B common stock, those individuals or entities could have significant influence over the management and affairs of the company and control over matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future. This concentrated voting control could limit your ability to influence corporate matters and could adversely affect the price of our Class A common stock.


If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the trading price of our Class A common stock and trading volume could decline.


The trading market for our shares of our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. A small number of securities and industry analysts currently publish research regarding our Company on a limited basis. In the event that one or more of the securities or industry analysts who have initiated coverage downgrade our securities or publish inaccurate or unfavorable research about our business, the price of our shares of Class A common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our securities could decrease, which might cause the trading price of our shares of Class A common stock and trading volume to decline.


The elimination of monetary liability against our directors and officers under Delaware law and the existence of indemnification rights held by our directors and officers may result in substantial expenditures by us and may discourage lawsuits against our directors and officers.


Our certificate of incorporation eliminates the personal liability of our directors and officers to our company and our stockholders for damages for breach of fiduciary duty as a director or officer to the extent permissible under Delaware law. Further, our bylaws provide that we are obligated to indemnify any of our directors or officers to the fullest extent authorized by Delaware law. We are also parties to separate indemnification agreements with certain of our directors and our officers which, subject to certain conditions, require us to advance the expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition. Those indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against our directors or officers, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even if such actions, if successful, might otherwise benefit us or our stockholders.


Risks Related to the BIG Platform and BIGToken Project


There can be no assurance that the Preferred Tracking Stocks will ever be issued.


There can be no assurance that the BIGToken Application will be completed and that users will be able to actually earn Preferred Tracking Stock. Should the Company fail to issue the Preferred Tracking Stock or complete the BIGToken Application, BIGToken as a whole may be materially affected and we will not recognize the benefits of the project.


The BIGToken Application is designed to distribute points redeemable for our Preferred Tracking Stock to consumers in exchange for their agreement to provide certain personal information to us. Providing this data exposes us to risks of privacy data breach and cybersecurity attacks.

 

We utilize a substantial amount of electronic information. This includes transaction information and sensitive personal information of the users of the BIGToken Application. The service providers used by us, may also use, store, and transmit such information. We intend to implement detailed cybersecurity policies and procedures and an incident response plan designed to protect such information and prevent data loss and security breaches.

 



17



 


There can be no assurances that the BIGToken Application, or a user’s data will be fully secure, which may result in impermissible transfer, a complete loss of users’ BIGToken points or data on the BIGToken Application or an unwillingness of users to access, adopt and utilize the BIGToken Application, whether through system faults or malicious attacks. Any such faults or attacks on the BIGToken Application and users’ data may materially and adversely affect the BIGToken Application. There are 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 the BIGToken Applications reputation, erode user confidence in the effectiveness of its security measures, negatively impact its ability to attract new users, or cause existing users to stop using the BIGToken Application. We may be compelled to disclose personal information about a user or users of the BIGToken Application to federal or state government regulators or taxation authorities. Accordingly, certain information concerning users may be shared outside Social Reality or the BIGToken Sub.


The further development and acceptance of blockchain networks, which are part of a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of blockchain networks and blockchain assets would have an adverse material effect on the successful development and adoption of the BIGToken Application.

 

The growth of the blockchain industry in general, as well as the blockchain networks on which the BIGToken Application will rely, are subject to a high degree of uncertainty. The factors affecting the further development of the blockchain networks, include, without limitation:


·

worldwide growth in the adoption and use of blockchain technologies;


·

government and quasi-government regulation blockchain assets and their use, or restrictions on or regulation of access to and operation of blockchain networks or similar systems;


·

changes in consumer demographics and public tastes and preferences; and


·

the availability and popularity of other forms or methods of buying and selling goods and services, or trading assets including new means of using government-backed currencies or existing networks;

 

Although they have experienced significant growth in recent years, the slowing or stopping of the development, general acceptance and adoption and usage of blockchain networks and blockchain assets may deter or delay the acceptance and adoption of the BIGToken Application.





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USE OF PROCEEDS


We will not receive any proceeds from the issuance of the Preferred Tracking Stock that will be earned by users of the BIGToken Application.






19



 


CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS


The following is a general summary of certain U.S. federal income tax considerations that may be relevant to the Plan. This discussion is based upon the Internal Revenue Code of 1986, as amended, (the “Code”), the U.S. Treasury regulations promulgated thereunder, administrative pronouncements and judicial decisions, all as of the date hereof and all of which are subject to change, possibly with retroactive effect. The following discussion is for general purposes only, is limited to U.S. federal income tax consequences, and is addressed only to individuals who are “U.S. persons” within the meaning of the Code (very generally, U.S. citizens and residents) and who hold their Shares as “capital assets” within the meaning of the Code. You are urged to consult your own tax advisor with respect to any other tax consequences of BIGToken, including the tax consequences, if any, under state, local, foreign, estate, and other tax laws.


We intend to treat your receipt of shares of Preferred Tracking Stock under BIGToken in connection with your redemption of your points as a taxable prize or award for U.S. federal income tax purposes, resulting in taxable ordinary income to you upon redemption equal to the fair market value of the shares of Preferred Tracking Stock on the date redeemed.


Upon a taxable sale or other taxable disposition of any shares of Preferred Tracking Stock you receive pursuant to BIGToken, you will realize, in general, a capital gain or loss equal to the difference between the amount you receive on such disposition and your adjusted tax basis in such shares. In general, any gain or loss recognized upon a disposition of shares will be long-term capital gain or loss if you have held the Shares for more than 12 months at the time of disposition. Otherwise, any gain or loss recognized on a disposition of shares will be treated as short-term capital gain or loss. Under the Code as currently in effect, long-term capital gains of individuals are taxed at lower rates than ordinary income and short-term capital gains are taxable at ordinary income rates. Your ability to deduct capital losses could be limited. Your adjusted tax basis in your shares should equal the taxable income that you recognize upon redemption of your points in BIGToken, which will generally equal the fair market value of the shares on the date of redemption.


If you receive shares pursuant to a redemption of points under BIGToken, you will be issued an IRS Form 1099-MISC, and a copy of such Form will be provided to the IRS. You will also be required to furnish your taxpayer identification number and to certify that you are not subject to backup withholding on an IRS Form W-9. If you fail to furnish properly a correct taxpayer identification number, or to certify that you are not subject to backup withholding, or if you have under-reported dividend or interest income, you may be subject to backup withholding at a rate of 28%. Your participation in the Plan may also be subject to other information reporting and tax withholding requirements.


Your participation in the Plan may increase the complexity of your tax filings and may cause you to be ineligible to file Internal Revenue Service Form 1040-EZ, if you would otherwise be eligible to file such form.


The U.S. federal income tax discussion set forth above is included for general information only. You are urged to consult your own tax advisor with respect to the tax consequences of your participation in the Plan, including the tax consequences under state, local, foreign, estate, and other tax laws and tax treaties, and the possible effects of changes in U.S. or other tax laws.






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PLAN OF DISTRIBUTION


The shares of Preferred Tracking Stock offered hereunder are offered directly to BIGToken users pursuant to their redemption of points earned in BIGToken. There are no expenses charged to participants in connection with redemption of points under the BIGtoken application. All costs of administering BIGToken will be paid by us. Our Preferred Tracking Stock may not be available through BIGToken in all states or jurisdictions. We are not making an offer to sell our Preferred Tracking Stock in any jurisdiction where the offer or sale is not permitted.







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DESCRIPTION OF SECURITIES TO BE REGISTERED


General

 

The following is a summary of the rights of our common stock and preferred stock and related provisions of our certificate of incorporation and bylaws. For more detailed information, please see our certificate of incorporation and bylaws, which are filed as exhibits to the registration statement of which this prospectus is a part.

 

Our certificate of incorporation provides that we will have two classes of common stock: Class A common stock, which has one vote per share, and Class B common stock, which has ten votes per share. Any holder of Class B common stock may convert his or her shares at any time into shares of Class A common stock on a share-for-share basis. Otherwise the rights of the two classes of common stock will be identical. The rights of these classes of common stock are discussed in greater detail below.

 

Our authorized capital stock consists of 309,000,000 shares, each with a par value of $0.001 per share, of which:


·

250,000,000 shares are designated as Class A common stock;

·

9,000,000 shares are designated as Class B common stock;

·

20,000,000 shares are designated as BIGToken Preferred Tracking Stock; and

·

30,000,000 remaining shares are designated as preferred stock.

 

As of February 4, 2019, we had 10,109,530 shares of Class A common stock outstanding and no shares of Class B common stock or preferred stock outstanding.

 

Common Stock

 

Voting Rights

 

Holders of our Class A and Class B common stock have identical rights, except that holders of our Class A common stock are entitled to one vote per share and holders of our Class B common stock are entitled to ten votes per share. Holders of shares of Class A common stock and Class B common stock will vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, unless otherwise required by law. Delaware law could require either our Class A common stock or Class B common stock to vote separately as a single class in the following circumstances:

 

 

·

If we amended our certificate of incorporation to increase the authorized shares of a class of stock, or to increase or decrease the par value of a class of stock, then that class would be required to vote separately to approve the proposed amendment.

 

 

 

 

·

If we amended our certificate of incorporation in a manner that altered or changed the powers, preferences or special rights of a class of stock in a manner that affects them adversely then that class would be required to vote separately to approve the proposed amendment.

 

We have not provided for cumulative voting for the election of directors in our certificate of incorporation.

 

Dividends

 

Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of Class A common stock and Class B common stock shall be entitled to share equally in any dividends that our board of directors may determine to issue from time to time. In the event a dividend is paid in the form of shares of common stock or rights to acquire shares of common stock, the holders of Class A common stock shall receive Class A common stock, or rights to acquire Class A common stock, as the case may be, and the holders of Class B common stock shall receive Class B common stock, or rights to acquire Class B common stock, as the case may be.

 

Liquidation Rights

 

Upon our liquidation, dissolution or winding-up, the holders of Class A common stock and Class B common stock shall be entitled to share equally all assets remaining after the payment of any liabilities and the liquidation preferences on any outstanding preferred stock.




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Subdivision or Combinations.

 

Upon the subdivision or combination of the outstanding shares of one class of Common Stock, the outstanding shares of the other class of Common Stock will be subdivided or combined in the same manner.

 

Conversion

 

Our Class A common stock is not convertible into any other shares of our capital stock.

 

Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock. In addition, each share of Class B common stock shall convert automatically into one share of Class A common stock upon any transfer, whether or not for value, except for certain transfers described in our certificate of incorporation, including the following:


·

Transfers between one Class B Stockholder to another Class B Stockholder.


·

Transfers for tax and estate planning purposes, including to trusts, corporations and partnerships controlled by a holder of Class B common stock

 

The death of any holder of Class B common stock who is a natural person will result in the conversion of his or her shares of Class B common stock to Class A common stock. Once transferred and converted into Class A common stock, the Class B common stock shall not be reissued. No class of common stock may be subdivided or combined unless the other class of common stock concurrently is subdivided or combined in the same proportion and in the same manner.


Dual Class Structure

 

As discussed above, our Class B common stock has ten votes per share, while our Class A common stock, which is the class of stock the Selling Stockholders are selling pursuant to this prospectus and which is the only class of stock which is publicly traded, has one vote per share. We currently have no shares of our Class B common stock outstanding. Notwithstanding, in the event Class B common stock were issued, due to our dual class structure with superior voting rights, such ownership of Class B common stock could discourage others from initiating any potential merger, takeover or other change of control transaction that other stockholders may view as beneficial.

 

Preferred Stock

 

Our board of directors has the authority, without approval by the stockholders, to issue up to a total of 50,000,000 shares of preferred stock in one or more series. Our board of directors may establish the number of shares to be included in each such series and may fix the designations, preferences, powers and other rights of the shares of a series of preferred stock. Our board could authorize the issuance of preferred stock with voting or conversion rights that could dilute the voting power or rights of the holders of common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of Social Reality.


Preferred Stock to be issued pursuant to this Prospectus:


BIGToken Preferred Tracking Stock


The Company has authorized the issuance of up to 20,000,000 shares of Preferred Tracking Stock.  The Board of Directors shall have the power to increase such number of shares of Preferred Tracking Stock in its sole discretion. The Preferred Tracking Stock has a par value of $0.001 per share and a stated value equal to $0.20, subject to increase as more fully described in the Company’s Certificate of Designation of BIGToken Preferred Tracking Stock (“COD”).


The descriptions herein are qualified in their entirety to the full text of the COD, filed as Exhibit 3.05(i) to this Registration Statement on Form S-1 and the BIGToken Stock Tracking Policy.


Sinking Fund Provisions


The amount periodically set aside for the holders of the Preferred Tracking Stock shall be calculated pursuant to the Preferred Tracking Stock Policy (the “Sinking Fund Amount”).



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Limitations on Redemptions or Repurchases


There are no restrictions on repurchases or redemptions of the Preferred Tracking Stock related to any arrearage in the payment of dividends or sinking fund installments.


Dividends


Dividends may be declared on the Preferred Tracking Stock at the sole discretion of the Board of Directors and shall be paid only out of the lesser of (i) corporate assets legally available therefor and (ii) an amount equal to the then in effect allocation percentage (to be determined by the Board and updated pursuant to the Preferred Tracking Stock Policy from time to time at the discretion of the Board of Directors – (“Allocation Percentage”), multiplied by the amount that would be legally available had the assets of BIGToken, including its assets, liabilities, and operations (“BIGToken Group”) been separate from Social Reality.  Dividends may be paid out in cash, property or shares of capital stock of Social Reality.


The Board of Directors may declare dividends exclusively to the Common Stock holders or Preferred Tracking Stock Holders, or any other class of capital stock or in such equal or unequal amounts as may be determined by the Board of Directors.


Voting Rights


The Preferred Tracking Stock will have no voting rights, except as required by law.


Liquidation


Upon a liquidation or winding-up of Social Reality, or the BIGToken Group, after payments of debts and liabilities and any preferences due to holders of other classes or series of capital stock, the holders of Preferred Tracking Stock shall be entitled to receive their proportionate interest in the Sinking Fund Amount, if any, less any Sinking Fund Amount paid out.  


In the event of a liquidation of Social Reality, such proportionate interest shall be a the Allocation Percentage of the value of the BIGToken Group divided by the market value of Social Reality.  


In the event of a liquidation of the BIGToken Group, such prorated proportionate interest shall be the Allocation Percentage of the market value of the BIGToken Group.


Redemption/Exchange of Preferred Tracking Stock by the Company


Redemption for Cash at the Election of Social Reality


At any time after the six (6) month anniversary of each Preferred Tracking Stock, but at least ten (10) trading days prior to any optional redemption date (the last day of each quarter whereby each holder of Preferred Tracking Stock may optionally redeem his or her shares for cash), Social Reality may provide a notice to each holder of its election to redeem some or all of the then outstanding shares of Preferred Tracking Stock at the next occurring last day of a calendar quarter for an amount equal to each holder’s prorated portion of the Sinking Fund Amount.


Redemption for Securities of BIGToken Subsidiary


Provided that the BIGToken Group is held by a wholly owned subsidiary of Social Reality, Social Reality may redeem all of the outstanding shares of Preferred Tracking Stock for shares of common stock of such subsidiary, provided that such common stock has been registered.  Upon such redemption, each share of Preferred Tracking Stock will receive such number of common shares of the subsidiary equal to the Allocation Percentage of the number of shares of such subsidiary’s common stock divided by one (1) minus the Allocation Percentage of the number of then issued and outstanding shares of Preferred Tracking Stock.


Any redemption hereunder must redeem all of the outstanding shares of Preferred Tracking Stock.




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Dividend, Redemption or Conversion in Case of BIGToken Group Disposition


In the event of a disposition of the BIGToken Group (constituting all or substantially all of its assets), Social Reality, within one hundred twenty (120) days following such disposition, will determine one of the following:


Dividend


(i)

Social Reality may pay a dividend, payable in cash, publicly traded securities (not including securities of Social Reality), or other assets, or any combination thereof to the Preferred Tracking Stock holders in such amount equal to the Allocation Percentage of the net proceeds of such disposition of the BIGToken Group;


Redemption


(ii)

In the event that a there are assets legally available therefor, Social Reality may apply an aggregate amount of cash or publicly traded securities (other than securities of Social Reality) as a redemption to the holders of the Preferred Tracking Stock in such amount equal to the Allocation Percentage of the net proceeds of such disposition of the BIGToken Group. Each share of Preferred Tracking Stock will be redeemed at a per share amount equal to: the Allocation Percentage of the market value of the BIGToken Group divided by the total number of issued and outstanding shares of Preferred Tracking Stock.


Conversion


(iii)

In the event that Social Reality’s Common Stock is publicly traded, Social Reality may convert such number of shares of Preferred Tracking Stock into such number of shares of Common Stock obtained by dividing the Allocation Percentage of the net proceeds of such disposition of the BIGToken Group by the number of issued and outstanding shares of Preferred Tracking Stock.  The shares of Preferred Tracking Stock will be converted into such number of shares of Common Stock of Social Reality equal to (I) the number of shares of Preferred Tracking Stock to be converted, multiplied by (II) (y) the price per share of Preferred Tracking Stock (pursuant to its publicly traded market price, or  the per share value of the Allocation Percentage) of the proceeds of a disposition if the BIGToken Group, or in good faith by the Board of Directors),  divided by the market value of the Social Reality Common Stock.


Combination of Conversion and either Dividend or Redemption


(iv)

In the event that Social Reality’s Common Stock is publicly traded, Social Reality may convert the Preferred Tracking Stock into shares of its Common Stock  as contemplated in the preceding paragraph with the payment or a dividend on, or redemption of the Preferred Tracking Stock as described in this section entitled “Dividend, Redemption or Conversion in Case of BIGToken Group Disposition” in the “Description of Securities” header.


Redemption for Cash at the Election of Holder


At any time after the twenty four (24) month anniversary of issuance of each share of Preferred Tracking Stock, but at least ten (10) trading days prior to the last day of the upcoming calendar quarter, each eligible holder may provide a notice to have some or all of its shares of Preferred Tracking Stock redeemed for cash in an amount equal to the such number of shares being redeemed multiplied by the Sinking Fund Amount divided by the number of issued and outstanding Preferred Tracking Stock share.  Such payment will be made at the last day of the next calendar quarter.


Conversion of Preferred Tracking Stock into Common Stock


Social Reality may, provided its Common Stock is publicly traded, at its option, convert all (and not less than all) of the outstanding shares of Preferred Tracking Stock into Common Stock of Social Reality. Each share of Preferred Tracking Stock will be converted into such number of shares of Common Stock equal to (x) the Allocation Percentage of the market value of the BIGToken Group divided by (y) the total number of issued and outstanding shares of Preferred Stock divided by the market value of the Social Reality Common Stock. Such conversion will occur within forty-five (45) days of such determination of conversion.





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Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws

 

Certain provisions of Delaware law, our certificate of incorporation and our bylaws contain provisions that could have the effect of delaying, deferring or discouraging another party from acquiring control of us. In particular, our dual class common stock structure will concentrate ownership of our voting stock in the hands of our founders, board members, and employees. These provisions, which are summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us because negotiation of these proposals could result in an improvement of their terms.

 

Special Approval for Change in Control Transactions

 

In the event a person seeks to acquire us by means of a merger or consolidation transaction, a purchase of all or substantially all of our assets, or an issuance of stock which constitutes 2% or more of our outstanding shares at the time of issuance and which results in any person or group owning more than 50% of our outstanding voting power, then these types of acquisition transactions must be approved by our stockholders at an annual or special meeting. At this meeting, we must obtain the approval of stockholders representing the greater of:

 

 

 

 

 

·

A majority of the voting power of our outstanding capital stock; and

 

 

 

 

·

60% of the voting power of the shares of capital stock present in person or represented by proxy at the stockholder meeting and entitled to vote.

 

Undesignated Preferred Stock

 

The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of our company.

 

Requirements for Advance Notification of Stockholder Nominations and Proposals

 

Our bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors. The bylaws do not give the board of directors the power to approve or disapprove stockholder nominations of candidates or proposals regarding business to be conducted at a special or annual meeting of the stockholders. However, our bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed. These provisions may also discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company.

 

Delaware Anti-Takeover Statute

 

We will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging under certain circumstances, in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder unless:

 

 

·

Prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder.

 

 

 

 

·

Upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (1) shares owned by persons who are directors and also officers and (2) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer.

 

 

 

 

·

On or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder.

 



26



 


Generally, a business combination includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporation’s outstanding voting securities. We expect the existence of this provision to have an anti-takeover effect with respect to transactions our board of directors does not approve in advance. We also anticipate that Section 203 may also discourage attempts that might result in a premium over the market price for the shares of common stock held by stockholders.

 

The provisions of Delaware law, our certificate of incorporation and our bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our Class A common stock is Transfer Online, Inc. 512 SE Salmon Street, Portland, OR 97214, 503-227-2950. Transfer Online will also be the transfer agent and registrar for our Preferred Tracking Stock.







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OUR BUSINESS


We are a digital marketing and data technology company with tools to reach and reveal valuable audiences with marketing and advertising communication. Our machine-learning technology analyzes marketing data to identify brands and content owners' core consumers and their characteristics across marketing channels. Through an omnichannel approach that integrates all aspects of the advertising experience into one platform, we discover new and measurable opportunities that amplify campaign performance and maximize profits. In addition to our business services and technologies, we also operate a direct to consumer platform that enables consumers to own, manage and sell access to their digital identity and data. This provides us with a direct consumer relationship and gives us valuable proprietary data. We derive our revenues from:


·

sales of digital advertising campaigns to advertising agencies and brands;

·

sales of media inventory through real-time bidding, or RTB, exchanges;

·

sale and licensing of our SRAX Social platform and related media;

·

creation of custom platforms for buying media on SRAX for large brands; and

·

sales of proprietary consumer data.


The core elements of our business as of are:


·

SRAXcore is our generalized services and technologies supporting brands and agencies in data management, audience optimization, and multi-channel and omnichannel media and marketing services;


·

SRAX Social is a social media and loyalty platform that allows brands to launch and manage their social media initiatives. Our team works with customers to identify their needs and then helps them in the creation, deployment and management of their social media presence;


·

SRAXshopper tools enable brands and agencies to connect with shoppers driving in store an online sales; and


·

SRAXauto tools enable targeting and engagement with potential auto buyers at dealerships, auto shows, and at home across desktop and mobile environments; and


·

SRAXir tools to assist public companies in analyzing and marketing to their shareholder population; and


·

BIGtoken which is a platform for consumers to own, manage and participate in the sales of their digital data, which provides SRAX proprietary audiences and data.


Marketing and sales


We market our services through our in-house sales team. Our in-house marketing is focused on social media, including Facebook, LinkedIn and Twitter, public relations (PR), industry events and the creation of white papers which assist in our marketing efforts and are used as lead generation tools for our sales team. We also attend industry specific events such as AdTech, AdExchanger, and Salesforce annual events and local events in Los Angeles and New York.


Intellectual property


We currently rely on a combination of trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary information. Prior to our acquisition of Five Delta in December 2014, in October 2014 it filed a U.S. patent for a method and system for bidding and performance tracking using online advertisements and provisional status has been granted under 62/060,247. In addition, it claimed the benefit of a pending U.S. patent number 61/604,348 for online advertising scoring. The provisional patent application has now been converted to a non-provisional patent application number 12/960,435 and is awaiting examination by the U.S. Patent Office.




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Competition


We operate in a highly competitive environment. Our competitors include companies who focus on the RTB market and companies who are focused on providing social media applications on a managed and self-service basis. We believe we compete based on both our ability to assist our customers to obtain the best available prices as well as our excellent customer service. The barrier to entry to our industry is low. We believe that in the future we will face increased competition from these companies as they expand their operations as well as new entrants to our industry. Most of the entities against which we compete, or may compete, are larger and have greater financial resources than our company. Competition for advertising placements among current and future suppliers of Internet navigational and informational services, high-traffic websites and Internet service providers, as well as competition with other media for advertising placements, could result in significant price competition, declining margins and reductions in advertising revenue. In addition, as we continue our efforts to expand the scope of our services, we may compete with a greater number of publishers and other media companies across an increasing range of different services, including vertical markets where competitors may have advantages in expertise, brand recognition and other areas. If existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over those offered by us, our business, results of operations and financial condition could be negatively affected. We also compete with traditional advertising media, such as direct mail, television, radio, cable, and print, for a share of advertisers' total advertising budgets. Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater financial, technical, sales, and marketing resources. As a result, we may not be able to compete successfully. If we fail to compete successfully, we could lose customers or media inventory and our revenue and results of operations could decline.


BIGToken, Inc.


During the third quarter of 2017, we also announced the launch of the BIGToken project (“BIGToken”), a platform for consumers to own, manage, and sell access to their digital identity and data, and a commercial platform for advertisers to purchase high-quality, user opt-in data. During the fourth quarter of 2017 we completed the incorporation of Big Token, Inc. as a wholly owned subsidiary in the state of Delaware. The core of the project is our blockchain identification graph platform or BIG.  BIGToken is intended to generate higher quality marketing opportunities for advertisers that we believe will pay a premium to have access to better, consumer self-generated data.


In March of 2018, we announced the Alpha launch of the BIG platform to a select group of individuals and entities. Users participating in our BIGToken Alpha will be able to create an account, integrate third party accounts and answer serves in order to create an initial data graph. Participants in the Alpha will be awarded points as opposed to a BIGToken.  Although the Alpha launch was a major milestone for the BIGToken project, there can be no assurance that we will complete final development of the BIGToken project or if developed, that it will be successful.  


In September of 2018, we announced the launch our BIGtoken Closed Beta and opened the application to more users. This version iterated on the features and learning from the Alpha version and added additional features. In order to access the Closed Beta, users had to register on the BIGtoken website to receive a Beta access code. Closed Beta included feature enhancements, security testing, and scalability testing. These tests and enhancements were completed in early November 2018, and Open Beta was released on November 12, 2018.


Government regulation


Aspects of the digital marketing and advertising industry and how our business operates are highly regulated. We are subject to a number of domestic and, to the extent our operations are conducted outside the U.S., foreign laws and regulations that affect companies conducting business on the Internet and through other electronic means, many of which are still evolving and could be interpreted in ways that could harm our business. In particular, we are subject to rules of the Federal Trade Commission, or FTC, the Federal Communications Commission, or FCC, and potentially other federal agencies and state laws related to our advertising content and methods, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, which establishes certain requirements for commercial electronic mail messages and specifies penalties for the transmission of commercial electronic mail messages that follow a recipient's opt-out request or are intended to deceive the recipient as to source or content, and federal and state regulations covering the treatment of member data that we collect from endorsers.




29



 


U.S. and foreign regulations and laws potentially affecting our business are evolving. We have not yet developed an internal compliance program nor do we have policies in place to monitor compliance. Instead, we rely on the policies of our publishing partners and advertising clients. If we are unable to identify all regulations to which our business is subject and implement effective means of compliance, we could be subject to enforcement actions, lawsuits and penalties including, but not limited to, fines and other monetary liability or injunction that could prevent us from operating our business or certain aspects of our business. In addition, compliance with the regulations to which we are subject now or in the future may require changes to our products or services, restrict or impose additional costs upon the conduct of our business or cause users to abandon products or aspects of our services. Any such action could have a material adverse effect on our business, results of operations and financial condition.


The FTC adopted Guides Concerning the Use of Endorsements and Testimonials in Advertising in October 2009. These guides recommend that advertisers and publishers clearly disclose in third-party endorsements made online, such as in social media, if compensation was received in exchange for said endorsements. Because some of our marketing campaigns entail the engagement of consumers to refer other consumers in their social networks to view ads or take action, and both we and the consumer may earn cash and other incentives, and any failure on our part to comply with these guides may be damaging to our business. We currently do not take any steps to monitor compliance with these guides. In the event of a violation, the FTC could potentially identify a violation of the guides, which could subject us to a financial penalty or loss of endorsers or advertisers.


In the area of information security and data protection, many states have passed laws requiring notification to users when there is a security breach for personal data, such as the 2002 amendment to California's Information Practices Act, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities.


We are also subject to federal, state, and foreign laws regarding privacy and protection of user data. Any failure by us to comply with these privacy-related laws and regulations could result in proceedings against us by governmental authorities or others, which could harm our business. In addition, the interpretation of data protection laws, and their application to the Internet is unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways from state to state, country to country, or region to region, and in a manner that is not consistent with our current data protection practices. Complying with these varying requirements could cause us to incur additional costs and change our business practices. Further, any failure by us to adequately protect users' privacy and data could result in a loss of confidence in our services and ultimately in a loss of customers, which could adversely affect our business.


We generally only receive user data authorized through the Facebook user API. Access to such information, in addition to being limited in scope by Facebook policies and procedures, requires the affirmative authorization of the participating user, as stipulated by Facebook. In a campaign, we post a privacy policy and user agreement, which describe the practices concerning the use, transmission and disclosure of member data in connection with such campaign. Any failure by us to comply with our privacy policy and user agreement could result in proceedings against us by users, customers, governmental authorities or others, which could harm our business.


Many states have passed laws requiring notification to subscribers when there is a security breach of personal data. There are also a number of legislative proposals pending before the United States Congress, various state legislative bodies and foreign governments concerning data protection. We partner with providers of data to acquire this data and we do not own this data. In addition, data protection laws in Europe and other jurisdictions outside the United States may be more restrictive, and the interpretation and application of these laws are still uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have an adverse effect on our business. Furthermore, the Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, our liability for linking to third-party websites that include materials that infringe copyrights or other rights, so long as we comply with the statutory requirements of this act. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.




30



 


Our users communicate across social and/or web-based channels. These communications are governed by a variety of U.S. federal, state, and foreign laws and regulations. In the United States, the CAN-SPAM Act establishes certain requirements for the distribution of "commercial" email messages for the primary purpose of advertising or promoting a commercial product, service, or Internet website and provides for penalties for transmission of commercial email messages that are intended to deceive the recipient as to source or content or that do not give opt-out control to the recipient. The FTC is primarily responsible for enforcing the CAN-SPAM Act, and the U.S. Department of Justice, other federal agencies, state attorneys general, and Internet service providers also have authority to enforce certain of its provisions.


The CAN-SPAM Act's main provisions include:


 

·

prohibiting false or misleading email header information;

 

·

prohibiting the use of deceptive subject lines;

 

·

ensuring that recipients may, for at least 30 days after an email is sent, opt out of receiving future commercial email messages from the sender, with the opt-out effective within 10 days of the request;

 

·

requiring that commercial email be identified as a solicitation or advertisement unless the recipient affirmatively assented to receiving the message; and

 

·

requiring that the sender include a valid postal address in the email message.


The CAN-SPAM Act preempts most state restrictions specific to email marketing. However, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act, particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as adult content or content regarding harmful products. Some portions of these state laws may not be preempted by the CAN-SPAM Act.


Violations of the CAN-SPAM Act's provisions can result in criminal and civil penalties, including statutory penalties that can be based in part upon the number of emails sent, with enhanced penalties for commercial email senders who harvest email addresses, use dictionary attack patterns to generate email addresses, and/or relay emails through a network without permission.


With respect to text message campaigns, for example, the CAN-SPAM Act and regulations implemented by the FCC pursuant to the CAN-SPAM Act, and the Telephone Consumer Protection Act, also known as the Federal Do-Not-Call law, among other requirements, prohibit companies from sending specified types of commercial text messages unless the recipient has given his or her prior express consent. We, our users and our advertisers may all be subject to various provisions of the CAN-SPAM Act. If we are found to be subject to the CAN-SPAM Act, we may be required to change one or more aspects of the way we operate our business.


If we were found to be in violation of the CAN-SPAM Act, other federal laws, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email, whether as a result of violations by our users or any determination that we are directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our reputation and our business.


In addition, because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, including in jurisdictions where we have no local entity, employees, or infrastructure.


Employees


At January 29, 2019 we had 61 full-time employees. We also contract for the services of a number individuals from a third-party provider. 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




31



 


Additional information

 

We file annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (“SEC” or the “Commission”). The public may read and copy any materials that we file with the Commission at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The Commission also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.


Other information about Social Reality can be found on our website www.socialreality.com. Reference in this document to that website address does not constitute incorporation by reference of the information contained on the website.




32



 


PROPERTIES


We lease our principal executive offices from an unrelated third party on a month-to-month basis, subject to termination with advance notice, at an amount of $5,823.00 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.






33



 


MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


Our Class A common stock is listed on the Nasdaq Capital Market under the symbol "SRAX." Prior thereto, our Class A common stock was quoted on the OTCQB Tier of the OTC Markets under the symbol “SCRI.” The reported high and low last bid prices for the Class A common stock are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.


 

 

High

 

 

Low

 

 

 

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

First quarter ended March 31, 2016

 

$

9.40

 

 

$

6.00

 

Second quarter ended June 30, 2016

 

$

9.10

 

 

$

6.65

 

Third quarter ended September 30, 2016

 

$

7.85

 

 

$

6.00

 

Fourth quarter ended December 31, 2016

 

$

7.05

 

 

$

5.75

 

 

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

First quarter ended March 31, 2017

 

$

6.14

 

 

$

1.58

 

Second quarter ended June 30, 2017

 

$

1.93

 

 

$

1.14

 

Third quarter ended September 30, 2017

 

$

5.75

 

 

$

1.11

 

Fourth quarter ended December 31, 2017

 

$

7.95

 

 

$

2.12

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

First quarter ended March 31, 2018

 

$

6.89

 

 

$

3.23

 

Second quarter ended June 30, 2018

 

$

5.56

 

 

$

3.00

 

Third quarter ended September 30, 2018

 

$

5.94

 

 

$

3.84

 

Fourth Quarter ended December 31, 2018

 

$

3.77

 

 

$

1.55

 


The last sale price of our Class A common stock as reported on the Nasdaq Capital Market on January 24, 2019 was $2.85 per share.


Holders


As of January 29, 2019, the approximate number of record holders of our Class A common stock was approximately 54.


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


Under the certificate of designation of our Preferred Tracking Stock, our Preferred Tracking Stock holders have certain rights in the event that we declare certain dividends as more fully set forth in the certificate of designation. Please see Description of Securities for a further discussion on the dividend rights of the Preferred Tracking Stock.





34



 


EQUITY COMPENSATION PLANS


Securities Authorized for Issuance under Equity Compensation Plans

 

The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity compensation plans not approved by our stockholders as of December 31, 2018


Plan category

 

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

 

 

223,401

 

 

$

4.56

 

 

 

262,932

 

2014 Equity Compensation Plan (1)

 

 

72,400

 

 

$

7.49

 

 

 

1,465,933

 

2016 Equity Compensation Plan

 

 

276,236

 

 

$

6.44

 

 

 

37,707

 

Plans not approved by stockholders

 

 

 

 

 

 

 

 

 

———————

(1)

Our 2014 Equity Compensation Plan was amended on 12/31/18 to increase the number of authorized share issuable under the plan from 600,000 to 1,600,000.






35



 


MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this prospectus. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this prospectus. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements.


Overview


We are a digital marketing and data technology company with tools to reach and reveal valuable audiences with marketing and advertising communication. Our machine-learning technology analyzes marketing data to identify brands and content owners' core consumers and their characteristics across marketing channels. Through an omnichannel approach that integrates all aspects of the advertising experience into one platform, we discover new and measurable opportunities that amplify campaign performance and maximize profits. In addition to our business services and technologies, we also operate a direct to consumer platform that enables consumers to own, manage and sell access to their digital identity and data. This provides us with a direct consumer relationship and gives us valuable proprietary data. We derive our revenues from:


·

sales of digital advertising campaigns to advertising agencies and brands;

·

sales of media inventory through real-time bidding, or RTB, exchanges;

·

sale and licensing of our SRAX Social platform and related media;

·

creation of custom platforms for buying media on SRAX for large brands; and

·

sales of proprietary consumer data.


The core elements of our business as of are:


·

SRAXcore is our generalized services and technologies supporting brands and agencies in data management, audience optimization, and multi-channel and omnichannel media and marketing services;


·

SRAX Social is a social media and loyalty platform that allows brands to launch and manage their social media initiatives. Our team works with customers to identify their needs and then helps them in the creation, deployment and management of their social media presence;


·

SRAXshopper tools enable brands and agencies to connect with shoppers driving in store an online sales; and


·

SRAXauto tools enable targeting and engagement with potential auto buyers at dealerships, auto shows, and at home across desktop and mobile environments; and


·

SRAXir tools to assist public companies in analyzing and marketing to their shareholder population; and


·

BIGtoken which is a platform for consumers to own, manage and participate in the sales of their digital data, which provides SRAX proprietary audiences and data.


We offer our customers several pricing options including cost-per-thousand-impression, commonly referred to as CPM, whereby our customers pay based on the number of times the target audience is exposed to the advertisement. In addition to campaign revenues, we generate SaaS revenue with SRAXir and other revenues on a monthly service fee.


During 2017, we launched a new SRAX Social tool for digital marketers and content owners to create posts and promote them beyond their respective Facebook Page communities. This tool is the first of many planned monetization opportunities to be developed and integrated into SRAX Social. We also released a new guide entitled “People-Based Advertising: How to Get Bigger Results by Targeting the Most Precise Audience” which we believe will provide support for our expertise as an Internet advertising resource. We also unveiled the Company’s new SRAX branding, designed to reflect the breadth and depth of the tools that we offer to digital marketers and content owners.




36



 


In 2017, we also announced several new product offerings designed to expand our reach for advertisers to other large digital audiences. SRAX Shopper is a buyside vertical focused on advertising to in market brand shoppers at specific retailers. SRAX Auto is another new buyside vertical launched to target car buyers. SRAXir is a platform for public companies to manage and market to their shareholder populations. While SRAX Shopper and SRAX Auto have formally launched, they remain very early stage. As such, we do not believe these two new initiatives will be significant contributors to revenue growth for the remainder of 2018.


In late 2017, we announced the launch of BIGToken. Presently we are developing BIGToken as a wholly owned subsidiary of Social Reality and eventually anticipate spinning the company out to our shareholders. In March of 2018, we announced the Alpha launch of the BIG platform to a select group of individuals and entities. Users participating in our BIGToken Alpha will be able to create an account, integrate third party accounts and answer serves in order to create an initial data graph. Participants in the Alpha will be awarded points as opposed to a BIGToken. Although the Alpha launch was a major milestone for the BIGToken project, there can be no assurance that we will complete final development of the BIGToken project or if developed, that it will be successful.


We commenced our closed Beta of the BIGToken platform during the third quarter of 2018, and anticipate commencing an open Beta during the first quarter of 2019. It is anticipated that the BIGToken platform will become generally available in mid 2019. Notwithstanding the foregoing anticipated development dates, to fully launch BIGToken, not only will we be required to complete development and testing of the platform, but we will also need to comply with both state and federal securities laws and regulations with regard to certain aspects of the platform. There can be no assurances that we will be able to comply with such laws or regulations on a timely basis, if at all. Our failure to adequately comply with such laws and regulations, or comply with them on a timely basis, will greatly impact the value and utility of the BIGToken platform.


Results of operations


Three and nine months ended September 30, 2018 and 2017


Selected Consolidated Financial Data

Social Reality, Inc.

(Unaudited)


 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,015,391

 

 

 

5,554,182

 

 

 

(63.7%

)

Cost of revenue

 

 

763,610

 

 

 

2,454,919

 

 

 

(68.9%

)

Gross margin percentage

 

 

62.1%

 

 

 

55.8%

 

 

 

11.3%

 

Operating expense, net

 

 

4,869,232

 

 

 

3,659,202

 

 

 

33.1%

 

Operating loss

 

 

(3,617,451

)

 

 

(559,939

)

 

 

546.0%

 

Other income (expense)

 

 

22,942,489

 

 

 

(471,234

)

 

 

(4,968.6%

)

Net income (loss)

 

$

19,325,038

 

 

 

(1,031,173

)

 

 

(1,974.1%

)


 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

8,823,592

 

 

 

16,861,449

 

 

 

(47.7%

)

Cost of revenue

 

 

2,902,179

 

 

 

8,378,247

 

 

 

(65.4%

)

Gross margin percentage

 

 

67.1%

 

 

 

50.3%

 

 

 

33.4%

 

Operating expense, net

 

 

14,414,279

 

 

 

12,260,165

 

 

 

17.6%

 

Operating loss

 

 

(8,492,866

)

 

 

(3,776,963

)

 

 

124.9%

 

Other income (expense)

 

 

21,210,439

 

 

 

(1,567,515

)

 

 

(1314.6%

)

Net income (loss)

 

$

12,717,573

 

 

 

(5,344,478

)

 

 

(338.0%

)




37



 


Revenue


Revenue decreased during the three months ended September 30, 2018 from the comparable period in 2017, by $3,538,791 or 63.7%, largely due to the absence of SRAXmd revenues in August and September following the sale of that product group. Gross profit decreased by $1,847,482 or 59.6%, also due to the absence of SRAXmd in August and September.  However, the decline in gross profit was partially offset by higher margins derived from ongoing clients resulting from the strategic shift that began in 2017 to focus on higher margin revenue opportunities from our advertising clients.  


For the nine month period ended September 30, 2018, revenue declined by $8,037,857 or 47.7% from the comparable period in 2017, while gross profit declined by $2,561,789 or 30.2%.


Cost of revenue


Cost of revenue consists of certain labor costs, payments to website publishers and others that are directly related to a revenue-generating event and project and application design costs. Approximately 100% of the cost of revenue was attributable to payments to website publishers and other media providers for the three and nine month period ending September 30, 2018 and 2017. Cost of revenue as a percentage of revenue declined to 37.9% for the third quarter of 2018 from 44.2% for the three months ended September 30, 2017. Cost of revenue as a percentage of revenue declined to 32.9% for the first nine months of 2018 from 49.7% for the nine month period ended September 30, 2017.


Operating expense


Our operating expenses are comprised of salaries, commissions, marketing and general overhead expenses. Overall, our net operating expense increased 33.1% in the third quarter of 2018 from the comparable period in 2017, driven primarily by headcount additions in our SRAXmd and BigToken product groups necessary for future revenue growth. Net operating expense increased 17.6% in the nine month period ending September 20, 2018 due to other fixed cost savings in the first quarter of 2018.


Other income (expense)


Other income (expense) in the first quarter of 2018 represents factoring fees and interest due on convertible debentures, as well as amortization of deferred debt issuance costs. Total interest expense increased to $1,045,658 for the three month period ended September 30, 2018 as compared to the $471,234 during the same period in 2017 due to the October 2017 Debenture issuance which resulted in a higher level of total debt and interest incurred. Total interest expense increased to $2,772,448 for the nine month period ended September 30, 2018 as compared to $1,567,515 during the same period in 2017 due to the same factors as well as us incurring one-time liquidated damages in the second quarter of 2018 resulting from delays in obtaining effective registration of the securities issued in the October Debenture financing.


We believe that our overall interest expense during the balance of 2018 will decrease with the redemption of our outstanding Debentures in November 2018.


Non-GAAP financial measures


We use adjusted net loss to measure our overall results because we believe it better reflects our net results by excluding the impact of non-cash equity based compensation and the accretion of put warrants. We use Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”) to measure our operations by excluding interest and certain additional one-time expenses. We believe the presentation of adjusted net loss and Adjusted EBITDA enhances our investors' overall understanding of the financial performance of our business.


You should not consider adjusted net loss and Adjusted EBITDA as an alternative to net loss, determined in accordance with GAAP, as an indicator of operating performance. A directly comparable GAAP measure to adjusted net loss and Adjusted EBITDA is net loss.




38



 


The following is a reconciliation of net loss to adjusted net loss and Adjusted EBITDA for the periods presented:


 

 

For the

Three Month Period Ended

September 30,

 

 

 

2018

 

 

2017

 

Net Income or (loss)

 

$

19,325,038

 

 

$

(1,031,173

)

Plus

 

 

 

 

 

 

 

 

Equity Based compensation

 

 

594,985

 

 

 

326,641

 

Adjusted net loss

 

$

19,920,023

 

 

$

(704,532

)

(Gain) or loss on sale of assets

 

 

(23,978,389

)

 

 

 

Interest Expense

 

 

1,045,658

 

 

 

471,234

 

Other non-operating expenses

 

 

(9,758

)

 

 

 

Depreciation and amortization

 

 

172,838

 

 

 

140,551

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

(2,849,628

)

 

$

(92,747

)


 

 

For the

Nine Month Period Ended

September 30,

 

 

 

2018

 

 

2017

 

Net Income or (loss)

 

$

12,717,573

 

 

$

(5,344,478

)

Plus

 

 

 

 

 

 

 

 

Equity Based compensation

 

 

1,756,745

 

 

 

947,968

 

Adjusted net loss

 

$

14,474,318

 

 

 

(4,396,510

)

(Gain) or loss on sale of assets

 

 

(23,978,389

)

 

 

 

Restructuring costs

 

 

 

 

 

377,961

 

Write off of non-compete agreement

 

 

 

 

 

468,750

 

Interest Expense

 

 

2,772,448

 

 

 

1,567,515

 

Other non-operating expenses

 

 

(4,498

)

 

 

 

Depreciation and amortization

 

 

543,038

 

 

 

372,938

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

(6,193,083

)

 

$

(1,609,346

)


BIGToken, Inc. Subsidiary


BIGToken, Inc.

Selected Financial Data

(Unaudited)


 

 

Three Months Ended September 30,

2018

 

 

 

(unaudited)

 

Revenue

 

$

 

Cost of revenue

 

 

 

Operating expense, net

 

 

533,042

 

Operating loss

 

 

(533,042

)

Other income (expense)

 

 

 

Net income (loss)

 

$

(533,042

)


 

 

Nine Months Ended September 30,

2018

 

 

 

(unaudited)

 

Revenue

 

$

 

Cost of revenue

 

 

 

Operating expense, net

 

 

1,455,997

 

Operating loss

 

 

(1,455,997

)

Other income (expense)

 

 

(5,260

)

Net income (loss)

 

$

(1,461,257

)



39



 


Revenue


BIGToken did not have any revenue for the three or nine month periods ending September 30, 2018.


Cost of revenue


BIGToken did not have any cost of revenue for the three or nine month periods ending September 30, 2018.


Operating expense


Our operating expenses are comprised of salaries, general overhead expenses and the development of the BIGToken platform. We began operations in the fourth quarter of 2017.  Operating expense for the three month period ended September 30, 2018 was $533,042.  Operating expense for the nine month period ended September 30, 2018 was $1,455,997.


Other income (expense)


For the three months ended September 30, 2018, other income was $0.  For the nine month period ended September 30, 2018, other expense was $5,260.


Year ended December 31, 2017 compared to year ended December 31, 2016


Selected Consolidated Financial Data

Social Reality, Inc.


 

 

Year ended December 31,

 

 

%

 

 

 

2017

 

 

2016

 

 

Change

 

Revenue

 

$

23,348,714

 

 

$

35,763,047

 

 

 

-34.7%

 

Cost of revenue

 

 

9,328,893

 

 

 

23,226,995

 

 

 

-59.8%

 

Gross margin percentage

 

 

60.1%

 

 

 

35.1%

 

 

 

72.8%

 

Operating expense

 

 

17,863,500

 

 

 

17,318,705

 

 

 

3.2%

 

Operating loss

 

 

(3,843,679

)

 

 

(4,782,653

)

 

 

-19.6%

 

Gain from write-off of contingent consideration

 

 

 

 

 

3,744,496

 

 

 

n/a

 

Interest expense, net

 

 

2,815,203

 

 

 

3,210,076

 

 

 

-12.3%

 

Net loss

 

$

(6,658,882

)

 

$

(4,248,233

)

 

 

56.7%

 


Revenue


The decrease in our revenue during year ended December 31, 2017 from 2016 reflects an decreases in revenue from our SRAX sell-side and buy-side clients, partially offset by continued growth in SRAXmd.


Cost of revenue


Cost of revenue consists of certain labor costs, payments to website publishers and others that are directly related to a revenue-generating event and project and application design costs. Approximately 99.2% of cost of revenue was attributable to payments to website publishers and other media providers for the year ended December 31, 2017 as compared to 99.5% for the year ended December 31, 2016. The balance was attributable to labor costs and project and application design costs. During the year ended December 31, 2017, our gross margin increased substantially as a result of a decrease in our cost of revenue as a percentage of our revenues. Cost of revenue as a percent of total revenue decreased to 39.9% for the year ended December 31, 2017 as compared to 64.9% for the year ended December 31, 2016. This decrease was due to our reduction in our overall lower-margin revenues for both our buy-side and sell-side clientele.


Operating expense


Our operating expense is comprised of salaries, commissions, marketing, and general overhead expense. Additionally, we also incurred an impairment in goodwill amounting to $670,000 during the year ended December 31, 2016. Overall, operating expense increased approximately 3.2% for the year ended December 31, 2017 as compared to the year ended December 31, 2016. This increase was primarily due to increased sales salaries and commissions resulting from the recruitment of additional sales personnel earlier in the year, partially offset by other overhead reductions. In the first quarter of 2017 we made certain changes in our operations to reduce expenses and focus our resources in areas of our operations which we believe have the greatest potential to increase our revenues, including the closure of a redundant operations center in New York city that we inherited as part of the Steel Media acquisition.  The operations of this facility were consolidated into our existing Los Angeles office, and the office lease in New York city was terminated. Additionally, during the third quarter of 2017 we launched the BIGToken project. To date, we have not segregated the costs and expenses of BIGToken, we estimate that we have spent an aggregate of approximately $209,623 on the project as of December 31, 2017.



40



 


In addition, we restructured several sales management roles and eliminated large sales override compensation structures to now better align employee compensation with Company profitability.


During the fourth quarter of 2016 we completed the up-listing of our Class A common stock to the Nasdaq Capital Market. As a result, our 2017 operating expense also increased due to expenditures associated with our status as an exchange listed public company.


Write off of contingent consideration


During the year ended December 31, 2016, we wrote-off  $3,744,496 which represented the reversal of the second earn out consideration which Mr. Steel would have been entitled to receive as additional consideration for the purchase of Steel Media as further described in Note 7 of the notes to our consolidated financial statements appearing elsewhere in this report. This non-cash item is not considered part of normal operations.


Interest expense


Interest expense for the years December 31, 2017 and 2016 represents interest under notes issued pursuant to the Financing Agreement and factoring fees, amortization of debt costs and the accretion of the put liability under the Financing Agreement. The Financing Agreement is described in Note 3 of the notes to our consolidated financial statements appearing elsewhere in this report.  Interest expense, net of interest income for the year ended December 31, 2017 decreased 12.3% as compared to the year ended December 31, 2016. This decrease in interest expense is attributable to the lower debt balance due to principal repayments and debenture conversions made earlier in the year, as well as an overall reduced rate of borrowing. In 2017, we also received $262,684 of interest income related to the settlement with Tronc.


Non-GAAP financial measures


We use Adjusted net loss to measure our overall results because we believe it better reflects our net results by excluding the impact of non-cash equity based compensation. We use Adjusted EBITDA to measure our operations by excluding interest and certain additional non-cash expenses. We believe the presentation of Adjusted net loss and Adjusted EBITDA enhances our investors' overall understanding of the financial performance of our business.


You should not consider Adjusted net loss and Adjusted EBITDA as an alternative to net income (loss), determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”), as an indicator of operating performance. A directly comparable GAAP measure to Adjusted net loss and Adjusted EBITDA is net loss.


The following is a reconciliation of net loss to Adjusted net loss and Adjusted EBITDA for the periods presented:


 

 

For the years ended

 

 

 

December 31,

 

 

 

2017

 

 

2016

 

Net loss

 

$

(6,658,882

)

 

$

(4,248,233

)

Plus:

 

 

 

 

 

 

 

 

Stock to be issued for services

 

 

 

 

 

678,000

 

Equity based compensation

 

 

2,085,988

 

 

 

1,625,843

 

Adjusted net loss

 

 

(4,572,894

)

 

 

(1,944,390

)

Interest (income) expense

 

 

3,661,914

 

 

 

(249,312

)

Depreciation and amortization

 

 

528,622

 

 

 

387,034

 

Impairment of goodwill

 

 

 

 

 

670,000

 

Adjusted EBITDA

 

$

(382,358

)

 

$

(1,136,668

)





41



 


BIGToken, Inc. Subsidiary


 

 

Year Ended December 31, 2017

 

 

 

 

 

Revenue

 

$

 

Cost of revenue

 

 

 

Operating expense, net

 

 

209,623

 

Operating loss

 

 

(209,623

)

Other income (expense)

 

 

 

Net income (loss)

 

$

(209,623

)


Revenue


The Company did not have any revenue for the period ended December 31, 2017.


Cost of revenue


The Company did not have any cost of revenue for the period ended December 31, 2017.


Operating expense


Our operating expenses are comprised of salaries, general overhead expenses, and the development of the BIGToken platform. We began operations in the fourth quarter of 2017, and incurred operating expenses of $209,623.


Other income (expense)


---


Liquidity and capital resources


Working Capital and Liquidity

  

The following table presents working capital as of September 30, 2018 and December 31, 2017:

  

 

 

September 30,

2018

 

 

December 31,

2017

 

 

 

 

 

 

 

 

 

 

Current assets(1)

 

$

16,259,280

 

 

$

6,134,838

 

Current liabilities

 

 

(2,475,229

)

 

 

(5,010,815

)

Working capital

 

$

13,784,052

 

 

$

1,124,023

 

———————

(1)

Includes cash and cash equivalents of $14.4 million and $1.0 million as of September 30, 2018 and December 31, 2017, respectively.

  

Our working capital increased by $12,660,029 in during the nine months ended September 30, 2018. This is primarily as a result of the increase of cash from the sale of our SRAXmd product line in the third quarter of 2018 as well as decreases in our current liabilities resulting from decreases in accounts payable as a result of payments made to outstanding vendors utilizing proceeds primarily from the sale of the SRAXmd product line.

  

Our current assets increased by $10,124,445 primarily from the increase of assets as a result of the sale of our SRAXmd product line in the third quarter of 2018.

  

Our current liabilities decreased by $2,535,586 primarily from decreases in our current liabilities resulting from decreases in accounts payable as a result of payments made to outstanding vendors utilizing proceeds from the sale of the SRAXmd product line.




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Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. Our primary need for liquidity is to fund working capital requirements of our business and other general corporate purposes, including debt repayment. At September 30, 2018, we had an accumulated deficit of $8,431,134. As of September 30, 2018, we had $14,423,573 in cash and cash equivalents and a net working capital surplus of $13,784,051 as compared to $1,017,299 in cash and cash equivalents and a net working capital surplus of $1,124,023 at December 31, 2017.


During the third quarter of 2017 we launched the BIGToken project. We have incurred an aggregate of approximately $1,987,073 of operating expenses related to this project since inception through September 30, 2018. We are currently financing BIGToken internally. Upon the commercial launch of BIGToken, we anticipate that it will be financed independently from Social Reality through the sale of the subsidiary’s equity, debt, or equity-linked securities. Based on our current development plans, and assuming there is no revenue for the first twelve months, we estimate that BIGToken will require approximately $5.4 million for the 12 months following its commercial launch, which is anticipated to be during the second quarter of 2019, provided that such capital requirements may increase or decrease based on our further development of the platform, user adoption rates, revenues and levels of marketing expenses. In the event that BIGToken is not able to secure independent funding, we may nonetheless continue to fund the BIGToken project internally albeit on a reduced scope and extended time frame. In such instance, we do not believe the project will initially result in a material increase to our operating expenses as the majority of BIGToken’s initial expenses are either duplicative administrative expenses or related to customer acquisition once the platform is successfully launched.


On August 6, 2018, the Company sold a majority interest in its SRAXmd product group, resulting in proceeds of approximately $20 million of cash into the company.


During January 2017, we satisfied all outstanding obligations under a financing agreement utilizing proceeds from the factoring of our receivables and sales of our securities. The repayment of these notes had adversely impacted our current liquidity. To address the immediate impact of this decreased liquidity, we developed certain operating plans that focus on increased revenue growth and cost reductions as further described herein. During April 2017, we raised $5,000,000 through the sale of 12.5% convertible debentures. We utilized $2,500,000 of the proceeds of this sale to satisfy the put obligation of the Series B Warrants issued to investors in the January 2017 offering. The balance of the debenture sales proceeds was used to satisfy the payment of accounts payable and other working capital requirements. During October 2017, we raised an additional $5,180,157 through the sale of similar 12.5% convertible debentures. We utilized $1,567,612 of the proceeds of this sale to satisfy obligations due under the Financing Warrant. The balance of the October 2017 debenture sales proceeds were also used to satisfy the payment of accounts payable and other working capital requirements.


Cash flows from operating activities


Net cash used in operating activities was $8,942,876 during the nine months ended September 30, 2018 compared to net cash used in operating activities of $2,240,400 for the comparable period in 2017. During the nine months ended September 30, 2018, the Company’s accounts receivable decreased by $1,816,668 from the accounts receivable balance at December 31, 2017. Accounts payable and accrued liabilities during the nine months ended September 30, 2018 decreased by $3,005,533 from the period ending December 31, 2017.


Cash flows from investing activities


During the nine months ended September 30, 2018 net cash provided by investing activities was $22,249,150 as compared to net cash used in investing activities of $551,655 during the nine months ended September 30, 2017. Our principal use of cash in investing activity is to acquire equipment and develop internally used software. In the third quarter of 2018, we also used $420,000 to purchase an ownership interest in Halyard MD Opco LLC.


Cash flows from financing activities


During the nine months ended September 30, 2018 net cash provided by financing activities was $100,000, which was comprised solely of proceeds from the maturity of our short-term investments.  During the comparable period in 2017, net cash in the amount of $1,959,702 was provided by financing activities which primarily consisted of proceeds from the sale of common stock of $3,820,001 and proceeds from the sale of convertible secured debentures of $2,136,629, offset by a $3,996,928 repayment of notes payable.




43



 


Capital Resources


Our sources of cash have historically consisted of proceeds from issuances of equity and debt securities and revenues generated from operations. We have also funded our operations with by factoring our receivables and, to a lesser extent, equipment leasing arrangements.


2017 Offerings


In 2017, we completed several private placement offerings of equity and debt securities in the aggregate of approximately $14 million, exclusive of placement agent fees and commissions and offering expenses paid by us.


Sufficiency of Cash Balances and Potential Sources of Additional Capital


Our capital requirements depend on many factors, including, among others: the acceptance of, and demand for, our products and services; our levels of net product revenues and any other revenues we may receive; the extent and timing of any investments in developing, marketing and launching new or enhanced products or technologies; the costs of developing, improving and maintaining our internal design, testing and development processes; the costs associated with maintaining, defending and enforcing our intellectual property rights; and the nature and timing of acquisitions and other strategic transactions or relationships in which we engage, if any.


We believe our existing cash balance, together with cash provided by our operations and taking into account cash expected to be used in our operations, will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our estimates of our operating revenues and expenses and working capital requirements could be incorrect and we may use our cash resources faster than we anticipate. Further, some or all of our ongoing or planned investments may not be successful and could further deplete our capital without immediate, or any, cash returns. Until we can generate sufficient revenues to finance our cash requirements from our operations, which we may never do, we may need to increase our liquidity and capital resources by one or more measures, which may include, among others, reducing operating expenses, restructuring our balance sheet by negotiating with creditors and vendors, entering into strategic partnerships or alliances, raising additional financing through the issuance of debt, equity or convertible securities or pursuing alternative sources of capital, such as through asset or technology sales or licenses or other alternative financing arrangements. Further, even if our near-term liquidity expectations prove correct, we may still seek to raise capital through one or more of these financing alternatives. However, we may not be able to obtain capital when needed or desired, on terms acceptable to us or at all.


Inadequate working capital would have a material adverse effect on our business and operations and could cause us to fail to execute our business plan, fail to take advantage of future opportunities or fail to respond to competitive pressures or customer requirements. A lack of sufficient funding may also require us to significantly modify our business model and/or reduce or cease our operations, which could include implementing cost-cutting measures or delaying, scaling back or eliminating some or all of our ongoing and planned investments in corporate infrastructure, research and development projects, business development initiatives and sales and marketing activities, among other activities. Modification of our business model and operations could result in an impairment of assets, the effects of which cannot be determined. Furthermore, if we continue to issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience significant dilution, and the new equity or debt securities may have rights, preferences and privileges that are superior to those of our existing stockholders.


Additionally, if we are not able to maintain the listing of our common stock on the Nasdaq Capital Market, the challenges and risks of equity financings may significantly increase, including potentially increasing the dilution of any such financing or decreasing our ability to effect such a financing at all. If we incur additional debt, it may increase our leverage relative to our earnings or to our equity capitalization or have other material consequences. If we pursue asset or technology sales or licenses or other alternative financing arrangements to obtain additional capital, our operational capacity may be limited and any revenue streams or business plans that are dependent on the sold or licensed assets may be reduced or eliminated. Moreover, we may incur substantial costs in pursuing any future capital-raising transactions, including investment banking, legal and accounting fees, printing and distribution expenses and other similar costs, which would reduce the benefit of the capital received from the transaction.




44



 


Critical accounting policies


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts 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 2 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.


Recent accounting pronouncements


The recent accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.


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.







45



 


DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES


The names of our directors and executive officers and their ages, positions, and biographies as of January 29, 2019 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

    

50

    

Chairman of the Board, Chief Executive Officer, President

    

2010

Kristoffer Nelson

 

40

 

Chief Operating Officer, Director

 

2014

Michael Malone

 

37

 

Chief Financial Officer

 

Mark Savas

 

50

 

Director

 

2012

Malcolm CasSelle

 

49

 

Director

 

2013

Robert Jordan

 

51

 

Director

 

2017

Colleen DiClaudio

 

40

 

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 recommending his re-election to the board.


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 recommending his re-election to the board.


Michael Malone, age 37, 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 15 years of experience in management and sales consulting and six years of experience in real estate easement acquisitions. 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 January 2005 until January 2009, Mr. Savas was the national Vice President of Business Development for Connexion Technologies where he built national teams of qualified individuals to effectively secure easements from large real estate owners in order to build telecommunication systems through their properties. Mr. Savas' management consulting and operational experience were factors considered by the Corporate Governance and Nominating Committee in recommending his re-election to the board.



46



 


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 by the Corporate Governance and Nominating Committee in recommending his election to the board.


Robert Jordan. Mr. Jordan has been a member of our board of directors since March 2017. He is a seasoned business executive who has spent the past 20 years acquiring, managing and divesting middle-market companies spanning a variety of industries. Since 2016 he has served as Chief Executive Officer of Yoi Corporation, a Los-Angeles-based company that provides software as a service (SaaS)-based mobile digital tools for line managers. In 2013, Mr. Jordan founded Tribeca Capital Partners LLC, a private investment holding company focused on acquiring and operating lower middle market companies. Immediately prior to founding Tribeca Capital Partners LLC, from 2003 to 2013 Mr. Jordan was Chief Executive Officer of KMS Software Company, LLC, a leading human capital management SaaS company which he successfully sold to SAP AG in April 2013. Prior to KMS, Mr. Jordan held chief executive officer roles at a number of companies across several industry sectors and senior management positions at both The Walt Disney Company and Pepsi-Cola Bottling Company. He 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.


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 she should serve on the Board.






47



 


CORPORATE GOVERNANCE


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 Social Reality 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 Social Reality, 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.


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.


Limitation on Liability and Indemnification of Directors and Officers

 

Our certificate of incorporation states that, to the fullest extent permitted by the Delaware General Corporate Law, or the DGCL, no director shall be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as director; provided, however, that this provision eliminating personal liability of a director shall not eliminate or limit the liability of a director (i) for any breach of the director’s duty of loyalty to us or our stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under section 174 of the DGCL, or (iv) for any transaction from which the director derived an improper personal benefit.

   

Section 174 of the DGCL provides, among other things, that a director who willfully and negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption may be held liable for such actions. A director who was either absent when the unlawful actions were approved or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered in the books containing the minutes of the meetings of the board of directors at the time the action occurred or immediately after the absent director receives notice of the unlawful acts.

 

Our certificate of incorporation and bylaws provide that we will indemnify our directors and officers and may indemnify our employees or agents to the fullest extent permitted by law against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices or positions with us. However, nothing in our certificate of incorporation or bylaws protects or indemnifies a director, officer, employee or agent against any liability to which that person would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of that person’s office or position. To the extent that a director has been successful in defending any proceeding brought against him, the Delaware General Corporation Law provides that the director shall be indemnified against reasonable expenses incurred by him in connection with the proceeding.





48



 


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.  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

    

[srax_s1003.gif]

    

    [srax_s1005.gif] (1)

    

[srax_s1007.gif]

Malcolm CasSelle

 

[srax_s1009.gif]

 

[srax_s1011.gif]

 

    [srax_s1013.gif] (1)

Robert Jordan

 

      [srax_s1015.gif] (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;

 

 

 

 

·

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.




49



 


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.

 

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




50



 


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, 2017.


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 10 of the Notes to our Consolidated Financial Statements for the year ended December 31, 2017.

 

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,

 

2018

 

 

291,250

 

 

 

540,000(9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

437,392(3)  

 

 

 

1,268,642

 

Chief Executive Officer (3)

 

2017

 

 

192,000

 

 

 

40,000    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

232,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chad Holsinger,

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,937      

 

 

 

3,937

 

Chief Revenue Officer (4)

 

2017

 

 

32,884

 

 

 

161,000    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

155,900(2)  

 

 

 

349,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kristoffer Nelson

 

2018

 

 

242,500

 

 

 

43,750    

 

 

 

 

 

 

 

398,675(5)

 

 

 

 

 

 

 

 

 

 

 

25,892(10)

 

 

 

710,817

 

Chief Operating Officer

 

2017

 

 

175,000

 

 

 

54,213    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

224,213

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph Hannan

 

2018

 

 

191,667

 

 

 

250,000    

 

 

 

 

 

 

 

488,107(7)

 

 

 

 

 

 

 

 

 

 

 

34,615(11)

 

 

 

964,389

 

Chief Financial Officer (6)

 

2017

 

 

200,000

 

 

 

100,000    

 

 

 

100,000(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

400,000

 

———————

(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 4 of the notes to our consolidated financial statements appearing in the 10-K for the year end December 31, 2017.

(2)

All other compensation represents commissions received in accordance with the terms of his employment agreement.

(3)

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.

(4)

Mr. Holsinger resigned from the Company, effective March 31, 2017

(5)

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

(6)

Mr. Hannan joined the Company as Chief Financial Officer, effective October 17, 2016. On November 29, 2018, Mr. Hannan informed the Company of his resignation.

(7)

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 these options were canceled.

(8)

Mr. Hannan’s stock award consists of 100,000 restricted Class A Common shares issued on October 14, 2016 that vests half on October 17, 2017 and half on October 17, 2018. The aggregate value of the shares on the grant date was $614,000. The award was granted pursuant to our 2016 Compensation Plan.

(9)

Mr. Miglino received a cash bonus for successfully completing the sale of the SRAXmd business division.

(10)

The Company paid $25,892 for insurance and benefit premiums on behalf of Mr. Nelson.

(11)

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.




51



 


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, 2018.

 

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:

 

$

723,047

 

 

$

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.


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.




52



 


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, 2018 (despite his employment beginning January 2, 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.


Employment Agreement with Kris 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.  Mr. Nelson received $175,000 for the year ending December 31, 2017.  Effective October 1, 2018, Mr. Nelson’s annual salary was increased to $250,000.


Employment Agreement with Chad Holsinger


Mr. Holsinger served as our Chief Revenue Officer from October 2014 until March 2017. His employment agreement was for a term of four years beginning October 30, 2014 with automatic renewals of one (1) year unless notice to not renew is previously given by either party.  Mr. Holsinger was paid a salary of $114,000 per annum, subject to increase from time to time at the Board’s discretion. Mr. Holsinger was also provided an annual bonus of $111,000 payable on January 31st of each year and a discretionary bonus at the discretion of the Board.  Such bonus payment was to be offset by payments made pursuant to certain earnout consideration related to the acquisition of Steel Media, Inc. on October 30, 2014.


Mr. Holsinger was also granted a one-time option to purchase 50,000 shares of Common Stock at an exercise price of $7.50 per share from the Company’s 2012 Equity Compensation Plan, which vested ¼ annually from the grant date.


Mr. Holsinger was also eligible to participate in all employee benefits made available by the Company to salaried employees.

 

In the event that Mr. Holsinger is terminated without cause or he resigns for good reason, he was entitled to severance equal to 12 months of his base salary as of the date of termination plus an amount equal to the greater of (a) the most recent bonus that would be payable and (b) $111,000.  As of March 2017, Mr. Holsinger was no longer employed by the Company.




53



 


Equity Compensation Plans


Our named executive officers participate in our equity compensation plans which are as follows:


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, 2018, we have granted awards under the 2012 Plan equal to approximately 399,467 shares of our common stock, and 0 shares have been cancelled or forfeited. Accordingly, there are 200,533 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, 2018, we have granted awards under the 2014 Plan equal to approximately 522,760 shares of our common stock, and 0 shares have been cancelled or forfeited. Accordingly, there are 1,077,240 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, 2018, we have granted awards under the 2016 Plan equal to approximately 516,293 shares of our common stock, and 0 shares have been cancelled or forfeited. Accordingly, there are 83,707 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.




54



 


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, 2018.



 

 

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

 

 

10,000

 

 

 

 

 

 

 

 

 

5.00

 

 

 

12/31/2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,333

 

 

 

 

 

 

 

 

 

 

 

7.50

 

 

 

10/10/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,333

 

 

 

 

 

 

 

 

 

 

 

7.50

 

 

 

10/10/2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,333

 

 

 

 

 

 

 

 

 

 

 

7.50

 

 

 

10/10/2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,333

 

 

 

66,667

 

 

 

 

 

 

 

5.78

 

 

 

1/2/2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael Malone

 

 

0

 

 

 

100,000

 

 

 

 

 

 

 

2.56

 

 

 

1/2/2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 





55



 


DIRECTOR COMPENSATION


Below are descriptions of the Companys 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.


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 2018. The information in the following table excludes any reimbursement of out-of-pocket travel and lodging expenses which we may have paid.


Director Compensation


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

 

 

 

 

 

 

15,000

(1)

  

 

 

  

 

 

  

 

 

  

 

 

30,000

 

Marc Savas

 

 

15,000

 

 

 

 

  

 

15,000

(1)

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Malcolm CasSelle

 

 

15,000

 

 

 

 

 

 

15,000

(1)

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Robert Jordan

 

 

15,000

 

 

 

 

 

 

15,000

(1)

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

———————

(1)

Represents option to purchase 5,059 shares of Class A common stock at a price per share of 4.92, a term of 7 years, which vests quarterly over the grant year.





56



 


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

BENEFICIAL OWNERSHIP OF SHARES OF CLASS A COMMON STOCK


At February 4, 2019, we had 10,109,530 shares of Class A common stock issued and outstanding. The following table sets forth information known to us as of January 16, 2019 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.


 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Name and Address of Beneficial Owner(1)

 

Shares

 

 

Shares

 Underlying

 Convertible

 Securities (2)

 

 

Total

 

 

Percent of

 Class (2)

 

Directors and named Executive Officers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Christopher Miglino

 

 

1,127,575

 

 

 

--

 

 

 

927,575

 

 

 

9.18

%

Kristoffer Nelson

 

 

135,001

 

 

 

141,666

 

 

 

276,667

 

 

 

2.70

%

Joseph P. Hannan +

 

 

84,159

 

 

 

20,833

 

 

 

104,992

 

 

 

1.04

%

Marc Savas

 

 

11,945

 

 

 

7,330

 

 

 

19,275

 

 

 

*

 

Malcolm CasSelle

 

 

 65,946 

 

 

 

3,794

 

 

 

 69,740

 

 

 

  *

 

Robert Jordan

 

 

6,510

 

 

 

3,794

 

 

 

10,340

 

 

 

*

 

Colleen DiClaudio

 

 

7,813

 

 

 

3,794

 

 

 

11,607

 

 

 

*

 

Michael Malone

 

 

1,292

 

 

 

8,333

 

 

 

9,625

 

 

 

*

 

All directors and executive officers as a group (8 persons)

 

 

1,240,241

 

 

 

189,545

 

 

 

1,429,786

 

 

 

13.88

%

———————

*

Less than one percent.

+

Effective December 31, 2018, Mr. Hannan resigned as chief financial officer

 

(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 10,109,530 shares of Class A common stock issued and outstanding as of November 27, 2018.






57



 


TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS


Related Party Transactions Procedure

 

We review all known relationships and transactions in which Social Reality 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 Social Reality 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 partys interest in the transaction;

 

 

 

 

· 

whether the transaction would impair the judgment of a director or executive officer to act in the best interests of Social Reality and our shareholders;

 

 

 

 

· 

the potential impact of the transaction on a directors 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 Social Reality 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, 2016.

 

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 the Section of this proxy statement entitled “Director Compensation” and “Executive Compensation.”

 

Information regarding disclosure of compensation to a director is included in the Section of this registration statement entitled “Director Compensation.

 

Information regarding the identification of each independent director is included in the Section of this registration statement entitled Directors, Executive Officers and Corporate Governance.


·

Mr. Malcolm CasSelle, a member of our Board, was previously the Chief Technology Officer and President of New Ventures at tronc, Inc., which was one of our major advertisers. Revenue from New Ventures of tronc, Inc. amounted to $4,395,124 and $0 for the years ended December 31, 2016 and 2015, respectively. At December 31, 2016, New Ventures of tronc, Inc. owed us $1,042,000, net of liabilities owed to them. In August 2017, after Mr. CasSelle had ended his employment with tronc, Inc., we filed a lawsuit against tronc, Inc. and Tribune Content Agency, LLC for breach of contract, fraudulent concealment and deceptive business practices (case number 1:17-cv-05998, U.S. District Court for the Northern District of Illinois). We have alleged that tronc, Inc. and Tribune Content Agency, LLC refused to perform their contractual obligations and breached the terms of contract and insertion orders. On December 4, 2017, we entered into a settlement agreement with tronc whereby neither party admitted fault and tronc agreed to (i) pay us $2,250,000 representing amounts owed for advertisements placed by us as well as accrued interest and related costs and (ii) provide us with $300,000 in media spread over a consecutive twelve month period beginning on a date to be agreed upon by us and tronc.




58



 


·

During February 2016, in connection with partial payment for services as directors, we issued an aggregate of 35,716 shares of Class A common stock.


·

Mr. Steven Antebi, a beneficial holder of greater than 5% of our Common Stock during 2016, served as a consultant to us. We paid him $467,230 and $634,452 for services provided to us during the years ended December 31, 2016 and 2015, respectively. Additionally, we entered a Consulting Agreement with a consultant that is controlled by Mr. Antebi. For further details regarding this arrangement, please see refer to Note 4 to the notes to our audited consolidated financial statements appearing in the form 10-K for the year ending December 31, 2016.


·

On October 10, 2016, 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 $7.50, has a term of three (3) years and vests one third (1/3) annually over a three (3) year period.


·

In January 2017, we issued 3,858 shares of our Class A common stock valued at $12,500 to Mr. Ferguson upon his appointment to our Board of Directors and the Audit Committee of the Board. The recipient is an accredited investor and the issuance was exempt from registration under the Securities Act pursuant to an exemption provided by Section 4(a)(2) of that act. As of the date hereof, Mr. Ferguson is no longer a member of our board of directors


·

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.  


·

On January 18, 2018, we issued Colleen DiClaudio, a board member, 7,813 Class A common shares valued at $10,000 as payment for 2017 services on our board of directors.  The shares were issued from our 2016 equity compensation plan


·

In January 2018, we issued Hardy Thomas, a former board member, 7,195 Class A common shares valued at $10,000 as payment for 2017 services on our board of directors.  The shares were issued from our 2016 equity compensation plan.


·

In January 2018, we issued Marc Savas, Malcolm CasSelle, and William Packer each 3,774 Class A common shares valued at $10,000 as payment for their respect 2017 service on our board of directors.  The shares were issued from our 2016 equity compensation plan. Mr. Packer is no longer a member of the board of directors of the Company.


·

On March 20, 2018, as we began to formally review potential strategic options for SRAXMD, we entered into certain agreements with Erin DeRuggiero, our 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 SRAXmd, but may be extended by the parties.  The terms of the consultancy are substantially similar to her prior employment agreement  except that in the event of a sale of the SRAXmd 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 SRAXmd 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, SRAXmd 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.


·

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;




59



 


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 SRAXmd 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 SRAXmd 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.





60



 


EXPERTS


The financial statements as of December 31, 2016 and for each interim period since December 31, 2016, included in this prospectus and in the registration statement of which it forms a part, have been so included in reliance on the report of RBSM LLP, our independent registered public accounting firm, appearing elsewhere in this prospectus and the registration statement of which it forms a part, given on the authority of said firm as experts in auditing and accounting.


INTERESTS OF NAMED EXPERTS AND COUNSEL


The validity of our securities offered and to be issued by this prospectus will be passed upon for us by Silvestre Law Group, P.C. of Westlake Village, CA. The Silvestre Law Group, P.C. or its various principals and/or affiliates, own 133,000 shares of our Class A common stock.


LEGAL PROCEEDINGS


None.


WHERE YOU CAN FIND ADDITIONAL INFORMATION


We will file annual, quarterly and other reports, proxy statements and other information with the Securities and Exchange Commission, or SEC, under the Exchange Act. You may read and copy any document we file at the public reference facilities of the SEC at 100 F Street, NE, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to the public at the SEC’s web site, free of charge, at http://www.sec.gov and at our website at http://www.genspera.com. The reference to our web address does not constitute incorporation by reference of the information contained at this site into this prospectus. We will furnish our stockholders with annual reports containing audited financial statements.


This prospectus is part of a registration statement on Form S-1 that we filed with the SEC under the Securities Act. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits and schedule(s) that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. We have also filed exhibits and schedules with the registration statement that are excluded from this prospectus. For further information you may:


 

·

read a copy of the registration statement, including the exhibits and schedules, without charge at the SEC’s public reference rooms or the SEC’s website; or


 

·

obtain a copy from the SEC upon payment of the fees prescribed by the SEC.


You may request and obtain a copy of any of our filings, including the exhibits thereto, at no cost, by writing or telephoning us at the following address or phone number:


Social Reality, Inc.
456 Seaton Avenue,

Los Angeles, CA 90013
323-694-9800

 

 

 




61



 


INDEX TO FINANCIAL STATEMENTS


SOCIAL REALITY, INC.


 

Page

Report of Independent Registered Public Accounting Firm

F-2

Consolidated balance sheets at December 31, 2017 and 2016

F-3

Consolidated statements of operations for the years ended December 31, 2017 and 2016

F-4

Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2017 and 2016

F-5

Consolidated statements of cash flows for the years ended December 31, 2017 and 2016

F-6

Notes to consolidated financial statements

F-9


Condensed consolidated balance sheets at September 30, 2018 and December 31, 2017

F-38

Condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017

F-39

Condensed consolidated statements of cash flows for the years ended December 31, 2017 and 2016

F-40

Notes to condensed consolidated financial statements

F-41



BIG TOKEN, INC.


 

Page

Report of Independent Registered Public Accounting Firm

F-67

Balance sheets at December 31, 2017 and 2016

F-68

Statements of operations for the years ended December 31, 2017 and 2016

F-69

Statements of changes in stockholders’ equity for the years ended December 31, 2017 and 2016

F-70

Statements of cash flows for the years ended December 31, 2017 and 2016

F-71

Notes to financial statements

F-72


Condensed balance sheets at September 30, 2018 and December 31, 2017

F-82

Condensed statements of operations for the three and nine months ended September 30, 2018 and 2017

F-83

Condensed statements of cash flows for the years ended December 31, 2017 and 2016

F-84

Notes to condensed financial statements

F-85





F-1



 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Social Reality, Inc.


 

Opinion on the Financial Statements


We have audited the accompanying consolidated balance sheets of Social Reality, Inc. (the “Company”), as of December 31, 2017 and 2016, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2017 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.


Basis for Opinion


These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The company is not required to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.


Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


 

/s/ RBSM LLP



We have served as the Company’s auditor since 2011


New York, New York

April 2, 2018






F-2



 


SOCIAL REALITY, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2017 AND 2016


 

 

2017

 

 

2016

 

Assets

  

 

  

  

                      

  

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,017,299

 

 

$

1,048,762

 

Accounts receivable, net

 

 

4,348,305

 

 

 

8,411,019

 

Prepaid expenses

 

 

468,336

 

 

 

332,503

 

Other current assets

 

 

300,898

 

 

 

6,488

 

Total current assets

 

 

6,134,838

 

 

 

9,798,772

 

Property and equipment, net

 

 

154,546

 

 

 

55,492

 

Goodwill

 

 

15,644,957

 

 

 

15,644,957

 

Intangible assets, net

 

 

1,642,760

 

 

 

1,365,241

 

Other assets

 

 

28,598

 

 

 

34,659

 

Total assets

 

$

23,605,699

 

 

$

26,899,121

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

 

5,010,815

 

 

 

13,156,083

 

Notes payable, net of unamortized costs

 

 

 

 

 

 

3,418,788

 

Put liability

 

 

 

 

 

 

1,500,000

 

Total current liabilities

 

 

5,010,815

 

 

 

18,074,871

 

Secured convertible debentures, net

 

 

1,711,146

 

 

 

 

Total liabilities

 

 

6,721,961

 

 

 

18,074,871

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued or outstanding at December 31, 2017 and 2016, respectively

 

 

 

 

 

 

 

Class A common stock, authorized 250,000,000 shares, $0.001 par value, 9,910,565 and 6,951,077 shares issued and outstanding at December 31, 2017 and 2016, respectively

 

 

9,911

 

 

 

6,951

 

Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued or outstanding at December 31, 2017 and 2016, respectively

 

 

 

 

 

 

Common stock to be issued

 

 

879,500

 

 

 

678,000

 

Additional paid in capital

 

 

37,143,033

 

 

 

22,529,303

 

Accumulated deficit

 

 

(21,148,706

)

 

 

(14,390,004

)

Total stockholders' equity

 

 

16,883,738

 

 

 

8,824,250

 

Total liabilities and stockholders' equity

 

$

23,605,699

 

 

$

26,899,121

 







The accompanying footnotes are an integral part of these consolidated financial statements.


F-3



 


SOCIAL REALITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2017 AND 2016


 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

Revenue

 

$

23,348,714

 

 

$

35,763,047

 

Cost of revenue

 

 

9,328,893

 

 

 

23,226,995

 

Gross profit

 

 

14,019,821

 

 

 

12,536,052

 

Operating expense:

 

 

 

 

 

 

 

 

General, selling and administrative expense

 

 

17,016,789

 

 

 

16,648,705

 

Impairment of goodwill

 

 

 

 

 

 

670,000

 

Write off of non-compete agreement

 

 

468,750

 

 

 

 

Restructuring Costs

 

 

377,961

 

 

 

 

Operating expense

 

 

17,863,500

 

 

 

17,318,705

 

Loss from operations

 

 

(3,843,679

)

 

 

(4,782,653

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Write off of contingent consideration

 

 

 

 

 

3,744,496

 

Interest expense

 

 

(2,815,203

)

 

 

(3,210,076

)

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

 

(6,658,882

)

 

 

(4,248,233

)

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

 

 

 

 

Net loss

 

$

(6,658,882

)

 

$

(4,248,233

)

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.81

)

 

$

(0.69

)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

8,253,851

 

 

 

6,196,197

 








The accompanying footnotes are an integral part of these consolidated financial statements.


F-4



 


SOCIAL REALITY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2017 AND 2016

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Common stock to be issued

 

 

Additional

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

Deficit

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

 

 

 

$

 

 

 

5,622,046

 

 

$

5,622

 

 

 

 

 

$

 

 

$

14,012,078

 

 

$

(10,141,771

)

 

$

3,864,685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from the sale of common stock units

 

 

 

 

 

 

 

 

1,042,392

 

 

 

1,042

 

 

 

 

 

 

 

 

 

4,642,757

 

 

 

 

 

 

4,643,799

 

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,062,621

 

 

 

 

 

 

1,062,621

 

Vested stock awards issued

 

 

 

 

 

 

 

 

10,000

 

 

 

10

 

 

 

 

 

 

 

 

 

(10

)

 

 

 

 

 

 

Shares issued for services

 

 

 

 

 

 

 

 

19,862

 

 

 

20

 

 

 

 

 

 

 

 

 

137,480

 

 

 

 

 

 

137,500

 

Shares to be issued for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

100,000

 

 

 

678,000

 

 

 

 

 

 

 

 

 

678,000

 

Common stock issued as Earn Out Consideration

 

 

 

 

 

 

 

 

256,754

 

 

 

257

 

 

 

 

 

 

 

 

 

2,399,743

 

 

 

 

 

 

2,400,000

 

Rounding of shares for stock split

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrant modification costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

274,634

 

 

 

 

 

 

274,634

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,248,233

)

 

 

(4,248,233

)

Balance, December 31, 2016

 

 

 

 

$

 

 

 

6,951,077

 

 

$

6,951

 

 

 

100,000

 

 

$

678,000

 

 

$

22,529,303

 

 

$

(14,390,004

)

 

$

8,824,250

 


(Continued)



The accompanying footnotes are an integral part of these consolidated financial statements.


F-5



 


SOCIAL REALITY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

YEARS ENDED DECEMBER 31, 2017 AND 2016

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Common stock to be issued

 

 

Additional

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Paid-in Capital

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2016

 

 

 

 

$

 

 

 

6,951,077

 

 

$

6,951

 

 

 

100,000

 

 

$

678,000

 

 

$

22,529,303

 

 

$

(14,390,004

)

 

$

8,824,250

 

Sale of common stock and warrants for cash

 

 

 

 

 

 

 

 

761,905

 

 

 

762

 

 

 

 

 

 

 

 

 

3,979,239

 

 

 

 

 

 

3,980,001

 

Fair value of put option

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,500,000

)

 

 

 

 

 

(2,500,000

)

Cost of sale of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(160,000

)

 

 

 

 

 

(160,000

)

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

444,051

 

 

 

 

 

 

444,051

 

Vested shares issued

 

 

 

 

 

 

 

 

51,667

 

 

 

52

 

 

 

 

 

 

 

 

 

(52

)

 

 

 

 

 

 

Shares issued to consultant

 

 

 

 

 

 

 

 

75,000

 

 

 

75

 

 

 

 

 

 

 

 

 

97,425

 

 

 

 

 

 

97,500

 

Common stock issued for services

 

 

 

 

 

 

 

 

300,000

 

 

 

300

 

 

 

(100,000

)

 

 

(678,000

)

 

 

1,197,700

 

 

 

 

 

 

520,000

 

Common stock issued to directors

 

 

 

 

 

 

 

 

10,368

 

 

 

10

 

 

 

 

 

 

 

 

 

44,977

 

 

 

 

 

 

44,987

 

Executive Bonus Shares

 

 

 

 

 

 

 

 

20,409

 

 

 

20

 

 

 

 

 

 

 

 

 

99,980

 

 

 

 

 

 

100,000

 

Common stock issued for software asset

 

 

 

 

 

 

 

 

200,000

 

 

 

200

 

 

 

 

 

 

 

 

 

279,800

 

 

 

 

 

 

280,000

 

Shares to be issued for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

150,000

 

 

 

879,500

 

 

 

 

 

 

 

 

 

879,500

 

Conversion of debentures

 

 

 

 

 

 

 

 

1,111,670

 

 

 

1,112

 

 

 

 

 

 

 

 

 

3,333,888

 

 

 

 

 

 

3,335,000

 

Exercise of warrants

 

 

 

 

 

 

 

 

428,469

 

 

 

429

 

 

 

 

 

 

 

 

 

1,284,975

 

 

 

 

 

 

1,285,404

 

Warrants issued for software asset

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

337,069

 

 

 

 

 

 

337,069

 

April debenture warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

866,182

 

 

 

 

 

 

866,182

 

October debenture BCF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,166,567

 

 

 

 

 

 

3,166,567

 

October debenture warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,093,591

 

 

 

 

 

 

1,093,591

 

Placement agent warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

948,518

 

 

 

 

 

 

948,518

 

Repricing of warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99,820

 

 

 

(99,820

)

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,658,882

)

 

 

(6,658,882

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017

 

 

 

 

$

 

 

 

9,910,565

 

 

$

9,911

 

 

 

150,000

 

 

$

879,500

 

 

$

37,143,033

 

 

$

(21,148,706

)

 

$

16,883,738

 

 




The accompanying footnotes are an integral part of these consolidated financial statements.


F-6



 


SOCIAL REALITY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2017 AND 2016


 

 

2017

 

 

2016

 

 

  

                      

  

  

                      

  

Cash flows from operating activities

 

 

 

 

 

 

Net loss

 

$

(6,658,882

)

 

$

(4,248,233

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Amortization of stock based prepaid fees

 

 

 

 

 

373,567

 

Stock to be issued for services

 

 

 

 

 

678,000

 

Stock based compensation

 

 

2,085,988

 

 

 

1,200,121

 

Amortization of debt issuance costs

 

 

1,082,830

 

 

 

1,076,634

 

Warrant modification costs

 

 

 

 

 

274,695

 

PIK interest expense accrued to principal

 

 

 

 

 

511,261

 

Amortization of debt discount

 

 

1,018,548

 

 

 

 

Impairment of goodwill

 

 

 

 

 

670,000

 

Write off of non-compete agreement

 

 

468,751

 

 

 

 

Accretion of contingent consideration, net of write-off

 

 

 

 

 

(3,585,435

)

Accretion of put liability

 

 

 

 

 

63,718

 

Provision for bad debts

 

 

(195,172

)

 

 

119,434

 

Depreciation expense

 

 

22,908

 

 

 

21,304

 

Amortization of intangibles

 

 

505,712

 

 

 

365,728

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,261,574

 

 

 

(6,817,597

)

Prepaid expenses

 

 

(135,834

)

 

 

(23,069

)

Other current assets

 

 

 

 

 

29,602

 

Other assets

 

 

(288,349

)

 

 

 

Accounts payable and accrued expenses

 

 

(6,535,152

 

 

8,020,903

 

Unearned revenue

 

 

 

 

 

(1,295

)

Net cash (used in) provided by operating activities

 

 

(4,367,078

)

 

 

(1,270,662

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchase of equipment

 

 

(121,962

)

 

 

(32,862

)

Development of software

 

 

(634,914

)

 

 

(119,225

)

Net cash used in investing activities

 

 

(756,876

)

 

 

(152,087

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from the issuance of common stock units

 

 

4,020,401

 

 

 

4,643,799

 

Proceeds from exercise of warrants

 

 

1,085,004

 

 

 

 

Proceeds from secured convertible debentures, net

 

 

6,066,406

 

 

 

 

Proceeds from note payable

 

 

 

 

 

2,100,000

 

Repayments of notes payable

 

 

(3,996,928

)

 

 

(3,763,474

)

Payment of contingent consideration

 

 

 

 

 

(1,600,000

)

Payment of Financing Warrant

 

 

(1,500,000

)

 

 

 

Debt issuance costs

 

 

(582,392

)

 

 

 

Net cash provided by financing activities

 

 

5,092,491

 

 

 

1,380,325

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(31,463

)

 

 

(42,424

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

Beginning of year

 

 

1,048,762

 

 

 

1,091,186

 

End of year

 

$

1,017,299

 

 

$

1,048,762

 


(Continued)




The accompanying footnotes are an integral part of these consolidated financial statements.


F-7



 


SOCIAL REALITY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

YEARS ENDED DECEMBER 31, 2017 AND 2016


 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

Supplemental schedule of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,217,716

 

 

$

1,312,293

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of noncash financing activities

 

 

 

 

 

 

 

 

Common stock issued for the payment of contingent consideration

 

$

 

 

$

2,400,000

 

Proceeds paid by FastPay on behalf of the Company

 

$

 

 

$

5,507,468

 

Common stock issued for preferred stock conversion and vesting grants

 

$

 

 

$

 

Put liability on issuance of put warrants

 

$

2,500,000

 

 

$

 

Issuance of placement agent warrants

 

$

948,518

 

 

$

 

Common stock to be issued

 

$

678,000

 

 

$

 

Repurchase of series B warrants and accounts payable balances directly paid by debenture holder on behalf of Company

 

$

4,113,753

 

 

$

 

Shares issued for convertible note conversions

 

$

3,335,000

 

 

$

 

Repricing of warrants

 

$

99,820

 

 

$

 

Common stock and warrants issued for asset purchase arrangements

 

$

617,069

 

 

$

 

Debt and warrants discount on convertible debentures issuance

 

$

5,126,340

 

 

$

 






The accompanying footnotes are an integral part of these consolidated financial statements.


F-8



SOCIAL REALITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organization and Basis of Presentation


Social Reality, Inc. ("Social Reality", "we", "us", “our” or the "Company") is a Delaware corporation formed on August 2, 2011. Effective January 1, 2012 we acquired 100% of the member interests and operations of Social Reality, LLC, a California limited liability company formed on August 14, 2009 which began business in May of 2010, in exchange for 2,465,753 shares of our Class A common stock. The former members of Social Reality, LLC owned 100% of our Class A common stock after the acquisition.


At Social Reality, we sell digital advertising campaigns to advertising agencies and brands. We have developed technology that allows brands to launch and manage digital advertising campaigns, and we provide the platform that allows website publishers to sell their media inventory to many different digital advertising buyers. Our focus is to provide technology tools that enable both publishers and advertisers to maximize their digital advertising initiatives. We derive our revenues from:


·

sales of digital advertising campaigns to advertising agencies and brands;

·

sales of media inventory owned by our publishing partners through real-time bidding (RTB) exchanges;

·

sale and licensing of our SRAX Social platform and related media; and,

·

creation of custom platforms for buying media on SRAX for large brands.


The core elements of this business are:


·

Social Reality Ad Exchange or "SRAX"  Real Time Bidding sell side and buy side representation is our technology which assists publishers in delivering their media inventory to the RTB exchanges. The SRAX platform integrates multiple market-leading demand sources. We also build custom platforms that allow our agency partners to launch and manage their own RTB campaigns by enabling them to directly place advertising orders on the platform dashboard and view and analyze results as they occur;

 

 

·

SRAXmd is our ad targeting and data platform for healthcare brands, agencies and medical content publishers. Healthcare and pharmaceutical publishers utilize the platform for yield optimization, audience extension campaigns and re-targeting of their healthcare professional audience. Agencies and brands purchase targeted digital and mobile ad campaigns;

 

 

·

SRAX Social is a social media and loyalty platform that allows brands to launch and manage their social media initiatives. Our team works with customers to identify their needs and then helps them in the creation, deployment and management of their social media presence; and.

 

 

·

SRAX app, a recently launched new product, is a platform that allows publishers and content owners to launch native mobile applications through our SRAX platform.

 

 

·

SRAXfan tools enable brands and agencies to connect with sports fans at home, the stadium or out-of-home at gathering locations, such as bars, restaurants, and universities, during live sporting events.

 

 

·

SRAXauto tools enable targeting and engagement with potential auto buyers at dealerships, auto shows, and at home across desktop and mobile environments.


We offer our customers a variety of pricing options including cost-per-thousand-impression, or "CPM", whereby our customers pay based on the number of times the target audience is exposed to the advertisement, and on a monthly service fee.

 

Social Reality is also an approved Facebook advertising partner. We sell targeted and measurable online advertising campaigns and programs to brand advertisers and advertising agencies across large Facebook apps and websites, generating qualified Facebook likes and quantifiable engagement for our clients, driving online sales and increased brand equity.


We are headquartered in Los Angeles, California.




F-9



SOCIAL REALITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 


Presentation of Financial Statements – Going Concern


Going Concern Evaluation


In connection with preparing consolidated financial statements for the year ended December 31, 2017, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.

The Company considered the following:


 

·

Net losses of $6,658,882 and $4,248,233 for the years ended December 31, 2017 and 2016, respectively.

 

·

Negative cash flow from operating activities for 2017 and 2016.

 

·

At December 31, 2017, the Company had an accumulated deficit of $21,148,706.

 

·

Revenue decline in 2017 of $12,414,333.


Ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the entity’s ability to meet its obligations as they become due.


The Company evaluated its ability to meet its obligations as they become due within one year from the date that the financial statements are issued by considering the following:


 

·

The Company raised $14.0 million via equity debt financing during the year ended December 31, 2017.

 

·

The Company has historically raised funds from debt and equity financings.

 

·

As a result of the Company’s restructurings that were implemented during the year ended December 31, 2017, the Company’s cost structure is now in line with its future revenue projections.

 

·

In 2017, the Company is in compliance with NASDAQ Capital Markets listing requirements.

 

·

In 2017, the Company converted $3.3 million of long term debt, and repaid its short-term notes payable.

 

·

Revenue declines were largely the result of a strategic shift away from lower margin sales the produced little to no positive cash flow benefit for the Company.


In addition to the recent capital raised 2017, management also believes that the Company will generate enough cash from operations to satisfy its obligations for the next twelve months from the issuance date.


The Company will take the following actions if it starts to trend unfavorably to its internal profitability and cash flow projections, in order to mitigate conditions or events that would raise substantial doubt about its ability to continue as a going concern:


 

·

Raise additional capital through short-term loans.

 

·

Implement additional restructuring and cost reductions.

 

·

Raise additional capital through a private placement.

 

·

Secure a commercial bank line of credit.

 

·

Dispose of one or more product lines.

 

·

Sell or license intellectual property.


At December 31, 2017, the Company had $1.1 million in cash and cash equivalents and $1 million of working capital.


Effect of Reverse Stock Split on Presentation


On September 20, 2016, the Company completed a 1 for 5 reverse stock split of our Class A common stock. The principal reason for the reverse stock split was to facilitate the up-listing of our Class A common stock to the NASDAQ Capital Market which has a minimum market (bid) price requirement for new applicants of $4.00 per share. Refer to Note 4 regarding a further discussion of the reverse stock split. 




F-10



SOCIAL REALITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 


These consolidated financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise specified.


Principles of Consolidation


The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.


The consolidated financial statements include the accounts of the Company and its subsidiaries from the acquisition date of majority voting control of the subsidiary.


Use of Estimates


The consolidated financial statements have been prepared in conformity with generally accepted accounting principles accepted in the United States of America (“GAAP”) and requires management of the Company to make estimates and assumptions in the preparation of these consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions.


The most significant areas that require management judgment and which are susceptible to possible change in the near term include the Company's revenue recognition, allowance for doubtful accounts and sales credits, stock-based compensation, income taxes, purchase price for acquisition, goodwill, other intangible assets, put rights and valuation of liabilities.


Cash and Cash Equivalents


The Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents.


Revenue Recognition


The Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists; no significant Company obligations remain; collection of the related receivable is reasonably assured; and the fees are fixed or determinable. The Company acts as a principal in revenue transactions as the Company is the primary obligor in the transactions. As such, revenue is recognized on a gross basis, and media and publisher expenses that are directly related to a revenue-generating event are recorded as a component of cost of revenue.


Cost of Revenue


Cost of revenue consists of payments to media providers and website publishers that are directly related to a revenue-generating event and project and application design costs. The Company becomes obligated to make payments related to media providers and website publishers in the period the advertising impressions, click-throughs, actions or lead-based information are delivered or occur. Such expenses are classified as cost of revenue in the corresponding period in which the revenue is recognized in the accompanying consolidated statements of operations.


Accounts Receivable


Credit is extended to customers based on an evaluation of their financial condition and other factors. Management periodically assesses the Company's accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company usually does not require collateral. Allowance for doubtful accounts was $59,703 and $254,875 at December 31, 2017 and 2016, respectively.

 



F-11



SOCIAL REALITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 


Concentration of Credit Risk, Significant Customers and Supplier Risk


Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions within the United States. The balances maintained at these financial institutions are generally more than the Federal Deposit Insurance Corporation insurance limits. The uninsured cash bank balances were $767,299 at December 31, 2017. The Company has not experienced any loss on these accounts. The balances are maintained in demand accounts to minimize risk.


At December 31, 2017, 4 customers accounted for more than 10% of the accounts receivable balance, for a total of 59.5%. For the year ended December 31, 2016, two customers accounted for 48% of total revenue.


Fair Value of Financial Instruments


The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.

 

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows:

 

 

·

Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; 

 

·

Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and

 

·

Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.


The Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At December 31, 2017 and 2016, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments. Derivative instruments are carried at fair value, generally estimated using the Black Scholes Merton model.


Property and equipment


Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets of three to seven years.


Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations. Management periodically reviews the carrying value of its property and equipment for impairment.




F-12



SOCIAL REALITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 


Intangible assets


Intangible assets consist of intellectual property, a non-complete agreement, and internally developed software and are stated at cost less accumulated amortization. Amortization is provided for on the straight-line basis over the estimated useful lives of the assets of five to six years. During 2016, the Company began capitalizing the costs of developing internal-use computer software, including directly related payroll costs. The Company amortizes costs associated with its internally developed software over periods up to three years, beginning when the software is ready for its intended use.


The Company capitalizes costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business process reengineering costs are expensed in the period in which they are incurred.


Business Combinations


For all business combinations (whether partial, full or step acquisitions), the Company records 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration, if any, is recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value are recognized in earnings until settlement and acquisition-related transaction and restructuring costs are expensed rather than treated as part of the cost of the acquisition.


Goodwill and change to annual impairment testing period


Goodwill is comprised of the purchase price of business combinations in excess of the fair value assigned at acquisition to the net tangible and identifiable intangible assets acquired. Goodwill is not amortized. The Company assesses goodwill for impairment at least annually, or when events or changes in the business environment indicate the carrying value may not be fully recoverable. The Company also has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the Company to determine that it is more likely than not (that is, a likelihood of more than 50%) that goodwill is impaired. If the Company chooses to first assess qualitative factors and it is determined that it is not more likely than not goodwill is impaired, the Company is not required to take further action to test for impairment. The Company also has the option to bypass the qualitative assessment and perform only the quantitative impairment test, which the Company may choose to do in some periods but not in others. The Company performs its annual impairment review as of December 31st.


The Company had historically performed its annual goodwill and impairment assessment on September 30th of each year; however, due to the elimination of the need to internally maintain certain segregated accounting records of the Steel Media business that occurred in the third quarter of 2016, following the determination that the second year Earn Out Consideration would not be achieved (See Note 2), this was reevaluated by the Company. Further, given the seasonal and cyclical nature of advertising sales in general, timing of the Company’s annual budgeting process, and the short-term nature of the Company’s advertising sales contracts, it was determined that it would be more effective and efficient to conduct the annual impairment analysis instead at December 31st of each year. This would also better align the Company with other advertising sales companies who also generally conduct this annual analysis in the fourth quarter. The Company does not believe this change will have any material impact on its consolidated financial statements, and continues to evaluate potential interim impairment to goodwill consistent with its historical practices.


When evaluating the potential impairment of goodwill, management first assess a range of qualitative factors, including but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company's products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and the overall financial performance for each of the Company's reporting units. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then proceed to a two-step impairment testing methodology using the income approach (discounted cash flow method).




F-13



SOCIAL REALITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016

 


In the first step of the two-step testing methodology, we compare the carrying value of the reporting unit, including goodwill, with its fair value, as determined by its estimated discounted cash flows. If the carrying value of a reporting unit exceeds its fair value, we then complete the second step of the impairment test to determine the amount of impairment to be recognized. In the second step, we estimate an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to 100% of the assets and liabilities other than goodwill (including any unrecognized intangible assets). If the carrying value of a reporting unit's goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference in that period.


When required, we arrive at our estimates of fair value using a discounted cash flow methodology which includes estimates of future cash flows to be generated by specifically identified assets, as well as selecting a discount rate to measure the present value of those anticipated cash flows. Estimating future cash flows requires significant judgment and includes making assumptions about projected growth rates, industry-specific factors, working capital requirements, weighted average cost of capital, and current and anticipated operating conditions. The use of different assumptions or estimates for future cash flows could produce different results.


Although the Company now operates within one business segment, it was determined that a portion of the goodwill originally assigned to the Steel Media, a California corporation (“Steel Media”), acquisition had become impaired as of June 30, 2016. Accordingly, we recorded a goodwill impairment charge of $670,000 during the year ended December 31, 2016. The impairment charge represents the excess of the carrying amount of the goodwill recorded in the acquisition over the implied fair value of the goodwill. The implied fair value of the goodwill is the residual fair value based on an income approach that utilized a discounted cash flow model based on revenue and profit forecasts. The Company performed its annual impairment test as of December 31, 2017 and no further impairment was required.

 

Long-lived Assets


Management evaluates the recoverability of the Company's identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company's stock price for a sustained period of time; and changes in the Company's business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets' carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. No impairments have been recorded regarding its identifiable intangible assets or other long-lived assets during the years ended December 31, 2017 or 2016, respectively.


Derivatives


The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480, Distinguishing Liabilities From Equity and FASB ASC Topic No. 815, Derivatives and Hedging.  Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments.


Loss Per Share


We use ASC 260, "Earnings Per Share" for calculating the basic and diluted earnings (loss) per share. We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share are the same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share.




F-14



SOCIAL REALITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2017 AND 2016