Securities Registration Statement (s-1/a)

Date : 10/16/2019 @ 9:29PM
Source : Edgar (US Regulatory)
Stock : SRAX Inc (SRAX)
Quote : 1.47  0.0 (0.00%) @ 12:00AM

Securities Registration Statement (s-1/a)

 


As filed with the Securities and Exchange Commission on October 16, 2019

Registration No. 333-229606

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


PRE-EFFECTIVE AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933


SRAX, INC.

(Exact name of registrant as specified in its charter)


Delaware

 

7311

 

45-2925231

(State or jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer Identification No.)


456 Seaton Street

Los Angeles, CA 90013

telephone (323) 694-9800

(Address, including zip code, and telephone number,

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


Paracorp Incorporated

2140 S Dupont Hwy

Camden, DE  19934

Telephone: (302) 697-4590

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

including area code, of agent for service)

———————

Copy to:

Raul Silvestre

Silvestre Law Group, P.C.

31200 Via Colinas, Suite 200

Westlake Village, CA 91362

(818) 597-7552

Fax (805) 553-9783


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

 

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


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


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


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


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


Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

þ

Smaller reporting company

þ

 

 

Emerging growth company

o


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

 

 




 




CALCULATION OF REGISTRATION FEE


Title of Each Class of Securities to be Registered

 

Amount to be Registered (1)

 

 

Proposed

Offering

Price

Per Share

 

 

Proposed

Aggregate

Offering

Price

 

 

Amount of

Registration

Fee

 

 

    

                       

  

  

                       

  

  

                       

  

  

                       

  

Big Token Preferred Tracking Stock

 

 

20,000,000

 

 

$

0.20

(1)

 

$

4,000,000

 

 

$

484.80

(2)

Total

 

 

20,000,000

 

 

 

 

 

 

 

4,000,000

 

 

 

 

 

———————

(1)

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

(2)

Previously paid in connection with the filing of the initial registration statement.





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






 


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

 

PRELIMINARY PROSPECTUS

SUBJECT TO COMPLETION

October 16, 2019


[SRAX_S1A001.JPG]


20,000,000 Shares of BIGToken Non-Voting Preferred Tracking Stock

——————————————

This prospectus relates to the offer of up to 20,000,000 shares of our BIGToken Non-Voting Preferred Tracking Stock, par value $0.001 per share, by SRAX, Inc. (the “Company”). The shares of Non-Voting Preferred Tracking Stock will be issued to users of the BIGToken application as part of a rewards program.

 

The shares of Non-Voting Preferred Tracking Stock will be issued for no monetary consideration and can be issued in fractional shares in amounts as small as 0.00000001 of a share. No underwriter or person has been engaged to facilitate the sale or distribution of the Non-Voting Preferred Tracking Stock in this prospectus. The shares will be distributed directly by SRAX.

 

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


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


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


The rewards program may be suspended, modified or terminated at any time. The terms and conditions of the Non-Voting Preferred Tracking Stock may be changed, limited, modified or eliminated as summarized in the section of the prospectus entitled “Description of Securities”.


The Non-Voting Preferred Tracking Stock being registered in this prospectus will only be issued to eligible users in the United States pursuant to the Company’s Rewards Program.


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

——————————————

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

——————————————

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

 

The date of this Prospectus is [_________], 2019





 


TABLE OF CONTENTS


 

Page

PROSPECTUS SUMMARY

1

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

7

RISK FACTORS

8

USE OF PROCEEDS

23

PLAN OF DISTRIBUTION

26

DESCRIPTION OF SECURITIES TO BE REGISTERED

27

OUR BUSINESS

35

PROPERTIES

39

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

40

EQUITY COMPENSATION PLANS

41

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

42

DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

50

CORPORATE GOVERNANCE

52

EXECUTIVE COMPENSATION

55

DIRECTOR COMPENSATION

60

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

61

TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS

62

EXPERTS

64

INTEREST OF NAMED EXPERTS AND COUNSEL

64

LEGAL PROCEEDINGS

64

WHERE YOU CAN FIND MORE INFORMATION

64

FINANCIAL STATEMENTS

F-1

 

 


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


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


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






i



 


PROSPECTUS SUMMARY


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


As used in this prospectus, unless context otherwise requires, the words “we,” “us,” “our,” the “Company” and “ SRAX ” refer to SRAX, Inc. Also, any reference to “common stock” refers to our Class A common stock, $0.001 par value per share.


Any references to “non-voting preferred tracking stock” refers to our BIGToken Non-Voting Preferred Tracking Stock, $0.001 par value, being registered hereunder having those rights, preferences and conditions as contained in the “Certificate of Designation of Preferences, Rights And Limitations of Bigtoken Preferred Tracking Stock” filed as an exhibit to the registration statement of which this prospectus relates to.


An reference to “Tracking Stock Policy” and “Policy Statement” relates to our “Bigtoken Tracking Stock Policy” which is filed as an exhibit to the registration statement to which this prospectus relates as well as contained on our website at Bigtoken.com/preferred , the terms of which can be updated from time to time.


Any reference to “BIGToken Application” or “BIGToken” relates to our direct to consumer platform that enables consumers to own, manage and sell access to their digital identity and data.


Any reference to “Rewards Program” means the program whereby users of BIGToken receive points for undertaking certain actions and those points can be exchanged for: (i) cash; (ii) gift cards, and (iii) share of Non-Voting Preferred Stock. It is also anticipated that in the future, users will be able to exchange points for the goods and services of our advertising sponsors and partners.


Our Company


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


·

sales of digital advertising campaigns to advertising agencies and brands;

·

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

·

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

·

sales of proprietary consumer data.


The core elements of our business are:


·

Ad Exchange or "SRAX"    Real Time Bidding buy side representation  is our technology which assists buyers of media to deliver their message to the right audience at the right time.  We also build custom platforms that allow our agency partners to launch and manage their own RTB campaigns by enabling them to directly place advertising orders on the platform dashboard and view and analyze results as they occur;


·

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



1



 



·

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


·

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


·

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


·

BIGToken which is a platform that allows consumers to manage and participate in the sales of their digital data.


BIGToken


We have formed a wholly-owned subsidiary, BIG Token, Inc. (“BIGToken Sub ”) which is developing BIGToken. SRAX  will be the issuer of the Non-Voting Preferred Tracking Stock which is intended to track the financial performance of the BIGToken Application. Although the Non-Voting Preferred Tracking Stock will track the financial performance of BIGToken, holders will have no direct ownership interest in either SRAX or the BIGToken Sub. The Non-Voting Preferred Tracking Stock represents a non-voting equity interest in SRAX. The Non-Voting Preferred will not participate in the financial performance of SRAX as a whole.


We have developed BIGToken as a way for consumers to benefit from the use of their data . In BIGToken, users will have the ability to earn a pre-established number of points for completing certain tasks. By way of example, a user may earn 4 points for providing their name and 10 points for checking in at a local restaurant. The number of points for each action will be prominently displayed for the user to review prior to undertaking such action. The points will be convertible by the user into rewards which initially will consist of: (i) cash, (ii) gift cards, (iii) donations to non-profit entities, and/or (iv) shares of Non-Voting Preferred Tracking Stock (“Rewards”). We anticipate that as the user base of BIGToken expands, additional goods and services offered by our advertising sponsors will also be available as rewards.


Earning Points


Users will earn points redeemable for Rewards by undertaking such actions as:


·

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

·

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

·

Users will earn points when they refer new users that sign up for BIGToken;

·

Users will earn points from the Actions that their referred network complete; and

·

Users will earn points when businesses and third parties purchase access to their data.

 

Eligibility Requirements


Each participating users are subject to the following in order to be able to receive points and Rewards:

 

 

·

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

 

·

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

 

·

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

 

·

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

 



2



 


Corporate Information


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


Our wholly owned subsidiary, BIGToken, Inc. maintains a website at Bigtoken.com. The reference to the BIGToken, Inc. web site does not constitute incorporation by reference of the information contained at this site into this prospectus except with respect to the information contained at www.bigtoken.com/preferred, as may be amended from time to time.


Election to Receive Non-Voting Preferred Tracking Stock


As one of the Rewards offered, e ligible users in the United States will be able to receive shares of Non-Voting Preferred Tracking Stock for completing certain tasks enumerated in BIGToken and as further governed by the rules and terms as updated and amended from time to time and contained at https://bigtoken.com related to our Rewards Program.


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


Applicable Restrictions


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


Timing of Receipt of Shares of Preferred Tracking Stock


At their election, and subject to the terms and condition of BIGToken and the Rewards Program, eligible users can receive their Rewards in the form of Non-Voting Preferred Tracking Stock. The shares will be issued by Transfer Online, the transfer agent for the Non-Voting Preferred Tracking Stock.


Electronic Book-Entry of Shares


Shares of Non-Voting Preferred Tracking Stock will be issued in book-entry form. Physical certificates are not available.


Communications and Reports to Participants


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

 

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




3



 


Cost to Participants


Applicable fees are as follows:

 

BIGToken Sign up:

 

No charge

Receive earned shares of Preferred Tracking Stock:

 

No charge


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


Additional Information about BIGToken


The shares of Non-Voting Preferred Tracking Stock may never have any realizable value. Your election to receive your Rewards via the issuance of Non-Voting Preferred Tracking Stock represents an investment in our securities. You are responsible for the investment decisions regarding your election to receive Non-Voting Preferred Tracking Stock. Unlike cash or gift cards which have a readably realizable economic value, there is no market for our Non-Voting Preferred Tracking Stock. We will not provide any investment advice. You must make independent investment decisions regarding your election to receive your Rewards via the issuance of Non-Voting Preferred Tracking Stock shares based upon your own judgment and research.


You are responsible for all costs that you separately incur in connection with your use of BIGToken or your receipt of Rewards, such as the cost of your Internet service provider or any fees that your bank, or brokers may charge you.


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


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




4



 


The Offering


Securities offered

 

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

 

 

 

Offering price

 

Shares of our Non-Voting Preferred Tracking Stock are being offered to users of BIGToken as one of the rewards they can elect to redeem for points they have earned by undertaking certain tasks. The shares of Non-Voting Preferred Tracking Stock are not being issued for monetary consideration.

 

 

 

Use of proceeds

 

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

 

 

 

Description of the Preferred Tracking Stock

 

A brief outline of the terms of the Non-Voting Preferred Tracking Stock are contained herein. For a more complete description, please see Description of Securities, beginning on page 27 of this Prospectus.

 

 

 

Dividends

 

Holders of the Non-Voting Preferred Tracking Stock may be entitled to receive dividends at the discretion of the Board of Directors – See “Dividends” in the Description of Securities section.

 

 

 

Voting Rights:

 

None. The shares of Non-Voting Preferred Track Stock being issued are non-voting.

 

 

 

Liquidation

 

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

 

 

 

Redemption/Exchange/Conversion

 

(1)

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

 

(2)

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

 

(3)

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

 

 

 

U.S. federal income tax consequences

 

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

 

 

 



5



 





Electronic Form and Transferability

 

Shares of Non-Voting Preferred Tracking Stock will be issued in electronic form only and will be available exclusively through our transfer agent. Shares of our Non-Voting Preferred Tracking Stock are new securities and there is currently no established market. We do not intend to apply for a listing of our Non-Voting Preferred Tracking Stock on any securities exchange or for their inclusion in any established automated dealer quotation system. The Non-Voting Preferred Tracking Stock will not be transferable except through our transfer agent and subject further to applicable federal and state securities laws.

 

 

 

Risk Factors

 

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

 



6



 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS


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

 

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

 

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






7



 


RISK FACTORS


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


Risks Related to our Business and BIGToken


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


Although we reported Net Income for the year- ended December 31, 2018 we reported losses from operations of $11,719,151. At December 31, 2018 and June 30, 2019 , we had an accumulated deficit of  $18,778,348 and $32,662,403 respectively. Our future success depends upon our ability to continue to grow our revenues, contain our operating expenses and generate profits. We do not have any long-term agreements with our customers. There are no assurances that we will be able to increase our revenues and cash flow to a level which supports profitable operations. We may continue to incur losses in future periods until such time, if ever, as we are successful in significantly increasing our revenues and cash flow beyond what is necessary to fund our ongoing operations and pay our obligations as they become due. If we are not able to grow, increase revenue and begin generating consistent profits, it is unlikely we will be able to generate sufficient cash from operations to pay our operating expenses and service our debt obligations, or report profitable operations in future periods.


We may not be able to continue as a going concern if we do not obtain additional financing .

 

We have incurred losses since our inception and have not demonstrated an ability to generate revenues from the sales of our proposed products. Our ability to continue as a going concern is dependent on raising capital from the sale of our common stock and/or obtaining debt financing. Our cash, cash equivalents and short-term investment balance at June 30, 2019 was approximately $2.5 million. On August 14, 2019, we completed a registered direct offering and concurrent private placement of our securities that resulted in gross proceeds of approximately $5 million.  Based on our cash, cash equivalents and short term investments as of June 30, 2019, as well as the proceeds from our registered direct offering and concurrent private placement, as well as our current expected level of operating expenditures, we expect to be able to fund our operations until March 31, 2020.  Our ability to remain a going concern is wholly dependent upon our ability to continue to obtain sufficient capital to fund our operations. Accordingly, despite our ability to secure capital in the past, there can be no assurance that additional equity or debt financing will be available to us when needed or that we may be able to secure funding from any other sources.  In the event that we are not able to secure funding, we may be forced to curtail operations, delay or stop ongoing clinical trials, cease operations altogether or file for bankruptcy.


Our management and audit committee have determined we needed to restate certain of our consolidated financial statements for the year ending December 31, 2017 and quarters ending March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 as a result of the improper accounting treatment of certain warrants.

 

On April 7, 2019, management and the audit committee of our board of directors determined that our previously issued quarterly and year-to-date unaudited consolidated financial statements for March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 and our audited consolidated financial statements for the year ending December 31, 2017 should no longer be relied upon. In addition, we determined that related press releases, earnings releases, and investor communications describing our financial statements for these periods should no longer be relied upon. The errors identified are all non-cash and primarily related to our classification of certain outstanding warrants with provisions that allow the warrant holder to force cash redemption under certain circumstances.


Accordingly, although we previously disclosed that we had ineffective controls, investors in our securities may lose confidence in our financial statements and management, which could result in a decrease in our stock price and negative sentiment in the investment community.




8



 


The restatement of certain of our financial statements may subject us to additional risks and uncertainties, including the increased possibility of legal proceedings and shareholder litigation.


As a result of our restatements of previously issued quarterly and year-to-date unaudited consolidated financial statements for March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 and our  audited consolidated financial statements for the year ending December 31, 2017, we may become subject to additional risks and uncertainties, including, among others, the increased possibility of legal proceedings, shareholder lawsuits or a review by the SEC and other regulatory bodies, which could cause investors to lose confidence in our reported financial information and could subject us to civil or criminal penalties, shareholder class actions or derivative actions. We could face monetary judgments, penalties or other sanctions that could have a material adverse effect on our business, financial condition and results of operations and could cause our stock price to decline.


Our failure to maintain an effective system of internal control over financial reporting, has resulted in the need for us to restate previously issued financial statements.  As a result, current and potential stockholders may lose confidence in our financial reporting, which could harm our business and value of our stock.


As described in our Annual Report on Form 10-K for the year ended December 31, 2018, as well as for the period ended June 30, 2019, our management has determined that, as of December 31, 2018 and June 30, 2019, we did not maintain effective internal controls over financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework as a result of identified material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.


We believe our failure to maintain effective systems of internal controls over financial reporting have resulted in our need to restate the following previously issued quarterly and year-to-date unaudited consolidated financial statements for March 31, 2017, June 30, 2017, September 30, 2017, December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 and our audited consolidated financial statements for the year ending December 31, 2017


We have concluded that certain of our previously issued financial statements should not be relied upon and have restated certain of our previously issued financial statements, which may lead to, among other things, shareholder litigation, loss of investor confidence, negative impact on our stock price and certain other risks.


As discussed in the Explanatory Note, 16, “Restatement of Previously Reported Consolidated Annual Financial Statements” and in Note 14, “Quarterly Financial Information (unaudited)” under Item 8 of our 2018 Form 10-K filed on April 16, 2019, we have concluded that our previously issued financial statements as of December 31, 2017 and for each of the quarterly and year-to-date periods in 2017, and the quarterly periods through September 30, 2018 should no longer be relied upon. The determination that the applicable financial statements should no longer be relied upon and that certain financial statements would be restated was made following the identification of misstatements. As a result of these misstatements, we have become subject to a number of additional risks and uncertainties, including unanticipated costs for accounting and legal fees in connection with or related to the restatement, shareholder litigation and government investigations. Any such proceeding could result in substantial defense costs regardless of the outcome of the litigation or investigation. If we do not prevail in any such litigation, we could be required to pay substantial damages or settlement costs.


We are remediating certain internal controls and procedures, which, if not successful, could result in additional misstatements in our financial statements negatively affecting our results of operations.


We are in the process of implementing certain remediation actions. To the extent these steps are not successful, not sufficient to correct our material weakness in internal control over financial reporting or are not completed in a timely manner, future financial statements may contain material misstatements and we could be required to restate our financial results. Any of these matters could adversely affect our business, reputation, revenues, results of operations, financial condition and stock price and limit our ability to access the capital markets through equity or debt issuances.




9



 


We may be required to expend significant capital to redeem BIGToken Points which will negatively impact our ability to fund our core operations.


Users of BIGToken receive points for undertaking certain actions on the platform that may be redeemed directly for cash from us, with such value as determined by management. Accordingly, we are currently obligated to redeem users’ points which are earned on BIGToken. We are currently redeeming each point for $0.01, subject to the user meeting certain conditions, including, being a US resident. As of June 30, 2019, we recorded a contingent liability for future point redemptions equal to $187,000 and we have redeemed an aggregate of 12 million points for $120,000. In March of 2019, we experienced a surge in the number of users of our BIGToken Platform. As of June 30, 2019, we had approximately 15.5 million users. Notwithstanding the foregoing, if our users continue to increase, we will be required to have enough cash reserves to redeem points held by our qualified users for cash. There can be no assurance that we will have enough cash reserves, or if we do have sufficient cash, if we will be able to continue to fund our other business obligations and operational expenses.


Security breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our systems, could harm our reputation and adversely affect our business.


Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users’ data or to disrupt our ability to provide service. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data, including personal information, content, or payment information from or to users, or information from marketers, could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become more prevalent in our industry. BIGToken has experienced an increase in the occurrence of such attempts and we cannot be assured that we will be able to prevent a successful attack on our systems in the future. We also regularly encounter attempts to create false or undesirable user accounts or take other actions on BIGToken for purposes such as spreading misinformation, attempting to have us improperly purchase user data or other objectionable ends. As a result of recent attention and growth of BIGToken, the size of our user base, and the types and volume of personal data on our systems, we believe that we are a particularly attractive target for such breaches and attacks. Our efforts to address undesirable activity may also increase the risk of retaliatory attacks. Such attacks may cause interruptions to the services we provide, degrade the user experience, cause users or marketers to lose confidence and trust in our products, impair our internal systems, or result in financial harm to us. Our efforts to protect our company data or the information we receive may also be unsuccessful due to software bugs or other technical malfunctions; employee, contractor, or vendor error or malfeasance; government surveillance; or other threats that evolve. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users' data. Cyber-attacks continue to evolve in sophistication and volume, and inherently may be difficult to detect for long periods of time. Although we are currently in the process of developing systems and processes that are designed to protect our data and user data, to prevent data loss, to disable undesirable accounts and activities on BIGToken, and to prevent or detect security breaches, we cannot assure you that such measures will ultimately become operational or provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.


Affected users or government authorities could initiate legal or regulatory actions against us in connection with any actual or perceived security breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices, especially with regard to the BIGToken. Such incidents or our efforts to remediate such incidents may also result in a decline in our active user base or engagement levels. Any of these events could have a material and adverse effect on our business, reputation, or financial results.


If our efforts to attract and retain BIGToken users are not successful, our number of users and the amount of data collected could fail to reach critical mass, grow or decline and our potential for BIGToken to earn revenues may be materially affected.


We will be dependent on advertisers to pay us for access to user data. We must attract users to grow the amount of accessible data and make it attractive to these third parties. If the public does not perceive our mission or our services to be reliable, valuable or of high quality, we may not be able to attract or retain users and create a critical mass of data which will impact our ability to earn revenues which could have a materially adversely affected on both the BIGToken Group and SRAX.




10



 


Privacy concerns could damage our reputation and deter current and potential users from contributing additional data through our BIGToken Application. If our security measures are breached resulting in the improper use and disclosure of user data, BIGToken may be perceived as not being secure, users and customers may curtail or stop using BIGToken, and we may incur significant legal and financial exposure.


Concerns about our practices with regard to the collection, use, disclosure, or security of user data or other privacy related matters, even if unfounded, could damage our reputation and adversely affect our operating results. Our services will involve the purchase, storage, transmission and sale of user data, and theft and security breaches expose us to a risk of loss of this information, improper use and disclosure of such information, litigation, and potential liability. Any systems failure or compromise of our security that results in the release of user data, or in our or our users’ ability to access such data, could seriously harm our reputation and brand and, therefore, our business, and impair our ability to attract and retain users. Additionally, if user data is somehow made public or made available through a security breach, it may be used to identify our users and people related thereto. We may experience cyber attacks of varying degrees. Our security measures may also be breached due to employee error, malfeasance, system errors or vulnerabilities, including vulnerabilities of our vendors, suppliers, their products, or otherwise. Such breach or unauthorized access, increased government surveillance, or attempts by outside parties to fraudulently induce employees, users, or customers to disclose sensitive information in order to gain access to user data could result in significant legal and financial exposure, damage to our reputation, and a loss of confidence in the security of BIGToken that could potentially have an adverse effect on our business. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently, become more sophisticated, and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Additionally, cyber attacks could also compromise trade secrets and other sensitive information and result in such information being disclosed to others and becoming less valuable, which could negatively affect our business. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose members and customers.


If BIGToken experiences an excessive rate of user attrition, our ability to attract customers could fail.


Users may elect to have their data deleted from BIGToken at any time. We must continually add new users both to replace users who choose to delete their data and to increase our user base. Users may choose to delete their data for many reasons. If users are concerned about privacy and security and do not perceive BIGToken to be reliable, if we fail to keep users engaged and interested in our application,  or if we simply lose our users’ attention, we could fail to gather sufficient user data and our ability to earn revenues may be materially affected.


Certain user data must be recurrently provided in order to provide full value.


Certain types of user data will need to be contributed by users recurrently for such data to provide full value to our potential customers. If users fail to provide us with sufficient recurring data, the value of the user data may substantially decrease and our ability to earn revenues may be materially affected.


Unfavorable media coverage could negatively affect our business.


Unfavorable publicity regarding, for example, our privacy practices, terms of service, regulatory activity, the actions of third parties, the use of our products or services for illicit, objectionable, or illegal ends or the actions of other companies that provide similar services to us, could adversely affect our reputation. Such negative publicity also could have an adverse effect on the size, engagement, and loyalty of our user base and result in user attrition which could adversely affect our business and financial results.




11



 


Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, content, competition, consumer protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.


We are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business, such as privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, electronic contracts and other communications, competition, protection of minors, consumer protection, taxation and securities law compliance. Expansion of our activities in certain jurisdictions, or other actions that we may take, may subject us to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be more restrictive than those in the United States.


Additionally, as we allow European users, we are subject to the European General Data Protection Regulation (GDPR), effective as of May 2018. The GDPR increases privacy rights for individuals in Europe, extends the scope of responsibilities for data controllers and data processors and imposes increased requirements and potential penalties on companies offering goods or services to individuals who are located in Europe or monitoring the behavior of such individuals (including by companies based outside of Europe). Noncompliance can result in penalties of up to the greater of 20 million, or 4% of global company revenues. See Description of Business Government Regulation.”


These U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government authorities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the newer industry in which we operate, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.


These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede our international growth, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business.


Challenges in acquiring user data could materially adversely affect our ability to retain and expand BIGToken, and therefore could materially affect the business, financial condition and results of operations of both the BIGToken Group and the Company.


In order to expand BIGToken, we must continue to expend resources to make the submission of user data as user-friendly as possible. We, and our users, may face legal, logistical, cultural and commercial challenges in procuring user data. Additionally, once such data is obtained, if the process for validation and collection of Rewards may be perceived as too cumbersome and discourage potential users from submission. We may need to expend significant resources on user interfaces for evolving platforms, such as mobile devices. Inconveniences to our users or potential users at any stage of the process may materially challenge our growth.


If we fail to ensure that the user data in the BIGToken Application is of high quality, our ability to attract customers or monetize the data may be materially impaired.


The reliability of our user data depends upon the integrity and the quality of the process of accepting user data into BIGToken. We will take certain measures to validate user data submitted by our users and potential users to assure a high quality of data in BIGToken and generally confirming that data is submitted in accordance with our terms for such data. We must continue to invest in our quality control measures relating to BIGToken in order to provide a high quality product to potential customers.




12



 


If we are unable to manage our marketing and advertising expenses, it could materially harm our results of operations and growth.


We plan to rely in part on our marketing and advertising efforts to attract new members. Our future growth and profitability, as well as the maintenance and enhancement of our brand, will depend in large part on the effectiveness and efficiency of our marketing and advertising strategies and expenditures. If we are unable to maintain our marketing and advertising channels on cost-effective terms, our marketing and advertising expenses could increase substantially, and our business, financial condition and results of operations may suffer. In addition, we may be required to incur significantly higher marketing and advertising expenses than we currently anticipate if excessive numbers of members withdraw their Member Data from our Database.

 

Failure to comply with federal, state and local laws and regulations or our contractual obligations relating to data privacy, protection and security of BIGToken user data, and civil liabilities relating to breaches of privacy and security of user data, could damage our reputation and harm our business.


A variety of federal, state and local laws and regulations govern the collection, use, retention, sharing and security of user data. We will collect BIGToken user data from and about our members when they redeem Rewards and maintain that date in our BIGToken Application. Claims or allegations that we have violated applicable laws or regulations related to privacy, data protection or data security could in the future result in negative publicity and a loss of confidence in us by our users and potential new users, and may subject us to fines and penalties by regulatory authorities. In addition, we have privacy policies and practices concerning the collection, use and disclosure of user data as part of our agreements with our members, including ones posted on our website. Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies and practices. In addition, our use and retention of user data could lead to civil liability exposure in the event of any disclosure of such information due to hacking, malware, phishing, inadvertent action or other unauthorized use or disclosure. Several companies have been subject to civil actions, including class actions, relating to this exposure.


We have incurred, and will continue to incur, expenses to comply with data privacy, protection and security standards and protocols for BIGToken user data imposed by law, regulation, self-regulatory bodies, industry standards and contractual obligations. Such laws, standards and regulations, however, are evolving and subject to potentially differing interpretations, and federal, state and provincial legislative and regulatory bodies may expand current or enact new laws or regulations regarding privacy matters. Additionally, we accept user from foreign countries which subjects us to the personal and other data privacy, protection and security laws of those countries, We are unable to predict what additional legislation, standards or regulation in the area of privacy and security of personal information could be enacted or its effect on our operations and business.


If we are unable to satisfy data privacy, protection, security, and other government- and industry-specific requirements, our growth could be harmed.


We need or may in the future need to comply with a number of data protection, security, privacy and other government- and industry-specific requirements, including those that require companies to notify individuals of data security incidents involving certain types of personal data. Security compromises could harm our reputation, erode user confidence in the effectiveness of our security measures, negatively impact our ability to attract new members, or cause existing users to withdraw their data from BIGToken.




13



 


Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our business.


The United States and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict our ability to collect, process, use, transfer and pool data collected from and about consumers and devices. Trade associations and industry self-regulatory groups have also promulgated best practices and other industry standards relating to targeted advertising. Various U.S. and foreign governments, self-regulatory bodies and public advocacy groups have called for new regulations specifically directed at the digital advertising industry, and we expect to see an increase in legislation, regulation and self-regulation in this area. The legal, regulatory and judicial environment we face around privacy and other matters is constantly evolving and can be subject to significant change. For example, the General Data Protection Regulation, or GDPR, which was agreed by E.U. institutions in 2016 and came into effect after a two year transition period on May 25, 2018, updated and modernized the principles of the 1995 Data Protection Directive and significantly increases the level of sanctions for non-compliance. Data Protection Authorities will have the power to impose administrative fines of up to a maximum of 20 million or 4% of the data controller’s or data processor’s total worldwide turnover of the preceding financial year. Similarly, the E-Privacy Regulation, which was launched by the European Parliament in October 2016, could result in, once enacted, new rules and mechanisms for "cookie" consent. In addition, the interpretation and application of data protection laws in the U.S., Europe and elsewhere are often uncertain and in flux. Legislative and regulatory authorities around the world may decide to enact additional legislation or regulations, which could reduce the amount of data we can collect or process and, as a result, significantly impact our business. Similarly, clarifications of and changes to these existing and proposed laws, regulations, judicial interpretations and industry standards can be costly to comply with, and we may be unable to pass along those costs to our clients in the form of increased fees, which may negatively affect our operating results. Such changes can also delay or impede the development of new solutions, result in negative publicity and reputational harm, require significant incremental management time and attention, increase our risk of non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business practices, including our ability to charge per click or the scope of clicks for which we charge. Additionally, any perception of our practices or solutions as an invasion of privacy, whether or not such practices or solutions are consistent with current or future regulations and industry practices, may subject us to public criticism, private class actions, reputational harm or claims by regulators, which could disrupt our business and expose us to increased liability. Finally, our legal and financial exposure often depends in part on our clients’ or other third parties' adherence to privacy laws and regulations and their use of our services in ways consistent with visitors’ expectations. We rely on representations made to us by clients that they will comply with all applicable laws, including all relevant privacy and data protection regulations. We make reasonable efforts to enforce such representations and contractual requirements, but we do not fully audit our clients’ compliance with our recommended disclosures or their adherence to privacy laws and regulations. If our clients fail to adhere to our contracts in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our own solutions, services and data collection, use and sharing practices in our own disclosures to consumers, then we and our clients may be subject to potentially adverse publicity, damages and related possible investigation or other regulatory activity in connection with our privacy practices or those of our clients.


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


We rely on third party vendors to provide us with media inventory to facilitate sales of advertising, the majority of which are engaged on a per order basis. Due to our lack of working capital, we are delinquent on payments to several of these media suppliers. While we will attempt to negotiate payment terms and forbearance agreements with these vendors on a case by case basis, many of these vendors may cease providing services to our company and may seek legal remedies against us. Any loss of these vendors or ligation arising out of our failure to satisfy our obligations to any of these vendors could disrupt our business and have a material negative effect on our operations.




14



 


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


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


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


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


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


Our success largely depends on the efforts and abilities of our executive officers, including Christopher Miglino, Kristoffer Nelson and Michael Malone. We are a party to an employment agreement with each of Mr. Miglino, and Mr. Malone, and an "at will" agreement with Mr. Nelson. Although we do not expect to lose their services in the foreseeable future, the loss of any of them could materially harm our business and operations in future periods until such time as we were able to engage a suitable replacement.


If advertising on the Internet loses its appeal, our revenue could decline.


Our business model may not continue to be effective in the future for a number of reasons, including:


·

a decline in the rates that we can charge for advertising and promotional activities;


·

our inability to create applications for customers;


·

Internet advertisements and promotions are, by their nature, limited in content relative to other media;


·

companies may be reluctant or slow to adopt online advertising and promotional activities that replace, limit or compete with their existing direct marketing efforts;


·

companies may prefer other forms of Internet advertising and promotions that we do not offer;


·

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


·

regulatory actions may negatively impact our business practices.


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




15



 


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


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


·

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


·

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


·

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


·

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


·

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


·

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


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


Weak economic conditions may reduce consumer demand for products and services .


A weak economy in the United States could adversely affect demand for advertising products, and services. A substantial portion of our revenue is derived from businesses that are highly dependent on discretionary spending by individuals, which typically falls during times of economic instability. Accordingly, the ability of our advertisers to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments remain weak or decline further. We currently are unable to predict the extent of any of these potential adverse effects.


Certain of our subsidiaries and business affiliates have operations outside of the United States that are subject to numerous operational risks.


Certain of our subsidiaries and business affiliates have operations in countries other than the United States. In many foreign countries, it is not uncommon to encounter business practices that are prohibited by certain regulations, such as the Foreign Corrupt Practices Act and similar laws. Although certain of our subsidiaries and business affiliates have undertaken compliance efforts with respect to these laws, their respective employees, contractors and agents, as well as those companies to which they outsource certain of their business operations, may take actions in violation of their policies and procedures. Any such violation, even if prohibited by the policies and procedures of these subsidiaries and business affiliates or the law, could have certain adverse effects on the financial condition of these subsidiaries and business affiliates. Any failure by these subsidiaries and business affiliates to effectively manage the challenges associated with the international operation of their businesses could materially adversely affect their, and hence our, financial condition.




16



 


Risks Related to Ownership of our Class A common stock.


We do not know whether an active and liquid trading market will develop for our Class A common stock.


The trading of our Class A common stock may be viewed as relatively sporadic and with limited liquidity. The lack of an active and liquid market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. Further, an inactive market may also impair our ability to raise capital by selling shares of our Class A common stock and may impair our ability to enter into collaborations or acquire companies or products by using our shares of Class A common stock as consideration. The market price of our offered securities may be volatile, and you could lose all or part of your investment.


The market price of our Class A common stock may be volatile.


The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than those of a seasoned issuer. The volatility in our share price is attributable to a number of factors. Mainly however, we are a speculative or “risky” investment due to our limited operating history, lack of significant revenues to date, our continued operating losses and missed guidance. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Additionally, in the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.


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


 

·

the success of competitive products;

 

 

 

 

·

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

 

 

 

 

·

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

 

 

 

 

·

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

 

 

 

 

·

the recruitment or departure of key personnel;

 

 

 

 

·

the level of expenses;

 

 

 

 

·

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

 

 

 

 

·

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

 

 

 

 

·

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

 

 

 

 

·

inconsistent trading volume levels of our shares;

 

 

 

 

·

announcement or expectation of additional financing efforts;

 

 

 

 

·

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

 

 

 

 

·

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

 

 

 

 

·

market conditions in the technology sectors; and

 

 

 

 

·

general economic, industry and market conditions.




17



 


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


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


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


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


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


Delaware law contains anti-takeover provisions that could deter takeover attempts that could be beneficial to our stockholders.


Provisions of Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. Section 203 of the Delaware General Corporation Law may make the acquisition of our company and the removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring us, without our board of directors' consent, for at least three years from the date they first hold 15% or more of the voting stock.


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


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


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


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




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


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


Risks Related to our Non-Voting Preferred Tracking Stock


Your ownership of the Non-Voting Preferred Tracking Stock will subject you to the risks associated with an investment in SRAX as a whole without the benefits of ownership.

 

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


The shares of Non-Voting Preferred Tracking Stock may be redeemed, converted, or exchanged by the us without your consent.


Upon meeting certain conditions and events, SRAX may, with respect to the Non-Voting Preferred Tracking Stock: (i) declare dividends, (ii) force a redemption for cash or securities, or (iii) convert your shares into SRAX Common Stock. As a result, the value of the Noon-Voting Preferred Tracking Stock may be greatly impacted and substantially less than the offering price of the shares in this offering. A further discussion of these features is contained in the Description of Securities section of this Prospectus.


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


The value of the Non-Voting Preferred Tracking Stock is dependent on the BIGToken Application achieving profitability. As of June 30, 2019, the BIGToken Application has not generated any revenue and has accumulated substantial costs. In the event the BIGToken Application does not achieve profitability, your shares of Non-Voting Preferred Tracking stock may not have any value at all. There can be no assurances that the BIGToken Application will ever generate any revenue, or will ever achieve profitability. Furthermore, even if the BIGToken Application becomes profitable, it may be discontinued by the board of directors of BIGToken at any time without your input.


Your election to receive our Non-Voting Preferred Tracking Stock or any of the Rewards will result in a tax consequences to you.


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




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There is no market for the Non-Voting Preferred Tracking Stock.

 

There is no market for the Non-Voting Preferred Tracking Stock. There is a limited ability of a security holder to sell their securities, if any, as those transfers or sales would be made privately. In addition to private sales, the only way to recognize value in the Non-Voting Preferred Tracking stock is through redemption, conversion, or exchange pursuant to the terms of the Non-Voting Preferred Tracking Stock. As a result, you should consider the Non-Voting Preferred Tracking Stock totally illiquid, and investors may not be able to liquidate their investment readily, or at all.


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


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


The Non-Voting Preferred Tracking Stock has no ownership in the asset of BIGToken, Inc. or SRAX.


The Non-Voting Preferred Tracking Stock has no ownership in the assets of BIGToken, Inc. or SRAX. Holders of the Non-Voting Preferred will only be able to participate in the financial performance of the BIGToken Application.  In the event the BIGToken Application does not perform as expected, the Non-Voting Preferred Tracking Stock may have little or no value.


There is no public market for the Non-Voting Preferred Tracking Stock and an investment in the shares should be considered totally illiquid.


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


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


SRAX does not presently intend to pay cash dividends on the Non-Voting Preferred Tracking Stock. SRAX has the right to pay dividends to holders of its Common Stock and Non-Voting Preferred Tracking Stock in equal or unequal amounts, and SRAX may elect to pay dividends on the shares of Common Stock and not pay dividends on shares of Non-Voting Preferred Tracking Stock. In addition, any dividends or distributions on, or repurchases of, shares of Common Stock only, will reduce SRAX’s assets legally available to be paid as dividends on the shares relating to the Non-Voting Preferred Tracking Stock.


The interests of the Common Stockholders and Non-Voting Preferred Tracking Stockholders may diverge.

 

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


·

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


·

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




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·

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


·

decisions as to the conversion, redemption, dividends of, or other transactions related to the Non-Voting Preferred Tracking Stock pursuant to which SRAXs Board of Directors may make in its sole discretion;


·

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


·

Decisions regarding internal or external financing attributable to businesses or assets attributed to either the BIGToken Group or SRAX; and


·

Decisions as to the dispositions of certain assets.


The board of directors of SRAX may change the tracking stock policy without the approval of the holders of the Non-Voting Preferred Tracking Stock.


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

 

Holders of Non-Voting Preferred Tracking Stock may not have any remedies if any action by SRAX’s directors or officers has an adverse effect on the Non-Voting Preferred Tracking Stock.


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


SRAX may dispose of assets of the BIGToken Group without the approval of holders of the Non-Voting Preferred Tracking Stock.


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


·

declare and pay a dividend on the Non-Voting Preferred Tracking Stock;

·

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

·

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




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

 

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


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

 

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


The Certificate of Incorporation permits the Board of Directors, in its sole discretion, to convert all of the outstanding shares of Non-Voting Preferred Tracking Stock into Common Stock at such time as the Common Stock is traded on a U.S. securities exchange and the shares are converted at a ratio that provides the holders of the Non-Voting Preferred Tracking Stock with the applicable conversion amount as set forth in the Certificate of Incorporation and as more fully described in the Description of Securities section herein. A conversion would preclude the holders of Non-Voting Preferred Tracking Stock from retaining their ownership in a security that is intended to reflect separately the performance of the BIGToken Group. If SRAX exercises its option to convert all outstanding shares of Preferred Tracking Stock into shares of Common Stock, such conversion would effectively eliminate the tracking stock structure because, upon conversion, the holders of the Non-Voting Preferred Tracking Stock would hold only Common Stock, which does not track the performance of any distinct program, application, business unit, or product line. Upon any such conversion, for example, holders would no longer have certain redemption or conversion provisions related to the Non-Voting Preferred Tracking Stock.





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USE OF PROCEEDS


We will not receive any proceeds from the issuance of the Non-Voting Preferred Tracking Stock pursuant to the Rewards Program.






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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS


The following discussion is a summary of the material U.S. federal income tax considerations relating to the purchase, ownership and disposition of the shares, but does not purport to be a complete analysis of all potential tax effects and does not address the effects of any state, local, alternative minimum, estate, gift or non-U.S. tax laws. This discussion is based upon the U.S. Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations issued thereunder, and judicial and administrative interpretations thereof, each as in effect on the date hereof , and all of which are subject to change, possibly with retroactive effect and to differing interpretations, all of which could result in U.S. federal income tax considerations different from those described below. No rulings from the Internal Revenue Service (“IRS”) have been or are expected to be sought with respect to the matters discussed below. The discussion below is not binding on the IRS or the courts. Accordingly, there can be no assurance that the IRS will not take a different position concerning the tax consequences of the purchase, ownership or disposition of the shares or that any such position would not be sustained.


This discussion does not address all of the U.S. federal income tax considerations that might be relevant to a beneficial owner in light of such beneficial owner’s particular circumstances. This discussion is limited to holders who hold the shares as capital assets within the meaning of Section 1221 of the Code.


·

an individual who is a citizen or resident of the United States;


·

a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;


·

an estate the income of which is subject to U.S. federal income taxation regardless of its source; or


·

a trust if (1) it is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.


For purposes of this discussion, a “U.S. holder” is a beneficial owner of shares that is, for U.S. federal income tax purposes:

 

For purposes of this discussion, a “non-U.S. holder” is a beneficial owner of shares that is (i) a foreign corporation, (ii) a nonresident alien individual, or (iii) a foreign estate or trust that in each case is not subject to U.S. federal income tax on a net-income basis on income or gain. Special rules may apply to certain non-U.S. shareholders such as “controlled foreign corporations,” or, in certain circumstances, individuals who are U.S. expatriates. Such entities should consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them.


We intend, and this summary assumes, that all shares issued pursuant to the offering either will be exempt from or will comply with the requirements of Section 409A of the Code regarding nonqualified deferred compensation such that its income inclusion and tax penalty provisions will not apply to the shareholders. The offering and any issuance of shares made under the offering will be administered consistently with this intent.


Prospective investors considering the purchase of shares should consult their own tax advisors concerning the particular U.S. federal income tax consequences to them of the ownership of the shares in light of their specific situation, as well as the consequences to them arising under the laws of any other taxing jurisdiction.


Classification of the Company


The Company has elected to be treated as a corporation for U.S. federal and state income tax purposes. The following discussion presumes that the Company is taxable as a corporation.




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U.S. Shareholders


The following discussion is a summary of certain U.S. federal income tax considerations applicable to a U.S. shareholder of shares.


Issuance of Shares


The receipt of shares by a shareholder in exchange for Member Data should result in the recognition of ordinary income by the shareholder in an amount equal to the excess of the fair market value of such shares on the date of purchase over the purchase price paid for such shares (i.e., zero). The holding period for such shares will commence just after the date the shares are purchased. Any income recognized at such time by a shareholder should not be subject to income tax withholding by the Company under the assumption that the shareholder is not an employee of the Company. The shareholder’s basis in the shares will be equal to the purchase price (i.e., zero), increased by the amount of ordinary income recognized. The Company believes that the issuance of shares either meets the requirements of Code Section 409A, or qualifies for an applicable exemption, and the offering is expected to avoid its adverse tax consequences.


Distributions to U.S. Shareholders


Distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions made on our shares that are treated as dividends generally will be included in a U.S. shareholder’s income as ordinary dividend income. With respect to noncorporate taxpayers, including individuals, such dividends are generally subject to reduced tax rates of U.S. federal income tax provided certain holding period requirements are satisfied.


Amounts not treated as dividends for U.S. federal income tax purposes will constitute a non-taxable return of capital and first be applied against and reduce a U.S. shareholder’s adjusted tax basis in its shares, but not below zero. Any excess will be treated as capital gain and will be treated as described below.


Sale or Taxable Disposition of Shares by U.S. Shareholders


Upon the sale , exchange or other taxable disposition of our shares, a U.S. shareholder generally will recognize capital gain or loss equal to the difference between (i) the amount of cash and the fair market value of any property received upon the sale or exchange and (ii) the U.S. shareholder’s adjusted tax basis in the shares. Such capital gain or loss will be long-term capital gain or loss if the U.S. holder’s holding period in the shares is more than one year at the time of the sale, exchange or other taxable disposition. Long -term capital gains recognized by certain noncorporate U.S. shareholders, including individuals, will generally be subject to reduced rates of U.S. federal income tax. The deductibility of capital losses is subject to limitations.


Medicare Contributions Tax


Certain U.S. shareholders who are individuals, estates or certain trusts must pay a 3.8% tax on the U.S. person’s “net investment income.” Net investment income generally includes, among other things, dividend income and net gains from the disposition of our shares. A U.S. holder that is an individual, estate or trust should consult its tax advisor regarding the applicability of the Medicare tax to its income and gains in respect of its investment in our shares.






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PLAN OF DISTRIBUTION


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


We are offering up to 20,000,000 shares of Non-Voting Preferred Tracking Stock to users of our BIGToken Application pursuant to the Rewards Program.  Shares can be issued in fractional amounts as small as 0.00000001 of a share. The Non-Voting Preferred Tracking Stock being registered in this prospectus will only be issued to eligible users in the United States pursuant to the Company’s Rewards Program. Furthermore, pursuant to the laws of individual states and territories of the United States, certain users may be ineligible to receive the Non-Voting Preferred Tracking Stock.  Eligibility requirements are further contained in the rules and terms as updated and amended from time to time contained at https://bigtoken.com .


We are offering the shares directly, without an underwriter or placement agent, and on a continuous basis. We do not have to sell any minimum amount of shares. We cannot assure you that all shares we are offering will be sold. The shares will not be listed on any securities exchange or automated quotation system, there will not be any public trading market for the shares, and the shares are non-transferable, except in compliance with applicable securities laws. The intended methods of offer include; our BIGToken mobile and desktop application, website promotion, digital and other advertising, email, telephone, direct mail solicitations and personal contacts. Shares must be purchased directly from us by providing user data via our BIGToken Application and delivering such documentation as we reasonably request.


No underwriter, broker or dealer is involved in this offering and there will be no underwriting, brokerage or dealer commissions paid in connection with this offering.


This prospectus will be furnished to prospective investors upon their request via electronic PDF format and will be available for viewing and download 24 hours per day, seven days per week on our website, subject to planned or unplanned interruptions of website access, as well as on the SEC’s website at www.sec.gov.







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DESCRIPTION OF SECURITIES TO BE REGISTERED


General

 

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

 

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

 

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


·

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

·

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

·

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

·

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

 

As of September 30 , 2019, we had: (i) 13,997,452 shares of Class A common stock outstanding, (ii) no shares of Class B common stock or preferred stock outstanding, and (iii) an aggregate of 15,612,946 special dividend rights outstanding.

 

Common Stock

 

Voting Rights

 

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

 

 

·

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

 

 

 

 

·

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

 

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

 

Dividends

 

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

 

Liquidation Rights

 

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




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Subdivision or Combinations.

 

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

 

Conversion

 

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

 

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


·

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


·

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

 

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


Dual Class Structure

 

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

 

Preferred Stock

 

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


Preferred Stock to be issued pursuant to this Prospectus:


BIGToken Preferred Tracking Stock


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


The Non-Voting Preferred Tracking Stock being registered in this prospectus will only be issued to eligible users in the United States pursuant to the Company’s Rewards Program. Furthermore, pursuant to the laws of individual states and territories of the United States, certain users may be ineligible to receive the Non-Voting Preferred Tracking Stock.  Eligibility requirements are further contained in the rules and terms as updated and amended from time to time contained at https://bigtoken.com .




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A user of the BIGToken platform who terminates his or her participation in the application will not retain his or her points.  All data associated with such user will be permanently erased from the BIGToken platform.  Shares of Non-Voting Preferred Tracking Stock will remain outstanding for such individuals who redeemed their Non-Voting Preferred Tracking Stock prior to such termination.


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


Dividends


Dividends may be declared on the Non-Voting Preferred Tracking Stock at the sole discretion of the Board of Directors and shall be paid only out of the lesser of (i) corporate assets legally available therefor and (ii) an amount equal to the then in effect allocation percentage (to be determined by the Board and updated pursuant to the Preferred Tracking Stock Policy from time to time at the discretion of the Board of Directors , which shall initially be five percent (5%) – (“Allocation Percentage”), multiplied by the amount that would be legally available had the assets of BIGToken, including its assets, liabilities, and operations (“BIGToken Group”) been separate from SRAX.  Dividends may be paid out in cash, property or shares of capital stock of SRAX.


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


Voting Rights


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


Liquidation


Upon a liquidation or winding-up of SRAX, or the BIGToken Group, after payments of debts and liabilities and any preferences due to holders of other classes or series of capital stock, the holders of Non-Voting Preferred Tracking Stock shall be entitled to receive:


(a)

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


(b)

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


Redemption/Exchange of Preferred Tracking Stock by the Company


Redemption for Cash at the Election of SRAX -- At any time after the six (6) month anniversary of each Non-Voting Preferred Tracking Stock, but at least ten (10) trading days prior to the optional redemption date (the last business day of each calendar quarter), SRAX may provide a notice to each holder of its election to redeem some or all of the then outstanding shares of Non-Voting Preferred Tracking Stock at the next occurring last day of a calendar quarter for an amount equal to (i) the market value of BIGToken Group multiplied by the Allocation Percentage, divided by (ii) the total number of issued and outstanding shares of the Preferred Tracking Stock.


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


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




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Dividend, Redemption or Conversion in Case of BIGToken Group Disposition


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


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


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


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


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


Conversion of Preferred Tracking Stock into Common Stock


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


Special Dividend Right

 

On September 17, 2018, we issued the holders of (i) our Class A common stock, (ii) certain of our outstanding Class A common stock purchase warrants, and (iii) the then outstanding 12.5% secured convertible debentures, a right to receive a special dividend, if and when declared, consisting of such number and designation of BIGToken (the “Special Dividend”) as determined by our management at their sole discretion.  Such dividend right will expire if not declared on or before 5:00 p.m. ET on December 31, 2019, unless extended by the Company.


The Special Dividend is anticipated to be (i) an analog security, (ii) be a fractional non-voting security, and (iii) participate only in the revenue of the BIGToken platform.


BIGToken Preferred Tracking Stock Policy


We have adopted a formal Policy Statement regarding our Non-Voting Preferred Tracking Stock. The following summary is qualified in its entire by the Policy Statement filed as an exhibit to the registration statement related to this prospectus.   




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General Policy


The Non-Voting Preferred Tracking Stock is intended to initially reflect the direct and indirect economic rights of the BIGToken Group, as defined in the section of this prospectus entitled “ Description of Securities. ” From time to time additional assets and liabilities may be allocated to the BIGToken Group in accordance with the rights, preferences and limitations set forth in the SRAX’s certificate of incorporation, as amended, including the Certificate of Designation of Preferences, Rights and Limitations of BIGToken Preferred Tracking Stock (collectively, the “ Certificate of Incorporation ”), the Bylaws of the Corporation (“Bylaws”) and as set forth herein in this Tracking Stock Policy Statement.


All material matters as to which the holders of the Class A Common Stock and the holders the Non-Voting Preferred Stock may have potentially divergent interests will be resolved by the Board of Directors or any committee appointed by the Board of Directors or in such manner as expressly provided in the Policy Statement, Bylaws, the Capital Stock Committee (as defined below) determine in accordance with such directors’ business judgment to be in the best interests of SRAX and its stockholders as a whole. All capitalized terms used but not defined herein have the respective meanings assigned thereto in the section of this prospectus entitled “ Description of Securities ”).

 

Amendment and Modification


The Board may, with the approval of the Capital Stock Committee but without stockholder approval, subject in each case to any limitations set forth in the Certificate of Incorporation, the Bylaws and to any limitations imposed by the fiduciary duties of the Board or applicable law, change the policies set forth in the Policy Statement, including any resolution implementing the provisions of this Policy Statement. The Board also may, with the approval of the Capital Stock Committee but without stockholder approval, adopt additional policies or make exceptions with respect to the application of the policies described in this Policy Statement in connection with particular facts and circumstances, all as the Board may determine in accordance with its business judgment to be in the best interests of SRAX and its stockholders as a whole. Any decision by the Board to amend, modify or rescind this Policy Statement shall require the approval of the Capital Stock Committee and will be final, binding and conclusive.

 

Corporate Opportunities


The Board will allocate any business opportunities and operations and any acquired assets and businesses between the SRAX Group and the BIGToken Group (together, the “ Groups ” and as each is described in the section of this prospectus entitled “ Description of Securities ”), in whole or in part, in a manner it considers in accordance with its business judgment to be in the best interests of SRAX and its stockholders as a whole. Any allocation of this type may involve the consideration of a number of factors that the Board determines to be relevant including, without limitation: (a) whether the business opportunity or operation, or the acquired asset or business, is principally within or related to the then existing scope of one Group’s business; (b) whether one Group is better positioned to undertake or have allocated to it that business opportunity or operation, acquired asset or business; and (c)  existing contractual agreements and restrictions.


No Group will be prohibited from: (a) engaging in the same or similar business activities or lines of business as the other Group; (b) doing business with any potential or actual supplier, competitor or customer of the other Group; or (c)engaging in, or refraining from, any other activities whatsoever relating to any of the potential or actual suppliers, competitors or customers of the other Group.


In addition, neither SRAX nor any Group will have any duty, responsibility or obligation: (a) to communicate or offer any business or other corporate opportunity that one Group has to the other Group, including any business or other corporate opportunity that may arise that either Group may be financially able to undertake, and that is, from its nature, in the line of either Group’s business and is of practical advantage to either Group; (b) to have one Group provide financial support to the other Group; or (c) otherwise to have one Group assist the other Group.


Relationship between the Groups


SRAX will manage its businesses and the businesses in the BIGToken Group in a manner intended to maximize the operations, assets and value of both Groups, and with complementary deployment of personnel, capital, and facilities, consistent with their respective business objectives. All material commercial transactions in the ordinary course of business between the Groups are intended, to the extent practicable, to be on terms consistent with terms that would be applicable to arm’s-length dealings with unrelated third parties. Neither Group is under any obligation to use or make available to its customers services provided by the other Group, and each Group may use or make available to its customers services provided by a competitor of the other Group.



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The Board may, with the approval of the Capital Stock Committee but without stockholder approval, otherwise allocate and reallocate assets and liabilities from one Group to the other. Any such reallocation will be effected by: (a)  the reallocation of other assets or consideration (including services) of the transferee Group to the transferor Group and/or of liabilities of the transferor Group to the transferee Group; (b)  in the case of a reallocation of assets, the creation of inter-Group debt owed by the transferee Group to the transferor Group or the reduction of inter-Group debt owed by the transferor Group to the transferee Group; or (c) a combination thereof; in each case, in an amount having a fair value equivalent to the fair value of the assets or liabilities reallocated by the transferor Group. For these purposes, the fair value of the assets or liabilities transferred will be determined in accordance with the Certificate of Incorporation to the extent applicable and otherwise by the Board with the approval of the Capital Stock Committee, in each case in good faith in accordance with its business judgment.


Initially, all of the debt and preferred stock of SRAX and its subsidiaries (other than debt and preferred stock of BIGToken Sub and its subsidiaries, if any) will be allocated to SRAX. Thereafter, each transaction, issuance, repurchase, dividend or issuance of debt will be attributed to the respective Group receiving the benefit or on whose account the action was undertaken.


Subject to the limitations set forth in the Certificate of Incorporation and to applicable law, the determination of any Group, as of any given date, will take into account the following factors, as determined by the Capital Stock Committee: (a) the direct and indirect interest of the Group and any of its subsidiaries in all of the businesses, assets, properties, liabilities and preferred stock of such Group or any of its subsidiaries; all assets, liabilities and businesses acquired or assumed by the SRAX or any of its subsidiaries for the account of a certain Group, or contributed, allocated or transferred to a Group (including the net proceeds of any issuances, sales or incurrences for the account of such Group’s securities, or indebtedness or preferred stock attributed to the and (c) all net income and net losses arising in respect of the foregoing and the proceeds of any disposition of any of the foregoing.


Financial Reporting


SRAX will prepare and include in its filings with the Securities and Exchange Commission consolidated financial statements of SRAX and segment information with respect to the SRAX Group and BIGToken Group in accordance with GAAP for so long as shares of Non-Voting Preferred Stock are outstanding. For purposes of these financial statements, the SRAX Group and BIGToken Group will be allocated debt and preferred stock in accordance with GAAP.


Shared Services and Support Activities . If the BIGToken Group is allocated operating assets, the Corporation will directly charge specifically identifiable corporate overhead and other costs to the BIGToken Group. Where determinations based on specific usage alone are impracticable, the Corporation will use other allocation methods that it believes are fair, including methods based on factors such as the number of employees in and total revenues generated by each Group.

 

Preferences, Rights, Qualifications, Limitations or Restrictions of Preferred Stock


Once every calendar quarter, the Capital Stock Committee will determine certain rights, qualification, limitations or restrictions related to the Non-Voting Preferred Stock. The determination of the Capital Stock Committee will be posted at least 10 days prior to the end of each respective quarter to the BIGToken website Bigtoken.com/preferred.  The determinations made will be effective for the following calendar quarter and any issuance of Non-Voting Preferred Stock occurring during such quarter. By way of example, if on March 20 the Capital Stock Committee makes a determination, such determination will be operative with respect to any shares of Non-Voting Preferred Stock issued from April 1 until the end of the calendar quarter on June 30.  Specifically, the Capital Stock Committee will determinate the following item (the “Quarterly Determination”):


Preferred Tracking Stock Allocation Percentage.


By electing to receive shares of Preferred Stock, the holder agrees to be bound by the rights, preferences and limitations set forth in the Certificate of Incorporation, as well as the Quarterly Determination of the Capital Stock Committee as posted on the BIGToken website at: www.bigtoken.com/preferred.




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Capital Stock Committee


SRAX will establish a standing committee of the Board known as the Capital Stock Committee (the “Capital Stock Committee”). The Capital Stock Committee shall consist of at least three members, and shall at all times be composed of a majority of directors who satisfy the independence requirements required to serve on the audit committee of a company listed on the principal securities exchange on which SRAX’s Common Stock is listed or if the Common Stock is not so listed, then of a company listed on the NASDAQ Stock Market. Each director serving on the Capital Stock Committee will have one vote on all matters presented to such committee. The Capital Stock Committee will have such powers, authority and responsibilities as are set forth in the Bylaws and in the Policy Statement, and such other powers, authority and responsibilities as the Board may grant to such committee, which shall include the authority to engage the services of accountants, investment bankers, appraisers, attorneys and other service providers to assist in discharging its duties.


In making determinations, the members of the Board and the Capital Stock Committee will act in a fiduciary capacity and pursuant to legal guidance concerning their respective obligations under applicable law. The members of the Board and of the Capital Stock Committee, in performing their duties in connection with the matters covered by the Policy Statement, shall be fully protected in relying in good faith upon the records of SRAX and upon such information, opinions, reports, advice or statements presented to SRAX, the Board or the Capital Stock Committee by any of SRAX’s officers or employees, or other committees of the Board, or by any accountants, investment bankers, appraisers, attorneys and other service providers retained by or on behalf of SRAX, the Board or the Capital Stock Committee.


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

 

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

 

Special Approval for Change in Control Transactions

 

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

 

 

·

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

 

 

 

 

·

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

 

Undesignated Preferred Stock

 

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

 

Requirements for Advance Notification of Stockholder Nominations and Proposals

 

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

 



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Delaware Anti-Takeover Statute

 

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

 

 

·

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

 

 

 

 

·

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

 

 

 

 

·

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

 

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

 

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

 

Transfer Agent and Registrar

 

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







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OUR BUSINESS


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


·

sales of digital advertising campaigns to advertising agencies and brands;

·

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

·

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

·

sales of proprietary consumer data.


The core elements of our business are:


Ad Exchange or "SRAX"    Real Time Bidding buy side representation  is our technology which assists buyers of media to deliver their message to the right audience at the right time. We also build custom platforms that allow our agency partners to launch and manage their own RTB campaigns by enabling them to directly place advertising orders on the platform dashboard and view and analyze results as they occur;


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


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


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


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


BIGToken which is a platform that allows consumers to manage and participate in the sales of their digital data.


Marketing and sales


We market our services through our in-house sales team, which is divided into two distinct activities. One group is responsible for brand advertisers and advertising agencies, and the other is responsible for publisher acquisition and management. Our in-house marketing is focused on social media, including Facebook, LinkedIn and Twitter, public relations (PR), industry events and the creation of white papers which assist in our marketing efforts and are used as lead generation tools for our sales team. We also attend industry specific events such as AdTech, AdExchanger, and Salesforce annual events and local events in Los Angeles and New York.


Intellectual property


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




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Competition


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


BIGToken Application


On February 1, 2019, BIGToken became generally available to the public. Users of BIGToken receive points for undertaking certain actions on the platform. These points are then redeemable from us pursuant to our Rewards Program. Our Rewards Program allows the user to redeem points for: (i) cash, (ii) gift cards, (iii) donations to non-profit organizations, and (iv) shares of Non-Voting Preferred Tracking Stock. We also anticipate that users will be able to redeem the points for goods and/or services offered by our sponsors and advertisers. The value each point being redeemed is at the discretion of management and we anticipate at the discretion of our sponsors with regard to goods and/or services they offer via BIGToken. As of June 30, 2019, we have not generated any revenue through the sale of data gathered from users of BIGToken. Since commencing the BIGToken project, we have spent approximately $4 million in the development and management of BIGToken. We are currently redeeming each points for US based registered users at $.01 per point and points from international users at a variety of  rates ($0.001 to $0.01), based on the estimated value of data in the particular country or jurisdiction subject to the user meeting certain conditions, including, being a US resident. As of June 30, 2019, we recorded a contingent liability of approximately $187,000 and we have redeemed an aggregate of 12 million points for $120,000. In March of 2019, we experienced a surge in the number of users of our BIGToken Platform. As of June 30, 2019, we had approximately 15.5 million users, based upon the points accumulated by qualified users, we may be required to redeem in excess of $500,000 worth of points.


Notwithstanding the foregoing, we believe that in order to fully launch the BIGToken Platform and recognize all the benefits therefrom, not only will we be required to further increase the functionally of the platform (the development of blockchain technology that has yet to be developed and implemented regarding the tracking of brand transactions) but we will also need to comply with both state and federal securities laws and regulations with regard to certain aspects of the platform. There can be no assurances that we will be able to develop the blockchain portion of the application or that we will be able to comply with any applicable laws or regulations on a timely basis, if at all. Our failure to fully development the application or to adequately comply with applicable laws and regulations, or comply with them on a timely basis, will greatly impact the value and utility of the BIGToken Application and could materially impact the operations of our company.


Government regulation


Aspects of the digital marketing and advertising industry and how our business operates are highly regulated. We are subject to a number of domestic and, to the extent our operations are conducted outside the U.S., foreign laws and regulations that affect companies conducting business on the Internet and through other electronic means, many of which are still evolving and could be interpreted in ways that could harm our business. In particular, we are subject to rules of the Federal Trade Commission, or FTC, the Federal Communications Commission, or FCC, and potentially other federal agencies and state laws related to our advertising content and methods.




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


Privacy and Data Protection


Privacy and data protection laws play a significant role in our business. In the United States, at both the state and federal level, there are laws that govern activities such as the collection and use of data by companies like us and privacy and data protection issues generally have gained wide media and public attention recently. Online advertising activities in the United States have primarily been subject to regulation by the FTC, which has regularly relied upon Section 5 of the Federal Trade Commission Act to enforce against unfair and deceptive trade practices. Section 5 has been the primary regulatory tool used to enforce against alleged violations of online privacy policies and would apply to privacy practices in the mobile advertising industry. In December 2012, the FTC adopted amendments to rules under COPPA, which went into effect in July 2013. These amendments broadened the potential applicability of COPPA compliance obligations to our activities and those of our clients. Further, Europe’s new General Data Protection Regulation (which came into force in May 2018) extends the jurisdictional scope of European data protection law. As a result, we will be subject to the European Union’s General Data Protection Regulation (“GDPR”) when we provide our media and data services in Europe. The GDPR imposes stricter data protection requirements that may necessitate changes to our services and business practices.


The issue of privacy online privacy in general and in the advertising industry is rapidly evolving. Federal legislation and rulemaking has been proposed from time to time that would govern certain advertising practices which we currently undertake, such as geotracking. Although such legislation has not been enacted, it remains a possibility that such federal and state laws may be passed in the future.


In addition, our services are generally not restricted by geographic boundaries and our services reach individuals throughout the world. We transact business with our customers in Europe and Southeast Asia and, as a result, some of our activities may also be subject to the laws of foreign jurisdictions. In particular, European data protection laws can be more restrictive regarding the collection and use of data than those in U.S. jurisdictions. As we continue to expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.


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


Employees


At September 30, 2019 we had 48 full-time employees. We also contract for the services of a number individuals from a third-party provider. There are no collective bargaining agreements covering any of our employees.


Our history


We were originally organized in August 2009 as a California limited liability company under the name Social Reality, LLC, and we converted to a Delaware corporation effective January 1, 2012. Social Reality, LLC began business in May, 2010. Upon the conversion, we changed our name to Social Reality, Inc. On July August 25, 2019, we formally changed our name to SRAX, Inc.




37



 


Additional information

 

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


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


Our wholly owned subsidiary, BIGToken, Inc. maintains a website at Bigtoken.com. The reference to the BIGToken, Inc. web address does not constitute incorporation by reference of the information contained at this site into this prospectus except with respect to the information contained on www.bigtoken.com/preferred, as may be amended from time to time.




38



 


PROPERTIES


We lease our principal executive offices from an unrelated third party on a month-to-month basis, subject to termination with advance notice, at an amount of $5,823.00 per month. We also maintain offices in Mexicali, Mexico where we lease approximately 3,400 square feet of office space from an unrelated third party under a lease agreement terminating in September 2021 at an initial annual rental of $77,580 plus a value-added tax (VAT) or its equivalent in the Mexican national currency and a 10% VAT for maintenance and certain overhead expenses.






39



 


MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


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


 

 

High

 

 

Low

 

 

 

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

First quarter ended March 31, 2017

 

$

6.14

 

 

$

1.58

 

Second quarter ended June 30, 2017

 

$

1.93

 

 

$

1.14

 

Third quarter ended September 30, 2017

 

$

5.75

 

 

$

1.11

 

Fourth quarter ended December 31, 2017

 

$

7.95

 

 

$

2.12

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

First quarter ended March 31, 2018

 

$

6.89

 

 

$

3.23

 

Second quarter ended June 30, 2018

 

$

5.56

 

 

$

3.00

 

Third quarter ended September 30, 2018

 

$

5.94

 

 

$

3.84

 

Fourth Quarter ended December 31, 2018

 

$

3.77

 

 

$

1.55

 

 

 

 

 

 

 

 

 

 

2019

 

 

 

 

 

 

 

 

First quarter ended March 31, 2019

 

$

4.20

 

 

$

1.88

 

Second quarter ended June 30, 2019

 

$

5.85

 

 

$

3.07

 

Third quarter ended September 30, 2019

 

$

4.94

 

 

$

2.07

 


The last sale price of our Class A common stock as reported on the Nasdaq Capital Market on September 30, 2019 was $2.30 per share.


Holders


As of October 1, 2019, the number of record holders of our Class A common stock was approximately 53.


Dividend policy


We have never paid cash dividends on either our Class A common stock or our Class B common stock. Under Delaware law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Delaware statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. If, however, the capital of our company, computed in accordance with the relevant Delaware statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits and dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired


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





40



 


EQUITY COMPENSATION PLANS


Securities Authorized for Issuance under Equity Compensation Plans

 

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


Plan category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights(a)

 

 

Weighted average exercise price of outstanding options, warrants and rights ($)

 

 

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Plans approved by our stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

2012 Equity Compensation Plan

 

 

223,401

 

 

$

4.56

 

 

 

262,932

 

2014 Equity Compensation Plan (1)

 

 

72,400

 

 

$

7.49

 

 

 

1,465,933

 

2016 Equity Compensation Plan

 

 

276,236

 

 

$

6.44

 

 

 

37,707

 

Plans not approved by stockholders

 

 

 

 

 

 

 

 

 

———————

(1)

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






41



 


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


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


Overview


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


·

sales of digital advertising campaigns to advertising agencies and brands;

·

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

·

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

·

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

·

sales of proprietary consumer data.


The core elements of our business as of are:


·

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


·

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


·

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


·

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


·

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


·

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


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


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




42



 


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


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


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


We have adopted a policy statement (the “Policy Statement”) setting forth management and allocation policies for purposes of attributing all of the business and operations of the Company to either the BIGToken Group or the SRAX Group, which is defined as all other operations of SRAX, including all existing and future businesses, other than the BIGToken Group. Among other things, the Policy Statement governs how assets, liabilities, revenue and expenses are attributed or allocated between SRAX Group and the BigToken Group. Such attributions and allocations generally do not affect the amounts reported in SRAX consolidated financial statements, except for the possible attribution of shareholders’ equity and net income or loss between the holders of the Non-Voting Preferred Tracking Stock and common stock. The Policy Statement also does not significantly affect the way that management assesses operating performance and allocates resources within SRAX.


Results of operations


Three and six months ended June 30, 2019 as compared to the three and six months ended June 30, 2018


Selected Consolidated Financial Data


 

 

For the three months ended

 

 

For the six months ended

 

 

Change YoY

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

 

Qtr

 

 

YTD

 

Total revenue

 

 

904,222

 

 

 

4,697,351

 

 

 

1,495,977

 

 

 

6,808,201

 

 

 

-80.8

%

 

 

-78.0

%

Costs of revenue

 

 

410,892

 

 

 

1,320,464

 

 

 

753,239

 

 

 

2,138,569

 

 

 

-68.9

%

 

 

-64.8

%

Gross Profit

 

$

493,330

 

 

$

3,376,887

 

 

$

742,738

 

 

$

4,669,632

 

 

 

-85.4

%

 

 

-84.1

%

Gross Profit Margin

 

 

55

%

 

 

72

%

 

 

50

%

 

 

69

%

 

 

-1733 bps

 

 

 

-1894 bps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expense

 

 

5,114,115

 

 

 

5,392,625

 

 

 

9,605,377

 

 

 

9,522,883

 

 

 

-5.2

%

 

 

0.9

%

Loss from operations

 

 

(4,620,785

)

 

 

(2,015,738

)

 

 

(8,862,639

)

 

 

(4,853,251

)

 

 

129.2

%

 

 

82.6

%

Non-cash financial instrument valuation adjustments

 

 

(2,875,554

)

 

 

(1,013,565

)

 

 

(4,837,405

)

 

 

2,710,129

 

 

 

183.7

%

 

 

-278.5

%

Interest

 

 

(183,257

)

 

 

(969,346

)

 

 

(250,944

)

 

 

(1,839,797

)

 

 

-81.1

%

 

 

-86.4

%

Other (income) / expense

 

 

(419,055

)

 

 

(22,761

)

 

 

66,933

 

 

 

(27,425

)

 

 

1741.1

%

 

 

-344.1

%

Net income (loss)

 

$

(8,098,651

)

 

$

(4,021,410

)

 

$

(13,884,055

)

 

$

(4,010,344

)

 

 

101.4

%

 

 

246.2

%

Earnings (loss) per share basic and diluted

 

 

(0.67

)

 

 

(0.39

)

 

 

(1.24

)

 

 

(0.40

)

 

 

69.6

%

 

 

212.7

%




43



 


Revenue


The decrease in our revenue during the three months ended June 30, 2019 compared to the same period of 2018 is the result of a decrease in revenue from our SRAX sell-side and buy-side clients and the loss of revenue from the sale of SRAXmd, partially offset by an increase in revenue from our SRAX verticals.


Cost of revenue


Cost of revenue consists of certain labor costs, payments to website publishers and others that are directly related to a revenue-generating event and project and application design costs. During the three months ended June 30, 2019, our gross margin decreased substantially as a result of a loss of our higher margin revenue from SRAXmd. Cost of revenue as a percent of total revenue increased to 45.4% for the three-month period ended June 30, 2019 as compared to 28.1% for the comparable period ended June 30, 2018.


Operating expense


Our operating expense is comprised of salaries, commissions, marketing, and general overhead expense. Overall, operating expense decreased approximately 5% for the three-month period ended June 30, 2019 as compared to the three-month period ended June 30, 2018. This decrease was primarily due to lower expenses resulting from the sale of the SRAXmd business unit. During the third quarter of 2017 we launched BIGToken. During the year ended December 31, 2018 operating expenses relating to the BIGToken project were approximately $2.2 million.


Interest expense


Interest expense for the period ending June 30, 2019 represents accounts receivable factoring fees. Interest expense, net of interest income for the three-month period ending June 30, 2019 decreased from the same period in the prior year by $786,089 due to the redemption of the Company’s 12.5% secured debentures on November 29, 2018.


Non-GAAP financial measures


We use Adjusted net loss to measure our overall results because we believe it better reflects our net results by excluding the impact of non-cash equity-based compensation and the accretion of warrants. We use Adjusted EBITDA to measure our operations by excluding interest and certain additional non-cash expenses and gain or loss on sale of assets and changes in the valuation of derivatives. We believe the presentation of Adjusted net loss and Adjusted EBITDA enhances our investors' overall understanding of the financial performance of our business.


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


The following is a reconciliation of net income (loss) Adjusted EBITDA for the periods presented:


 

 

For the three months ended

 

 

For the six months ended

 

 

Change YoY

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

 

Qtr

 

 

YTD

 

Net Income / (Loss)

 

$

(8,098,651

)

 

$

(4,021,410

)

 

$

(13,884,055

)

 

$

(4,010,344

)

 

 

101

%

 

 

246

%

Plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity based compensation

 

 

325,511

 

 

 

995,630

 

 

 

325,511

 

 

 

1,161,760

 

 

 

-67

%

 

 

-72

%

Interest (income) expense

 

 

183,257

 

 

 

969,346

 

 

 

250,944

 

 

 

1,839,797

 

 

 

-81

%

 

 

-86

%

Depreciation and amortization

 

 

275,884

 

 

 

194,576

 

 

 

275,884

 

 

 

370,201

 

 

 

42

%

 

 

-25

%

Change in Fair Value of Warrant Liability

 

 

2,875,554

 

 

 

1,013,565

 

 

 

4,837,405

 

 

 

(2,710,129

)

 

 

184

%

 

 

-278

%

Financing Costs

 

 

341,682

 

 

 

 

 

 

341,682

 

 

 

 

 

 

n/m

 

 

 

n/m

 

Gain on Sale

 

 

77,373

 

 

 

49,513

 

 

 

(395,106

)

 

 

71,678

 

 

 

56

%

 

 

-651

%

Other (income)/ expense

 

 

 

 

 

596

 

 

 

(13,509

)

 

 

5,260

 

 

 

-100

%

 

 

-357

%

Adjusted EBITDA

 

$

(4,019,390

)

 

$

(798,184

)

 

$

(8,261,244

)

 

$

(3,271,777

)

 

 

404

%

 

 

153

%





44



 


BIGToken, Inc. Subsidiary


BIGToken, Inc.

Selected Financial Data

(Unaudited)


 

 

For the three months ended

 

 

For the six months ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

Revenue

 

$

 

 

$

 

 

$

 

 

$

 

Cost of revenue

 

 

 —

 

 

 

 —

 

 

 

 —

 

 

 

 —

 

Operating expense, net

 

 

1,043,182

 

 

 

621,224

 

 

 

1,762,876

 

 

 

922,956

 

Operating loss

 

 

(1,043,182

)

 

 

(621,224

)

 

 

(1,762,876

)

 

 

(922,956

)

Other income (expense)

 

 

 

 

 

(596

)

 

 

(1,772

)

 

 

(5,260

)

Net income (loss)

 

$

(1,043,182

)

 

$

(621,820

)

 

$

(1,764,648

)

 

$

(928,216

)


Revenue


BIGToken did not have any revenue for the three or six month periods ending June 30, 2019 or June 30, 2018.


Cost of revenue


BIGToken did not have any cost of revenue for the three or six month periods ending June 30, 2019 or June 30, 2018.


Operating expense


Our operating expenses are comprised of salaries, general overhead expenses and the development of the BIGToken platform. We began operations in the fourth quarter of 2017.  Operating expense for the three and six month periods ended June 30, 2019 were $1,043,182 and $1,762,876 respectively.  Operating expense for the three and six month periods ended June 30, 2018 were $621,225 and $922,956 respectively.


Other income (expense)


For the three and six month periods ended June 30, 2019, other expense was $0 and $1,772 respectively.  For the three and six month periods ended June 30, 2018, other expense was $596 and $5,260 respectively.


Year ended December 31, 2018 compared to year ended December 31, 2017


Selected Consolidated Financial Data


 

 

Year ended December 31,

 

 

$

 

 

%

 

 

 

2018

 

 

2017

 

 

Change

 

 

Change

 

 

 

 

 

 

As Restated

 

 

 

 

 

 

 

Revenue

 

$

9,880,608

 

 

$

23,348,714

 

 

$

(13,468,106

)

 

 

(136.3

)%

Cost of revenue

 

 

3,156,920

 

 

 

9,328,893

 

 

 

(6,171,973

)

 

 

(195.5

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

18,442,839

 

 

 

17,863,500

 

 

 

579,339

 

 

 

3.1

%

Operating loss

 

 

(11,719,151

 

 

(3,843,679

)

 

 

(7,875,472

)

 

 

67.2

%

Gain from sale of SRAX md

 

 

22,108,028

 

 

 

 

 

 

 

 

 

 

n/a

 

Interest expense, net

 

 

(3,056,541

)

 

 

(3,864,876

)

 

 

808,335

 

 

 

(26.5

)%

Other income (loss)

 

 

1,411,257

 

 

 

(5,323,562

)

 

 

6,734,819

 

 

 

477.2

%

Net income (loss)

 

$

8,743,593

 

 

$

(13,032,117

)

 

$

21,775,710

 

 

 

249.0

%


Revenue


The decrease in our revenue during the year ended December 31, 2018 compared to the same period of 2017 is the result of a decrease in revenue from our SRAX sell-side and buy-side clients, partially offset by revenue from our SRAXmd business unit which we sold in August of 2018.




45



 


Cost of revenue


Cost of revenue consists of certain labor costs, payments to website publishers and others that are directly related to a revenue-generating event and project and application design costs. During the year ended December 31, 2018, our gross margin increased substantially as a result of a decrease in our cost of revenue as a percentage of our revenues. Cost of revenue as a percent of total revenue decreased to 31.9% for the year ended December 31, 2018 as compared to 39.9% for the year ended December 31, 2017. This decrease was primarily due to our reduction in our overall lower-margin revenues for both our buy-side and sell-side clientele.


Operating expense


Our operating expense is comprised of salaries, commissions, marketing, and general overhead expense. Overall, operating expense increased approximately 3. 1 % for the year ended December 31, 2018 as compared to the year ended December 31, 2017. This increase was primarily due to increased expense related to our BIGToken subsidiary partially offset by lower expenses resulting from the sale of the SRAX md business unit. During the third quarter of 2017 we launched the BIGToken. During the year ended December 31, 2018 operating expenses relating to the BIGToken project was approximately $ 2.0 million.


Interest expense


Interest expense for the years December 31, 2018 and 2017 represents interest under notes and debentures issued in our financings as well as factoring fees, and the amortization of debt costs. Interest expense, net of interest income for the year ended December 31, 2018 decreased 26.5% as compared to the year ended December 31, 2017. This decrease in interest expense is attributable to the redemption of the Company’s 12.5% secured debentures on November 29, 2018. Additionally, in 2017, we also recognized of $262,684 of interest income related to a legal settlement.


Non-GAAP financial measures


We use Adjusted net loss to measure our overall results because we believe it better reflects our net results by excluding the impact of non-cash equity based compensation and the accretion of warrants. We use Adjusted EBITDA to measure our operations by excluding interest and certain additional non-cash expenses and gain or loss on sale of assets and changes in the valuation of derivatives. We believe the presentation of Adjusted net loss and Adjusted EBITDA enhances our investors' overall understanding of the financial performance of our business.


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


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


 

 

For the years ended

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

As Restated

 

Net income (loss)

 

$

8,743,593

 

 

$

(13,032,117

)

Plus:

 

 

 

 

 

 

 

 

Equity based compensation

 

 

2,089,301

 

 

 

2,085,988

 

Accretion of beneficial conversion feature

 

 

3,085,822

 

 

 

925,748

 

Accretion of debenture discount and warrants

 

 

1,208,524

 

 

 

263,648

 

Adjusted net income (loss)

 

 

15,127,240

 

 

 

(9,756,733

)

Interest expense

 

 

3,056,541

 

 

 

3,864,876

 

Depreciation and amortization

 

 

767,821

 

 

 

528,622

 

Change in Fair Value of Warrant Liability

 

 

(8,953,933

)

 

 

4,134,166

 

Restructuring Costs

 

 

 

 

 

377,961

 

Write-off of non-compete agreement

 

 

 

 

 

468,750

 

Gain on Sale

 

 

(22,099,824

)

 

 

 

Other income

 

 

8,204

 

 

 

 

Loss on settlement

 

 

3,240,126

 

 

 

 

Adjusted EBITDA

 

$

(8,853,825

)

 

$

(382,358

)




46



 


BIGToken, Inc. Subsidiary


 

 

For the years ended

 

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,044,054

)

 

$

(209,623

)

Plus:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

37,903

 

 

 

442

 

Cryptocurrency impairment

 

 

(35,474

)

 

 

 

Adjusted EBITDA

 

$

(2,041,625

)

 

$

(209,181

)


Revenue


The Company did not have any revenue for the periods ended December 31, 2018 and 2017.


Cost of revenue


The Company did not have any cost of revenue for periods ended December 31, 2018 and 2017.


Operating expense


Our operating expenses are comprised of salaries, general overhead expenses, and the development of the BIGToken platform, marketing expenses and Bigtoken point redemptions and accruals. We began operations in the fourth quarter of 2017, and incurred operating expenses of $209,623 through December 31, 2017. For the full year period ended December 31, 2018 we incurred $2,008,580 in operating expenses.


Other income (expense)


During the full year period ended December 31, 2018 the Company incurred an impairment charge of $35,474 for the decrease in value of its crypto-currency holdings. As of December 31, 2018, the Company’s remaining crypto-currency holdings were valued at $34,900.


Liquidity and capital resources


Liquidity generally refers to the ability to generate adequate amounts of cash to meet our cash needs. We require cash to fund our operating expenses and working capital requirements, to make required payments of principal and interest under our outstanding debt instruments and, to a lesser extent, to fund capital expenditures.


Working Capital

  

The following table presents working capital as of June 30, 2019 and December 31, 2018:

  

 

 

June 30,

2019

 

 

December 31,

2018

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

4,096,727

 

 

$

5,467,713

 

Current liabilities

 

 

(12,630,951

)

 

 

(9,017,121

)

Working capital

 

$

(8,534,224

)

 

$

(3,549,408

)

  

Our   current assets include cash and cash equivalents of $2.5 million and $2.8 million as of June 30, 2019 and December 31, 2018, respectively. Current assets decreased by $1.4 million driven by a decrease in cash and accounts receivable driven by cash used to fund our operations during the quarter.


Our current liabilities include warrant and derivative liabilities of $10.3 million and $5.4 million as of June 30, 2019 and December 31, 2018, respectively.  Current liabilities increased by $3.6 million primarily from increase in derivative liabilities driven by increase in the valuation of these derivatives, which was partially off-set by a decrease in accounts payable of $2.1 million.




47



 


Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. Our primary need for liquidity is to fund working capital requirements of our business and other general corporate purposes, including debt repayment. At June 30, 2019 , we had an accumulated deficit of $32,662,403. As of June 30, 2019, we had $2.5 in cash and cash equivalents and net working capital deficit of $8,534,224 as compared to $2,784,865 in cash and cash equivalents and net working capital deficit of $3,549,408 at December 31, 2018. On August 14, 2019, we completed an offering of securities which resulted in gross proceeds of $5.49 million.  Based on our cash and cash equivalents as of September 1, 2019, and our working capital needs, we have enough cash to continue our operations until March 31, 2020 .


On February 1, 2019 the BIGToken Platform became generally available to the public. To date, we have not generated any revenue with the exception of minimal test phase revenue from larger brand advertisers. We anticipate that once the BIGToken Platform begins generating revenue, we will be able to finance it independently from SRAX through the sale of the subsidiary’s equity, debt, or equity-linked securities. Until such time, we anticipate we will continue funding the BIGToken Platform internally. Based on our current development plans, and assuming there is no revenue for the first twelve months, we estimate that the BIGToken Platform will require approximately $2 million and $4 million for the initial and subsequent 12-month periods from the time it became generally available to the public, respectively, provided however that such capital requirements may increase or decrease based on the speed of development, user adoption rates, revenues and the rate at which users redeem points. In the event that BIGToken is not able to secure independent funding once it commences generating on going revenues, we may nonetheless continue to develop the BIGToken project internally. In such instance, we do not believe the project will initially result in a material increase to our operating expenses as the majority of BIGToken’s initial expenses are either duplicative administrative expenses or related to customer acquisition once the platform is successfully launched.


As part of the BIGToken Platform becoming generally available to the public, we offered to redeem points earned on the platform from our users.  Accordingly, we are currently obligated to redeem users’ points which are earned on our BIGToken Platform. We are currently redeeming each points for US based registered users at $.01 per point and points from international users at a variety of rates ($0.001 to $0.01), based on the estimated value of data in the particular country or jurisdiction subject to the user meeting certain conditions, including, being a US resident. As of June 30, 2019, we recorded a contingent liability of approximately $187,000 and we have redeemed an aggregate of 12 million points for $120,000. In March of 2019, we experienced a surge in the number of users of our BIGToken Platform. As of June 30, 2019, we had approximately 15.5 million users, based upon the points accumulated by qualified users, we may be required to redeem in excess of $500,000 worth of points.


Cash flows from operating activities


Net cash used in operating activities was $8,492,648 during the six months ended June 30, 2019 compared to $554,303 for the comparable period in 2018. During the six months ended June 30, 2019 , the Company’s accounts receivable decreased by $807,000 compared to a decrease of $1,630,258 for the comparable period in 2018. Accounts payable and accrued liabilities during the six months ended June 30, 2019 decreased by $1,363,056 compared to an increase of $2,140,856 for the comparable period in 2018.


Cash flows from investing activities


During the six months ended June 30, 2019 net cash used in investing activities was $201,435 compared to $471,961 for the six months ended June 30, 2018.


Cash flows from financing activities


During the six months ended June 30, 2019 net cash provided by financing activities $8.4 million, consisting of $6.3 million from the sale of common stock shares in a registered direct offering, $1 million from the sale of common stock units in a private placement of our common stock and $1.1 million from the conversion of warrants into common stock units.  On August 14, 2019, we closed an offering of our securities resulting in gross proceeds of $5.49 million.


During the six months ended June 30, 2018 net cash provided by financing activities was $50,001, consisting of proceeds from the exercise of warrants for common stock.




48



 


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


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


Critical accounting policies


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 2 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.


Recent accounting pronouncements


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


Off balance sheet arrangements


As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.







49



 


DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES


The names of our directors and executive officers and their ages, positions, and biographies as of January 29, 2019 are set forth below. Our executive officers are appointed by, and serve at the discretion of the Board. There are no family relationships among any of our directors or executive officers. All directors hold office until the next annual meeting of shareholders or until their respective successors are elected, except in the case of death, resignation, or removal.


Name

 

Age

 

Positions

 

Director Since

Christopher Miglino

    

50

    

Chairman of the Board, Chief Executive Officer, President

    

2010

Kristoffer Nelson

 

41

 

Chief Operating Officer, Director

 

2014

Michael Malone

 

37

 

Chief Financial Officer

 

Mark Savas

 

50

 

Director

 

2012

Malcolm CasSelle

 

49

 

Director

 

2013

Robert Jordan

 

51

 

Director

 

2017

Colleen DiClaudio

 

41

 

Director

 

2017


Christopher Miglino. Since co-founding our company in April 2010, Mr. Miglino has served as our Chief Executive Officer and a member of our board of directors. He was appointed President of our company in January 2017. He also served as our Chief Financial Officer from April 2010 until November 2014, and as our principal financial and accounting officer since August 2015. Mr. Miglino, who has over 15 years of experience running various advertising companies, oversees all of our affairs. Some of the companies Mr. Miglino has helped launch programs for include Diet Coke, Bank of America, Nestle, General Mills, HBO, National Geographic, Target, Aflac, and Bayer. In addition, from August 2008 until March 2010, Mr. Miglino was CEO of the Lime Ad Network, a subsidiary of Gaiam, Inc. (Nasdaq: GAIA), where his responsibilities included management of interactive and innovative advertising programs for 250 green and socially conscious websites. Prior to that, from June 2004 until August 2008, Mr. Miglino was CEO of Conscious Enlightenment, where he oversaw their day to day operations in the publishing and advertising industry. From 2004 until 2008, Mr. Miglino served as a board member for Golden Bridge Yoga in Los Angeles, a studio that encompasses over 20,000 square feet of yoga spaces including a restaurant. Mr. Miglino's role as a co-founder of our company, his operational experience in our company as well as his professional experience in our business sector were factors considered by the Corporate Governance and Nominating Committee in recommending his re-election to the board.


Kristoffer Nelson. Mr. Nelson has served as an executive officer of our company since June 2012 and a member of our board of directors since September 2014. He has been employed by our company since September 2011, serving as Director of Business Development (September 2011 until January 2012), Executive Vice President Publisher Relations (January 2012 until June 2016) and President and Chief Revenue Officer, until being named to his current position in October 2014. Prior to joining our company, Mr. Nelson served as a project manager for Living Full Blast, Inc. from August 2009 until December 2010 and President of Krama Consulting & Development from January 2004 until August 2009. Mr. Nelson attended Kings College and Seminary, Van Nuys, California from 1998 until 2000 and West Los Angeles College from 2000 until 2003. He also attended the Leadership Institute of Seattle through Pacific Integral from 2006 until 2008. Mr. Nelson's significant operational experience in multiple aspects of our company coupled with his experience at Living Full Blast, Inc. and Krama Consulting & Development were factors considered by the Corporate Governance and Nominating Committee in recommending his re-election to the board.


Michael Malone, age 37, has served as our chief financial officer since January 2019.  Mr. Malone has over fourteen (14) years of experience in corporate finance in public and private companies. From 2014 until December 2018, he served as Vice President Finance of Westwood One, LLC, a subsidiary of Cumulus Media, Inc. (NYSE: CMLS”), an audio broadcast network in New York. Prior to that, from January 2013 through June 2014, he served as Finance Director / Controller for Cumulus Media Network’, audio broadcast network in Georgia, until its merger with Westwood One, LLC. Prior to that from 2012 to 2013, he worked as Director of Internal Auditing of Cumulus Media from. He holds a BA in accounting from Monmouth College.


Marc Savas. Mr. Savas has been a member of our board of directors since January 2012. Mr. Savas has over 15 years of experience in management and sales consulting and six years of experience in real estate easement acquisitions. Since January 2007 he has served as CEO of Living Full Blast, Inc., overseeing business development and consulting for numerous companies and putting together sales teams for such companies. In addition, from January 1998 until January 2006, Mr. Savas was also CEO for Unfair Advantage Inc., where he conducted 118 management consulting projects, many of which were created using programs that his company had designed. Additionally, from January 2005 until January 2009, Mr. Savas was the national Vice President of Business Development for Connexion Technologies where he built national teams of qualified individuals to effectively secure easements from large real estate owners in order to build telecommunication systems through their properties. Mr. Savas' management consulting and operational experience were factors considered by the Corporate Governance and Nominating Committee in recommending his re-election to the board.



50



 


Malcolm CasSelle. Mr. CasSelle has been a member of our board of directors since August 2013. Mr. CasSelle is an entrepreneur and since August 2017 has served as President of Worldwide Asset eXchange (WAX), a utility token designed with functionalities to simplify digital item trading which is operated by Norris Services, LLC. Since August 2017 he has also served as Chief Information Officer of OPSkins, a marketplace for buying and selling digital items, including e-Sports digital merchandise which is managed by Norris Services, LLC. From February 2016 until August 2017 Mr. CasSelle was Chief Technology Officer and President of New Ventures at tronc, Inc. where he oversaw all digital operations and was responsible for leveraging data and technology to accelerate digital growth. Prior to tronc, Inc., he was Senior Vice President and General Manager, Digital Media of SeaChange International. He joined SeaChange International in 2015 as part of the company's acquisition of Timeline Labs, where he served as CEO. Previously, Mr. CasSelle led startups in the digital industry, including MediaPass, Xfire and Groupon's joint venture with Tencent in China. He has also been an active early stage investor in companies including Facebook, Zynga, and most recently Bitcoin-related companies. Mr. CasSelle received a B.S. in Computer Science from the Massachusetts Institute of Technology in 1991 and an M.S. in Computer Science from Stanford University in 1994. Mr. CasSelle's entrepreneurial background, knowledge of our market segment and experience as a Board member for other companies were factors considered by the Corporate Governance and Nominating Committee in recommending his election to the board.


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


Colleen DiClaudio. Ms. DiClaudio has been a member of our board of directors since September 2017. She currently serves as president of 340B Technologies, a 340B software solutions healthcare technology company she co-founded in August 2014. From June 2009 through August 2014 she served as vice president of business development of CompleteCare Health Network, located in New Jersey. Ms. DiClaudio has received a Master's Degree of Public Health from the University of Medicine and Dentistry of New Jersey and a Bachelor's Degree in Public Health from Stockton University. Ms. DiClaudio’s experience in the healthcare technology sector and entrepreneurial background were factors considered by the Corporate Governance and Nominating Committee in determining she should serve on the Board.






51



 


CORPORATE GOVERNANCE


Independence


Our common stock is listed on the NASDAQ Capital Market. As such, we are subject to the NASDAQ Stock Market LLC (“NASDAQ”) director independence standards. In accordance with these standards, in determining independence the Board affirmatively determines whether a director has a "material relationship" with SRAX that would compromise his or her independence from management or would cause him or her to fail to meet the NASDAQ’s specific independence criteria. When assessing the "materiality" of a director's relationship with SRAX, the Board considers all relevant facts and circumstances, not merely from the director's standpoint, but from that of the persons or organizations with which the director has an affiliation, and, where applicable, the frequency and regularity of the services, and whether the services are being carried out at arm's length in the ordinary course of business. Material relationships can include commercial, consulting, charitable, familial and other relationships. A relationship is not material if, in the Board's judgment, it is not inconsistent with the NASDAQ’S director independence standards and it does not compromise a director's independence from management.


Applying the NASDAQ’s standards, the Board has determined that Messrs. Savas, CasSelle, Jordan and Ms. DiClaudio are each “independent” as that term is defined by the NASDAQ’s standards.


Family Relationships


There are no family relationships between any director, executive officer, or person nominated or chosen by the registrant to become a director or executive officer.


Limitation on Liability and Indemnification of Directors and Officers

 

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

   

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

 

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





52



 


Board committees


The Board of Directors has standing Audit, Compensation and Corporate Governance and Nominating committees. Each committee has a written charter. The charters are available on our website at www.SRAX.com.  All committee members are independent directors. Information concerning the current membership and function of each committee is as follows:


Director

 

Audit Committee Member

 

Compensation Committee Member

 

Corporate Governance and Nominating Committee Member

Marc Savas

    

[SRAX_S1A003.GIF]

    

     [SRAX_S1A005.GIF]  (1)

    

[SRAX_S1A007.GIF]

Malcolm CasSelle

 

[SRAX_S1A009.GIF]

 

[SRAX_S1A011.GIF]

 

     [SRAX_S1A013.GIF]  (1)

Robert Jordan

 

       [SRAX_S1A015.GIF]  (1)

 

 

 

 

———————

(1) Denotes chairperson.


Audit Committee


We have a designated an audit committee in accordance with section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended.  The Audit Committee assists the board in fulfilling its oversight responsibility relating to:

 

 

·

the integrity of our financial statements;

 

 

 

 

·

our compliance with legal and regulatory requirements; and

 

 

 

 

·

the qualifications and independence of our independent registered public accountants.

 

The Audit Committee has the ultimate authority to select, evaluate and, where appropriate, replace the independent auditor, approve all audit engagement fees and terms, and engage outside advisors, including its own counsel, as it deems necessary to carry out its duties. The Audit Committee is also responsible for performing other related responsibilities set forth in its charter.

 

The Audit Committee currently consists of Robert Jordan (chairperson), Malcolm CasSelle, and Marc Savas.


The Board has determined that Robert Jordan qualifies as an “audit committee financial expert” within the meaning of SEC rules. An audit committee financial expert is a person who can demonstrate the following attributes: (1) an understanding of generally accepted accounting principles and financial statements; (2) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; (3) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the Company’s financial statements, or experience actively supervising one or more persons engaged in such activities; (4) an understanding of internal controls and procedures for financial reporting; and (5) an understanding of audit committee functions.  Mr. Jordan has also been determined to be “independent” by the board of directors as such term is defined in the NASDAQ listing standards.  Additionally, Mr. Jordan meets the independence standards for audit committees under the NASDAQ rules.




53



 


Compensation Committee

 

The Compensation Committee assists the Board in:

 

 

Recommending, in executive session at which our chief executive officer is not present, the compensation and awards / bonuses for our CEO or president, if such person is acting as the CEO, as well as other executive officers;

 

 

 

 

discharging its responsibilities for approving and evaluating our officer compensation plans, policies and programs;

 

 

 

 

reviewing and recommending to the Board, compensation to be provided to our employees and directors; and

 

 

 

 

administering our equity compensation plan(s).

 

The Compensation Committee is charged with ensuring that our compensation programs are competitive, designed to attract and retain highly qualified directors, officers and employees, encourage high performance, promote accountability and assure that employee interests are aligned with the interests of our stockholders. The Compensation Committee is composed of two directors, each of whom has been determined by the Board to be independent within the meaning of Rule 5605 of the NASDAQ Marketplace Rules.

 

Corporate Governance and Nominating Committee

 

The Corporate Governance and Nominating Committee:

 

 

assists the Board in selecting nominees for election to the Board;

 

 

 

 

monitor the composition of the Board;

 

 

 

 

develops and recommends to the Board, and annually reviews, a set of effective corporate governance policies and procedures applicable to our company; and

 

 

 

 

regularly review the overall corporate governance of the Company and recommends improvements to the Board as necessary.

 

The purpose of the Corporate Governance and Nominating Committee is to assess the performance of the Board and to make recommendations to the Board from time to time, or whenever it shall be called upon to do so, regarding nominees for the Board and to ensure our compliance with appropriate corporate governance policies and procedures.  The Corporate Governance and Nominating Committee is composed of two directors, each of whom has been determined by the Board to be independent within the meaning of Rule 5605 of the NASDAQ Marketplace Rules




54



 


EXECUTIVE COMPENSATION


Summary Compensation Table


The following table summarizes all compensation recorded by us in each of the last two completed years ended December 31, for:


 

·

all individuals serving as our principal executive officer or acting in a similar capacity;

 

·

our two most highly compensated named executive officers, whose annual compensation exceeded $100,000; and

 

·

up to two additional individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as a named executive officer of our company, at December 31, 2018.


The value attributable to any option awards is computed in accordance with FASB ASC Topic 718. The assumptions made in the valuations of the option awards are included in Note 10 of the Notes to our Consolidated Financial Statements for the year ended December 31, 2018.

 

Name and principal position

 

Year

 

Salary

($)

 

 

Bonus

($)

 

 

Stock

Awards

($)

 

 

Option

Awards

($) (1)

 

 

No equity

incentive plan

compensation

($)

 

 

Non-qualified

deferred

compensation

earnings

($)

 

 

All

other

compensation

($)

 

 

Total

($)

 

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Christopher Miglino,

 

2018

 

 

291,250

 

 

 

540,000(9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

437,392(3)  

 

 

 

1,268,642

 

Chief Executive Officer (3)

 

2017

 

 

192,000

 

 

 

40,000    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

232,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chad Holsinger,

 

2018

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,937      

 

 

 

3,937

 

Chief Revenue Officer (4)

 

2017

 

 

32,884

 

 

 

161,000    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

155,900(2)  

 

 

 

349,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kristoffer Nelson

 

2018

 

 

242,500

 

 

 

43,750    

 

 

 

 

 

 

 

398,675(5)

 

 

 

 

 

 

 

 

 

 

 

25,892(10)

 

 

 

710,817

 

Chief Operating Officer

 

2017

 

 

175,000

 

 

 

54,213    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

224,213

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph Hannan

 

2018

 

 

191,667

 

 

 

250,000    

 

 

 

 

 

 

 

488,107(7)

 

 

 

 

 

 

 

 

 

 

 

34,615(11)

 

 

 

964,389

 

Chief Financial Officer (6)

 

2017

 

 

200,000

 

 

 

100,000    

 

 

 

100,000(8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

400,000

 

———————

(1)

The amounts included in the “Option Awards” column represent the aggregate grant date fair value of the stock options, compute din accordance with ASC Topic 718. The assumptions made in the valuations of the option awards are included in Note 4 of the notes to our consolidated financial statements appearing in the 10-K for the year end December 31, 2018.

(2)

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

(3)

Mr. Miglino’s contracted base salary is $340,000 annually. Prior to March 16, 2017, Mr. Miglino had been voluntarily reducing his base salary to $114,000. In September 2018, all of Mr. Miglino’s previously deferred salary was paid in full. Additionally, Mr. Miglino received a cash bonus of $540,000 and $23,142 of Company paid health benefits.

(4)

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

(5)

Mr. Nelson’s Stock award represents consists of options to purchase 100,000 shares of our Class A Common stock at $5.78 options to purchase

(6)

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

(7)

Mr. Hannan’s stock option award consisted of 250,000 options to purchase Class A common stock at $4.20. Upon Mr. Hannan’s termination these options were canceled.

(8)

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

(9)

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

(10)

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

(11)

Mr. Hannan received payment for his accrued and unused vacation at the time of his termination.


Employment agreements and how the executive’s compensation is determined


We are a party to an employment agreement with each of Messrs. Miglino and Malone which provide the compensation arrangements with these individuals. We have not engaged a compensation consultant or other consultant performing similar functions to advise our company on compensation arrangements for our executive officers and directors.




55



 


Employment Agreement with Mr. Miglino


We employ Christopher Miglino as our Chief Executive Officer for a term of four years pursuant to an employment agreement entered into on January 1, 2012. The employment agreement automatically renews for successive two-year terms unless either party provides notice of non-renewal not later than three (3) months before the conclusion of the then current term. As compensation for his services, Mr. Miglino was entitled to receive a base salary of $192,000 which is subject to an annual review.   During 2012, in an effort to conserve our cash resources, Mr. Miglino agreed to a temporary reduction in his annual base salary to $60,000, which was increased to $90,000 during the fourth quarter of 2013. Mr. Miglino's annual base salary for the 2015 was $114,000.  On March 16, 2017, his salary deferral ended and he returned his compensation to $192,000 per annum. On September 18, 2018, the board of directors agreed to pay Mr. Miglino an aggregate of $414,250 in salary deferred between 2012 and March 15, 2017. Additionally, effective October 1, 2018, Mr. Miglino’s salary was increased to $340,000 per annum. In addition, he is eligible to receive an annual bonus based upon the achievement of certain to-be-established goals fixed by the Board, which is payable in cash or non-cash compensation as determined by the Board, as well as a discretionary bonus as determined by the Board. Mr. Miglino is entitled to participate in all benefit plans we may offer, up to 45 days of paid vacation annually and reimbursement for out-of-pocket expenses incurred in furtherance of our business.


In addition to accrued obligations (including but not limited to, reimbursements, unpaid salary, unused vacation days, etc.), the following table sets forth the payments that would be made to Mr. Miglino in accordance with his employment agreement had he been terminated by us without cause or by Mr. Miglino for Good Reason, or termination as a result of disability on December 31, 2018.

 

Name

 

Terminated
Without Cause /

For Good Reason

 

 

Termination as a
result of Disability

 

                                                                                                                                     

    

 

                          

  

  

 

                          

  

Christopher Miglino

 

 

 

 

 

 

 

 

Salary (1)

 

$

680,000

 

 

$

680,000

 

Accelerated Vesting of Awards

 

 

 

 

 

 

Health Care

 

 

43,074

 

 

 

 

Total:

 

$

723,074

 

 

$

680,000

 

———————

(1)

Amount equal to twenty four (24) months of Base Salary). Amount is to be paid over a twenty four (24) month period.


Employment Agreement with Michael Malone


On December 15, 2018 we entered into an Employment Agreement with Mr. Malone pursuant to which he was engaged to serve as Chief Financial Officer to be effective January 2, 2019. Under the terms of the employment agreement, Mr. Malone's compensation includes:


 

·

an annual base salary of $200,000;

 

 

 

 

·

an annual bonus of $100,000, payable in equal quarterly installments beginning on April 1, and subject to the timely filings of our periodic reports;

 

 

 

 

·

a one time option grant to purchase 100,000 shares of Class A Common Stock with a grant date of December 15, 2018, an exercise price of $2.56 per share, a term of three (3) years that vests quarterly over a three (3) year period subject to continued employment;

 

 

 

 

·

the reimbursement of up to $20,000 in expenses incurred in moving and temporary living arrangements within the first sixty (60) days following the effective date; and

 

 

 

 

·

annual paid time off of 30 days per year.


Mr. Malone is entitled to participate in all benefit programs we offer our other executive officers and expense reimbursement.  The employment agreement with Malone contains customary confidentiality, non-disclosure and noninterference provisions.




56



 


The following table sets forth the payments that would be made to Malone in accordance with his employment agreement had he been terminated by us “without cause” on December 31, 2018 (despite his employment beginning January 2, 2019).


Name

 

Terminated
Without Cause

 

 

Termination as a
result of Disability

 

                                                                                                                                     

    

 

                          

  

  

 

                          

  

Michael Malone

 

 

 

 

 

 

 

 

Salary (1)

 

$

33,667

 

 

$

 

Total:

 

$

33,667

 

 

$

 


Employment Agreement with Mr. Hannan


On October 14, 2016 we entered into an Employment Agreement with Mr. Hannan pursuant to which he was engaged to serve as Chief Financial Officer. Mr. Hannan resigned from the Company effective December 16, 2018.  Under the terms of the employment agreement, Mr. Hannan's compensation included:


 

·

an annual base salary of $200,000;

 

 

 

 

·

an annual bonus of $100,000, payable in equal quarterly installments beginning on April 1, and subject to the timely filings of our periodic reports;

 

 

 

 

·

an annual bonus of a restricted stock grant of $100,000 in value of shares of our Class A common stock on each annual anniversary date of the employment agreement, also subject to the timely filings of our periodic reports, subject to continued employment;

 

 

 

 

·

a one time restricted stock award of 100,000 shares of our Class A common stock, which completed vesting on October 17, 2018, subject to continued employment; and

 

 

 

 

·

annual paid time off of 30 days per year.


Mr. Hannan was entitled to participate in all benefit programs we offer our other executive officers and expense reimbursement. Upon termination of the agreement by either party, regardless of the reason, he is not entitled to any additional compensation.  The employment agreement with Mr. Hannan contains customary confidentiality, non-disclosure and noninterference provisions.


Employment Agreement with Kris Nelson


Mr. Nelson is not a party to a written employment agreement, but his compensation is determined by the Compensation committee of the board of directors in consultation with the Company’s CEO.  Mr. Nelson received $175,000 for the year ending December 31, 2017.  Effective October 1, 2018, Mr. Nelson’s annual salary was increased to $250,000.


Employment Agreement with Chad Holsinger


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


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


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

 

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




57



 


Equity Compensation Plans


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


2012 Equity Compensation Plan


Our 2012 Equity Compensation Plan (“2012 Plan”) is administered by our board or any of its committees. The purposes of the 2012 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants, and to promote the success of our business. The issuance of awards under our 2012 Plan is at the discretion of the administrator, which has the authority to determine the persons to whom any awards shall be granted and the terms, conditions and restrictions applicable to any award. Under our 2012 Plan, we may grant stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock based awards. Our 2012 Plan authorizes the issuance of up to 600,000 shares of Class A common stock for the foregoing awards. As of December 31, 2018, we have granted awards under the 2012 Plan equal to approximately 399,467 shares of our common stock, and 0 shares have been cancelled or forfeited. Accordingly, there are 200,533 shares of common stock available for future awards under the 2012 Plan. In the event of a change in control, awards under the 2012 Plan will become fully vested unless such awards are assumed or substituted by the successor corporation.


2014 Equity Compensation Plan


Our 2014 Equity Compensation Plan (“2014 Plan”) is administered by our board or any of its committees. The purposes of the 2014 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants, and to promote the success of our business. The issuance of awards under our 2014 Plan is at the discretion of the administrator, which has the authority to determine the persons to whom any awards shall be granted and the terms, conditions and restrictions applicable to any award. Under our 2014 Plan, we may grant stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock based awards. Our 2014 Plan authorizes the issuance of up to 1,600,000 shares of Class A common stock for the foregoing awards. As of December 31, 2018, we have granted awards under the 2014 Plan equal to approximately 522,760 shares of our common stock, and 0 shares have been cancelled or forfeited. Accordingly, there are 1,077,240 shares of common stock available for future awards under the 2014 Plan. In the event of a change in control, awards under the 2014 Plan will become fully vested unless such awards are assumed or substituted by the successor corporation.


2016 Equity Compensation Plan


Our 2016 Equity Compensation Plan (“2016 Plan”) is administered by our board or any of its committees. The purposes of the 2016 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees, Directors and Consultants, and to promote the success of our business. The issuance of awards under our 2016 Plan is at the discretion of the administrator, which has the authority to determine the persons to whom any awards shall be granted and the terms, conditions and restrictions applicable to any award. Under our 2016 Plan, we may grant stock options, restricted stock, stock appreciation rights, restricted stock units, performance units, performance shares and other stock based awards. Our 2016 Plan authorizes the issuance of up to 600,000 shares of Class A common stock for the foregoing awards. As of December 31, 2018, we have granted awards under the 2016 Plan equal to approximately 516,293 shares of our common stock, and 0 shares have been cancelled or forfeited. Accordingly, there are 83,707 shares of common stock available for future awards under the 2016 Plan. In the event of a change in control, awards under the 2016 Plan will become fully vested unless such awards are assumed or substituted by the successor corporation.




58



 


The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2018.



 

 

OPTION AWARDS

 

 

STOCK AWARDS

 

Name

 

Number of securities underlying unexercised options

(#)

exercisable

 

 

Number of securities underlying unexercised options

(#)

unexercisable

 

 

Equity incentive

plan awards: Number of securities underlying unexercised unearned options

(#)

 

 

Option

exercise

price

($)

 

 

Option

expiration

date

 

 

Number of shares or units of stock that have not vested

(#)

 

 

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

($)

 

 

Equity incentive

plan awards: Number of unearned shares, units or other rights that have not vested

(#)

 

 

Equity incentive

plan awards: Market or payout value of unearned shares, units or other rights that have not vested

(#)

 

Kristoffer Nelson

 

 

10,000

 

 

 

 

 

 

 

 

 

5.00

 

 

 

12/31/2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,333

 

 

 

 

 

 

 

 

 

 

 

7.50

 

 

 

10/10/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,333

 

 

 

 

 

 

 

 

 

 

 

7.50

 

 

 

10/10/2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,333

 

 

 

 

 

 

 

 

 

 

 

7.50

 

 

 

10/10/2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,333

 

 

 

66,667

 

 

 

 

 

 

 

5.78

 

 

 

1/2/2024

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael Malone

 

 

0

 

 

 

100,000

 

 

 

 

 

 

 

2.56

 

 

 

1/2/2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 





59



 


DIRECTOR COMPENSATION


Below are descriptions of the Company’s previous legacy compensation policy for non-executive director compensation and its current policy, which is in effect beginning April 15, 2018.


Legacy Policy


 

·

an annual cash retainer of $10,000, payable quarterly;

 

 

 

 

·

a restricted stock award of a number of shares of our Class A common stock equal to $10,000 on the date such director joined the board if he or she joined in 2017, or on the one-year anniversary of he or she joining the board if prior to 2017.

 

 

 

 

·

a per meeting fee of $2,000, with a maximum annual payment of $10,000.


Current Director Compensation Policy


Effective April 15, 2018, each non-employee director will receive $30,000 as an annual board fee payable as follows:


·

Up to $15,000 in cash paid quarterly over the grant year; and


·

The balance in Class A common stock purchase options issued on April 15 of each year and vesting quarterly over the grant year and have a term of seven (7) years.  The stock options will be valued using the Black-Scholes option pricing model and are subject to customary assumptions used in the preparation of financial statements.


All elections of compensation will be made by April 1 of each year by incumbent directors and newly elected or appointed directors will have their compensation pro-rated and made on the fifth (5th) day following their election or appointment to the board.


The following table provides information concerning the compensation paid to our non-executive directors for their services as members of our board of directors for 2018. The information in the following table excludes any reimbursement of out-of-pocket travel and lodging expenses which we may have paid.


Director Compensation


Name

 

Fees

earned or

paid in

cash ($)

 

 

Stock

awards

($)

 

 

Option

awards

($)

 

 

Non-equity

incentive plan

compensation

($)

 

 

Nonqualified

deferred

compensation

earnings

($)

 

 

All other

compensation

($)

 

 

Total

($)

 

Colleen DiClaudio

   

 

15,000

 

 

 

 

 

 

15,000

(1)

  

 

 

  

 

 

  

 

 

  

 

 

30,000

 

Marc Savas

 

 

15,000

 

 

 

 

  

 

15,000

(1)

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Malcolm CasSelle

 

 

15,000

 

 

 

 

 

 

15,000

(1)

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

Robert Jordan

 

 

15,000

 

 

 

 

 

 

15,000

(1)

 

 

 

 

 

 

 

 

 

 

 

 

30,000

 

———————

(1)

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





60



 


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

BENEFICIAL OWNERSHIP OF SHARES OF CLASS A COMMON STOCK


At September 30 , 2019, we had 13,997,452 shares of Class A common stock issued and outstanding. The following table sets forth information known to us as of September 30, 2019 relating to the beneficial ownership of shares of our Class A common stock by:


 

·

each person who is known by us to be the beneficial owner of 5% or more of any class of our voting securities;

 

 

 

 

·

Each of our current directors and nominees;

 

 

 

 

·

each of our current named executive officers; and

 

 

 

 

·

all current named executive officers and directors as a group.


Beneficial ownership is determined according to the rules of the SEC. Beneficial ownership means that a person has or shares voting or investment power of a security and includes any securities that person or group has the right to acquire within 60 days after the measurement date. This table is based on information supplied by officers, directors and principal shareholders. Except as otherwise indicated, we believe that each of the beneficial owners of the common stock listed below, based on the information such beneficial owner has given to us, has sole investment and voting power with respect to such beneficial owner’s shares, except where community property laws may apply.


 

 

 

 

 

Common Stock

 

 

 

 

 

 

 

Name and Address of Beneficial Owner(1)

 

Shares

 

 

Shares

 Underlying

 Convertible

 Securities (2)

 

 

Total

 

 

Percent of

 Class (2)

 

Directors and named Executive Officers

   

 

                     

  

  

 

                     

  

  

 

                     

  

  

 

                     

 

Christopher Miglino

 

 

927,575

 

 

 

 

 

 

927,575

 

 

 

6.54

%

Kristoffer Nelson

 

 

135,001

 

 

 

133,333

 

 

 

268,334

 

 

 

1.89

%

Marc Savas

 

 

11,945

 

 

 

8,162

 

 

 

20,107

 

 

 

*

 

Malcolm CasSelle

 

 

65,946

 

 

 

5,762

 

 

 

71,708

 

 

 

*

 

Robert Jordan

 

 

6,510

 

 

 

5,762

 

 

 

12,272

 

 

 

*

 

Colleen DiClaudio

 

 

7,813

 

 

 

5,762

 

 

 

13,575

 

 

 

*

 

Michael Malone

 

 

1,292

 

 

 

25,000

 

 

 

26,292

 

 

 

*

 

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

 

 

1,156,082

 

 

 

183,731

 

 

 

1,339,863

 

 

 

9.45

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial Owners of 5% or more

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Anson Funds Management LP (3)

 

 

1,017,778

 

 

 

420,217

 

 

 

1,437,995

 

 

 

 

 

———————

*

Less than one percent.

+

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

 

(1)

Except as otherwise indicated, the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and to the information contained in the footnotes to this table. Unless otherwise indicated, the address of the beneficial owner is 456 Seaton St., Los Angeles, CA 90013.

(2)

Pursuant to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership includes any shares as to which a shareholder has sole or shared voting power or investment power, and also any shares which the shareholder has the right to acquire within 60 days, including upon exercise of common shares purchase options or warrants. There are 12,384,123 shares of Class A common stock issued and outstanding as of September 10, 2019.

(3)

Based on a Schedule 13(g) filed with the SEC on August 14, 2019.  The Address of holder is 5950 Berkshire Lane, Suite 2010, Dallas, Texas 75225.  Bruce R Winston, Amin Nathoo and Moez Kassam have voting and investment power with respect to the common stock beneficially owned.





61



 


TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL PERSONS


Related Party Transactions Procedure

 

We review all known relationships and transactions in which SRAX and our directors, executive officers, and significant stockholders or their immediate family members are participants to determine whether such persons have a direct or indirect interest. Our management, in consultation with our outside legal consultants, determines based on specific fact and circumstances whether SRAX or a related party has a direct or indirect interest in these transactions. In addition, our directors and executive officers are required to notify us of any potential related party transactions and provide us with the information regarding such transactions.

 

If it is determined that a transaction is a related party transaction, the Audit Committee must review the transaction and either approve or disapprove it. In determining whether to approve or ratify a transaction with a related party, the Audit Committee will take into account all of the relevant facts and circumstances available to it, including, among any other factors it deems appropriate:

 

 

· 

the benefits to us of the transaction;

 

 

 

 

· 

the nature of the related partys interest in the transaction;

 

 

 

 

· 

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

 

 

 

 

· 

the potential impact of the transaction on a directors independence; and

 

 

 

 

· 

whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances.

 

Any member of the Audit Committee who is a related party with respect to a transaction under review may not participate in the deliberations or vote on the approval of the transaction.

 

Related Party Transactions

 

Summarized below are certain transactions and business relationships between SRAX and persons who are or were an executive officer, director or holder of more than five percent of any class of our securities since January 1, 2017.

 

Information regarding disclosure of an employment relationship or transaction involving an executive officer and any related compensation solely resulting from that employment relationship or transaction is included in the Section of this proxy statement entitled “Director Compensation” and “Executive Compensation.”

 

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

 

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


·

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


·

On January 2, 2018, we issued a common stock purchase option to Kristoffer Nelson, our Chief Operating Officer and a member of our board of directors.  The option entitles Mr. Nelson to purchase 100,000 shares of Class A Common Stock at a price per share of $5.78, has a term of three years and vests quarterly over a three (3) year period.  


·

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



62



 


·

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


·

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


·

On March 20, 2018, as we began to formally review potential strategic options for SRAXMD, we entered into certain agreements with Erin DeRuggiero, our chief innovations officer.  Pursuant to the terms of the agreements, Ms. DeRuggiero employment agreement was terminated, and she became a consultant of the Company.  The term of the consultancy expires in the second quarter of 2018, or upon the sale of the assets comprising SRAXmd, but may be extended by the parties.  The terms of the consultancy are substantially similar to her prior employment agreement  except that in the event of a sale of the SRAXmd business unit or substantially all of the assets thereof within 120 days from March 20, 2018, (i) we (or our assignee) have the right and the obligation to purchase all of Ms. DeRuggiero’s outstanding Class A common shares (514,667) at a price of $5.80 per share, or an aggregate of $2,985,068.60 and (ii) we will pay Ms. DeRuggiero, an amount equal to five percent (5%) of the cash consideration received from the sale of the SRAXmd business unit. The Company and Ms. DeRuggiero agreed to a customary release from any claims that may have arisen during her employment.   In August 2018, SRAXmd was sold to Halyard MD Opco, LLC, an affiliate of Halyard Capital, a private equity firm.   Pursuant to the sale, all of the aforementioned Class A common stock of Erin DeRuggiero was repurchased.


·

Due to certain provisions of our insider trading policy, on April 2, 2018, we agreed to extend certain outstanding Class A common stock purchase options of varying expiration dates to an extended expiration date of December 31, 2018.  Included in these options were the following options held by Kristoffer Nelson, our Chief operating officer and Board member and Marc Savas, a board member:


o

10,000 Class A common stock purchase options issued to Kristoffer Nelson on 1/1/2013 with an exercise price per share of $5.00 and an original expiration date of 1/1/2018;


o

2,400 Class A common stock purchase options issued to Marc Savas on 2/1/2013 with an exercise price per share of $5.00 and an original expiration date of 2/1/2018; and


o

10,000 Class A common stock purchase options issued to Marc Savas on 4/1/2013 with an exercise price per share of $5.00 and an original expiration date of 4/1/2018.


·

In August 2018, pursuant to our sale of the SRAXmd product line, we paid out an aggregate of $2,191,338.04 in stay bonuses, which amount includes $1,507,302.89 paid to Erin DeRuggiero, our former chief innovations officer and Board member.


·

On September 18, 2018, the Board agreed to pay Christopher Miglino, our chief executive officer, an aggregate of $414,250 in salary previously deferred from 2012 through March 15, 2017.


·

On September 18, 2018, as partial consideration for the successful sale of the SRAXmd product line, the Company paid the following transaction bonuses: (i) Christopher Miglino, our chief executive officer received $548,416.67, (ii) Joseph P. Hannan, our former chief financial officer received $50,000 and (iii) Kristoffer Nelson, our chief operating officer, received $43,750


·

On September 18, 2018, we issued a common stock purchase option to Joseph P Hannan, our former Chief Financial Officer. The option entitles Mr. Hannan to purchase 250,000 shares of Class A Common Stock at a price per share of $4.20, has a term of three years and vests quarterly over a three (3) year period.


·

On October 15, 2018, the Compensation Committee agreed to pay Joseph P. Hannan, our former chief financial officer, a lump sum of $100,000 in lieu of a bonus of the same amount of restricted stock units, to which he was entitled to under his employment agreement.


·

On December 15, 2018, the we issued a common stock purchase option to Michael Malone, our Chief Financial Officer.  The option entitles Mr. Malone to purchase 100,000 shares of Class A Common stock at a price per share of $2.56, has a term of three years and vests quarterly over a three year period.



63



 


EXPERTS


The financial statements as of December 31, 2018 and for each interim period since December 31, 2017, included in this prospectus and in the registration statement of which it forms a part, have been so included in reliance on the report of RBSM LLP, our independent registered public accounting firm, appearing elsewhere in this prospectus and the registration statement of which it forms a part, given on the authority of said firm as experts in auditing and accounting.


INTERESTS OF NAMED EXPERTS AND COUNSEL


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


LEGAL PROCEEDINGS


None.


WHERE YOU CAN FIND ADDITIONAL INFORMATION


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


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


 

·

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


 

·

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


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


SRAX, Inc.
456 Seaton Avenue,

Los Angeles, CA 90013
323-694-9800

 

 

 




64



 


INDEX TO FINANCIAL STATEMENTS


SRAX , INC.


 

Page

Report of Independent Registered Public Accounting Firm

F-2

Consolidated balance sheets at December 31, 2018 and 2017

F-3

Consolidated statements of operations for the years ended December 31, 2018 and 2017

F-4

Consolidated statements of changes in stockholders’ equity for the years ended December 31, 2018 and 2017

F-5

Consolidated statements of cash flows for the years ended December 31, 2018 and 2017

F-7

Notes to consolidated financial statements

F-9


Condensed consolidated balance sheets at June 30, 2019 and December 31, 2018

F-45

Condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2018

F-46

Consolidated statements of changes in stockholders’ equity for the three and six months ended June 30, 2019 and 2018

F-47

Condensed consolidated statements of cash flows for the six months ended June 30, 2019 and 2018

F-48

Notes to condensed consolidated financial statements

F-49



BIG TOKEN, INC.


 

Page

Report of Independent Registered Public Accounting Firm

F-58

Carve-out Balance sheets at December 31, 2018 and 2017

F-59

Carve-out Statements of operations for the years ended December 31, 2018 and For the Period From December 14, 2017 (date of inception) to December 31, 2017

F-60

Carve-out Statements of changes in stockholders’ equity for the years ended December 31, 2018 and For the Period From December 14, 2017 (date of inception) to December 31, 2017

F-61

Carve-out Statements of cash flows for the years ended December 31, 2018 and For the Period From December 14, 2017 (date of inception) to December 31, 2017

F-62

Notes to Carve-out financial statements

F-63


Carve-out Condensed balance sheets at June 30, 2019 (unaudited) and December 31, 2018

F-75

Carve-out Condensed statements of operations for the three and six months ended June 30, 2019 and 2018 (unaudited)

F-76

Carve-out Condensed statements of changes in stockholders’ equity for the three and six months ended June 30, 2019 and 2018 (unaudited)

F-77

Carve-out Condensed statements of cash flows for the six months ended June 30, 2019 and 2018  (unaudited)

F-78

Notes to Carve-out condensed financial statements  (unaudited)

F-79




 




F-1



 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

SRAX Inc.


 

Opinion on the Financial Statements


We have audited the accompanying consolidated balance sheets of SRAX, Inc. (f/k/a Social Reality, Inc.) (the “Company”), as of December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2018 and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.


Restatement of Previously Issued Financial Statements


As discussed in Note 16 to the consolidated financial statements, the consolidated financial statements for the year ended December 31, 2017 have been restated to reflect (1) corrections related to the accounting for certain warrants.


Basis for Opinion


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

 

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


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


 

/s/ RBSM LLP



We have served as the Company’s auditor since 2011


New York, New York

April 16, 2019






F-2



 


SRAX, INC.

(f/k/a SOCIAL REALITY, INC.)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2018 AND 2017


 

 

2018

 

 

2017

 

 

 

 

 

 

 

As Restated

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,784,865

 

 

$

1,017,299

 

Accounts receivable, net

 

 

1,828,940

 

 

 

4,348,305

 

Prepaid expenses

 

 

466,823

 

 

 

468,336

 

Other current assets

 

 

387,085

 

 

 

300,898

 

Total current assets

 

 

5,467,713

 

 

 

6,134,838

 

Property and equipment, net

 

 

192,065

 

 

 

154,546

 

Goodwill

 

 

15,644,957

 

 

 

15,644,957

 

Intangible assets, net

 

 

1,762,605

 

 

 

1,642,760

 

Other assets

 

 

51,153

 

 

 

28,598

 

Total assets

 

$

23,118,493

 

 

$

23,605,699

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

3,574,926

 

 

$

5,010,815

 

Debenture warrant liability

 

 

4,323,499

 

 

 

7,256,864

 

Leapfrog warrant liability

 

 

622,436

 

 

 

1,873,107

 

Derivative liability

 

 

496,260

 

 

 

2,026,031

 

Total current liabilities

 

 

9,017,121

 

 

 

16,166,817

 

Secured convertible debentures, net

 

 

 

 

 

1,524,592

 

Total liabilities

 

 

9,017,121

 

 

 

17,691,409

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued or outstanding at December 31, 2018 and 2017, respectively

 

 

 

 

 

 

Class A common stock, authorized 250,000,000 shares, $0.001 par value, 10,109,530 and 9,910,565 shares issued and outstanding at December 31, 2018 and 2017, respectively

 

 

10,109

 

 

 

9,911

 

Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued or outstanding at December 31, 2018 and 2017, respectively

 

 

 

 

 

 

Common stock to be issued

 

 

 

 

 

879,500

 

Additional paid in capital

 

 

32,869,611

 

 

 

32,546,820

 

Accumulated deficit

 

 

(18,778,348

)

 

 

(27,521,941

)

Total stockholders' equity

 

 

14,101,372

 

 

 

5,914,290

 

Total liabilities and stockholders' equity

 

$

23,118,493

 

 

$

23,605,699

 




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


F-3



 


SRAX, INC.

(f/k/a SOCIAL REALITY, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2018 AND 2017


 

 

2018

 

 

2017

 

 

 

 

 

 

As Restated

 

 

 

 

 

 

 

 

Revenues

 

$

9,880,608

 

 

$

23,348,714

 

Cost of revenue

 

 

3,156,920

 

 

 

9,328,893

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

6,723,688

 

 

 

14,019,821

 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

 

 

 

 

 

 

General, selling and administrative expense

 

 

18,442,839

 

 

 

17,016,789

 

Write-off of non-compete agreement

 

 

 

 

 

468,750

 

Restructuring costs

 

 

 

 

 

377,961

 

Total operating expense

 

 

18,442,839

 

 

 

17,863,500

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(11,719,151

)

 

 

(3,843,679

)

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest income (expense)

 

 

(2,030,321

)

 

 

(2,782,047

)

Amortization of debt issuance costs

 

 

(1,026,220

)

 

 

(1,082,829

)

Total interest expense

 

 

(3,056,541

)

 

 

(3,864,876

)

Gain on sale of SRAXmd, net

 

 

22,108,028

 

 

 

 

Accretion of conversion feature

 

 

(3,085,822

)

 

 

(925,748

)

Accretion of debt discount and warrants

 

 

(1,208,524

)

 

 

(263,648

)

Gain (loss) on settlement

 

 

(3,240,126

)

 

 

 

Other Income

 

 

(8,204

)

 

 

 

Change in fair value of warrant liability

 

 

8,953,933

 

 

 

(4,134,166

)

Total other income (expense)

 

 

20,462,744

 

 

 

(9,188,438

)

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

 

8,743,593

 

 

 

(13,032,117

)

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

8,743,593

 

 

$

(13,032,117

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income per share, basic

 

$

0.86

 

 

$

(1.58

)

Net (loss) income per share, diluted

 

$

0.86

 

 

$

(1.58

)

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

 

10,121,408

 

 

 

8,253,851

 

Weighted average shares outstanding, diluted

 

 

10,121,408

 

 

 

8,253,851

 






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


F-4



 


SRAX, INC.

(f/k/a SOCIAL REALITY, INC.)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 2018 AND 2017


 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Common stock to be issued

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance, December 31, 2016

 

 

 

 

$

 

 

 

6,951,077

 

 

$

6,951

 

 

 

100,000

 

 

$

678,000

 

 

$

22,529,303

 

 

$

(14,390,004

)

 

$

8,824,250

 

Sale of common stock and warrants for cash

 

 

 

 

 

 

 

 

761,905

 

 

 

762

 

 

 

 

 

 

 

 

 

3,979,239

 

 

 

 

 

 

3,980,001

 

Fair value of put option

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,038,344

)

 

 

 

 

 

(3,038,344

)

Cost of sale of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(160,000

)

 

 

 

 

 

(160,000

)

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

444,051

 

 

 

 

 

 

444,051

 

Vested shares issued

 

 

 

 

 

 

 

 

51,667

 

 

 

52

 

 

 

 

 

 

 

 

 

(52

)

 

 

 

 

 

 

Shares issued to consultant

 

 

 

 

 

 

 

 

75,000

 

 

 

75

 

 

 

 

 

 

 

 

 

97,425

 

 

 

 

 

 

97,500

 

Common stock issued for services

 

 

 

 

 

 

 

 

300,000

 

 

 

300

 

 

 

(100,000

)

 

 

(678,000

)

 

 

1,197,700

 

 

 

 

 

 

520,000

 

Common stock issued to directors

 

 

 

 

 

 

 

 

10,368

 

 

 

10

 

 

 

 

 

 

 

 

 

44,977

 

 

 

 

 

 

44,987

 

Executive Bonus Shares

 

 

 

 

 

 

 

 

20,409

 

 

 

20

 

 

 

 

 

 

 

 

 

99,980

 

 

 

 

 

 

100,000

 

Common stock issued for software asset

 

 

 

 

 

 

 

 

200,000

 

 

 

200

 

 

 

 

 

 

 

 

 

279,800

 

 

 

 

 

 

280,000

 

Shares to be issued for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

150,000

 

 

 

879,500

 

 

 

 

 

 

 

 

 

879,500

 

Conversion of debentures

 

 

 

 

 

 

 

 

1,111,670

 

 

 

1,112

 

 

 

 

 

 

 

 

 

3,333,888

 

 

 

 

 

 

3,335,000

 

Exercise of warrants

 

 

 

 

 

 

 

 

428,469

 

 

 

429

 

 

 

 

 

 

 

 

 

1,284,975

 

 

 

 

 

 

1,285,404

 

October debenture BCF

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,405,540

 

 

 

 

 

 

1,405,540

 

Placement agent warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

948,518

 

 

 

 

 

 

948,518

 

Repricing of warrants

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99,820

 

 

 

(99,820

)

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,032,117

)

 

 

(13,032,117

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2017 (As Restated)

 

 

 

 

$

 

 

 

9,910,565

 

 

$

9,911

 

 

 

150,000

 

 

$

879,500

 

 

$

32,546,820

 

 

$

(27,521,941

)