See accompanying footnotes to these unaudited condensed consolidated financial statements.
See accompanying footnotes to these unaudited condensed consolidated financial statements.
See accompanying footnotes to these unaudited condensed consolidated financial statements.
See accompanying footnotes to these unaudited condensed consolidated financial statements.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Social Reality, Inc. ("Social Reality" or SRAX) is a Delaware corporation formed on August 2, 2011. These unaudited condensed consolidated financial statements include the consolidated results of Social Reality and its wholly owned subsidiary, Big Token, Inc. (BigToken) (collectively referred to as we, us, our or the Company). We are headquartered in Los Angeles, California.
We are a digital marketing and data management company that delivers our customers the ability to reach and engage with their target audiences
We derive our revenue from:
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sales of data-centric digital advertising campaigns to advertising agencies and brands;
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sales of media inventory owned by our publishing partners through real-time bidding, or RTB, exchanges;
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sales and licensing of our
SRAX Social
platform and related media; and,
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·
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creation of custom platforms for buying media on
SRAX
for large brands.
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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 Companys annual financial statements have been condensed or omitted. The December 31, 2017 condensed balance sheet data was derived from our 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 three month and nine month period ended September 30, 2018 and 2017. These results are not necessarily indicative of the results to be expected for the year ending December 31, 2018 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, 2017, included in the Company's annual report on Form 10-K filed with the SEC on April 2, 2018, as amended on Form 10-K/A (Amendment No. 1) as filed with the SEC on April 27, 2018.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Uses and Sources of Liquidity
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 $3,659,202 for the three months ended September 30, 2017 to $4,869,232 for the three months ended September 30, 2018. Our general, selling and administrative expenses increased from $11,395,454 for the nine months ended September 30, 2017 to
$14,392,114
for the nine months ended September 30, 2018. We generated net income of
$21,271,464
for the three months ended September 30, 2018 compared to a net loss of
$2,683,978
for the three months ended September 30, 2017. We generated net income of
$17,261,121
for the nine months ended September 30, 2018 compared to a net loss of
$6,180,590
for the nine months ended September 30, 2017. At September 30, 2018, we had an accumulated deficit of
$10,260,822.
As of September 30, 2018, we had $14,423,573 in cash and cash equivalents and a
working capital
surplus
of
$7,177,199
as compared to $1,017,299 in cash and cash equivalents and a
working capital
deficit
of
$10,031,979
at December 31, 2017. We continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported losses and have historically funded our operations and investing activities with cash provided by financing activities. In late 2017, we announced several new initiatives intended to provide additional growth opportunities which launched in the third quarter of 2018. On August 6, 2018, we announced the completion of the sale of our SRAXmd product group in a transaction valued at up to $52.5 million.
5
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Although we believe that the foregoing actions will assist with our liquidity needs during the 12 months following the issuance of the financial statements, there is no assurance that the outcome of our actions will result in liquidity. If we continue to experience operating losses, we may need to raise additional capital through the sale of our equity and/or debt securities. Although historically we have funded our operations through the sale of our debt and equity securities, there is no assurance that we will be able to raise additional capital or that if such capital is raised, it will be on favorable terms. A failure to generate additional liquidity could negatively impact our business, including our access to critical business services. Additionally, if we require additional capital and are not able to secure it, we may need to greatly curtail our current and planned business initiatives.
Principles of Consolidation
The unaudited condensed 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.
Use of Estimates
The unaudited condensed consolidated financial statements have been prepared in conformity with GAAP and requires management of the Company to make estimates and assumptions in the preparation of these unaudited condensed 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 expense during the reporting periods. 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, 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 has adopted the new revenue recognition guidelines in accordance with ASC 606,
Revenue from Contracts with Customers
(ASC 606), commencing from the period under this report. The Company analyzes its contracts to assess that they are within the scope and in accordance with ASC 606. In determining the appropriate amount of revenue to be recognized as the Company fulfills its obligations under each of its agreements, whether for goods and services or licensing, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.
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.
6
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Cost of Revenue
Cost of revenue consists of payments to media providers and website publishers that are directly related to either a revenue-generating event or project and application design costs. The Company becomes obligated to make payments related to media providers and website publishers in the period the advertising impressions, click-through, actions or lead-based information are delivered or occur. Such expenses are classified as cost of revenue in the corresponding period in which the revenue is recognized in the accompanying unaudited condensed 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 does not require collateral. Allowance for doubtful accounts was $51,103 and $59,703 at September 30, 2018 and December 31, 2017, respectively.
Concentration of Credit Risk, Significant Customers and Supplier Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions within the United States. The Company has not experienced any loss on these accounts. The balances are maintained in demand accounts to minimize risk.
At September 30, 2018, two customers accounted for more than 10% of the accounts receivable balance for a total of 43.7%.
At December 31, 2017, four customers accounted for more than 10% of the accounts receivable balance for a total of 59.5%.
Fair Value of Financial Instruments
The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Companys 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:
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Level 1
—
Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
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●
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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
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●
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Level 3
—
Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
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The Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At September 30, 2018 and December 31, 2017, 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.
7
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Goodwill and 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 31
st
.
The Company had historically performed its annual goodwill and impairment assessment on September 30
th
of each year. Due to the seasonal and cyclical nature of advertising sales in general, timing of the Companys annual budgeting process, and the short-term nature of the Companys advertising sales contracts, it was determined that it would be more effective and efficient to conduct the annual impairment analysis instead at December 31
st
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 changed the date for its impairment testing during the fourth quarter 2016. The Company does not believe this change had any material impact on its unaudited condensed 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).
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.
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 and no impairment of goodwill was recorded for the twelve month period ended December 31, 2017. No interim impairments have been recorded regarding its goodwill during the three months ended September 30, 2018 or 2017, respectively.
8
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
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 three months ended September 30, 2018 or 2017, respectively.
Earnings (Loss) Per Share
We use Accounting Standards Codification (ASC) 260, "
Earnings Per Share
" for calculating the basic and diluted earnings (loss) per share. We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share are the same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share.
There were 4,948,354 common share equivalents at September 30, 2018 and 6,254,705 common share equivalents at September 30, 2017. For the three and nine months ended September 30, 2017, these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.
Stock-Based Compensation
We account for our stock-based compensation under ASC 718 "
Compensation Stock Compensation
" using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.
We use the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
Common stock awards
The Company grants common stock awards to non-employees in exchange for services provided. The Company measures the fair value of these awards using the fair value of the services provided or the fair value of the awards granted, whichever is more reliably measurable. The fair value measurement date of these awards is generally the date the performance of services is complete. The fair value of the awards is recognized on a straight-line basis as services are rendered. The share-based payments related to common stock awards for the settlement of services provided by non-employees is recorded on the consolidated statement of comprehensive loss in the same manner and charged to the same account as if such settlements had been made in cash.
9
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Warrants
In connection with certain financing, consulting and collaboration arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date. Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants are recorded at fair value as expense over the requisite service period or at the date of issuance, if there is not a service period. Warrants granted in connection with ongoing arrangements are more fully described in Note 11,
Stockholders Equity
.
Business Segments
The Company uses the "management approach" to identify its reportable segments. The management approach designates the internal organization used by management for making operating decisions and assessing performance as the basis for identifying the Company's reportable segments. Using the management approach, the Company determined that it has one operating segment due to business similarities and similar economic characteristics.
NOTE 3 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Adoption of New Accounting Standards
For a discussion of recent accounting pronouncements, please refer to Recently Issued Accounting Standards as contained in Note 1 in the December 31, 2017 audited consolidated financial statements included in the Companys annual report on Form 10-K filed with the SEC on April 2, 2018.
In May 2014, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2014-09 Revenue from Contracts with Customers to supersede previous revenue recognition guidance under current U.S. GAAP. The guidance presents a single five-step model for comprehensive revenue recognition that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Two options are available for implementation of the standard which is either the retrospective approach or cumulative effect adjustment approach. The guidance becomes effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company adopted ASU 2014-09 using the modified retrospective transition method in the first quarter of 2018 and such adoption did not have a material impact on the condensed consolidated financial statements.
The Company has established it only earns revenue from contracts with customers for advertising services. Therefore, the disclosure requirement to disaggregate revenue information is not material to the Companys current business model
. These revenue contracts are generally short term in nature, and no more than one year maximum. The transaction price per contract is derived on pre-negotiated cost per thousand (CPM) impression basis.
The Company recognizes its revenue from these contracts when it delivers the quantity of advertising impressions for the current period as stipulated in the customer contract. Once advertising impressions have been delivered, performance under these contracts is satisfied, and there is no ongoing obligation for the Company with regard to returns or warranty.
10
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customer (Topic 606): Principal versus Agent Considerations - Reporting Revenue Gross versus Net
, (ASU No. 2016-08) that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU No. 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for ASU No. 2016-08 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company has performed an evaluation of the impact of the adoption of this standard on its consolidated financial statements, and given its revenue recognition practices already in place, this did not have a material impact on the Companys future presentation of consolidated financial statements. The Company will continue to evaluate new revenue streams as they develop from future new product launches.
In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). The effective date for ASU 2017-13 is for fiscal years beginning after December 31, 2017. The adoption of this ASU did not have a material impact to our consolidated financial statements.
Accounting Standards Issued But Not Yet Effective
In July 2017, the Financial Accounting Standards Board (FASB) issued ASU No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Part 1 Accounting for Certain Financial Instruments with Down Round Features and Part 2 Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with Scope Exception
(ASU No. 2017-11). Part 1 of ASU No. 2017-11 addresses the complexity of accounting for certain financial instruments with down round features. Down round features are provisions in certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of ASU No. 2017-11 addresses the difficulty of navigating
Topic 480, Distinguishing Liabilities from Equity,
because of the existence of extensive pending content in the
FASB Accounting Standards Codification
®. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We early adopted the proposed guidance under ASU 2017-11 for the year end December 31, 2017, and recognized warrants issued in the fourth quarter of 2017 with a down round feature as equity. Adjustments to the Companys previously issued financial statements were required for the retrospective application of this standard.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(ASU No. 2017-04). ASU No. 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. A public business entity that is a SEC filer should adopt the amendments of ASU No. 2017-04 for its annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect any impact from the adoption of this standard on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory
(ASU No. 2016-16). ASU No. 2016-16 will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The guidance will be effective for the first interim period of our 2019 fiscal year, with earlier adoption permitted.
11
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
In connection with its financial instruments project, the FASB issued ASU No. 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
in September 2016 and ASU No. 2016-01,
Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
in January 2016.
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ASU No. 2016-13 introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a forward-looking expected loss model that will replace the current incurred loss model and generally will result in earlier recognition of allowances for losses. The guidance will be effective for the first interim period of our 2021 fiscal year, with early adoption in fiscal year 2020 permitted.
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·
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ASU No. 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the new guidance requires the fair value measurement of investments in certain equity securities. For investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. All changes in measurement will be recognized in net income. The guidance will be effective for the first interim period of our 2019 fiscal year. Early adoption is not permitted, except for certain provisions relating to financial liabilities.
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In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying unaudited condensed consolidated financial statements.
NOTE 4 ACQUISITIONS AND DIVESTITURES
Sale of SRAXmd:
On August 6, 2018, we completed the sale of substantially all of the assets related to our SRAXmd product line for aggregate consideration of up to $52,500,000. The purchase price consists of (i) $33,500,000 in cash, (ii) $10,000,000 worth of securities issued by the purchaser and (iii) an earn-out of up to $9,000,000 upon the SRAXmd product line achieving certain gross profit thresholds (the Earn-Out). A total of $762,500 of the purchase price was placed into escrow accounts subject to future release.
Given the Company will retain an ongoing equity interest in the purchaser of SRAXmd, the Company evaluated the potential existence of variable interest entity accounting treatment under ASC 810. Given the Company had no imput into the design of the purchasing entity, is not a primary beneficiary of the purchaser entity and has no ongoing role in management or governance other than that of a passive, minority investor, the Company determined that the presence of a variable interest entity was not present.
Assets transferred to the purchaser in the transaction included $3,536,503 of accounts receivable and $216,479 of prepaid expense items. The purchaser also assumed $191,164 of accounts payable obligations and $333,014 of additional accrued expense items. The Company received a credit to the purchase price of $228,803 for over-delivery of working capital beyond a contractual $3 million working capital target. A final working capital calculation will be determined by the parties no later than 120 days following closing of the transaction.
The Company paid $1,709,500 of advisory fees and $351,089 of legal fees at closing. An additional $164,028 was also paid by the Company at closing for insurance premiums and escrow related fees.
12
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
The Company recorded a gain on sale of assets totaling $23,978,389. Less escrow holdbacks and other reimbursements, the Company received net proceeds from the transaction totaling $22,980,824.
Components of operating results for the SRAXmd product group have not been classified as discontinued operations. Pursuant to guidance in ASC 205-20, Discontinued Operations, we noted that the SRAXmd product line was not a reportable segment or a separate operating segment and nor was it deemed to be a strategic shift. Under this guidance, an entity presents a disposal as a discontinued operation if it represents a strategic shift that has (or will have) a major effect on an entitys operations and financial results. ASC Topic 205-20-45 does not clearly define on a quantitative basis as to how an entity would establish whether a component, business activity is individually significant. Additionally, the sale of the SRAXmd product line did not qualify under ASC Topic 360-10-35 to 45 for determination of the gain or loss. The sale of the SRAXmd product group does not constitute a shift in our corporate strategy or purpose as we continue to operate a diversified product group of digital advertising tools, as we have done since inception in 2010. The core technology and other key elements of the SRAX advertising platform will remain owned by us, with certain license agreements for use of our software granted to the purchaser as part of the transaction. SRAXmd was a product developed from our core technology. In addition to the assets, 12 of our existing employees also transferred.
SRAXmd, like each of the remaining SRAX product groups/offerings, has not historically operated as a discrete business entity or division within our company. As such, it along with the other product groups rely upon shared employees and a shared technology platform to operate. Furthermore, certain advertisers may also purchase advertising across multiple product lines, making individual product financial statements more difficult to segregate. Due to its in-house organic development, SRAXmd also has no separately capitalized assets that may be presented as held for sale on our balance sheet.
Based on managements best estimates, for the three and nine month periods ended September 30, 2018 and 2017, the unaudited results for revenue and cost of sales attributable to the SRAXmd product group are estimated below:
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Three Months ended
September 30,
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Nine Months ended
September 30,
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2018
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2017
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2018
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2017
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Revenue
|
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$
|
1,049,283
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$
|
2,631,068
|
|
|
$
|
6,306,613
|
|
|
$
|
6,474,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
$
|
146,401
|
|
|
$
|
275,592
|
|
|
$
|
1,101,080
|
|
|
$
|
916,005
|
|
Gross Profit
|
|
$
|
902,882
|
|
|
$
|
2,355,476
|
|
|
$
|
5,205,533
|
|
|
$
|
5,558,131
|
|
Gross Margin
|
|
|
86.0%
|
|
|
|
89.5%
|
|
|
|
82.5%
|
|
|
|
85.9%
|
|
General, Sales & Administrative expense
|
|
$
|
611,608
|
|
|
$
|
918,429
|
|
|
$
|
2,887,142
|
|
|
$
|
2,028,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
$
|
291,274
|
|
|
$
|
1,437,047
|
|
|
$
|
2,318,391
|
|
|
$
|
3,529,723
|
|
There is no specific depreciation and amortization, or interest expense specifically attributable to the SRAXmd product line.
NOTE 5 PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at September 30, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Office equipment
|
|
$
|
281,218
|
|
|
$
|
251,415
|
|
Accumulated depreciation
|
|
|
(127,599
|
)
|
|
|
(96,869
|
)
|
Property and equipment, net
|
|
$
|
153,619
|
|
|
$
|
154,546
|
|
Depreciation expense for the three months ended September 30, 2018 and 2017 was $10,695 and $8,058, respectively. Depreciation expense for the nine months ended September 30, 2018 and 2017 was $30,730 and $14,240, respectively.
13
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
NOTE 6 INTANGIBLE ASSETS, NET
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Non-compete agreement
|
|
$
|
1,250,000
|
|
|
$
|
1,250,000
|
|
Intellectual property
|
|
|
756,000
|
|
|
|
756,000
|
|
Acquired software Leapfrog
|
|
|
617,069
|
|
|
|
617,069
|
|
Internally developed software
|
|
|
1,456,011
|
|
|
|
754,140
|
|
|
|
|
4,079,080
|
|
|
|
3,377,209
|
|
Accumulated amortization
|
|
|
(2,246,757
|
)
|
|
|
(1,734,449
|
)
|
Carrying value
|
|
$
|
1,832,323
|
|
|
$
|
1,642,760
|
|
During the three and nine months ended September 30, 2018, the Company capitalized $250,703 and $701,871, respectively, of costs associated with the development of internal-use software, including directly related payroll costs.
On August 17, 2017, the Company acquired software from Leapfrog Media Trading in exchange for 200,000 shares of Class A common stock and 350,000 warrants with a term of five years and an exercise price of $3.00. This software is currently being integrated into our platform and we estimate launching by December 31, 2018. No other assets, customers, employees, intangibles or business operations were acquired in this transaction.
In connection with a separation and release agreement with Mr. Steel, the Company agreed to reduce the remaining period of the non-compete agreement with Mr. Steel, which was entered into in connection with the acquisition of Steel Media, to a period of eighteen months from the date of his separation from the Company. Accordingly, the Company wrote off $468,750 in value of the non-compete agreement during 2017.
Amortization expense was $37,800 for intellectual property, $17,362 for the non-compete agreement and $106,982 for the internally developed software for the three months ended September 30, 2018. Amortization expense was $37,800 for intellectual property, $52,083 for the non-compete agreement, and $42,610 for the internally developed software for the three months ended September 30, 2017. Amortization expense was $113,400 for intellectual property, $121,528 for the non-compete agreement, and $277,380 for the internally developed software for the nine months ended September 30, 2018. Amortization expense was $113,400 for intellectual property, $156,249 for the non-compete agreement, and $89,049 for the internally developed software for the nine months ended September 30, 2017.
The estimated future amortization expense for the remainder of 2018 and the years ended December 31 thereafter, are as follows:
|
|
|
|
|
Remainder of 2018
|
|
$
|
144,782
|
|
2019
|
|
|
752,429
|
|
2020
|
|
|
461,243
|
|
2021
|
|
|
473,869
|
|
|
|
$
|
1,832,323
|
|
14
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
NOTE 7 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Accounts payable, trade
|
|
$
|
1,988,072
|
|
|
$
|
2,858,871
|
|
Accrued expenses
|
|
|
155,702
|
|
|
|
1,800,621
|
|
Accrued compensation
|
|
|
31,769
|
|
|
|
256,164
|
|
Accrued commissions
|
|
|
299,686
|
|
|
|
95,159
|
|
Total
|
|
$
|
2,475,229
|
|
|
$
|
5,010,815
|
|
NOTE 8 NOTES PAYABLE
Financing Agreement with Victory Park Management, LLC as agent for the lenders
On October 30, 2014, we entered a financing agreement with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders and holders of notes and warrants issued thereunder. The Financing Notes issued under the financing agreement were scheduled to mature on October 30, 2017.
During 2017, we completely repaid the financing notes and made principal and payment in kind interest repayments in the amount of $3,996,928.
Notes payable consisted of the following at December 31, 2017:
We incurred a total of $3,164,352 of costs related to the financing agreement. These costs were amortized to interest expense over the life of the notes. During the three months ended September 30, 2018 and 2017, $138,612 and $51,042, respectively, of debt issuance costs were amortized as interest expense. During the nine months ended September 30, 2018 and 2017, $325,791 and $663,209, respectively, of debt issuance costs were amortized as interest expense. As of September 30, 2018, $700,428 of deferred debt issuance costs remain to be amortized.
During the three months ended September 30, 2018 and 2017, $0 and $0, respectively, were recorded as payment in kind interest expense. During the nine months ended September 30, 2018 and 2017, $0 and $0, respectively, were recorded as payment in kind interest expense.
Pursuant to the financing agreement, we issued to the lender a five-year warrant to purchase 580,000 shares of its Class A common stock at an exercise price of $5.00 per share Pursuant to the terms of the warrant, the warrant holder had the right, at any time after the earlier of April 30, 2016 and the maturity date of the notes, but prior to October 30, 2019, to exercise its put right, pursuant to which the warrant holder could sell to the Company, and the Company would be required to purchase from the warrant holder, all or any portion of the warrant that had not been previously exercised. The put right purchase price was equal to an amount based upon the percentage of the warrant for which the put right is being exercised, multiplied by the lesser of (a) 50% of the total consolidated revenue for the Company for the trailing 12-month period ending with our then-most recently completed fiscal quarter, and (b) $1,500,000. In May 2017, we were notified by the warrant holder that it was exercising the put right. On October 27, 2017, pursuant to the put right, we paid the warrant holder $1,567,612, consisting of: (i) the $1,500,000 warrant value, and (ii) accrued interest of $67,612.
Financing and Security Agreement with FastPay
In September 2016, we executed a Financing and Security Agreement, as amended (collectively, the "FastPay Agreement"). with FastPay Partners, LLC to create an accounts receivable-based credit facility. The FastPay Agreement was further amended in April 2018.
15
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Under the April 2018 amended terms of the FastPay Agreement, FastPay may, at its sole discretion, purchase our eligible accounts receivable. Upon any acquisition of accounts receivable, FastPay will advance us up to 80% of the gross value of the purchased accounts, up to a maximum of $4,000,000 in advances. Each account receivable purchased by FastPay will be subject to a factoring fee rate specified in the FastPay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over 30 days. We are subject to a concentration limitation on the percentage of debt from any single customer of 25% to the total amount outstanding on its purchased accounts, subject to an increase to 30% for one specific large customer.
We are obligated to repurchase accounts remaining uncollected after a specified deadline, and FastPay will generally have full recourse against us in the event of nonpayment of any purchased accounts. Our obligations under the FastPay Agreement are secured by a first position security interest in its accounts receivable, deposit accounts and all proceeds therefrom.
The FastPay Agreement contains covenants that are customary for agreements of this type and are primarily related to accounts receivable and audit rights. We are also required to provide FastPay with 30-day notice of any transaction that result, or would result in, a change of control as defined in the FastPay Agreement. The failure to satisfy covenants under the FastPay Agreement or the occurrence of other specified events that constitute an event of default, as defined, could result in the termination of the FastPay Agreement and/or the acceleration of our obligations. The FastPay Agreement contains provisions relating to events of default that are customary for agreements of this type.
The current FastPay Agreement has a term of 18 months and automatically renews thereafter for successive one-year terms, subject to earlier termination by written notice by the Company, provided all obligations are paid, including the payment of an early termination fee.
At September 30, 2018, $115,659 of accounts receivable purchased by FastPay remain outstanding and are subject to repurchase under the terms of the FastPay Agreement.
NOTE 9
WARRANT
LIABILITIES
The discussion below relates to the following (collectively, the Derivative Warrant Instruments):
1.
In January 2017, the Company issued Series A and Series B Warrants in our registered direct and concurrent private placement. In April 2017, the Company repurchased the Series B Warrants for $2,500,000 and recognized a loss on the repurchase amounting to $2,068,221. Accordingly, only the Series A Warrants are currently outstanding; and
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.
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 on each subsequent balance sheet dates.
16
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
As of January 4, 2017, the issuance date of the Series A and B Warrants, the fair value of the Series A and B Warrants of $3,038,344 was determined using the Black-Scholes Pricing Option Model based on a risk-free interest rate of 2% for both the Series A Warrants and the Series B Warrants, an expected term of 5.5 years for the Series A Warrants and 5 years for the Series B Warrants, an expected volatility of 110% for the Series A Warrants and the Series B Warrants and a 0% dividend yield for the Series A Warrants and the Series B Warrants, respectively. In April 2017, the Company repurchased the Series B Warrants for $2,500,000 and recognized a loss on the repurchase amounting to $2,068,221
The Series A Warrants fair value as of September 30, 2018 and December 31, 2017 was estimated to be $954,000 and $2,026,000 respectively, based on a risk-free interest rates of 2.88% and 2.20%, respectively, an expected term of 3.25 and 4 years, respectively, an expected volatility of 167% and 164%, respectively and a 0% dividend yield. . During the three-month period ending September 30, 2018 and 2017, we recorded a decrease in the fair value of the warrant derivative liability of $269,000 and $417,000. This was recorded as a gain on change in fair value of derivative liability. During the nine-month period ending September 30, 2018 and 2017, we recorded an decrease of $1,072,000 and an increase of $477,000 in the fair value of the warrant derivative liability, respectively. This was recorded as a (gain) loss on change in fair value of derivative liability.
As of April 21, and April 28, 2017, the issuance date of the Series A1 Warrants, the Company determined a fair value of $1,228,000 of the Series A1 Warrants. The fair value of the Series A1 Warrants was determined using the Black-Scholes Pricing Option Model based on a risk-free interest rate of 1.875%, an expected term of 5.5 years, an expected volatility of 109% and a 0% dividend yield for each respective date.
The Series A1 Warrants fair value at September 30, 2018 and December 31, 2017 was estimated to be $1,661,000 and $2,641,000 respectively based on a risk-free interest rate ranging from 2.88 to 2.73, an expected term ranging from 3.625 to 4.375 years, an expected volatility ranging from 162% to 167% and a 0% dividend yield. During the three-month period ending September 30, 2018, we recorded a decrease in the fair value of the warrant derivative liability of $470,000. This was recorded as a loss on change in fair value of derivative liability. During the nine-month period ending September 30, 2018 and 2017, we recorded a decrease of $981,000 and increase of $354,000, in the fair value of the warrant derivative liability, respectively. This was recorded as a loss on change in fair value of derivative liability.
As October 27, 2017, of the issuance date of the Series A2 Warrants, the Company determined a fair value of $2,856,000 of the Series A2 Warrants. The fair value of the Series A2 Warrants was determined using the Black-Scholes Model based on a risk-free interest rate of 2.03%, an expected term of 5.5 years, an expected volatility of 122% and a 0% dividend yield.
The fair value at September 30, 2018 and December 31, 2017 of the Series A2 Warrants was estimated to be $2,808,000 and $4,615,000, respectively based on a risk-free interest rate ranging from 2.88 to 2.46, an expected term ranging from 4.00 to 4.875 years, an expected volatility ranging from 160% to 161% and a 0% dividend yield. During the three-month period ending September 30, 2018, we recorded a decrease in the fair value of the warrant derivative liability of $771,000. This was recorded as a loss on change in fair value of derivative liability.
As August 17, 2017, of the issuance date of the Leapfrog Warrants, the Company determined a fair value of $337,069. The fair value of the Leapfrog Warrants was determined using the Black-Scholes Model based on a risk-free interest rate of 1.65%, an expected term of 5.0 years, an expected volatility of 108% and a 0% dividend yield.
The fair value at September 30, 2018 and December 31, 2017 of the Leapfrog Warrants was estimated to be $1,184,000 and $1,873,000 based on a risk-free interest rate of 2.88% and 2.20%, an expected term of 3.88 and 4.63 years, an expected volatility of 162% and 164% and a 0% dividend yield. During the three-month period ending September 30, 2018 and 2017, we recorded a decrease of $359,000 and increase of $366,000 in the fair value of the warrant derivative liability, respectively. This was recorded as a gain on change in fair value of derivative liability. During the nine-month period ending September 30, 2018 and 2017, we recorded a decrease of $689,000 and an increase of $1,536,000 in the fair value of the warrant derivative liability, respectively. This was recorded as a gain on change in fair value of derivative liability.
17
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
The
Warrant
liabilities are
comprised of the following at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debenture
Warrant
Liability
|
|
|
Leapfrog
Warrant
Liability
|
|
|
Derivative
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of beginning of period (December 31, 2017)
|
|
|
7,256,000
|
|
|
|
1,873,000
|
|
|
|
2,026,000
|
|
Adjustment to fair value
|
|
|
(2,787,000
|
)
|
|
|
(689,000
|
)
|
|
|
(1,072,000
|
)
|
Balance as of end of period (September 30, 2018)
|
|
|
4,469,000
|
|
|
|
1,184,000
|
|
|
|
954,000
|
|
NOTE 10 SECURED CONVERTIBLE DEBENTURES, NET
In April 2017, we sold an aggregate of : (i) $5,000,000 in principal of 12.5% secured convertible debentures; and (ii) five-year Series A warrants representing the right to acquire up to 833,337 shares of our Class A common stock.
The debentures, which mature three years from the date of issuance, pay interest in cash at the rate of 12.5% per annum, payable quarterly on January 1, April 1, July 1 and October 1, beginning on July 1, 2017. Our obligations under the debentures are secured by a second position security interest in our accounts receivable and a first position security interest in the balance of our assets, and we are subject to continued compliance with certain financial covenants. The debentures are convertible at the option of the holder into shares of our Class A common stock at an initial conversion price of $3.00 per share, subject to adjustment as set forth in the debentures. Subject to our compliance with certain equity conditions set forth in the debentures, upon 20 trading days' notice to the holders we have the right to redeem the debentures in cash at a 120% premium during the first year and a 110% premium during the remaining term of the debentures. Upon any optional redemption, we are obligated to issue the holder Series B warrants, the terms of which will be identical to the Series A warrants, to purchase a number of shares of our Class A common stock equal to 50% of the conversion shares issuable on an as-converted basis as if the principal amount of the debentures had been converted immediately prior to the optional redemption. As of September 30, 2018, we were in compliance with all financial covenants. Effective October 29, 2018, we provided the debenture holders with notice of our intent to optionally redeem the debentures.
The Series A warrants are initially exercisable at $3.00 per share and, if at any time after the six-month anniversary of the issuance the underlying shares of our Class A common stock are not covered by an effective resale registration statement, the Series A warrants are exercisable on a cashless basis. The conversion price of the Debentures and the exercise price of the Debenture Warrants are subject to adjustments upon certain events, including stock splits, stock dividends, subsequent equity transactions (other than specified exempt issuances), subsequent rights offerings, and fundamental transactions, subject to a floor of $1.40 per share. If we fail to timely deliver the shares of our Class A common stock upon any conversion of the Debentures or exercise of the Series A warrants we will be subject to certain buy-in provisions. The debentures and Series A warrants, also contain certain beneficial ownership limitations.
Chardan Capital Markets, LLC, Noble Capital Markets, Inc. and Aspenwood Capital (an independent branch of Colorado Financial Services Corporation), all broker-dealers and members of FINRA, acted as either our placement agent or a finder in connection with the sale of the securities. In addition, an affiliate of Noble purchased Debentures amounting to $720,000 and was issued a Series A warrant to purchase 120,000 shares of our Class A common stock in this offering. We paid aggregate cash commissions of $276,700 in connection with the sale of the securities. Additionally, we issued Chardan placement agent warrants to purchase 100,000 shares of our Class A common stock at an exercise price of $3.75 per share which are exercisable for 5.5 years commencing nine months from the issuance date. We issued Noble placement agent warrants to purchase up to 66,800 shares of our Class A common stock at an exercise price of $3.00 per share which will become exercisable nine months from the date of issuance. We also issued Colorado Financial Service Corporation and its designees warrants to purchase 7,700 shares of our Class A common stock at an exercise price of $3.75 per share which are exercisable for 5.5 years commencing nine months from the issuance date. We included the shares underlying the placement agent warrants in a resale registration statement that was declared effective by the SEC in September 2017.
18
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
The net proceeds to us from the offering, after deducting placement agent fees and estimated offering expenses, were approximately $4,566,405. We utilized $2,500,000 of the net proceeds to satisfy a put obligation under the Series B Warrants from our January 2017 offering as described in Note 11. The balance of the net proceeds was used to pay down accounts payable and satisfy other working capital requirements.
The Series A1 Warrants have been accounted for utilizing ASC 815
Derivatives and Hedging.
The Company has determined that the Series A1 Warrants have an embedded feature that cause the Series A1 Warrants to be treated as a derivative liability. The Company has estimated the fair value of the Series A1 Warrant instruments using the Black-Scholes Model with key input variables provided by management, as of the date of issuance, with the fair value treated as a discount to the Series A1 Debenture liability, and at each reporting date, with the changes in fair value of the Series A1 Warrants recorded as gains or losses on revaluation in other income (expense). See Note 9 for further information for the fair value of the Series A1 Warrants.
The Company accounted for the Series A1 Debentures in accordance with ASC 470-20 Debt with Conversion and other options. The net proceeds of $4,639,629 from the issuance of the Series A1 Debentures was allocated between the Series A1 Debentures and the fair value of the Series A1 Warrants. The values allocated to the Series A1 Debentures and Series A1Warrant was $3,408,629 and $1,288,000 respectively. After the allocation between the Series A1 Debentures and Series A1 Warrants, the effective conversion feature was greater than the fair market value of the Companys common stock on the date of issuance, so the adjusted proceeds were not allocated to the conversion feature.
On October 26, 2017, we sold an aggregate of: (i) $5,180,157 in principal amount of 12.5% secured convertible debentures; and (ii) five year Series A common stock purchase warrants representing the right to acquire up to 863,365 shares of our Class A common stock.
The debentures and warrants are substantially identical to the debentures and warrants issued in our April 2017 offer described above. Effective October 29, 2018, we provided the debenture holders with notice of our intent to optionally redeem the debentures.
Chardan Capital Markets, LLC acted as lead placement agent and Aspenwood Capital acted as co-placement agent, in connection with the sale of the securities. Pursuant to their respective engagement agreements
, we paid Chardan Capital a cash commission of $149,021 and Aspenwood a cash commission of $70,000. We also issued an aggregate of 160,000 placement agent warrants to Chardan Capital and an aggregate of 23,337 placement agent warrants to Aspenwood.
The Company identified embedded derivatives related to the Series A Warrants issued. These embedded derivatives included the right for the holders to request for the Company to purchase the Series A Warrant from the Holder by paying to the Holder an amount of cash equal to the black scholes value of the remaining unexercised portion of the Series A2 Warrant on the date of the consummation of a fundamental transaction.
The Series A Warrants have been accounted for utilizing ASC 815
Derivatives and Hedging.
The Company has determined that the Series A Warrants have an embedded feature that cause the Series A Warrants to be treated as a derivative liability. The Company has estimated the fair value of the Series A Warrant instruments using the Black-Scholes Model with key input variables provided by management, as of the date of issuance, with the fair value treated as a discount to the Series A2 Debenture liability, and at each reporting date, with the changes in fair value of the Series A Warrants recorded as gains or losses on revaluation in other income (expense). See Note 9 for further information for the fair value of the Series A Warrants.
The Company accounted for the Series A2 Debentures in accordance with ASC 470-20 Debt with Conversion and other options. The net proceeds of $4,261,684 from the issuance of the Series A2 Debentures was allocated between the Series A2 Debentures and the fair value of the Series A Warrants. The values allocated to the Series A2 Debentures and Series A Warrant was $1,405,540 and $2,856,108 respectively. After the allocation between the Series A2 Debentures and the Series A Warrants, the adjusted value assigned to Series A Debenture created the effected conversion feature to be a rate lower than the current market price for the Companys common stock on the date of the issuance. The value assigned to the conversion feature was $1,405,540.
19
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Convertible Notes
During the year ended December 31, 2017, certain debenture holders exercised their rights to convert an aggregate of $3,335,000 in principal into 1,111,667 shares of the Companys Class A common stock. During the three and nine month period ended September 30, 2018, certain debenture holders converted an aggregate of $300,000 in principal into 100,000 shares of the Companys Class A common stock.
During the three and nine month period ended September 30, 2018, the Company made no other principal payments on the debentures.
During the three and nine month period ended September 30, 2018, the Company recorded interest expense on the convertible debentures totaling $254,615 and $950,371, respectively, including the portion accrued for liquidated damages related to the Registration Rights Agreement that became effective on May 25, 2018. During the three and nine month periods ended September 30, 2018, the Company also recognized
$619,312
and
$1,537,565
of amortization of debt discount and deferred financing costs. During the three and nine month periods ended September 30, 2017, the Company recorded interest expense on the convertible debentures totaling $157,534 and $274,315, respectively. During the three and nine month periods ended September 30, 2017, the Company recognized
$162,883
and
$749,792
of amortization of debt discount and deferred financing costs.
Future minimum principal payments under senior secured convertible notes as of September 30, 2018, were as follows:
|
|
|
|
|
|
|
Convertible
|
|
Year Ending December 31,
|
|
Notes
|
|
2018
|
|
$
|
|
|
2019
|
|
|
|
|
2020
|
|
|
6,545,158
|
|
Total minimum principal payments
|
|
|
6,545,158
|
|
Less: debt discount
|
|
|
(3,082,572
|
)
|
Less: deferred debt issuance costs
|
|
|
(700,428
|
)
|
Convertible notes, net
|
|
$
|
2,762,158
|
|
NOTE 11 STOCKHOLDERS' EQUITY
Common Stock
On January 4, 2017, we sold an aggregate of: (i) 761,905 shares of Class A common stock; and (ii) five-year Series B Warrants representing the right to acquire up an additional 380,953 shares of our Class A common stock at an exercise price of $7.00 per share. The shares of our Class A common stock and the Series B Warrants were sold in a registered direct offering and we received gross proceeds of $3,980,001. Simultaneously we conducted a private placement with the same investors for no additional consideration of Series A Warrants representing the right to acquire up to an additional 380,953 shares of our Class A common stock at an exercise price of $6.70 per share. The Series A Warrants are exercisable for five years commencing 6 months from the date of closing. The exercise price of the Series A Warrants is subject to full ratchet adjustment in certain circumstances, subject to a floor price of $1.20 per share. The adjustment provisions under the terms of the Series A Warrants will be extinguished at such time as our Class A common stock trades at or above $10.00 per share for 20 consecutive trading days, subject to the satisfaction of certain equity conditions. In addition, if there is no effective registration statement covering the shares issuable upon the exercise of the Series A Warrants, the warrants are exercisable on a cashless basis. If we fail to timely deliver the shares underlying the warrants, we will be subject to certain buy-in provisions. As a result of the sale of the debentures in April 2017, the exercise price of the Series A Warrants issued to investors in our January 2017 private offering were reset to $2.245 per share.
(See Note 9 Warrant Liabilities for further information)
20
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Beginning 100 days after the issuance date of the Series B Warrants, at any time the market price of our Class A common stock is less than $5.25 per share, the holders had the right to exercise the Series B Warrants on a cashless basis for shares of our Class A common stock calculated pursuant to a formula set forth in the Series B Warrants. We had the right, in lieu of delivery of such shares of our Class A common stock, to pay the holder of the Series B Warrants being exercised on a cashless basis, a specified amount in cash, with a maximum cash payment of $2,500,000. The holders of the Series B Warrants exercised their right in April 2017 and we repurchased the Series B Warrants for $2,500,000.
Pursuant to an engagement letter dated December 29, 2016 by and between the Company and Chardan Capital Markets, Chardan Capital agreed to act as the Companys placement agent in connection with both the registered direct offering and a concurrent private placement. Pursuant to the agreement, the Company paid Chardan Capital a cash fee equal to $160,000 (4% of the gross proceeds), as well as reimbursement of its expenses related to the offering in the amount of $15,000. In addition, the Company granted Chardan Capital a warrant to purchase 76,190 shares of Class A common. The warrants have an exercise price of $6.50 per share and are exercisable for 5.5 years commencing nine months from the issuance date. The shares underlying the warrants were included in a resale registration statement that was declared effective by the SEC in September 2017.
The net proceeds to the Company from the offering, after deducting placement agent fees and estimated offering expenses, were $3,830,000. The proceeds of the offering were used to satisfy the outstanding notes issued under the terms of the financing agreement. In connection with the January 2017 capital raise, Victory Park Management, LLC agreed not to exercise the put right prior to May 20, 2017. Victory Park Management, LLC exercised the put right on May 22, 2017. On October 27, 2017, the Company satisfied this obligation in full utilizing a portion of net proceeds from a second debenture financing.
The Class A shares of common stock and Series B warrants were sold and issued pursuant to the Prospectus Supplement, dated January 4, 2017, to the Prospectus included in the Companys Registration Statement on Form S-3 (Registration No. 333-214644) filed with the SEC on November 16, 2016 and declared effective on November 28, 2016.
In January 2017, in connection with an advisory agreement with kathy ireland Worldwide LLC ("kiWW"), the Company issued affiliates and designees of kiWW 100,000 shares of its Class A common stock valued at $678,000
In January 2017, we issued 3,858 shares of our Class A common stock valued at $12,500 to Mr. Derek J. Ferguson upon his appointment to our board of directors and the audit committee of the board. He is an accredited investor and the issuance was exempt from registration under the Securities Act pursuant to an exemption provided by Section 4(a)(2) of that act.
In February 2017, the Company issued Mr. Steven Antebi 150,000 shares of our Class A common stock valued at $540,000 as compensation for services under the terms of a consulting agreement. He is a principal stockholder of the Company.
In March 2017, we issued 51,667 shares of Class A common stock for vested stock awards.
In March 2017, we issued 6,510 shares of our Class A common stock valued at $12,500 to Mr. Robert Jordan upon his appointment to our board of directors and the audit committee of the board. He is an accredited investor and the issuance was exempt from registration under the Securities Act pursuant to an exemption provided by Section 4(a)(2) of that act.
In August 2017, we issued 200,000 shares in conjunction with our acquisition of certain intellectual property assets from Leapfrog Media Trading, Inc.
On September 15, 2017, the Company entered an Investor Relations and Consulting Agreement. The Company engaged the consultant to provide certain consulting services on behalf of the Company. Under the terms of this agreement, which expired on December 15, 2017, the Company engaged consultant to provide a variety of advisory and consulting services to the Company, including introducing the Company to potential sources of media, marketing agreement(s) and/or other strategic alliances which may benefit the Company in the performance of implementing its business plan(s), including but not limited to radio and television media spots; various media publications; and internet podcasts. As compensation for such services, the Company issued consultant 75,000 shares of its Class A common stock, valued at $97,500, on September 15, 2017.
21
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Between September 2017 and January 2018, we issued an aggregate of 225,000 shares of Class A common stock valued at $1,137,650 as consideration for media and marketing services.
In October 2017, we issued 70,409 shares of our Class A common stock to Joseph P. Hannan, our chief financial officer, pursuant to his October 2017 employment agreement. The shares were issued pursuant to our 2016 equity compensation plan.
In October 2017, we entered into securities purchase agreements to sell an aggregate of $5,180,158 of our 12.5% secured convertible debentures and issued 863,365 Series A common stock purchase warrants. The debentures are convertible into shares of our Class A common stock at $3.00 per share, subject to adjustment, and contain anti-dilution protection for subsequent financings and have a conversion price floor of $1.40 per share (pursuant to shareholder vote approving the offering that occurred on December 29, 2017). The warrants have an exercise price of $3.00 per share, subject to adjustment and contain anti-dilution protection for subsequent financings and have an exercise price floor of $1.40 per share. In connection with the offering we issued Chardan Capital Markets 160,000 placement agent warrants, of which: (i) 129,176 have an exercise price of $3.75 and (ii) 54,161 have an exercise price of $4.49 (. We also issued Aspenwood Capital 23,337 placement agent warrants with an exercise price of $3.75. All placement agent warrants have a term of five and a half years (exercisable beginning 6 months after issuance).
In October 2017, certain debenture holders converted an aggregate of $655,000 of debentures into 218,334 shares of Class A common stock.
In October 2017, 83,334 Series A common stock purchase warrants were exercised at a price of $3.00 per share, resulting in gross proceeds to the Company of $250,002.
In January 2018, we issued Colleen DiClaudio, a board member, 7,813 Class A common shares valued at $10,000 as payment for 2017 services on our board of directors. The shares were issued from our 2016 equity compensation plan
In January 2018, we issued Hardy Thomas, a former board member, 7,195 Class A common shares valued at $10,000 as payment for 2017 services on our board of directors. The shares were issued from our 2016 equity compensation plan.
In January 2018, we issued Marc Savas and Malcolm CasSelle each 3,774 Class A common shares valued at $10,000 as payment for their respective 2017 service on our board of directors. The shares were issued from our 2016 equity compensation plan.
In January 2018, we issued a consultant an additional 150,000 shares for media consulting services. In August 2018, we issued the consultant an additional 150,000 shares pursuant to this same agreement.
In March 2018, we issued 6,667 shares of Class A common stock to one employee for vested stock awards.
In March 2018, 122,950 shares of Class A common stock were awarded to one employee for sales performance achievement pursuant to our 2016 equity compensation plan.
In July 2018, 16,667 Series A common stock purchase warrants were exercised at a price of $3.00 per share, resulting in gross proceeds to the Company of $50,000.
In August 2018, we issued William Packer 3,774 shares of Class A common shares valued at $10,000 as payment for 2017 services on our board of directors. The shares were issued from our 2016 equity compensation plan.
In June 2018, 44,815 Series A common stock purchase warrants at an exercise price of $2.245 per share, on a cashless basis.
In September 2018, one investor in the Companys October 2017 debenture financing exercised 16,667 Series A common stock purchase warrants were exercised at a price of $3.00 per share, resulting in gross proceeds to the Company of $50,000.
In September 2018, we issued 100,000 shares of our Class A common stock for legal services rendered.
22
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
In September 2018, we issued 50,000 shares of our Class A common stock to Joseph P. Hannan, our chief financial officer, pursuant to his October 2017 employment agreement. The shares were issued pursuant to our 2016 equity compensation plan, and subject to vesting at issue.
In September 2018, we issued 3,334 shares of Class A common stock to one employee for vested stock awards.
During September 30, 2018, certain debenture holders converted an aggregate of $300,000 in principal into 100,000 shares of the Companys Class A common stock.
On August 6, 2018, we repurchased 514,000 shares of our Class A common stock from Erin DeRuggiero as contracted under the terms of her separation agreement with the Company.
In October 2017, 50,000 shares of our Class A common stock were retired in lieu of cash tax withholding from a vesting on shares previously issued to Joseph P. Hannan, our chief financial officer.
Stock Awards
During the three months ended September 30, 2018 and 2017, respectively, there were no new grants of restricted stock awards made nor were any previously issued grants forfeited. During the nine months ended September 30, 2018 and 2017, respectively, there were no new grants of stock awards made, no awards were forfeited during the nine months ended September 30, 2018, and awards in the amount of 3,333 common shares were forfeited during the nine months ended September 30, 2017.
During the three months ended September 30, 2018 and 2017, we recorded stock award expenses of $56,496 and $129,166, respectively. During the nine months ended September 30, 2018 and 2017, we recorded stock award expenses of $160,874 and $398,412, respectively.
Stock Options and Warrants
In November 2016, the Company entered a consulting agreement with regard to certain investor relations and public relations services. The term of the consulting agreement is for a period of six-months from the effective date and may be extended for an additional six-month term. In lieu of cash payments for the services rendered by the consultant, the Company issued the consultant a three year Class A common stock purchase warrant to purchase 400,000 shares of the Companys Class A common stock at an exercise price of $7.50 per share. The warrants vest based on specific milestones. The Company is recognizing the value of the services rendered over the term of the agreement. As of September 30, 2017, the consultant had not yet attained any of the milestones contained within the agreement and the Company reversed $275,637 of expense related hereto.
During the three and nine month periods ended September 30, 2017, an aggregate of 662,773 common stock purchase warrants, having exercise prices of between $5.00 and $10.00, per share, expired.
On January 24, 2018, 176,400 common stock purchase warrants, having exercise prices of $7.50, per share, expired.
On September 11, 2018, 250,000 common stock purchase warrants, having an exercise price of $4.20 per share were granted to Joseph P. Hannan, our chief financial officer.
During the three months ended September 30, 2018 and 2017, we recorded stock option expense of $84,489 and $90,038, respectively. During the nine months ended September 30, 2018 and 2017, we recorded stock option expense of $252,371 and $308,908, respectively.
23
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
NOTE 12 RELATED PARTY TRANSACTIONS
On March 20, 2018,
we entered into certain retention and bonus agreements with SRAXMD employees, including Erin DeRuggiero, our chief innovations officer. Pursuant to the terms of the agreements with Ms. DeRuggiero, her employment agreement was terminated, and she became a consultant to the Company. The term of the consultancy expired upon the sale of the assets comprising SRAXmd. Pursuant to the terms of the agreement, we paid Ms. DeRuggiero a total of $5.2 million at closing which also included repurchase of 514,000 shares of our Class A common stock.
On April 2, 2018, we issued a common stock purchase warrant to Kristoffer Nelson, our Chief Operating Officer and a member of our board of directors. The option entitles Mr. Nelson to purchase 100,000 shares of Class A Common Stock at a price per share of $5.78, has a term of three years and vests quarterly over a three (3) year period.
On September 11, 2018, we issued a common stock purchase warrant to Joseph P. Hannan, our 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.
NOTE 13 COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases offices under operating leases that have expired and now operate on a month-to-month basis, subject to certain notice of termination provisions. Future minimum lease payments required under the operating leases amount to $50,636 for the year ended December 31, 2018.
Rent expense for office space amounted to $69,484 and $35,000 for the three month period ended September 30, 2018 and 2017, respectively. Rent expense for office space amounted to $206,552 and $177,908 for the nine month period ended September 30, 2018 and 2017, respectively.
Other Commitments
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered indemnification agreements with its directors and certain of its officers and employees that will require the Company to, among other things, indemnify them against certain liabilities that may arise due to their status or service as directors, officers or employees. The Company has also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and certain of its officers and employees, and former officers, directors and employees of acquired companies, in certain circumstances.
It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each agreement. Such indemnification agreements may not be subject to maximum loss clauses.
Employment agreements
We have entered employment agreements with key employees. These agreements may include provisions for base salary, guaranteed and discretionary bonuses and option grants. The agreements may contain severance provisions if the employees are terminated without cause, as defined in the agreements.
24
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Litigation
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company's business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
NOTE 14
RESTATEMENT
Financial Information (As Restated)
|
|
|
|
·
|
The Company has presented restated 2018 financials as of September 30, 2018 and for the three-month and nine-month periods ended September 30, 2018 and 2017, below.
|
|
|
|
|
·
|
In addition to the restatement of the financial statements, certain information within contained in the following notes to the financial statements and financial statement schedule has been restated to reflect the corrections of misstatements discussed previously.
|
The individual restatement matter that underlies the restatement adjustments is described below.
Classification of Warrants
The Company has concluded that the certain Warrants issued in 2017 are required to be classified as liabilities pursuant to the provisions of ASC 815-10 since all of the characteristics of a derivative instrument were met and the Warrants do not qualify for the equity classification scope exception in ASC 815-40-25-10 from derivative accounting, primarily because the Company may be required to cash settle the warrants in circumstances where holders of the Companys common stock would not be entitled to cash, which is inconsistent with ASC 815-40-55-2 through 55-6. The warrant agreements include a fundamental transaction clause whereby, in the unlikely event that another person becomes the beneficial owner of 50% of the outstanding shares of the Companys common stock, and if other conditions are met, the Company may be required to purchase the warrants from the holders by paying cash in an amount equal to the Black Scholes value of the remaining unexercised portion of the warrants on the date of such fundamental transaction.
25
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Impact of the Restatement
Summary of Restatement Condensed Consolidated Balance Sheet, Statement of Operations and Cashflows 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
|
|
|
|
September 30,
2018
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Total assets
|
|
$
|
34,341,324
|
|
|
$
|
|
|
|
$
|
34,341,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,475,229
|
|
|
$
|
|
|
|
$
|
2,475,229
|
|
Debenture warrant liability
|
|
|
|
|
|
|
4,468,609
|
|
|
|
4,468,609
|
|
Leapfrog warrant liability
|
|
|
|
|
|
|
1,184,086
|
|
|
|
1,184,086
|
|
Derivative liability
|
|
|
|
|
|
|
954,157
|
|
|
|
954,157
|
|
Total current liabilities
|
|
|
2,475,229
|
|
|
|
6,606,852
|
|
|
|
9,082,081
|
|
Secured convertible debentures, net
|
|
|
2,943,109
|
|
|
|
(180,951
|
)
|
|
|
2,762,158
|
|
Total liabilities
|
|
|
5,418,338
|
|
|
|
6,425,901
|
|
|
|
11,844,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued or outstanding at September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock, authorized 50,000,000 shares, $0.001 par value, 10,183,330 shares issued and outstanding at September 30, 2018
|
|
|
10,183
|
|
|
|
|
|
|
|
10,183
|
|
Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued or outstanding at September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid in capital
|
|
|
37,343,937
|
|
|
|
(4,596,213
|
)
|
|
|
32,747,724
|
|
Accumulated deficit
|
|
|
(8,431,134
|
)
|
|
|
(1,829,688
|
)
|
|
|
(10,260,822
|
)
|
Total stockholders' equity
|
|
|
28,922,986
|
|
|
|
(6,425,901
|
)
|
|
|
22,497,084
|
|
Total liabilities and stockholders' equity
|
|
$
|
34,341,324
|
|
|
$
|
|
|
|
$
|
34,341,324
|
|
26
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
September 30,
2018
|
|
|
|
|
|
September 30,
2018
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,617,451
|
)
|
|
|
|
|
|
|
(3,617,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(318,942
|
)
|
|
|
|
|
|
|
(318.942
|
)
|
Amortization of debt issuance costs
|
|
|
(726,716
|
)
|
|
|
107,404
|
|
|
|
(619,312
|
)
|
Total interest expense
|
|
|
(1,045,658
|
)
|
|
|
107,404
|
|
|
|
(938,254
|
)
|
Gain on sale of assets
|
|
|
23,978,389
|
|
|
|
|
|
|
|
23,978,389
|
|
Change in fair value of derivative liabilities
|
|
|
|
|
|
|
1,839,020
|
|
|
|
1,839,020
|
|
Other
|
|
|
9,758
|
|
|
|
|
|
|
|
9,758
|
|
Total other income (expense)
|
|
|
22,942,489
|
|
|
|
1,946,424
|
|
|
|
24,888,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
19,325,038
|
|
|
|
1,946,424
|
|
|
|
21,271,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
19,325,038
|
|
|
$
|
1,946,424
|
|
|
$
|
21,271,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
1.91
|
|
|
$
|
0.19
|
|
|
$
|
2.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
10,112,804
|
|
|
|
|
|
|
|
10,112,804
|
|
27
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
Nine Month Ended
|
|
|
|
September 30,
2018
|
|
|
|
|
|
September 30,
2018
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
5,921,413
|
|
|
|
|
|
|
$
|
5,921,413
|
|
General, selling and administrative expense
|
|
|
14,414,279
|
|
|
|
(22,165
|
)
|
|
|
14,392,114
|
|
Loss from operations
|
|
|
(8,492,866
|
)
|
|
|
22,165
|
|
|
|
(8,470,701
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,240,485
|
)
|
|
|
|
|
|
|
(1,240,485
|
)
|
Amortization of debt issuance costs
|
|
|
(1,531,963
|
)
|
|
|
(5,602
|
)
|
|
|
(1,537,565
|
)
|
Total interest expense
|
|
|
(2,772,448
|
)
|
|
|
(5,602
|
)
|
|
|
(2,778,050
|
)
|
Gain on sale of assets
|
|
|
23,978,389
|
|
|
|
(22,165
|
)
|
|
|
23,956,224
|
|
Change in fair value of derivative liabilities
|
|
|
|
|
|
|
4,549,150
|
|
|
|
4,549,150
|
|
Other
|
|
|
4,498
|
|
|
|
|
|
|
|
4,498
|
|
Total other income (expense)
|
|
|
21,210,439
|
|
|
|
4,521,383
|
|
|
|
25,731,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
12,717,573
|
|
|
|
4,543,548
|
|
|
|
17,261,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
12,717,573
|
|
|
$
|
4,543,548
|
|
|
$
|
17,261,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
1.26
|
|
|
$
|
0.45
|
|
|
$
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
10,121,717
|
|
|
|
|
|
|
|
10,121,717
|
|
28
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
Nine
Month Ended
|
|
|
|
September 30,
2018
|
|
|
|
|
|
September 30,
2018
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
12,717,573
|
|
|
$
|
4,543,548
|
|
|
$
|
17,261,121
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
1,756,795
|
|
|
|
|
|
|
|
1,756,795
|
|
Amortization of debt issuance costs
|
|
|
325,791
|
|
|
|
5,602
|
|
|
|
331,393
|
|
Accretion of debenture discount and warrants
|
|
|
1,206,172
|
|
|
|
|
|
|
|
1,206,172
|
|
Change in valuation of derivative liabilities
|
|
|
|
|
|
|
(4,549,150
|
)
|
|
|
(4,549,150
|
)
|
Gain on sale of assets
|
|
|
(23,978,389
|
)
|
|
|
22,165
|
|
|
|
(23,956,224
|
)
|
Provision for bad debts
|
|
|
(8,600
|
)
|
|
|
|
|
|
|
(8,600
|
)
|
Depreciation expense
|
|
|
30,730
|
|
|
|
|
|
|
|
30,730
|
|
Amortization of intangibles
|
|
|
512,308
|
|
|
|
|
|
|
|
512,308
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,816,668
|
|
|
|
|
|
|
|
1,816,668
|
|
Prepaid expenses
|
|
|
(196,929
|
)
|
|
|
|
|
|
|
(196,929
|
)
|
Other current assets
|
|
|
(119,462
|
)
|
|
|
|
|
|
|
(119,462
|
)
|
Accounts payable and accrued expenses
|
|
|
(3,005,533
|
)
|
|
|
|
|
|
|
(3,005,533
|
)
|
Net cash used in operating activities
|
|
|
(8,942,876
|
)
|
|
|
22,165
|
|
|
|
(8,920,711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
22,249,150
|
|
|
|
(22,165
|
)
|
|
|
22,226,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
13,406,274
|
|
|
|
|
|
|
|
13,406,274
|
|
Cash and cash equivalents, beginning of period
|
|
|
1,017,299
|
|
|
|
|
|
|
|
1,017,299
|
|
Cash and cash equivalents, end of period
|
|
$
|
14,423,573
|
|
|
$
|
|
|
|
$
|
14,423,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
758,767
|
|
|
$
|
|
|
|
$
|
758,767
|
|
Cash paid for taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of common stock awards
|
|
$
|
150,000
|
|
|
|
|
|
|
$
|
150,000
|
|
Issuance of common stock to be issued
|
|
$
|
879,500
|
|
|
|
|
|
|
$
|
879,500
|
|
Shares issued for convertible note conversion
|
|
$
|
300,000
|
|
|
|
|
|
|
$
|
300,000
|
|
29
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
Summary of Restatement Condensed Consolidated Statement of Operations and Cashflows 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
September 30,
2017
|
|
|
|
|
|
September 30,
2017
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(559,939
|
)
|
|
|
|
|
|
|
(559,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(338,010
|
)
|
|
|
|
|
|
|
(338,010
|
)
|
Amortization of debt issuance costs
|
|
|
(281,352
|
)
|
|
|
118,469
|
|
|
|
(162,883
|
)
|
Total interest expense
|
|
|
(619,362
|
)
|
|
|
118,469
|
|
|
|
(500,893
|
)
|
Change in fair value of derivative liabilities
|
|
|
(2,895,027
|
)
|
|
|
1,271,881
|
|
|
|
(1,623,146
|
)
|
Total other income (expense)
|
|
|
(3,514,389
|
)
|
|
|
1,390,350
|
|
|
|
(2,124,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(4,074,328
|
)
|
|
|
1,390,350
|
|
|
|
(2,683,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,074,328
|
)
|
|
$
|
1,390,350
|
|
|
$
|
(2,683,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.50
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
8,115,790
|
|
|
|
|
|
|
|
8,115,790
|
|
30
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
Nine Month Ended
|
|
|
|
September 30,
2017
|
|
|
|
|
|
September 30,
2017
|
|
|
|
As Previously Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,776,963
|
)
|
|
|
|
|
|
|
(3,776,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(668,583
|
)
|
|
|
|
|
|
|
(668,583
|
)
|
Amortization of debt issuance costs
|
|
|
(1,047,060
|
)
|
|
|
297,268
|
|
|
|
(749,792
|
)
|
Total interest expense
|
|
|
(1,715,643
|
)
|
|
|
297,268
|
|
|
|
(1,418,375
|
)
|
Change in fair value of warrant liabilities
|
|
|
809,443
|
|
|
|
373,346
|
|
|
|
1,182,789
|
|
Loss on repurchase of series B warrant
|
|
|
(2,053,978
|
)
|
|
|
(14,246
|
)
|
|
|
(2,068,221
|
)
|
Loss on repricing of series A warrants
|
|
|
(99,820
|
)
|
|
|
|
|
|
|
(99,820
|
)
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
(3,059,995
|
)
|
|
|
(656,368
|
)
|
|
|
(2,403,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes
|
|
|
(6,836,958
|
)
|
|
|
(656,368
|
)
|
|
|
(6,180,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,836,958
|
)
|
|
$
|
(656,368
|
)
|
|
$
|
(6,180,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(0.85
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(0.77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
8,008,717
|
|
|
|
|
|
|
|
8,008,717
|
|
31
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
Nine Month Ended
|
|
|
|
September 30,
2017
|
|
|
|
|
|
September 30,
2017
|
|
|
|
As Originally Reported
|
|
|
Adjustments
|
|
|
As Restated
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,836,958
|
)
|
|
$
|
656,368
|
|
|
$
|
(6,180,590
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
947,968
|
|
|
|
|
|
|
|
947,968
|
|
Amortization of debt issuance costs
|
|
|
663,210
|
|
|
|
(297,268
|
)
|
|
|
365,942
|
|
Amortization of debt discount
|
|
|
383,850
|
|
|
|
|
|
|
|
383,850
|
|
Loss on repurchase of Series B warrants
|
|
|
2,053,978
|
|
|
|
14,246
|
|
|
|
2,068,221
|
|
PIK interest expense accrued to principal
|
|
|
51,323
|
|
|
|
|
|
|
|
51,323
|
|
Loss on repurchase of series A warrants
|
|
|
99,820
|
|
|
|
|
|
|
|
99,820
|
|
Change in fair value of derivative liabilities
|
|
|
(809,443
|
)
|
|
|
(373,346
|
)
|
|
|
(1,182,789
|
)
|
Write-off of non-compete agreement
|
|
|
468,751
|
|
|
|
|
|
|
|
468,751
|
|
Provision for bad debts
|
|
|
(163,703
|
)
|
|
|
|
|
|
|
(163,703
|
)
|
Depreciation expense
|
|
|
14,420
|
|
|
|
|
|
|
|
14,420
|
|
Amortization of intangibles
|
|
|
358,698
|
|
|
|
|
|
|
|
358,698
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,377,870
|
|
|
|
|
|
|
|
1,377,870
|
|
Prepaid expenses
|
|
|
(209,007
|
)
|
|
|
|
|
|
|
(209,007
|
)
|
Other current assets
|
|
|
12,762
|
|
|
|
|
|
|
|
12,762
|
|
Accounts payable and accrued expenses
|
|
|
(721,272
|
)
|
|
|
|
|
|
|
(721,272
|
)
|
Unearned revenue
|
|
|
67,516
|
|
|
|
|
|
|
|
67,516
|
|
Net cash used in operating activities
|
|
|
(2,240,400
|
)
|
|
|
|
|
|
|
(2,240,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
(551,655
|
)
|
|
|
|
|
|
|
(551,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
1,959,702
|
|
|
|
|
|
|
|
1,959,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(832,353
|
)
|
|
|
|
|
|
|
(832,353
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
1,048,762
|
|
|
|
|
|
|
|
1,048,762
|
|
Cash and cash equivalents, end of period
|
|
$
|
216,409
|
|
|
$
|
|
|
|
$
|
216,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
873,433
|
|
|
$
|
|
|
|
$
|
873,433
|
|
Cash paid for taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial derivative liability on issuance of put warrants
|
|
$
|
3,038,344
|
|
|
|
|
|
|
|
3,038,344
|
|
Issuance of placement agent warrants
|
|
|
249,028
|
|
|
|
|
|
|
|
249,028
|
|
Common stock issued for vested grants
|
|
|
52
|
|
|
|
|
|
|
|
52
|
|
Issuance of common stock to be issued
|
|
|
100
|
|
|
|
|
|
|
|
100
|
|
Initial derivative and warrant liability accounted as debt discount on convertible debenture
|
|
|
2,763,723
|
|
|
|
|
|
|
|
2,763,723
|
|
Repurchase of series B warrants directly paid by debenture holder on behalf of the Company
|
|
|
2,500,000
|
|
|
|
|
|
|
|
2,500,000
|
|
Common stock issued and Initial warrant liability accounted for assets purchase arrangement
|
|
|
617,069
|
|
|
|
|
|
|
|
617,069
|
|
32
SOCIAL REALITY, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(Unaudited)
NOTE 15 SUBSEQUENT EVENTS
On May 13, 2019, the Company entered into a securities purchase agreement with an accredited investor whereby the investor purchased 200,000 shares of the Companys Class A common stock at a price per share of $5.00. The Company received aggregate gross proceeds of $1,000,000. Pursuant to the terms of the securities purchase agreement, the investor has piggyback registration rights with respect to the shares.
Please refer to the Companys 2018 Annual report filed on Form 10-K on April 16
th
, 2019 and the March 31, 2019 Quarterly report filed on Form 10-Q on May 15
th
, 2019 for additional subsequent events.
33
ITEM 2.