PART
I
We
urge you to read this entire Annual Report on Form 10-K, including the “Risk Factors” section, the financial statements
and the related notes included therein. As used in this Annual Report, unless context otherwise requires, the words “we,”
“us,” “our,” “the Company,” “SRAX,” “Registrant” refer to SRAX, Inc.
and its subsidiaries. Additionally, and reference to “BIGToken”and “BIGToken, Inc.”, or the “BIGToken
Project” refer to the Company’s wholly owned subsidiary, BIGToken, Inc. and the assets used in its operations. Also,
any reference to “common share” or “common stock,” refers to our $.001 par value Class A common stock.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The
statements contained in this Annual Report on Form 10-K that are not purely historical are considered to be “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include, but are not limited
to: any projections of revenues, earnings, or other financial items; any statements of the strategies, plans and objectives of
management for future operations; any statements concerning proposed new products or developments; any statements regarding future
economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,”
“continue,” “believe,” “expect” or “anticipate” and any other similar words. These
statements represent our expectations, beliefs, anticipations, commitments, intentions, and strategies regarding the future and
include, but are not limited to, the risks and uncertainties outlined in Item 1.A Risk Factors and Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations and those discussed in other documents we file with the
Securities and Exchange Commission (SEC). Readers are cautioned that actual results could differ materially from the anticipated
results or other expectations that are expressed in forward-looking statements within this report. The forward-looking statements
included in this report speak only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise, except as required by law. Given these risks and
uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
We
are a data technology company offering tools and services to identify and reach consumers for the purpose of marketing and advertising
communication. Our technologies assist our clients in: (i) identifying their core consumers and such consumers’ characteristics
across various channels in order to discover new and measurable opportunities maximize profits associated with advertising campaigns
and (ii) gaining insight into the activities of their customers.
We
derive our revenues from the:
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Sale
and licensing of our proprietary SaaS platform; and
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Sales
of proprietary consumer data; and
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Sales
of digital advertising campaigns.
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Sales
of Advertising Campaigns.
We
provide services and data to allow our customers to utilize our proprietary data to enhance their data analytics and marketing
needs. Our products and services support and assist our customers with data management, audience optimization and recognition,
multi-channel and omnichannel media, and marketing services. These tools also assist our customers in driving online and traditional
retail sales.
Our
solutions allow for the analysis of multiple layers of data to build and scale audience profiles that can be analyzed and targeted
with digital media. Our capabilities allow the leveraging of data from our proprietary platforms to achieve more effective analysis
and marketing campaigns.
Key
features of our platforms:
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Access
to consumers who have joined our proprietary platforms who have opted to be marketed to. We provide proprietary information
on these consumers and have their consent to market to them, providing marketers safe and reliable data.
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The
discovery of new avenues through which customers are able to reach the higher-performing audiences / customers by leveraging
machine learning capabilities.
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The
use of our proprietary platform in order to allow marketers to unlock shopper profiles built from location, web browsing,
purchase history, social behavior and other analytics.
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The
use of customized audience creation tools.
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Sale
and licensing of SaaS platform
Our
software as a service (“SaaS”) solution, SRAX IR, enables companies to understand their shareholder base through the
tracking of holdings, the management of investor contact information and identification of trends in the purchase and sale of
issuer’s securities, if applicable. Once the investors are identified, our platform provides tools to communicate with these
investors.
SRAX
IR provides the following:
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Insight
into investor sentiment by analyzing buying and selling trends of an issuer’s shareholder base.
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Communication
points with an issuer’s investors, such as emails, phone number, social media accounts and address of record.
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Engaging
current and potential shareholders through real-time targeted cross-device omni-channel informational campaigns regarding
an issuer’s products and services.
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Assisting
issuers in managing and monitoring the return of investment achieved from investor relations and corporate communication initiatives.
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Sales
of proprietary consumer data.
In
2019 we launched our BIGToken consumer data management platform, where consumers are rewarded for providing and verifying their
data and completing activities within the platform. Our business is currently based on a platform of registered users, developed
as a direct to consumer data marketplace, providing advertisers and marketers highly accurate, informed consent-based research
and ad targeting data. We believe that the information gathered through the BIGToken platform will, upon reaching critical mass,
be significantly more valuable than information that is gathered and validated through other means without the specific knowledge
and consent of the data provider.
Our
strategy is to develop an opt-in first party data set (CCPA and GDPR compliant) which we believe will uniquely position SRAX to
capitalize on the rapidly evolving data marketplace. We are currently focused on executing on our plans to increase registered
users on the platform, and effectively segment, and eventually monetize on the data our users provide and the insight we derive
therefrom. As part of this strategy, we continue to explore partnership opportunities that would allow us to leverage the capabilities
of the BIGToken platform to effectively grow the platform and increase and enhance our user experience and user rewards / compensation.
Examples
of how we plan to use BIGToken and the proprietary consumer data derived therefrom include:
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The
use of BIGToken user surveys and the sale of such information received from surveys.
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The
creation and management of targeted rewards and loyalty programs based on information and buying trends ascertained by data
captured on our BIGToken platform.
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The
ability to assist our customers in conducting market research based on analytics received from users of the BIGToken platform.
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The
ability to identify specific audiences for our customers and to target questions, surveys and data analytics geared toward
our customers’ products / industries. Additionally, if we are unable to scale the needed information for a customer’s
target audience, we may utilize our proprietary analytics to gain insight to further focus and refine user segments that need
to be targeted in order to optimize data and media spend.
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The
use of Lightning Insights that allow our customers to conduct research around specific audience groups through both long and
short research studies.
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The
creation of customized loyalty programs that utilize rewards to drive consumer purchasing habits.
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Marketing
and sales
We
market our services through our in-house sales team, which is divided into three distinct groups. The First group is responsible
for national brand advertisers and advertising agencies; the second group is responsible for selling our SaaS solutions to issuers
of public securities; and the third group is focused on mid-market agencies and brands. Our in-house marketing is focused on social
media, including Facebook, LinkedIn and Twitter, public relations (PR), industry events and the creation of white papers which
assist in our marketing efforts and are used as lead generation tools for our sales team.
Intellectual
property
We
currently rely on a combination of trade secret laws and restrictions on disclosure to protect our intellectual property rights.
Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing
on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees,
consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary
information.
Competition
We
operate in a highly competitive digital media and ad tech environment. We compete based on our ability to: assist our customers
in obtaining the best available prices, data, and analytics, our customer service and, the quality and accessibility of our innovative
products and service offerings. We believe our product and services associated with BIGToken and our SaaS solution, SRAX IR, are
both unique and provide for a competitive advantage. Should other companies create similar software and acquire the customers
that we currently have, then in the future we could face increased competition. Competition for advertising placements among current
and future suppliers of Internet navigational and informational services, high-traffic websites and Internet service providers,
as well as competition with other media for advertising placements, could result in significant price competition, declining margins
and reductions in advertising revenue. In addition, as we continue our efforts to expand the scope of our services, we may compete
with a greater number of publishers and other media companies across an increasing range of different services, including vertical
markets where competitors may have advantages in expertise, brand recognition and other areas. If existing or future competitors
develop or offer products or services that provide significant performance, price, creative or other advantages over those offered
by us, our business, results of operations and financial condition could be negatively affected. We also compete with traditional
advertising media, such as direct mail, television, radio, cable, and print, for a share of advertisers’ total advertising
budgets. Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater
name recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater
financial, technical, sales, and marketing resources. As a result, we may not be able to compete successfully. If we fail to compete
successfully, we could lose customers or media inventory and our revenue and results of operations could decline.
Government
regulation
We
are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business.
Many of these laws and regulations are still evolving and being tested in courts and could be interpreted in ways that could harm
our business. These may involve privacy, data protection and personal information, rights of publicity, content, intellectual
property, advertising, marketing, distribution, data security, data retention and deletion, electronic contracts and other communications,
competition, protection of minors, consumer protection, product liability, taxation, economic or other trade prohibitions or sanctions,
anti-corruption law compliance, securities law compliance, and online payment services. In particular, we are subject to federal,
state, and foreign laws regarding privacy and protection of people’s data. Foreign data protection, privacy, content, competition,
and other laws and regulations can impose different obligations or be more restrictive than those in the United States. U.S. federal
and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities,
are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement
of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate,
and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.
Proposed
or new legislation and regulations could also significantly affect our business. For example, the European General Data Protection
Regulation (GDPR) took effect in May 2018 and applies to all of our products and services used by people in Europe. The GDPR includes
operational requirements for companies that receive or process personal data of residents of the European Union that are different
from those previously in place in the European Union and includes significant penalties for non-compliance. The California Consumer
Privacy Act, which took effect in January 2020, also establishes certain transparency rules and creates new data privacy rights
for users. Similarly, there are a number of legislative proposals in the European Union, the United States, at both the federal
and state level, as well as other jurisdictions that could impose new obligations or limitations in areas affecting our business,
such as liability for copyright infringement. In addition, some countries are considering or have passed legislation implementing
data protection requirements or requiring local storage and processing of data or similar requirements that could increase the
cost and complexity of delivering our services.
We
may become the subject of investigations, inquiries, data requests, requests for information, actions, and audits by government
authorities and regulators in the United States, Europe, and around the world, particularly in the areas of privacy, data protection,
law enforcement, consumer protection, and competition, as we continue to grow and expand our operations. We are currently, and
may in the future be, subject to regulatory orders or consent decrees, including the modified consent order we entered into in
July 2019 with the U.S. Federal Trade Commission (FTC) which is pending federal court approval and which, among other matters,
will require us to implement a comprehensive expansion of our privacy program. Orders issued by, or inquiries or enforcement actions
initiated by, government or regulatory authorities could cause us to incur substantial costs, expose us to unanticipated civil
and criminal liability or penalties (including substantial monetary remedies), interrupt or require us to change our business
practices in a manner materially adverse to our business, divert resources and the attention of management from our business,
or subject us to other remedies that adversely affect our business.
Employees
At
April 24, 2020, we had 35 full-time employees. We also contract for the services of an additional approximately
100 individuals from a third-party provider in Mexicali, Mexico. There are no collective bargaining agreements covering any of
our employees.
Our
history
We
were originally organized in August 2009 as a California limited liability company under the name Social Reality, LLC, and we
converted to a Delaware corporation effective January 1, 2012. Social Reality, LLC began business in May 2010. Upon the conversion,
we changed our name to Social Reality, Inc. On August 15, 2019 we formally changed our Name to SRAX, Inc.
Additional
information
We
file annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities
and Exchange Commission (“SEC” or the “Commission”). The public may read and copy any materials that we
file with the Commission at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549, on official business
days during the hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. The Commission also maintains an Internet site at http://www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that file electronically with the Commission.
Other
information about SRAX can be found on our website www.srax.com. Reference in this document to that website address does
not constitute incorporation by reference of the information contained on the website.
Please
consider the following risk factors carefully. If any one or more of the following risks were to occur, it could have a material
adverse effect on our business, prospects, financial condition and results of operations, and the market price of our securities
could decrease significantly. Statements below to the effect that an event could or would harm our business (or have an adverse
effect on our business or similar statements) mean that the event could or would have a material adverse effect on our business,
prospects, financial condition and results of operations, which in turn could or would have a material adverse effect on the market
price of our securities. Although we have organized the risk factors below under headings to make them easier to read, many of
the risks we face involve more than one type of risk. Consequently, you should read all of the risk factors below carefully before
making any decision to acquire or hold our securities.
Any
investment in our securities involves a high degree of risk. Investors should consider carefully the risks and uncertainties described
below, and all other information in this Form 10-K and in any reports we file with the SEC after we file this Form 10-K, before
deciding whether to purchase or hold our securities. Additional risks and uncertainties not currently known to us or that we currently
deem immaterial may also become important factors that may harm our business. The occurrence of any of the risks described in
this Form 10-K could harm our business. The trading price of our securities could decline due to any of these risks and uncertainties,
and investors may lose part or all of their investment.
Risks
Related to our Business and BIGToken
We
have a history of operating losses and there are no assurances we will report profitable operations in the foreseeable future.
For
the year-ended December 31, 2019 we reported losses from operations of $16,859,000. At December 31, 2019, we had an accumulated
deficit of $35,637,000. Our future success depends upon our ability to continue to grow our revenues, contain our operating
expenses and generate profits. We do not have any long-term agreements with our customers. There are no assurances that we will
be able to increase our revenues and cash flow to a level which supports profitable operations. In addition, our operating expenses
increased 7.2% in 2019 from 2018. As described elsewhere herein, in 2019 we made certain changes in our operations to limit
growth of operating expenses and focus our resources in areas of our operations which we believe have the greatest potential to
increase our revenues. We may continue to incur losses in future periods until such time, if ever, as we are successful in significantly
increasing our revenues and cash flow beyond what is necessary to fund our ongoing operations and pay our obligations as they
become due. If we are able to significantly increase our revenues in future periods, the rapid growth which we are pursuing will
strain our organization and we may encounter difficulties in maintaining the quality of our operations. If we are not able to
grow successfully, it is unlikely we will be able to generate sufficient cash from operations to pay our operating expenses and
service our debt obligations, or report profitable operations in future periods.
A
pandemic, epidemic or outbreak of an infectious disease in the markets in which we operate or that otherwise impacts our facilities
or advisors could adversely impact our business.
If
a pandemic, epidemic, or outbreak of an infectious disease including the recent outbreak of respiratory illness caused by a novel
coronavirus (COVID-19) or other public health crisis were to affect the our operations, facilities or those of our customers or
suppliers, our business could be adversely affected. A pandemic typically results in social
distancing, travel bans and quarantine, and this may limit access to our facilities, customers, management, support staff and
professional advisors. These factors, in turn, may not only materially impact our operations, financial condition and demand for
our services but our overall ability to react timely to mitigate the impact of this event. Also, it may hamper our efforts to
comply with our filing obligations with the Securities and Exchange Commission.
Our
auditors have expressed substantial doubt about our ability to continue as a going concern.
Our
auditors’ report on our December 31, 2019 consolidated financial statements expresses an opinion that our capital resources
as of the date of their audit report were not sufficient to sustain operations or complete our planned activities for the upcoming
year unless we raised additional funds. Our current cash level raises substantial doubt about our ability to continue as a going
concern past the beginning of the second quarter of 2020. If we do not obtain additional capital by such time, we may no longer
be able to continue as a going concern and may cease operation or seek bankruptcy protection.
Our
failure to maintain an effective system of internal control over financial reporting, has resulted in the need for us to restate
previously issued financial statements. As a result, current and potential stockholders may lose confidence in our financial reporting,
which could harm our business and value of our stock.
Our
management has determined that, as of December 31, 2019, we did not maintain effective internal controls over financial reporting
based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework as a result of identified material weaknesses in our internal control over financial reporting. A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or
detected on a timely basis.
We
believe our failure to maintain effective systems of internal controls over financial reporting resulted in our need to restate
the following previously issued quarterly and year-to-date unaudited consolidated financial statements for March 31, 2017, June
30, 2017, September 30, 2017, December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 and our audited consolidated
financial statements for the year ending December 31, 2017.
Our management and audit committee determined we needed to restate
certain of our consolidated financial statements for the year ending December 31, 2017 and quarters ending March 31, 2017, June
30, 2017, September 30, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 as a result of the improper accounting treatment
of certain warrants.
On April 7, 2019, management and the audit committee of our board
of directors determined that our previously issued quarterly and year-to-date unaudited consolidated financial statements for March
31, 2017, June 30, 2017, September 30, 2017, March 31, 2018, June 30, 2018 and September 30, 2018 and our audited consolidated
financial statements for the year ending December 31, 2017 should no longer be relied upon. In addition, we determined that related
press releases, earnings releases, and investor communications describing our financial statements for these periods should no
longer be relied upon. The errors identified are all non-cash and primarily related to our classification of certain outstanding
warrants with provisions that allow the warrant holder to force cash redemption under certain circumstances. Accordingly, although
we previously disclosed that we had ineffective controls, investors in our securities may lose confidence in our financial statements
and management, which could result in a decrease in our stock price and negative sentiment in the investment community.
The
restatement of certain of our financial statements may subject us to additional risks and uncertainties, including the increased
possibility of legal proceedings and shareholder litigation.
As a result of our restatements of previously issued quarterly and
year-to-date unaudited consolidated financial statements for March 31, 2017, June 30, 2017, September 30, 2017, March 31, 2018,
June 30, 2018 and September 30, 2018 and our audited consolidated financial statements for the year ending December 31, 2017, we
may become subject to additional risks and uncertainties, including, among others, the increased possibility of legal proceedings,
shareholder lawsuits or a review by the SEC and other regulatory bodies, which could cause investors to lose confidence in our
reported financial information and could subject us to civil or criminal penalties, shareholder class actions or derivative actions.
We could face monetary judgments, penalties or other sanctions that could have a material adverse effect on our business, financial
condition and results of operations and could cause our stock price to decline.
We
will need to raise additional capital to pay our indebtedness as it comes due.
In
February of 2020 we entered into a term loan and security agreement with BRF Finance Co., LLC, an affiliate of B. Riley Financial,
Inc. Pursuant to the loan agreement, we can borrow up to $5,000,000, subject to certain terms and conditions. The loan is secured
by substantially all of the assets and the intellectual property of the Company. Beginning on August 1, 2020, and continuing on
the first day of each month thereafter until March 22, 2022, the Company will be required to make monthly payments of principal
and interest. Based upon our current financial results, we will need to raise additional capital through the sale of debt or equity
or the sale of assets, in order to make the required loan payments. If we are unable to make the required payments, or if we fail
to comply with the various requirements and covenants of our indebtedness, we would be in default, which would permit the holders
of our indebtedness to accelerate the maturity and require immediate repayment and lead to potential foreclosure on the assets
securing the debt. If we are unable to refinance or repay our indebtedness as it becomes due, including upon an event of default,
we may become insolvent and be unable to continue operations.
We
may be required to expend significant capital to redeem BIGToken Points which will negatively impact our ability to fund our core
operations.
Users
of BIGToken receive points for undertaking certain actions on the platform that may be redeemed directly for cash from us, with
such value as determined by management. Accordingly, we are currently obligated to redeem users’ points which are earned
on BIGToken. We are currently redeeming each point for $0.01, subject to the user meeting certain conditions. As of December 31,
2019, we recorded a contingent liability for future point redemptions equal to $446,000 and we have redeemed an aggregate amount
of $525,000. In March of 2019, we experienced a surge in the number of users of our BIGToken platform. As of December 31, 2019,
we had approximately 16.5 million users. Notwithstanding the foregoing, if our users continue to increase, we will be required
to have enough cash reserves to redeem points held by our qualified users for cash. There can be no assurance that we will have
enough cash reserves, or if we do have sufficient cash, if we will be able to continue to fund our other business obligations
and operational expenses.
If
our efforts to attract and retain BIGToken users are not successful, our number of users and the amount of data collected could
fail to reach critical mass, grow or decline and our potential for BIGToken to earn revenues may be materially affected.
We
will be dependent on advertisers to pay us for access to user data. We must attract users to grow the amount of accessible data
and make it attractive to these third parties. If the public does not perceive our mission or our services to be reliable, valuable
or of high quality, we may not be able to attract or retain users and create a critical mass of data which will impact our ability
to earn revenues which could have a materially adversely affected on SRAX.
Natural
disasters, epidemic or pandemic disease outbreaks, trade wars, political unrest or other events could disrupt our business or
operations or those of our development partners, manufacturers, regulators or other third parties with whom we conduct business
now or in the future.
A
wide variety of events beyond our control, including natural disasters, epidemic or pandemic disease outbreaks (such as the recent
novel coronavirus outbreak), trade wars, political unrest or other events could disrupt our business or operations or those of
our manufacturers, regulatory authorities, or other third parties with whom we conduct business. These events may cause businesses
and government agencies to be shut down, supply chains to be interrupted, slowed, or rendered inoperable, and individuals to become
ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. For example, California
recently ordered most businesses closed, mandating work-from-home arrangements, where feasible, in response to the coronavirus
pandemic. These limitations could negatively affect our business operations and continuity, and could negatively impact ability
to timely perform basic business functions, including making SEC filings and preparing financial reports. If our operations or
those of third parties with whom we have business are impaired or curtailed as a result of these events, the development and commercialization
of our products and product candidates could be impaired or halted, which could have a material adverse impact on our business.
Challenges
in acquiring user data could materially adversely affect our ability to retain and expand BIGToken, and therefore could materially
affect our business, financial condition and results of operations.
In
order to expand BIGToken, we must continue to expend resources to make the submission of user data as user-friendly as possible.
We, and our users, may face legal, logistical, cultural and commercial challenges in procuring user data. Additionally, once such
data is obtained, if the process for validation and collection of Rewards may be perceived as too cumbersome and discourage potential
users from submission. We may need to expend significant resources on user interfaces for evolving platforms, such as mobile devices.
Inconveniences to our users or potential users at any stage of the process may materially challenge our growth.
If
we fail to ensure that the user data derived from BIGToken is of high quality, our ability to attract customers or monetize the
data may be materially impaired.
The
reliability of our user data depends upon the integrity and the quality of the process of accepting user data into BIGToken. We
will take certain measures to validate user data submitted by our users and potential users to assure a high quality of data in
BIGToken and generally confirming that data is submitted in accordance with our terms for such data. We must continue to invest
in our quality control measures relating to BIGToken in order to provide a high-quality product to potential customers.
If
BIGToken experiences an excessive rate of user attrition, our ability to attract customers could fail.
Users
may elect to have their data deleted from BIGToken at any time. We must continually add new users both to replace users who choose
to delete their data and to increase our user base. Users may choose to delete their data for many reasons. If users are concerned
about privacy and security and do not perceive BIGToken to be reliable, if we fail to keep users engaged and interested in our
application, or if we simply lose our users’ attention, we could fail to gather sufficient user data and our ability to
earn revenues may be materially affected.
If
we are unable to manage our marketing and advertising expenses, it could materially harm our results of operations and growth.
We
plan to rely in part on our marketing and advertising efforts to attract new members. Our future growth and profitability, as
well as the maintenance and enhancement of our brand, will depend in large part on the effectiveness and efficiency of our marketing
and advertising strategies and expenditures. If we are unable to maintain our marketing and advertising channels on cost-effective
terms, our marketing and advertising expenses could increase substantially, and our business, financial condition and results
of operations may suffer. In addition, we may be required to incur significantly higher marketing and advertising expenses than
we currently anticipate if excessive numbers of members withdraw their member data from our Database.
Failure
to comply with federal, state and local laws and regulations or our contractual obligations relating to data privacy, protection
and security of BIGToken user data, and civil liabilities relating to breaches of privacy and security of user data, could damage
our reputation and harm our business.
A
variety of federal, state and local laws and regulations govern the collection, use, retention, sharing and security of user data.
We will collect BIGToken user data from and about our members when they redeem Rewards and maintain that date in our BIGToken
Application. Claims or allegations that we have violated applicable laws or regulations related to privacy, data protection or
data security could in the future result in negative publicity and a loss of confidence in us by our users and potential new users,
and may subject us to fines and penalties by regulatory authorities. In addition, we have privacy policies and practices concerning
the collection, use and disclosure of user data as part of our agreements with our members, including ones posted on our website.
Several Internet companies have incurred penalties for failing to abide by the representations made in their privacy policies
and practices. In addition, our use and retention of user data could lead to civil liability exposure in the event of any disclosure
of such information due to hacking, malware, phishing, inadvertent action or other unauthorized use or disclosure. Several companies
have been subject to civil actions, including class actions, relating to this exposure.
We
have incurred, and will continue to incur, expenses to comply with data privacy, protection and security standards and protocols
for BIGToken user data imposed by law, regulation, self-regulatory bodies, industry standards and contractual obligations. Such
laws, standards and regulations, however, are evolving and subject to potentially differing interpretations, and federal, state
and provincial legislative and regulatory bodies may expand current or enact new laws or regulations regarding privacy matters.
Additionally, we accept user from foreign countries which subjects us to the personal and other data privacy, protection and security
laws of those countries, We are unable to predict what additional legislation, standards or regulation in the area of privacy
and security of personal information could be enacted or its effect on our operations and business.
If
we are unable to satisfy data privacy, protection, security, and other government- and industry-specific requirements, our growth
could be harmed.
We
need or may in the future need to comply with a number of data protection, security, privacy and other government- and industry-specific
requirements, including those that require companies to notify individuals of data security incidents involving certain types
of personal data. Security compromises could harm our reputation, erode user confidence in the effectiveness of our security measures,
negatively impact our ability to attract new members, or cause existing users to withdraw their data from BIGToken.
Regulatory,
legislative or self-regulatory developments regarding internet privacy matters could adversely affect our ability to conduct our
business.
The
United States and foreign governments have enacted, considered or are considering legislation or regulations that could significantly
restrict our ability to collect, process, use, transfer and pool data collected from and about consumers and devices. Trade associations
and industry self-regulatory groups have also promulgated best practices and other industry standards relating to targeted advertising.
Various U.S. and foreign governments, self-regulatory bodies and public advocacy groups have called for new regulations specifically
directed at the digital advertising industry, and we expect to see an increase in legislation, regulation and self-regulation
in this area. The legal, regulatory and judicial environment we face around privacy and other matters is constantly evolving and
can be subject to significant change. For example, the General Data Protection Regulation, or GDPR, which was agreed by E.U. institutions
in 2016 and came into effect after a two year transition period on May 25, 2018, updated and modernized the principles of the
1995 Data Protection Directive and significantly increases the level of sanctions for non-compliance. Data Protection Authorities
will have the power to impose administrative fines of up to a maximum of €20 million or 4% of the data controller’s
or data processor’s total worldwide turnover of the preceding financial year. Similarly, the E-Privacy Regulation, which
was launched by the European Parliament in October 2016, could result in, once enacted, new rules and mechanisms for “cookie”
consent. In addition, the interpretation and application of data protection laws in the U.S., Europe and elsewhere are often uncertain
and in flux. Legislative and regulatory authorities around the world may decide to enact additional legislation or regulations,
which could reduce the amount of data we can collect or process and, as a result, significantly impact our business. Similarly,
clarifications of and changes to these existing and proposed laws, regulations, judicial interpretations and industry standards
can be costly to comply with, and we may be unable to pass along those costs to our clients in the form of increased fees, which
may negatively affect our operating results. Such changes can also delay or impede the development of new solutions, result in
negative publicity and reputational harm, require significant incremental management time and attention, increase our risk of
non-compliance and subject us to claims or other remedies, including fines or demands that we modify or cease existing business
practices, including our ability to charge per click or the scope of clicks for which we charge. Additionally, any perception
of our practices or solutions as an invasion of privacy, whether or not such practices or solutions are consistent with current
or future regulations and industry practices, may subject us to public criticism, private class actions, reputational harm or
claims by regulators, which could disrupt our business and expose us to increased liability. Finally, our legal and financial
exposure often depends in part on our clients’ or other third parties’ adherence to privacy laws and regulations and
their use of our services in ways consistent with visitors’ expectations. We rely on representations made to us by clients
that they will comply with all applicable laws, including all relevant privacy and data protection regulations. We make reasonable
efforts to enforce such representations and contractual requirements, but we do not fully audit our clients’ compliance
with our recommended disclosures or their adherence to privacy laws and regulations. If our clients fail to adhere to our contracts
in this regard, or a court or governmental agency determines that we have not adequately, accurately or completely described our
own solutions, services and data collection, use and sharing practices in our own disclosures to consumers, then we and our clients
may be subject to potentially adverse publicity, damages and related possible investigation or other regulatory activity in connection
with our privacy practices or those of our clients.
We
are remediating certain internal controls and procedures, which, if not successful, could result in additional misstatements in
our financial statements negatively affecting our results of operations.
We
are in the process of implementing certain remediation actions. See Item 9A. “Controls and Procedures” of this Form
10-K for a description of these remediation measures. To the extent these steps are not successful, not sufficient to correct
our material weakness in internal control over financial reporting or are not completed in a timely manner, future financial statements
may contain material misstatements and we could be required to restate our financial results. Any of these matters could adversely
affect our business, reputation, revenues, results of operations, financial condition and stock price and limit our ability to
access the capital markets through equity or debt issuances.
Privacy
concerns could damage our reputation and deter current and potential users from contributing additional data through our BIGToken
Application. If our security measures are breached resulting in the improper use and disclosure of user data, BIGToken may be
perceived as not being secure, users and customers may curtail or stop using BIGToken, and we may incur significant legal and
financial exposure.
Concerns
about our practices with regard to the collection, use, disclosure, or security of user data or other privacy related matters,
even if unfounded, could damage our reputation and adversely affect our operating results. Our services will involve the purchase,
storage, transmission and sale of user data, and theft and security breaches expose us to a risk of loss of this information,
improper use and disclosure of such information, litigation, and potential liability. Any systems failure or compromise of our
security that results in the release of user data, or in our or our users’ ability to access such data, could seriously
harm our reputation and brand and, therefore, our business, and impair our ability to attract and retain users. Additionally,
if user data is somehow made public or made available through a security breach, it may be used to identify our users and people
related thereto. We may experience cyber attacks of varying degrees. Our security measures may also be breached due to employee
error, malfeasance, system errors or vulnerabilities, including vulnerabilities of our vendors, suppliers, their products, or
otherwise. Such breach or unauthorized access, increased government surveillance, or attempts by outside parties to fraudulently
induce employees, users, or customers to disclose sensitive information in order to gain access to user data could result in significant
legal and financial exposure, damage to our reputation, and a loss of confidence in the security of BIGToken that could potentially
have an adverse effect on our business. Because the techniques used to obtain unauthorized access, disable or degrade service,
or sabotage systems change frequently, become more sophisticated, and often are not recognized until launched against a target,
we may be unable to anticipate these techniques or to implement adequate preventative measures. Additionally, cyber attacks could
also compromise trade secrets and other sensitive information and result in such information being disclosed to others and becoming
less valuable, which could negatively affect our business. If an actual or perceived breach of our security occurs, the market
perception of the effectiveness of our security measures could be harmed and we could lose members and customers.
Certain
user data must be provided on a recurring basis in order to provide full value.
Certain
types of user data will need to be contributed by users recurrently for such data to provide full value to our potential customers.
If users fail to provide us with sufficient recurring data, the value of the user data may substantially decrease and our ability
to earn revenues may be materially affected.
Unfavorable
media coverage could negatively affect our business.
Unfavorable
publicity regarding, for example, our privacy practices, terms of service, regulatory activity, the actions of third parties,
the use of our products or services for illicit, objectionable, or illegal ends or the actions of other companies that provide
similar services to us, could adversely affect our reputation. Such negative publicity also could have an adverse effect on the
size, engagement, and loyalty of our user base and result in user attrition which could adversely affect our business and financial
results.
Our
business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, content,
competition, consumer protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation,
and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in
user growth or engagement, or otherwise harm our business.
We
are subject to a variety of laws and regulations in the United States and abroad that involve matters central to our business,
such as privacy, data protection and personal information, rights of publicity, content, intellectual property, advertising, marketing,
distribution, data security, data retention and deletion, electronic contracts and other communications, competition, protection
of minors, consumer protection, taxation and securities law compliance. Expansion of our activities in certain jurisdictions,
or other actions that we may take, may subject us to additional laws, regulations, or other government scrutiny. In addition,
foreign data protection, privacy, content, competition, and other laws and regulations can impose different obligations or be
more restrictive than those in the United States.
Additionally,
as we allow European users, we are subject to the European General Data Protection Regulation (GDPR), effective as of May 2018.
The GDPR increases privacy rights for individuals in Europe, extends the scope of responsibilities for data controllers and data
processors and imposes increased requirements and potential penalties on companies offering goods or services to individuals who
are located in Europe or monitoring the behavior of such individuals (including by companies based outside of Europe). Noncompliance
can result in penalties of up to the greater of €20 million, or 4% of global company revenues.
These
U.S. federal and state and foreign laws and regulations, which in some cases can be enforced by private parties in addition to
government authorities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation,
and enforcement of these laws and regulations are often uncertain, particularly in the newer industry in which we operate, and
may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices.
These
laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to
comply with and may delay or impede our international growth, result in negative publicity, increase our operating costs, require
significant management time and attention, and subject us to remedies that may harm our business.
Security
breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our systems,
could harm our reputation and adversely affect our business.
Our
industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users’ data or to disrupt
our ability to provide service. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our
data or user data, including personal information, content, or payment information from or to users, or information from marketers,
could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position.
In addition, computer malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become
more prevalent in our industry. Our BIGToken platform has experienced an increase in the occurrence of such attempts and we cannot
be assured that we will be able to prevent a successful attack on our systems in the future. We also regularly encounter attempts
to create false or undesirable user accounts or take other actions on our BIGToken platform for purposes such as spreading misinformation,
attempting to have us improperly purchase user data or other objectionable ends. As a result of recent attention and growth of
our BIGToken platform, the size of our user base, and the types and volume of personal data on our systems, we believe that we
are a particularly attractive target for such breaches and attacks. Our efforts to address undesirable activity may also increase
the risk of retaliatory attacks. Such attacks may cause interruptions to the services we provide, degrade the user experience,
cause users or marketers to lose confidence and trust in our products, impair our internal systems, or result in financial harm
to us. Our efforts to protect our company data or the information we receive may also be unsuccessful due to software bugs or
other technical malfunctions; employee, contractor, or vendor error or malfeasance; government surveillance; or other threats
that evolve. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order
to gain access to our data or our users’ data. Cyber-attacks continue to evolve in sophistication and volume, and inherently
may be difficult to detect for long periods of time. Although we are currently in the process of developing systems and processes
that are designed to protect our data and user data, to prevent data loss, to disable undesirable accounts and activities on our
BIGToken platform, and to prevent or detect security breaches, we cannot assure you that such measures will ultimately become
operational or provide absolute security, and we may incur significant costs in protecting against or remediating cyber-attacks.
Affected
users or government authorities could initiate legal or regulatory actions against us in connection with any actual or perceived
security breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result in
orders or consent decrees forcing us to modify our business practices, especially with regard to the BIGToken platform. Such incidents
or our efforts to remediate such incidents may also result in a decline in our active user base or engagement levels. Any of these
events could have a material and adverse effect on our business, reputation, or financial results.
We
are delinquent in pays to various third-party vendors on which we rely.
We
rely on third party vendors to provide us with media inventory to facilitate sales of advertising, the majority of which are engaged
on a per order basis. Due to our lack of working capital, we are delinquent on payments to several of these media suppliers. While
we will attempt to negotiate payment terms and forbearance agreements with these vendors on a case by case basis, many of these
vendors may cease providing services to our company and may seek legal remedies against us. Any loss of these vendors or ligation
arising out of our failure to satisfy our obligations to any of these vendors could disrupt our business and have a material negative
effect on our operations.
Our
success is dependent upon our ability to effectively expand and manage our relationships with our publishers. We do not have any
long-term contracts with our publishing partners.
We
do not generate our own media inventory. Accordingly, we are dependent upon our publishing partners to provide the media which
we sell. We depend on these publishers to make their respective media inventories available to us to use in connection with our
campaigns that we manage, create or market. We are not a party to any long-term agreements with any of our publishing partners
and there are no assurances we will have continued access to the media. Our growth depends, in part, on our ability to expand
and maintain our publisher relationships within our network and to have access to new sources of media inventory such as new partner
websites and Facebook pages that offer attractive demographics, innovative and quality content and growing Web user traffic volume.
Our ability to attract new publishers to our networks and to retain Web publishers currently in our networks will depend on various
factors, some of which are beyond our control. These factors include, but are not limited to, our ability to introduce new and
innovative products and services, our pricing policies, and the cost-efficiency to Web publishers of outsourcing their advertising
sales. In addition, the number of competing intermediaries that purchase media inventory from Web publishers continues to increase.
In the event we are not able to maintain effective relationships with our publishers, our ability to distribute our advertising
campaigns will be greatly hindered which will reduce the value of our services and adversely impact our results of operations
in future periods.
If
we were to lose or have limited access to certain platforms or data sources, we will lose our existing revenue from these platform
and sources.
The
loss of access to any platforms or data sources could limit our ability to effectively grow a portion of our operations. Our business
would be harmed if these platforms:
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discontinues
or limits access to its platform by us and other application developers;
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modify terms of
service or other policies, including fees charged to, or other restrictions on, us or other application developers, or changes
how the personal information of its users is made available to application developers;
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establishes more
favorable relationships with one or more of our competitors; or
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develops its own
competitive offerings.
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We
have benefited from Facebook’s strong brand recognition and large user base. Facebook has broad discretion to change its
terms of service and other policies with respect to us and other developers, and any changes to those terms of service may be
unfavorable to us. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform,
change how the personal information of its users is made available to application developers on the Facebook platform or restrict
how Facebook users can share information with friends on their platform. In the event Facebook makes any changes in the future,
we may have to modify the structure of our campaigns which could impact the effectiveness of our campaigns and adversely impact
our results of operations in future periods.
If
we lose access to RTB inventory buyers our business may suffer.
In
an effort to reduce our dependency on any one provider of advertising demand, we created a platform that utilizes feeds from a
number of demand sources for our inventory. We believe that our proprietary technology assists us in aggregating this demand,
as well as providing the tools needed by our publishing partners to evaluate and track the effectiveness of the demand that we
are aggregating for them. In the event that we lose access to a majority of this demand, however, our revenues would be impacted
and our results of operations would be materially adversely impacted until such time, if ever, as we could secure alternative
sources of demand for our inventory.
We
depend on the services of our executive officers and the loss of any of their services could harm our ability to operate our business
in future periods.
Our
success largely depends on the efforts and abilities of our executive officers, including Christopher Miglino, Kristoffer Nelson
and Michael Malone. We are a party to an employment agreement with each of Mr. Miglino, and Mr. Malone, and an “at will”
agreement with Mr. Nelson. Although we do not expect to lose their services in the foreseeable future, the loss of any of them
could materially harm our business and operations in future periods until such time as we were able to engage a suitable replacement.
If
advertising on the Internet loses its appeal, our revenue could decline.
Our
business model may not continue to be effective in the future for a number of reasons, including:
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a decline in the
rates that we can charge for advertising and promotional activities;
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our inability to
create applications for our customers;
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Internet advertisements
and promotions are, by their nature, limited in content relative to other media;
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companies may be
reluctant or slow to adopt online advertising and promotional activities that replace, limit or compete with their existing
direct marketing efforts;
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companies may prefer
other forms of Internet advertising and promotions that we do not offer;
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the quality or placement
of transactions, including the risk of non-screened, non-human inventory and traffic, could cause a loss in customers or revenue;
and
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regulatory actions
may negatively impact our business practices.
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If
the number of companies who purchase online advertising and promotional services from us does not grow, we may experience difficulty
in attracting publishers, and our revenue could decline.
Weak
economic conditions may reduce consumer demand for products and services.
A
weak economy in the United States could adversely affect demand for advertising products, and services. A substantial portion
of our revenue is derived from businesses that are highly dependent on discretionary spending by individuals, which typically
falls during times of economic instability. Accordingly, the ability of our advertisers to increase or maintain revenue and earnings
could be adversely affected to the extent that relevant economic environments remain weak or decline further. We currently are
unable to predict the extent of any of these potential adverse effects.
Certain
of our subsidiaries and business affiliates have operations outside of the United States that are subject to numerous operational
risks.
Certain
of our subsidiaries and business affiliates have operations in countries other than the United States. In many foreign countries,
it is not uncommon to encounter business practices that are prohibited by certain regulations, such as the Foreign Corrupt Practices
Act and similar laws. Although certain of our subsidiaries and business affiliates have undertaken compliance efforts with respect
to these laws, their respective employees, contractors and agents, as well as those companies to which they outsource certain
of their business operations, may take actions in violation of their policies and procedures. Any such violation, even if prohibited
by the policies and procedures of these subsidiaries and business affiliates or the law, could have certain adverse effects on
the financial condition of these subsidiaries and business affiliates. Any failure by these subsidiaries and business affiliates
to effectively manage the challenges associated with the international operation of their businesses could materially adversely
affect their, and hence our, financial condition.
Our
success is dependent upon our ability to effectively expand and manage our relationships with our publishers. We do not have any
long-term contracts with our publishing partners.
We
do not generate our own media inventory. Accordingly, we are dependent upon our publishing partners to provide the media which
we sell. We depend on these publishers to make their respective media inventories available to us to use in connection with our
campaigns that we manage, create or market. We are not a party to any long-term agreements with any of our publishing partners
and there are no assurances we will have continued access to the media. Our growth depends, in part, on our ability to expand
and maintain our publisher relationships within our network and to have access to new sources of media inventory such as new partner
websites and Facebook pages that offer attractive demographics, innovative and quality content and growing Web user traffic volume.
Our ability to attract new publishers to our networks and to retain Web publishers currently in our networks will depend on various
factors, some of which are beyond our control. These factors include, but are not limited to, our ability to introduce new and
innovative products and services, our pricing policies, and the cost-efficiency to Web publishers of outsourcing their advertising
sales. In addition, the number of competing intermediaries that purchase media inventory from Web publishers continues to increase.
In the event we are not able to maintain effective relationships with our publishers, our ability to distribute our advertising
campaigns will be greatly hindered which will reduce the value of our services and adversely impact our results of operations
in future periods.
Weak
economic conditions may reduce consumer demand for products and services.
A
weak economy in the United States could adversely affect demand for advertising products, and services. A substantial portion
of our revenue is derived from businesses that are highly dependent on discretionary spending by individuals, which typically
falls during times of economic instability. Accordingly, the ability of our advertisers to increase or maintain revenue and earnings
could be adversely affected to the extent that relevant economic environments remain weak or decline further. We currently are
unable to predict the extent of any of these potential adverse effects.
Certain
of our subsidiaries and business affiliates have operations outside of the United States that are subject to numerous operational
risks.
Certain
of our subsidiaries and business affiliates have operations in countries other than the United States. In many foreign countries,
it is not uncommon to encounter business practices that are prohibited by certain regulations, such as the Foreign Corrupt Practices
Act and similar laws. Although certain of our subsidiaries and business affiliates have undertaken compliance efforts with respect
to these laws, their respective employees, contractors and agents, as well as those companies to which they outsource certain
of their business operations, may take actions in violation of their policies and procedures. Any such violation, even if prohibited
by the policies and procedures of these subsidiaries and business affiliates or the law, could have certain adverse effects on
the financial condition of these subsidiaries and business affiliates. Any failure by these subsidiaries and business affiliates
to effectively manage the challenges associated with the international operation of their businesses could materially adversely
affect their, and hence our, financial condition.
Risks
Related to Ownership of our Securities
The
market price of our common stock may be adversely affected by sales of substantial amounts of our common stock pursuant to our
at the market sales agreement.
In
February of 2020 we entered into a term loan and security agreement with BRF Finance Co., LLC, an affiliate of B. Riley Financial,
Inc. Pursuant to the loan agreement, we are required to enter into an at-the-market sales agreement pursuant to which we will
sell our common shares directly into the market in order to payback the loans. If we are required to sell a substantial number
of shares, or the public perceives that these sales may occur, it could cause the market price of our common stock to decline.
In addition, the sale of these shares in the public market, or the possibility of such sales, could impair our ability to raise
capital through the sale of additional equity securities.
We
do not know whether an active and liquid trading market will develop for our Class A common stock.
The
trading of our Class A common stock may be viewed as relatively sporadic and with limited liquidity. The lack of an active and
liquid market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable.
The lack of an active market may also reduce the fair market value of your shares. Further, an inactive market may also impair
our ability to raise capital by selling shares of our Class A common stock and may impair our ability to enter into collaborations
or acquire companies or products by using our shares of Class A common stock as consideration. The market price of our offered
securities may be volatile, and you could lose all or part of your investment.
The
market price of our Class A common stock may be volatile.
The
market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect
that our share price will continue to be more volatile than those of a seasoned issuer. The volatility in our share price is attributable
to a number of factors. Mainly however, we are a speculative or “risky” investment due to our limited operating history,
lack of significant revenues to date, our continued operating losses and missed guidance. As a consequence of this enhanced risk,
more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack
of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case
with the stock of a seasoned issuer. Additionally, in the past, plaintiffs have often initiated securities class action litigation
against a company following periods of volatility in the market price of its securities. We may in the future be the target of
similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s
attention and resources.
The
trading price of the shares of our Class A common stock is likely to be highly volatile and could be subject to wide fluctuations
in response to various factors, some of which are beyond our control. In addition to the factors discussed in this “Risk
Factors” section and elsewhere in this annual report, these factors include:
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the success of competitive products;
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actual or anticipated changes in our growth
rate relative to our competitors;
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announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
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regulatory or legal developments in the United
States and other countries;
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the recruitment or departure of key personnel;
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the level of expenses;
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actual or anticipated changes in estimates to
financial results, development timelines or recommendations by securities analysts;
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variations in our financial results or those
of companies that are perceived to be similar to us;
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fluctuations
in the valuation of companies perceived by investors to be comparable to us;
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inconsistent
trading volume levels of our shares;
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announcement
or expectation of additional financing efforts;
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sales
of our Class A common stock by us, our insiders or our other stockholders;
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additional
issuances of securities upon the exercise of outstanding options and warrants;
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market
conditions in the technology sectors; and
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general
economic, industry and market conditions.
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In
addition, the stock market in general, and advertising technology companies in particular, have experienced extreme price and
volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad
market and industry factors may negatively affect the market price of our Class A common stock, regardless of our actual operating
performance. The realization of any of these risks could have a dramatic and material adverse impact on the market price of the
shares of our Class A common stock.
We
may be subject to securities litigation, which is expensive and could divert management attention.
The
market price of the shares of our Class A common stock may be volatile, and in the past companies that have experienced volatility
in the market price of their securities have been subject to securities class action litigation. We may be the target of this
type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s
attention from other business concerns, which could seriously harm our business. To the extent that any claims or suits are brought
against us and successfully concluded, we could be materially adversely affected, jeopardizing our ability to operate successfully.
Furthermore, our human and capital resources could be adversely affected by the need to defend any such actions, even if we are
ultimately successful in our defense.
Failure
to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in
a decline in our stock price.
We
have previously provided, and may provide in the future, public guidance on our expected financial results for future periods.
Although we believe that this guidance provides investors with a better understanding of management’s expectations for the
future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements
subject to the risks and uncertainties. Our actual results may not always be in line with or exceed the guidance we have provided.
For example, in the past, we have missed guidance a number of times. If our financial results for a particular period do not meet
our guidance or if we reduce our guidance for future periods, the market price of our Class A common stock may decline.
Delaware
law contains anti-takeover provisions that could deter takeover attempts that could be beneficial to our stockholders.
Provisions
of Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders.
Section 203 of the Delaware General Corporation Law may make the acquisition of our company and the removal of incumbent officers
and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring us,
without our board of directors’ consent, for at least three years from the date they first hold 15% or more of the voting
stock.
If
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the
trading price of our Class A common stock and trading volume could decline.
The
trading market for our shares of our Class A common stock will depend in part on the research and reports that securities or industry
analysts publish about us or our business. A small number of securities and industry analysts currently publish research regarding
our Company on a limited basis. In the event that one or more of the securities or industry analysts who have initiated coverage
downgrade our securities or publish inaccurate or unfavorable research about our business, the price of our shares of Class A
common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on
us regularly, demand for our securities could decrease, which might cause the trading price of our shares of Class A common stock
and trading volume to decline.
The
elimination of monetary liability against our directors and officers under Delaware law and the existence of indemnification rights
held by our directors and officers may result in substantial expenditures by us and may discourage lawsuits against our directors
and officers.
Our
certificate of incorporation eliminates the personal liability of our directors and officers to our company and our stockholders
for damages for breach of fiduciary duty as a director or officer to the extent permissible under Delaware law. Further, our bylaws
provide that we are obligated to indemnify any of our directors or officers to the fullest extent authorized by Delaware law.
We are also parties to separate indemnification agreements with certain of our directors and our officers which, subject to certain
conditions, require us to advance the expenses incurred by any director or officer in defending any action, suit or proceeding
prior to its final disposition. Those indemnification obligations could result in our company incurring substantial expenditures
to cover the cost of settlement or damage awards against our directors or officers, which we may be unable to recoup. These provisions
and resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or officers
for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against
our directors and officers even if such actions, if successful, might otherwise benefit us or our stockholders.
ITEM
1B.
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UNRESOLVED
STAFF COMMENTS.
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Not
applicable to a smaller reporting company.
ITEM
2.
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DESCRIPTION
OF PROPERTY.
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We
lease our principal executive offices, located in Los Angeles, California and consisting of approximately 3,000 square feet on
a month-to-month basis at a rate of $5,626 per month. We also maintain offices in Mexicali, Mexico where we lease approximately
3,400 square feet of office space from an unrelated third party under a lease agreement terminating in September 2021 at an initial
annual rental of $77,580 plus a value-added tax (VAT) or its equivalent in the Mexican national currency and a 10% VAT for maintenance
and certain overhead expenses. We believe both locations are suitability and adequacy for our currently levels of operations and
anticipate growth.
ITEM
3.
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LEGAL
PROCEEDINGS.
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As
of the date of this Annual Report, there are no material pending legal or governmental proceedings relating to our company or
properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive
officers or affiliates are a party adverse to us or which have a material interest adverse to us.
ITEM
4.
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MINE
SAFETY DISCLOSURES.
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Not
applicable.
NOTE
1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Basis of Presentation
SRAX, Inc.
(formally known as “Social Reality, Inc.”, (“SRAX”, “we”, “us”,
“our” or the “Company”) is a Delaware corporation formed on August 2, 2011. Effective January 1, 2012
we acquired 100% of the member interests and operations of Social Reality, LLC, a California limited liability company formed
on August 14, 2009 which began business in May of 2010, in exchange for 2,465,753 shares of our Class A common stock. The
former members of Social Reality, LLC owned 100% of our Class A common stock after the acquisition.
We
are a data technology company offering tools and services to identify and reach consumers for the purpose of marketing and advertising
communication. Our technologies assist our clients in: (i) identifying their core consumers and such consumers’ characteristics
across various channels in order to discover new and measurable opportunities maximize profits associated with advertising campaigns
and (ii) gaining insight into the activities of their customers.
We
derive our revenues from the:
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Sale
and licensing of our proprietary SaaS platform; and
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Sales
of proprietary consumer data; and
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Sales
of digital advertising campaigns.
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We
are headquartered in Los Angeles, California.
Liquidity
and Going Concern
The
Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues
from the sales of its goods and services to achieved profitable operations. There can be no assurance that profitable operations
will ever be achieved, or if achieved, could be sustained on a continuing basis. In addition, the Company’s operations and
specifically, the development of BIGToken will require significant additional financing. These factors create substantial doubt
about the Company’s ability to continue as a going concern within one year after the date that the consolidated financial
statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern. Accordingly, the consolidated financial statements have been prepared on a basis that
assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities
and commitments in the ordinary course of business.
In
making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position at
December 31, 2019, our cash flow and cash usage forecasts for the period covering one-year from the issuance date of this Annual
Report filed on Form 10-K and our current capital structure including outstanding warrants and other equity-based instruments
and our obligations and debts.
We
expect that our existing cash and cash equivalents as of December 31, 2019, along with the proceeds will be sufficient to enable
us to fund our anticipated level of operations based on our current operating plans, until beginning of the second quarter of
2020. Accordingly, we will require additional capital to fund our operations and the development
of BIGToken. We anticipate raising additional capital through the private and public sales of our equity or debt securities, or
a combination thereof. Although management believes that such capital sources will be available, there can be no assurance that
financing will be available to us when needed in order to allow us to continue our operations, or if available, on terms acceptable
to us. At December 31, 2019, the Company had $32,000 in cash and cash equivalents. If
we do not raise sufficient capital in a timely manner, among other things, we may be forced scale back our operations or cease
operations all together.
During
the first quarter of 2020, the Company was able to raise $3.5 million in debt investments. The Company’s capital-raising
efforts are ongoing and the Company has taken the following steps to increase the likelihood of a successful financing: 1) Applied
to the Small Business Administration for funding under the Payroll Protection Program, 2) additional agreements are in place for
an additional $2.5 million in debt financing, contingent on certain factors, and 3) Monthly operating expenses are scrutinized
and controlled. If sufficient capital cannot be raised during 2020, the Company will continue its plans of curtailing operations
by reducing discretionary spending and staffing levels and attempting to operate by only pursuing activities for which it has
external financial support. However, there can be no assurance that such external financial support will be sufficient to maintain
even limited operations or that the Company will be able to raise additional funds on acceptable terms, or at all. In such a case,
the Company might be required to enter into unfavorable agreements or, if that is not possible, be unable to continue operations,
and to the extent practicable.
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
The
consolidated financial statements include the accounts of the Company and its subsidiaries from the acquisition date of majority
voting control of the subsidiary.
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.
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.
Accounting
for discontinued operations
We
regularly review underperforming assets (product offerings) 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 receivable 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 SRAX MD product 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 SRAX MD product line. The
Company decided to monetize the SRAX MD product line via a sale rather than continue to offer the SRAX MD product to its customers.
We have retained an approximately 30% interest in the purchaser of the SRAX MD product line, however, based on the operating
agreement covering our ownership we have no ongoing or further involvement in the operations of the purchaser of
SRAX MD. The sale of the SRAX MD product line is not considered to be discontinued operations pursuant to the guidance in ASC
205-20.
Use
of Estimates
The
consolidated financial statements have been prepared in conformity with generally accepted accounting principles accepted in the
United States of America (“GAAP”) and requires management of the Company to make estimates and assumptions in the
preparation of these consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these estimates and assumptions.
The
most significant areas that require management judgment and which are susceptible to possible change in the near term include
the Company’s revenue recognition, allowance for doubtful accounts, BigToken point redemption liability, stock-based
compensation, income taxes, warrant liabilities, embedded conversion options, goodwill, other intangible assets, put rights
and free standing warrants.
Fair
Value of Financial Instruments
The
accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding
fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence
of a principal, most advantageous market for the specific asset or liability.
The
Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a
recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their
initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable
inputs, when determining fair value. The three tiers are defined as follows:
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Level
1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
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Level
2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in
the marketplace for identical or similar assets and liabilities; and
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Level
3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
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The
determination of fair value and the assessment of a measurement’s 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. Management’s 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 December 31, 2019 and 2018, the carrying amounts of these instruments approximated
their fair values because of the short-term nature of these instruments. The Company measures certain non-financial assets, liabilities,
and equity issuances at fair value on a non-recurring basis. These non-recurring valuations include evaluating assets such as
long-lived assets and goodwill for impairment; allocating value to assets in an acquired asset group; and applying accounting
for business combinations. Derivative instruments are carried at fair value, generally estimated using the Black-Scholes Merton
model.
As
of December 31, 2019 and 2018 the Company had none and $2,723,264, respectively, of United States Treasury bills with maturities
less than 90 days within cash and cash equivalents.
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.
Accounts
Receivable
Credit
is extended to customers based on an evaluation of their financial condition and other factors. Management periodically assesses
the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts
determined to be uncollectible are charged to operations when that determination is made. The Company usually does not require
collateral. Allowance for doubtful accounts was approximately $530,000 and $49,000 at December 31, 2019 and 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 balances maintained
at these financial institutions are generally more than the Federal Deposit Insurance Corporation insurance limits. The Company
has not experienced any loss on these accounts.
As
of December 31, 2019, the Company had three customers with accounts receivable balances of approximately 23.7%, 15.0%, and 13.7%.
At December 31, 2018, the Company had two customers with accounts receivable balances of approximately 57.7% and 17.3%.
For
the year ended December 31, 2019, the Company had two customers that account for approximately 17.7% and 12.9% of total revenue.
For the year ended December 31, 2018, the Company had two customers that accounted for 19.4% and 14.9%.
As
of December 31, 2019, the Company had two suppliers with accounts payable balances of approximately 17.9% and 12.7%. At December
31, 2018, the Company had three suppliers with accounts payable balances of approximately 36.6%, 26.0%, and 13.9%.
For the year ended December
31, 2019, the Company had two suppliers that account for approximately 29.7% and 14.9% of total expense. For the year ended December
31, 2018, the Company had two suppliers that accounted for 21.9% and 15.9% of total expense.
Long-lived
Assets
Management
evaluates the recoverability of the Company’s identifiable intangible assets and other long-lived assets when events or
circumstances indicate a potential impairment exists. Events and circumstances considered by the Company in determining whether
the carrying value of identifiable intangible assets and other long-lived assets may not be recoverable include, but are not limited
to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant
negative industry or economic trends; a significant decline in the Company’s stock price for a sustained period of time;
and changes in the Company’s business strategy. In determining if impairment exists, the Company estimates the undiscounted
cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison
of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the
carrying amount of the assets exceeds the fair value of the assets. No impairments have been recorded regarding its identifiable
intangible assets or other long-lived assets during the years ended December 31, 2019 or 2018, respectively.
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 five to six years.
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 years ended December 31, 2019, and 2018 there has been
no impairment associated with internal use software. For the years ended December 31, 2019, and 2018, the Company capitalized
software development costs of $1,292,000 and $961,000, 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.
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.
Right
of Use Assets and Lease Obligations
The
Right of Use Asset and Lease Liability reflect the present value of the Company’s estimated future minimum lease payments
over the lease term, which may include options that are reasonably assured of being exercised, discounted using a collateralized
incremental borrowing rate.
Typically,
renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold
improvements exceed that of the initial lease term, and the sales performance of the restaurant remains strong. Therefore, the
Right of Use Asset and Lease Liability may include an assumption on renewal options that have not yet been exercised by the Company.
As
the rate implicit in leases are not readily determinable, the Company uses an incremental borrowing rate to calculate the lease
liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the
term of a lease within a particular currency environment.
Goodwill
Goodwill
is comprised of the purchase price of business combinations in excess of the fair value assigned at acquisition to the net tangible
and identifiable intangible assets acquired. Goodwill is not amortized. The Company tests goodwill for impairment for its reporting
units on an annual basis, or when events occur or circumstances indicate the fair value of a reporting unit is below its carrying
value. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that
implied fair value of the goodwill within the reporting unit is less than its carrying value. The Company performed its most recent
annual goodwill impairment test as of December 31, 2019 using market data and discounted cash flow analysis. Based on this
analysis, it was determined that the fair value exceeded the carrying value of its reporting units. The Company concluded the
fair value of the goodwill exceed the carrying value accordingly there were no indicators of impairment for the years ended December
31, 2019 and 2018.
The
Company had historically performed its annual goodwill and impairment assessment on December 31st of each year. This
aligns the Company with other advertising sales companies who also generally conduct this annual analysis in the fourth quarter.
When
evaluating the potential impairment of goodwill, management first assess a range of qualitative factors, including but not limited
to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company’s
products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel,
and the overall financial performance for each of the Company’s reporting units. If, after completing this assessment, it
is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then
proceed to the impairment testing methodology primarily using the income approach (discounted cash flow method).
We
compare the carrying value of the goodwill, with its fair value, as determined by a combination of the market approach
and income approach, its estimated discounted cash flows. If the carrying value of goodwill exceeds its fair value, then the
amount of impairment to be recognized. We operate as one reporting unit.
When
required, we arrive at our estimates of fair value using a discounted cash flow methodology which includes estimates of future
cash flows to be generated by specifically identified assets, as well as selecting a discount rate to measure the present value
of those anticipated cash flows. Estimating future cash flows requires significant judgment and includes making assumptions about
projected growth rates, industry-specific factors, working capital requirements, weighted average cost of capital, and current
and anticipated operating conditions. The use of different assumptions or estimates for future cash flows could produce different
results.
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.
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 entity’s 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.
Registration
Rights
The
Company accounts for registration rights agreements in accordance with the Accounting Standards Codification subtopic 825-20,
Registration Payment Arraignments (“ASC 825-20”). Under ASC 825-20, the Company is required to disclose the nature
and terms of the arraignment, the maximum potential amount and to assess each reporting period the probable liability under these
arraignments and, if exists, to record or adjust the liability to current period operations.
On
November 29, 2018, the Company invoked the early redemption clause in certain of its convertible notes payable pursuant to which
the Company redeemed early these convertible notes payable by cash and issuing warrant to purchase shares of common stock (the
“Redemption Penalty Warrants”). In connection with the early retirement of these notes payable, the warrants issued
to these investors included a registration rights agreement clause, pursuant to which the Company agreed to provide certain registration
rights with respect to the warrants issued. The registration rights agreements require the Company to file a registration statement
within 90 calendar days from the final closing under the retirement transaction and to be effective 60 calendar days thereafter.
The final closing under the retirement transaction of the debentures occurred on November 29, 2018. On February 11, 2019, the
Company filed the required registration statement, as of this filing, it has yet to be declared effective. If the registration
statement is not declared effective, the Company is subject to a 2% penalty of investors’ subscription amount. The Company
has estimated the liability under the registration rights agreement was $0 as of December 31, 2019 and 2018.
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 offerings 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 party’s
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 customer’s intent and ability to pay the promised consideration.
We
apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including
the customer’s 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.
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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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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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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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.
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Cost
of Revenue
Cost
of revenue consists of payments to media providers and website publishers that are directly related to a revenue-generating event
and project and application design costs. The Company becomes obligated to make payments related to media providers and website
publishers in the period the advertising impressions, click-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
consolidated statements of operations.
Stock-Based
Compensation
We
account for our stock-based compensation under ASC 718 “Compensation – Stock Compensation” using the
fair value-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and
is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting
for transactions in which an entity exchanges it equity instruments for goods or services. It also addresses transactions in which
an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments
or that may be settled by the issuance of those equity instruments.
We
use the fair value method for equity instruments granted to non-employees and use the Black-Scholes model for measuring the fair
value of options. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance
of the services is completed (measurement date) and is recognized over the vesting periods.
Common
stock awards
The
Company grants common stock awards to non-employees in exchange for services provided. The Company measures the fair value of
these awards using the fair value of the services provided or the fair value of the awards granted, whichever is more reliably
measurable. The fair value measurement date of these awards is generally the date the performance of services is complete. The
fair value of the awards is recognized on a straight-line basis as services are rendered. The share-based payments related to
common stock awards for the settlement of services provided by non-employees is recorded in accordance with ASC 505-50 on the
consolidated statement of comprehensive loss in the same manner and charged to the same account as if such settlements had been
made in cash.
Warrants
In
connection with certain financing, consulting and collaboration arrangements, the Company has issued warrants to purchase shares
of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the
holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing
model as of the measurement date. Warrants issued in conjunction with the issuance of common stock are initially recorded at fair
value as a reduction in additional paid-in capital of the common stock issued. All other warrants are recorded at fair value as
expense over the requisite service period or at the date of issuance, if there is not a service period. Warrants granted in connection
with ongoing arrangements are more fully described in Note 11, Stockholders’ Equity.
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 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.
Earnings
Per Share
We
use ASC 260, “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. We compute
basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted
earnings (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive
potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include
outstanding stock options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share are the
same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss
per share.
There
were 7,429,949 common share equivalents at December 31, 2019 and 4,853,085 at December 31, 2018. For the year ended December 31,
2018 these potential shares were excluded from the shares used to calculate diluted. These securities were not included in the
computation of diluted net earnings per share as their effect would have been antidilutive.
Recently
Issued Accounting Standards
Changes
to accounting principles are established by the FASB in the form of ASUs to the FASB’s Codification. We consider the applicability
and impact of all ASUs on our financial position, results of operations, cash flows, or presentation thereof. Described below
are ASUs that are not yet effective, but may be applicable to our financial position, results of operations, cash flows, or presentation
thereof. ASUs not listed below were assessed and determined to not be applicable to our financial position, results of operations,
cash flows, or presentation thereof.
Recently
Adopted Accounting Pronouncements
In
February 2016, the FASB issued ASU 2016-02 (with amendments issued in 2018), which changes the accounting for leases and requires
expanded disclosures about leasing activities. This new guidance also requires lessees to recognize a ROU asset and a lease liability
at the commencement date for all leases with terms greater than twelve months. Accounting by lessors is largely unchanged. ASU
2016-02 is effective for fiscal periods beginning after December 15, 2018. We adopted ASU 2016-02 on January 1, 2019 using the
modified retrospective optional transition method. Thus, the standard was applied starting January 1, 2019 and prior periods were
not restated.
We
applied the package of practical expedients permitted under the transition guidance. As a result, we did not reassess the identification,
classification and initial direct costs of leases commencing before the effective date. We also applied the practical expedient
to not separate lease and non-lease components to all new leases as well as leases commencing before the effective date. See Note
5 for additional information.
In
June 2018, the FASB issued ASU 2018-07, “Improvements to Non-employee Share-Based Payment Accounting.” This guidance
expands the scope of Topic 718 “Compensation - Stock Compensation” to include share-based payment transactions for
acquiring goods and services from non-employees, but excludes awards granted in conjunction with selling goods or services to
a customer as part of a contract accounted for under ASC 606, “Revenue from Contracts with Customers.” The adoption
of ASU 2018-07 did not have a material impact on our consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract,” which amends ASC 350-40, “Intangibles - Goodwill and Other - Internal-Use
Software.” The ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that
is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software
and requires the capitalized implementation costs to be expensed over the term of the hosting arrangement. The accounting for
the service element of a hosting arrangement that is a service contract is not affected. ASU 2018-15 is effective for fiscal periods
beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of ASU 2018-15, effective January
1, 2019, did not have a material impact on our consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment.” This guidance simplifies
how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Instead, if
the carrying amount of a reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that
excess, limited to the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for fiscal periods beginning
after December 31, 2019. Early adoption is permitted. We adopted ASU 2017-04 and it did not have a material impact on our consolidated
financial statements.
Recent
Accounting Updates Not Yet Effective
In
December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” This guidance, among other
provisions, eliminates certain exceptions to existing guidance related to the approach for intraperiod tax allocation, the methodology
for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.
This guidance also requires an entity to reflect the effect of an enacted change in tax laws or rates in its effective income
tax rate in the first interim period that includes the enactment date of the new legislation, aligning the timing of recognition
of the effects from enacted tax law changes on the effective income tax rate with the effects on deferred income tax assets and
liabilities. Under existing guidance, an entity recognizes the effects of the enacted tax law change on the effective income tax
rate in the period that includes the effective date of the tax law. ASU 2019-12 is effective for interim and annual periods beginning
after December 15, 2020, with early adoption permitted. We are currently evaluating the impact of this guidance.
In
June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.” This guidance updates
existing guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred
loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net
amount expected to be collected. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019. Early adoption is
permitted. We do not expect the adoption of ASU 2016-13 will have a material impact on our consolidated financial statements.
NOTE
2 – ACQUISITIONS AND DIVESTITURES
Sale
of SRAX MD:
On
August 6, 2018, we completed the sale of substantially all of the assets related to our SRAX MD product line for aggregate consideration
of up to $52,500,000. The purchase price consists of (i) $33,000,000 in cash, (ii) 30% interest in the purchaser of SRAX MD assets
and (iii) an earn-out of up to $9,000,000 upon the SRAX MD product line achieving certain gross profit thresholds (the “Earn-Out”).
A total of $762,500 of the purchase price was placed into escrow accounts subject to future release. During the year ended December
31, 2019, the Company received the escrow funds of approximately $658,000, net of expense of $105,000.
Given
the Company will retain an ongoing equity interest in the purchaser of SRAX MD, 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 of SRAX MD assets.
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.
The
Company recorded a gain on sale of assets totaling $22,108,028. Less escrow holdbacks and other reimbursements, the Company received
net proceeds from the transaction totaling $22,980,824.
Below
are the major components of the gain we recorded on the sale of the SRAX md assets during 2018:
GAIN
ON SALE OF SRAX MD:
Cash Proceeds
|
|
$
|
32,966,303
|
|
Fair Value of Interest Retained
|
|
|
—
|
|
Carrying amount of Assets Sold
|
|
|
|
|
Fixed Assets
|
|
|
(117,000
|
)
|
Working Capital
|
|
|
(3,228,803
|
)
|
Transactions
Fees & Sales Commissions
|
|
|
(7,512,472
|
)
|
Gain on Sale
|
|
$
|
22,108,028
|
|
Components
of operating results for the SRAX MD product group have not been classified as discontinued operations. Pursuant to guidance in
ASC 205-20, Discontinued Operations, we noted that the SRAX MD 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 entity’s 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 SRAX MD product line did not qualify
under ASC Topic 360-10-35 to 45 for determination of the gain or loss. The sale of the SRAX MD 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. SRAX
Md was a product developed from our core technology. In addition to the assets, 12 of our existing employees also transferred.
The Company have not assigned any goodwill upon disposal of a SRAX MD.
SRAX
MD, 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, SRAX MD also had no separately
capitalized assets.
NOTE
3 – PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at December 31:
|
|
2019
|
|
|
2018
|
|
Office equipment
|
|
$
|
406,000
|
|
|
|
333,000
|
|
Accumulated depreciation
|
|
|
(215,000
|
)
|
|
|
(141,000
|
)
|
Property
and equipment, net
|
|
$
|
191,000
|
|
|
|
192,000
|
|
Depreciation
expense for the years ended December 31, 2019 and 2018 was $74,000 and $44,000, respectively.
NOTE
4 – INTANGIBLE ASSETS
Intangible
assets consist of the following at December 31:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Non-compete agreement
|
|
$
|
1,250,000
|
|
|
$
|
1,250,000
|
|
Intellectual property
|
|
|
756,000
|
|
|
|
756,000
|
|
Acquired Software
|
|
|
617,000
|
|
|
|
617,000
|
|
Internally developed
software
|
|
|
2,856,000
|
|
|
|
1,564,000
|
|
Total cost
|
|
|
5,479,000
|
|
|
|
4,187,000
|
|
Accumulated amortization
|
|
|
(3,513,000
|
)
|
|
|
(2,424,000
|
)
|
Intangible
assets, net
|
|
$
|
1,966,000
|
|
|
$
|
1,763,000
|
|
Amortization
expense was $151,000 for intellectual property, $733,000 for internally developed software and $206,000 acquired software for
the year ended December 31, 2019. Amortization expense was $51,000 for intellectual property, $122,000 for the non-compete agreement,
$365,000 for internally developed software and $151,000 acquired software for the year ended December 31, 2018.
The
estimated future amortization expense for the years ended December 31, are as follows:
2020
|
|
$
|
1,019,000
|
|
2021
|
|
|
732,000
|
|
2022
|
|
|
215,000
|
|
|
|
$
|
1,966,000
|
|
As
of December 31, 2019 and 2018, goodwill was $15,645,000 and there were no additions or impairments during the years ended December
31, 2019 and 2018.
NOTE
5 – RIGHT TO USE ASSETS
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.
The
below table summarizes these lease asset and liability accounts presented on our accompanying Consolidated Balance Sheets:
Operating
Leases*
|
|
Consolidated
Balance Sheet Caption
|
|
Balance
as of December 31,
2019
|
|
Operating
lease right-of-use assets - non-current
|
|
Right
of Use Asset
|
|
$
|
456,000
|
|
|
|
|
|
|
|
|
Operating lease liabilities - current
|
|
Accrued liabilities
|
|
$
|
91,000
|
|
Operating lease
liabilities - non-current
|
|
Lease Obligation
– Long-Term
|
|
$
|
352,000
|
|
Total
operating lease liabilities
|
|
|
|
$
|
443,000
|
|
*
As of December 31, 2019, we have no “finance leases” as defined in ASC 842.
Components
of Lease Expense
We
recognize lease expense on a straight-line basis over the term of our operating leases, as reported within “selling, general
and administrative” expense on the accompanying Consolidated Statement of Operations.
The
components of our aggregate lease expense summarized below for the year ended December 31, 2019:
Operating lease cost
|
|
|
163,000
|
|
Variable lease cost
|
|
|
—
|
|
Short-term lease
cost
|
|
|
—
|
|
Total lease cost
|
|
|
163,000
|
|
Weighted
Average Remaining Lease Term and Applied Discount Rate
|
|
Weighted
Average
Remaining
Lease
Term
|
|
|
Weighted
Average
Discount
Rate
|
|
Operating leases as of December 31, 2019
|
|
|
3.75
years
|
|
|
|
18
|
%
|
Future
Contractual Lease Payments as of December 31, 2019
The
below table summarizes our (i) minimum lease payments over the next five years, (ii) lease arrangement implied interest, and (iii)
present value of future lease payments for the years ending December 31:
Operating
Leases - future payments
|
|
|
|
2020
|
|
|
163,000
|
|
2021
|
|
|
163,000
|
|
2022
|
|
|
163,000
|
|
2023
|
|
|
123,000
|
|
Total future lease payments, undiscounted
|
|
|
612,000
|
|
Less: Implied
interest
|
|
|
(169,000
|
)
|
Present value
of operating lease payments
|
|
|
443,000
|
|
NOTE
6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses at December 31, are comprised of the following:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
1,708,000
|
|
|
$
|
2,518,000
|
|
Accrued expenses
|
|
|
335,000
|
|
|
|
256,000
|
|
Accrued compensation
|
|
|
270,000
|
|
|
|
722,000
|
|
Accrued commissions
|
|
|
129,000
|
|
|
|
79,000
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,442,000
|
|
|
$
|
3,575,000
|
|
NOTE
7 – OTHER CURRENT LIABILITIES
BIGToken
Point liability
In
2019, the Company launched the BIGToken consumer data management platform, where registered users are rewarded for undertaking
actions and sharing data within the platform. The business is currently based on a platform of registered users, developed as
a direct to consumer data marketplace where users are paid for their data.
During
the year ended December 31, 2019 the Company instituted a policy that allows BIGToken users to redeem outstanding BIGToken points
for cash if their account and point balances meet certain criteria. As of December 31, 2019, the Company has estimated the future
liability for point redemptions to be $446,000. The Company considered the total number of points outstanding, the conversion
rate in which points are redeemable for cash, and each user’s redemption eligibility
The
Company utilizes an account scoring system that evaluates a number of factors in determining an account’s redemption eligibility.
These factors include an evaluation of the following: the infrastructure utilized by the user when engaging with BIGToken’s
systems, the user’s geographical associations, consistency, and verifiability of the user’s data.
NOTE
8 – SECURED CONVERTIBLE DEBENTURES, NET
On
November 29, 2018, the Company redeemed the outstanding principal balance of the Series A1 and A2 Debentures (collectively the
“Debentures”) with the repayment of the Debentures face value or $6,545,157, a 10% prepayment penalty of $654,517
and the issuance of Series B1 warrants for a total of 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.. Also, the Company issued
warrants to purchase 1,090,862 shares of its Class A common stock (“Series B1 Warrants”). The Series B1 Warrants were
issued pursuant to the redemption terms of the Company’s Debentures. The Company received no additional consideration for
the issuance. The Series B1 Warrants were issued in a transaction exempt from registration under the Securities Act of 1933, as
amended (the Securities Act), in reliance on the exemption provided by Rule 506(b) of Regulation D and Section 4(a)(2) of the
Securities Act.
As
of December 31, 2019 and 2018, there was zero principle balance of secured convertible debentures.
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 B1 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 B 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.
The
exercise price of the Series B1 Warrants is subject to adjustment upon certain events, including stock splits, stock dividends,
subsequent equity transactions (other than specified exempt issuances), subsequent rights offerings, and fundamental transactions,
subject to the $1.40 floor described above. If we fail to timely deliver the shares of our Class A common stock (“Common
Stock”) upon any exercise of the Series B Warrants, we will be subject to certain buy-in provisions. Additionally, the Series
B Warrants contained certain beneficial ownership limitations.
The
Company identified embedded derivatives related to the Series B Warrants issued. These embedded derivatives included the right
for the holders to request for the Company to purchase the Series B Warrant from the Holder by paying to the Holder an amount
of cash equal to the Black-Scholes value of the remaining unexercised portion of the Series A2 Warrant on the date of the consummation
of a fundamental transaction.
The
Series B1 Warrants have been accounted for utilizing ASC 815 “Derivatives and Hedging”. The Company has determined
that the Series B1 Warrants have an embedded feature that cause the Series B1 Warrants to be treated as a derivative liability.
The Company has estimated the fair value of the Series B1 Warrant instruments using the Black-Scholes Model with key input variables
provided by management, as of the date of issuance, with the fair value treated as an additional expense related to the extinguishment
of the Debentures, and at each reporting date, with the changes in fair value of the Series B Warrants recorded as gains or losses
on revaluation in other income (expense). See Note 9 – Warrant Liabilities for further information for the fair value of
the Series B1 Warrants.
NOTE
9 – DERIVATIVE LIABILITIES
The
Derivative Warrant Instruments have been accounted for utilizing ASC 815 “Derivatives and Hedging”. The Company
has incurred a liability for the estimated fair value of Derivative Warrant Instruments. The estimated fair value of the Derivative
Warrant Instruments has been calculated using the Black-Scholes fair value option-pricing model with key input variables provided
by management, as of the date of issuance, with the valuation offset against additional paid in capital, and at each reporting
date, with changes in fair value recorded as gains or losses on revaluation in other income (expense).
The
Company identified embedded features in the Derivative Warrant Instruments which caused the warrants to be classified as a liability.
These embedded features included the right for the holders to request for the Company to cash settle the Warrant Instruments from
the Holder by paying to the Holder an amount of cash equal to the Black-Scholes value of the remaining unexercised portion of
the Derivative Warrant Instruments on the date of the consummation of a fundamental transaction. The accounting treatment of derivative
financial instruments requires that the Company treat the whole instrument as liability and record the fair value of the instrument
as a derivative as of the inception date of the instrument and to adjust the fair value of the instrument as of each subsequent
balance sheet dates.
The
Warrant derivative liability is comprised of the following warrant instruments (collectively, the “Derivative Liabilities”):
|
1.
|
In
January 2017, the Company issued Series A Warrants in Our registered direct and concurrent private placement;
|
|
2.
|
In
April and October 2017, the Company issued the Series A1 Warrants and Series A2 Warrants in connection with the private placement
of secured convertible debentures; and
|
|
3.
|
In
November 2018, the Company issued the Series B1 Warrants upon redemption of the outstanding convertible debentures issued
in April and October 2017, pursuant to the terms of such debentures.
|
Series
|
|
Number
of Warrants
|
|
Series A warrants
|
|
|
267,535
|
|
Series A1 warrants
|
|
|
471,667
|
|
Series A2 warrants
|
|
|
813,364
|
|
Series B1 warrants
|
|
|
1,090,863
|
|
Leapfrog warrants
|
|
|
350,000
|
|
Total
|
|
|
2,993,429
|
|
Series
A Warrants
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.
The
Series A Warrants fair value as of December 31, 2019 and 2018 was estimated to be $368,000 and $496,000, respectively, based on
a risk-free interest rates of 1.62 and 2.46 respectively, an expected term of 2 and 3 years, respectively, an expected volatility
of 100% and 164%, respectively and a 0% dividend yield.
Series
A1 Warrant
The
Series A1 Warrants are initially exercisable at $3.00 per share and, if at any time after the six-month anniversary of the issuance
the underlying shares of our class A common stock are not covered by an effective resale registration statement, the Series A1
Warrants are exercisable on a cashless basis. The conversion price of the Debentures and the exercise price of the Series A1 Warrants
are subject to adjustments upon certain events, including stock splits, stock dividends, subsequent equity transactions (other
than specified exempt issuances), subsequent rights offerings, and fundamental transactions, subject to a floor of $1.40 per share.
If we fail to timely deliver the shares of our class A common stock upon any conversion of the Series A1 Debentures or exercise
of the Series A1 Warrants, we will be subject to certain buy-in provisions. Pursuant to the terms of the Series A1 Debentures
and Series A1 Warrants, a holder will not have the right to convert any portion of the Series A1 Debentures or exercise any portion
of the Series A1 Warrants if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number
of shares of class A common stock outstanding immediately after giving effect to such conversion or exercise, as such percentage
ownership is determined in accordance with the terms of the Series A1 Debentures and the Series A1 Warrants; provided that after
the Shareholder Approval Date, as defined below, at the election of a holder and notice to us such percentage ownership limitation
may be increased or decreased to any other percentage, not to exceed 9.99%; provided that any increase will not be effective until
the 61st day after such notice is delivered from the holder to us.
In
accordance with the Nasdaq Marketplace Rules, until such time as our stockholders have approved the Securities Purchase Agreements
and the transactions thereunder (the “Shareholder Approval Date”), we were not obligated to issue any shares of our
class A common stock upon any conversion of the Series A1 Debentures and/or exercise of the Series A1 Warrants, and the holders
had no right to receive upon conversion and/or exercise thereof any shares of our Class A common stock, to the extent the issuance
of such shares of Class A common stock would exceed 20% of our outstanding Class A common stock prior to the transaction. We held
a special meeting of the shareholders on June 23, 2017 whereby we obtained approval of the Securities Purchase Agreements and
the transactions thereunder.
We
agreed to file a registration statement registering the resale of the shares of our Class A common stock underlying the Series
A1 Debentures and the Series A1 Warrants. Under the terms of the Securities Purchaser Agreements, we also granted the Purchasers
of the Series A1Debentures the right to purchase an additional $3,000,000 of Series A1 Debentures upon the same terms and conditions
for a period beginning on the Shareholder Approval Date and expiring on earliest of the date that (a) the initial registration
statement has been declared effective by the SEC, (b) all of the underlying shares have been sold pursuant to Rule 144 or may
be sold pursuant to Rule 144 without the requirement for our company to be in compliance with the current public information required
under Rule 144 and without volume or manner-of-sale restrictions, (c) following the one year anniversary of the closing date provided
that a holder of the underlying shares is not an affiliate of the Company or (d) all of the underlying shares may be sold pursuant
to an exemption from registration under Section 4(a)(1) of the Securities Act. The shares underlying the Series A1 Debentures
and Series Warrants were included in a resale registration statement on Form S-3 that was declared effective by the SEC in June
2017.
The
Series A1 Warrants fair value as of December 31, 2019 and 2018 was estimated to be $618,000 and $868,000, respectively based on
a risk-free interest rate ranging from 1.62% to 2.46%, an expected term ranging from 2.38 to 3.38, an expected volatility ranging
from 100% to 164% and a 0% dividend yield. During the years ended December 31, 2019 and 2018, we recorded a decrease in the fair
value of the warrant derivative liability of $284,000 and $1,774,000, respectively. This was recorded as a gain on change in fair
value of derivative liability.
Series
A2 Warrants
The
Series A2 Warrants have an exercise price of $3.00 per share, subject to adjustment and contain anti-dilution protection for subsequent
financings and have an exercise price floor of $1.40 per share.
The
Series A2 Warrants fair value as of December 31, 2019 and 2018 was estimated to be $1,142,000 and $1,446,000, respectively based
on a risk-free interest rate ranging from 1.62 to 2.46, an expected term ranging from 2.88 to 3.88 years, an expected volatility
ranging from 100% to 158% and a 0% dividend yield. During the years ended December 31, 2019 and 2018, we recorded the decrease
in the fair value of the warrant derivative liability of $303,000 and $3,170,000, respectively. This was recorded as a gain on
change in fair value of derivative liability.
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 B1 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 B 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.
The
exercise price of the Series B1 Warrants is subject to adjustment upon certain events, including stock splits, stock dividends,
subsequent equity transactions (other than specified exempt issuances), subsequent rights offerings, and fundamental transactions,
subject to the $1.40 floor described above. If we fail to timely deliver the shares of our Class A common stock (“Common
Stock”) upon any exercise of the Series B Warrants, we will be subject to certain buy-in provisions. Additionally, the Series
B Warrants contained certain beneficial ownership limitations.
The
Series B1 Warrants fair value at December 31, 2019 and 2018 was estimated to be $1,786,000 and $2,010,000, respectively,
based on a risk-free interest rate of 1.62 and 2.46, respectively, an expected term of 3.91 and 4.91 an expected volatility
of 100% and a 155%, respectively, and a 0% dividend yield. During the years ended December 31, 2019 and 2018, we recorded a
decrease, in the fair value of the warrant derivative liability of $224,000 and $1,230,000, respectively. This
was recorded as a loss on change in fair value of derivative liability.
Leapfrog
Warrants
The
Leapfrog Warrants fair value at December 31, 2019 and 2018 was estimated to be $480,000 and $622,000, respectively, based on a
risk-free interest rate of 1.62 and 2.46, an expected term of 2.63 and 3.63, respectively, expected volatility of 100% and 167%,
respectively and a 0% dividend yield. During the years ended December 31, 2019 and 2018, we recorded a decrease, in the fair value
of the warrant derivative liability of $142,000 and $1,251,000, respectively. This was recorded as a loss on change in fair value
of derivative liability.
The
Warrant liabilities are comprised of the following at December 31:
|
|
Debenture
Warrant Liabilities
|
|
|
Leapfrog
Warrant Liability
|
|
|
Derivative
Liability
|
|
|
Total
|
|
Balance December 31, 2017
|
|
$
|
7,257,000
|
|
|
$
|
1,873,000
|
|
|
$
|
2,026,000
|
|
|
$
|
11,156,000
|
|
Issuance of derivate instruments
|
|
|
3,240,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,240,000
|
|
Adjustment to outstanding instruments
|
|
|
2,000
|
|
|
|
-
|
|
|
|
(329,000
|
)
|
|
|
(327,000
|
)
|
Adjustment to fair value
|
|
|
(6,175,000
|
)
|
|
|
(1,251,000
|
)
|
|
|
(1,201,000
|
)
|
|
|
(8,627,000
|
)
|
Balance December 31, 2018
|
|
|
4,324,000
|
|
|
|
622,000
|
|
|
|
496,000
|
|
|
|
5,442,000
|
|
Adjustment to fair value
|
|
|
(775,000
|
)
|
|
|
(142,000
|
)
|
|
|
(128,000
|
)
|
|
|
(1,045,000
|
)
|
Balance December 31, 2019
|
|
$
|
3,549,000
|
|
|
$
|
480,000
|
|
|
$
|
368,000
|
|
|
$
|
4,397,000
|
|
NOTE
10 – COMMITMENTS AND CONTINGENCIES
Other
Commitments
In
the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors,
business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the
Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement
claims made by third parties. In addition, the Company has entered indemnification agreements with its directors and certain of
its officers and employees that will require the Company to, among other things, indemnify them against certain liabilities that
may arise due to their status or service as directors, officers or employees. The Company has also agreed to indemnify certain
former officers, directors and employees of acquired companies in connection with the acquisition of such companies. The Company
maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors
and certain of its officers and employees, and former officers, directors and employees of acquired companies, in certain circumstances.
It
is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited
history of prior indemnification claims and the unique facts and circumstances involved in each agreement. Such indemnification
agreements may not be subject to maximum loss clauses.
Employment
agreements
We
have entered employment agreements with key employees. These agreements may include provisions for base salary, guaranteed and
discretionary bonuses and option grants. The agreements may contain severance provisions if the employees are terminated without
cause, as defined in the agreements.
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.
Business
Interruption
The Company may be impacted
by public health crises beyond its control. This could disrupt its operations and negatively impact sales of its products. The
Company’s customer and, suppliers may experience similar disruption. In December 2019, a novel strain of the Coronavirus,
COVID-19, was reported to have surfaced in Wuhan, China, which has evolved into a pandemic. This situation and preventative or
protective actions that governments have taken to counter the effects of the pandemic have resulted in a period of business disruption,
including delays in shipments of products and raw materials. COVID-19 has spread to over 175 countries, including the United States,
and efforts to contain the spread of COVID-19 have intensified. To the extent the impact of COVID-19 continues or worsens, the
demand for the Company’s products may be negatively impacted. COVID-19 has also impacted the Company’s sales efforts
as its ability to make sales calls is constrained. The Company’s ability to promote sales through promotional activities
has also been constrained. Trade shows and sales conferences, major events used to introduce and sell the Company’s products,
have been postponed indefinitely. The length and severity of the pandemic could also affect the Company’s regular sales,
which could in turn result in reduced sales and a lower gross margin.
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, respectively.
In
January 2018, we issued Colleen DiClaudio, a board member, 7,813 Class A common shares valued at $10,000 as payment for 2017 services
on our board of directors. The shares were issued from our 2016 equity compensation plan.
In
January 2018, we issued Hardy Thomas, a former board member, 7,195 Class A common shares valued at $10,000 as payment for 2017
services on our board of directors. The shares were issued from our 2016 equity compensation plan.
In
January 2018, we issued Marc Savas and Malcolm CasSelle each 3,774 Class A common shares valued at $10,000 as payment for their
respective 2017 service on our board of directors. The shares were issued from our 2016 equity compensation plan.
In
January 2018, we issued a consultant an additional 150,000 shares for media consulting services. In August 2018, we issued the
consultant an additional 150,000 shares pursuant to this same agreement.
In
March 2018, we issued 6,667 shares of Class A common stock to one employee for vested stock awards.
In
March 2018, 122,950 shares of Class A common stock were awarded to one employee for sales performance achievement pursuant to
our 2016 equity compensation plan.
In
July 2018, 16,667 Series A common stock purchase warrants were exercised at a price of $3.00 per share, resulting in gross proceeds
to the Company of $50,000.
In
August 2018, we issued William Packer 3,774 shares of Class A common shares valued at $10,000 as payment for 2017 services on
our board of directors. The shares were issued from our 2016 equity compensation plan.
In
June 2018, 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 Company’s 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 Company’s
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.
In
April 2019, the Company sold 1,687,825 shares of the Company’s common stock for gross proceeds of $6,751,300, or $4.00 per
share. The net proceeds after the placement agent fees, of approximately $523,000, was approximately $6,229,000.
In
conjunction with this offering, the Company entered into a placement agent agreement, which provided for the placement agent to
receive a cash fee equal to 7.0% of the gross proceeds received by the Company from the sale of the shares of common stock, warrants
to purchase up to 101,270 shares of Common Stock at an exercise price of $5.00 per share and reimbursement of up to $50,000 for
offering related expense.
In
July 2019, we issued a 75,000 share of the Company’s common stock as compensation. On the date of grant the fair value of
the shares was $374,000. The fair value is be expensed over a one-year service period. For the twelve months ended December
31, 2019, the compensation expense was $235,000.
In
August 2019, the Company entered into a settlement agreement with a lender. Based on the settlement agreement, the lender and
the Company agreed to cancel the 220,000 shares of common stock issued as collateral. As of the settlement date, the Company
owed the lender $150,000 for the original issue discount. The Company issued 58,101 shares of the Company’s common stock
as payment for the original issue discount issue. The fair value of the shares on the date of issuance was $219,000.
On
August 12, 2019, the Company sold 1,525,000 shares of the Company’s Class A common stock, par value $0.001 per share (the
“Common Stock”) and Series A warrants (“Series A Warrants”) to purchase 965,500 shares of Common Stock
at a purchase price per share of $3.60 (the “Registered Direct Offering”) resulting in gross proceeds to the Company
of $5,490,000 and net proceeds of $4,968,000 after cash payments to the placement agents and legal fees.
Concurrently
with the offering the Company also issued the Investors in a private placement (“Private Placement”) (i) Series B
warrants (“Series B Warrants”) to purchase an aggregate of 1,525,000 shares of Common Stock and (ii) Series C warrants
(“Series C Warrants”) to purchase an aggregate of 965,500 shares of Common Stock (collectively, the Series B Warrants
and Series C Warrants are referred to herein as the “Private Warrants”).
The
Series A Warrants are immediately exercisable upon issuance, have a term of ninety (90) days from the date of issuance, and have
an exercise price of $3.60 per share. The Series B Warrants and Series C Warrants are not exercisable for a period of six (6)
months following the issuance date, have an exercise price of $4.00 per share, and expire on October 1, 2022. Additionally, the
Series C Warrants vest ratably from time to time in proportion to such Investor’s exercise of the Series A Warrants.
The
1,525,000 shares of Common Stock and Series A Warrants to purchase 965,500 shares of Common Stock sold in the Registered Direct
Offering were offered and sold by the Company pursuant to an effective “shelf” registration statement on Form S-3
(File No. 333-214644), which was declared effective on November 28, 2016.
The
Private Warrants and the Placement Agent Warrants (as defined below) were sold and issued without registration under the Securities
Act of 1933, as amended (the “Securities Act”), in reliance on the exemptions provided by Section 4(a)(2) of the Securities
Act as transactions not involving a public offering and Rule 506 promulgated under the Securities Act as sales to accredited investors,
and in reliance on similar exemptions under applicable state laws.
In
connection with the Registered Direct Offering and the Private Placement, the Company entered into engagement agreements (the
“PA Agreements”) with The Special Equities Group, LLC, a division of Bradley Woods & Co. Ltd., and WestPark Capital,
Inc. (the “Placement Agents”) on August 11, 2019 and August 9, 2019, respectively. Pursuant to the PA Agreements,
the Placement Agents received (i) aggregate cash fees of 7.0% for one Placement Agent or 8.0% for the other Placement Agent, of
their respective portions of the gross proceeds received by the Company from the sale of the securities, (ii) approximately $60,000
for certain expenses, and (iii) warrants to purchase up to 59,668 shares of Common Stock (the “Placement Agent Warrants”),
representing 6.0% of the Common Stock and Series B Warrants sold by one of the Placement Agents in the Registered Direct Offering.
The Placement Agent Warrants have substantially the same terms as the Series B Warrants, except that the exercise price of the
Placement Agent Warrants is $4.50 per share and has a four (4) year term beginning one (1) year after issuance. Additionally,
upon the exercise of up to 1,027,778 Series A Warrants, 650,701 Series B Warrants, and 1,027,778 Series C Warrants sold Registered
Direct Offering and Private Placement, we have agreed to pay one of the Placement Agents a cash fee of 8% of proceeds from the
exercise of such warrants exercised within 120 days following the closing of this offering or a cash fee of 5% of the proceeds
from the exercise of such warrants after such 120 day period following the closing of this offering. One of the Placement Agents
will be entitled to the foregoing cash commission and fee in the previous sentence with respect to certain investors if such investors
provide capital to us in any future private or public offering, or other financing or capital-raising transaction during the six
(6) months following the expiration or termination of our engagement of such Placement Agent.
NOTE
12 – STOCK OPTIONS, AWARDS AND WARRANTS
2012,
2014 and 2016 Equity Compensation Plans
In
January 2012, our board of directors and stockholders authorized the 2012 Equity Compensation Plan, which we refer to as the 2012
Plan, covering 600,000 shares of our Class A common stock. On November 5, 2014, our board of directors approved the adoption of
our 2014 Equity Compensation Plan (the “2014 Plan”) and reserved 600,000 shares of our Class A common stock
for grants under this plan. On February 23, 2016, our board of directors approved the adoption of our 2016 Equity Compensation
Plan (the “2016 Plan”) and reserved 600,000 shares of our Class A common stock for grants under this plan. The purpose
of the 2012, 2014 and 2016 Plans is to attract and retain the best available personnel for positions of substantial responsibility,
to provide additional incentive to our employees, directors and consultants and to promote the success of our company’s
business. The 2012, 2014 and 2016 Plans are administered by our board of directors. Plan options may either be:
|
●
|
incentive
stock options (ISOs),
|
|
●
|
non-qualified
options (NSOs),
|
|
●
|
awards
of our common stock,
|
|
●
|
stock
appreciation rights (SARs),
|
|
●
|
restricted
stock units (RSUs),
|
|
●
|
performance
units,
|
|
●
|
performance
shares, and
|
|
●
|
other
stock-based awards.
|
Any
option granted under the 2012, 2014 and 2016 Plans must provide for an exercise price of not less than 100% of the fair market
value of the underlying shares on the date of grant, but the exercise price of any ISO granted to an eligible employee owning
more than 10% of our outstanding common stock must not be less than 110% of fair market value on the date of the grant. The plans
further provide that with respect to ISOs the aggregate fair market value of the common stock underlying the options which are
exercisable by any option holder during any calendar year cannot exceed $100,000. The exercise price of any NSO granted under
the 2012, 2014 or 2016 Plans is determined by the Board at the time of grant but must be at least equal to fair market value on
the date of grant. The term of each plan option and the manner in which it may be exercised is determined by the board of directors
or the compensation committee, provided that no option may be exercisable more than 10 years after the date of its grant and,
in the case of an incentive option granted to an eligible employee owning more than 10% of the common stock, no more than five
years after the date of the grant. The terms of grants of any other type of award under the 2012, 2014 or 2016 Plans is determined
by the Board at the time of grant. Subject to the limitation on the aggregate number of shares issuable under the plans, there
is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person.
Transactions
involving our stock options for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:
In
September 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. Hannan’s
termination in December of 2018, 229,166 option terminated.
In
December 2018, 100,000 common stock purchase warrants, having an exercise price of $2.56 per share with an option value as of
the grant date of $220,832 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.
In
March 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.
In
April 2019 the Company issued 11,252 options to purchase the Company’s common stock at a price of $5.49 to our non-executive
directors. Each of our four non-executive directors received 2,813 options that vest 1/4th quarterly over the next
year with an expiration date of April 15, 2026. The options were valued using the Black Scholes option pricing model at a total
of $60,000 based on the seven-year term, implied volatility of 102% and a risk-free equivalent yield of 2.46%, stock price of
$5.49.
|
|
Number
of Shares
|
|
|
Weighted
Average Strike Price/Share
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value(1)
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Outstanding — December 31, 2017
|
|
|
424,300
|
|
|
$
|
6.65
|
|
|
|
3.10
|
|
|
$
|
105,425
|
|
|
$
|
|
|
Granted
|
|
|
480,236
|
|
|
|
3.57
|
|
|
|
1.41
|
|
|
|
—
|
|
|
|
2.74
|
|
Exercised
|
|
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(356,874
|
)
|
|
|
4.84
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.91
|
|
Outstanding — December 31, 2018
|
|
|
547,662
|
|
|
|
5.94
|
|
|
|
2.73
|
|
|
|
—
|
|
|
|
|
|
Vested and exercisable
- December 31. 2018
|
|
|
331,993
|
|
|
|
6.80
|
|
|
|
2.86
|
|
|
|
—
|
|
|
|
4.24
|
|
Unvested and non-exercisable -
December 31, 2018
|
|
|
205,669
|
|
|
|
4.36
|
|
|
|
2.62
|
|
|
|
—
|
|
|
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding — December 31, 2018
|
|
|
547,662
|
|
|
|
5.94
|
|
|
|
2.73
|
|
|
|
—
|
|
|
|
|
|
Granted
|
|
|
696,252
|
|
|
|
3.45
|
|
|
|
2.34
|
|
|
|
—
|
|
|
|
2.25
|
|
Exercised
|
|
|
-
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(51,395
|
)
|
|
|
6.92
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3.37
|
|
Outstanding — December 31, 2019
|
|
|
1,192,519
|
|
|
|
4.14
|
|
|
|
2.17
|
|
|
|
—
|
|
|
|
|
|
Vested and exercisable —
December 31, 2019
|
|
|
355,083
|
|
|
|
5.63
|
|
|
|
2.22
|
|
|
|
—
|
|
|
|
3.98
|
|
Unvested and non-exercisable -
December 31, 2019
|
|
|
837,436
|
|
|
$
|
3.49
|
|
|
|
2.15
|
|
|
$
|
—
|
|
|
$
|
2.29
|
|
During
the years ended December 31, 2019 and 2018, we recorded compensation expense of $1,168,000 and $668,000, respectively,
related to stock-based compensation.
As
of December 31, 2019, compensation cost related to the unvested options not yet recognized was approximately $2,070,000.
The weighted average period over which the $2,070,000 will vest is estimated to be 2.2 years.
Transactions
involving our common stock awards for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:
On
May 13, 2019 the Company entered into a consulting agreement with a contractor for services related to BIGToken. The agreement
provides for 300,000 warrants with vesting conditions based on BIGToken user growth in Asia. The warrants were valued using the
Black Scholes option pricing model at a total of $1,138,332 based on the five-year term, implied volatility of 101%, a risk-free
equivalent yield of 1.8% and stock price of $4.99.
|
|
Number
of Shares
|
|
|
Weighted
Average Strike Price/Share
|
|
|
Weighted
Average Remaining Contractual Term (Years)
|
|
|
Aggregate
Intrinsic Value(1)
|
|
|
Weighted
Average Grant Date Fair Value
|
|
Outstanding — December 31, 2017
|
|
|
2,485,005
|
|
|
$
|
5.09
|
|
|
|
2.19
|
|
|
$
|
7,201,286
|
|
|
$
|
|
|
Granted
|
|
|
2,162,058
|
|
|
|
3.00
|
|
|
|
3.82
|
|
|
|
—
|
|
|
|
2.97
|
|
Exercised
|
|
|
(95,238
|
)
|
|
|
2.25
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.48
|
|
Forfeited
|
|
|
(226,402
|
)
|
|
|
6.95
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.52
|
|
Outstanding — December 31, 2018
|
|
|
4,325,423
|
|
|
|
5.05
|
|
|
|
2.85
|
|
|
|
—
|
|
|
|
|
|
Vested and exercisable - December 31.
2018
|
|
|
4,325,423
|
|
|
|
5.05
|
|
|
|
2.85
|
|
|
|
—
|
|
|
|
3.08
|
|
Unvested and non-exercisable - December 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding — December 31, 2018
|
|
|
4,325,423
|
|
|
|
5.05
|
|
|
|
2.85
|
|
|
|
—
|
|
|
|
|
|
Granted
|
|
|
3,885,442
|
|
|
|
3.99
|
|
|
|
2.21
|
|
|
|
94,910
|
|
|
|
1.60
|
|
Exercised
|
|
|
(342,000
|
)
|
|
|
3.50
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.79
|
|
Forfeited
|
|
|
(1,631,435
|
)
|
|
|
5.14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.97
|
|
Outstanding — December 31, 2019
|
|
|
6,237,430
|
|
|
|
3.57
|
|
|
|
2.68
|
|
|
|
—
|
|
|
|
|
|
Vested and exercisable —
December 31, 2019
|
|
|
5,937,430
|
|
|
|
3.51
|
|
|
|
2.60
|
|
|
|
—
|
|
|
|
2.34
|
|
Unvested and non-exercisable -
December 31, 2019
|
|
|
300,000
|
|
|
$
|
4.75
|
|
|
|
4.43
|
|
|
$
|
—
|
|
|
$
|
3.88
|
|
NOTE
13 – RELATED PARTY TRANSACTIONS
On
March 20, 2018, we entered into certain retention and bonus agreements with SRAX MD employees, including Erin DeRuggiero, our
chief innovations officer. Pursuant to the terms of the agreements with Ms. DeRuggiero, her employment agreement was terminated,
and she became a consultant to the Company. The term of the consultancy expired upon the sale of the assets comprising SRAX MD.
Pursuant to the terms of the agreement, we paid Ms. DeRuggiero a total of $5.2 million at closing which also included repurchase
of 514,000 shares of our Class A common stock in 2018.
On
April 2, 2018, we issued a common stock purchase warrant to Kristoffer Nelson, our Chief Operating Officer and a member of our
board of directors. The option entitles Mr. Nelson to purchase 100,000 shares of Class A Common Stock at a price per share of
$5.78, has a term of three years and vests quarterly over a three (3) year period.
On
September 11, 2018, we issued a common stock purchase warrant to Joseph P. Hannan, our 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. Hannan’s termination in December 2018, 234,375 of these options
expired.
Our
Chief Executive Officer served on the board of directors for some months in 2018 of one of our advertising customers which purchases
advertising at market rates.
NOTE
14 – INCOME TAXES
Income
tax (benefit) expense from continuing operations for the year ended December 31, 2019 consisted of the following:
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(3,198,000
|
)
|
|
$
|
(3,198,000
|
)
|
State
|
|
|
—
|
|
|
|
(920,000
|
)
|
|
|
(920,000
|
)
|
Subtotal
|
|
|
—
|
|
|
|
(4,118,000
|
)
|
|
|
(4,118,000
|
)
|
Valuation allowance
|
|
|
—
|
|
|
|
4,118,000
|
|
|
|
4,118,000
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Income
tax (benefit) expense from continuing operations for the year ended December 31, 2018 consisted of the following:
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(1,302,000
|
)
|
|
|
(1,302,000
|
)
|
State
|
|
|
—
|
|
|
|
(701,000
|
)
|
|
|
(701,000
|
)
|
Subtotal
|
|
|
—
|
|
|
|
(2,003,000
|
)
|
|
|
(2,003,000
|
)
|
Valuation allowance
|
|
|
—
|
|
|
|
2,003,000
|
|
|
|
2,003,000
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
A
reconciliation of the federal statutory income tax rate to the Company’s effective income tax rate is as follows:
|
|
2019
|
|
|
2018
|
|
Taxes calculated at federal
rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
State income tax, net of federal benefit
|
|
|
-
|
%
|
|
|
(1.9
|
)%
|
Stock based compensation
|
|
|
(1.4
|
)%
|
|
|
1.4
|
%
|
Permanent Differences
|
|
|
-
|
%
|
|
|
1.0
|
)%
|
Change in Valuation Allowance
|
|
|
(23.7
|
)%
|
|
|
13.9
|
%
|
Fair market adjustment derivatives
|
|
|
1.3
|
%
|
|
|
(21.5
|
)%
|
Prior year True-ups
|
|
|
3.0
|
%
|
|
|
(14.9
|
)%
|
True-up to deferred tax rate
|
|
|
-
|
%
|
|
|
—
|
%
|
Other adjustments
|
|
|
(0.2
|
)%
|
|
|
1.0
|
%
|
Provision for
income taxes
|
|
|
—
|
%
|
|
|
—
|
%
|
The
tax effects, rounded to thousands, of temporary differences that give rise to significant portions of the deferred tax assets
and liabilities at December 31, are presented below:
|
|
2019
|
|
|
2018
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
6,621,000
|
|
|
$
|
2,915,000
|
|
Bad
debt expense
|
|
|
111,000
|
|
|
|
—
|
|
Accrued
interest
|
|
|
492,000
|
|
|
|
—
|
|
Stock
based compensation
|
|
|
431,000
|
|
|
|
431,000
|
|
Other
accruals
|
|
|
84,000
|
|
|
|
25,000
|
|
Total
Deferred Tax Assets
|
|
|
7,739,000
|
|
|
|
3,371,000
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Fixed
assets
|
|
|
(39,000
|
)
|
|
|
(38,000
|
)
|
Stock
based compensation
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(327,000
|
)
|
|
|
(250,000
|
)
|
Prepaid
expenses
|
|
|
(20,000
|
)
|
|
|
(13,000
|
)
|
Total
Deferred Tax Liabilities
|
|
|
(386,000
|
)
|
|
|
(301,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax
Assets
|
|
|
7,353,000
|
|
|
|
3,070,000
|
|
Valuation
Allowance
|
|
|
(7,353,000
|
)
|
|
|
(3,070,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax / (liabilities)
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
tax assets and liabilities are computed by applying the federal and state income tax rates in effect to the gross amounts of temporary
differences and other tax attributes, such as net operating loss carry-forwards. In assessing if the deferred tax assets will
be realized, the Company considers whether it is more likely than not that some or all of these deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in
which these deductible temporary differences reverse.
During
the years ended December 31, 2019 and 2018, the valuation allowance increased (decreased) by $4,283,000 and $(1,221,226),
respectively. The increase (decrease) for both years was attributable to the increase (decrease) in our net
operating loss carryforwards. The total valuation allowance results from the Company’s estimate of its inability to recover
its net deferred tax assets.
At
December 31, 2019, the Company has federal and state net operating loss carry forwards, which are available to offset future taxable
income, of approximately $29,511,000 and $23,447,000, respectively, both of which begin to expire in 2032 and 2032
respectively. These carry forwards may be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code
of 1986, and similar state provisions if the Company experienced one or more ownership changes which would limit the amount of
NOL and tax credit carryforwards that can be utilized to offset future taxable income and tax, respectively. In general, an ownership
change, as defined by Section 382 and 383, results from transactions increasing ownership of certain stockholders or public groups
in the stock of the corporation by more than 50 percentage points over a three-year period. The Company has not completed an IRC
Section 382/383 analysis. If a change in ownership were to have occurred, NOL and tax credit carryforwards could be eliminated
or restricted. If eliminated, the related asset would be removed from the deferred tax asset schedule with a corresponding reduction
in the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes,
if any, will not impact the Company’s effective tax rate.
The
Company files income tax returns in the United States and various state jurisdictions. Due to the Company’s net operating
loss posture all tax years are open and subject to income tax examination by tax authorities. The Company’s policy is to
recognize interest expense and penalties related to income tax matters as tax expense. At December 31, 2019 and 2018, there
are no unrecognized tax benefits, and there are no significant accruals for interest related to unrecognized tax benefits or tax
penalties.
The
Company is in the process of analyzing their NOL and has not determined if the company has had any change of control issues that
could limit the future use of NOL. NOL carryforwards that were generated after 2017 of approximately $20.1 million may only be used
to offset 80% of taxable income and are carried forward indefinitely.
NOTE
15 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The
carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash and accounts payable and
accrued expenses, approximate their respective fair values due to the short-term nature of such instruments.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
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. This determination requires significant judgments to be
made. The Company had no financial assets or liabilities as of December 31, 2019 and 2018:
|
|
|
|
|
Quoted
Prices in
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
|
Balance
as of
|
|
|
Active
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December
31,
|
|
|
Identical
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2019
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Debenture
warrant liability
|
|
$
|
3,549,000
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
3,549,000
|
|
Leapfrog warrant liability
|
|
|
480,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
480,000
|
|
Derivative liability
|
|
|
368,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
368,000
|
|
Total
liabilities
|
|
$
|
4,397,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,397,000
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Money
Market funds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Quoted
Prices in
|
|
|
Significant
Other
|
|
|
Significant
|
|
|
|
Balance
as of
|
|
|
Active
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December
31,
|
|
|
Identical
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
2018
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Debenture
warrant liability
|
|
$
|
4,324,000
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
4,324,000
|
|
Leapfrog warrant liability
|
|
|
622,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
622,000
|
|
Derivative
liability
|
|
|
496,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
496,000
|
|
Total
liabilities
|
|
$
|
5,442,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,442,000
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government-sponsored agency securities
|
|
|
2,723,000
|
|
|
|
2,723,000
|
|
|
|
—
|
|
|
|
—
|
|
Total
assets
|
|
$
|
2,723,000
|
|
|
$
|
2,723,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
A
reconciliation of the beginning and ending balances for the derivative and warrant liability measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) is as follows for the years ended December 31:
|
|
2019
|
|
|
2018
|
|
Outstanding, beginning of the period
|
|
$
|
5,442,000
|
|
|
$
|
11,156,000
|
|
Initial derivative liability on issuance
of warrants
|
|
|
-
|
|
|
|
3,240,000
|
|
Change in fair
value
|
|
|
(1,045,000
|
)
|
|
|
(8,954,000
|
)
|
Warrant liabilities
|
|
$
|
4,397,000
|
|
|
$
|
5,442,000
|
|
Equity
investments include the Company’s retention of an approximately 30% membership interest in the purchaser of SRAX MD group
of assets (a limited liability company). The investment was valued initially at its cost basis which was nil. The Company has
limited access to operating results and information and has no significant influence over the purchaser of SRAX MD. The operating
agreement designates a different managing member for that entity. Accordingly, the value at December 31, 2019 and 2018
is nil and is a level 3 asset.
The
Company accounts for its investments in equity securities in accordance with ASC 321-10 Investments - Equity Securities. The equity
securities may be classified into two categories and accounted for as follows:
|
●
|
Equity
securities with a readily determinable fair value are reported at fair value, with unrealized gains and losses included in
earnings. Any dividends received are recorded in interest income, the fair value of equity investments with fair values is
primarily obtained from third-party pricing services.
|
|
|
|
|
●
|
Equity
securities without a readily determinable fair value are reported at their cost minus impairment, if any, plus or minus changes
resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer
and their impact on fair value. Any dividends received are recorded in interest income. For equity investments without readily
determinable fair values, when an orderly transaction for the identical or similar investment of the same issuer is identified,
we use the valuation techniques permitted under ASC 820 Fair Value Measurement to evaluate the observed transaction(s) and
adjust the fair value of the equity investment.
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NOTE
16 – SUBSEQUENT EVENTS
Loans
and Security Agreements
On
February 28, 2020, SRAX, Inc. (the “Company”) entered into a term loan and security agreement (the “Loan Agreement”)
with BRF Finance Co., LLC, an affiliate of B. Riley Financial, Inc. (“Lender). Pursuant to the Loan Agreement, the Company
will borrow up to $5,000,000, subject to the conditions contained below (the “Loan”).
The
Loan is secured by substantially all of the assets of the Company pursuant to the Loan Agreement and the intellectual property
security agreement (“Security Agreement”) entered into in connection with the transaction.
The
Loan bears interest at ten percent (10%) per annum, and has a maturity date of March 1, 2022 (“Maturity Date”). Beginning
on August 1, 2020, and continuing on the first day of each month thereafter until the Maturity Date, the Company will make monthly
payments of principal and interest on an eighteen (18) month straight line amortization schedule, based on the principal outstanding
on July 31, 2020. Additionally, the Company will have the option of a one (1) time payment-in-kind payment (“PIK Payment”)
for a monthly required payment of principal and interest, which will defer such payments and result in a recalculation of the
amortization schedule. In the event that the Company is late on any payments under the Loan, a late charge of three percent (3%)
of the amount of the payment due will be assessed.
Upon
the Initial Loan, the Company paid Lender: (i) an origination fee of $300,000, (ii) $35,000 in attorneys’ fees reimbursement,
and (iii) certain other costs and expenses associated with the completion of the Loan, including but not limited to escrow fees
and recording fees. Accordingly, the Company received net proceeds of approximately $2,163,800 from the Initial Loan.
The
occurrence of an event of default under the Loan Agreement (“Event of Default”) will accelerate all amounts due under
the Loan. Events of Default include, but are not limited to: (i) failure to make payments on principal or interest due after Lender
providing five (5) days notice, (ii) failure by the Company to timely perform its obligations, or abide by its covenants, or agreements
in the Loan Agreement, subject to applicable cure periods, (ii) certain breaches of representations and warranties, or (iv) the
initiation of bankruptcy proceedings. Upon an Event of Default, the interest rate will be increased by an additional five percent
(5%) on all amounts owed under the Loan.
Under
the Loan: (i) an initial draw of $2,500,000 on February 28, 2020 (the “Initial Loan”) and (ii) the remaining $2,500,000
(“Second Loan”) within (30) days of the Company entering into an at the market sales agreement (“ATM Agreement”)
with the Lender and the filing of an at the market offering on Form S-3 with the Securities and Exchange Commission (“SEC”)
registering the shares to be sold pursuant to the ATM Agreement (the “ATM”). The Company agreed to file the ATM by
May 1, 2020. Additionally, the Company will be required to increase the dollar amount authorized under the ATM each time additional
capacity of at least $1,000,000 is available under federal securities laws.
The
Loan may be prepaid in whole or in part at any time at the discretion of the Company. The Loan also provides for mandatory prepayments
of all of the net cash received upon (i) a sale of the company’ assets, (ii) raising additional capital through the issuance
of equity or debt securities, or (iii) sales under the ATM described above.
Pursuant
to the Loan Agreement, the Company agreed to issue to Lender: (i) 500,000 Common Stock purchase warrants on the date of the Initial
Loan (“Initial Warrant”) and (ii) 500,000 Common Stock purchase warrants on the date of the Second Loan (“Second
Warrant”) (collectively, the “Warrants”). The Warrants have an exercise price equal to a 25% premium of the
closing price of the Common Stock on their respective date of issue (provided that the exercise price of the Warrants cannot be
less than $2.50 per share, subject to adjustment contained therein). The Initial Warrant has an exercise price of $3.60. The Warrants
will expire on October 31, 2022. The Warrants allow for cashless exercise in the event that they are not subject to a registration
statement on the six (6) month anniversary of their respective issuances. The Warrants do not contain any price protection / anti-dilution
provisions.
During
the three months ended March 31, 2020, the Company sold a series of short-term notes with a total principal amount of $450,000.
These short-term notes have maturities of 90 days from the date of sale. The notes are redeemable by the Company at any time
prior to maturity at face value plus a fee determined by the number of days the notes are outstanding. These fees range from 10%
to 36% of the face value. The notes are collateralized by 450,000 shares of the Company’s stock, subject to certain
adjustments.
On
January 22, 2020 and January 30, 2020, the Company entered into agreements to sell, with recourse, certain accounts receivable
with a face value of $453,753 and $74,843, respectively (the “Receivables”) $453,753 and $56,000, respectively. Also,
the Company has granted the purchaser a security interest in 268,548 shares of the Company’s common stock. The shares have
been issued and held by the Company’s stock transfer agent as treasury shares. Commencing on March 24, 2020 and March 30,
2020, the purchaser may, at its sole option exercise an option (the “Put Option”), cause Company to purchase from
Purchaser, any outstanding portion of the Receivables. The purchase price payable by Company to Purchaser for the Receivables
upon exercise of the Put Option shall be equal to one hundred and thirty six percent (136%) of the then remaining outstanding
balance of the Receivables (“Put Price”). For all Receivables, not subject to a Put Option, the Company pay a true
up amount (“True UP Amounts”), as follows (“True UP Triggers”):
January
22, 2020 Purchase
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a.
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ten
percent (10%) of the portion of the Receivables which are paid on or before February 21, 2020;
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b.
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twenty
percent (20%) of the portion of the Receivables which are paid after February 21, 2020 and but on or before March 24, 2020;
and
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c.
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thirty
six percent (36%) of the portion of the Receivables which are paid after March 24, 2020
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January
30, 2020 Purchase
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a.
|
ten
percent (10%) of the portion of the Receivables which are paid on or before February 28, 2020;
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|
b.
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twenty
percent (20%) of the portion of the Receivables which are paid after February 28, 2020 but on or before March 30, 2020; and
|
|
c.
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thirty
six percent (36%) of the portion of the Receivables which are paid after March 30, 2020
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On
April 9, 2020 the Company entered into an agreement to amend the January 22 and 30 Accounts receivable agreements. The Purchaser
agreed to amend the payment of the Put Price to June 23, 2020 and June 30, 2020 for the receivable sale originating on January
22, 2020 and January 30, 2020, respectively. As consideration for the extension the Company agreed to issue the purchaser
32,668 and 4,032 shares of Class A common stock for the receivable sale originating on January 22, 2020 and January
30, 2020, respectively.