NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
NOTE
1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNT POLICIES
Effective
August 25, 2019, the Company amended its certificate of incorporation to change the name of the Company from Social Reality, Inc.
to SRAX, Inc.
The
accompanying unaudited interim condensed consolidated financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain
information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to prevent the information presented from being misleading. These financial
statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, which
contains audited financial information for the two years in the period ended December 31, 2018.
Description
of 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. In addition to our business services and technologies, we also operate a
direct to consumer platform, BIGToken, which enables consumers to own, manage and sell access to their digital identity and data.
This provides us with a direct consumer relationship and gives us valuable proprietary data. We derive our revenues from:
|
●
|
sales
of digital advertising campaigns to advertising agencies and brands;
|
|
●
|
sale
and licensing of our SRAXir platform; and,
|
|
●
|
creation
of custom platforms for buying media on SRAX for large brands;
|
|
●
|
sales
of proprietary consumer data.
|
The
core elements of our business are:
|
●
|
Social
Reality Ad Exchange or “SRAX” – Real Time Bidding sell side and buy side representation is our
technology which assists publishers in delivering their media inventory to the RTB exchanges. The SRAX platform integrates
multiple market-leading demand sources, including OpenX, Pubmatic and Xander. 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;
|
|
|
|
|
●
|
SRAXauto
tools enable targeting and engagement with potential auto buyers at dealerships, auto shows, and at home across desktop
and mobile environments.
|
|
|
|
|
●
|
SRAXcore
is our generalized services and technologies supporting brands and agencies in data management, audience optimization, and
multi-channel and omnichannel media and marketing services;
|
|
|
|
|
●
|
SRAXshopper
tools enable brands and agencies to connect with shoppers driving in store an online sales;
|
|
|
|
|
●
|
SRAXir
tools to assist public companies in analyzing and marketing to their shareholder population; and
|
|
|
|
|
●
|
BIGToken
is a platform that allows consumers to manage the sales of their digital data.
|
SRAX,
INC.
(Formerly
Known As Social Reality, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements and notes thereto are unaudited. The unaudited interim financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information
and note disclosures normally included in the Company’s annual financial statements have been condensed or omitted. The
December 31, 2018 condensed balance sheet data was derived from our audited financial statements, but does not include all disclosures
required by GAAP. These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary
for a fair presentation of the financial position, results of operations and cash flows for the interim three and nine month periods
ended September 30, 2019 and 2018. The results for the three and nine months ended September 30, 2019 are not necessarily indicative
of the results to be expected for the full year ending December 31, 2019 or for any future period.
These
unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements
and the notes thereto for the year ended December 31, 2018, included in the Company’s annual report on Form 10-K filed with
the SEC on April 16, 2019.
Uses
and Sources of Liquidity – Going Concern Our primary need for liquidity is to fund working capital requirements of our
business, establish and develop new business units, development of internally used software and for general corporate purposes,
including debt repayment. Our general, selling and administrative expenses increased from $4,869,000 for the three months ended
September 30, 2018 to $5,389,000 for the three months ended September 30, 2019. We had a net income of $1,409,000 for the
three months ended September 30, 2019 compared to a net income of $21,271,000 for the three months ended September 30, 2018. Net
income for the three months ended September 30, 2019 included a gain of $6,227,000 from the change in the fair value of derivative
liabilities. At September 30, 2019, we had an accumulated deficit of $31,252,000. As of September 30, 2019, we had $2,843,000
in cash and cash equivalents and a working capital deficit of $1,301,000 as compared to $2,785,000 in cash and cash equivalents
and a working capital deficit of $3,549,000 at December 31, 2018.
The
Company has incurred losses since its inception and has not demonstrated an ability to generate significant operational cashflow
and have not yet achieved profitable operations. There can be no assurance that profitable operations will ever be achieved, or
if achieved, could be sustained on a continuing basis. In addition, our new business initiatives and products, including BIGToken,
will require significant additional capital. These factors create substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that the consolidated financial statements are issued. The consolidated financial
statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly,
the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern
and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
In
making this assessment the Company performed a comprehensive analysis of its current circumstances including: its financial position
at September 31, 2019, its cash flow and cash usage forecasts for the period covering one-year from the issuance date of this
Quarterly Report and its current capital structure including outstanding warrants and other equity-based instruments and its obligations
and debts.
Impact
of Recently Issued Accounting Standards
Leases
In
February 2016, the FASB issued ASU No. 2016-02 (“ASC 842”), Leases, to require lessees to recognize all leases, with
certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease
accounting. Subsequently, the FASB issued ASU No.2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted
Improvements, ASU No. 2018-20, Narrow-Scope Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and
amend the guidance in ASU No. 2016-02. ASC 842 eliminates real estate-specific provisions and modifies certain aspects of lessor
accounting. This standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted.
We
are using a modified retrospective adoption approach, is required to recognize and measure leases existing at the beginning of
the adoption period, with certain practical expedients available.
We
adopted the standard effective January 1, 2019. The standard allows a number of optional practical expedients to use for transition.
The Company choose the certain practical expedients allowed under the transition guidance which permitted us to not to reassess
any existing or expired contracts to determine if they contain embedded leases, to not to reassess our lease classification on
existing leases, to account for lease and non-lease components as a single lease component for equipment leases, and whether initial
direct costs previously capitalized would qualify for capitalization under FASB ASC 842. The new standard also provides practical
expedients and recognition exemptions for an entity’s ongoing accounting policy elections. The Company has elected the short-term
lease recognition for all leases that qualify, which means that we do not recognize a ROU asset and lease liability for any lease
with a term of twelve months or less. The most significant impact of adopting the standard was the recognition of ROU assets and
lease liabilities for operating leases on the Company’s consolidated balance sheet but it did not have an impact on the
Company’s consolidated statements of operations or consolidated statements of cash flows. We recorded a ROU and the related
operating lease liability for our long-term facilities lease.
SRAX,
INC.
(Formerly
Known As Social Reality, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
The
below table summarizes these lease asset and liability accounts presented on our accompanying Condensed Consolidated Balance Sheets:
Operating
Leases*
|
|
Condensed
Consolidated Balance Sheet Caption
|
|
Balance
as of
September
30, 2019
|
|
Operating
lease right-of-use assets - non-current
|
|
Right
of Use Asset
|
|
$
|
429,000
|
|
|
|
|
|
|
|
|
Operating lease liabilities - current
|
|
Other Current Liabilities
|
|
$
|
134,000
|
|
Operating lease
liabilities - non-current
|
|
Lease Obligation
– Long-Term
|
|
$
|
295,000
|
|
Total
operating lease liabilities
|
|
|
|
$
|
429,000
|
|
*
As of September 30, 2019, we have no “finance leases” as defined in ASC 842.
Components
of Lease Expense
We
recognize lease expense on a straight-line basis over the term of our operating leases, as reported within “selling, general
and administrative” expense on the accompanying Condensed Consolidated Statement of Operations.
The
components of our aggregate lease expense is summarized below:
|
|
Three
Months Ended
September 30, 2019
|
|
|
Nine
Months Ended
September 30, 2019
|
|
Operating lease cost
|
|
|
41,000
|
|
|
|
125,000
|
|
Variable lease cost
|
|
|
—
|
|
|
|
—
|
|
Short-term lease
cost
|
|
|
33,000
|
|
|
|
102,000
|
|
Total lease cost
|
|
|
74,000
|
|
|
|
227,000
|
|
Weighted
Average Remaining Lease Term and Applied Discount Rate
|
|
Weighted
Average Remaining Lease Term
|
|
|
Weighted
Average Discount Rate
|
|
Operating leases as of September 30, 2019
|
|
|
4.00
years
|
|
|
|
18
|
%
|
Future
Contractual Lease Payments as of September 30, 2019
The
below table summarizes our (i) minimum lease payments over the next five years, (ii) lease arrangement implied interest, and (iii)
present value of future lease payments:
Operating
Leases - future payments
|
|
|
|
2019 (remaining)
|
|
$
|
41,000
|
|
2020
|
|
|
163,000
|
|
2021
|
|
|
163,000
|
|
2022
|
|
|
163,000
|
|
2023
|
|
|
136,000
|
|
Total future lease payments, undiscounted
|
|
|
666,000
|
|
Less: Implied
interest
|
|
|
(237,000
|
)
|
Present value
of operating lease payments
|
|
|
429,000
|
|
SRAX,
INC.
(Formerly
Known As Social Reality, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
Effective
January 1, 2018, we adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230), which addresses eight specific cash flow
issues with the objective of reducing the existing diversity in practice in how cash receipts and cash payments are presented
in the statement of cash flows. The adoption of ASU No. 2016-15 did not have a significant impact on our consolidated financial
statements.
In
February 2018, the FASB issued ASU 2018-02: Income Statement – Reporting Comprehensive Income (Topic 220). Under
current accounting guidance, the income tax effects for changes in income tax rates and certain other transactions are recognized
in income from continuing operations resulting in income tax effects recognized in accumulated other comprehensive income that
do not reflect the current tax rate of the entity (“stranded tax effects”). The new guidance allows us the option
to reclassify these stranded tax effects to accumulated deficit that relate to the change in the federal tax rate resulting from
the passage of the Tax Cuts and Jobs Act. This update is effective for fiscal years beginning after December 15, 2018, including
interim periods therein, and early adoption is permitted. We do not expect the adoption of this standard will have a significant
impact on our consolidated financial statements.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for
Fair Value Measurement, which amends the disclosure requirements in ASC 820 by adding, changing, or removing certain disclosures.
The ASU applies to all entities that are required under this guidance to provide disclosures about recurring or nonrecurring fair
value measurements. These amendments are effective for all entities for fiscal years beginning after December 15, 2019 including
interim periods within those fiscal years. We do not expect ASU 2018-13 will have a material impact on our consolidated financial
statements.
Accounting
Guidance Issued but Not Adopted at September 30, 2019
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes
to the Disclosure Requirements for Fair Value Measurement,” which is part of the FASB disclosure framework project to improve
the effectiveness of disclosures in the notes to the financial statements. The amendments in the new guidance remove, modify,
and add certain disclosure requirements related to fair value measurements covered in Topic 820, “Fair Value Measurement.”
The new standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for either the entire
standard or only the requirements that modify or eliminate the disclosure requirements, with certain requirements applied prospectively,
and all other requirements applied retrospectively to all periods presented. We are currently evaluating the impact of adopting
this guidance.
In
June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU replaces
the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information for credit loss estimates. In addition, new disclosures
are required. The ASU is effective for fiscal years beginning after December 15, 2019. We are currently evaluating the impact
of adopting this guidance.
During
the nine months ended September 30, 2019, the Financial Accounting Standards Board (“FASB”) has not issued any Accounting
Standard Updates which are expected to have a material retrospective or future effect on the consolidated financial statements.
NOTE
2 – WARRANT DERIVATIVE LIABILITIES
The
discussion below relates to the following (collectively, the “Derivative Liabilities”):
|
1.
|
In
January 2017, the Company issued Series A in our registered direct and concurrent private placement.
|
|
2.
|
In
April and October 2017, the Company issued the Series A1 Warrants and Series A2 Warrants in connection with the private placement
of secured convertible debentures; and
|
|
3.
|
In
November 2018, the Company issued the Series B1 Warrants upon redemption of the outstanding convertible debentures issued
in April and October 2017, pursuant to the terms of such debentures.
|
SRAX,
INC.
(Formerly
Known As Social Reality, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
The
Derivative Warrant Instruments have been accounted for utilizing ASC 815 “Derivatives and Hedging”. The Company
has incurred a liability for the estimated fair value of Derivative Warrant Instruments. The estimated fair value of the Derivative
Warrant Instruments has been calculated using the Black-Scholes fair value option-pricing model with key input variables provided
by management, as of the date of issuance, with the valuation offset against additional paid in capital, and at each reporting
date, with changes in fair value recorded as gains or losses on revaluation in other income (expense).
The
Company identified embedded features in the Derivative Warrant Instruments which caused the warrants to be classified as a liability.
These embedded features included the right for the holders to request for the Company to cash settle the Warrant Instruments from
the Holder by paying to the Holder an amount of cash equal to the Black-Scholes value of the remaining unexercised portion of
the Derivative Warrant Instruments on the date of the consummation of a fundamental transaction. The accounting treatment of derivative
financial instruments requires that the Company treat the whole instrument as liability and record the fair value of the instrument
as a derivative as of the inception date of the instrument and to adjust the fair value of the instrument as of each subsequent
balance sheet dates.
The
Warrant derivative liabilities are comprised of the following:
|
|
Debenture
Warrant Liability
|
|
|
Leapfrog
Warrant Liability
|
|
|
Derivative
Liability
|
|
Balance as of December 31, 2018
|
|
$
|
4,323,000
|
|
|
$
|
623,000
|
|
|
$
|
496,000
|
|
Adjustments to warrants outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Adjustment to
fair value
|
|
|
3,892,000
|
|
|
|
539,000
|
|
|
|
407,000
|
|
Balance as of June 30, 2019
|
|
|
8,215,000
|
|
|
|
1,162,000
|
|
|
|
903,000
|
|
Adjustments to warrants outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjustments to
fair value
|
|
|
(4,948,000
|
)
|
|
|
(717,000
|
)
|
|
|
(562,000
|
)
|
Balance as of September 30, 2019
|
|
$
|
3,267,000
|
|
|
$
|
445,000
|
|
|
$
|
341,000
|
|
|
|
Debenture
Warrant Liability
|
|
|
Leapfrog
Warrant Liability
|
|
|
Derivative
Liability
|
|
Balance as of December 31, 2017
|
|
$
|
7,257,000
|
|
|
$
|
1,873,000
|
|
|
$
|
2,026,000
|
|
Adjustments to warrants outstanding
|
|
|
—
|
|
|
|
—
|
|
|
|
(329,000
|
)
|
Adjustment to
fair value
|
|
|
(1,548,000
|
)
|
|
|
(360,000
|
)
|
|
|
(474,000
|
)
|
Balance as of June 30, 2018
|
|
|
5,709,000
|
|
|
|
1,513,000
|
|
|
|
1,223,000
|
|
Adjustments to warrants outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjustments to
fair value
|
|
|
(1,240,000
|
)
|
|
|
(335,000
|
)
|
|
|
(264,000
|
)
|
Balance as of September 30, 2018
|
|
$
|
4,469,000
|
|
|
$
|
1,178,000
|
|
|
$
|
959,000
|
|
NOTE
3 – STOCKHOLDERS’ EQUITY
Common
Stock
In
August 2019, the Company entered into a settlement agreement with a lender. Based on the settlement agreement, the lender and
the Company agreed to cancel the 200,000 shares of common stock issued as collateral. As of the settlement date, the Company owed
the lender $150,000 for the original issue discount. The Company issued 58,101 shares of the Company’s common stock as payment
for the original issued discount issue. The fair value of the shares on the date of issuance was $219,000.
SRAX,
INC.
(Formerly
Known As Social Reality, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
On
August 12, 2019, the Company sold 1,525,000 shares of the Company’s Class A common stock, par value $0.001 per share (the
“Common Stock”) and Series A warrants (“Series A Warrants”) to purchase 965,500 shares of Common Stock
at a purchase price per share of $3.60 (the “Registered Direct Offering”) resulting in gross proceeds to the Company
of $5,490,000 and net proceeds of $4,968,000 after cash payments to the placement agents and legal fees.
Concurrently
with the offering the Company also issued the Investors in a private placement (“Private Placement”) (i) Series B
warrants (“Series B Warrants”) to purchase an aggregate of 1,525,000 shares of Common Stock and (ii) Series C warrants
(“Series C Warrants”) to purchase an aggregate of 965,500 shares of Common Stock (collectively, the Series B Warrants
and Series C Warrants are referred to herein as the “Private Warrants”).
The
Series A Warrants are immediately exercisable upon issuance, have a term of ninety (90) days from the date of issuance, and have
an exercise price of $3.60 per share. The Series B Warrants and Series C Warrants are not exercisable for a period of six (6)
months following the issuance date, have an exercise price of $4.00 per share, and expire on October 1, 2022. Additionally, the
Series C Warrants vest ratably from time to time in proportion to such Investor’s exercise of the Series A Warrants.
The
1,525,000 shares of Common Stock and Series A Warrants to purchase 965,500 shares of Common Stock sold in the Registered Direct
Offering were offered and sold by the Company pursuant to an effective “shelf” registration statement on Form S-3
(File No. 333-214644), which was declared effective on November 28, 2016.
The
Private Warrants and the Placement Agent Warrants (as defined below) were sold and issued without registration under the Securities
Act of 1933, as amended (the “Securities Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Securities
Act as transactions not involving a public offering and Rule 506 promulgated under the Securities Act as sales to accredited investors,
and in reliance on similar exemptions under applicable state laws.
In
connection with the Registered Direct Offering and the Private Placement, the Company entered into engagement agreements (the
“PA Agreements”) with The Special Equities Group, LLC, a division of Bradley Woods & Co. Ltd., and WestPark Capital,
Inc. (the “Placement Agents”) on August 11, 2019 and August 9, 2019, respectively. Pursuant to the PA Agreements,
the Placement Agents received (i) aggregate cash fees of 7.0% for one Placement Agent or 8.0% for the other Placement Agent, of
their respective portions of the gross proceeds received by the Company from the sale of the securities, (ii) approximately $60,000
for certain expenses, and (iii) warrants to purchase up to 59,668 shares of Common Stock (the “Placement Agent Warrants”),
representing 6.0% of the Common Stock and Series B Warrants sold by one of the Placement Agents in the Registered Direct Offering.
The Placement Agent Warrants have substantially the same terms as the Series B Warrants, except that the exercise price of the
Placement Agent Warrants is $4.50 per share and has a four (4) year term beginning one (1) year after issuance. Additionally,
upon the exercise of up to 1,027,778 Series A Warrants, 650,701 Series B Warrants, and 1,027,778 Series C Warrants sold Registered
Direct Offering and Private Placement, we have agreed to pay one of the Placement Agents a cash fee of 8% of proceeds from the
exercise of such warrants exercised within 120 days following the closing of this offering or a cash fee of 5% of the proceeds
from the exercise of such warrants after such 120 day period following the closing of this offering. One of the Placement Agents
will be entitled to the foregoing cash commission and fee in the previous sentence with respect to certain investors if such investors
provide capital to us in any future private or public offering, or other financing or capital-raising transaction during the six
(6) months following the expiration or termination of our engagement of such Placement Agent.
During
the quarter ended June 30, 2019, the Company sold 1,687,825 shares of the Company’s common stock for gross proceeds of $6,751,300,
or $4.00 per share. The net proceeds after the placement agent fees, of approximately $523,000, was approximately $6,229,000.
In
conjunction with this offering, the Company entered into a placement agent agreement, which provided for the placement agent to
receive a cash fee equal to 7.0% of the gross proceeds received by the Company from the sale of the shares of common stock, warrants
to purchase up to 101,270 shares of Common Stock at an exercise price of $5.00 per share and reimbursement of up to $50,000 for
offering related expense.
In July 2019, we issued a 75,000 share
of the Company’s common stock as compensation. On the date of grant the fair value of the shares was $374,000. The fair
value is be expense over a one-year service period. For the three and nine months ended September 30, 2019, the compensation expense
was $94,000 and $138,000 respectively.
SRAX,
INC.
(Formerly
Known As Social Reality, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
Stock
Options
During
the three-month period ended September 30, 2019, the Company issue no stock options.
During
the three-month period ended June 30, 2019 the Company issued 11,252 options to purchase the Company’s common stock at a
price of $5.49 to our non-executive directors. Each of our four non-executive directors received 2,813 options that vest 1/4th
quarterly over the next year with an expiration date of April 15, 2026. The options were valued using the Black Scholes
option pricing model at a total of $60,000 based on the seven-year term, implied volatility of 102% and a risk free equivalent
yield of 2.46%, stock price of $5.49.
On
March 27, 2019, an aggregate of 685,000 common stock purchase options, having an exercise price of $3.42 per share, were granted
to our employees and members of the management team. The option has a grant date value of $1,513,137, calculated using the Black-Scholes
option pricing model. This expense associated with this option award will be recognized in operating expenses ratably over the
vesting period.
The
expected option life assumption is estimated based on the simplified method. Accordingly, the Company has utilized the average
of the contractual term of the options and the weighted average vesting period for all options to calculate the expected option
term. The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected term of our employee
stock options. In April 2019, the Company amended its expected volatility assumption from using exclusively a historical volatility.
The Company calculates its expected volatility assumption based on a its historical and implied volatilities over the expected
life of the stock-based award. We do not anticipate paying dividends on the common stock in the foreseeable future.
We
recognize stock-based compensation expense over the vesting period using the straight-line single option method. Stock-based compensation
expense is recognized only for those awards that vest. We account for the forfeitures of unvested awards as they occur.
Total
stock-based compensation expense for the three-month period ended September 30, 2019 and 2018 was $329,000 and $605,000,
respectively. Total stock-based compensation expense for the nine-month period ended September 30, 2019 and 2018 was $775,000
and $1,757,000, respectively. The expense is included in its entirety within General, selling and administrative expenses.
Transactions
involving our stock options for the nine months ended September 30, 2019 include the follows:
|
|
Number
of Shares
|
|
|
Weighted
Average Strike Price/Share
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value(1)
|
|
Outstanding — December 31, 2018
|
|
|
547,662
|
|
|
$
|
5.27
|
|
|
|
2.7
|
|
|
$
|
—
|
|
Granted (weighted-average fair value of $2.21 per share)
|
|
|
696,252
|
|
|
|
3.45
|
|
|
|
2.5
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(45,062
|
)
|
|
|
7.34
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding — September 30, 2019
|
|
|
1,198,852
|
|
|
|
4.14
|
|
|
|
2.5
|
|
|
|
—
|
|
Vested and exercisable —
September 30, 2019
|
|
|
(270,936
|
)
|
|
|
5.85
|
|
|
|
2.5
|
|
|
|
—
|
|
Unvested and non-exercisable -
September 30, 2019
|
|
|
927,916
|
|
|
$
|
3.68
|
|
|
|
2.4
|
|
|
$
|
—
|
|
(1)
|
Aggregate
intrinsic value represents the difference between the exercise price of the option and the closing market price of our common
stock on September 30, 2019, which was $2.30 per share
|
SRAX,
INC.
(Formerly
Known As Social Reality, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
Warrants
On
May 13, 2019 the Company entered into a consulting agreement with a contractor for services related to BIGtoken. The agreement
provides for 300,000 warrants with vesting conditions based on BIGtoken user growth in Asia. The warrants were valued using the
Black Scholes option pricing model at a total of $1,138,332 based on the five-year term, implied volatility of 101%, a risk free
equivalent yield of 1.8% and stock price of $4.99.
We
typically issue warrants to purchase shares of our common stock to investors as part of a financing transaction or in connection
with services rendered by placement agents and consultants. Our outstanding warrants expire on varying dates through November
2021. A summary of warrant activity is as follows:
Transactions
involving our stock warrants for the nine months ended September 30, 2019 include the following:
|
|
Number
of Shares
|
|
|
Weighted
Average Strike Price/Share
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value(1)
|
|
Outstanding — December 31, 2018
|
|
|
4,325,423
|
|
|
$
|
3.77
|
|
|
|
2.9
|
|
|
$
|
3,849,626
|
|
Granted
|
|
|
2,919,941
|
|
|
|
3.98
|
|
|
|
1.9
|
|
|
|
—
|
|
Exercised
|
|
|
(342,000
|
)
|
|
|
3.50
|
|
|
|
0.7
|
|
|
|
1,196,147
|
|
Forfeited
|
|
|
(70,000
|
)
|
|
|
7.50
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding — September 30, 2019
|
|
|
6,833,364
|
|
|
|
3.84
|
|
|
|
2.3
|
|
|
|
600,616
|
|
Vested and exercisable —
September 30, 2019
|
|
|
6,533,364
|
|
|
|
3.80
|
|
|
|
2.2
|
|
|
|
600,616
|
|
Unvested and non-exercisable -
September 30, 2019
|
|
|
300,000
|
|
|
$
|
4.75
|
|
|
|
4.6
|
|
|
$
|
—
|
|
The
fair value of each warrant grant was estimated on the date of grant using Black-Scholes with the following weighted average assumptions:
Expected life (years)
|
|
|
1
- 7
|
|
Risk-free interest rate
|
|
|
1.31%
- 2.3
|
%
|
Volatility
|
|
|
100%
- 167
|
%
|
Dividend yield
|
|
|
0
|
%
|
(1)
|
Aggregate
intrinsic value represents the difference between the exercise price of the warrant and the closing market price of our common
stock on September 30, 2019, which was $2.30 per share. Total intrinsic value of warrants exercised during the three and nine
months ended September 30, 2019 was $49,999 and $1,196,147 respectively.
|
Net
loss per share
Basic
loss per share is computed by dividing the net loss by the weighted average number of common shares issued and outstanding during
the period reported. Diluted loss per share gives effect to all potentially dilutive common shares outstanding at the end of the
reporting period, including stock options and share purchase warrants, using the treasury stock method. As the Company incurred
a net loss during the three and nine months ended September 30, 2019, the computation of diluted loss per share does not assume
conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on loss per share. The following
outstanding instruments could have a dilutive effect in the future:
|
|
September
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Warrants
|
|
|
6,833,364
|
|
|
|
2,196,700
|
|
Stock options
|
|
|
1,198,852
|
|
|
|
370,600
|
|
Total
|
|
|
8,032,216
|
|
|
|
2,567,300
|
|
SRAX,
INC.
(Formerly
Known As Social Reality, Inc.)
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)
NOTE
4 – COMMITMENTS AND CONTINGENCIES
BIGtoken
Point liability
During
the three and nine months ended September 30, 2019 the Company instituted a policy that allows BIGtoken user to redeem outstanding
BIGtoken points for cash if their account and point balances meet certain criteria. As of September 30, 2019, the Company has
estimated the future liability for point redemptions to be $772,000. The Company considered the total number of points outstanding,
the conversion rate in which points are redeemable for cash. Due to the recency of the BIGtoken platform and the ability for users
to redeem points for cash, the Company does not have sufficient history to estimate account attrition and the associate breakage
rates for outstanding points. Therefore, the Company utilized a breakage factor of zero percent as of September 30, 2019 in determining
the estimated liability.
NOTE
5 – SUBSEQUENT EVENTS
The Company has evaluated all events that
occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be
reported. The Management of the Company determined that there were no reportable subsequent events to disclose.