See accompanying footnotes to these unaudited condensed consolidated financial statements.
See accompanying footnotes to these unaudited condensed consolidated financial statements.
See accompanying footnotes to these unaudited condensed consolidated financial statements.
See accompanying footnotes to these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
We are a digital marketing and data technology company with tools to reach and reveal valuable audiences with marketing and advertising communication. Our machine-learning technology analyzes marketing data to identify brands and content owners' core consumers and their characteristics across marketing channels. In addition to our business services and technologies, we also operate a direct to consumer platform, BIGToken, which enables consumers to own, manage and sell access to their digital identity and data. This provides us with a direct consumer relationship and gives us valuable proprietary data. We derive our revenues from:
·
sales of digital advertising campaigns to advertising agencies and brands;
·
sales of media inventory through real-time bidding, or RTB, exchanges;
·
sale and licensing of our
SRAX Social
platform and related media; and,
·
creation of custom platforms for buying media on
SRAX
for large brands;
·
Sales of proprietary consumer data.
The core elements of our business are:
·
Social Reality Ad Exchange or "SRAX"
Real Time Bidding sell side and buy side representation
is our technology which assists publishers in delivering their media inventory to the RTB exchanges. The
SRAX
platform integrates multiple market-leading demand sources, including OpenX, Pubmatic and AppNexus. 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;
·
SRAX Social
is a social media and loyalty platform that allows brands to launch and manage their social media initiatives. Our team works with customers to identify their needs and then helps them in the creation, deployment and management of their social media presence; and
·
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; and
·
SRAXir
tools to assist public companies in analyzing and marketing to their shareholder population; and
·
BIGToken
is a platform that allows consumers to manage the sales of their digital data.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and notes thereto are unaudited. The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in the Companys annual financial statements have been condensed or omitted. The December 31, 2018 condensed balance sheet data was derived from financial statements, but does not include all disclosures required by GAAP. These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim three month periods ended March 31, 2019 and 2018. The results for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year ending December 31, 2019 or for any future period.
These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2018, included in the Company's annual report on Form 10-K filed with the SEC on April 16, 2019.
5
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Uses and Sources of Liquidity
Our primary need for liquidity is to fund working capital requirements of our business, establish and develop new business units, development of internally used software and for general corporate purposes, including debt repayment. Our general, selling and administrative expenses increased from $4,108,093 for the three months ended March 31, 2018 to $4,490,961 for the three months ended March 31, 2019. We had a net loss of $5,785,404 for the three months ended March 31, 2019 compared to net income of $11,068 for the three months ended March 31, 2018. At March 31, 2019, we had an accumulated deficit of $24,563,753. As of March 31, 2019, we had $17,672 in cash and cash equivalents and a working capital deficit of $9,464,004 as compared to $2,784,865 in cash and cash equivalents and a working capital deficit of $3,549,408 at December 31, 2018. We continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported losses and have historically funded our operations and investing activities with cash provided by financing activities. In late 2017, we announced several new initiatives intended to provide additional growth opportunities which launched in the third quarter of 2018.
Although we believe that the foregoing actions will assist with our liquidity needs during the 12 months following the issuance of the financial statements, there is no assurance that the outcome of our actions will result in liquidity. If we continue to experience operating losses, we may need to raise additional capital through the sale of our equity and/or debt securities. Although historically we have funded our operations through the sale of our debt and equity securities, there is no assurance that we will be able to raise additional capital or that if such capital is raised, it will be on favorable terms. A failure to generate additional liquidity could negatively impact our business, including our access to critical business services. Additionally, if we require additional capital and are not able to secure it, we may need to greatly curtail our current and planned business initiatives.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All material intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The unaudited condensed consolidated financial statements have been prepared in conformity with GAAP and requires management of the Company to make estimates and assumptions in the preparation of these unaudited condensed consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting periods. Actual results could differ from these estimates and assumptions.
The most significant areas that require management judgment and which are susceptible to possible change in the near term include the Company's revenue recognition, allowance for doubtful accounts and sales credits, stock-based compensation, income taxes, goodwill, other intangible assets, put rights and valuation of liabilities.
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents.
6
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Revenue Recognition
The Company adopted Accounting Standards Codification (ASC) Topic 606,
Revenue from Contracts with Customers
(ASC Topic 606) on January 1, 2018 using the modified retrospective method. Our operating results for reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts continue to be reported in accordance with our historic accounting under Topic 605. The timing and measurement of our revenues under ASC Topic 606 is similar to that recognized under previous guidance, accordingly, the adoption of ASC Topic 606 did not have a material impact on our financial position, results of operations, cash flows, or presentation thereof at adoption or in the current period. There were no changes in our opening retained earnings balance as a result of the adoption of ASC Topic 606.
ASC Topic 606 is a comprehensive revenue recognition model that requires revenue to be recognized when control of the promised goods or services are transferred to our customers at an amount that reflects the consideration that we expect to receive. Application of ASC Topic 606 requires us to use more judgment and make more estimates than under former guidance. Application of ASC Topic 606 requires a five-step model applicable to all product offereing revenue streams as follows:
Identification of the contract, or contracts, with a customer
A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each partys rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customers intent and ability to pay the promised consideration.
We apply judgment in determining the customers ability and intention to pay, which is based on a variety of factors including the customers historical payment experience or, in the case of a new customer, published credit or financial information pertaining to the customer.
Identification of the performance obligations in the contract
Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.
When a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services are capable of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.
Determination of the transaction price
The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods or services to our customer. We estimate any variable consideration included in the transaction price using the expected value method that requires the use of significant estimates for discounts, cancellation periods, refunds and returns. Variable consideration is described in detail below.
Allocation of the transaction price to the performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative Stand-Alone Selling Price (SSP,) basis. We determine SSP based on the price at which the performance obligation would be sold separately. If the SSP is not observable, we estimate the SSP based on available information, including market conditions and any applicable internally approved pricing guidelines.
7
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Recognition of revenue when, or as, we satisfy a performance obligation
We recognize revenue at the point in time that the related performance obligation is satisfied by transferring the promised goods or services to our customer.
Principal versus Agent Considerations
When another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in ASC Topic 606 to determine if we are the principal or an agent to the transaction. When we control the specified goods or services before they are transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services before they are transferred to our customer, revenue is reported net of the fees paid to the other party, as agent. Our evaluation to determine if we control the goods or services within ASC Topic 606 includes the following indicators:
We are primarily responsible for fulfilling the promise to provide the specified good or service.
When we are primarily responsible for providing the goods and services, such as when the other party is acting on our behalf, we have indication that we are the principal to the transaction. We consider if we may terminate our relationship with the other party at any time without penalty or without permission from our customer.
We have risk before the specified good or service have been transferred to a customer or after transfer of control to the customer.
We may commit to obtaining the services of another party with or without an existing contract with our customer. In these situations, we have risk of loss as principal for any amount due to the other party regardless of the amount(s) we earn as revenue from our customer.
The entity has discretion in establishing the price for the specified good or service.
We have discretion in establishing the price our customer pays for the specified goods or services.
Contract Liabilities
Contract liabilities consist of customer advance payments and billings in excess of revenue recognized. We may receive payments from our customers in advance of completing our performance obligations. We record contract liabilities equal to the amount of payments received in excess of revenue recognized, including payments that are refundable if the customer cancels the contract according to the contract terms. Contract liabilities have been historically low historically recorded as current liabilities on our consolidated financial statements when the time to fulfill the performance obligations under terms of our contracts is less than one year. We have no Long-term contract liabilities which would represent the amount of payments received in excess of revenue earned, including those that are refundable, when the time to fulfill the performance obligation is greater than one year.
Practical Expedients and Exemptions
We have elected certain practical expedients and policy elections as permitted under ASC Topic 606 as follows:
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·
|
We applied the transitional guidance to contracts that were not complete at the date of our initial application of ASC Topic 606 on January 1, 2018.
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|
|
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·
|
We adopted the practical expedient related to not adjusting the promised amount of consideration for the effects of a significant financing component if the period between transfer of product and customer payment is expected to be less than one year at the time of contract inception;
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·
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We made the accounting policy election to not assess promised goods or services as performance obligations if they are immaterial in the context of the contract with the customer;
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8
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
|
|
|
|
·
|
We made the accounting policy election to exclude any sales and similar taxes from the transaction price; and
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·
|
We adopted the practical expedient not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.
|
Cost of Revenue
Cost of revenue consists of payments to media providers and website publishers that are directly related to either a revenue-generating event or project and application design costs. The Company becomes obligated to make payments related to media providers and website publishers in the period the advertising impressions, click-through, actions or lead-based information are delivered or occur. Such expenses are classified as cost of revenue in the corresponding period in which the revenue is recognized in the accompanying unaudited condensed consolidated statements of operations.
Accounts Receivable
Credit is extended to customers based on an evaluation of their financial condition and other factors. Management periodically assesses the Company's accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company does not require collateral. Allowance for doubtful accounts was $48,448, $48,091, and $59,278 at March 31, 2019, December 31, 2018, and March 31, 2018 respectively.
Concentration of Credit Risk, Significant Customers and Supplier Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions within the United States. The Company has not experienced any loss on these accounts. The balances are maintained in demand accounts to minimize risk.
At March 31, 2019, one customer accounted for approximately 48.45% of our accounts receivable balance. At December 31, 2018, two customers accounted for approximately 75.1% of our accounts receivable balance.
For the three months ended March 31, 2019, two customers accounted for 28.9% of total revenue. For the three months ended March 31, 2018, two customers accounted for more than 10% of the total revenue for a total of 44.9%.
Fair Value of Financial Instruments
The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Companys principal or, in absence of a principal, most advantageous market for the specific asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows:
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·
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Level 1Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
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·
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Level 2Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and
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·
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Level 3Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
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9
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
The determination of fair value and the assessment of a measurements placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions. Managements assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include: estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods. The Company may also engage external advisors to assist us in determining fair value, as appropriate.
Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.
The Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At March 31, 2019 and December 31, 2018, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments. The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. Derivative Instruments are carried at fair value, generally estimated using the Black-Scholes Merton model. This determination requires significant judgments to be made.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is provided on the straight-line basis over the estimated useful lives of the assets of three to seven years.
Expenditures for repair and maintenance which do not materially extend the useful lives of property and equipment are charged to operations. When property or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the respective accounts with the resulting gain or loss reflected in operations. Management periodically reviews the carrying value of its property and equipment for impairment.
Intangible assets
Intangible assets consist of intellectual property, a non-complete agreement, and internally developed software and are stated at cost less accumulated amortization. Amortization is provided for on the straight-line basis over the estimated useful lives of the assets of three to six years. The Company capitalizes the costs of developing internal-use computer software, including directly related payroll costs. The Company amortizes costs associated with its internally developed software over periods up to three years, beginning when the software is ready for its intended use.
Costs Incurred to Develop Software for Internal Use
Costs incurred to develop computer software for internal use are capitalized once: (1) the preliminary project stage is completed, (2) management authorizes and commits to funding a specific software project, and (3) it is probable that the project will be completed and the software will be used to perform the function intended. Costs incurred prior to meeting the qualifications are expensed as incurred. Capitalization of costs ceases when the project is substantially complete and ready for its intended use. Post-implementation costs related to the internal use computer software, are expensed as incurred. Internal use software development costs are amortized using the straight-line method over its estimated useful life which ranges up to three years. Software development costs may become impaired in situations where development efforts are abandoned due to the viability of the planned project becoming doubtful or due to technological obsolescence of the planned software product. For the three months ended March 31
2019 and year ended December 31, 2018 there has been no impairment associated with internal use software. For the three months ended March 31, 2019 and the year ended December 31, 2018, the Company capitalized software development costs of $279,752 and $960,157 respectively.
During 2016, the Company began capitalizing the costs of developing internal-use computer software, including directly related payroll costs. The Company amortizes costs associated with its internally developed software over periods up to three years, beginning when the software is ready for its intended use.
10
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
The Company capitalizes costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business process reengineering costs are expensed in the period in which they are incurred.
Business Combinations
For all business combinations (whether partial, full or step acquisitions), the Company records 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration, if any, is recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value are recognized in earnings until settlement and acquisition-related transaction and restructuring costs are expensed rather than treated as part of the cost of the acquisition.
Goodwill and annual impairment testing period
We account for goodwill and other indefinite-lived intangible assets in accordance with FASB ASC Topic 350 IntangiblesGoodwill and Other. Approximately 79% of our total assets as of March 31, 2019, consist of indefinite-lived intangible assets, such goodwill, the value of which depends significantly upon the operating results of our businesses. We believe that our estimate of the value of our goodwill is a critical accounting estimate as the value is significant in relation to our total assets, and our estimates incorporate variables and assumptions that are based on experiences and judgment about future operating performance of our markets and product offerings.
We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired. We complete our annual impairment tests in the fourth quarter of each year. The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820 Fair Value Measurements and Disclosures as Level 3 inputs.
We have the option to assess whether it is more likely than not that an indefinite-lived intangible asset is impaired. If it is more likely than not that impairment exists, we are required to perform a quantitative analysis to estimate the fair value of the assets. The qualitative assessment requires significant judgment in considering events and circumstances that may affect the estimated fair value of our indefinite-lived intangible assets and to weigh these events and circumstances by what we believe to be the strongest to weakest indicator of potential impairment. Our annual test is conducted on December 31st.
The FASB guidance provides examples of events and circumstances that could affect the estimated fair value of indefinite-lived intangible assets; however, the examples are not all-inclusive and are not by themselves indicators of impairment. We considered these events and circumstances, as well as other external and internal considerations. Our analysis, in order of what we consider to be the strongest to weakest indicators of impairment include: (1) the difference between any recent fair value calculations and the carrying value; (2) financial performance, such as operating revenue, including performance as compared to projected results used in prior estimates of fair value; (3) macroeconomic economic conditions, including limitations on accessing capital that could affect the discount rates used in prior estimates of fair value; (4) industry and market considerations such as a declines in market-dependent multiples or metrics, a change in demand, competition, or other economic factors; (5) operating cost factors, such as increases in labor, that could have a negative effect on future expected earnings and cash flows; (6) legal, regulatory, contractual, political, business, or other factors; (7) other relevant entity-specific events such as changes in management or customers; and (8) any changes to the carrying amount of the indefinite-lived intangible asset.
We engage an independent third-party appraisal and valuation firm to assist us with determining the enterprise value. Noble Financial Capital Markets prepared the valuations for the testing periods ending December 31, 2018 and 2017.
11
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
We performed a sensitivity analysis of certain key assumptions including reducing the long-term revenue growth rate to determine that such changes would have no incremental impact to the carrying value of goodwill associated with our Company.
Long-lived Assets
Management evaluates the recoverability of the Company's identifiable intangible assets and other long-lived assets when events or circumstances indicate a potential impairment exists. Events and circumstances considered by the Company in determining whether the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; a significant decline in the Company's stock price for a sustained period of time; and changes in the Company's business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets' carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
No impairments have been recorded regarding its identifiable intangible assets or other long-lived assets during the three months ended March 31, 2019 or 2018, respectively.
Accounting for discontinued operations
We regularly review underperforming assets (product offereings) to determine if a sale or disposal might be a better way to monetize the assets. When a product line or other asset group is considered for sale or disposal, we review the transaction to determine if or when the entity qualifies as a discontinued operation in accordance with the criteria of FASB ASC Topic 205-20 Discontinued Operations. The FASB has issued authoritative guidance that raises the threshold for disposals to qualify as discontinued operations. Under the this guidance, a discontinued operation is (1) a component of an entity or group of components that have been disposed of or are classified as held for sale and represent a strategic shift that has or will have a major effect on an entity's operations and financial results, or (2) an acquired business that is classified as held for sale on the acquisition date.
We operate as a single reporting unit that has multiple product offerings. All our product offerings are in the same geographic market, sharing the same building, equipment, and managed by a single general manager. The product level is the lowest level for which discrete financial information related solely to revenue and related accounts recievalbe is available and the level reviewed by management to analyze operating results. Our senior management is compensated based on the results of all the product offerings as a whole, not the results of any individual product line We have determined that the sale of the SRAXmd prodcut line did not qualify for as a discontinued operation pursuant to guidance in ASC 205-20.
During 2018, based on revenue results management and board decided to accept the offer for the sale of the SRAXmd product line. The Company decided to monetize the SRAXmd product line via a sale rather than continue to offer the SRAXmd product to its customers. We have retained an approximatley 30% interest in the purchaser of the SRAXmd product line, however, based on the operating agreement covering our ownerhisp we have no ongoing or further involvement in the operations of the purschaser of SRAXmd. The sale of the SRAXmd product line is not considered to be discontinued operations pursuant to the guidance in ASC 205-20.
Derivatives
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480,
Distinguishing Liabilities From Equity
and FASB ASC Topic No. 815,
Derivatives and Hedging
. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments.
12
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
The Company has adopted ASU 2017-11, Earnings per share (Topic 260), provided that when determining whether certain financial instruments should be classified as liability or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entitys own stock. If a down round feature on the conversion option embedded in the note is triggered, the Company will evaluate whether a beneficial conversion feature exists, the Company will record the amount as a debt discount and will amortize it over the remaining term of the debt.
If the down round feature in the warrants that are classified as equity is triggered, the Company will recognize the effect of the down round as a deemed dividend, which will reduce the income available to common stockholders.
Warrant Liability
The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company's consolidated statements of operations. The fair value of the warrants issued by the Company has been estimated using a Black-Scholes option pricing model, at each measurement date.
Debt Discounts
The Company accounts for debt discounts originating in connection with conversion features that remain embedded in the related notes in accordance with ASC 470-20,
Debt with Conversion and Other Options
. These costs are classified on the consolidated balance sheet as a direct deduction from the debt liability. The Company amortizes these costs over the term of its debt agreements as interest expense-debt discount in the consolidated statement of operations.
Earnings Per Share
We use Accounting Standards Codification (ASC) 260, "
Earnings Per Share
" for calculating the basic and diluted earnings (loss) per share. We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share are the same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share.
There were 5,417,864 common share equivalents at March 31, 2019 and 5,053,258 common share equivalents at March 31, 2018. For the three months ended March 31, 2019 these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would and be antidilutive. For the three months ended March 31, 2018 these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be antidilutive.
Income Taxes
We utilize ASC 740
Income Taxes
which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at year-end based on enacted laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
The Company recognizes the impact of a tax position in the consolidated financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense.
13
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Stock-Based Compensation
We account for our stock based compensation under ASU 2018-07 "
Compensation Stock Compensation
" using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. We employ this method of accounting for stock compensation paid to employees and non-employees.
We use the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair value of options. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods.
Business Segments
The Company uses the "management approach" to identify its reportable segments. The management approach designates the internal organization used by management for making operating decisions and assessing performance as the basis for identifying the Company's reportable segments. Using the management approach, the Company determined that it has one operating segment due to business similarities and similar economic characteristics.
NOTE 3 IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Adoption of New Accounting Standards
For a discussion of recent accounting pronouncements, please refer to Recently Issued Accounting Standards as contained in Note 1 in the December 31, 2018 audited consolidated financial statements included in the Companys annual report on Form 10-K filed with the SEC on April 16, 2019.
Leases
In February 2016, the FASB issued ASU No. 2016-02 (ASC 842), Leases, to require lessees to recognize all leases, with certain exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. Subsequently, the FASB issued ASU No.2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20, Narrow-Scope Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and amend the guidance in ASU No. 2016-02. ASC 842 eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. This standard is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted.
We are using a modified retrospective adoption approach, is required to recognize and measure leases existing at the beginning of the adoption period, with certain practical expedients available.
We adopted the standard effective January 1, 2019. The standard allows a number of optional practical expedients to use for transition. The Company choose the certain practical expedients allowed under the transition guidance which permitted us to not to reassess any existing or expired contracts to determine if they contain embedded leases, to not to reassess our lease classification on existing leases, to account for lease and non-lease components as a single lease component for equipment leases, and whether initial direct costs previously capitalized would qualify for capitalization under FASB ASC 842. The new standard also provides practical expedients and recognition exemptions for an entity's ongoing accounting policy elections. The Company has elected the short-term lease recognition for all leases that qualify, which means that we do not recognize a ROU asset and lease liability for any lease with a term of twelve months or less. The most significant impact of adopting the standard was the recognition of ROU assets and lease liabilities for operating leases on the Company's consolidated balance sheet but it did not have an impact on the Company's consolidated statements of operations or consolidated statements of cash flows. We recorded a ROU and the related operating lease liability for our long-term facilities lease.
14
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Effective January 1, 2018, we adopted ASU No. 2016-15,
Statement of Cash Flows (Topic 230)
, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how cash receipts and cash payments are presented in the statement of cash flows. The adoption of ASU No. 2016-15 did not have a significant impact on our consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02:
Income Statement Reporting Comprehensive Income (Topic 220)
. Under current accounting guidance, the income tax effects for changes in income tax rates and certain other transactions are recognized in income from continuing operations resulting in income tax effects recognized in accumulated other comprehensive income that do not reflect the current tax rate of the entity (stranded tax effects). The new guidance allows us the option to reclassify these stranded tax effects to accumulated deficit that relate to the change in the federal tax rate resulting from the passage of the Tax Cuts and Jobs Act. This update is effective for fiscal years beginning after December 15, 2018, including interim periods therein, and early adoption is permitted. We do not expect the adoption of this standard will have a significant impact on our consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement.
which amends the disclosure requirements in ASC 820 by adding, changing, or removing certain disclosures. The ASU applies to all entities that are required under this guidance to provide disclosures about recurring or nonrecurring fair value measurements. These amendments are effective for all entities for fiscal years beginning after December 15, 2019 including interim periods within those fiscal years. We do not expect ASU 2018-13 will have a material impact on our consolidated financial statements.
NOTE 4 SALE OF SRAXmd
Sale of SRAXmd:
On August 6, 2018, we completed the sale of substantially all of the assets related to our SRAXmd product line for aggregate consideration of $43,000,000. The purchase price consists of (i) $33,000,000 in cash and (ii) an interest in an affiliate of the purchaser of SRAXmd assets that was valued on the closing date at $10,000,000. A total of $762,500 of the purchase price was placed into escrow accounts subject to future release.
Given that the Company will retain an ongoing equity interest in an affiliate of the purchaser of SRAXmd, the Company evaluated the potential existence of variable interest entity accounting treatment under ASC 810. Given the Company had no input into the design of the purchasing entity, is not a primary beneficiary of the purchaser entity and has no ongoing role in management or governance other than that of a passive, minority investor, the Company determined that the presence of a variable interest entity was not present.
Assets transferred to the purchaser in the transaction included $3,536,503 of accounts receivable and $216,479 of prepaid expense items. The purchaser also assumed $191,164 of accounts payable obligations and $333,014 of additional accrued expense items. The Company received a credit to the purchase price of $196,055 for over-delivery of working capital beyond a contractual $3 million working capital target. The Company has recorded a zero value for the interest retained in the purchaser affiliate.
The Company paid $1,709,500 of advisory fees and $351,089 of legal fees at closing. An additional $164,028 was also paid by the Company at closing for insurance premiums and escrow related fees.
During the fourth quarter of 2018, the Company recognized an additional $1,870,361 in costs associated with the transaction.
During the first quarter of 2019, the Company recorded an additional $143,365 in working capital adjustments associated with the transaction and received proceeds of $472,479 on the closure of a $500,000 escrow account.
The Company recorded a gain on sale of assets totaling $22,580,507. Less escrow holdbacks and other reimbursements, the Company received net proceeds from the transaction totaling $23,364,980.
15
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Below are the major components of the gain we recorded on the sale of the SRAX md assets:
GAIN ON SALE OF SRAXmd:
|
|
|
|
|
Cash Proceeds
|
|
$
|
33,350,459
|
|
Fair Value of Interest Retained
|
|
|
|
|
Carrying amount of Assets Sold
|
|
|
|
|
Fixed Assets
|
|
|
(117,000
|
)
|
Working Capital
|
|
|
(3,140,480
|
)
|
Transactions Fees & Sales Commissions
|
|
|
(7,512,472
|
)
|
Gain on Sale
|
|
$
|
22,580,507
|
|
Components of operating results for the SRAXmd product group have not been classified as discontinued operations. Pursuant to guidance in ASC 205-20, Discontinued Operations, we noted that the SRAXmd product line was not a reportable segment or a separate operating segment and nor was it deemed to be a strategic shift. Under this guidance, an entity presents a disposal as a discontinued operation if it represents a strategic shift that has (or will have) a major effect on an entitys operations and financial results. ASC Topic 205-20-45 does not clearly define on a quantitative basis as to how an entity would establish whether a component, business activity is individually significant. Additionally, the sale of the SRAXmd product line did not qualify under ASC Topic 360-10-35 to 45 for determination of the gain or loss. The sale of the SRAXmd product group does not constitute a shift in our corporate strategy or purpose as we continue to operate a diversified product group of digital advertising tools, as we have done since inception in 2010. The core technology and other key elements of the SRAX advertising platform will remain owned by us, with certain license agreements for use of our software granted to the purchaser as part of the transaction. SRAXmd was a product developed from our core technology. In addition to the assets, 12 of our existing employees also transferred. The Company has not assigned any goodwill upon disposal of SRAXmd.
SRAXmd, like each of the remaining SRAX product groups/offerings, has not historically operated as a discrete business entity or division within our company. As such, it along with the other product groups rely upon shared employees and a shared technology platform to operate. Furthermore, certain advertisers may also purchase advertising across multiple product lines, making individual product financial statements more difficult to segregate. Due to its in-house organic development, SRAXmd also has no separately capitalized assets that may be presented as held for sale on our balance sheet.
Based on managements best estimates, for the three month period ending March 31, 2018 and twelve month period ended December 31, 2018, the unaudited results for revenue and cost of sales attributable to the SRAXmd product group are estimated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended
March 31,
|
|
Full Year
December 31,
|
|
|
|
|
|
|
2018
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
$
|
1,598,217
|
|
$
|
6,306,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
|
$
|
360,792
|
|
$
|
1,101,080
|
|
Gross Profit
|
|
|
|
|
|
|
$
|
1,237,425
|
|
$
|
5,205,533
|
|
Gross Margin
|
|
|
|
|
|
|
|
77.43%
|
|
|
82.54%
|
|
General, Sales & Administrative expense
|
|
|
|
|
|
|
$
|
887,709
|
|
$
|
2,896,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
$
|
349,716
|
|
$
|
2,309,340
|
|
There is no specific depreciation and amortization, or interest expense specifically attributable to the SRAXmd product line.
16
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
NOTE 5 PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at March 31, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Office equipment
|
$
|
353,832
|
|
|
332,933
|
|
Accumulated depreciation
|
|
(156,836
|
)
|
|
(140,868
|
)
|
Property and equipment, net
|
$
|
196,996
|
|
|
192,065
|
|
Depreciation expense for the three months ended March 31, 2019, December 31, 2018
, and March 31, 2018
was $15,968, $13,268, and $9,941 respectively.
NOTE 6 INTANGIBLE ASSETS, NET
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Non-compete agreement
|
$
|
1,250,000
|
|
$
|
1,250,000
|
|
Intellectual property
|
|
756,000
|
|
|
756,000
|
|
Acquired Software
|
|
617,069
|
|
|
617,069
|
|
Internally developed software
|
|
1,843,153
|
|
|
1,563,401
|
|
Total cost
|
|
4,466,222
|
|
|
4,186,470
|
|
Accumulated amortization
|
|
2,660,939
|
|
|
2,423,865
|
|
Intangible assets, net
|
$
|
1,805,283
|
|
$
|
1,762,605
|
|
During the three months ended March 31, 2019 and 2018 the Company capitalized $279,752 and $231,774 of costs associated with the development of internal-use software, including directly related payroll costs, respectively.
On August 17, 2017, the Company acquired software from Leapfrog Media Trading in exchange for 200,000 shares of Class A common stock and 350,000 warrants with a term of five years and an exercise price of $3.00. This software was fully integrated into our platform on October 1, 2018. No other assets, customers, employees, intangibles or business operations were acquired in this transaction.
Amortization expense was $37,800 for intellectual property, $51,422 for the acquired Leapfrog software, and $147,852 for the internally developed software for the three months ended March 31, 2019. Amortization expense was $37,800 for intellectual property, $52,083 for the non-compete agreement, and $76,301 for the internally developed software for the three months ended March 31, 2018.
The estimated future amortization expense for the remainder of 2019 and the years ended December 31 thereafter, are as follows:
|
|
|
|
|
The estimated future amortization expense for the years ended December 31, are as follows:
|
|
|
|
2019
|
|
$
|
707,458
|
|
2020
|
|
|
830,899
|
|
2021
|
|
|
260,167
|
|
2022
|
|
|
6,759
|
|
|
|
$
|
1,805,283
|
|
17
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
NOTE 7 ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses are comprised of the following:
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Accounts payable, trade
|
$
|
2,293,943
|
|
$
|
2,517,749
|
|
Accrued expenses
|
|
562,516
|
|
|
256,009
|
|
Accrued compensation
|
|
491,656
|
|
|
722,010
|
|
Accrued commissions
|
|
73,796
|
|
|
79,158
|
|
Accounts payable and accrued expenses
|
$
|
3,421,911
|
|
$
|
3,574,926
|
|
NOTE 8 NOTES PAYABLE
Financing and Security Agreement with FastPay
In September 2016, we executed a Financing and Security Agreement, as amended (collectively, the "FastPay Agreement"). with FastPay Partners, LLC to create an accounts receivable-based credit facility. The FastPay Agreement was further amended in April 2018.
Under the April 2018 amended terms of the FastPay Agreement, FastPay may, at its sole discretion, purchase our eligible accounts receivable. Upon any acquisition of accounts receivable, FastPay will advance us up to 80% of the gross value of the purchased accounts, up to a maximum of $4,000,000 in advances. Each account receivable purchased by FastPay will be subject to a factoring fee rate specified in the FastPay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over 30 days. We are subject to a concentration limitation on the percentage of debt from any single customer of 25% to the total amount outstanding on its purchased accounts, subject to an increase to 30% for one specific large customer.
We are obligated to repurchase accounts remaining uncollected after a specified deadline, and FastPay will generally have full recourse against us in the event of nonpayment of any purchased accounts. Our obligations under the FastPay Agreement are secured by a first position security interest in its accounts receivable, deposit accounts and all proceeds therefrom.
The FastPay Agreement contains covenants that are customary for agreements of this type and are primarily related to accounts receivable and audit rights. We are also required to provide FastPay with 30-day notice of any transaction that result, or would result in, a change of control as defined in the FastPay Agreement. The failure to satisfy covenants under the FastPay Agreement or the occurrence of other specified events that constitute an event of default, as defined, could result in the termination of the FastPay Agreement and/or the acceleration of our obligations. The FastPay Agreement contains provisions relating to events of default that are customary for agreements of this type.
The current FastPay Agreement has a term of 18 months and automatically renews thereafter for successive one-year terms, subject to earlier termination by written notice by the Company, provided all obligations are paid, including the payment of an early termination fee.
At March 31, 2019 and 2018, $222,549 and $1,287,176 of accounts receivable purchased by FastPay remain outstanding and are subject to repurchase under the terms of the FastPay Agreement.
NOTE 9 WARRANT LIABILITIES
The discussion below relates to the following (collectively, the Derivative Warrant Instruments):
1.
In January 2017, the Company issued Series A and Series B Warrants in our registered direct and concurrent private placement. In April 2017, the Company repurchased the Series B Warrants for $2,500,000 and recognized a loss on the repurchase amounting to $2,053,975. Accordingly, only the Series A Warrants are currently outstanding.
18
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
2.
In April and October 2017, the Company issued the Series A1 Warrants and Series A2 Warrants in connection with the private placement of secured convertible debentures; and
3.
In November 2018, the Company issued the Series B1 Warrants upon redemption of the outstanding convertible debentures issued in April and October 2017, pursuant to the terms of such debentures.
The Derivative Warrant Instruments have been accounted for utilizing ASC 815
Derivatives and Hedging.
The Company has incurred a liability for the estimated fair value of Derivative Warrant Instruments. The estimated fair value of the Derivative Warrant Instruments has been calculated using the Black-Scholes fair value option-pricing model with key input variables provided by management, as of the date of issuance, with the valuation offset against additional paid in capital, and at each reporting date, with changes in fair value recorded as gains or losses on revaluation in other income (expense).
The Company identified embedded features in the Derivative Warrant Instruments which caused the warrants to be classified as a liability. These embedded features included the right for the holders to request for the Company to cash settle the Warrant Instruments from the Holder by paying to the Holder an amount of cash equal to the Black-Scholes value of the remaining unexercised portion of the Derivative Warrant Instruments on the date of the consummation of a fundamental transaction. The accounting treatment of derivative financial instruments requires that the Company treat the whole instrument as liability and record the fair value of the instrument as a derivative as of the inception date of the instrument and to adjust the fair value of the instrument as of each subsequent balance sheet dates.
As of January 4, 2017, the issuance date of the Series A and B Warrants, the fair value of the Series A and B Warrants of $3,038,344 was determined using the Black-Scholes Model based on a risk-free interest rate of 2% for both the Series A Warrants and the Series B Warrants, an expected term of 5.5 years for the Series A Warrants and 5 years for the Series B Warrants, an expected volatility of 110% for the Series A Warrants and the Series B Warrants and a 0% dividend yield for the Series A Warrants and the Series B Warrants, respectively. In April 2017, the Company repurchased the Series B Warrants for $2,500,000 and recognized a loss on the repurchase amounting to $2,053,975.
The Series A Warrants fair value as of March 31 2019 and December 31, 2018 was estimated to be $672,155 and $496,000 respectively, based on a risk-free interest rates of 2.46 and 2.20, respectively, an expected term of 3 and 4 years, respectively, an expected volatility of 102% and 167%, respectively and a 0% dividend yield.
As of April 21, and April 28, 2017, the issuance date of the Series A1 Warrants, the Company determined a fair value of $1,228,000 of the Series A1 Warrants. The fair value of the Series A1 Warrants was determined using the Black-Scholes Model based on a risk-free interest rate of 1.875%, an expected term of 5.5 years, an expected volatility of 109% and a 0% dividend yield for each respective date.
The Series A1 Warrants fair value at March 31, 2019 and December 31, 2018 was estimated to be $1,089,621 and $868,000 respectively based on a risk-free interest rate ranging from 2.21 to 2.73, an expected term ranging from 3.375 to 4.375 years, an expected volatility ranging from 102% to 164% and a 0% dividend yield. During the three month period ending March 31, 2019 and 2018, we recorded an increase and decrease, respectively, in the fair value of the warrant derivative liability of $223,360 and ($888,512), respectively. This was recorded as a loss on change in fair value of derivative liability.
As October 27, 2017, of the issuance date of the Series A2 Warrants, the Company determined a fair value of $2,856,000 of the Series A2 Warrants. The fair value of the Series A2 Warrants was determined using the Black-Scholes Model based on a risk-free interest rate of 2.03%, an expected term of 5.5 years, an expected volatility of 122% and a 0% dividend yield.
The fair value at March 31, 2019 and December 31, 2018 of the Series A2 Warrants was estimated to be $1,950,842 and $1,446,000, respectively based on a risk-free interest rate ranging from 2.20 to 2.46, an expected term ranging from 3.875 to 4.875 years, an expected volatility ranging from 102% to 158% and a 0% dividend yield. During the three month period ending March 31, 2019 and March 31, 2018, we recorded an increase and decrease, respectively, in the fair value of the warrant derivative liability of $505,632 and ($1,517,646), respectively. This was recorded as a loss on change in fair value of derivative liability.
19
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
As of November 29, 2018, the issuance date of the Series B1 Warrants, the Company determined a fair value of $3,240,000 of the Series B1 Warrants. The fair value of the Series B1 was determined using the Black-Scholes Model based on a risk-free interest rate of 2.9%, an expected term of 5.0 years, an expected volatility of 162% and a 0% dividend yield. During the three month period ending March 31, 2019, we recorded an increase, in the fair value of the warrant derivative liability of $848,872. This was recorded as a loss on change in fair value of derivative liability.
The fair value at March 31, 2019 of the Series B1 Warrants was estimated to be $2,860,621 based on a risk-free interest rate of 2.5, an expected term of 3.92, an expected volatility of 155% and a 0% dividend yield. The fair value was estimated to be $2,010,230 at December 31, 2018 based on a risk-free interest rate of 2.5, an expected term of 4.6 years, an expected volatility of 105% and a 0% dividend yield.
As August 17, 2017, of the issuance date of the Leapfrog Warrants, the Company determined a fair value of $337,069. The fair value of the Leapfrog Warrants was determined using the Black-Scholes Model based on a risk-free interest rate of 1.65%, an expected term of 5.0 years, an expected volatility of 108% and a 0% dividend yield.
The fair value at March 31, 2019 and December 31, 2018 of the Leapfrog Warrants was estimated to be $830,367 and $622,296 based on a risk-free interest rate of 2.2%, an expected term of 3.4 years, an expected volatility of 105% and a 0% dividend yield.
The Warrant liabilities are comprised of the following at March 31:
|
|
|
|
|
|
|
|
|
|
|
Debenture
Warrant
Liability
|
|
Leapfrog
Warrant
Liability
|
|
Derivative
Liability
|
|
Balance as of beginning of period (December 31, 2018)
|
|
4,323,218
|
|
|
622,436
|
|
|
496,241
|
|
Adjustments to Warrants Outstanding
|
|
|
|
|
|
|
|
|
|
Adjustment to fair value
|
|
1,577,866
|
|
|
208,071
|
|
|
175,914
|
|
Balance as of end of period ( March 31, 2019)
|
|
5,901,084
|
|
|
830,507
|
|
|
672,155
|
|
|
|
|
|
|
|
|
|
|
|
|
Debenture
Warrant
Liability
|
|
Leapfrog
Warrant
Liability
|
|
Derivative
Liability
|
|
Balance as of beginning of period (December 31, 2017)
|
|
7,256,864
|
|
|
1,873,106
|
|
|
2,026,031
|
|
Adjustments to Warrants Outstanding
|
|
|
|
|
|
|
|
|
|
Adjustment to fair value
|
|
(2,409,444
|
)
|
|
(629,170
|
)
|
|
(685,080
|
)
|
Balance as of end of period ( March 31, 2018)
|
|
4,847,420
|
|
|
1,243,936
|
|
|
1,340,951
|
|
NOTE 10 SECURED CONVERTIBLE DEBENTURES, NET
In April 2017, the Company entered into definitive securities purchase agreements with certain accredited investors for the purchase and sale of an aggregate of : (i) $5,000,000 principal amount of 12.5% secured convertible debentures (the Debentures); and (ii) five-year warrants (Series A Warrants) representing the right to acquire up to 833,337 shares of our class A common stock that expire in April 2022, in a transaction exempt from registration under the Securities Act, in reliance on an exemption provided by Rule 506(b) of Regulation D and Section 4(a)(2) of the Securities Act.
In connection with our April 2017 Debenture Offering, we also issued the following placement agent warrants:
·
Chardan Capital Markets, and its affiliates received warrants to purchase an aggregate of 100,000 shares of Class A common stock at an exercise price of $3.75 per share, with an expiration date of October 21, 2022;
·
Noble Financial Capital Markets, and its affiliates received warrants to purchase an aggregate of 66,800 shares of Class A common stock at an exercise price of $3.00 per share, with an expiration date of October 21, 2022; and
·
Aspenwood Capital (Colorado Financial Service Corporation) and its affiliates received warrants to purchase an aggregate of 7,700 shares of Class A common stock at an exercise price of $3.75 per share, with an expiration date of October 21,2022.
The net proceeds to us from the offering, after deducting placement agent fees and estimated offering expenses, were approximately $4,636,629. We utilized $2,500,000 of the net proceeds to satisfy a put obligation under the Series B Warrants issued to investors in a registered direct offering that we conducted in January 2017 as described in Note 11. The balance of the net proceeds was used to pay down accounts payable and satisfy other working capital requirements.
20
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
In October 2017, the Company sold an additional $5,180,157.78 of Debentures and issued an additional 863,365 Series A Warrants that expire in October 2022.
In connection with our October 2017 Debenture Offering, we also issued the following placement agent warrants:
·
Chardan Capital Markets, and its affiliates received warrants to purchase an aggregate of 160,000 shares of Class A common stock with (i) 105,839 warrants having an exercise price of $3.75 and (ii) 54,161 warrants having an exercise price of $4.49 per share, with an expiration date of April 27, 2022; and
·
Aspenwood Capital (Colorado Financial Service Corporation) and its affiliates received warrants to purchase an aggregate of 23,337 shares of Class A common stock at an exercise price of $3.75 per share, with an expiration date of April 27, 2022.
The Company accounted for the Series A1 Debentures in accordance with ASC 470-20 Debt with Conversion and other options. The net proceeds of $4,639,629 from the issuance of the Series A1 Debentures was allocated between the Series A1 Debentures and the fair value of the Series A1 Warrants. The values allocated to the Series A1 Debentures and Series A1 Warrant was $3,408,629 and $1,288,000 respectively. After the allocation between the Series A1 Debentures and Series A1 Warrants, the effective conversion feature was greater than the fair market value of the Companys common stock on the date of issuance, so the adjusted proceeds were not allocated to the conversion feature.
The Company accounted for the Series A2 Debentures in accordance with ASC 470-20 Debt with Conversion and other options. The net proceeds of $4,261,684 from the issuance of the Series A2 Debentures was allocated between the Series A2 Debentures and the fair value of the Series A2 Warrants. The values allocated to the Series A2 Debentures and Series A2 Warrant was $1,405,540 and $2,856,108 respectively. After the allocation between the Series A2 Debentures and the Series A2 Warrants, the adjusted value assigned to Series A2 Debenture created the effected conversion feature to be a rate lower than the current market price for the Companys common stock on the date of the issuance. The value assigned to the conversion feature was $1,405,540.
In November of 2018, the Company redeemed the remaining Debentures for $7,199,674. The redemption amount consisted of: (i) the Debentures face value $6,545,157 and (ii) a 10% prepayment penalty of $654,517. Additionally, we issued the holders of the outstanding Debentures Series B1 warrants equal to 50% of the of the conversion shares issuable on an as-converted basis as if the principal amount of the Debenture had been converted immediately prior to the optional redemption, or an aggregate of 1,090,862 Series B1 Warrants. The Company received no additional consideration for the issuance of the Series B1 Warrants.
The Series B1 warrants have a term of five (5) years from the date in which each of the redeemed Debenture were issued. Accordingly, of the Series B Warrants: (i) 277,500 have an expiration date of April 21, 2022, and (ii) 813,362 have an expiration date of October 27, 2022.
The Series B1 Warrants are initially exercisable at $3.00 per share and, are subject to cashless exercise after six (6) months from the issuance date if the shares underlying the warrants are not subject to an effective registration statement. The Series B1 Warrants also contain anti- dilution protection for subsequent equity sales for a price lower than the then applicable exercise price, with a floor of $1.40.
21
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
NOTE 11 STOCKHOLDERS' EQUITY
Preferred Stock
We are authorized to issue 50,000,000 of preferred stock, par value $0.001, of which 200,000 shares were designated as Series 1 Preferred Stock. Our board of directors, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. The rights, preferences, limitations and restrictions of different series of preferred stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions and other matters. Our board of directors may authorize the issuance of preferred stock, which ranks senior to our common stock for the payment of dividends and the distribution of assets on liquidation. In addition, our board of directors can fix limitations and restrictions, if any, upon the payment of dividends on both classes of our common stock to be effective while any shares of preferred stock are outstanding.
Common Stock
We are authorized to issue an aggregate of 259,000,000 shares of common stock. Our certificate of incorporation provides that we will have two classes of common stock: Class A common stock (authorized 250,000,000 shares, par value $0.001), which has one vote per share, and Class B common stock (authorized 9,000,000 shares, par value $0.001), 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 are identical. There were no shares of Class B common stock outstanding at December 31, 2018 or 2017 or as of March 31, 2019 or 2018.
On January 4, 2017, we sold an aggregate of: (i) 761,905 shares of Class A common stock; and (ii) five-year Series B Warrants representing the right to acquire up an additional 380,953 shares of our Class A common stock at an exercise price of $7.00 per share. The shares of our Class A common stock and the Series B Warrants were sold in a registered direct offering and we received gross proceeds of $3,980,001. Simultaneously we conducted a private placement with the same investors for no additional consideration of Series A Warrants representing the right to acquire up to an additional 380,953 shares of our Class A common stock at an exercise price of $6.70 per share. The Series A Warrants are exercisable for five years commencing 6 months from the date of closing. The exercise price of the Series A Warrants is subject to full ratchet adjustment in certain circumstances, subject to a floor price of $1.20 per share. The adjustment provisions under the terms of the Series A Warrants will be extinguished at such time as our Class A common stock trades at or above $10.00 per share for 20 consecutive trading days, subject to the satisfaction of certain equity conditions. In addition, if there is no effective registration statement covering the shares issuable upon the exercise of the Series A Warrants, the warrants are exercisable on a cashless basis. If we fail to timely deliver the shares underlying the warrants, we will be subject to certain buy-in provisions. As a result of the sale of the Debentures in April 2017, the exercise price of the Series A Warrants issued to investors in our January 2017 private offering were reset to $2.245 per share.
On April 2017 and we repurchased the Series B Warrants for $2,500,000.
Pursuant to an engagement letter dated December 29, 2016 by and between the Company and Chardan Capital Markets, Chardan Capital agreed to act as the Companys placement agent in connection with both the registered direct offering and a concurrent private placement. Pursuant to the agreement, the Company paid Chardan Capital a cash fee equal to $160,000 (4% of the gross proceeds), as well as reimbursement of its expenses related to the offering in the amount of $15,000. In addition, the Company granted Chardan Capital a warrant to purchase 76,190 shares of Class A common. The warrants have an exercise price of $6.50 per share and are exercisable for 5.5 years commencing nine months from the issuance date. The shares underlying the warrants were included in a resale registration statement that was declared effective by the SEC in September 2017.
Between September 2017 and January 2018, we issued an aggregate of 225,000 shares of Class A common stock valued at $1,137,650 as consideration for media and marketing services.
In January 2018, we issued Colleen DiClaudio, a board member, 7,813 Class A common shares valued at $10,000 as payment for 2017 services on our board of directors. The shares were issued from our 2016 equity compensation plan.
22
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
In January 2018, we issued Hardy Thomas, a former board member, 7,195 Class A common shares valued at $10,000 as payment for 2017 services on our board of directors. The shares were issued from our 2016 equity compensation plan.
In January 2018, we issued Marc Savas and Malcolm CasSelle each 3,774 Class A common shares valued at $10,000 as payment for their respective 2017 service on our board of directors. The shares were issued from our 2016 equity compensation plan.
In January 2018, we issued a consultant an additional 150,000 shares for media consulting services. In August 2018, we issued the consultant an additional 150,000 shares pursuant to this same agreement.
In March 2018, we issued 6,667 shares of Class A common stock to one employee for vested stock awards.
In March 2018, 122,950 shares of Class A common stock were awarded to one employee for sales performance achievement pursuant to our 2016 equity compensation plan.
In July 2018, 16,667 Series A common stock purchase warrants were exercised at a price of $3.00 per share, resulting in gross proceeds to the Company of $50,000.
In August 2018, we issued William Packer 3,774 shares of Class A common shares valued at $10,000 as payment for 2017 services on our board of directors. The shares were issued from our 2016 equity compensation plan.
In June 2018, we issued 44,815 Series A common stock purchase warrants at an exercise price of $2.245 per share, on a cashless basis.
In September 2018, one investor in the Companys October 2017 debenture financing exercised 16,667 Series A common stock purchase warrants were exercised at a price of $3.00 per share, resulting in gross proceeds to the Company of $50,000.
In September 2018, we issued 100,000 shares of our Class A common stock for legal services rendered.
In September 2018, we issued 50,000 shares of our Class A common stock to Joseph P. Hannan, our former chief financial officer, pursuant to his October 2017 employment agreement. The shares were issued pursuant to our 2016 equity compensation plan, and subject to vesting at issue.
In September 2018, we issued 3,334 shares of Class A common stock to one employee for vested stock awards.
During September 30, 2018, certain debenture holders converted an aggregate of $300,000 in principal into 100,000 shares of the Companys Class A common stock.
On August 6, 2018, we repurchased 514,000 shares of our Class A common stock from Erin DeRuggiero as contracted under the terms of her separation agreement with the Company.
In October 2018, 50,000 shares of our Class A common stock were retired in lieu of cash tax withholding from a vesting on shares previously issued to Joseph P. Hannan, our former chief financial officer.
In October 2018, 23,800 shares of our Class A common stock were retired in lieu of cash tax withholding from a vesting on shares previously issued to Joseph P. Hannan, our former chief financial officer.
During the three months ended March 31, 2019, no Class A common stock was issued.
As of March 31, 2019, and December 31, 2018, there are 10,109,530 issued and outstanding Class A common shares.
23
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Stock Awards
During the year ended December 31, 2018 and as of March 31, 2019, respectively, there were no new grants of restricted stock awards made nor were any previously issued grants forfeited.
Stock Options and Warrants
During the three months ended March 31, 2019 and 2018, we recorded compensation expense of $120,883 and $166,130, respectively, related to stock based compensation. During the three months ended March 31, 2019 and 2018, no options were forfeited, respectively.
During the three months ended March 31, 2019 and 2018, respectively, 0 and 176,402 common stock purchase warrants, having exercise prices of between $5.00 and $10.00, per share, expired.
On January 24, 2018, 176,400 common stock purchase warrants, having exercise prices of $7.50, per share, expired.
On September 11, 2018, 250,000 common stock purchase warrants, having an exercise price of $4.20 per share with an option value as of the grant date of $488,106 calculated using the Black-Scholes option pricing model were granted to Joseph P. Hannan, our former chief financial officer. The options vested one third annually and expire three years after the vesting date. Upon Mr. Hannans termination in December of 2018, 229,166 option terminated.
On December 16, 2018, 100,000 common stock options, having an exercise price of $2.56 per share with an option value as of the grant date of $226,580 calculated using the Black-Scholes option pricing model were granted to Michael Malone, our chief financial officer. This expense associated with this option award will be recognized in operating expenses ratably over the vesting period.
On March 27, 2019, 685,000 common stock options having an exercise price of $3.42 per share with an option value as of the grant date of $1,513,137 calculated using the Black-Scholes option pricing model were granted to several employees and members of our management team. This expense associated with this option award will be recognized in operating expenses ratably over the vesting period.
NOTE 12 RELATED PARTY TRANSACTIONS
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. DeRuggieros 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. DeRuggieros outstanding Class A common shares (514,667) at a price of $5.80 per share, or an aggregate of $2,985,069 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. The Company and Ms. DeRuggiero agreed to a customary release from any claims that may have arisen during her employment.
On September 11, 2018, we issued a common stock purchase warrant to Joseph P. Hannan, our former Chief Financial Officer. The option entitled Mr. Hannan to purchase 250,000 shares of Class A Common Stock at a price per share of $4.20, had a term of three years and vested quarterly over a three (3) year period. Upon Mr. Hannans termination in December 2018, 234,375 of these options expired.
24
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Our Chief Executive Officer joined the board of directors of one of our advertising customers which purchases advertising at market rates during the first quarter of 2018.
NOTE 13 COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company records the lease asset and lease liability at the present value of lease payments over the lease term. The leases typically do not provide an implicit rate; therefore, the Company uses its estimated incremental borrowing rate at the time of lease commencement to discount the present value of lease payments. The Companys discount rate for operating leases at March 31, 2019 was 18%. Our Lease does not include rental escalation clauses, renewal options and/or termination options that are factored into the determination of lease payments when appropriate. Lease expense is recognized on a straight-line basis over the lease term. Our weighted-average remaining lease term is 5 years.
Future minimum lease payments required under the operating lease for the Mexico facility amounts to $745,363 as of March 31, 2019.
Future minimum lease payments under this rental agreement are approximately as follows:
|
|
|
|
|
12/31/2019
|
|
$
|
122,414
|
|
12/31/2020
|
|
|
163,218
|
|
12/31/2021
|
|
|
163,218
|
|
12/31/2022
|
|
|
163,218
|
|
12/31/2023
|
|
|
133,295
|
|
Total
|
|
|
745,363
|
|
Less: Amount representing interest
|
|
|
(240,085
|
)
|
Present Value of future lease payments
|
|
|
505,278
|
|
Less: Current obligation under lease
|
|
|
(146,166
|
)
|
Long-term lease obligations
|
|
$
|
359,112
|
|
The operating cash flows from operating leases were $ 76,564 for the three months ended March 31, 2019.
Lease costs for office space amounted to $76,564
Rent expense was $68,070 for the three months ended March 31, 2018.
Other Commitments
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered indemnification agreements with its directors and certain of its officers and employees that will require the Company to, among other things, indemnify them against certain liabilities that may arise due to their status or service as directors, officers or employees. The Company has also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and certain of its officers and employees, and former officers, directors and employees of acquired companies, in certain circumstances.
It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each agreement. Such indemnification agreements may not be subject to maximum loss clauses.
25
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Employment agreements
We have entered employment agreements with key employees. These agreements may include provisions for base salary, guaranteed and discretionary bonuses and option grants. The agreements may contain severance provisions if the employees are terminated without cause, as defined in the agreements.
BIGtoken Point liability
During the three months ended March 31, 2019 the Company instituted a policy that allows BIGtoken user to redeem outstanding BIGtoken points for cash if their account and point balances meet certain criteria. As of March 31, 2019, the Company has estimated the future liability for point redemptions to be $125,000. The Company considered the total number of points outstanding, the conversion rate in which points are redeemable for cash. Due to the recency of the BIGtoken platform and the ability for users to redeem points for cash, the Company does not have sufficient history to estimate account attrition and the associate breakage rates for outstanding points. Therefore, the Company utilized a breakage factor of zero percent as of March 31, 2019 in determining the estimated liability.
Litigation
From time to time, the Company may become subject to legal proceedings, claims and litigation arising in the ordinary course of business. In addition, the Company may receive letters alleging infringement of patent or other intellectual property rights. The Company is not currently a party to any material legal proceedings, nor is the Company aware of any pending or threatened litigation that would have a material adverse effect on the Company's business, operating results, cash flows or financial condition should such litigation be resolved unfavorably.
Income Taxes
We and our subsidiaries file U.S. Federal income tax returns and income tax returns in various state, local and foreign jurisdictions.
Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation due to several factors, including the variability in accurately predicting our pre-tax and taxable income and the mix of jurisdictions to which they relate, changes in how we do business, changes in our stock price, tax law developments (including changes in statues, regulations, case law, and administrative practices), and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount if pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.
For 2019, the anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 21% primarily because of the full valuation allowance related to net operating loss carryforwards and certain discrete items.
We consider both positive and negative evidence when evaluating the recoverability of our deferred tax assets ("DTAs"). The assessment is required to determine whether based on all available evidence, it is more likely than not (i.e. greater than a 50% probability) that all or some portion of the DTAs will be realized in the future. As of March 31, 2019, management has concluded a full valuation allowance of the DTAs is necessary because of sufficient uncertainty in our ability to realize the benefit associated with such DTAs in the future.
26
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
NOTE 14 SUBSEQUENT EVENTS
On April 10, 2019 we completed a registered direct offering of 1,687,825 shares our Class A common stock. The offering resulted in gross proceeds to the company of approximately $6.75 million.
On April 8, 2019, we accepted proposals from certain holders of outstanding Class A common stock purchase warrants. Pursuant to the proposal, the holders agreed to exercise their outstanding warrants to purchase an aggregate of 310,487 shares of our common stock, for cash, by April 10, 2019, in exchange for the Company reducing the exercise price of the Warrants from $7.50 to $3.56. As a result of the exercises we received gross proceeds of $1,105,333.
On April 1, 2019, we sold a non-performing receivable in the amount of $567,977, (such amount includes a mutually agreed upon gross-up with our customer of $150,000) for $417,977. In connection with the sale, we agreed to repurchase the receivable if the purchaser was not able to collect on the amounts owed by June 30, 2019. As security for our repurchase obligation, we issued and pledged 220,000 shares of our Class A common stock.
NOTE 15 Restatement
Financial Information (As Restated)
·
The Company has presented restated 2018 financials as of March 31, 2018 and for the three month period ended March 31, 2018, below.
·
In addition to the restatement of the financial statements, certain information within the following notes to the financial statements and financial statement schedule has been restated to reflect the corrections of misstatements discussed previously.
The individual restatement matter that underlies the restatement adjustments is described below.
Classification of Warrants
The Company has concluded that the certain Warrants issued in 2017 were required to be classified as liabilities pursuant to the provisions of ASC 815-10 since all of the characteristics of a derivative instrument were met and the Warrants do not qualify for the equity classification scope exception in ASC 815-40-25-10 from derivative accounting, primarily because the Company may be required to cash settle the warrants in circumstances where holders of the Companys common stock would not be entitled to cash, which is inconsistent with ASC 815-40-55-2 through 55-6. The warrant agreements include a fundamental transaction clause whereby, in the unlikely event that another person becomes the beneficial owner of 50% of the outstanding shares of the Companys common stock, and if other conditions are met, the Company may be required to purchase the warrants from the holders by paying cash in an amount equal to the Black Scholes value of the remaining unexercised portion of the warrants on the date of such fundamental transaction.
27
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Impact of the Restatement
Below weve presented the first quarter 2018 Financial Statements as previously reported with a reconciliation to the restated financials:
Summary of Restatement Condensed Consolidated Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
|
2018
|
|
Adjustments
|
|
2018
|
|
|
|
Originally
reported
|
|
|
|
As Restated
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
189,888
|
|
$
|
|
|
$
|
189,888
|
|
Accounts receivable, net
|
|
|
1,734,058
|
|
|
|
|
|
1,734,058
|
|
Prepaid expenses
|
|
|
540,753
|
|
|
|
|
|
540,753
|
|
Other current assets
|
|
|
300,898
|
|
|
|
|
|
300,898
|
|
Total current assets
|
|
|
2,765,597
|
|
|
|
|
|
2,765,597
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
165,898
|
|
|
|
|
|
165,898
|
|
Goodwill
|
|
|
15,644,957
|
|
|
|
|
|
15,644,957
|
|
Intangible assets, net
|
|
|
1,708,349
|
|
|
|
|
|
1,708,349
|
|
Other assets
|
|
|
32,043
|
|
|
|
|
|
32,043
|
|
Total non-current assets
|
|
|
17,551,247
|
|
|
|
|
|
17,551,247
|
|
Total assets
|
|
$
|
20,316,844
|
|
$
|
|
|
$
|
20,316,844
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders' equity
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
4,682,794
|
|
$
|
|
|
$
|
4,682,794
|
|
Debenture warrant liability
|
|
|
|
|
|
1,340,951
|
|
|
1,340,951
|
|
Leapfrog warrant liability
|
|
|
|
|
|
1,243,936
|
|
|
1,243,936
|
|
Derivative liability
|
|
|
|
|
|
4,847,420
|
|
|
4,847,420
|
|
Put liability
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
4,682,794
|
|
|
7,432,307
|
|
|
12,115,101
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities:
|
|
|
|
|
|
|
|
|
|
|
Secured convertible debentures, net
|
|
|
2,043,804
|
|
|
(83,545
|
)
|
|
1,960,259
|
|
Total non-current liabilities
|
|
|
2,043,804
|
|
|
(83,545
|
)
|
|
1,960,259
|
|
Total liabilities
|
|
|
6,726,598
|
|
|
7,348,762
|
|
|
14,075,360
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued or outstanding at March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Class A common stock, authorized 250,000,000 shares, $0.001 par value, 10,212,738 shares issued and outstanding at March 31, 2018
|
|
|
10,213
|
|
|
|
|
|
10,213
|
|
Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued or outstanding at March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Common stock to be issued
|
|
|
10,000
|
|
|
|
|
|
10,000
|
|
Additional paid in capital
|
|
|
38,328,359
|
|
|
(4,596,211
|
)
|
|
33,732,148
|
|
Accumulated deficit
|
|
|
(24,758,326
|
)
|
|
(2,752,550
|
)
|
|
(27,510,876
|
)
|
Total stockholders' equity
|
|
|
13,590,246
|
|
|
(7,348,762
|
)
|
|
6,241,485
|
|
Total liabilities and stockholders' equity
|
|
$
|
20,316,844
|
|
$
|
|
|
$
|
20,316,844
|
|
28
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Summary of Restatement Condensed Consolidated Statement of Operations Adjustments
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
2018
|
|
Adjustments
|
|
2018
|
|
|
Originally
Reported
|
|
|
|
As Restated
|
|
Revenue
|
$
|
2,110,850
|
|
$
|
|
|
$
|
2,110,850
|
|
Cost of revenue
|
|
818,105
|
|
|
|
|
|
818,105
|
|
Gross profit
|
|
1,292,745
|
|
|
|
|
|
1,292,745
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
General, selling and administrative expense
|
|
4,130,258
|
|
|
(22,165
|
)
|
|
4,108,093
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
Write off of non-compete agreement
|
|
|
|
|
|
|
|
|
|
Restructuring Costs
|
|
|
|
|
|
|
|
|
|
Operating expense
|
|
4,130,258
|
|
|
(22,165
|
)
|
|
4,108,093
|
|
Loss from operations
|
|
(2,837,513
|
)
|
|
22,165
|
|
|
(2,815,348
|
)
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(434,785
|
)
|
|
|
|
|
(434,785
|
)
|
Amortization of debt issuance costs
|
|
(332,658
|
)
|
|
(103,008
|
)
|
|
(435,666
|
)
|
Total Interest Expense
|
|
(767,443
|
)
|
|
(103,008
|
)
|
|
(870,451
|
)
|
Gain on sale of Assets
|
|
|
|
|
(22,165
|
)
|
|
(22,165
|
)
|
Exchange Gain or Loss
|
|
(4,664
|
)
|
|
|
|
|
(4,664
|
)
|
Loss on settlement
|
|
|
|
|
|
|
|
|
|
Change in Fair Value of Warrant Liability
|
|
|
|
|
3,723,696
|
|
|
3,723,696
|
|
Other non operating income / (expense)
|
|
(4,664
|
)
|
|
3,701,531
|
|
|
3,696,867
|
|
Total other income / (expense)
|
|
(772,107
|
)
|
|
3,598,523
|
|
|
2,826,416
|
|
Income / (Loss) before provision for income taxes
|
|
(3,609,620
|
)
|
|
3,620,688
|
|
|
11,068
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
Net income / (loss)
|
$
|
(3,609,620)
|
|
$
|
3,620,688
|
|
$
|
11,068
|
|
|
|
|
|
|
|
|
|
|
|
Net income / (loss) per share, basic and diluted
|
$
|
(0.36
|
)
|
|
0.35
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
Basic
|
|
10,037,905
|
|
|
|
|
|
10,037,905
|
|
Diluted
|
|
10,037,905
|
|
|
|
|
|
10,037,905
|
|
29
SOCIAL REALITY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTH PERIOD ENDED MARCH 31, 2019 AND 2018
(Unaudited)
Summary of Restatement Condensed Consolidated Statement of Cash Flows Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
|
2018
|
|
Adjustments
|
|
2018
|
|
|
|
Originally
Reported
|
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
(3,609,620
|
)
|
|
3,620,688
|
|
$
|
11,068
|
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
166,130
|
|
|
|
|
|
166,130
|
|
Amortization of debt issuance costs
|
|
|
93,639
|
|
|
|
|
|
93,639
|
|
Accretion of debenture discount and warrants
|
|
|
239,018
|
|
|
103,008
|
|
|
342,026
|
|
Gain/Loss on valuation of warrant derivatives
|
|
|
|
|
|
(3,723,696
|
)
|
|
(3,723,696
|
)
|
Gain on sale of SRAXmd
|
|
|
|
|
|
|
|
|
|
|
Provision for bad debts
|
|
|
(425
|
)
|
|
|
|
|
(425
|
)
|
Depreciation expense
|
|
|
9,441
|
|
|
|
|
|
9,441
|
|
Amortization of intangibles
|
|
|
166,185
|
|
|
|
|
|
166,185
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
2,614,671
|
|
|
|
|
|
2,614,671
|
|
Prepaid expenses
|
|
|
(72,416
|
)
|
|
|
|
|
(72,416
|
)
|
Other assets
|
|
|
(3,445
|
)
|
|
|
|
|
(3,445
|
)
|
Accounts payable and accrued expenses
|
|
|
(178,022
|
)
|
|
|
|
|
(178,022
|
)
|
Net cash used in operating activities
|
|
|
(574,844
|
)
|
|
|
|
|
(574,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Proceeds from SRAXmd
|
|
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
(20,793
|
)
|
|
|
|
|
(20,793
|
)
|
Development of software
|
|
|
(231,774
|
)
|
|
|
|
|
(231,774
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(252,567
|
)
|
|
|
|
|
(252,567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase / (decrease) in cash and cash equivalents
|
|
|
(827,411
|
)
|
|
|
|
|
(827,411
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
1,017,299
|
|
|
|
|
|
1,017,299
|
|
Cash and cash equivalents, end of period
|
|
$
|
189,888
|
|
|
|
|
$
|
189,888
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of cash flow information
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
340,684
|
|
|
|
|
$
|
340,684
|
|
Cash paid for taxes
|
|
$
|
|
|
|
|
|
$
|
|
|
Supplemental schedule of noncash financing activities
|
|
|
|
|
|
|
|
|
|
|
Vesting of common stock award
|
|
|
150,000
|
|
|
|
|
|
150,000
|
|
Issuance of common stock to be issued
|
|
|
869,500
|
|
|
|
|
|
869,500
|
|
Notes on Adjustments:
The adjustments to the consolidated balance sheet reflect the effect of adjusting certain warrants from equity reporting to liability reporting. The adjustments to the consolidated statement of operations reflect the changes in fair the value of these warrants from 12/31/17 through March 31, 2018.
30
ITEM 2.