0001553350-16-002669.txt : 20161114 0001553350-16-002669.hdr.sgml : 20161111 20161114172813 ACCESSION NUMBER: 0001553350-16-002669 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 54 CONFORMED PERIOD OF REPORT: 20160930 FILED AS OF DATE: 20161114 DATE AS OF CHANGE: 20161114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOCIAL REALITY, Inc. CENTRAL INDEX KEY: 0001538217 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 452925231 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37916 FILM NUMBER: 161996092 BUSINESS ADDRESS: STREET 1: 456 SEATON STREET CITY: LOS ANGELES STATE: CA ZIP: 90013 BUSINESS PHONE: 323-283-8505 MAIL ADDRESS: STREET 1: 456 SEATON STREET CITY: LOS ANGELES STATE: CA ZIP: 90013 FORMER COMPANY: FORMER CONFORMED NAME: SOCIAL REALITY DATE OF NAME CHANGE: 20111227 10-Q 1 srax_10q.htm QUARTERLY REPORT Quarterly Report

 



 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


———————

FORM 10-Q

———————


(Mark One)


þ  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 2016


or


¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from________ to ________


Commission File Number 001-37916

———————

[srax_10q001.jpg]

SOCIAL REALITY, INC.

(Exact name of registrant as specified in its charter)

———————


Delaware

45-2925231

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

 

456 Seaton Street, Los Angeles, CA

90013

(Address of principal executive offices)

(Zip Code)


(323) 694-9800

(Registrant’s telephone number, including area code)


Not Applicable

(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ  NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ  NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   ¨

 

Accelerated filer   ¨

Non-accelerated filer  ¨

 

Smaller reporting company  þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨  NO þ

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.  6,941,077 shares of Class A common stock are issued and outstanding as of November 11, 2016.

 

 




 


TABLE OF CONTENTS


 

 

Page

 

 

No

 

 

 

 

PART I-FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements.

1

 

 

 

ITEM 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations.

23

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk.

28

 

 

 

ITEM 4.

Controls and Procedures.

28

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings.

29

 

 

 

ITEM 1A.

Risk Factors.

29

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

30

 

 

 

ITEM 3.

Defaults Upon Senior Securities.

30

 

 

 

ITEM 4.

Mine Safety Disclosures.

31

 

 

 

ITEM 5.

Other Information.

31

 

 

 

ITEM 6.

Exhibits.

31

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION


This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:


 

·

our history of losses;

 

 

 

 

·

the terms of the Financing Agreement dated October 30, 2014, as amended, with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders and holders of notes and warrants issued thereunder ("Financing Agreement") and its impact on our business and operations;

 

 

 

 

·

our dependence on revenues from a limited number of customers;

 

 

 

 

·

the impact of our debt obligations on our liquidity and financial condition;

 

 

 

 

·

our ability to manage our relationships with our publishers;

 

 

 

 

·

risks associated with loss to access to the Facebook platform;

 

 

 

 

·

risks associated with loss of access to real time bidding inventory buyers and RTB platforms;

 

 

 



i



 





 

·

our dependence on our executive officers;

 

 

 

 

·

the continued appeal of Internet advertising;

 

 

 

 

·

risks related to possible future acquisitions;

 

 

 

 

·

the possible exercise of the put right by the holder of the warrant issued under the terms of the Financing Agreement (the "Financing Warrant");

 

 

 

 

·

the limited market for our Class A common stock;

 

 

 

 

·

risks associated with securities litigation;

 

 

 

 

·

our failure to meet financial performance guidance;

 

 

 

 

·

risks associated with material weaknesses in our internal control over financial reporting;

 

 

 

 

·

anti-takeover provisions of Delaware law;

 

 

 

 

·

the possible issuance of shares of our Class B common stock;

 

 

 

 

·

our failure to attract securities or industry analysts;

 

 

 

 

·

concentration of ownership by our management;

 

 

 

 

·

dilution to our stockholders from the exercise of outstanding options and warrants, including those with cashless features; and

 

 

 

 

·

the terms of indemnification agreements with our executive officers and directors.


Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part I, Item 1A. - Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the Securities and Exchange Commission on March 16, 2016 and our subsequent filings. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this prospectus, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.


OTHER PERTINENT INFORMATION


When used in this report, the terms “Social Reality,” “we,” “us,” or “our” refers to Social Reality, Inc., a Delaware corporation, and our subsidiaries Steel Media, a California corporation which we refer to as "Steel Media," and Five Delta, Inc., a Delaware corporation which we refer to as "Five Delta." In addition, the "third quarter of 2016" refers to the three months ended September 30, 2016, the "third quarter of 2015" refers to the three months ended September 30, 2015, "2015” refers to the year ended December 31, 2015, and “2016” refers to the year ending December 31, 2016.  


All share and per share information contained in this report gives effect to the 1:5 reverse stock split of our Class A common stock effective September 20, 2016.


The information which appears on our web sites www.socialreality.com, www.steelmediainc.com, www.SRAX.com, www.sraxmd.com, www.sraxapp.com, www.sraxdi.com and www.groupad.com are not part of this report.




ii



 


PART 1 - FINANCIAL INFORMATION


ITEM 1.

FINANCIAL STATEMENTS.


SOCIAL REALITY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

 

Assets

  

                        

  

  

                        

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,241,230

 

 

$

1,091,186

 

Accounts receivable, net

 

 

4,387,878

 

 

 

7,056,298

 

Prepaid expenses

 

 

227,878

 

 

 

309,436

 

Other current assets

 

 

6,488

 

 

 

36,090

 

Total current assets

 

 

8,863,474

 

 

 

8,493,010

 

 

 

 

 

 

 

 

 

 

Property and equipment, net of accumulated depreciation of $69,951 and $42,295

 

 

31,458

 

 

 

43,936

 

Goodwill

 

 

15,644,958

 

 

 

16,314,957

 

Intangibles assets – net

 

 

1,342,094

 

 

 

1,611,744

 

Prepaid stock based compensation

 

 

 

 

 

373,567

 

Other assets

 

 

34,659

 

 

 

34,659

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

25,916,643

 

 

$

26,871,873

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

11,673,969

 

 

$

5,138,807

 

Note payable, net of unamortized costs of $838,069 and $1,076,633

 

 

5,095,736

 

 

 

1,378,367

 

Unearned revenue

 

 

19,410

 

 

 

1,295

 

Contingent consideration payable to related party- current portion

 

 

 

 

 

7,585,435

 

Put liability

 

 

1,500,000

 

 

 

1,436,282

 

Total current liabilities

 

 

18,289,115

 

 

 

15,540,186

 

 

 

 

 

 

 

 

 

 

Notes payable, net of unamortized cost of $0 and $578,160

 

 

 

 

 

7,455,758

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

18,289,115

 

 

 

22,995,944

 

 

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued and outstanding

 

 

 

 

 

 

Class A common stock, authorized 250,000,000 shares, $0.001 par value, 6,663,662 and 5,622,052 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively

 

 

6,664

 

 

 

5,622

 

Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued and outstanding

 

 

 

 

 

 

Additional paid in capital

 

 

20,666,933

 

 

 

14,012,078

 

Accumulated deficit

 

 

(13,046,069

)

 

 

(10,141,771

)

 

 

 

 

 

 

 

 

 

Total stockholders' equity

 

 

7,627,528

 

 

 

3,875,929

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

25,916,643

 

 

 

26,871,873

 



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


1



 


SOCIAL REALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)


 

 

Three Months ended

September 30,

 

 

Nine Months ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

9,530,842

 

 

$

7,390,238

 

 

$

24,249,588

 

 

$

22,173,095

 

Cost of revenue

 

 

6,986,834

 

 

 

3,296,144

 

 

 

16,430,204

 

 

 

10,697,062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

2,544,008

 

 

 

4,094,094

 

 

 

7,819,384

 

 

 

11,476,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General, selling and administrative expense

 

 

3,851,890

 

 

 

3,751,736

 

 

 

11,082,581

 

 

 

10,914,488

 

Impairment of goodwill

 

 

 

 

 

 

 

 

670,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

(1,307,882

)

 

 

342,358

 

 

 

(3,933,197

)

 

 

561,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Write off of contingent consideration

 

 

 

 

 

 

 

 

3,744,496

 

 

 

 

Interest income (expense)

 

 

(1,067,964

)

 

 

(1,000,898

)

 

 

(2,715,598

)

 

 

(2,858,955

)

 

 

 

(1,067,964

)

 

 

(1,000,898

)

 

 

1,028,898

 

 

 

(2,858,955

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

 

(2,375,846

)

 

 

(658,540

)

 

 

(2,904,299

)

 

 

(2,297,410

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(2,375,846

)

 

$

(658,540

)

 

$

(2,904,299

)

 

$

(2,297,410

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.40

)

 

$

(0.12

)

 

$

(0.49

)

 

$

(0.43

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic and diluted

 

 

5,958,897

 

 

 

5,409,248

 

 

 

5,929,793

 

 

 

5,387,126

 





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


2



 


SOCIAL REALITY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTH PERIODS ENDED SEPTEMBER 30, 2016 AND 2015

(Unaudited)


 

 

Nine Month Period Ended

September 30,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

  

                        

  

  

                        

 

Net loss

 

$

(2,904,299

)

 

$

(2,297,410

)

Adjustments to reconcile net loss to net cash provided (used) by operating activities:

 

 

 

 

 

 

 

 

Amortization of stock based prepaid fees

 

 

373,567

 

 

 

475,839

 

Stock based compensation

 

 

610,397

 

 

 

626,539

 

Non-cash financing cost

 

 

274,695

 

 

 

 

Amortization of debt issue costs

 

 

816,705

 

 

 

925,612

 

PIK interest expense accrued to principal

 

 

447,738

 

 

 

279,216

 

Impairment of goodwill

 

 

670,000

 

 

 

-

 

Accretion of contingent consideration

 

 

(3,585,388

)

 

 

692,674

 

Accretion of put liability

 

 

63,718

 

 

 

129,643

 

Depreciation and amortization

 

 

286,944

 

 

 

203,585

 

Bad debt expense

 

 

96,253

 

 

 

66,728

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(2,767,590

)

 

 

(5,102,151

)

Prepaid expenses

 

 

81,562

 

 

 

91,568

 

Other current assets

 

 

29,602

 

 

 

(15,132

)

Other assets

 

 

 

 

 

(10,855

)

Accounts payable and accrued expenses

 

 

6,355,103

 

 

 

2,833,564

 

Unearned revenue

 

 

18,115

 

 

 

(23,600

)

Cash provided (used) by operating activities

 

 

867,122

 

 

 

(1,124,180

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of equipment

 

 

(4,816

)

 

 

(30,657

)

Cash used by investing activities

 

 

(4,816

)

 

 

(30,657

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Sale of units

 

 

3,550,815

 

 

 

 

Sale of warrants

 

 

 

 

 

6,921

 

Proceeds from notes payable

 

 

2,100,000

 

 

 

1,500,000

 

Repayments of note payable

 

 

(1,763,077

)

 

 

(1,162,519

)

Payment of contingent consideration

 

 

(1,600,000

)

 

 

 

Cash provided by financing activities

 

 

2,287,738

 

 

 

344,402

 

 

 

 

 

 

 

 

 

 

Net increase in cash

 

 

3,150,044

 

 

 

(810,435

)

Cash, beginning of period

 

 

1,091,186

 

 

 

1,843,393

 

Cash, end of period

 

$

4,241,230

 

 

$

1,032,958

 

 

 

 

 

 

 

 

 

 

Supplemental Schedule of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,224,525

 

 

$

718,119

 

Cash paid for taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash financial activities:

 

 

 

 

 

 

 

 

Proceeds paid by FastPay on behalf of the Company

 

$

5,507,468

 

 

$

 

Common stock issuance for payment of contingent consideration

 

$

2,400,000

 

 

$

 



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


3



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.


Organization and Basis of Presentation


Social Reality, Inc. ("Social Reality", "we", "us" or the "Company") is a Delaware corporation formed on August 2, 2011. Effective January 1, 2012 we acquired all 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 and Class B common stock. The former members of Social Reality, LLC owned all of our common stock after the acquisition.


At Social Reality, we sell digital advertising campaigns to advertising agencies and brands. We have developed technology that allows brands to launch and manage digital advertising campaigns, and we provide the platform that allows website publishers to sell their media inventory to many different digital adverting buyers. Our focus is to provide technology tools that enable both publishers and advertisers to maximize their digital advertising initiatives. We derive our revenues from:


·

sales of digital advertising campaigns to advertising agencies and brands;

·

sales of media inventory owned by our publishing partners through real-time bidding, or RTB, exchanges;

·

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

·

creation of custom platforms for buying media on SRAX for large brands.


The core elements of this business are:


·

Social Reality Ad Exchange or "SRAX" Real Time Bidding sell side and buy side representation is our technology which assists publishers in delivering their media inventory to the real-time bidding, or RTB, exchanges.  The SRAX platform integrates multiple market-leading demand sources. We also build custom platforms that allow our agency partners to launch and manage their own RTB campaigns by enabling them to directly place advertising orders on the platform dashboard and view and analyze results as they occur;

 

 

·

SRAXmd is our ad targeting and data platform for healthcare brands, agencies and medical content publishers. Healthcare and pharmaceutical publishers utilize the platform for yield optimization, audience extension campaigns and re-targeting of their healthcare professional audience. Agencies and brands purchase targeted digital and mobile ad campaigns;

 

 

·

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

 

 

·

 SRAX APP, a recently launched new product, is a platform that allows publishers and content owners to launch native mobile applications through our SRAX platform.


We offer our customers a number of pricing options including cost-per-thousand-impression, or "CPM", whereby our customers pay based on the number of times the target audience is exposed to the advertisement, and on a monthly service fee.

 

Social Reality is also an approved Facebook advertising partner. We sell targeted and measurable online advertising campaigns and programs to brand advertisers and advertising agencies across large Facebook apps and websites, generating qualified Facebook likes and quantifiable engagement for our clients, driving online sales and increased brand equity.


We are headquartered in Los Angeles, California.



4



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).


Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

 

These interim financial statements as of and for the three and nine months ended September 30, 2016 and 2015 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any future period. All references to September 30, 2016 and 2015 in these footnotes are unaudited.

 

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2015, included in the Company's annual report on Form 10-K filed with the SEC on March 16, 2016.


The condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited consolidated financial statements at that date but do not include all disclosures required by GAAP. Certain items have been reclassified to conform to the current period presentation.


Effect of Reverse Stock Split on Presentation


On September 20, 2016, the Company completed a reverse stock split.  The principal reason for the reverse stock split was to facilitate the up-listing of our Class A common stock to the NASDAQ Capital Market which has a minimum market (bid) price requirement for new applicants of $4.00 per share.  


As a result of the reverse stock split, each five shares of the Company's Class A common stock issued and outstanding, or held as treasury shares, immediately prior to the effective date of the reverse stock split became one share of its Class A common stock on the effective date of the reverse stock split. No fractional shares of Class A common stock were issued to any stockholder in connection with the reverse stock split and all fractional shares which might otherwise be issuable as a result of the reverse stock split were rounded up to the nearest whole share. On the effective date of the reverse stock split, all outstanding options and warrants to purchase shares of the Company's Class A common stock were proportionally adjusted based upon the split ratio and became exercisable into one-fifth of the number of shares of the Company's Class A common stock as it was prior to the reverse stock split at an exercise price which is five times the exercise price prior to the reverse stock split.  


After the effective date of the reverse stock split, each certificate representing shares of pre-reverse stock split Class A common stock was deemed to represent one-fifth of a share of the post-reverse stock split Class A common stock, subject to rounding for fractional shares, and the records of the Company's transfer agent, Transfer Online, Inc., were adjusted to give effect to the reverse stock split. Following the effective date of the reverse stock split, the share certificates representing the pre-reverse stock split Class A common stock continue to be valid for the appropriate number of shares of post-reverse stock split Class A common stock, adjusted for rounding.  


These condensed consolidated financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise specified.



5



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).


Principles of Consolidation


The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.


The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries from the acquisition date of majority voting control and through the date of disposition, if any.


Use of Estimates


GAAP requires management of the Company to make estimates and assumptions in the preparation of these condensed consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and 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 and sales credits, stock-based compensation, income taxes, purchase price for acquisition, goodwill, other intangible assets, put rights and valuation of liabilities. The accounting policies for these areas are discussed elsewhere in these unaudited condensed consolidated financial statements.


Cash and Cash Equivalents


The Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents.


Revenue Recognition


The Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists; no significant Company obligations remain; collection of the related receivable is reasonably assured; and the fees are fixed or determinable. The Company acts as a principal in revenue transactions as the Company is the primary obligor in the transactions. As such, revenue is recognized on a gross basis, and media and publisher expenses that are directly related to a revenue-generating event are recorded as a component of cost of revenue.


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-throughs, 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 income statement.


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 $231,695 and $135,442 at September 30, 2016 and December 31, 2015, respectively.



6



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).


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 in the United States. The balances in the United States held at any one financial institution are generally in excess of Federal Deposit Insurance Corporation ("FDIC") insurance limits. The uninsured cash bank balances were approximately $4.2 million at September 30, 2016. The Company has not experienced any loss on these accounts. The balances are maintained in demand accounts to minimize risk.


At September 30, 2016, two customers accounted for more than 10% of the accounts receivable balance, for a total of 50%. For the nine months ended September 30, 2016 one customer accounted for 49% of total revenue. At September 30, 2015, two customers accounted for more than 10% of the accounts receivable balance, for a total of 61%. For the nine months ended September 30, 2015 one customer accounted for 50% of total revenue.


Fair Value of Financial Instruments


The Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At September 30, 2016 and December 31, 2015, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.


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 and a non-complete agreement 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.


Business Combinations


For all business combinations (whether partial, full or step acquisitions), the Company records 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration, if any, is recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value are recognized in earnings until settlement and acquisition-related transaction and restructuring costs are expensed rather than treated as part of the cost of the acquisition.


Goodwill and change to annual impairment testing period


Our goodwill consists of the excess purchase price paid in business combinations over the fair value of assets acquired. Goodwill is considered to have an indefinite life.



7



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).


The Company has historically performed its annual goodwill and impairment assessment on September 30th of each year; however, due to the elimination of the need to internally maintain certain segregated accounting records of the Steel Media business that occurred in the third quarter of 2016, following the determination that the second year Earn Out Consideration would not be achieved (See Note 2), this was reevaluated by the Company.  Further, given the seasonal and cyclical nature of advertising sales in general, timing of the Company’s annual budgeting process, and the short-term nature of the Company’s advertising sales contracts, it was determined that it would be more effective and efficient to conduct the annual impairment analysis instead at December 31st of each year.  This would also better align the Company with other advertising sales companies who also generally conduct this annual analysis in the fourth quarter.  The Company does not believe this change will have any material impact on its consolidated financial statements, and continues to evaluate potential interim impairment to goodwill consistent with its historical practices.


The Company employs the non-amortization approach to account for goodwill. Under the non-amortization approach, goodwill is not amortized into the results of operations, but instead is reviewed annually or more frequently if events or changes in circumstances indicate that the asset might be impaired, to assess whether the fair value exceeds the carrying value.


When evaluating the potential impairment of goodwill, we first assess a range of qualitative factors, including but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company's products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and the overall financial performance for each of the Company's reporting units. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then proceed to a two-step impairment testing methodology using the income approach (discounted cash flow method).


In the first step of the two-step testing methodology, we compare the carrying value of the reporting unit, including goodwill, with its fair value, as determined by its estimated discounted cash flows. If the carrying value of a reporting unit exceeds its fair value, we then complete the second step of the impairment test to determine the amount of impairment to be recognized. In the second step, we estimate an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). If the carrying value of a reporting unit's goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference in that period.


When required, we arrive at our estimates of fair value using a discounted cash flow methodology which includes estimates of future cash flows to be generated by particular 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.


During the nine months ended September 30, 2016, we determined that a portion of the goodwill assigned to Steel Media acquisition has become impaired. Accordingly, we recorded a goodwill impairment charge of $670,000 for the nine months ended September 30, 2016. The impairment charge represents the excess of the carrying amount of the goodwill recorded in the acquisition over the implied fair value of the goodwill. The implied fair value of the goodwill is the residual fair value based on an income approach using discounted cash flow model using revenue and profit forecasts.  No additional impairment of goodwill has been recorded in the three months ended September 30, 2016.



8



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).

 

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 in either the nine months ended September 30, 2016 or 2015.


Loss 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 2,912,069 common share equivalents at September 30, 2016 and 2,796,803 at September 30, 2015. For the nine months ended September 30, 2016 and 2015 these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.


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 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.



9



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).


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.


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.


Liquidity


The Company had an accumulated deficit at September 30, 2016 of $(13.0) million. As of September 30, 2016, we had approximately $4.2 million in cash and cash equivalents and a deficit in working capital of $(9.4) million as compared to $(1.1) million in cash and cash equivalents and a deficit in working capital of $(7.0) million at December 31, 2015. The Company believes it has established an ongoing source of revenue that is sufficient to cover its operating costs over the next twelve months. In addition, management plans to continue as a going concern could also include raising additional capital through borrowing and/or additional sales of equity or equity linked securities.


Recently Issued Accounting Standards


In  October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16 - Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The guidance will be effective for the first interim period of our 2019 fiscal year, with early adoption permitted.


In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 provides guidance regarding the classification of certain items within the statements of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted.


In connection with its financial instruments project, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments in June 2016 and ASU 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities in January 2016.


·

ASU 2016-13 introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a forward-looking “expected loss” model that will replace the current “incurred loss” model and generally will result in earlier recognition of allowances for losses. The guidance will be effective for the first interim period of our 2021 fiscal year, with early adoption in fiscal year 2020 permitted.




10



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued).


·

ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the new guidance requires the fair value measurement of investments in certain equity securities. For investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. All changes in measurement will be recognized in net income. The guidance will be effective for the first interim period of our 2019 fiscal year. Early adoption is not permitted, except for certain provisions relating to financial liabilities.


In April 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-10, Identifying Performance Obligations and Licensing (Topic 606), which amends certain aspects of the FASB’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customer (Topic 606). ASU 2016-10 identifies performance obligations and provides licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 (Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date) defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.


In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), which is part of the FASB's Simplification Initiative. The updated guidance simplifies the accounting for share-based payment transactions. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.


In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customer (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), or ASU 2016-08, that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company is still currently evaluating the full impact of the adoption of this standard on its consolidated financial statements.  However, given revenue recognition practices already in place, it does not appear likely that this will have a material impact on the Company’s future presentation of consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.


In April 2015, the FASB issued ASU No. 2015-3, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-3”) which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset.  ASU 2015-3 became effective for public companies during interim and annual reporting periods beginning after December 15, 2015.  The Company adopted this ASU on January 1, 2016. The adoption of this ASU did not have a material impact to our consolidated financial statements.


Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.




11



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 2 – ACQUISITIONS.


Acquisition of Steel Media


On October 30, 2014, we acquired 100% of the capital stock of Steel Media, a California corporation ("Steel Media"), from Richard Steel pursuant to the terms and conditions of a stock purchase agreement, dated October 30, 2014, by and among the Company, Steel Media and Mr. Steel (the "Stock Purchase Agreement").


As consideration for the purchase of Steel Media, we agreed to pay Mr. Steel up to $20.0 million, consisting of: (i) a cash payment at closing of $7.5 million; (ii) a cash payment of $2.0 million which is being held in escrow to satisfy certain indemnification obligations to the extent such arise under the Stock Purchase Agreement; (iii) a one year secured subordinated promissory note in the principal amount of $2.5 million (the "Note") which was secured by 477,373 shares of our Class A common stock (the "Escrow Shares"); and (iv) earn out payments of up to $8 million (the "Earn Out Consideration").


The Earn Out Consideration target was achieved for the first earn out period ended October 31, 2015 and on January 29, 2016 we paid Mr. Steel $4.0 million, of which $1.6 million was paid in cash and the balance was paid through the issuance of 256,754 shares of our Class A common stock in accordance with the terms of the Stock Purchase Agreement. The Company determined the Earn Out Consideration would not be achieved for the second earn out period ended October 31, 2016. As a result, the Company reversed the second earn out liability of $3.5 million during nine months ended September 30, 2016.  At September 30, 2016, we did not record a liability for the Earn Out Consideration. At December 31, 2015, we recorded $7.6 million associated with the first and second earn out periods.


Acquisition of Five Delta, Inc.


On December 19, 2014, we acquired 100% of the outstanding capital stock of Five Delta, Inc., a Delaware corporation ("Five Delta"), in exchange for 120,000 shares of our Class A common stock pursuant to the terms and conditions of the Share Acquisition and Exchange Agreement dated December 19, 2014 (the "Five Delta Agreement") by and among Social Reality, Five Delta and the stockholders of Five Delta. The acquisition price was $756,000.


NOTE 3 – NOTES PAYABLE.


Financing Agreement with Victory Park Management, LLC as agent for the lenders


On October 30, 2014 (the "Financing Agreement Closing Date"), the Company entered into a financing agreement (the "Financing Agreement") with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders and holders of notes and warrants issued thereunder (the "Agent"). The Financing Agreement provides for borrowings of up to $20.0 million to be evidenced by notes issued thereunder, which are secured by a first priority, perfected security interest in substantially all of the assets of the Company and its subsidiaries (including Steel Media) and a pledge of 100% of the equity interests of each domestic subsidiary of the Company pursuant to the terms of a pledge and security agreement (the "Pledge and Security Agreement") entered into by the Company on the Financing Agreement Closing Date (which was joined by Steel Media immediately after the Company's acquisition of Steel Media). The Financing Agreement contains covenants limiting, among other things, indebtedness, liens, transfers or sales of assets, distributions or dividends, and merger or consolidation activity. The notes (the "Financing Notes") issued pursuant to the Financing Agreement, including the note issued to the lender thereunder in the original aggregate principal amount of $9.0 million on the Financing Agreement Closing Date (the "Initial Financing Note") and the subsequent notes described below, bear interest at a rate per annum equal to the sum of (1) cash interest at a rate of 10% per annum and (2) payment-in-kind (PIK) interest at a rate of 4% per annum for the period commencing on the Financing Agreement Closing Date and extending through the last day of the calendar month during which the Company's financial statements for December 31, 2014 are delivered, and which PIK interest rate thereafter from time to time may be adjusted based on the ratio of the Company's consolidated indebtedness to its earnings before interest, taxes, depreciation and amortization. If the Company achieves a reduction in the leverage ratio as described in the Financing Agreement, the PIK interest rate declines on a sliding scale from 4% to 2%. The Financing Notes issued under the Financing Agreement are scheduled to mature on October 30, 2017, with scheduled quarterly payment dates commencing December 31, 2014. Proceeds from the Initial Financing Note issued on the Financing Agreement Closing Date were used to finance, in part, the Company's acquisition of Steel Media as described in Note 2.




12



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 3 – NOTES PAYABLE (continued).


The Financing Agreement provides for subsidiaries of the Company to join the Financing Agreement from time to time as borrowers and cross guarantors thereunder. Immediately after the Company's acquisition of Steel Media on October 30, 2014, Steel Media executed a joinder agreement under which it became a borrower under the Financing Agreement. The Company and its subsidiary, Steel Media, are cross guarantors of each other's obligations under the Financing Agreement, all of which guaranties and obligations are secured pursuant to the terms of the Pledge and Security Agreement.


On May 14, 2015, we entered into the First Amendment to Financing Agreement with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders. Under the terms of the amendment, the leverage ratio, senior leverage ratio, fixed charge coverage ratio and interest coverage ratio under the Financing Agreement were all modified, and the minimum current ratio was reduced. The amendment also modified our obligations with respect to the delivery of certain reports, certain representations by us as well as clarifying other additional terms by which the loan is administered.


On July 6, 2015, we borrowed an additional $1.5 million pursuant to the Financing Agreement. The loan funded on July 8, 2015. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $1.5 million. The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement for working capital.


On October 26, 2015, we borrowed an additional $1.4 million pursuant to the Financing Agreement. The loan funded on October 26, 2015. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $1.4 million.  The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement towards the payment of the Note due Richard Steel described in Note 2, and for working capital.


On January 26, 2016, we borrowed an additional $1.6 million pursuant to the financing agreement with Victory Park Management, LLC. The loan funded on January 28, 2016. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $1.6 million.  The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement as a portion of the payment to Mr. Richard Steel of the first year Earn Out Consideration described in Notes 2 and 6.


On February 16, 2016, we borrowed an additional $500,000 pursuant to the Financing Agreement with Victory Park Management, LLC. The loan funded on February 16, 2016. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $500,000. The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement as working capital.


For the nine months ended September 30, 2016, we made principal payments of approximate $6.7 million.


Notes payable consists of the following:


 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

 

 

 

 

 

Current portion of note payable

 

$

5,933,805

 

 

$

2,455,000

 

Non-current portion of note payable

 

 

 

 

 

8,033,898

 

Total note payable including PIK interest

 

 

5,933,805

 

 

 

10,488,898

 

Less deferred financing costs

 

 

(838,069

)

 

 

(1,654,773

)

Notes payable and PIK interest accrued, net of deferred costs

 

$

5,095,736

 

 

$

8,834,125

 




13



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 3 – NOTES PAYABLE (continued).


During the three months ended September 30, 2016 and 2015, $206,287 and $102,250, respectively, were recorded as PIK interest expense.  During the nine months ended September 30, 2016 and 2015, $447,737, and $279,216, respectively, were recorded as PIK interest expense.


Pursuant to the Financing Agreement dated October 31, 2014, the Company also issued to the lender thereunder, on the Financing Agreement Closing Date, a five-year warrant to purchase 580,000 shares of its Class A common stock at an exercise price of $5.00 per share (the "Financing Warrant"). The warrant holder may not, however, exercise the Financing Warrant for a number of shares of Class A common stock that would cause such holder to beneficially own shares of Class A common stock in excess of 4.99% of the Company's outstanding shares of Class A common stock following such exercise. The number of shares issuable upon exercise of the Financing Warrant and the exercise price therefor are subject to adjustment in the event of stock splits, stock dividends, recapitalizations and similar corporate events. Pursuant to the Financing Warrant, the warrant holder has the right, at any time after the earlier of April 30, 2016 and the maturity date of the Financing Notes issued pursuant to the Financing Agreement, but prior to the date that is five years after the Financing Agreement Closing Date, to exercise its put right under the terms of the Financing Warrant, pursuant to which the warrant holder may sell to the Company, and the Company will purchase from the warrant holder, all or any portion of the Financing Warrant that has not been previously exercised. In connection with any exercise of this put right, the purchase price will be equal to an amount based upon the percentage of the Financing Warrant for which the put right is being exercised, multiplied by the lesser of (A) 50% of the total revenue for the Company and its subsidiaries, on a consolidated basis, for the trailing 12-month period ending with the Company's then-most recently completed fiscal quarter, and (B) $1.5 million. We have recorded the put liability at its present value of $1.5 million at September 30, 2016.


As contemplated under the Financing Agreement, the Company also entered into a registration rights agreement on the Financing Agreement Closing Date (the "Financing Registration Rights Agreement") with the holder of the Financing Warrant, pursuant to which the Company granted to such holder certain "piggyback" rights to register the shares of the Company's Class A common stock issuable upon exercise of the Financing Warrant. Specifically, the holder of the Financing Warrant has the right, subject to certain allocation provisions set forth in the Financing Registration Rights Agreement, to include the shares underlying the Financing Warrant in registration statements for offerings by the Company of its Class A common stock, as well as offerings of the Company's Class A common stock held by third parties. The shares underlying the Financing Warrant were included in a registration statement on Form S-1 that was declared effective by the Securities and Exchange Commission in October 2015.


As part of the arrangements under the Financing Agreement, the Agent, Mr. Steel, and the Company and Steel Media (as borrowers under the Financing Agreement) have also entered into a subordination agreement (the "Subordination Agreement") under which Mr. Steel agreed, subject to the terms and conditions of the Subordination Agreement, to subordinate to the lenders and holders of Financing Notes and the Financing Warrant issued under the Financing Agreement (i) certain obligations, liabilities, and indebtedness, including, without limitation, payments under the Note and payments of Earn Out Consideration, which may be owed to him by the Company; and (ii) during the time the Note was outstanding a put right we granted him if in the event of a default under the Note.  As set forth above, the Note was paid in full in October 2015 and the put right was terminated upon such payment.


Activity for the put liability during the nine months ended September 30, 2016 was:


 

 

December 31,

2015

 

 

Activity

During

the Period

 

 

Accretion

in Value

 

 

September 30,

2016

 

Put liability

 

$

1,436,282

 

 

$

 

 

$

63,718

 

 

$

1,500,000

 

Total

 

$

1,436,282

 

 

$

 

 

$

63,718

 

 

$

1,500,000

 




14



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 3 – NOTES PAYABLE (continued).


We incurred a total of $3.1 million of costs related to the Financing Agreement. These costs will be amortized to interest expense over the life of the debt. During the three months ended September 30, 2016 and 2015, $250,100 and $297,242, respectively of debt issuance costs were amortized. During the nine months ended September 30, 2016 and 2015, $816,705 and $(925,612), respectively of debt issuance costs were amortized. As of September 30, 2016 and December 31, 2015, capitalized debt costs had a balance of $838,069 and $1.6 million, respectively.


The terms of the Financing Agreement require us to maintain certain financial covenants, including leverage ratios, senior leverage ratios, fixed charge coverage ratios, interest coverage ratios and minimum current ratios. Financing Agreement covenant violations constitute an event of default which, at the election of the Victory Park Management LLC, could result in the acceleration of the unpaid principal loan balance and accrued interest under the Financing Agreement.


In anticipation that the Company would not be in compliance with one or more of these financial covenants under terms of the Financing Agreement by the second or third quarter of 2016, we advised the Agent.  On August 22, 2016, we entered into a Forbearance Agreement with the Agent (the “Forbearance Agreement”).


Under the terms of the Forbearance Agreement, until the earlier of either the expiration of the Forbearance Period, which is defined to mean the date when all conditions of the agreement have been satisfied, or the Forbearance Termination Date of January 1, 2017,  the lenders have agreed not to take any actions, including declaring an event of default or otherwise accelerating the obligations owed under the Financing Agreement, related to our failure solely to comply with the financial covenants for the periods ended June 30, 2016 and September 30, 2016.  During the Forbearance Period, beginning on July 1, 2016 the PIK interest rate of the outstanding amounts due under the Financing Agreement increased by 3% per annun to 7% per annum.  Our monthly cash interest payments remain unchanged at 10% per annum.  We are also required to pay all amounts due under the Financing Agreement on or before December 31, 2016.  We agreed to pay a forbearance fee of $115,322 together with legal fees of the lender’s counsel not to exceed $25,000.


At September 30, 2016, we had $5.93 million outstanding under the Financing Agreement.


Financing and Security Agreement with Fast Pay Partners, LLC


On September 19, 2016, the Company executed a Financing and Security Agreement dated September 14, 2016, as amended by Amendment No. 1 also dated September 14, 2016 (collectively, the "FastPay Agreement"), with FastPay Partners LLC (“FastPay”) creating an accounts receivable-based credit facility.


Under the terms of the FastPay Agreement, FastPay may, at its sole discretion, purchase the Company's eligible accounts receivables. Upon any acquisition of accounts receivable, FastPay will advance the Company up to 80% of the gross value of the purchased accounts, up to a maximum of $8.0 million in advances. Each account receivable purchased by FastPay will be subject to a factoring fee rate specified in the FastPay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over 30 days. The Company is subject to a concentration limitation on the percentage of debt from any single customer of 25% to the total amount outstanding on its purchased accounts, subject to increase to 50% for its larger customer.  


The Company will be obligated to repurchase accounts remaining uncollected after a specified deadline, and FastPay will generally have full recourse against the Company in the event of nonpayment of any purchased accounts. The Company's obligations under the FastPay Agreement are secured by a first position security interest in its accounts receivable, deposit accounts and all proceeds therefrom.  


The FastPay Agreement contains covenants that are customary for agreements of this type and are primarily related to accounts receivable and audit rights. The Company is also required to provide FastPay with 30 day notice of any transaction that results, or would result in, a “change of control” as defined in the FastPay Agreement.  The failure to satisfy covenants under the FastPay Agreement or the occurrence of other specified events that constitute an event of default could result in the termination of the FastPay Agreement and/or the acceleration of the Company's obligations. The FastPay Agreement contains provisions relating to events of default that are customary for agreements of this type.



15



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 3 – NOTES PAYABLE (continued).


The FastPay Agreement has an initial one-year term and automatically renews for successive one-year terms thereafter, subject to earlier termination by written notice by the Company, provided that all obligations are paid and the payment of an early termination fee.


The initial advance under the FastPay Agreement was approximately $5.5 million and the Company used substantially all of this amount to reduce the obligations outstanding under the Financing Agreement, as amended, with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders.  Additional proceeds available to the Company under the FastPay Agreement will be used for working capital.


The proceeds from the initial advance under the FastPay Agreement were paid directly to Victory Park Management.  As such, these transactions are presented as non-cash financing activities in the Supplemental Schedule of Cash Flow Information in the Company’s consolidated financial statements.


NOTE 4 – 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.


On August 16, 2013, our Board of Directors approved a Certificate of Designations, Rights and Preferences pursuant to which it designated a series consisting of 200,000 shares of its blank check preferred stock as Series 1 Preferred Stock. The designations, rights and preferences of the Series 1 Preferred Stock are as follows:


 

·

each share has a stated and liquidation value of $0.001 per share,

 

·

the shares do not pay any dividends, except as may be declared by our Board of Directors, and are not redeemable,

 

·

the shares do not have any voting rights, except as may be provided under Delaware law,

 

·

each share is convertible into 10 shares of our Class A common stock, subject to customary anti-dilution provisions in the event of stock splits, recapitalizations and similar corporate events, and

 

·

the number of shares of Series 1 Preferred Stock, as well as the number of shares of Class A common stock issued upon a conversion of shares of Series 1 Preferred Stock, that a holder may sell, transfer, assign, hypothecate or otherwise dispose of (collectively or severally, a "Disposition") at any one time shall be limited to an amount which is pari passu to any Disposition of Class A common stock by either Christopher Miglino and/or Erin DeRuggiero, executive officers and directors of our company. Notwithstanding anything contained in the designations, the holder of Series 1 Preferred Stock is not obligated to make any Dispositions of Series 1 Preferred Stock or Class A common stock issued upon the conversion of Series 1 Preferred Stock.


Following the conversion of the remaining shares of our Series 1 Preferred Stock during 2015 into shares of our Class A common stock, in February 2016 we filed a Certificate of Elimination with the Secretary of State of Delaware returning all shares of previously designated Series 1 Preferred Stock to our blank check preferred stock.



16



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 4 – STOCKHOLDERS' EQUITY (continued).


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 during either the 2015 or 2016 periods.


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 terms of the 2016 Plan, which is administered by our Board of Directors, are identical to those of our 2012 Plan and 2014 Plan. We have reserved 600,000 shares of our Class A common stock for awards under the 2016 Plan.


Common Stock


During January 2016 and February 2016, we received aggregate proceeds of $500,000 from the sale of 100,000 shares of our Class A common stock.


During January 2016, we issued 256,754 shares of Class A common stock, valued at $2.4 million, to Richard Steel as partial payment of the first year Earn Out Consideration.


During February 2016, we issued 6,786 shares of Class A common stock, valued at $47,500, to members of our board of directors for services.


On February 23, 2016, we issued an aggregate of 10,000 shares of our Class A common stock valued at $70,000 as partial compensation for services under the terms of a consulting agreement.


On August 16, 2016, we issued 3,077 shares of our Class A common stock valued at $20,000 to a new member of our board of directors for services.


On September 22, 2016, we issued 6 shares of our Class A common stock as a result of rounding in connection with the reverse stock split.


On September 30, 2016, we sold an aggregate of 665,000 units of its securities to 14 accredited investors in a private placement exempt from registration under the Securities Act of 1933, as amended, in reliance on exemptions provided by Section 4(a)(2) and Rule 506(b) of Regulation D. The units were sold at a purchase price of $5.00 per unit resulting in gross proceeds to us of $3.3 million.  Each unit consisted of one share of our Class A common stock and one three year Class A Common Stock Purchase Warrant to purchase 0.5 shares of our Class A common stock at an exercise price of $7.50 per share.  We agreed to file a registration statement with the Securities and Exchange Commission within 90 days after the final closing in this offering registering for resale the shares of our Class A common stock issuable upon the exercise of the warrants included in the units sold in this offering, together with the shares of our Class A common stock underlying the Placement Agent Warrants.  In the event we fail to timely file this resale registration, or at any time thereafter that the prospectus contained in the effective resale registration is not available for the issuance of the shares to the holder upon the exercise of the warrant for a period of at least 60 days following the delivery by us of a suspension notice, then the warrants are exercisable on a cashless basis. T.R. Winston & Company, LLC, a broker-dealer and member of FINRA, acted as placement agent for us in this offering. We paid the placement agent commissions totaling $266,000 and agreed to issue it three year warrants Placement Agent Warrants to purchase 53,200 shares of our Class A common stock at an exercise price of $7.50 per share.  T.R. Winston & Company, LLC has reallocated a portion of the commissions and Placement Agent Warrants to a selected dealer member of the selling group. We also agreed to pay T.R. Winston & Company, LLC a fee of 4% of the proceeds we may receive upon the exercise of the warrants included in the units.  We used $2.0 million of the net proceeds received by us in this offering to further reduce our obligations which are outstanding under the Financing Agreement, as amended, with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders.  We will use the balance of the proceeds for general working capital.



17



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 4 – STOCKHOLDERS' EQUITY (continued).


Stock Awards


In February 2016, we granted an aggregate of 6,786 shares of our Class A common stock awards to four directors. The shares were vested upon grant. We recorded $47,500 of compensation expense related to these awards.


In April 2016, we granted a total of 20,000 shares of our Class A common stock awards to an employee.  During the three and nine months ended September 30, 2016, we have recorded a total of $20,750 and $38,042; respectively, as compensation expense related to these awards.


During the nine months ended September 30, 2016, we recorded expense of $250,088 related to stock awards granted in prior years. During the nine months ended September 30, 2015, we recorded expense of $364,800 related to stock awards granted in prior years.


During the three months ended September 30, 2016 and 2015, we recorded expense relating to stock awards granted in prior years of $40,834 and $60,458, respectively.


Awards in the amount of 6,000 common shares were forfeited during 2016.


Stock Options and Warrants


During nine months ended September 30, 2016, we granted an aggregate of 30,000 stock options to one employee. The options will vest over three years. The options have an exercise price of $1.33 per share and a term of five years. These options have a grant date fair value of $1.07 per option, determined using the Black Scholes method based on the following assumptions: (1) risk free interest rate of 0.35%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 115%; and (4) an expected life of the options of 5 years. We have recorded an expense for the options of $2,671 and $3,116 for the three and nine months ended September 30, 2016, respectively.


During the three months ended September 30, 2016 and 2015, we recorded expense of $66,588 and $2,726 respectively, related to stock options granted in the prior years but vested in current period. During nine months ended September 30, 2016 and 2015, we recorded expense of $181,650 and $142,456, respectively, relating to stock options granted in the prior years but vested in current period.   There were no new grants of stock options made in the third quarter of 2016.


Awards in the amount of 42,000 options were forfeited during 2016.


On September 19, 2016, the Company extended the expiration date of common stock purchase warrants issued and sold in 2013 to purchase an aggregate of 642,000 shares of its Class A common stock at an exercise price of $5.00 per share from between October 8, 2016 and November 6, 2016 to March 31, 2017, for which, the Company applied ASC 718-20-35-3 modification of equity-classified contracts and therefore the incremental fair value from the modification (the change in the fair value of the instrument before and after the modification) of $274,695 is recognized as an expense in the income statement to the extent the modified instrument has a higher fair value.


Reverse Stock Split


On September 20, 2016, the Company completed a reverse stock split. The principal reason for the reverse stock split was to facilitate the up-listing of our Class A common stock to the NASDAQ Capital Market which has a minimum market (bid) price requirement for new applicants of $4.00 per share.




18



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 4 – STOCKHOLDERS' EQUITY (continued).


As a result of the reverse stock split, each five shares of the Company's Class A common stock issued and outstanding, or held as treasury shares, immediately prior to the effective date of the reverse stock split became one share of its Class A common stock on the effective date of the reverse stock split. No fractional shares of Class A common stock were issued to any stockholder in connection with the reverse stock split and all fractional shares which might otherwise be issuable as a result of the reverse stock split were rounded up to the nearest whole share. On the effective date of the reverse stock split, all outstanding options and warrants to purchase shares of the Company's Class A common stock were proportionally adjusted based upon the split ratio and became exercisable into one-fifth of the number of shares of the Company's Class A common stock as it was prior to the reverse stock split at an exercise price which is five times the exercise price prior to the reverse stock split.


After the effective date of the reverse stock split, each certificate representing shares of pre-reverse stock split Class A common stock was deemed to represent one-fifth of a share of the post-reverse stock split Class A common stock, subject to rounding for fractional shares, and the records of the Company's transfer agent, Transfer Online, Inc., were adjusted to give effect to the reverse stock split. Following the effective date of the reverse stock split, the share certificates representing the pre-reverse stock split Class A common stock continue to be valid for the appropriate number of shares of post-reverse stock split Class A common stock, adjusted for rounding.


These condensed consolidated financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise specified.


NOTE 5 – INTANGIBLE ASSETS.


Intangible assets consist of the following:


 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

 

 

 

 

 

Non-compete agreement

 

$

1,250,000

 

 

$

1,250,000

 

Intellectual property

 

 

756,000

 

 

 

756,000

 

 

 

 

2,006,000

 

 

 

2,006,000

 

Accumulated amortization

 

 

(663,906

)

 

 

(394,256

)

Carrying value

 

$

1,342,094

 

 

$

1,611,744

 


Amortization expense was $37,800 for intellectual property and $52,083 for the non-compete agreement for the three months ended September 30, 2016. Amortization expense was $113,400 for intellectual property and $156,250 for the non-compete agreement for the nine months ended September 30, 2016.  No amortization expense for intellectual property was recorded for the three and nine months ended September 30, 2015. Amortization expense was $190,972 for the non-compete agreement for the three and nine months ended September 30, 2015.


NOTE 6 – RELATED PARTY TRANSACTIONS.


We are obligated to Mr. Steel for contingent Earn Out Consideration of up to $8.0 million incurred in connection with the acquisition of Steel Media, as described in Note 2 upon Steel Media meeting certain EBITDA measurements. The Company had initially recorded the liability at its present value of $6.6 million. Changes in the value will be recorded through the statement of operations. The Earn Out Consideration target was achieved for the first earn out period ended October 31, 2015 and on January 29, 2016 we paid Mr. Steel $4 million, of which $1.6 million was paid in cash and the balance was paid through the issuance of 256,754 shares of our Class A common stock in accordance with the terms of the Stock Purchase Agreement. As discussed in Note 2, during the nine months ended September 30, 2016 the Company determined the Earn Out Consideration would not be achieved for the second earn out period ended October 31, 2016.  The Company determined the fair value of the second Earn Out Consideration to be zero as of September 30, 2016.




19



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 6 – RELATED PARTY TRANSACTIONS (continued).


Activity for the contingent consideration payable was:


 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

Balance, beginning of year

 

$

7,585,435

 

 

$

6,732,123

 

Accretion in value

 

 

159,061

 

 

 

853,312

 

Payment made

 

 

(4,000,000

)

 

 

 

Reversal of second year Earn Out Consideration

 

 

(3,744,496

)

 

 

 

Balance, September 30 2016

 

$

 

 

$

7,585,435

 


NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES.


Accounts payable and accrued expenses are comprised of the following:


 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

 

 

 

 

 

Accounts payable, trade

 

$

9,757,195

 

 

$

3,003,642

 

Accrued expenses

 

 

1,178,919

 

 

 

45,450

 

Accrued compensation

 

 

182,896

 

 

 

659,262

 

Accrued commissions

 

 

554,959

 

 

 

1,430,453

 

Total

 

$

11,673,969

 

 

$

5,138,807

 

 

The increase in accounts payable for the period ending September 30, 2016 was primarily due an increase in cost of goods sold due on higher revenue for the period.


NOTE 8 – COMMITMENTS AND CONTINGENCIES.


Operating Leases


The Company leases offices under operating leases with lease terms which expire through September 30, 2021. Rent expense for office space amounted to $200,584 and $118,343 for the nine months ended September 30, 2016 and 2015, respectively.  Rent expense for office space amounted to $73,385 and $42,322 for the three months ended September 30, 2016 and 2015, respectively.


Other Commitments


In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into 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 by reason of 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.




20



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 8 – COMMITMENTS AND CONTINGENCIES (continued).


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 particular agreement. Such indemnification agreements may not be subject to maximum loss clauses.


Employment agreements


We have entered into employment agreements with a number of our 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.


NOTE 9 – SUBSEQUENT EVENTS.


On October 13, 2016, the Company's Class A common stock began trading on The NASDAQ Stock Market LLC under the symbol "SRAX."


On October 14, 2016 Mr. Rahul Thumati resigned as the Chief Financial Officer of the Company and we appointed Mr. Joseph P. ("JP") Hannan as our Chief Financial Officer. Mr. Hannan entered an Employment Agreement with the Company, the term of which extends until such time as either party chooses to terminate his employment with the Company. Under the terms of the Employment Agreement, Mr. Hannan's compensation includes:


·

an annual base salary of $200,000;

·

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

·

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

·

a one time restricted stock award of 100,000 shares of the Company's Class A common stock, vesting 50,000 shares on October 14, 2017 and 50,000 shares on October 14, 2018, subject to continued employment; and

·

annual paid time off of 30 days per year.


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


In connection with Mr. Thumati's resignation, on October 14, 2016 the Company entered into Separation and Release Agreement with Mr. Thumati pursuant to which it agreed to pay him a severance amount of $180,000 and he forfeited all rights to vested and unvested stock awards. The agreement contained customary cross general releases, confidentiality and trade secret clauses.




21



 


SOCIAL REALITY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2016 AND 2015

(Unaudited)


NOTE 9 – SUBSEQUENT EVENTS (continued).


On October 31, 2016, the Company sold an aggregate of 255,000 units of its securities to nine accredited investors in a private placement exempt from registration under the Securities Act of 1933, as amended, in reliance on exemptions provided by Section 4(a)(2) and Rule 506(b) of Regulation D. The units were sold at a purchase price of $5.00 per unit resulting in gross proceeds to us of $1.3 million. This was the final closing of a private placement commenced in September 2016. Each unit consisted of one share of our Class A common stock and one three year Class A Common Stock Purchase Warrant to purchase 0.5 shares of our Class A common stock at an exercise price of $7.50 per share. We agreed to file a registration statement with the Securities and Exchange Commission within 90 days after the final closing in this offering registering for resale the shares of our Class A common stock issuable upon the exercise of the warrants included in the units sold in this offering, together with the shares of our Class A common stock underlying the Placement Agent Warrants. In the event we fail to timely file this resale registration, or at any time thereafter that the prospectus contained in the effective resale registration is not available for the issuance of the shares to the holder upon the exercise of the warrant for a period of at least 60 days following the delivery by us of a suspension notice, then the warrants are exercisable on a cashless basis.  


On October 3, 2016, we made an additional principal repayment to Victory Park in the amount of $2.0 million, bringing our current note payable balance to date to approximately $3.9 million.


T.R. Winston & Company, LLC, a broker-dealer and member of FINRA, acted as placement agent for us in this offering and received, in lieu of a cash placement agent commission totaling $109,956, and in reimbursement of certain expenses, 22,392 units in the offering. We also agreed to issue it three year warrants Placement Agent Warrants to purchase 15,200 shares of our Class A common stock at an exercise price of $7.50 per share. T.R. Winston & Company, LLC also reallocated a portion of the gross placement agent commissions and Placement Agent Warrants to a selected dealer member of the selling group resulting in the payment by us of a cash commission of $2,000 and the issuance of an additional 400 Placement Agent Warrants. We also agreed to pay T.R. Winston & Company, LLC a fee of 4% of the proceeds we may receive upon the exercise of the warrants included in the units. We are using the net proceeds for general working capital.


On November 14, 2016 the Company entered into an Advisory Agreement with kathy ireland Worldwide LLC ("kiWW"). Under the terms of this agreement, which expires on December 31, 2018, the Company engaged kiWW to provide a variety of advisory and consulting services to the Company, including (i) if the Company forms an Advisory Committee of independent, third party brand, marketing and/or consumer product C-level executives, to serve on such committee on terms no less favorable than the highest compensated person on such committee, (ii) as an advisor, hold the non-executive designation of Chief Branding Advisor, and (iii) provide reasonable input to the Company on various aspects of corporate branding, and (iv) use good faith efforts to introduce the Company to potential business customers. As compensation for such services, the Company will issue kiWW 100,000 shares of its Class A common stock on January 2, 2017 and reimburse kiWW for expenses incurred in connection with the services to be provided to the Company. The agreement contains customary confidentiality and indemnification provisions.






22



 



ITEM 2.

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


The following discussion of our financial condition and results of operations for the three and nine month periods ended September 30, 2016 and 2015 should be read in conjunction with the condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Part I, Item 1A, Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in our Annual Report on Form 10-K for the year ended December 31, 2015, this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.


Overview


We are an Internet advertising and platform technology company that provides tools to automate the digital advertising market. We have built technologies and leveraged partner technologies that service social media and the real-time bidding (RTB) markets. Our focus is to provide technology tools that enable both publishers and advertisers to maximize their digital advertising initiatives. We derive our revenues from:


·

sales of digital advertising campaigns to advertising agencies and brands;

·

sales of media inventory through RTB exchanges;

·

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

·

creation of custom platforms for buying media on SRAX for large brands.


The core elements of our business are:


·

Social Reality Ad Exchange or "SRAX"Real Time Bidding sell side and buy side representation is our technology which assists publishers in delivering their media inventory to the real-time bidding, or RTB, exchanges. The SRAX platform integrates multiple market-leading demand sources. We also build custom platforms that allow our agency partners to launch and manage their own campaigns by enabling them to directly place advertising orders on the platform dashboard and view and analyze results as they occur;


·

SRAXmd is our ad targeting and data platform for healthcare brands, agencies and medical content publishers. Healthcare and pharmaceutical publishers utilize the platform for yield optimization, audience extension campaigns and re-targeting of their healthcare professional audience. Agencies and brands purchase targeted digital and mobile ad campaigns;


·

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


·

SRAX APP, a recently launched new product, which is a platform that allows publishers and content owners to launch native mobile applications through our SRAX APP platform.


We offer our customers several pricing options including cost-per-thousand-impression, whereby our customers pay based on the number of times the target audience is exposed to the advertisement, and on a monthly service fee.


In 2015 we completed the technology needed to both operate the buy side of our SRAX platform and the buy side of SRAXmd, and launched our SRAX APP which we expect to begin contributing to our revenues in during the second half of 2016. The SRAX APP is a free platform that provides online publishers an opportunity to distribute their content via a branded mobile application that updates automatically as they publish new content to their website. The platform also allows publishers the opportunity to bring in influencer feeds from Facebook, Instagram, YouTube and Twitter that are relevant to their content.



23



 


During the fourth quarter of 2016 we have continued to enhance all of our technology offerings and expand our sales force.  In the fourth quarter of 2016 we launched the SRAX Social platform. The initial response was favorable and we expect to begin actively marketing the offering before the end of the year.  Our efforts are focused on the continued growth of our sales and marketing efforts of these platforms, with the goal of eliminating the dependence on revenues from a limited number of customers.


Results of operations


Selected Consolidated Financial Data


 

 

Third Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

change

 

 

2016

 

 

2015

 

 

change

 

 

 

(unaudited)

 

 

(unaudited)

 

 

 

 

 

(unaudited)

 

 

(unaudited)

 

 

 

 

Revenues

 

$

9,530,842

 

 

$

7,390,238

 

 

 

29.0

%

 

$

24,249,588

 

 

$

22,173,095

 

 

 

9.4

%

Cost of revenue

 

 

6,986,834

 

 

 

3,296,144

 

 

 

113.3

%

 

 

16,430,204

 

 

 

10,697,062

 

 

 

54.0

%

Gross margin percentage

 

 

26.6

%

 

 

55.4

%

 

 

(52.7

)%

 

 

32.1

%

 

 

51.8

%

 

 

7.3

%

Operating expenses

 

 

3,851,890

 

 

 

3,751,736

 

 

 

1.5

%

 

 

11,752,581

 

 

 

10,914,488

 

 

 

4.8

%

Operating income (loss)

 

 

(1,307,882

)

 

 

342,358

 

 

 

(482.0

)%

 

 

(3,933,197

)

 

 

561,545

 

 

 

(800.4

)%

Other income (expense)

 

 

(1,067,964

)

 

 

(1,000,898

)

 

 

(6.7

)%

 

 

1,028,898

 

 

 

(2,858,955

)

 

 

(136.0

)%

Net income (loss)

 

$

(2,375,846

)

 

$

(658,540

)

 

 

(260.8

)%

 

$

(2,904,299

)

 

$

(2,297,410

)

 

 

(26.4

)%


Revenue


The increase in our revenues during the three and nine months ended September 30, 2016 from the comparable periods in 2015 reflect an increase in revenues from our SRAX buy side and sell side clients and media bought and sold as well as continuing growth in SRAXmd.  These increases are offset by a continued decline in revenues from a significant Steel Media customer at significantly reduced margins.  In continuation of the trend during the 2016 periods, revenues from this historic Steel Media customer during the third quarter and first nine months of 2016 continued to account for a significant portion of our total revenues during the first nine months of 2016.  Early in the third quarter of 2016 we took several actions including hiring of additional sales personnel in an effort to broaden our customer base, internally reallocating our sales resources in an effort to broaden our product offerings to additional buy-side clients and exploring new channels of revenue.  During the latter part of the third quarter of 2016 we began to see the effects of these efforts to mitigate the impact of these low margin revenues on our overall operating results.  Subsequent to September 30, 2016 we have both expanded our product offerings to our buy-side clients, ceased providing the high-volume, low margin business to this historic Steel Media client and now only offer it industry standard margin solutions.  With the growth of our revenues coming from other areas of our business we do not expect that the loss of low-margin revenues from this client will adversely impact our expected overall revenue growth in the fourth quarter of 2016.


Cost of revenue


Cost of revenue consists of certain labor costs, payments to website publishers and others that are directly related to a revenue-generating event and project and application design costs. Approximately 98% of cost of revenue was attributable to payments to website publishers and other media providers for the third quarter of 2016 and the nine months ended September 30, 2016 as compared to 99% in each of the third quarter of 2015 and the nine months ended September 30, 2015.   The balance was attributable to labor costs and project and application design costs. During the third quarter of 2016 and the nine months then ended our gross margin declined substantially as a result of an increase in our cost of revenue as a percentage of our revenues. Cost of revenue as a percent of revenue increased to 73.8% for the third quarter of 2016 and 67.9% for the nine months ended September 30, 2016 as compared to 44.6% and 48.2%, respectively, for the comparable periods in 2015. These increases were due to the percentage of our overall lower-margin revenues attributable to the significant Steel Media customer.  During the third quarter of 2016 and the nine months ended September 30, 2016 revenues from this customer accounted approximately 24.6% and approximately 30.6%, respectively, of our total revenues.  As lower margin sales to this customer are reduced during the fourth quarter of 2016 and into 2017 we expect that our margins will begin to return to historic levels.



24



 


Operating expense


Our operating expenses are comprised of salaries, commissions, marketing and general overhead expenses. Overall, our operating expense decreased approximately 1% in both the third quarter of 2016 and the nine months then ended from the comparable periods in 2015.  The decrease in the 2016 periods is primarily attributable to reductions in salaries, commissions and payroll expenses which was offset by an impairment of goodwill recorded in the acquisition of Steel Media in the amount of $670,000 during the second quarter of 2016.


We have recently expanded our sales force in conjunction with our efforts to increase our sales on higher margin product offerings.  During the fourth quarter of 2016 we also completed the uplisting of our Class A common stock to the Nasdaq Capital Market.  We expect that our operating expense will increase in future quarters commensurate with the expected growth of our business and increased costs associated with our status as an exchange listed public company.


Other income (expense)


Interest expense in the third quarter and first nine months of 2016 and 2015 represents interest under notes issued pursuant to the Financing Agreement and factoring fees, amortization of debt costs and the accretion of the put liability under the Financing Agreement.  In addition, interest expense in the 2015 periods also includes the costs associated with the note issued to Mr. Steel as partial consideration for the purchase of Steel Media described elsewhere in this report. Interest expense increased 6.7% for the third quarter of 2016 as compared to the third quarter of 2015, but decreased 5% for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.  The increase in interest expense in the third quarter of 2016 is attributable to the higher rate of interest due under the Forbearance Agreement.  The decrease in interest expense for the nine months ended September 30, 2016 reflects the satisfaction of the note to Mr. Steel in October 2015, offset by interest associated with increased borrowings under the Financing Agreement during 2015 and the first quarter of 2016.  Subsequent to September 30, 2016 we further reduced our obligations under the Financing Agreement and we expect that our overall interest expense during the balance of 2016 will continue to decline as our factoring arrangement significantly reduces our cost of capital.


For the nine months ended September 30, 2016, write-off of contingent consideration represents the reversal of the second Earn Out Consideration of $3.7 million which Mr. Steel would have been entitled to receive as described elsewhere herein.  This non-cash item is considered a one-time occurrence and is not considered part of normal operations.


Non-GAAP financial measures


We use Adjusted net (loss) to measure our overall results because we believe it better reflects our net results by excluding the impact of non-cash equity based compensation. We use Adjusted EBITDA to measure our operations by excluding interest and certain additional non-cash expenses. During the nine months ended September 30, 2016 we also excluded the one-time adjustment related to the reversal of the possible future contingent payment to Mr. Steel for the second year Earn Out Consideration as described elsewhere herein, together with an impairment in a portion of the carrying value of the goodwill for Steel Media which we recorded in conjunction with our acquisition of that company in 2014.  We believe the presentation of Adjusted net (loss) and Adjusted EBITDA enhances our investors' overall understanding of the financial performance of our business.


You should not consider Adjusted net (loss) and Adjusted EBITDA as an alternative to net income (loss), determined in accordance with GAAP, as an indicator of operating performance. A directly comparable GAAP measure to Adjusted net (loss) and Adjusted EBITDA is net (loss). The following is a reconciliation of net (loss) to Adjusted net (loss) and Adjusted EBITDA for the periods presented:


 

 

Three Months Ended

September 30,

 

Nine Months Ended

 September 30,

 

(unaudited, in thousands)

 

2016

 

2015

 

2016

 

2015

 

Net income (loss)

 

$

(2,376

)

$

(658

)

$

(2,904

)

$

(2,297

)

plus:

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity based compensation

 

 

207

 

 

237

 

 

984

 

 

1,102

 

Adjusted net (loss)

 

$

(2,169

)

$

(421

)

$

(1,920

)

$

(1,195

)

Reversal of contingent consideration

 

 

 

 

 

 

(3,744

)

 

 

Impairment of goodwill

 

 

 

 

 

 

670

 

 

 

Adjust value of warrants

 

 

275

 

 

 

 

275

 

 

 

Interest expense

 

 

1,066

 

 

1,001

 

 

2,714

 

 

2,859

 

Depreciation and amortization

 

 

94

 

 

194

 

 

287

 

 

204

 

Adjusted EBITDA

 

$

(734

)

$

774

 

$

(1,719

)

$

1,868

 



25



 


Liquidity and capital resources


Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash.  We had an accumulated deficit at September 30, 2016 of $13.0 million. As of September 30, 2016, we had approximately $4.2 million in cash and cash equivalents and a working capital deficit of $9.4 million as compared to $1.1 million in cash and cash equivalents and a working capital deficit of $7.04 million at December 31, 2015. Our current assets increased 4.4% at September 30, 2016 as compared to December 31, 2015 which is primarily attributable to a decrease in accounts receivable as a result of our factoring arrangement offset by an increase in cash.  Our current liabilities increased 17.9% at September 30, 2016 as compared to December 31, 2015 which is primarily the result of an increase in accounts payable and accrued expenses due to increased cost of sales due on higher revenue and the reclassification of notes payable, net from long-term liabilities to current liabilities as a result of the accelerated due date under the Forbearance Agreement described below, together with additional borrowings during 2016 under the Financing Agreement and scheduled increases in payment under the terms of the agreement.  These increases were offset by the decrease in contingent consideration, which represents the payment of the first year Earn Out Consideration Mr. Steel in January 2016 and the reversal of the accrual for the second year Earn Out Consideration as described elsewhere herein.


Our principal sources of operating capital have historically been equity and debt financing. During the fourth quarter of 2014 we entered into the Financing Agreement with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders which is elsewhere herein. The Financing Agreement provides for borrowings of up to $20 million. Our obligations to Victory Park Management, LLC are secured by a first priority, perfected security interest in substantially all of our assets (other than accounts receivable), including those of our subsidiaries, and a pledge of 100% of the equity interests of each of our domestic subsidiaries pursuant to the terms of a Pledge and Security Agreement. As of September 30, 2016, we owed $5.1 under the Financing Agreement.


The terms of the Financing Agreement require us to maintain certain financial covenants, including leverage ratios, senior leverage ratios, fixed charge coverage ratios, interest coverage ratios and minimum current ratios.  We are not in compliance with these ratios and in August 2016 we entered into a Forbearance Agreement with Victory Park Management, LLC.  Under the terms of the Forbearance Agreement, until the earlier of either the expiration of the Forbearance Period, which is defined to mean the date when all conditions of the agreement have been satisfied, or the Forbearance Termination Date of January 1, 2017, the lenders and Victory Park Management, LLC have agreed not to take any actions, including declaring an event of default or otherwise accelerating the obligations owed under the Financing Agreement, related to our failure solely to comply with the financial covenants for the periods ended June 30, 2016 and September 30, 2016.  During the Forbearance Period, beginning on July 1, 2016 the PIK interest rate of the outstanding amounts due under the Financing Agreement increased by 3% per annun to 7% per annum.  Our monthly cash interest payments remain unchanged at 10% per annum.  In September 2016, we reduced our obligations under the Financing Agreement by $5.3 million through the allocation of the initial amounts drawn under the factoring agreement described below and utilizing a portion of the proceeds of the sale of our securities as hereinafter described.  At November 1, 2016, the remaining balance under the Financing Agreement is approximately $4 million.  We are required to pay all amounts due under the Financing Agreement on or before December 31, 2016.


The initial net effect of the required payments under the Financing Agreement was anticipated to equal the majority of the cash flow generated from Steel Media’s operations. As a result of the decline in margins to a certain buy-side client discussed elsewhere herein, cash flow from Steel Media's operations has significantly declined which is requiring us to allocate cash flow from other operations to satisfy these required payments under the Financing Agreement.  This reallocation of cash, combined with the reduction in margins on certain of the historic Steel Media clients, adversely impacted our cash flow.  During the third quarter of 2016 we entered into the Financing and Security Agreement with Fast Pay as described Note 3 to the notes to our unaudited condensed consolidated financial statements appearing elsewhere herein.  Under this factoring line, which is secured by a first position security interest in our accounts receivable, we may sell and assign eligible accounts receivable to the factor in exchange for advances made to us.


In addition, in September 2016 and October 2016 we received $4.6 million in gross proceeds through the sale of our equity securities as described elsewhere in this report.  We used $2.0 million of the net proceeds from the closing in September 2016 to further reduce our obligations under the Financing Agreement, and are using the balance of the proceeds for working capital.  


We do not have any commitments for capital expenditures.




26



 


Other than cash generated from operations and the unused availability under the Fast Pay agreement, we do not have any external sources of liquidity. While the Financing Agreement provides that we can borrow up to $20.0 million, based upon our non-compliance with the financial ratios and the accelerated due date of the obligation to December 31, 2016, we do not expect that the lender will consent to any additional draws under the Financing Agreement.  In additional, this obligation matures on December 31, 2016.  We are exploring a number of options related to this obligation, including refinancing with a third party, raising additional capital, utilizing availability under the factoring line, or a combination of any of these options.  If we should fail to pay the obligation, or extend the due date, an event of default would occur.  Upon an event of default under the Financing Agreement, if we were unable to cure the default within the prescribed periods, if at all, the lender could increase our interest rates or accelerate all amounts then due. If we were unable to repay these obligations, the lender could foreclose on our assets and collateral, in which case our ability to continue our business and operations as then conducted would be in jeopardy. If the lender should foreclose on our assets, it is likely you would lose your entire investment in our company.


Net Cash Used in Operating Activities


Net cash provided by operating activities was $867,122 during the nine months ended September 30, 2016 compared to net cash used in operating activities of $(1.1 million) for the comparable period in 2015. The period to period change was primarily attributable to a decrease in accounts receivable of $2.2 million, an increase in accounts payable and accrued expenses of $6.4 million, and a decrease in amortization of debt issue costs (non-cash) of $816,704.


Net Cash Provided Used in Investing Activities


During the nine months ended September 30, 2016 net cash used in investing activities was $4,816 as compared to $30,657 during the nine months ended September 30, 2015.  In both periods cash used was associated with the purchase of equipment.


Net Cash Provided Used by Financing Activities


During the nine months ended September 30, 2016 net cash used by financing activities was $2.3 million which represented the proceeds from the sale of securities and draws under the Financing Agreement, net of costs and repayments and the cash portion of the payment to Mr. Steel of the first year Earn Out Consideration. During the comparable period in 2015, we were provided $344,402 of cash in financing activities which is primarily attributable to a $1.5 million draw in July 2015 from Victory Park under the Financing Agreement.


Critical accounting policies


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reported periods. The more critical accounting estimates include estimates related to revenue recognition and accounts receivable allowances. We also have other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding our results, which are described in Note 1 to our unaudited condensed consolidated financial statements appearing elsewhere in this report.


Recent accounting pronouncements


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




27



 


Off balance sheet arrangements


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


ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable for a smaller reporting company.

ITEM 4.

CONTROLS AND PROCEDURES.


Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective to ensure that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of continuing material weaknesses in our internal control over financial reporting identified in our Annual Report on Form 10-K for the year ended December 31, 2015.  During the first quarter of 2016 we engaged a full-time Chief Financial Officer.  We expect to remediate all material weaknesses in our internal control over financial reporting prior to the end of 2016.


Changes in Internal Control over Financial Reporting.   There have been no changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




28



 


PART II - OTHER INFORMATION


ITEM 1.

LEGAL PROCEEDINGS.


None.


ITEM 1A.

RISK FACTORS.


In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2015 and our subsequent filings with the Securities and Exchange Commission, which could materially affect our business, financial condition or future results, subject to the new or modified risk factors appearing below that should be read in conjunction with the risk factors disclosed in such Form 10-K. These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission.


Our debt obligations could impair our liquidity and financial condition, and our ability to grow our company could be in jeopardy.


Our debt obligations currently include notes issued under the Financing Agreement and there is an aggregate principal amount of $4 million outstanding at November 1, 2016.  These notes mature on December 31, 2016.  While we are exploring a number of options related to this obligation, including refinancing with a third party, raising additional capital, utilizing availability under the factoring line, or a combination of any of these options, if we should fail to pay the obligation, or extend the due date, an event of default would occur.  Upon an event of default under the Financing Agreement, if we were unable to cure the default within the prescribed periods, if at all, the lender could increase our interest rates or accelerate all amounts then due. If we were unable to repay these obligations, the lender could foreclose on our assets and collateral, in which case our ability to continue our business and operations as then conducted would be in jeopardy. If the lender should foreclose on our assets, it is likely you would lose your entire investment in our company.


The terms of the Financing Agreement contain financial and operating terms which place significant operating demands on our company, may restrict our ability to efficiently operate our business, or could result in significant financial penalties. If we were to breach any of these covenants and terms, the lender could accelerate the amounts due under the Financing Agreement and we would be unable to operate our business as it is presently conducted.


The terms of the Financing Agreement include ongoing requirements to, among other actions, meet financial covenants including minimum leverage and current ratios, and interest and fixed charge coverages.  In August 2016, we entered into a Forbearance Agreement with Victory Park Management, LLC related to our failure to meet certain financial covenants at June 30, 2016.  We do not expect to regain compliance with those financial covenants until the end of the forbearance period which is December 31, 2016.  The terms of the Financing Agreement also create restrictions on how we undertake certain future events and our failure to conduct our business within the confines of these contractual restrictions could result in an event of default under the Financing Agreement.  Upon default, remedies range from notice and cure, to acceleration of both principal and interest. Our operations may not generate sufficient cash to enable us to service our debt. Upon an event of default under the Financing Agreement, if we were unable to cure the default within the prescribed periods, if at all, the lender could increase our interest rates or accelerate all amounts then due. If we were unable to repay these obligations, the lender could foreclose on our assets, in which case our ability to continue our business and operations as then conducted would be in jeopardy. If the lender should foreclose on our assets, we would be unable to continue our business and operations as they are presently conducted and it is likely you would lose your entire investment in our company.




29



 


Since our acquisition of Steel Media in October 2014, we have become dependent on revenues from a limited number of customers.  The decline in total revenues from a principal customer, or a change in margins from this customer, will adversely impact our results of operations in future periods so long as revenues from this customer represent a material portion of our total revenues.


For the nine months ended September 30, 2016 revenues for one customer accounted for 49% of our total revenues.  For 2015 revenues from this customer accounted for 48% of our total revenues and at December 31, 2015, this customer accounted for 38% of our accounts receivable. While we have continued reporting revenues from this customer in the first nine months of 2016, a significant portion of sales to this customer have been made a significantly lower margins as a result of a change in the type of sales being generated. In an effort to mitigate the impact of these low margin revenues from this one customer, during the third quarter of 2016 undertook several actions including hiring of additional sales personnel in an effort to broaden our customer base, internally reallocating our sales resources in an effort to broaden our product offerings to additional buy-side clients and exploring new channels of revenue.  Subsequent to September 30, 2016 we have also ceased high-volume, low margin business from this client and are only providing industry standard margin solutions going forward.  Until such time, however, as we are successful in returning our overall gross margins to hear historic levels, continuing sales to this customer at the significantly lower margin level could have material adverse impact on our results of operations and cash flows in future periods.


ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.


In addition to issuances previously disclosed, subsequent to the period covered by this report on October 31, 2016 we sold an aggregate of 255,000 units of its securities to nine accredited investors in a private placement exempt from registration under the Securities Act of 1933, as amended, in reliance on exemptions provided by Section 4(a)(2) and Rule 506(b) of Regulation D.  The units were sold at a purchase price of $5.00 per unit resulting in gross proceeds to us of $1.3 million.  This was the final closing of a private placement commenced in September 2016.  Each unit consisted of one share of our Class A common stock and one three year Class A Common Stock Purchase Warrant to purchase 0.5 shares of our Class A common stock at an exercise price of $7.50 per share.  We agreed to file a registration statement with the Securities and Exchange Commission within 90 days after the final closing in this offering registering for resale the shares of our Class A common stock issuable upon the exercise of the warrants included in the units sold in this offering, together with the shares of our Class A common stock underlying the Placement Agent Warrants.  In the event we fail to timely file this resale registration, or at any time thereafter that the prospectus contained in the effective resale registration is not available for the issuance of the shares to the holder upon the exercise of the warrant for a period of at least 60 days following the delivery by us of a suspension notice, then the warrants are exercisable on a cashless basis.   


T.R. Winston & Company, LLC, a broker-dealer and member of FINRA, acted as placement agent for us in this offering and received, in lieu of a cash placement agent commission totaling $109,956, and in reimbursement of certain expenses, 22,392 units in the offering.  We also agreed to issue it three year warrants Placement Agent Warrants to purchase 15,200 shares of our Class A common stock at an exercise price of $7.50 per share.  T.R. Winston & Company, LLC also reallocated a portion of the gross placement agent commissions and Placement Agent Warrants to a selected dealer member of the selling group resulting in the payment by us of a cash commission of $2,000 and the issuance of an additional 400 Placement Agent Warrants.  We also agreed to pay T.R. Winston & Company, LLC a fee of 4% of the proceeds we may receive upon the exercise of the warrants included in the units.  We are using the net proceeds for general working capital.


ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.


None.




30



 


ITEM 4.

MINE SAFETY DISCLOSURES.


Not applicable to our company’s operations.


ITEM 5.

OTHER INFORMATION.


On November 14, 2016 the Company entered into an Advisory Agreement with kathy ireland Worldwide LLC ("kiWW"). Under the terms of this agreement, which expires on December 31, 2018, the Company engaged kiWW to provide a variety of advisory and consulting services to the Company, including (i) if the Company forms an Advisory Committee of independent, third party brand, marketing and/or consumer product C-level executives, to serve on such committee on terms no less favorable than the highest compensated person on such committee, (ii) as an advisor, hold the non-executive designation of Chief Branding Advisor, and (iii) provide reasonable input to the Company on various aspects of corporate branding, and (iv) use good faith efforts to introduce the Company to potential business customers.  As compensation for such services, the Company will issue kiWW 100,000 shares of its Class A common stock on January 2, 2017 and reimburse kiWW for expenses incurred in connection with the services to be provided to the Company.  The agreement contains customary confidentiality and indemnification provisions.  The description of the terms of the Advisory Agreement is qualified in its entirety by reference to the agreement which is filed as Exhibit 10.49 to this report.


ITEM 6.

EXHIBITS.


No.

 

Description

 

 

 

3.5

 

Certificate of Amendment to the Certificate of Incorporation of Social Reality, Inc. (incorporated by reference to the Current Report on Form 8-K filed September 19, 2016).

4.6

 

Form of Class A Common Stock Purchase Warrant (incorporated by reference to the Current Report on Form 8-K filed October 6, 2016).

10.46

 

Forbearance Agreement dated August 22, 2016 by and among Social Reality, Inc., Steel Media, Five Delta, Inc., the lenders and Victory Park Management, LLC (incorporated by reference to the Current Report on Form 8-K filed August 24, 2016).

10.47

 

Financing and Security Agreement by and between Social Reality, Inc. and FastPay Partners LLC, as amended (incorporated by reference to the Current Report on Form 8-K filed September 23, 2016).

10.48

 

Employment Agreement dated October 17, 2016 by and between Social Reality, Inc. and Joseph P. Hannan *

10.49

 

Advisory Agreement dated November 14, 2016 by and between Social Reality, Inc. and kathy ireland Worldwide, LLC *

18.1

 

Preference letter regarding change in accounting principle

31.1

 

Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer *

31.2

 

Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer*

32.1

 

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer*

101.INS

 

XBRL Instance Document*

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase *

101.LAB

 

XBRL Taxonomy Extension Label Linkbase *

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase *

101.SCH

 

XBRL Taxonomy Extension Schema *

———————

*

 

Filed herewith




31



 


SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 

SOCIAL REALITY, INC.

 

 

 

November 14, 2016

By:

/s/ Christopher Miglino

 

 

Christopher Miglino, Chief Executive Officer, principal executive officer


November 14, 2016

By:

/s/ Joseph P. Hannan

 

 

Joseph P. Hannan, Chief Financial Officer, principal financial and accounting officer







32


EX-10.48 2 srax_ex10z48.htm EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT

 



EXHIBIT 10.48


EMPLOYMENT AGREEMENT


This Agreement (“Agreement”) is entered into as of October 17, 2016 (the “Effective Date”), by and between Social Reality, Inc., a Delaware corporation (the “Company”) and J.P. Hannan, an individual (“Employee”). The parties hereby agree as follows:


In consideration of their mutual promises and covenants set forth herein, and intending to be legally bound hereby, Company and Employee agree as follows:


1.

Employment. The Company shall employ Employee to provide the services as are customary for a public company Chief Financial Officer (“CFO”), or other title that may change from time to time. Employee hereby accepts employment, upon the terms and conditions hereinafter set forth.


2.

Term. The Company shall employ Employee from October 17, 2016 until such time as either party chooses to terminate the employment (the “Term”).  The employment relations hip shall be employment at-will, terminable by either party with or without cause.


3.

Duties of Employee. During the Term, the Executive shall be a full-time employee of the Company, shall dedicate substantially all of his working time to the Company, and shall have no employment or other business ventures that are undisclosed to the Company or that conflict with Employee's duties under this Agreement. Notwithstanding the foregoing, nothing herein shall prohibit the Employee from (i) participating in trade associations or industry organizations that are related to the business of the Company, (ii) engaging in charitable, civic or political activities, (iii) engaging in personal investment activities for the Employee and his family that do not give rise to any conflicts of interest with the Company or its affiliates, or (iv) with the prior approval of the Chief Executive Officer, accepting directorships unrelated to the Company that do not give rise to any conflicts of interest with the Company or its affiliates, in each case so long as such interests do not materially interfere, individually or in the aggregate, with the performance of the Employee’s duties hereunder. The Company acknowledges and approves the current activities of the Employee as set forth on Schedule l hereto. Employee shall render such duties and services for the Company or its affiliated entities as the Company or its affiliated entities may from time to time request. Employee agrees to serve the Company faithfully and perform such duties and services using his best effort and abilities. Employee agrees to act at all times in the best interests of the Company. Employee agrees to conduct himself at all times in a business-like and professional manner as appropriate for a person in Employee’s position and to represent the Company in all respects in a manner that comports with sound business judgment in the highest ethical standards. Employee will be subject to abide by the Employee Handbook and all policies and procedures of the Company and its affiliated entities, as adopted and revised by the Company and its affiliated entities, from time to time. Employee shall be subject to the direction of the Company, which shall retain full control over the means and methods by which Employee performs his duties and the above services.



4.

Compensation. As remuneration to Employee for his services, the Company shall compensate Employee as follows:



 


a.

Salary. Effective as of the date of this Agreement, the Employee shall be paid an annual base salary (“Base Salary”) of Two Hundred Thousand Dollars ($200,000.00) made payable in accordance with the Company’s normal payroll practices and subject to all required withholdings, as they may be modified from time to time. The Base Salary shall be paid to Employee on a twice a month basis. The Employee’s Base Salary shall be reevaluated on an annual basis.


b.

Annual Bonus. In addition to Employee’s Base Salary, Employee shall be paid an additional $100,000.00 annual bonus (“Annual Bonus”), to be distributed in equal quarterly installments based on the Company’s Fiscal Year, with the first distribution on April 1, second distribution on May 16, third distribution on August 16, and fourth distribution on November 16. All distributions are contingent on the timely filing per SEC Guidelines of the 10Q Quarterly Report and the 10K Annual Report, and subject to the continued employment of the Employee. The Annual Bonus is payable in conformity with the Company’s normal payroll practices and subject to all required withholdings, as they may be modified from time to time.

c.

Restricted Stock Grant Annual Bonus. The Company shall grant to the Employee $100,000 worth of the Company’s Restricted Stock Units on an annual basis pursuant to the Company’s Equity Compensation Plan (“Plan”), contingent on the timely filing per SEC Guidelines of the 10Q Quarterly Report and the 10K Annual Report, and subject to the continued employment of the Employee. Distribution of the Restricted Stock Grant shall be made on an annual basis on the anniversary of the Effective Date of this Agreement. The terms and conditions of the Restricted Stock Grant shall be memorialized in a separate writing, a copy of which is attached hereto as Exhibit A and incorporated herein by such reference, and shall be governed by the terms of the Plan. The Restricted Stock Grant is subject to the limitations of sale outlined in Exhibit A.


d.

One Time Restricted Stock Grant of Shares. The Company shall grant to Employee an additional 100,000 shares of Restricted Stock Units, with 50,000 units vesting each year on the Effective Date of this Agreement for a two year period, subject to the continued employment of the Employee. The terms and conditions of the Restricted Stock Grant shall be memorialized in a separate writing, a copy of which is attached hereto as Exhibit A and incorporated herein by such reference, and shall be governed by the terms of the Plan. The Restricted Stock Grant is subject to the limitations of sale outlined in Exhibit A.


e.

Employee Benefits. The Employee shall be entitled to participate in all benefit programs of the Company existing as of the Effective Date of the Agreement or hereafter made available to other Company executives, including, but not limited to, pension and other retirement plans, group life insurance, hospitalization, surgical and major medical coverage, sick leave, disability and salary continuation, vacation and holidays, long-term disability, and other fringe benefits in accordance with Company’s policies that may be modified, changed, reduced or eliminated from time to time.


f.

Expenses. Employee shall be entitled to receive reimbursement from the Company for all reasonable business expenses actually incurred by or paid by him in connection with his services hereunder, which constitute tax deductible expenses in accordance with Company’s reimbursement policies that may be modified from time to time, upon presentation of expense statements or such other supporting information as the Company may customarily require of its employees.




 



g.

Paid Time Off. Employee is entitled to accrue thirty (30) days of Paid Time Off (“PTO”) on an annual basis. Employee becomes eligible for PTO upon hire (“annual anniversary date”). PTO does not accrue during the Employee’s unpaid leave of absence.


PTO accrues in full on the Employee’s annual anniversary date. Unused PTO will carry over to the following year, and the employee’s PTO will be subject to a maximum accrual of 30 days.


Whenever possible, PTO must be scheduled in advance for time off for vacations, personal leave, appointments, or other appropriate reasons. PTO requests of three (3) or more consecutive dates must be submitted in writing.


PTO requests for purposes of an illness or injury, domestic violence, sexual assault and stalking may be made upon the oral or written request of an employee for the diagnosis, care or treatment of an existing health condition of, or preventative care for, an employee or an employee's family member. PTO may also be used by an employee who is the victim of domestic violence, sexual assault or stalking in order to obtain relief, such as to obtain a restraining order. It is up to each employee to determine how much PTO he or she needs to use for an illness or injury, domestic violence, sexual assault or stalking. If the need for PTO due to illness or injury, domestic violence, sexual assault or stalking is unforeseeable, the employee shall provide notice of the need for the leave as soon as practicable.


Company will not deny an employee the right to use PTO for purposes of illness or injury, domestic violence, sexual assault or stalking, nor discharge, threaten to discharge, demote, suspend, or in any manner discriminate against an employee for using such PTO or attempting to exercise the right to use such PTO. It is in Employee’s best interest not to be at work when she/he is disabled due to illness or injury.


PTO is paid at the employee’s regular rate of pay. PTO is not applied to holidays recognized by Company.


PTO may be used in two-hour increments, at a minimum. The Company can charge partial PTO days to exempt employees who have accrued unused PTO, and who work less than four (4) hours on any particular workday.


5.

Termination of Employment; Death or Disability.


a.

Each party shall have the right to terminate the employment of Employee by the Company at any time, with or without cause.


b.

Upon termination of this Agreement for any reason, Employee will, if requested in writing by the Company, cooperate with the Company to help assure a smooth transition of his duties to his successor. The Company will compensate Employee for any time spent providing such transition assistance at an hourly rate based upon Employee’s salary at the time of termination.




 


c.

Death or Disability. In the event of the death of the Employee during the Term, this Agreement shall terminate effective as of the date of the Employee’s death, and the Company shall not have any further obligations or liability hereunder.


In the event of the Employee’s Disability during the Term, the Employee shall be entitled to compensation in accordance with the Company’s disability compensation practice for employees, if any, but in all events the Employee shall continue to receive the Base Salary through the date on which the Disability has been deemed to occur as hereinafter provided. “Disability”, for the purposes of this Agreement, shall be deemed to have occurred in the event (A) the Employee is unable by reason of sickness or accident, to perform the Employee’s duties under this Agreement for an aggregate of sixty (60) days in any consecutive six (6) month period, or (B) the Employee has a guardian of the person or estate appointed by a court of competent jurisdiction. “Termination due to Disability” shall be deemed to have occurred upon the first day of the month following the determination of Disability as defined in the preceding sentence. Notwithstanding anything contained herein to the contrary, the Company is not obligated to adopt or continue any disability compensation practices for its employees, including the Employee.


d.

Resignation for Good Reason. In the event that the Employee resigns, then the Employee shall be entitled to no compensation or other benefits of any kind whatsoever, other than the Employee’s vested stock options and/or restricted shares as of the termination date.


6.

Confidential Information, Proprietary Information, and Non-Disclosure


The Employee agrees that she will be a recipient of confidential and propriety information treated, designed, gathered, ordered by, and conceived by the Company or prepared by a third party such as a client, attorney, employee, owner, shareholder, member, manager, lender, or representative for the Company’s business purposes.


The Employee agrees that the dissemination of such information to any other party could cause significant harm to the Company.


The Company is willing to disclose information to the Employee subject to the conditions and terms hereinafter set forth.


a.

Confidential Information.


For purposes of this Agreement, Confidential Information shall mean all Company information both written and oral, involving the Company’s business, including but not limited to: business plans, strategic and development plans, contracts, financial arrangements, budgets, financial statements, products and services, financial condition, pricing data, gross profit margin, co-developer identities, data, business records, actual and potential customer lists, project records, correspondence, market reports, sales and marketing information, advertising sources, employee lists and employee information, employee personnel files, suppliers and vendor lists, recipes, formulas, business manuals, policies and procedures, methods of production (including quality control and packaging), ideas, concepts, systems, practices, methods, techniques, processes, studies, technologies, technical designs, schematics, tool designs, inventions, discoveries or theories and any other information which may be disclosed by the Company or to which the Employee may be provided access by the Company or others in accordance with this Agreement,




 


or which is generated as a result of or in connection with the Company’s business purposes which is generally not made available to the public.

b.

Proprietary Information.


For purposes of this Agreement, Proprietary Information shall mean all Company intellectual property, customer relationships, personnel, or sales, marketing, and financial operations and methods, trade secrets, formulas, devices, secret inventions, processes, and other compilations of information, records, and specifications, confidential or trade secret information (including but not limited to “trade secrets” as defined in Section 3426.1 of the California Civil Code) (collectively “Proprietary Information”). The Company and any of its affiliates shall have the exclusive, worldwide rights and ownership to Employee’s contribution to all Proprietary Information, as well as the exclusive worldwide rights to reproduce, adapt, publish, market, distribute, sell, license and display Employee’s contribution to any and all Proprietary Information. These rights may be exercised by the Company through the Company or any of its affiliates. Nothing contained in this Agreement shall be construed as an assignment or grant to Employee of any right, title, or interest in or to any Proprietary Information, it being understood that all rights relating thereto owned by the Company are reserved by the Company. Employee is deemed to have simultaneously assigned, transferred, and conveyed to the Company any trade rights, trademark, service mark, or copyright, equities, good will, titles, or other rights in and to Employee’s contribution to Proprietary Information, including which may have been obtained or created by Employee’s contribution to any and all Proprietary Information during the employment relationship. Any such assignment, transfer or conveyance shall be made without other considerations.


c.

 Employee’s Obligations.


Employee promises and agrees to hold the Confidential Information and Proprietary Information including any such information developed by Employee for the Company in confidence.


Employee further promises and agrees:

i.

to protect and safeguard the Confidential Information and Proprietary Information against unauthorized use, publication, or disclosure and not disclose same to any person or entity other than employees or agents of Employee who need to know the Confidential Information and Proprietary Information and in those instances only to the extent justifiable by that need,

ii.

not to use any of the Confidential Information and Proprietary Information except for the business purposes of the Company,

iii.

not to, directly or indirectly reveal, report, publish, disclose, transfer or otherwise use any of the Confidential Information and Proprietary Information for any purpose whatsoever except as specifically authorized by the Company in accordance with this Agreement,

iv.

to keep record of the Confidential Information and Proprietary Information furnished by the Company and its location and to retain upon request of the Company, all Confidential Information and Proprietary Information received in written or tangible form, including copies or reproductions within ten (10) days of such request,




 


v.

that in the event the Employee becomes legally compelled by deposition, interrogation, subpoena, civil investigative demand or similar process to disclose any of the Confidential Information and Proprietary Information, the Employee so compelled shall provide the Company with prompt prior written notice of such requirement so the Company may seek a protective order or other appropriate remedy and/or waive compliance with the terms of this Agreement. In the event that the Company does not obtain Protective Order, the Employee agrees to furnish only the portion of the Confidential Information and Proprietary Information, which it is advised by written opinion of counsel is legally required,

vi.

that Employee shall have no right to assign its rights under this Agreement, whether expressly or by operation or law, without the written consent of the Company. The Agreement and Employee’s obligations hereunder shall be binding on Representatives, permitted assigns, and successors or Employee and shall inure to the benefit of the representatives, assigns and successors of the Company.

d.

Exceptions.


The confidentiality obligations hereunder shall not apply to:


i.

information which is, or later becomes lawfully obtainable from other non-confidential sources,

ii.

information that was known to Employee prior to the disclosure thereof by Company to Employee, as evidenced by written records,

iii.

information that the company waives the Employee’s duty as to the confidentiality in writing.

e.

No Right To Confidential Information Or Proprietary Information.


Employee hereby agrees and acknowledges that no license, either express or implied, is hereby granted to Employee by the Company to use any of the Confidential Information and Proprietary Information and that all Confidential Information and Proprietary Information, even if created by Employee shall be the exclusive property of the Company and the Employee has no right or title thereto. Company makes no representation or warranty as to the accuracy of completeness of the Confidential Information and Proprietary Information and Employee agrees that Company and its employees and agents shall have no liability to Employee resulting from any use of the Confidential Information and Proprietary Information.


f.

Indemnification.


Employee agrees to indemnify and hold harmless the Company and its owners, officers, directors, shareholders, employees, members, managers, lenders, and agents from and against any and all losses, damages, claims, liabilities, expenses, joint or several incurred or suffered by the Company as a result of Employee’s breach of this Confidential Information, Proprietary Information, and Non-Disclosure provision.


g.

Re turn Of Confidential Information And Proprietary Information.


In further consideration of the disclosure to be made by the Company, Employee agrees to promptly redeliver to the Company upon request, and without relieving Employee of any obligation




 


of confidentiality, all written material containing or reflecting any Confidential Information and Proprietary Information (including all copies, extracts or other reproductions) and further agrees that the Company shall have no liability to Employee resulting from the use of the Confidential Information and Proprietary Information. Upon request, Employee shall certify to Company that it has returned all of the Confidential Information and Proprietary Information.


h.

Remedies.


Employee agrees that he shall be liable for all damages caused to the Company for any willful disclosure of the Confidential Information and Proprietary Information, either directly or indirectly, including, but not limited to, loss of revenue, loss of business, loss of customers, loss of customer goodwill, and loss of trade secrets. The Company may prosecute Employee for any violation of this provision, at Employee’s expense, and the Company’s remedies shall include, but not be limited to, damages, punitive damages, and special damages.


Employee hereby further agrees that the Confidential Information and Proprietary Information referenced herein are of a unique character and that the breach of this Agreement would cause the Company irreparable harm which cannot be reasonably or adequately compensated for in damages in an action at law. Therefore, the Company shall also be entitled to injunctive relief for such breach with the requirement that a bond be posted in addition to any other rights or remedies Company may have at law or in equity.


7.

Noninterference.


While employed by the Company and for a period of three years after termination of the Agreement, Employee agrees not to interfere with the business of the Company or any of its affiliated entities by directly or indirectly soliciting, attempting to solicit, inducing, or otherwise causing any employee of the Company or any of its affiliated entities to terminate his or her employment in order to become an employee, consultant or independent contractor to or for any other employer.


Employee further agrees that during the Term and for a period of three years after termination of his employment for any reason, not to, directly or indirectly, either on his own behalf or on behalf of any other person or entity, utilize any Confidential Information and Proprietary Information, as defined above, to (i) attempt to persuade or solicit any customer of the Company or any of its affiliates to cease to do business or to reduce the amount of business which the customer has customarily done or contemplates doing with the Company or any of its affiliates or to expand its business with a competitor of the Company or any of its affiliates; (ii) attempt to persuade or solicit any employee of independent contractor of the Company or any of its affiliates to terminate his/her employment or relationship with the Company or any of its affiliates.


8.

Binding Effect/Successors.


a.

As to Employee, this is a personal service contract and Employee may not assign this Agreement or any part hereof.


b.

The Agreement is fully assignable by the Company.




 


9.

Notices. Any notice, consent or other communication under this Agreement shall be in writing and shall be delivered personally, telexed, sent by facsimile transmission or overnight courier (regularly providing proof of delivery) or sent by registered, certified, or express mail and shall be deemed given when so delivered personally, sent by facsimile transmission or overnight courier, or if mailed, two (2) days after the date of deposit in the United States mail. Notice to parties shall be delivered or mailed to the Employee’s last known place of residence based on the records of the Company, or in the case of the Company to its principal place of business located at 456 Seaton Street, Los Angeles, CA 90013, or at such other place as the Company may specify by written notice.


10.

Prior Agreements; Modification. Employee and Company understand and agree that this Agreement constitutes the entire Agreement between Employee and the Company concerning the scope of Employee’s employment with the Company, and that this Agreement supersedes any and all prior oral or written agreements and understandings between Employee and Company on such issues. No warranty, representation, condition, understanding or agreement of any kind with respect to the subject hereof shall be relied upon by the Employee of the Company unless incorporated herein. Notwithstanding any other provision contained herein, this Agreement may be pled as a thorough and complete defense to, and may be used as the basis for an injunction against, any action, suit or other proceeding that may be instituted, prosecuted or attempted in breach of the provisions contained herein.


11.

Counterparts. This Agreement may be executed in two counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument, even though the parties do not sign the same counterpart.


12.

Choice of Law. The laws of the State of California shall govern the validity, interpretation, construction and performance of this Agreement.


13.

Arbitration. Employee and the Company agree that in the event a dispute arises concerning or relating to this Agreement, or the Employee’s employment with the Company, or any termination thereof, all such disputes shall be submitted to binding arbitration before an arbitrator experienced in employment law. The arbitration will be conducted in accordance with the rule s applicable to employment disputes of Judicial Arbitration and Mediation Services (“JAMS”). The Company will be responsible for paying any filing fees and costs of the arbitration proceeding itself (for example, arbitrator’s fees, conference room, transcripts), but each party shall be responsible for its own attorneys’ fees. The Company and Employee agree that this promise to arbitrate covers any disputes that the Company may have against Employee, or that Employee may have against the Company and all of its affiliated entities and their directors, officers, and employees, arising out of or relating to this Agreement, the employment relationship or termination of employment, including any claims concerning the validity, interpretation, effect or violation of this Agreement; violation of any federal, state, or local law; any tort; and any other aspect of Employee’s compensation or employment. The Company and Employee further agree that arbitration as provided in Section 15 shall be the exclusive and binding remedy for any such dispute and will be used instead of any court action which is hereby expressly waived, except for any request by either party hereto for temporary or preliminary injunctive relief pending arbitration in accordance with applicable law, or an administrative claim with an administrative agency. The Federal Arbitration Act shall govern the interpretation and enforcement of such arbitration proceeding. The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the State of California, or federal law, if




 


California law is preempted. The arbitration shall be conducted in Los Angeles, California, unless otherwise mutually agreed.


14.

Legal Advice. Each party has had an opportunity to review this Agreement with attorneys and other professional advisors of its choice. Employee acknowledges that she has not received or relied upon any advice concerning this agreement from any attorneys or other advisors of the Company.


15.

Headings. The headings of the sections are for convenience only and shall not control or affect the meaning or construction or limit the scope or intent of any of the provisions of this Agreement.


16.

Survival. Sections 6, 7, and 12 through 14 inclusive, hereof will survive any termination of this Agreement.


17.

Severability. If any provision of this Agreement shall be found invalid by any court of competent jurisdiction, such finding shall not affect the validity of any other provision hereof and the invalid provision shall be deemed to have been severed here from.



IN WITNESS WHEREOF, the parties have executed this Agreement as of date and year first above written.


[srax_ex10z48002.gif]







 


Schedule 1

Other Preapproved Activities



1.

Employee currently serves as Executive Chairman of the Board of Directors of Barefoot Luxury, Inc., an investment holding company of international boutique hotels that is majority controlled by members of Employee’s immediate family.


2.

Employee currently serves as Chairman of the Board of Directors of Chrysalis Fund, a not for profit charitable foundation benefiting children with autism co-founded with his spouse.


3.

Employee currently serves as Vice President of the North Atlanta High School Baseball Association, a volunteer not-for profit organization benefiting a public high school sports program in Atlanta, Georgia.














EX-10.49 3 srax_ex10z49.htm ADVISORY AGREEMENT ADVISORY AGREEMENT

 


EXHIBIT 10.49

ADVISORY AGREEMENT

THIS ADVISORY AGREEMENT (the “Agreement”) is made this 14th day of November, 2016 (the “Effective Date”) by and between SOCIAL REALITY, INC., a Delaware corporation (the “Company”), with its principal place of business located at 456 Seaton Street, Los Angeles, CA  90013 and kathy ireland Worldwide LLC (the “Advisor”), with its principal offices located care of PO Box 1410, Rancho Mirage, CA 92270.

R E C I T A L S

WHEREAS, the Company desires to retain the Advisor to provide certain advisory services as hereinafter set forth.

WHEREAS, the Advisor desires to provide certain advisory and consulting services to the Company in accordance with the terms and conditions contained hereinafter.

NOW, THEREFORE, in consideration of the mutual promises set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

1.

Advisory Services.  During the Term of this Agreement, the Advisor is hereby retained by the Company on a non-exclusive basis to provide strategic advisory services (the “Services”) to the Company to be mutually agreed to from time to time which are anticipated to include: (i) if the Company forms an Advisory Committee of independent, third party brand, marketing and/or consumer product C-level executives, to serve on such committee on terms no less favorable than the highest compensated person on such committee, (ii)  as an advisor, hold the non-executive designation of Chief Branding Advisor, and (iii) provide reasonable input to the Company on various aspects of corporate branding, and (iv) use good faith efforts to introduce the Company to potential business customers.  The services provided by Advisor and her availability will, in all respects, be subject to the “Standard Terms and Conditions” set forth on Exhibit “A” attached hereto and incorporated herein by this reference and, in the event of any conflict between this Agreement and Exhibit “A”, Exhibit “A” shall control.  For the avoidance of doubt, any reference to Advisor or its affiliates by the Company or its affiliates, or any use of Advisor’s or its affiliates’ brand, name, use or likeness shall be subject to the prior written approval of Advisor (which may be withheld in its sole discretion) and further subject to the terms and conditions of Exhibit “A”.  If Company requests the Advisor to travel in connection with the rendering of any Services, Advisor shall be entitled to approve each such request (which approval may be withheld in the Advisor’s sole discretion), and any arrangements for such travel will be pursuant to the terms and conditions of Exhibit “A”.  

2.

Term; Termination.  The Term of this Agreement shall commence on the Effective Date as set forth above and end on December 31, 2018, (the “Expiration Date”).  Either party may terminate this Agreement in the event that the other party breaches or fails to perform any of its material obligations under this Agreement, or otherwise defaults in any of its material obligations under this Agreement, and such failure or default continues uncured for a period of thirty (30) days following written notice from the non-defaulting party (or if such






 


breach, failure or default is not reasonably capable of cure without cost or liability to the non breaching party, then termination shall be effective immediately upon delivery of notice).  The parties acknowledge and agree that each term and provision on Exhibit “A” is a material obligation of the Company under this Agreement.

3.

Compensation; Investment Intent.

(a)

As full and complete compensation for the Services, on January 2, 2017, unless  Advisor has been convicted or pleaded no contest to a felony and, as a direct and proximate cause thereof, the rendering of services by Advisor on such date is impossible (the “Share Condition”), the Company shall issue the Advisor one hundred thousand (100,000) shares of the Company’s Class A common stock (the “Compensation Shares”), which such Compensation Shares shall be fully paid and non-assessable upon issuance thereof.  Notwithstanding any early termination of this Agreement pursuant to Section 2 hereof, the Compensation Shares shall be deemed earned upon the (i) execution of this Agreement by all parties and (ii) satisfaction of the Share Condition.  If Advisor and the Company are required to report the issuance of the Compensation Shares to any third party governmental or regulatory authority, the parties shall consult and mutually agree upon a consistent reporting position.

(b)

The Compensation Shares are “restricted securities” as that term is defined in the Securities Act of 1933, as amended (the “Securities Act”).  The Advisor has such knowledge and experience in financial, investment and business matters that it is capable of evaluating the merits and risks of the investment in the Compensation Shares and represents that it (i) has adequate means of providing for its current financial needs and possible personal contingencies, and has no need for liquidity of investment in the Company; (ii) can afford (a) to hold unregistered securities for an indefinite period of time and (b) sustain a complete loss of the entire amount of such securities; and (iii) has not made an overall commitment to investments which are not readily marketable which is disproportionate so as to cause such overall commitment to become excessive.  The Compensation Shares are being acquired by the Advisor solely for its account for personal investment and not with a view to, or for resale in connection with, any distribution.  The Advisor does not intend to dispose of all or any part of the Compensation Shares except in compliance with the provisions of the Securities Act and applicable state securities laws and understands that the Compensation Shares are being issued pursuant to a specific exemption under the provisions of the Securities Act, which exemption depends, among other things, upon the compliance with the provisions of the Securities Act.

(c)

The Company may insert the following or similar legend on the face of the certificate representing the Compensation Shares, if required in compliance with the Securities Act or state securities laws:

“These securities have not been registered under the Securities Act of 1933, as amended (“Securities Act”), or any state securities laws and may not be sold or otherwise transferred or disposed of except pursuant to an effective registration statement under the Securities Act and any applicable state securities laws, or an opinion of counsel satisfactory to counsel to the Social Reality, Inc. that an exemption from registration under the act and any applicable state securities laws is available.”






 


(d)

Advisor shall be permitted to transfer the Compensation Shares to the individuals and entities identified on Exhibit “B” attached hereto in the percentages set forth therein.  At the request of Consultant, Company shall issue and deliver new certificates respecting the ownership of the Compensation Shares as set forth on Exhibit “B”.

4.

Social Media Management.  During the Term and any extension(s) thereof, Company shall dedicate not less than two (2) of its employees on a full-time basis to manage and implement the various social media and marketing efforts and initiatives contemplated in connection with the Advisor’s performance of Services hereunder (each a “Company Contact”).  All activities of the Company Contacts shall be subject to the advanced review and approval of Advisor.  Advisor shall also have right of prior approval over each individual Company intends to allocate to the roles provided in this Section 3, and Company shall remove and replace any Company Contact upon the request of the Advisor (provided further that any such replacement also to be subject to the Advisor’s approval).  The services rendered by Company Contacts will be in mutual cooperation with the Advisor to achieve the objectives of this Agreement. The Advisor acknowledges that the Company Contacts will coordinate with specific departments inside Company to carry out the business under this Agreement.

5.

Expenses.  The Advisor shall be reimbursed for all out of pocket costs and expenses incurred by it in the performance of the Services hereunder subject to preapproval by the Company.  Should the Advisor be requested to travel on the Company's behalf, the Company shall pay all expenses in accordance with Exhibit “A”.  In addition to the foregoing, the Company shall pay all reasonable fees and expenses incurred by Advisor’s legal, tax and accounting advisors in connection with the negotiation and execution of this Agreement up to an aggregate amount of $10,000.

6.

Return of Documents.  On termination of this Agreement or at any time upon the request of Company in writing, Advisor shall return to Company all documents, including all copies thereof, and all other property relating to the business of Company and/or its subsidiaries, including without limitation, the Confidential Information (as hereinafter defined), in its possession or control.

7.

Amendment or Assignment.  No modification, waiver, amendment, discharge or change of this Agreement shall be valid unless the same is evidenced by a written instrument, executed by the party against which such modification, waiver, amendment, discharge or change is sought.  This Agreement is not assignable by the Advisor without the prior written consent of the Company, which such consent may not be forthcoming; provided, that for the avoidance of doubt, assignment by Advisor of one or more advisory services to its employees or affiliates shall not constitute a violation of this Agreement.

8.

Confidentiality.

(a)

In connection with the performance of the Services contemplated by this Agreement, the Advisor and its affiliates may gain access to Confidential Information (as hereinafter defined) of the Company.  Confidential Information includes information communicated orally, in writing, by electronic or magnetic media, by visual observation, or by other means, and may be marked confidential or proprietary, or bear a marking of like import, or






 


which the Company states to be confidential or proprietary, or which would logically be considered confidential or proprietary under circumstances of its disclosure known to Advisor. No rights or licenses to trademarks, inventions, copyrights, patents or any other intellectual property rights are implied or granted under this Agreement or by the conveying of Confidential Information to Advisor.

(b)

The Advisor acknowledges and understands that: (i) Confidential Information provides the Company with a competitive advantage (or that could be used to the disadvantage of the Company by a competitor); (ii) the Company has a continuing interest in maintaining the confidentiality of Confidential Information; and (iii) the Company has a compelling business interest in preventing unfair competition stemming from the use or disclosure of Confidential Information.

(c)

For purposes hereof, “Confidential Information” includes, but is not limited to, information pertaining to business plans, joint venture agreements, licensing agreements, financial information, contracts, customers, products, trade secrets, specifications, designs, plans, drawings, software, data, prototypes, processes, methods, research, development or other information relating to the business activities and operations of the Company.

(d)

The Advisor agrees, and shall use reasonable efforts, to cause its controlled affiliates to agree, to keep Confidential Information confidential and, except as authorized by the Company, Advisor shall not, directly or indirectly, use Confidential Information for any reason except in a manner Advisor believes reasonable or appropriate to perform the Services under this Agreement.  The Advisor acknowledges that such Confidential Information could be deemed to be material non-public information that is not generally available to the public.  The Advisor further acknowledges its understanding that federal securities laws strictly prohibit any individual or entity who obtains inside information, and has a duty not to disclose it such as the Advisor, from using the information in connection with the purchase or sale of securities, and Company shall advise Advisor whether information disclosed to it constitutes material, nonpublic information.

(e)

The restrictions in subsection (d) of this Section shall not apply to any Confidential Information that: (i) is or becomes available to the public through no breach of this Agreement by Advisor; (ii) was previously known by Advisor or its affiliates; (iii) is received from a third party free to disclose such information without restriction; (iv) is independently developed by Advisor or its affiliates  without the use of the Confidential Information; (v) is approved for release by written authorization of the Company or its affiliates; (vi) is required by law or regulation to be disclosed, but only to the extent and for the purposes of such required disclosure; or (vii) is disclosed in response to an order or request of a governmental agency, provided that Advisor notifies the Company of the order or request ten (10) days prior to disclosure and permits the Company to seek an appropriate protective order.

9.

Indemnity; Insurance.

(a)

Indemnity:  The Company shall indemnify, defend, and hold Advisor and its affiliates harmless, at Company’s own expense, from and against any and all losses, liability, obligations, damages, third-party claims, demands, causes of action, costs and expenses of






 


whatever form or nature (each a “Claim” and collectively, “Claims”), including reasonable outside attorney’s fees and other costs of legal defense, arising out of or related to: (i) the Advisor’s rendering of Services under this Agreement; (ii) an actual or alleged breach of any of the representations, warranties or covenants of this Agreement by the Company; (iii) Company’s negligence, willful misconduct, or willful misrepresentation; or (iv) any other act or omission by or attributable to Company in connection with this Agreement except to extent such indemnity is prohibited by law.  Company shall give prompt written notice to the Advisor of any proposed settlement of any Claim. Company may not, without the Advisor’s prior written consent, which the Advisor shall not unreasonably withhold, condition or delay, settle or compromise any claim or consent to the entry of any judgment regarding which indemnification is being sought hereunder unless such settlement, compromise or consent: (X) includes an unconditional release of the Advisor from all liability arising out of such claim; (Y) does not contain any admission or statement suggesting any wrongdoing or liability on behalf of the Advisor; and (Z) does not contain any equitable order, judgment or term (other than the fact of payment or the amount of such payment) that in any manner affects, restrains or interferes with the business of the Advisor. Provided, however, that the indemnity agreement contained in this Section 9(a) shall not apply to any such losses, claims, related expenses, damages or liabilities arising out of gross negligence, willful misconduct or fraud of the Advisor, or a material breach of the Advisor’s representations and warranties hereunder.

(b)

Exculpation:  Notwithstanding anything to the contrary herein, the Advisor shall, to the greatest extent permitted by law at the time this clause is construed, be exculpated from any liability whatsoever for any alleged abuse of discretion, tort, breach of fiduciary duty and/or breach of trust caused by any act or omission in connection with this Agreement.  As a consequence, the Advisor shall under no circumstances ever be held personally liable to any other person, firm or corporation for any damages directly or indirectly arising out of any act or omission committed in connection with this Agreement.  This exculpation shall not, however, protect the Advisor from any liability for a breach of trust committed intentionally or in bad faith.  Even if this Section 9(b) shall not protect the Advisor due to the foregoing sentence, in no event shall the Advisor ever be liable for any punitive or exemplary damages for any act or omission committed in connection with this Agreement hereunder regardless of whether such act or omission constituted an act committed intentionally or in bad faith.

(c)

Insurance: The Company has procured, and shall continue to maintain, policies of director and officer insurance that provides to the same coverage to Advisor and its affiliates as is provided to any officer and director of the Company which policies shall provide, at a minimum, the coverage set forth on Exhibit “C” attached hereto and incorporated herein by this reference.

10.

Waiver. Unless agreed in writing, the failure of either party, at any time, to require performance by the other of any provisions hereunder shall not affect its right thereafter to enforce the same, nor shall a waiver by either party of any breach of any provision hereof be taken or held to be a waiver of any other preceding or succeeding breach of any term or provision of this Agreement. No extension of time for the performance of any obligation or act shall be deemed to be an extension of time for the performance of any other obligation or act hereunder.






 


11.

Notices. All notices, demands or other communications given hereunder shall be in writing and shall be deemed to have been duly given on the day when delivered in person or transmitted by confirmed facsimile transmission or on the third (3rd) calendar day after being mailed by United States registered or certified mail, return receipt requested, postage prepaid, to the addresses hereinabove first mentioned or to such other address as any party hereto shall designate to the other for such purpose in the manner herein set forth.

12.

Entire Agreement.  This Agreement contains all of the understandings and agreements of the parties with respect to the subject matter discussed herein.  All prior agreements, whether written or oral, are merged herein and shall be of no force or effect.

13.

Survival. Any termination of this Agreement shall not, however, affect the ongoing provisions of this Agreement which shall survive such termination in accordance with their terms.

14.

Severability.  The invalidity, illegality or unenforceability of any provision or provisions of this Agreement will not affect any other provision of this Agreement, which will remain in full force and effect, nor will the invalidity, illegality or unenforceability of a portion of any provision of this Agreement affect the balance of such provision.  In the event that any one or more of the provisions contained in this Agreement or any portion thereof shall for any reason be held to be invalid, illegal or unenforceable in any respect, this Agreement shall be reformed, construed and enforced as if such invalid, illegal or unenforceable provision had never been contained herein.

15.

Governing Law. This Agreement shall become valid when executed and accepted by Company. This Agreement shall be construed in accordance with the laws of the State of California, without an application of the principles of conflicts of laws.  Anything in this Agreement to the contrary notwithstanding, the Advisor shall conduct the Advisor's business in a lawful manner and faithfully comply with applicable laws or regulations of the state, city or other political subdivision in which the Advisor is located.

16.

Enforcement.  Any suit, action or proceeding with respect to this Agreement shall be brought in the state or federal courts located in Los Angeles County in the State of California.  The parties hereto hereby accept the exclusive jurisdiction and venue of those courts for the purpose of any such suit, action or proceeding.  The parties hereto hereby irrevocably waive, to the fullest extent permitted by law, any objection that any of them may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any judgment entered by any court in respect thereof brought in Los Angeles County, California, and hereby further irrevocably waive any claim that any suit, action or proceeding brought in Los Angeles County, California has been brought in an inconvenient form.

17.

Binding Nature, No Third Party Beneficiary.  The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties, and their respective successors and assigns.  






 


18.

Counterparts.  This Agreement may be executed in any number of counterparts, including facsimile signatures which shall be deemed as original signatures.  All executed counterparts shall constitute one agreement, notwithstanding that all signatories are not signatories to the original or the same counterpart.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 

THE COMPANY

 

 

 

SOCIAL REALITY, INC.

 

 

 

 

By:

/s/ Christopher Miglino

 

 

Christopher Miglino, Chief Executive Officer

 

 

 

 

kathy ireland Worldwide LLC

 

 

 

 

By:

/s/ Kathy Ireland

 

 

Kathy Ireland, Chief Executive Officer






EX-18.1 4 srax_ex18z1.htm PREFERENCE LETTER Preference Letter

 


EXHIBIT 18.1



November 14, 2016



Board of Directors

Social Reality, Inc.

456 Seaton Street, Los Angeles, CA


Dear Directors:


We are providing this letter to you for inclusion as an exhibit to your Form 10-Q filing pursuant to Item 601 of Regulation S-K.


At your request, we have read the description included in your Quarterly Report on Form 10-Q to the Securities and Exchange Commission for the quarter ended September 30, 2016, of the facts relating to your change in the date of the annual impairment test for goodwill from September 30, to December 31. We believe, on the basis of the facts so set forth and other information furnished to us by the Company, that the accounting change described in your Form 10-Q is to an alternative accounting principle that is preferable under the circumstances.


We have not audited any financial statements of the Company as of any date or for any period subsequent to December 31, 2015. Therefore, we are unable to express, and we do not express, an opinion on the facts set forth in the above-mentioned Form 10-Q, on the related information furnished to us by the Company, or on the financial position, results of operations, or cash flows of Social Reality, Inc. and its consolidated subsidiaries as of any date or for any period subsequent to December 31, 2015.


Very Truly Yours,


/s/RBSM LLP


New York, New York



EX-31.1 5 srax_ex31z1.htm CERTIFICATION Certification

EXHIBIT 31.1


Rule 13a-14(a)/15d-14(a) Certification


I, Christopher Miglino, certify that:


1.

I have reviewed this report on Form 10-Q for the period ended September 30, 2016 of Social Reality, Inc.;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

 

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Dated:  November 14, 2016

 

/s/ Christopher Miglino

Christopher Miglino, Chief Executive Officer, principal executive officer




EX-31.2 6 srax_ex31z2.htm CERTIFICATION Certification

EXHIBIT 31.2


Rule 13a-14(a)/15d-14(a) Certification


I, Joseph P. Hannan, certify that:


1.

I have reviewed this report on Form 10-Q for the period ended September 30, 2016 of Social Reality, Inc.;

 

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

 

5.

The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Dated: November 14, 2016

 

/s/ Joseph P. Hannan

Joseph P. Hannan, Chief Financial Officer, principal financial and accounting officer

 




EX-32.1 7 srax_ex32z1.htm CERTIFICATION Certification



EXHIBIT 32.1


Section 1350 Certification


In connection with the Quarterly Report of Social Reality, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2016 as filed with the Securities and Exchange Commission (the “Report”), I, Christopher Miglino, Chief Executive Officer, and I, Joseph P. Hannan, Chief Financial Officer, of the Company, do hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and

 

2.

The information contained in the Report fairly presents, in all material respects, the financial conditions and results of operations of the Company.


November 14, 2016

 

/s/ Christopher Miglino

Christopher Miglino, Chief Executive Officer, principal executive officer


November 14, 2016

 

/s/ Joseph P. Hannan

Joseph P. Hannan, Chief Financial Officer, principal financial and accounting officer



A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.




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(&#34;Social Reality&#34;, &#34;we&#34;, &#34;us&#34; or the &#34;Company&#34;) is a Delaware corporation formed on August 2, 2011. Effective January 1, 2012 we acquired all 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 and Class B common stock. The former members of Social Reality, LLC owned all of our common stock after the acquisition.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">At Social Reality, we sell digital advertising campaigns to advertising agencies and brands. We have developed technology that allows brands to launch and manage digital advertising campaigns, and we provide the platform that allows website publishers to sell their media inventory to many different digital adverting buyers. 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Healthcare and pharmaceutical publishers utilize the platform for yield optimization, audience extension campaigns and re-targeting of their healthcare professional audience. Agencies and brands purchase targeted digital and mobile ad campaigns;</p> </td></tr> <tr><td style="margin-top: 0px; vertical-align: top; width: 80px"><p style="margin: 0px; padding-right: 2.2px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: top"><p style="margin: 0px; padding-right: 2.2px">&#160;</p> </td></tr> <tr><td style="margin-top: 0px; vertical-align: top; width: 80px"><p style="margin: 0px; padding-left: 48px; padding-right: 2.2px; font-family: Symbol">&#183;</p> </td><td style="margin-top: 0px; vertical-align: top"><p style="margin: 0px; padding-right: 2.2px"><i>SRAX Social</i> is a social media and loyalty platform that allows brands to launch and manage their social media initiatives. Our team works with customers to identify their needs and then helps them in the creation, deployment and management of their social media presence; and.</p> </td></tr> <tr><td style="margin-top: 0px; vertical-align: top; width: 80px"><p style="margin: 0px; padding-right: 2.2px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: top"><p style="margin: 0px; padding-right: 2.2px">&#160;</p> </td></tr> <tr><td style="margin-top: 0px; vertical-align: top; width: 80px"><p style="margin: 0px; padding-left: 48px; padding-right: 2.2px; font-family: Symbol">&#183;</p> </td><td style="margin-top: 0px; vertical-align: top"><p style="margin: 0px; padding-right: 2.2px"><i>&#160;SRAX APP,</i> a recently launched new product, is a platform that allows publishers and content owners to launch native mobile applications through our SRAX platform.</p> </td></tr> </table> <p style="margin: 0px"><br /></p> <p style="margin: 0px">We offer our customers a number of pricing options including cost-per-thousand-impression, or &#34;CPM&#34;, whereby our customers pay based on the number of times the target audience is exposed to the advertisement, and on a monthly service fee.</p> <p style="margin: 0px">&#160;<a name="SCRI_10K_HTM_SCRI_10Q_HTM_EOLPAGE9"></a></p> <p style="margin: 0px">Social Reality is also an approved Facebook advertising partner. We sell targeted and measurable online advertising campaigns and programs to brand advertisers and advertising agencies across large Facebook apps and websites, generating qualified Facebook likes and quantifiable engagement for our clients, driving online sales and increased brand equity.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">We are headquartered in Los Angeles, California.</p> <p style="margin: 0px"><b>Principles of Consolidation</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries from the acquisition date of majority voting control and through the date of disposition, if any.</p> <p style="margin: 0px"></p> <p style="margin: 0px"><b>Use of Estimates</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">GAAP requires management of the Company to make estimates and assumptions in the preparation of these condensed consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates and assumptions.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The most significant areas that require management judgment and which are susceptible to possible change in the near term include the Company's revenue recognition, allowance for doubtful accounts and sales credits, stock-based compensation, income taxes, purchase price for acquisition, goodwill, other intangible assets, put rights and valuation of liabilities. The accounting policies for these areas are discussed elsewhere in these unaudited condensed consolidated financial statements.</p> <p style="margin: 0px"><b>Cash and Cash Equivalents</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">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.</p> <p style="margin: 0px"><b>Revenue Recognition</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists; no significant Company obligations remain; collection of the related receivable is reasonably assured; and the fees are fixed or determinable. The Company acts as a principal in revenue transactions as the Company is the primary obligor in the transactions. As such, revenue is recognized on a gross basis, and media and publisher expenses that are directly related to a revenue-generating event are recorded as a component of cost of revenue.</p> <p style="margin: 0px"></p> <p style="margin: 0px"><b>Cost of Revenue</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">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-throughs, actions or lead-based information are delivered or occur. 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Allowance for doubtful accounts was $231,695 and $135,442 at September 30, 2016 and December 31, 2015, respectively.</p> <p style="margin: 0px"><b>Concentration of Credit Risk, Significant Customers and Supplier Risk</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">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 in the United States. The balances in the United States held at any one financial institution are generally in excess of Federal Deposit Insurance Corporation (&#34;FDIC&#34;) insurance limits. The uninsured cash bank balances were approximately $4.2 million<font style="font-family: Arial"> </font>at September 30, 2016. The Company has not experienced any loss on these accounts. The balances are maintained in demand accounts to minimize risk.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">At September 30, 2016, two customers accounted for more than 10% of the accounts receivable balance, for a total of 50%. For the nine months ended September 30, 2016 one customer accounted for 49% of total revenue. At September 30, 2015, two customers accounted for more than 10% of the accounts receivable balance, for a total of 61%. For the nine months ended September 30, 2015 one customer accounted for 50% of total revenue. </p> <p style="margin: 0px"><b>Fair Value of Financial Instruments</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At September 30, 2016 and December 31, 2015, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.</p> <p style="margin: 0px"><b>Property and equipment</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">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.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">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. 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Goodwill is considered to have an indefinite life.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The Company has historically performed its annual goodwill and impairment assessment on September 30<sup>th</sup> of each year; however, due to the elimination of the need to internally maintain certain segregated accounting records of the Steel Media business that occurred in the third quarter of 2016, following the determination that the second year Earn Out Consideration would not be achieved (See Note 2), this was reevaluated by the Company. &#160;Further, given the seasonal and cyclical nature of advertising sales in general, timing of the Company&#146;s annual budgeting process, and the short-term nature of the Company&#146;s advertising sales contracts, it was determined that it would be more effective and efficient to conduct the annual impairment analysis instead at December 31<sup>st</sup> of each year. &#160;This would also better align the Company with other advertising sales companies who also generally conduct this annual analysis in the fourth quarter. &#160;The Company does not believe this change will have any material impact on its consolidated financial statements, and continues to evaluate potential interim impairment to goodwill consistent with its historical practices. </p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The Company employs the non-amortization approach to account for goodwill. 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If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then proceed to a two-step impairment testing methodology using the income approach (discounted cash flow method).</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In the first step of the two-step testing methodology, we compare the carrying value of the reporting unit, including goodwill, with its fair value, as determined by its estimated discounted cash flows. If the carrying value of a reporting unit exceeds its fair value, we then complete the second step of the impairment test to determine the amount of impairment to be recognized. In the second step, we estimate an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). 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The implied fair value of the goodwill is the residual fair value based on an income approach using discounted cash flow model using revenue and profit forecasts. &#160;No additional impairment of goodwill has been recorded in the three months ended September 30, 2016.</p> <p style="margin: 0px"><b>Long-lived Assets</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">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 in either the nine months ended September 30, 2016 or 2015.</p> <p style="margin: 0px"></p> <p style="margin: 0px"><b>Loss Per Share</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">We use ASC 260, &#34;<i>Earnings Per Share</i>&#34; 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. 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(&#34;Social Reality&#34;, &#34;we&#34;, &#34;us&#34; or the &#34;Company&#34;) is a Delaware corporation formed on August 2, 2011. Effective January 1, 2012 we acquired all 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 and Class B common stock. The former members of Social Reality, LLC owned all of our common stock after the acquisition.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">At Social Reality, we sell digital advertising campaigns to advertising agencies and brands. We have developed technology that allows brands to launch and manage digital advertising campaigns, and we provide the platform that allows website publishers to sell their media inventory to many different digital adverting buyers. 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No fractional shares of Class A common stock were issued to any stockholder in connection with the reverse stock split and all fractional shares which might otherwise be issuable as a result of the reverse stock split were rounded up to the nearest whole share. 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Management periodically reviews the carrying value of its property and equipment for impairment.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px"><b>Intangible assets</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">Intangible assets consist of intellectual property and a non-complete agreement and are stated at cost less accumulated amortization. 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Goodwill is considered to have an indefinite life.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The Company has historically performed its annual goodwill and impairment assessment on September 30<sup>th</sup> of each year; however, due to the elimination of the need to internally maintain certain segregated accounting records of the Steel Media business that occurred in the third quarter of 2016, following the determination that the second year Earn Out Consideration would not be achieved (See Note 2), this was reevaluated by the Company. &#160;Further, given the seasonal and cyclical nature of advertising sales in general, timing of the Company&#146;s annual budgeting process, and the short-term nature of the Company&#146;s advertising sales contracts, it was determined that it would be more effective and efficient to conduct the annual impairment analysis instead at December 31<sup>st</sup> of each year. &#160;This would also better align the Company with other advertising sales companies who also generally conduct this annual analysis in the fourth quarter. &#160;The Company does not believe this change will have any material impact on its consolidated financial statements, and continues to evaluate potential interim impairment to goodwill consistent with its historical practices. </p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The Company employs the non-amortization approach to account for goodwill. Under the non-amortization approach, goodwill is not amortized into the results of operations, but instead is reviewed annually or more frequently if events or changes in circumstances indicate that the asset might be impaired, to assess whether the fair value exceeds the carrying value.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">When evaluating the potential impairment of goodwill, we first assess a range of qualitative factors, including but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company's products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and the overall financial performance for each of the Company's reporting units. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then proceed to a two-step impairment testing methodology using the income approach (discounted cash flow method).</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In the first step of the two-step testing methodology, we compare the carrying value of the reporting unit, including goodwill, with its fair value, as determined by its estimated discounted cash flows. If the carrying value of a reporting unit exceeds its fair value, we then complete the second step of the impairment test to determine the amount of impairment to be recognized. In the second step, we estimate an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). If the carrying value of a reporting unit's goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference in that period.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">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 particular 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.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">During the nine months ended September 30, 2016, we determined that a portion of the goodwill assigned to Steel Media acquisition has become impaired. Accordingly, we recorded a goodwill impairment charge of $670,000 for the nine months ended September 30, 2016. The impairment charge represents the excess of the carrying amount of the goodwill recorded in the acquisition over the implied fair value of the goodwill. The implied fair value of the goodwill is the residual fair value based on an income approach using discounted cash flow model using revenue and profit forecasts. &#160;No additional impairment of goodwill has been recorded in the three months ended September 30, 2016.</p> <p style="margin: 0px; text-align: center"></p> <p style="margin: 0px">&#160;</p> <p style="margin: 0px"><b>Long-lived Assets</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">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 in either the nine months ended September 30, 2016 or 2015.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px"><b>Loss Per Share</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">We use ASC 260, &#34;<i>Earnings Per Share</i>&#34; 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.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">There were 2,912,069 common share equivalents at September 30, 2016 and 2,796,803 at September 30, 2015. For the nine months ended September 30, 2016 and 2015 these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share. </p> <p style="margin: 0px"><br /></p> <p style="margin: 0px"><b>Income Taxes</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">We utilize ASC 740 &#147;<i>Income Taxes</i>&#148; which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. &#160;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.</p> <p style="margin: 0px">&#160;</p> <p style="margin: 0px">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.</p> <p style="margin: 0px; text-align: center"><br /></p> <p style="margin: 0px"><b>Stock-Based Compensation</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">We account for our stock based compensation under ASC 718 &#34;<i>Compensation &#150; Stock Compensation</i>&#34; 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.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">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.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px"><b>Business Segments</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The Company uses the &#34;management approach&#34; 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.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px"><b>Liquidity</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The Company had an accumulated deficit at September 30, 2016 of $(13.0) million. As of September 30, 2016, we had approximately $4.2 million in cash and cash equivalents and a deficit in working capital of $(9.4) million as compared to $(1.1) million in cash and cash equivalents and a deficit in working capital of $7.0 million at December 31, 2015. &#160;The Company believes it has established an ongoing source of revenue that is sufficient to cover its operating costs over the next twelve months. &#160;In addition, management plans to continue as a going concern could also include raising additional capital through borrowing and/or additional sales of equity or equity linked securities.</p> <p style="margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px"><b>Recently Issued Accounting Standards</b></p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">In &#160;October 2016, the Financial Accounting Standards Board (&#147;FASB&#148;) issued Accounting Standards Update (&#147;ASU&#148;) 2016-16 - Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The guidance will be effective for the first interim period of our 2019 fiscal year, with early adoption permitted. </p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">In August 2016, the Financial Accounting Standards Board (&#147;FASB&#148;) issued Accounting Standards Update (&#147;ASU&#148;) ASU No. 2016-15, &#147;Classification of Certain Cash Receipts and Cash Payments&#148; (&#147;ASU 2016-15&#148;). ASU 2016-15 provides guidance regarding the classification of certain items within the statements of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted.</p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px; font-family: inherit,Times New Roman">In connection with its financial instruments project, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments in June 2016 and ASU 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities in January 2016. </p> <p style="line-height: 11pt; margin: 0px"><br /></p> <table cellpadding="0" cellspacing="0" style="width: 100%; margin-top: 0px; font-size: 10pt"><tr style="height: 0px; font-size: 0"><td style="width: 80px" /><td /></tr> <tr><td style="vertical-align: top; width: 80px; margin-top: 0px"><p style="margin: 0px; padding-left: 48px; font-family: Symbol">&#183;</p> </td><td style="vertical-align: top; margin-top: 0px"><p style="margin: 0px; font-family: inherit,Times New Roman">ASU 2016-13 introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a forward-looking &#147;expected loss&#148; model that will replace the current &#147;incurred loss&#148; model and generally will result in earlier recognition of allowances for losses. The guidance will be effective for the first interim period of our 2021 fiscal year, with early adoption in fiscal year 2020 permitted.</p> </td></tr> </table> <p style="margin: 0px"><br /></p> <table cellpadding="0" cellspacing="0" style="width: 100%; margin-top: 0px; font-size: 10pt"><tr style="height: 0px; font-size: 0"><td style="width: 80px" /><td /></tr> <tr><td style="vertical-align: top; width: 80px; margin-top: 0px"><p style="margin: 0px; padding-left: 48px; font-family: Symbol">&#183;</p> </td><td style="vertical-align: top; margin-top: 0px"><p style="margin: 0px; font-family: inherit,Times New Roman">ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the new guidance requires the fair value measurement of investments in certain equity securities. For investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. All changes in measurement will be recognized in net income. The guidance will be effective for the first interim period of our 2019 fiscal year. Early adoption is not permitted, except for certain provisions relating to financial liabilities. </p> </td></tr> </table> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In April 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-10, <i>Identifying Performance Obligations and Licensing (Topic 606)</i>, which amends certain aspects of the FASB&#146;s new revenue standard, ASU 2014-09, <i>Revenue from Contracts with Customer (Topic 606)</i>. ASU 2016-10 identifies performance obligations and provides licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 <i>(Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date)</i> defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. </p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In March 2016, the FASB issued ASU No. 2016-09, <i>Compensation - Stock Compensation (Topic 718</i>), which is part of the FASB's Simplification Initiative. The updated guidance simplifies the accounting for share-based payment transactions. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In March 2016, the FASB issued ASU No. 2016-08, <i>Revenue from Contracts with Customer (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)</i>, or ASU 2016-08, that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company is still currently evaluating the full impact of the adoption of this standard on its consolidated financial statements. &#160;However, given revenue recognition practices already in place, it does not appear likely that this will have a material impact on the Company&#146;s future presentation of consolidated financial statements.</p> <p style="margin: 0px">&#160;</p> <p style="margin: 0px">In February 2016, the FASB issued ASU No. 2016-02, <i>Leases (Topic 842)</i>, which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. </p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In April 2015, the FASB issued ASU No. 2015-3, <i>Simplifying the Presentation of Debt Issuance Costs </i>(&#147;ASU 2015-3&#148;) which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset. &#160;ASU 2015-3 became effective for public companies during interim and annual reporting periods beginning after December 15, 2015. &#160;The Company adopted this ASU on January 1, 2016. The adoption of this ASU did not have a material impact to our consolidated financial statements. </p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.</p> <p style="margin: 0px"></p> <p style="margin: 0px"><b>Effect of Reverse Stock Split on Presentation</b></p> <p style="margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">On September 20, 2016, the Company completed a reverse stock split. &#160;The principal reason for the reverse stock split was to facilitate the up-listing of our Class A common stock to the NASDAQ Capital Market which has a minimum market (bid) price requirement for new applicants of $4.00 per share. &#160;</p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">As a result of the reverse stock split, each five shares of the Company's Class A common stock issued and outstanding, or held as treasury shares, immediately prior to the effective date of the reverse stock split became one share of its Class A common stock on the effective date of the reverse stock split. No fractional shares of Class A common stock were issued to any stockholder in connection with the reverse stock split and all fractional shares which might otherwise be issuable as a result of the reverse stock split were rounded up to the nearest whole share. On the effective date of the reverse stock split, all outstanding options and warrants to purchase shares of the Company's Class A common stock were proportionally adjusted based upon the split ratio and became exercisable into one-fifth of the number of shares of the Company's Class A common stock as it was prior to the reverse stock split at an exercise price which is five times the exercise price prior to the reverse stock split. &#160;</p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="margin: 0px">After the effective date of the reverse stock split, each certificate representing shares of pre-reverse stock split Class A common stock was deemed to represent one-fifth of a share of the post-reverse stock split Class A common stock, subject to rounding for fractional shares, and the records of the Company's transfer agent, Transfer Online, Inc., were adjusted to give effect to the reverse stock split. Following the effective date of the reverse stock split, the share certificates representing the pre-reverse stock split Class A common stock continue to be valid for the appropriate number of shares of post-reverse stock split Class A common stock, adjusted for rounding. &#160;</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">These condensed consolidated financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise specified. </p> <p style="margin: 0px"></p> <p style="margin: 0px"><b>NOTE 2 &#150; ACQUISITIONS.</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px; text-align: justify"><u>Acquisition of Steel Media </u></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">On October 30, 2014, we acquired 100% of the capital stock of Steel Media, a California corporation (&#34;Steel Media&#34;), from Richard Steel pursuant to the terms and conditions of a stock purchase agreement, dated October 30, 2014, by and among the Company, Steel Media and Mr. Steel (the &#34;Stock Purchase Agreement&#34;).</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">As consideration for the purchase of Steel Media, we agreed to pay Mr. Steel up to $20.0 million, consisting of: (i) a cash payment at closing of $7.5 million; (ii) a cash payment of $2.0 million which is being held in escrow to satisfy certain indemnification obligations to the extent such arise under the Stock Purchase Agreement; (iii) a one year secured subordinated promissory note in the principal amount of $2.5 million (the &#34;Note&#34;) which was secured by 477,373 shares of our Class A common stock (the &#34;Escrow Shares&#34;); and (iv) earn out payments of up to $8 million (the &#34;Earn Out Consideration&#34;). </p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The Earn Out Consideration target was achieved for the first earn out period ended October 31, 2015 and on January 29, 2016 we paid Mr. Steel $4.0 million, of which $1.6 million was paid in cash and the balance was paid through the issuance of 256,754 shares of our Class A common stock in accordance with the terms of the Stock Purchase Agreement. The Company determined the Earn Out Consideration would not be achieved for the second earn out period ended October 31, 2016. As a result, the Company reversed the second earn out liability of $3.5 million during nine months ended September 30, 2016. &#160;At September 30, 2016, we did not record a liability for the Earn Out Consideration. At December 31, 2015, we recorded $7.6 million associated with the first and second earn out periods.<br /><br /></p> <p style="margin: 0px; text-align: justify"><u>Acquisition of Five Delta, Inc. </u></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">On December 19, 2014, we acquired 100% of the outstanding capital stock of Five Delta, Inc., a Delaware corporation (&#34;Five Delta&#34;), in exchange for 120,000 shares of our Class A common stock pursuant to the terms and conditions of the Share Acquisition and Exchange Agreement dated December 19, 2014 (the &#34;Five Delta Agreement&#34;) by and among Social Reality, Five Delta and the stockholders of Five Delta. The acquisition price was $756,000.</p> <p style="margin: 0px"><b>NOTE 3 &#150; NOTES PAYABLE.</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px"><u>Financing Agreement with Victory Park Management, LLC as agent for the lenders</u></p> <p style="margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">On October 30, 2014 (the &#34;Financing Agreement Closing Date&#34;), the Company entered into a financing agreement (the &#34;Financing Agreement&#34;) with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders and holders of notes and warrants issued thereunder (the &#34;Agent&#34;). The Financing Agreement provides for borrowings of up to $20.0 million to be evidenced by notes issued thereunder, which are secured by a first priority, perfected security interest in substantially all of the assets of the Company and its subsidiaries (including Steel Media) and a pledge of 100% of the equity interests of each domestic subsidiary of the Company pursuant to the terms of a pledge and security agreement (the &#34;Pledge and Security Agreement&#34;) entered into by the Company on the Financing Agreement Closing Date (which was joined by Steel Media immediately after the Company's acquisition of Steel Media). The Financing Agreement contains covenants limiting, among other things, indebtedness, liens, transfers or sales of assets, distributions or dividends, and merger or consolidation activity. The notes (the &#34;Financing Notes&#34;) issued pursuant to the Financing Agreement, including the note issued to the lender thereunder in the original aggregate principal amount of $9.0 million on the Financing Agreement Closing Date (the &#34;Initial Financing Note&#34;) and the subsequent notes described below, bear interest at a rate per annum equal to the sum of (1) cash interest at a rate of 10% per annum and (2) payment-in-kind (PIK) interest at a rate of 4% per annum for the period commencing on the Financing Agreement Closing Date and extending through the last day of the calendar month during which the Company's financial statements for December 31, 2014 are delivered, and which PIK interest rate thereafter from time to time may be adjusted based on the ratio of the Company's consolidated indebtedness to its earnings before interest, taxes, depreciation and amortization. If the Company achieves a reduction in the leverage ratio as described in the Financing Agreement, the PIK interest rate declines on a sliding scale from 4% to 2%. The Financing Notes issued under the Financing Agreement are scheduled to mature on October 30, 2017, with scheduled quarterly payment dates commencing December 31, 2014. Proceeds from the Initial Financing Note issued on the Financing Agreement Closing Date were used to finance, in part, the Company's acquisition of Steel Media as described in Note 2.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">The Financing Agreement provides for subsidiaries of the Company to join the Financing Agreement from time to time as borrowers and cross guarantors thereunder. Immediately after the Company's acquisition of Steel Media on October 30, 2014, Steel Media executed a joinder agreement under which it became a borrower under the Financing Agreement. The Company and its subsidiary, Steel Media, are cross guarantors of each other's obligations under the Financing Agreement, all of which guaranties and obligations are secured pursuant to the terms of the Pledge and Security Agreement.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">On May 14, 2015, we entered into the First Amendment to Financing Agreement with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders. Under the terms of the amendment, the leverage ratio, senior leverage ratio, fixed charge coverage ratio and interest coverage ratio under the Financing Agreement were all modified, and the minimum current ratio was reduced. The amendment also modified our obligations with respect to the delivery of certain reports, certain representations by us as well as clarifying other additional terms by which the loan is administered.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">On July 6, 2015, we borrowed an additional $1.5 million pursuant to the Financing Agreement.&#160;The loan funded on July 8, 2015. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $1.5 million. The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement for working capital.</p> <p style="margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">On October 26, 2015, we borrowed an additional $1.4 million pursuant to the Financing Agreement.&#160;The loan funded on October 26, 2015. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $1.4 million. &#160;The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement towards the payment of the Note due Richard Steel described in Note 2, and for working capital.</p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">On January 26, 2016, we borrowed an additional $1.6 million pursuant to the financing agreement with Victory Park Management, LLC.&#160;The loan funded on January 28, 2016. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $1.6 million. &#160;The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement as a portion of the payment to Mr. Richard Steel of the first year Earn Out Consideration described in Notes 2 and 6.</p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">On February 16, 2016, we borrowed an additional $500,000 pursuant to the Financing Agreement with Victory Park Management, LLC.&#160;The loan funded on February 16, 2016. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $500,000. The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement as working capital.</p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">For the nine months ended September 30, 2016, we made principal payments of approximate $6.7 million.</p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">Notes payable consists of the following:</p> <p style="line-height: 11pt; margin: 0px"><br /></p> <table cellpadding="0" cellspacing="0" style="margin-top: 0px; font-size: 10pt; width: 100%"><tr style="height: 0px; font-size: 0"><td /><td style="width: 8.86px" /><td style="width: 9.93px" /><td style="width: 72.73px" /><td style="width: 7.66px" /><td style="width: 7.66px" /><td style="width: 9.93px" /><td style="width: 66.53px" /><td style="width: 14.26px" /></tr> <tr><td style="margin-top: 0px; vertical-align: top"><p style="margin: 0px; padding-right: 2.2px; font-size: 8pt">&#160;</p> </td><td style="margin-top: 0px; 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The warrant holder may not, however, exercise the Financing Warrant for a number of shares of Class A common stock that would cause such holder to beneficially own shares of Class A common stock in excess of 4.99% of the Company's outstanding shares of Class A common stock following such exercise. The number of shares issuable upon exercise of the Financing Warrant and the exercise price therefor are subject to adjustment in the event of stock splits, stock dividends, recapitalizations and similar corporate events. Pursuant to the Financing Warrant, the warrant holder has the right, at any time after the earlier of April 30, 2016 and the maturity date of the Financing Notes issued pursuant to the Financing Agreement, but prior to the date that is five years after the Financing Agreement Closing Date, to exercise its put right under the terms of the Financing Warrant, pursuant to which the warrant holder may sell to the Company, and the Company will purchase from the warrant holder, all or any portion of the Financing Warrant that has not been previously exercised. In connection with any exercise of this put right, the purchase price will be equal to an amount based upon the percentage of the Financing Warrant for which the put right is being exercised, multiplied by the lesser of (A) 50% of the total revenue for the Company and its subsidiaries, on a consolidated basis, for the trailing 12-month period ending with the Company's then-most recently completed fiscal quarter, and (B) $1.5 million. We have recorded the put liability at its present value of $1.5 million at September 30, 2016. <br /></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">As contemplated under the Financing Agreement, the Company also entered into a registration rights agreement on the Financing Agreement Closing Date (the &#34;Financing Registration Rights Agreement&#34;) with the holder of the Financing Warrant, pursuant to which the Company granted to such holder certain &#34;piggyback&#34; rights to register the shares of the Company's Class A common stock issuable upon exercise of the Financing Warrant. Specifically, the holder of the Financing Warrant has the right, subject to certain allocation provisions set forth in the Financing Registration Rights Agreement, to include the shares underlying the Financing Warrant in registration statements for offerings by the Company of its Class A common stock, as well as offerings of the Company's Class A common stock held by third parties. 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padding-right: 1.06px; text-align: right">63,718</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom; width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom; width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #CCFFCC; border-bottom: #000000 1px solid; vertical-align: bottom; width: 8.33px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;$</p></td><td style="margin-top: 0px; background-color: #CCFFCC; border-bottom: #000000 1px solid; vertical-align: bottom; width: 66.4px"><p style="margin: 0px; padding-right: 1.06px; text-align: right">1,500,000</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; border-bottom: #FFFFFF 1px solid; vertical-align: bottom; width: 7.53px"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td></tr> <tr><td style="margin-top: 0px; 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vertical-align: bottom; width: 8.86px"><p style="margin: 0px; padding-right: 2.2px">&#160;</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #000000 1px solid; vertical-align: bottom; width: 9.93px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #000000 1px solid; vertical-align: bottom; width: 72.73px"><p style="margin: 0px; text-align: right">-</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #FFFFFF 1px solid; vertical-align: bottom; width: 7.66px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; vertical-align: bottom; width: 7.66px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #000000 1px solid; vertical-align: bottom; width: 9.93px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #000000 1px solid; 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width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #CCFFCC; border-bottom: #000000 1px solid; vertical-align: bottom; width: 9.4px"><p style="margin: 0px; padding-right: 1.06px">$</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; border-bottom: #000000 1px solid; vertical-align: bottom; width: 65.33px"><p style="margin: 0px; padding-right: 1.06px; text-align: right">63,718</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom; width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom; width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #CCFFCC; border-bottom: #000000 1px solid; vertical-align: bottom; width: 8.33px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;$</p></td><td style="margin-top: 0px; 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padding-right: 1px; text-align: right">1,436,282</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #FFFFFF 3px double; vertical-align: bottom; width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #FFFFFF; vertical-align: bottom; width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #000000 3px double; vertical-align: bottom; width: 22.2px"><p style="margin: 0px; padding-right: 1.06px">$</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #000000 3px double; vertical-align: bottom; width: 62.73px"><p style="margin: 0px; padding-right: 1.06px; text-align: right">&#151;</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #FFFFFF 3px double; vertical-align: bottom; width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #FFFFFF; border-top: #FFFFFF 1px solid; vertical-align: bottom; width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #000000 3px double; vertical-align: bottom; width: 9.4px"><p style="margin: 0px; padding-right: 1.06px">$</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #000000 3px double; vertical-align: bottom; width: 65.33px"><p style="margin: 0px; padding-right: 1.06px; text-align: right">63,718</p> </td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #FFFFFF 3px double; vertical-align: bottom; width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #FFFFFF; vertical-align: bottom; width: 7.8px"><p style="margin: 0px; padding: 0px; font-size: 12pt">&#160;</p></td><td style="margin-top: 0px; background-color: #FFFFFF; border-bottom: #000000 3px double; 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vertical-align: bottom"><p style="margin: 0px; padding-right: 3.26px; font-size: 8pt">&#160;</p> </td><td style="margin-top: 0px; vertical-align: top; width: 8.6px"><p style="margin: 0px; padding-right: 3.26px; font-size: 8pt">&#160;</p> </td><td colspan="2" style="margin-top: 0px; border-bottom: #000000 1px solid; vertical-align: bottom; width: 70.66px"><p style="margin: 0px; font-size: 8pt; text-align: center"><b>September 30, </b></p> <p style="margin: 0px; font-size: 8pt; text-align: center"><b>2016</b></p> </td><td style="margin-top: 0px; vertical-align: top; width: 8.6px"><p style="margin: 0px; font-size: 8pt">&#160;</p> </td><td style="margin-top: 0px; vertical-align: top; width: 6.6px"><p style="margin: 0px; font-size: 8pt">&#160;</p> </td><td colspan="2" style="margin-top: 0px; border-bottom: #000000 1px solid; vertical-align: bottom; width: 82.8px"><p style="margin: 0px; font-size: 8pt; text-align: center"><b>December 31, </b></p> <p style="margin: 0px; font-size: 8pt; text-align: center"><b>2015</b></p> </td><td style="margin-top: 0px; vertical-align: top; width: 9.53px"><p style="margin: 0px; font-size: 8pt">&#160;</p> </td></tr> <tr><td style="margin-top: 0px; vertical-align: bottom"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: top; width: 8.6px"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td><td colspan="2" style="margin-top: 0px; vertical-align: top; width: 70.66px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: bottom; width: 8.6px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: bottom; width: 6.6px"><p style="margin: 0px">&#160;</p> </td><td colspan="2" style="margin-top: 0px; vertical-align: top; width: 82.8px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: top; width: 9.53px"><p style="margin: 0px">&#160;</p> </td></tr> <tr><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom"><p style="margin: 0px; padding-right: 3.26px">Non-compete agreement</p> </td><td style="margin-top: 0px; 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border-bottom: #000000 1px solid; vertical-align: bottom; width: 72.86px"><p style="margin: 0px; text-align: right">756,000</p> </td><td style="margin-top: 0px; border-bottom: #FFFFFF 1px solid; vertical-align: top; width: 9.53px"><p style="margin: 0px">&#160;</p> </td></tr> <tr><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: top; width: 8.6px"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: top; width: 9.93px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom; width: 60.73px"><p style="margin: 0px; text-align: right">2,006,000</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; border-bottom: #FFFFFF 1px solid; vertical-align: top; width: 8.6px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; 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vertical-align: bottom; width: 60.73px"><p style="margin: 0px; text-align: right">(663,906</p> </td><td style="margin-top: 0px; border-bottom: #FFFFFF 1px solid; vertical-align: bottom; width: 8.6px"><p style="margin: 0px">)</p> </td><td style="margin-top: 0px; vertical-align: top; width: 6.6px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; border-bottom: #000000 1px solid; vertical-align: top; width: 9.93px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; border-bottom: #000000 1px solid; vertical-align: bottom; width: 72.86px"><p style="margin: 0px; text-align: right">(394,256</p> </td><td style="margin-top: 0px; border-bottom: #FFFFFF 1px solid; vertical-align: bottom; width: 9.53px"><p style="margin: 0px">)</p> </td></tr> <tr><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom"><p style="margin: 0px; padding-right: 3.26px">Carrying value</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: top; 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text-align: right">1,611,744</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; border-bottom: #FFFFFF 3px double; vertical-align: top; width: 9.53px"><p style="margin: 0px">&#160;</p> </td></tr> </table> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">Amortization expense was $37,800 for intellectual property and $52,083 for the non-compete agreement for the three months ended September 30, 2016. Amortization expense was $113,400 for intellectual property and $156,250 for the non-compete agreement for the nine months ended September 30, 2016. &#160;No amortization expense for intellectual property was recorded for the three and nine months ended September 30, 2015. 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text-align: center"><b>2016</b></p> </td><td style="margin-top: 0px; vertical-align: top; width: 8.6px"><p style="margin: 0px; font-size: 8pt">&#160;</p> </td><td style="margin-top: 0px; vertical-align: top; width: 6.6px"><p style="margin: 0px; font-size: 8pt">&#160;</p> </td><td colspan="2" style="margin-top: 0px; border-bottom: #000000 1px solid; vertical-align: bottom; width: 82.8px"><p style="margin: 0px; font-size: 8pt; text-align: center"><b>December 31, </b></p> <p style="margin: 0px; font-size: 8pt; text-align: center"><b>2015</b></p> </td><td style="margin-top: 0px; vertical-align: top; width: 9.53px"><p style="margin: 0px; font-size: 8pt">&#160;</p> </td></tr> <tr><td style="margin-top: 0px; vertical-align: bottom"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: top; width: 8.6px"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td><td colspan="2" style="margin-top: 0px; vertical-align: top; width: 70.66px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: bottom; width: 8.6px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: bottom; width: 6.6px"><p style="margin: 0px">&#160;</p> </td><td colspan="2" style="margin-top: 0px; vertical-align: top; width: 82.8px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: top; width: 9.53px"><p style="margin: 0px">&#160;</p> </td></tr> <tr><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom"><p style="margin: 0px; padding-right: 3.26px">Non-compete agreement</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: top; width: 8.6px"><p style="margin: 0px; padding-right: 3.26px">&#160;</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: top; width: 9.93px"><p style="margin: 0px">$</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom; width: 60.73px"><p style="margin: 0px; text-align: right">1,250,000</p> </td><td style="margin-top: 0px; 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border-bottom: #000000 1px solid; vertical-align: bottom; width: 60.73px"><p style="margin: 0px; text-align: right">756,000</p> </td><td style="margin-top: 0px; border-bottom: #FFFFFF 1px solid; vertical-align: top; width: 8.6px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; vertical-align: top; width: 6.6px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; border-bottom: #000000 1px solid; vertical-align: top; width: 9.93px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; border-bottom: #000000 1px solid; vertical-align: bottom; width: 72.86px"><p style="margin: 0px; text-align: right">756,000</p> </td><td style="margin-top: 0px; border-bottom: #FFFFFF 1px solid; vertical-align: top; width: 9.53px"><p style="margin: 0px">&#160;</p> </td></tr> <tr><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: top; width: 8.6px"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: top; width: 9.93px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom; width: 60.73px"><p style="margin: 0px; text-align: right">2,006,000</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; border-bottom: #FFFFFF 1px solid; vertical-align: top; width: 8.6px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: top; width: 6.6px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: top; width: 9.93px"><p style="margin: 0px">&#160;</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; vertical-align: bottom; width: 72.86px"><p style="margin: 0px; text-align: right">2,006,000</p> </td><td style="margin-top: 0px; background-color: #CCFFCC; 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margin-top: 0px"><p style="margin: 0px">&#160;</p> </td><td colspan="2" style="vertical-align: top; width: 81.13px; margin-top: 0px"><p style="margin: 0px">&#160;</p> </td><td style="vertical-align: top; width: 8.6px; margin-top: 0px"><p style="margin: 0px">&#160;</p> </td></tr> <tr><td style="vertical-align: top; margin-top: 0px; background-color: #CCFFCC"><p style="margin: 0px; padding-right: 2.2px">Accounts payable, trade</p> </td><td style="vertical-align: bottom; width: 8.73px; margin-top: 0px; background-color: #CCFFCC"><p style="margin: 0px; padding-right: 2.2px">&#160;</p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px; background-color: #CCFFCC"><p style="margin: 0px">$</p> </td><td style="vertical-align: bottom; width: 60.46px; margin-top: 0px; background-color: #CCFFCC"><p style="text-align: right; margin: 0px">9,757,195</p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px; background-color: #CCFFCC"><p style="margin: 0px">&#160;</p> </td><td style="vertical-align: bottom; 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margin-top: 0px"><p style="margin: 0px; padding-right: 2.2px; font-size: 8pt">&#160;</p> </td><td style="vertical-align: bottom; width: 8.73px; margin-top: 0px"><p style="margin: 0px; padding-right: 2.2px; font-size: 8pt">&#160;</p> </td><td colspan="2" style="vertical-align: top; width: 69.33px; margin-top: 0px; border-bottom: #000000 1px solid"><p style="text-align: center; margin: 0px; font-size: 8pt"><b>September 30, </b></p> <p style="text-align: center; margin: 0px; font-size: 8pt"><b>2016</b></p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px"><p style="margin: 0px; font-size: 8pt">&#160;</p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px"><p style="margin: 0px; font-size: 8pt">&#160;</p> </td><td colspan="2" style="vertical-align: top; width: 81.13px; margin-top: 0px; border-bottom: #000000 1px solid"><p style="text-align: center; margin: 0px; font-size: 8pt"><b>December 31, </b></p> <p style="text-align: center; margin: 0px; font-size: 8pt"><b>2015</b></p> </td><td style="vertical-align: bottom; width: 8.6px; margin-top: 0px"><p style="margin: 0px; font-size: 8pt">&#160;</p> </td></tr> <tr><td style="vertical-align: top; margin-top: 0px"><p style="margin: 0px; padding-right: 2.2px">&#160;</p> </td><td style="vertical-align: top; width: 8.73px; margin-top: 0px"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td><td colspan="2" style="vertical-align: top; width: 69.33px; margin-top: 0px"><p style="margin: 0px">&#160;</p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px"><p style="margin: 0px">&#160;</p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px"><p style="margin: 0px">&#160;</p> </td><td colspan="2" style="vertical-align: top; width: 81.13px; margin-top: 0px"><p style="margin: 0px">&#160;</p> </td><td style="vertical-align: top; width: 8.6px; margin-top: 0px"><p style="margin: 0px">&#160;</p> </td></tr> <tr><td style="vertical-align: top; margin-top: 0px; background-color: #CCFFCC"><p style="margin: 0px; padding-right: 2.2px">Accounts payable, trade</p> </td><td style="vertical-align: bottom; 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margin: 0px">45,450</p> </td><td style="vertical-align: bottom; width: 8.6px; margin-top: 0px; border-bottom: #FFFFFF 1px solid"><p style="margin: 0px">&#160;</p> </td></tr> <tr><td style="vertical-align: top; margin-top: 0px; background-color: #CCFFCC"><p style="margin: 0px; padding-right: 2.2px">Accrued compensation</p> </td><td style="vertical-align: bottom; width: 8.73px; margin-top: 0px; background-color: #CCFFCC"><p style="margin: 0px; padding-right: 1.06px">&#160;</p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px; background-color: #CCFFCC"><p style="margin: 0px">&#160;</p> </td><td style="vertical-align: bottom; width: 60.46px; margin-top: 0px; background-color: #CCFFCC"><p style="text-align: right; margin: 0px">182,896</p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px; background-color: #CCFFCC; border-bottom: #FFFFFF 1px solid"><p style="margin: 0px">&#160;</p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px; 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margin: 0px">554,959</p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px; border-bottom: #FFFFFF 1px solid"><p style="margin: 0px">&#160;</p> </td><td style="vertical-align: bottom; width: 8.86px; margin-top: 0px"><p style="margin: 0px">&#160;</p> </td><td style="vertical-align: bottom; width: 11.93px; margin-top: 0px; border-bottom: #000000 1px solid"><p style="margin: 0px">&#160;</p> </td><td style="vertical-align: bottom; width: 69.2px; margin-top: 0px; border-bottom: #000000 1px solid"><p style="text-align: right; margin: 0px">1,430,453</p> </td><td style="vertical-align: bottom; width: 8.6px; margin-top: 0px; border-bottom: #FFFFFF 1px solid"><p style="margin: 0px">&#160;</p> </td></tr> <tr><td style="vertical-align: top; margin-top: 0px; background-color: #CCFFCC"><p style="margin: 0px; padding-right: 2.2px">Total</p> </td><td style="vertical-align: bottom; width: 8.73px; margin-top: 0px; background-color: #CCFFCC"><p style="margin: 0px; padding-right: 2.2px">&#160;</p> </td><td style="vertical-align: bottom; 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(&#34;JP&#34;) Hannan as our Chief Financial Officer. &#160;Mr. Hannan entered an Employment Agreement with the Company, the term of which extends until such time as either party chooses to terminate his employment with the Company. &#160;Under the terms of the Employment Agreement, Mr. Hannan's compensation includes: </p> <p style="margin: 0px"><br /></p> <p style="margin-top: 0px; margin-bottom: -2px; text-indent: 48px; width: 96px; font-family: Symbol; float: left">&#183;</p> <p style="margin: 0px; padding-left: 96px; text-indent: -2px">an annual base salary of $200,000; </p> <p style="margin-top: 0px; margin-bottom: -2px; text-indent: 48px; width: 96px; font-family: Symbol; clear: left; float: left">&#183;</p> <p style="margin: 0px; padding-left: 96px; text-indent: -2px">an annual bonus of $100,000, payable in equal quarterly installments beginning on April 1, and subject to the timely filings of our periodic reports;</p> <p style="margin-top: 0px; margin-bottom: -2px; text-indent: 48px; width: 96px; font-family: Symbol; clear: left; float: left">&#183;</p> <p style="margin: 0px; padding-left: 96px; text-indent: -2px">an annual bonus of a restricted stock grant of $100,000 in value of shares of the Company's Class A common stock on each annual anniversary date of the Employment Agreement, also subject to the timely filings of our periodic reports, subject to continued employment;</p> <p style="margin-top: 0px; margin-bottom: -2px; text-indent: 48px; width: 96px; font-family: Symbol; clear: left; float: left">&#183;</p> <p style="margin: 0px; padding-left: 96px; text-indent: -2px">a one time restricted stock award of 100,000 shares of the Company's Class A common stock, vesting 50,000 shares on October 14, 2017 and 50,000 shares on October 14, 2018, subject to continued employment; and</p> <p style="margin-top: 0px; margin-bottom: -2px; text-indent: 48px; width: 96px; font-family: Symbol; clear: left; float: left">&#183;</p> <p style="margin: 0px; padding-left: 96px; text-indent: -2px">annual paid time off of 30 days per year.<br /></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">Mr. Hannan is entitled to participate in all benefit programs it offers its other executive officers and expense reimbursement. Upon termination of the agreement by either party, regardless of the reason, he is not entitled to any additional compensation. &#160;The Employment Agreement with Mr. Hannan contains customary confidentiality, non-disclosure and noninterference provisions. &#160;</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In connection with Mr. Thumati's resignation, on October 14, 2016 the Company entered into Separation and Release Agreement with Mr. Thumati pursuant to which it agreed to pay him a severance amount of $180,000 and he forfeited all rights to vested and unvested stock awards. &#160;The agreement contained customary cross general releases, confidentiality and trade secret clauses.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">On October 31, 2016, the Company sold an aggregate of 255,000 units of its securities to nine accredited investors in a private placement exempt from registration under the Securities Act of 1933, as amended, in reliance on exemptions provided by Section 4(a)(2) and Rule 506(b) of Regulation D. &#160;The units were sold at a purchase price of $5.00 per unit resulting in gross proceeds to us of $1.3 million. &#160;This was the final closing of a private placement commenced in September 2016. &#160;Each unit consisted of one share of our Class A common stock and one three year Class A Common Stock Purchase Warrant to purchase 0.5 shares of our Class A common stock at an exercise price of $7.50 per share. &#160;We agreed to file a registration statement with the Securities and Exchange Commission within 90 days after the final closing in this offering registering for resale the shares of our Class A common stock issuable upon the exercise of the warrants included in the units sold in this offering, together with the shares of our Class A common stock underlying the Placement Agent Warrants. &#160;In the event we fail to timely file this resale registration, or at any time thereafter that the prospectus contained in the effective resale registration is not available for the issuance of the shares to the holder upon the exercise of the warrant for a period of at least 60 days following the delivery by us of a suspension notice, then the warrants are exercisable on a cashless basis. &#160;&#160;</p> <p style="margin: 0px">&#160;</p> <p style="margin: 0px">On October 3, 2016, we made an additional principal repayment to Victory Park in the amount of $2.0 million, bringing our current note payable balance to date to approximately $3.9 million.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">T.R. Winston &#38; Company, LLC, a broker-dealer and member of FINRA, acted as placement agent for us in this offering and received, in lieu of a cash placement agent commission totaling $109,956, and in reimbursement of certain expenses, 22,392 units in the offering. &#160;We also agreed to issue it three year warrants Placement Agent Warrants to purchase 15,200 shares of our Class A common stock at an exercise price of $7.50 per share. &#160;T.R. Winston &#38; Company, LLC also reallocated a portion of the gross placement agent commissions and Placement Agent Warrants to a selected dealer member of the selling group resulting in the payment by us of a cash commission of $2,000 and the issuance of an additional 400 Placement Agent Warrants. &#160;We also agreed to pay T.R. Winston &#38; Company, LLC a fee of 4% of the proceeds we may receive upon the exercise of the warrants included in the units. &#160;We are using the net proceeds for general working capital.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">On November 14, 2016 the Company entered into an Advisory Agreement with kathy ireland Worldwide LLC (&#34;kiWW&#34;). &#160;&#160;Under the terms of this agreement, which expires on December 31, 2018, the Company engaged kiWW to provide a variety of advisory and consulting services to the Company, including (i) if the Company forms an Advisory Committee of independent, third party brand, marketing and/or consumer product C-level executives, to serve on such committee on terms no less favorable than the highest compensated person on such committee, (ii) as an advisor, hold the non-executive designation of Chief Branding Advisor, and (iii) provide reasonable input to the Company on various aspects of corporate branding, and (iv) use good faith efforts to introduce the Company to potential business customers. &#160;As compensation for such services, the Company will issue kiWW 100,000 shares of its Class A common stock on January 2, 2017 and reimburse kiWW for expenses incurred in connection with the services to be provided to the Company. &#160;The agreement contains customary confidentiality and indemnification provisions. &#160;<br /><br /></p> 5.00 5.00 0.04 0.04 266000 109957 200000 100000 100000 100000 50000 50000 180000 2000 400 2400000 <p style="margin: 0px"></p> <p style="margin: 0px"><b>NOTE 4 &#150; STOCKHOLDERS' EQUITY.</b></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px"><u>Preferred Stock</u></p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">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. 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Notwithstanding anything contained in the designations, the holder of Series 1 Preferred Stock is not obligated to make any Dispositions of Series 1 Preferred Stock or Class A common stock issued upon the conversion of Series 1 Preferred Stock.</p> </td></tr> </table> <p style="margin: 0px"><br /></p> <p style="margin: 0px">Following the conversion of the remaining shares of our Series 1 Preferred Stock during 2015 into shares of our Class A common stock, in February 2016 we filed a Certificate of Elimination with the Secretary of State of Delaware returning all shares of previously designated Series 1 Preferred Stock to our blank check preferred stock.</p> <p style="margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px"><u>Common Stock</u></p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">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. &#160;There were no shares of Class B common stock outstanding during either the 2015 or 2016 periods.</p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">On February 23, 2016, our Board of Directors approved the adoption of our 2016 Equity Compensation Plan (the &#147;2016<u> </u>Plan&#148;) and reserved 600,000 shares of our Class A common stock for grants under this plan. &#160;The terms of the 2016 Plan, which is administered by our Board of Directors, are identical to those of our 2012 Plan and 2014 Plan. 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The units were sold at a purchase price of $5.00 per unit resulting in gross proceeds to us of $3.3 million. &#160;Each unit consisted of one share of our Class A common stock and one three year Class A Common Stock Purchase Warrant to purchase 0.5 shares of our Class A common stock at an exercise price of $7.50 per share. &#160;We agreed to file a registration statement with the Securities and Exchange Commission within 90 days after the final closing in this offering registering for resale the shares of our Class A common stock issuable upon the exercise of the warrants included in the units sold in this offering, together with the shares of our Class A common stock underlying the Placement Agent Warrants. &#160;In the event we fail to timely file this resale registration, or at any time thereafter that the prospectus contained in the effective resale registration is not available for the issuance of the shares to the holder upon the exercise of the warrant for a period of at least 60 days following the delivery by us of a suspension notice, then the warrants are exercisable on a cashless basis. T.R. Winston &#38; Company, LLC, a broker-dealer and member of FINRA, acted as placement agent for us in this offering. We paid the placement agent commissions totaling $266,000 and agreed to issue it three year warrants Placement Agent Warrants to purchase 53,200 shares of our Class A common stock at an exercise price of $7.50 per share. &#160;T.R. Winston &#38; Company, LLC has reallocated a portion of the commissions and Placement Agent Warrants to a selected dealer member of the selling group. We also agreed to pay T.R. Winston &#38; Company, LLC a fee of 4% of the proceeds we may receive upon the exercise of the warrants included in the units. &#160;We used $2.0 million of the net proceeds received by us in this offering to further reduce our obligations which are outstanding under the Financing Agreement, as amended, with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders. &#160;We will use the balance of the proceeds for general working capital.</p> <p style="margin: 0px"></p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px"><u>Stock Awards</u></p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">In February 2016, we granted an aggregate of 6,786 shares of our Class A common stock awards to four directors. The shares were vested upon grant. We recorded $47,500 of compensation expense related to these awards. </p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">In April 2016, we granted a total of 20,000 shares of our Class A common stock awards to an employee. &#160;During the three and nine months ended September 30, 2016, we have recorded a total of $20,750 and $38,042; respectively, as compensation expense related to these awards.</p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">During the nine months ended September 30, 2016, we recorded expense of $250,088 related to stock awards granted in prior years. 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These options have a grant date fair value of $1.07 per option, determined using the Black Scholes method based on the following assumptions: (1) risk free interest rate of 0.35%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 115%; and (4) an expected life of the options of 5 years. We have recorded an expense for the options of $2,671 and $3,116 for the three and nine months ended September 30, 2016, respectively.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">During the three months ended September 30, 2016 and 2015, we recorded expense of $66,588 and $2,726 respectively, related to stock options granted in the prior years but vested in current period. During nine months ended September 30, 2016 and 2015, we recorded expense of $181,650 and $142,456, respectively, relating to stock options granted in the prior years but vested in current period. &#160;&#160;There were no new grants of stock options made in the third quarter of 2016.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">Awards in the amount of 42,000 options were forfeited during 2016. </p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">On September 19, 2016, the Company extended the expiration date of common stock purchase warrants issued and sold in 2013 to purchase an aggregate of 642,000 shares of its Class A common stock at an exercise price of $5.00 per share from between October 8, 2016 and November 6, 2016 to March 31, 2017, for which, the Company applied ASC 718-20-35-3 modification of equity-classified contracts and therefore the incremental fair value from the modification (the change in the fair value of the instrument before and after the modification) of $274,695 is recognized as an expense in the income statement to the extent the modified instrument has a higher fair value.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px"><u>Reverse Stock Split</u></p> <p style="margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">On September 20, 2016, the Company completed a reverse stock split. 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On the effective date of the reverse stock split, all outstanding options and warrants to purchase shares of the Company's Class A common stock were proportionally adjusted based upon the split ratio and became exercisable into one-fifth of the number of shares of the Company's Class A common stock as it was prior to the reverse stock split at an exercise price which is five times the exercise price prior to the reverse stock split. </p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="margin: 0px">After the effective date of the reverse stock split, each certificate representing shares of pre-reverse stock split Class A common stock was deemed to represent one-fifth of a share of the post-reverse stock split Class A common stock, subject to rounding for fractional shares, and the records of the Company's transfer agent, Transfer Online, Inc., were adjusted to give effect to the reverse stock split. 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ASU 2016-16 will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The guidance will be effective for the first interim period of our 2019 fiscal year, with early adoption permitted. </p> <p style="line-height: 11pt; margin: 0px"><br /></p> <p style="line-height: 11pt; margin: 0px">In August 2016, the Financial Accounting Standards Board (&#147;FASB&#148;) issued Accounting Standards Update (&#147;ASU&#148;) ASU No. 2016-15, &#147;Classification of Certain Cash Receipts and Cash Payments&#148; (&#147;ASU 2016-15&#148;). ASU 2016-15 provides guidance regarding the classification of certain items within the statements of cash flows. 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For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a forward-looking &#147;expected loss&#148; model that will replace the current &#147;incurred loss&#148; model and generally will result in earlier recognition of allowances for losses. The guidance will be effective for the first interim period of our 2021 fiscal year, with early adoption in fiscal year 2020 permitted.</p> </td></tr> </table> <p style="margin: 0px"><br /></p> <table cellpadding="0" cellspacing="0" style="width: 100%; margin-top: 0px; font-size: 10pt"><tr style="height: 0px; font-size: 0"><td style="width: 80px" /><td /></tr> <tr><td style="vertical-align: top; width: 80px; margin-top: 0px"><p style="margin: 0px; padding-left: 48px; font-family: Symbol">&#183;</p> </td><td style="vertical-align: top; margin-top: 0px"><p style="margin: 0px; font-family: inherit,Times New Roman">ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the new guidance requires the fair value measurement of investments in certain equity securities. For investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. All changes in measurement will be recognized in net income. The guidance will be effective for the first interim period of our 2019 fiscal year. Early adoption is not permitted, except for certain provisions relating to financial liabilities. </p> </td></tr> </table> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In April 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-10, <i>Identifying Performance Obligations and Licensing (Topic 606)</i>, which amends certain aspects of the FASB&#146;s new revenue standard, ASU 2014-09, <i>Revenue from Contracts with Customer (Topic 606)</i>. ASU 2016-10 identifies performance obligations and provides licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 <i>(Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date)</i> defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. </p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In March 2016, the FASB issued ASU No. 2016-09, <i>Compensation - Stock Compensation (Topic 718</i>), which is part of the FASB's Simplification Initiative. The updated guidance simplifies the accounting for share-based payment transactions. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.</p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In March 2016, the FASB issued ASU No. 2016-08, <i>Revenue from Contracts with Customer (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)</i>, or ASU 2016-08, that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company is still currently evaluating the full impact of the adoption of this standard on its consolidated financial statements. &#160;However, given revenue recognition practices already in place, it does not appear likely that this will have a material impact on the Company&#146;s future presentation of consolidated financial statements.</p> <p style="margin: 0px">&#160;</p> <p style="margin: 0px">In February 2016, the FASB issued ASU No. 2016-02, <i>Leases (Topic 842)</i>, which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements. </p> <p style="margin: 0px"><br /></p> <p style="margin: 0px">In April 2015, the FASB issued ASU No. 2015-3, <i>Simplifying the Presentation of Debt Issuance Costs </i>(&#147;ASU 2015-3&#148;) which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset. &#160;ASU 2015-3 became effective for public companies during interim and annual reporting periods beginning after December 15, 2015. &#160;The Company adopted this ASU on January 1, 2016. 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Document and Entity Information - shares
9 Months Ended
Sep. 30, 2016
Nov. 11, 2016
Document And Entity Information    
Entity Registrant Name SOCIAL REALITY, Inc.  
Entity Central Index Key 0001538217  
Document Type 10-Q  
Document Period End Date Sep. 30, 2016  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   6,941,077
Document Fiscal Period Focus Q3  
Document Fiscal Year Focus 2016  

XML 17 R2.htm IDEA: XBRL DOCUMENT v3.5.0.2
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Current assets:    
Cash and cash equivalents $ 4,241,230 $ 1,091,186
Accounts receivable, net 4,387,878 7,056,298
Prepaid expenses 227,878 309,436
Other current assets 6,488 36,090
Total current assets 8,863,474 8,493,010
Property and equipment, net of accumulated depreciation of $69,951 and $42,295 31,458 43,936
Goodwill 15,644,958 16,314,957
Intangibles - net 1,342,094 1,611,744
Prepaid stock based compensation 373,567
Other assets 34,659 34,659
Total assets 25,916,643 26,871,873
Current liabilities:    
Accounts payable and accrued expenses 11,673,969 5,138,807
Note payable, net of unamortized costs of $838,069 and $1,076,633 5,095,736 1,378,367
Unearned revenue 19,410 1,295
Contingent consideration payable to related party - current portion 7,585,435
Put liability 1,500,000 1,436,282
Total current liabilities 18,289,115 15,540,186
Notes payable, net of unamortized cost of $0 and $578,160 7,455,758
Total liabilities 18,289,115 22,995,944
Stockholders' equity    
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued and outstanding
Additional paid in capital 20,666,933 14,012,078
Accumulated deficit (13,046,069) (10,141,771)
Total stockholders' equity 7,627,528 3,875,929
Total liabilities and stockholders' equity 25,916,643 26,871,873
Common Class A [Member]    
Stockholders' equity    
Common stock 6,664 5,622
Common Class B [Member]    
Stockholders' equity    
Common stock
XML 18 R3.htm IDEA: XBRL DOCUMENT v3.5.0.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Property and equipment, accumulated depreciation $ 69,951 $ 42,295
Notes payable, unamortized cost, current 838,069 1,076,633
Notes payable, unamortized cost, noncurrent potion $ 0 $ 578,160
Preferred Stock, shares authorized 50,000,000 50,000,000
Preferred Stock, par value per share $ 0.001 $ 0.001
Preferred Stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common Class A [Member]    
Common Stock, shares authorized 250,000,000 250,000,000
Common Stock, par value per share $ 0.001 $ 0.001
Common Stock, shares issued 6,663,662 28,110,229
Common Stock, shares outstanding 5,622,052 28,110,229
Common Class B [Member]    
Common Stock, shares authorized 9,000,000 9,000,000
Common Stock, par value per share $ 0.001 $ 0.001
Common Stock, shares issued 0 0
Common Stock, shares outstanding 0 0
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Income Statement [Abstract]        
Revenues $ 9,530,842 $ 7,390,238 $ 24,249,588 $ 22,173,095
Cost of revenue 6,986,834 3,296,144 16,430,204 10,697,062
Gross profit 2,544,008 4,094,094 7,819,384 11,476,033
Operating expense        
General, selling and administrative expense 3,851,890 3,751,736 11,082,581 10,914,488
Impairment of goodwill 670,000
Income (loss) from operations (1,307,882) 342,358 (3,933,197) 561,545
Other income (expense)        
Write off of contingent consideration 3,744,496
Interest income (expense) (1,067,964) (1,000,898) (2,715,598) (2,858,955)
Other income (expense) (1,067,964) (1,000,898) 1,028,898 (2,858,955)
Income (loss) before provision for income taxes (2,375,846) (658,540) (2,904,299) (2,297,410)
Provision for income taxes
Net income (loss) $ (2,375,846) $ (658,540) $ (2,904,299) $ (2,297,410)
Net loss per share, basic and diluted $ (0.4) $ (0.12) $ (0.49) $ (0.43)
Weighted average shares outstanding, basic and diluted 5,958,897 5,409,248 5,929,793 5,387,126
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Cash flows from operating activities:    
Net loss $ (2,904,299) $ (2,297,410)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:    
Amortization of stock based prepaid fees 373,567 475,839
Stock based compensation 610,397 626,539
Non-cash financing cost 274,695
Amortization of debt issue costs 816,705 925,612
PIK interest expense accrued to principal 447,738 279,216
Impairment of goodwill 670,000
Accretion of contingent consideration (3,585,388) 692,674
Accretion of put liability 63,718 129,643
Depreciation and amortization 286,944 203,585
Bad debt expense 96,253 66,728
Changes in operating assets and liabilities:    
Accounts receivable (2,767,590) (5,102,151)
Prepaid expenses 81,562 91,568
Other current assets 29,602 (15,132)
Other assets (10,855)
Accounts payable and accrued expenses 6,355,103 2,833,564
Unearned revenue 18,115 (23,600)
Cash provided (used) by operating activities 867,122 (1,124,180)
Cash flows from investing activities:    
Purchase of equipment (4,816) (30,657)
Cash used by investing activities (4,816) (30,657)
Cash flows from financing activities:    
Sale of units 3,550,815
Sale of warrants 6,921
Proceeds from notes payable 2,100,000 1,500,000
Repayments of note payable (1,763,077) (1,162,519)
Payment of contingent consideration (1,600,000)
Cash provided by financing activities 2,287,738 344,402
Net increase in cash 3,150,044 (810,435)
Cash, beginning of period 1,091,186 1,843,393
Cash, end of period 4,241,230 1,032,958
Supplemental Schedule of Cash Flow Information:    
Cash paid for interest 1,224,525 718,119
Cash paid for taxes
Non-cash financial activities:    
Proceeds paid by FastPay on behalf of the Company 5,507,468
Common stock issuance for payment of contingent consideration $ 2,400,000
XML 21 R6.htm IDEA: XBRL DOCUMENT v3.5.0.2
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Sep. 30, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.


Organization and Basis of Presentation


Social Reality, Inc. ("Social Reality", "we", "us" or the "Company") is a Delaware corporation formed on August 2, 2011. Effective January 1, 2012 we acquired all 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 and Class B common stock. The former members of Social Reality, LLC owned all of our common stock after the acquisition.


At Social Reality, we sell digital advertising campaigns to advertising agencies and brands. We have developed technology that allows brands to launch and manage digital advertising campaigns, and we provide the platform that allows website publishers to sell their media inventory to many different digital adverting buyers. Our focus is to provide technology tools that enable both publishers and advertisers to maximize their digital advertising initiatives. We derive our revenues from:


·

sales of digital advertising campaigns to advertising agencies and brands;

·

sales of media inventory owned by our publishing partners through real-time bidding, or RTB, exchanges;

·

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

·

creation of custom platforms for buying media on SRAX for large brands.


The core elements of this business are:


·

Social Reality Ad Exchange or "SRAX" Real Time Bidding sell side and buy side representation is our technology which assists publishers in delivering their media inventory to the real-time bidding, or RTB, exchanges.  The SRAX platform integrates multiple market-leading demand sources. We also build custom platforms that allow our agency partners to launch and manage their own RTB campaigns by enabling them to directly place advertising orders on the platform dashboard and view and analyze results as they occur;

 

 

·

SRAX md is our ad targeting and data platform for healthcare brands, agencies and medical content publishers. Healthcare and pharmaceutical publishers utilize the platform for yield optimization, audience extension campaigns and re-targeting of their healthcare professional audience. Agencies and brands purchase targeted digital and mobile ad campaigns;

 

 

·

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

 

 

·

 SRAX APP, a recently launched new product, is a platform that allows publishers and content owners to launch native mobile applications through our SRAX platform.


We offer our customers a number of pricing options including cost-per-thousand-impression, or "CPM", whereby our customers pay based on the number of times the target audience is exposed to the advertisement, and on a monthly service fee.

 

Social Reality is also an approved Facebook advertising partner. We sell targeted and measurable online advertising campaigns and programs to brand advertisers and advertising agencies across large Facebook apps and websites, generating qualified Facebook likes and quantifiable engagement for our clients, driving online sales and increased brand equity.


We are headquartered in Los Angeles, California.


Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

 

These interim financial statements as of and for the three and nine months ended September 30, 2016 and 2015 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any future period. All references to September 30, 2016 and 2015 in these footnotes are unaudited.

 

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2015, included in the Company's annual report on Form 10-K filed with the SEC on March 16, 2016.


The condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited consolidated financial statements at that date but do not include all disclosures required by GAAP. Certain items have been reclassified to conform to the current period presentation.


Effect of Reverse Stock Split on Presentation


On September 20, 2016, the Company completed a reverse stock split.  The principal reason for the reverse stock split was to facilitate the up-listing of our Class A common stock to the NASDAQ Capital Market which has a minimum market (bid) price requirement for new applicants of $4.00 per share.  


As a result of the reverse stock split, each five shares of the Company's Class A common stock issued and outstanding, or held as treasury shares, immediately prior to the effective date of the reverse stock split became one share of its Class A common stock on the effective date of the reverse stock split. No fractional shares of Class A common stock were issued to any stockholder in connection with the reverse stock split and all fractional shares which might otherwise be issuable as a result of the reverse stock split were rounded up to the nearest whole share. On the effective date of the reverse stock split, all outstanding options and warrants to purchase shares of the Company's Class A common stock were proportionally adjusted based upon the split ratio and became exercisable into one-fifth of the number of shares of the Company's Class A common stock as it was prior to the reverse stock split at an exercise price which is five times the exercise price prior to the reverse stock split.  


After the effective date of the reverse stock split, each certificate representing shares of pre-reverse stock split Class A common stock was deemed to represent one-fifth of a share of the post-reverse stock split Class A common stock, subject to rounding for fractional shares, and the records of the Company's transfer agent, Transfer Online, Inc., were adjusted to give effect to the reverse stock split. Following the effective date of the reverse stock split, the share certificates representing the pre-reverse stock split Class A common stock continue to be valid for the appropriate number of shares of post-reverse stock split Class A common stock, adjusted for rounding.  


These condensed consolidated financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise specified.


Principles of Consolidation


The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.


The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries from the acquisition date of majority voting control and through the date of disposition, if any.


Use of Estimates


GAAP requires management of the Company to make estimates and assumptions in the preparation of these condensed consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and 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 and sales credits, stock-based compensation, income taxes, purchase price for acquisition, goodwill, other intangible assets, put rights and valuation of liabilities. The accounting policies for these areas are discussed elsewhere in these unaudited condensed consolidated financial statements.


Cash and Cash Equivalents


The Company considers all short-term highly liquid investments with a remaining maturity at the date of purchase of three months or less to be cash equivalents.


Revenue Recognition


The Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists; no significant Company obligations remain; collection of the related receivable is reasonably assured; and the fees are fixed or determinable. The Company acts as a principal in revenue transactions as the Company is the primary obligor in the transactions. As such, revenue is recognized on a gross basis, and media and publisher expenses that are directly related to a revenue-generating event are recorded as a component of cost of revenue.


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-throughs, 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 income statement.


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 $231,695 and $135,442 at September 30, 2016 and December 31, 2015, 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 in the United States. The balances in the United States held at any one financial institution are generally in excess of Federal Deposit Insurance Corporation ("FDIC") insurance limits. The uninsured cash bank balances were approximately $4.2 million at September 30, 2016. The Company has not experienced any loss on these accounts. The balances are maintained in demand accounts to minimize risk.


At September 30, 2016, two customers accounted for more than 10% of the accounts receivable balance, for a total of 50%. For the nine months ended September 30, 2016 one customer accounted for 49% of total revenue. At September 30, 2015, two customers accounted for more than 10% of the accounts receivable balance, for a total of 61%. For the nine months ended September 30, 2015 one customer accounted for 50% of total revenue.


Fair Value of Financial Instruments


The Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At September 30, 2016 and December 31, 2015, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.


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 and a non-complete agreement 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.


Business Combinations


For all business combinations (whether partial, full or step acquisitions), the Company records 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration, if any, is recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value are recognized in earnings until settlement and acquisition-related transaction and restructuring costs are expensed rather than treated as part of the cost of the acquisition.


Goodwill and change to annual impairment testing period


Our goodwill consists of the excess purchase price paid in business combinations over the fair value of assets acquired. Goodwill is considered to have an indefinite life.


The Company has historically performed its annual goodwill and impairment assessment on September 30th of each year; however, due to the elimination of the need to internally maintain certain segregated accounting records of the Steel Media business that occurred in the third quarter of 2016, following the determination that the second year Earn Out Consideration would not be achieved (See Note 2), this was reevaluated by the Company.  Further, given the seasonal and cyclical nature of advertising sales in general, timing of the Company’s annual budgeting process, and the short-term nature of the Company’s advertising sales contracts, it was determined that it would be more effective and efficient to conduct the annual impairment analysis instead at December 31st of each year.  This would also better align the Company with other advertising sales companies who also generally conduct this annual analysis in the fourth quarter.  The Company does not believe this change will have any material impact on its consolidated financial statements, and continues to evaluate potential interim impairment to goodwill consistent with its historical practices.


The Company employs the non-amortization approach to account for goodwill. Under the non-amortization approach, goodwill is not amortized into the results of operations, but instead is reviewed annually or more frequently if events or changes in circumstances indicate that the asset might be impaired, to assess whether the fair value exceeds the carrying value.


When evaluating the potential impairment of goodwill, we first assess a range of qualitative factors, including but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company's products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and the overall financial performance for each of the Company's reporting units. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then proceed to a two-step impairment testing methodology using the income approach (discounted cash flow method).


In the first step of the two-step testing methodology, we compare the carrying value of the reporting unit, including goodwill, with its fair value, as determined by its estimated discounted cash flows. If the carrying value of a reporting unit exceeds its fair value, we then complete the second step of the impairment test to determine the amount of impairment to be recognized. In the second step, we estimate an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). If the carrying value of a reporting unit's goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference in that period.


When required, we arrive at our estimates of fair value using a discounted cash flow methodology which includes estimates of future cash flows to be generated by particular 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.


During the nine months ended September 30, 2016, we determined that a portion of the goodwill assigned to Steel Media acquisition has become impaired. Accordingly, we recorded a goodwill impairment charge of $670,000 for the nine months ended September 30, 2016. The impairment charge represents the excess of the carrying amount of the goodwill recorded in the acquisition over the implied fair value of the goodwill. The implied fair value of the goodwill is the residual fair value based on an income approach using discounted cash flow model using revenue and profit forecasts.  No additional impairment of goodwill has been recorded in the three months ended September 30, 2016.

 

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 in either the nine months ended September 30, 2016 or 2015.


Loss 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 2,912,069 common share equivalents at September 30, 2016 and 2,796,803 at September 30, 2015. For the nine months ended September 30, 2016 and 2015 these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.


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 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.


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.


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.


Liquidity


The Company had an accumulated deficit at September 30, 2016 of $(13.0) million. As of September 30, 2016, we had approximately $4.2 million in cash and cash equivalents and a deficit in working capital of $(9.4) million as compared to $(1.1) million in cash and cash equivalents and a deficit in working capital of $7.0 million at December 31, 2015.  The Company believes it has established an ongoing source of revenue that is sufficient to cover its operating costs over the next twelve months.  In addition, management plans to continue as a going concern could also include raising additional capital through borrowing and/or additional sales of equity or equity linked securities.


Recently Issued Accounting Standards


In  October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16 - Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The guidance will be effective for the first interim period of our 2019 fiscal year, with early adoption permitted.


In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 provides guidance regarding the classification of certain items within the statements of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted.


In connection with its financial instruments project, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments in June 2016 and ASU 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities in January 2016.


·

ASU 2016-13 introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a forward-looking “expected loss” model that will replace the current “incurred loss” model and generally will result in earlier recognition of allowances for losses. The guidance will be effective for the first interim period of our 2021 fiscal year, with early adoption in fiscal year 2020 permitted.


·

ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the new guidance requires the fair value measurement of investments in certain equity securities. For investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. All changes in measurement will be recognized in net income. The guidance will be effective for the first interim period of our 2019 fiscal year. Early adoption is not permitted, except for certain provisions relating to financial liabilities.


In April 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-10, Identifying Performance Obligations and Licensing (Topic 606), which amends certain aspects of the FASB’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customer (Topic 606). ASU 2016-10 identifies performance obligations and provides licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 (Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date) defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.


In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), which is part of the FASB's Simplification Initiative. The updated guidance simplifies the accounting for share-based payment transactions. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.


In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customer (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), or ASU 2016-08, that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company is still currently evaluating the full impact of the adoption of this standard on its consolidated financial statements.  However, given revenue recognition practices already in place, it does not appear likely that this will have a material impact on the Company’s future presentation of consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.


In April 2015, the FASB issued ASU No. 2015-3, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-3”) which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset.  ASU 2015-3 became effective for public companies during interim and annual reporting periods beginning after December 15, 2015.  The Company adopted this ASU on January 1, 2016. The adoption of this ASU did not have a material impact to our consolidated financial statements.


Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

XML 22 R7.htm IDEA: XBRL DOCUMENT v3.5.0.2
ACQUISITIONS
9 Months Ended
Sep. 30, 2016
Business Combinations [Abstract]  
ACQUISITIONS

NOTE 2 – ACQUISITIONS.


Acquisition of Steel Media


On October 30, 2014, we acquired 100% of the capital stock of Steel Media, a California corporation ("Steel Media"), from Richard Steel pursuant to the terms and conditions of a stock purchase agreement, dated October 30, 2014, by and among the Company, Steel Media and Mr. Steel (the "Stock Purchase Agreement").


As consideration for the purchase of Steel Media, we agreed to pay Mr. Steel up to $20.0 million, consisting of: (i) a cash payment at closing of $7.5 million; (ii) a cash payment of $2.0 million which is being held in escrow to satisfy certain indemnification obligations to the extent such arise under the Stock Purchase Agreement; (iii) a one year secured subordinated promissory note in the principal amount of $2.5 million (the "Note") which was secured by 477,373 shares of our Class A common stock (the "Escrow Shares"); and (iv) earn out payments of up to $8 million (the "Earn Out Consideration").


The Earn Out Consideration target was achieved for the first earn out period ended October 31, 2015 and on January 29, 2016 we paid Mr. Steel $4.0 million, of which $1.6 million was paid in cash and the balance was paid through the issuance of 256,754 shares of our Class A common stock in accordance with the terms of the Stock Purchase Agreement. The Company determined the Earn Out Consideration would not be achieved for the second earn out period ended October 31, 2016. As a result, the Company reversed the second earn out liability of $3.5 million during nine months ended September 30, 2016.  At September 30, 2016, we did not record a liability for the Earn Out Consideration. At December 31, 2015, we recorded $7.6 million associated with the first and second earn out periods.

Acquisition of Five Delta, Inc.


On December 19, 2014, we acquired 100% of the outstanding capital stock of Five Delta, Inc., a Delaware corporation ("Five Delta"), in exchange for 120,000 shares of our Class A common stock pursuant to the terms and conditions of the Share Acquisition and Exchange Agreement dated December 19, 2014 (the "Five Delta Agreement") by and among Social Reality, Five Delta and the stockholders of Five Delta. The acquisition price was $756,000.

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NOTES PAYABLE
9 Months Ended
Sep. 30, 2016
Notes Payable [Abstract]  
NOTES PAYABLE

NOTE 3 – NOTES PAYABLE.


Financing Agreement with Victory Park Management, LLC as agent for the lenders


On October 30, 2014 (the "Financing Agreement Closing Date"), the Company entered into a financing agreement (the "Financing Agreement") with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders and holders of notes and warrants issued thereunder (the "Agent"). The Financing Agreement provides for borrowings of up to $20.0 million to be evidenced by notes issued thereunder, which are secured by a first priority, perfected security interest in substantially all of the assets of the Company and its subsidiaries (including Steel Media) and a pledge of 100% of the equity interests of each domestic subsidiary of the Company pursuant to the terms of a pledge and security agreement (the "Pledge and Security Agreement") entered into by the Company on the Financing Agreement Closing Date (which was joined by Steel Media immediately after the Company's acquisition of Steel Media). The Financing Agreement contains covenants limiting, among other things, indebtedness, liens, transfers or sales of assets, distributions or dividends, and merger or consolidation activity. The notes (the "Financing Notes") issued pursuant to the Financing Agreement, including the note issued to the lender thereunder in the original aggregate principal amount of $9.0 million on the Financing Agreement Closing Date (the "Initial Financing Note") and the subsequent notes described below, bear interest at a rate per annum equal to the sum of (1) cash interest at a rate of 10% per annum and (2) payment-in-kind (PIK) interest at a rate of 4% per annum for the period commencing on the Financing Agreement Closing Date and extending through the last day of the calendar month during which the Company's financial statements for December 31, 2014 are delivered, and which PIK interest rate thereafter from time to time may be adjusted based on the ratio of the Company's consolidated indebtedness to its earnings before interest, taxes, depreciation and amortization. If the Company achieves a reduction in the leverage ratio as described in the Financing Agreement, the PIK interest rate declines on a sliding scale from 4% to 2%. The Financing Notes issued under the Financing Agreement are scheduled to mature on October 30, 2017, with scheduled quarterly payment dates commencing December 31, 2014. Proceeds from the Initial Financing Note issued on the Financing Agreement Closing Date were used to finance, in part, the Company's acquisition of Steel Media as described in Note 2.


The Financing Agreement provides for subsidiaries of the Company to join the Financing Agreement from time to time as borrowers and cross guarantors thereunder. Immediately after the Company's acquisition of Steel Media on October 30, 2014, Steel Media executed a joinder agreement under which it became a borrower under the Financing Agreement. The Company and its subsidiary, Steel Media, are cross guarantors of each other's obligations under the Financing Agreement, all of which guaranties and obligations are secured pursuant to the terms of the Pledge and Security Agreement.


On May 14, 2015, we entered into the First Amendment to Financing Agreement with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders. Under the terms of the amendment, the leverage ratio, senior leverage ratio, fixed charge coverage ratio and interest coverage ratio under the Financing Agreement were all modified, and the minimum current ratio was reduced. The amendment also modified our obligations with respect to the delivery of certain reports, certain representations by us as well as clarifying other additional terms by which the loan is administered.


On July 6, 2015, we borrowed an additional $1.5 million pursuant to the Financing Agreement. The loan funded on July 8, 2015. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $1.5 million. The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement for working capital.


On October 26, 2015, we borrowed an additional $1.4 million pursuant to the Financing Agreement. The loan funded on October 26, 2015. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $1.4 million.  The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement towards the payment of the Note due Richard Steel described in Note 2, and for working capital.


On January 26, 2016, we borrowed an additional $1.6 million pursuant to the financing agreement with Victory Park Management, LLC. The loan funded on January 28, 2016. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $1.6 million.  The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement as a portion of the payment to Mr. Richard Steel of the first year Earn Out Consideration described in Notes 2 and 6.


On February 16, 2016, we borrowed an additional $500,000 pursuant to the Financing Agreement with Victory Park Management, LLC. The loan funded on February 16, 2016. In connection therewith, we issued a Senior Secured Term Note to the lender in the principal amount of $500,000. The Senior Secured Term Note has terms identical to the Initial Financing Note described above. The Senior Secured Term Note will mature on October 30, 2017. We used the proceeds from this additional draw under the Financing Agreement as working capital.


For the nine months ended September 30, 2016, we made principal payments of approximate $6.7 million.


Notes payable consists of the following:


 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

 

 

 

 

 

Current portion of note payable

 

$

5,933,805

 

 

$

2,455,000

 

Non-current portion of note payable

 

 

-

 

 

 

8,033,898

 

Total note payable including PIK interest

 

 

5,933,805

 

 

 

10,488,898

 

Less deferred financing costs

 

 

(838,069

)

 

 

(1,654,773

)

Notes payable and PIK interest accrued, net of deferred costs

 

$

5,095,736

 

 

$

8,834,125

 


During the three months ended September 30, 2016 and 2015, $206,287 and $102,250, respectively, were recorded as PIK interest expense.  During the nine months ended September 30, 2016 and 2015, $447,737 and $279,216, respectively, were recorded as PIK interest expense.


Pursuant to the Financing Agreement dated October 31, 2014, the Company also issued to the lender thereunder, on the Financing Agreement Closing Date, a five-year warrant to purchase 580,000 shares of its Class A common stock at an exercise price of $5.00 per share (the "Financing Warrant"). The warrant holder may not, however, exercise the Financing Warrant for a number of shares of Class A common stock that would cause such holder to beneficially own shares of Class A common stock in excess of 4.99% of the Company's outstanding shares of Class A common stock following such exercise. The number of shares issuable upon exercise of the Financing Warrant and the exercise price therefor are subject to adjustment in the event of stock splits, stock dividends, recapitalizations and similar corporate events. Pursuant to the Financing Warrant, the warrant holder has the right, at any time after the earlier of April 30, 2016 and the maturity date of the Financing Notes issued pursuant to the Financing Agreement, but prior to the date that is five years after the Financing Agreement Closing Date, to exercise its put right under the terms of the Financing Warrant, pursuant to which the warrant holder may sell to the Company, and the Company will purchase from the warrant holder, all or any portion of the Financing Warrant that has not been previously exercised. In connection with any exercise of this put right, the purchase price will be equal to an amount based upon the percentage of the Financing Warrant for which the put right is being exercised, multiplied by the lesser of (A) 50% of the total revenue for the Company and its subsidiaries, on a consolidated basis, for the trailing 12-month period ending with the Company's then-most recently completed fiscal quarter, and (B) $1.5 million. We have recorded the put liability at its present value of $1.5 million at September 30, 2016.


As contemplated under the Financing Agreement, the Company also entered into a registration rights agreement on the Financing Agreement Closing Date (the "Financing Registration Rights Agreement") with the holder of the Financing Warrant, pursuant to which the Company granted to such holder certain "piggyback" rights to register the shares of the Company's Class A common stock issuable upon exercise of the Financing Warrant. Specifically, the holder of the Financing Warrant has the right, subject to certain allocation provisions set forth in the Financing Registration Rights Agreement, to include the shares underlying the Financing Warrant in registration statements for offerings by the Company of its Class A common stock, as well as offerings of the Company's Class A common stock held by third parties. The shares underlying the Financing Warrant were included in a registration statement on Form S-1 that was declared effective by the Securities and Exchange Commission in October 2015.


As part of the arrangements under the Financing Agreement, the Agent, Mr. Steel, and the Company and Steel Media (as borrowers under the Financing Agreement) have also entered into a subordination agreement (the "Subordination Agreement") under which Mr. Steel agreed, subject to the terms and conditions of the Subordination Agreement, to subordinate to the lenders and holders of Financing Notes and the Financing Warrant issued under the Financing Agreement (i) certain obligations, liabilities, and indebtedness, including, without limitation, payments under the Note and payments of Earn Out Consideration, which may be owed to him by the Company; and (ii) during the time the Note was outstanding a put right we granted him if in the event of a default under the Note.  As set forth above, the Note was paid in full in October 2015 and the put right was terminated upon such payment.


Activity for the put liability during the nine months ended September 30, 2016 was:


 

 

December 31,

2015

 

 

Activity

During

the Period

 

 

Accretion

in Value

 

 

September 30,

2016

 

Put liability

 

$

1,436,282

 

 

$

 

 

$

63,718

 

 

 $

1,500,000

 

Total

 

$

1,436,282

 

 

$

 

 

$

63,718

 

 

 $

1,500,000

 


We incurred a total of $3.1 million of costs related to the Financing Agreement. These costs will be amortized to interest expense over the life of the debt. During the three months ended September 30, 2016 and 2015, $250,100 and $297,242, respectively of debt issuance costs were amortized. During the nine months ended September 30, 2016 and 2015, $816,705 and $(925,612), respectively of debt issuance costs were amortized. As of September 30, 2016 and December 31, 2015, capitalized debt costs had a balance of $838,069 and $1.6 million, respectively.


The terms of the Financing Agreement require us to maintain certain financial covenants, including leverage ratios, senior leverage ratios, fixed charge coverage ratios, interest coverage ratios and minimum current ratios. Financing Agreement covenant violations constitute an event of default which, at the election of the Victory Park Management LLC, could result in the acceleration of the unpaid principal loan balance and accrued interest under the Financing Agreement.  


In anticipation that the Company would not be in compliance with one or more of these financial covenants under terms of the Financing Agreement by the second or third quarter of 2016, we advised the Agent.  On August 22, 2016, we entered into a Forbearance Agreement with the Agent (the “Forbearance Agreement”).   


Under the terms of the Forbearance Agreement, until the earlier of either the expiration of the Forbearance Period, which is defined to mean the date when all conditions of the agreement have been satisfied, or the Forbearance Termination Date of January 1, 2017,  the lenders have agreed not to take any actions, including declaring an event of default or otherwise accelerating the obligations owed under the Financing Agreement, related to our failure solely to comply with the financial covenants for the periods ended June 30, 2016 and September 30, 2016.  During the Forbearance Period, beginning on July 1, 2016 the PIK interest rate of the outstanding amounts due under the Financing Agreement increased by 3% per annun to 7% per annum.  Our monthly cash interest payments remain unchanged at 10% per annum.  We are also required to pay all amounts due under the Financing Agreement on or before December 31, 2016.  We agreed to pay a forbearance fee of $115,322 together with legal fees of the lender’s counsel not to exceed $25,000.


At September 30, 2016, we had $5.93 million outstanding under the Financing Agreement.


Financing and Security Agreement with Fast Pay Partners, LLC


On September 19, 2016, the Company executed a Financing and Security Agreement dated September 14, 2016, as amended by Amendment No. 1 also dated September 14, 2016 (collectively, the "FastPay Agreement"), with FastPay Partners LLC (“FastPay”) creating an accounts receivable-based credit facility.


Under the terms of the FastPay Agreement, FastPay may, at its sole discretion, purchase the Company's eligible accounts receivables. Upon any acquisition of accounts receivable, FastPay will advance the Company up to 80% of the gross value of the purchased accounts, up to a maximum of $8.0 million in advances. Each account receivable purchased by FastPay will be subject to a factoring fee rate specified in the FastPay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over 30 days. The Company is subject to a concentration limitation on the percentage of debt from any single customer of 25% to the total amount outstanding on its purchased accounts, subject to increase to 50% for its larger customer.  


The Company will be obligated to repurchase accounts remaining uncollected after a specified deadline, and FastPay will generally have full recourse against the Company in the event of nonpayment of any purchased accounts. The Company's obligations under the FastPay Agreement are secured by a first position security interest in its accounts receivable, deposit accounts and all proceeds therefrom.  


The FastPay Agreement contains covenants that are customary for agreements of this type and are primarily related to accounts receivable and audit rights. The Company is also required to provide FastPay with 30 day notice of any transaction that results, or would result in, a “change of control” as defined in the FastPay Agreement.  The failure to satisfy covenants under the FastPay Agreement or the occurrence of other specified events that constitute an event of default could result in the termination of the FastPay Agreement and/or the acceleration of the Company's obligations. The FastPay Agreement contains provisions relating to events of default that are customary for agreements of this type.


The FastPay Agreement has an initial one-year term and automatically renews for successive one-year terms thereafter, subject to earlier termination by written notice by the Company, provided that all obligations are paid and the payment of an early termination fee.


The initial advance under the FastPay Agreement was approximately $5.5 million and the Company used substantially all of this amount to reduce the obligations outstanding under the Financing Agreement, as amended, with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders.  Additional proceeds available to the Company under the FastPay Agreement will be used for working capital.

 

The proceeds from the initial advance under the FastPay Agreement were paid directly to Victory Park Management. As such, these transactions are presented as non-cash financing activities in the Supplemental Schedule of Cash Flow Information in the Company’s consolidated financial statements.

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STOCKHOLDERS' EQUITY
9 Months Ended
Sep. 30, 2016
Stockholders' Equity Note [Abstract]  
STOCKHOLDERS' EQUITY

NOTE 4 – 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.


On August 16, 2013, our Board of Directors approved a Certificate of Designations, Rights and Preferences pursuant to which it designated a series consisting of 200,000 shares of its blank check preferred stock as Series 1 Preferred Stock. The designations, rights and preferences of the Series 1 Preferred Stock are as follows:


 

·

each share has a stated and liquidation value of $0.001 per share,

 

·

the shares do not pay any dividends, except as may be declared by our Board of Directors, and are not redeemable,

 

·

the shares do not have any voting rights, except as may be provided under Delaware law,

 

·

each share is convertible into 10 shares of our Class A common stock, subject to customary anti-dilution provisions in the event of stock splits, recapitalizations and similar corporate events, and

 

·

the number of shares of Series 1 Preferred Stock, as well as the number of shares of Class A common stock issued upon a conversion of shares of Series 1 Preferred Stock, that a holder may sell, transfer, assign, hypothecate or otherwise dispose of (collectively or severally, a "Disposition") at any one time shall be limited to an amount which is pari passu to any Disposition of Class A common stock by either Christopher Miglino and/or Erin DeRuggiero, executive officers and directors of our company. Notwithstanding anything contained in the designations, the holder of Series 1 Preferred Stock is not obligated to make any Dispositions of Series 1 Preferred Stock or Class A common stock issued upon the conversion of Series 1 Preferred Stock.


Following the conversion of the remaining shares of our Series 1 Preferred Stock during 2015 into shares of our Class A common stock, in February 2016 we filed a Certificate of Elimination with the Secretary of State of Delaware returning all shares of previously designated Series 1 Preferred Stock to our blank check preferred stock.


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 during either the 2015 or 2016 periods.


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 terms of the 2016 Plan, which is administered by our Board of Directors, are identical to those of our 2012 Plan and 2014 Plan. We have reserved 600,000 shares of our Class A common stock for awards under the 2016 Plan.


Common Stock


During January 2016 and February 2016, we received aggregate proceeds of $500,000 from the sale of 100,000 shares of our Class A common stock.


During January 2016, we issued 256,754 shares of Class A common stock, valued at $2.4 million, to Richard Steel as partial payment of the first year Earn Out Consideration.


During February 2016, we issued 6,786 shares of Class A common stock, valued at $47,500, to members of our board of directors for services.


On February 23, 2016, we issued an aggregate of 10,000 shares of our Class A common stock valued at $70,000 as partial compensation for services under the terms of a consulting agreement.


On August 16, 2016, we issued 3,077 shares of our Class A common stock valued at $20,000 to a new member of our board of directors for services.


On September 22, 2016, we issued 6 shares of our Class A common stock as a result of rounding in connection with the reverse stock split.


On September 30, 2016, we sold an aggregate of 665,000 units of its securities to 14 accredited investors in a private placement exempt from registration under the Securities Act of 1933, as amended, in reliance on exemptions provided by Section 4(a)(2) and Rule 506(b) of Regulation D. The units were sold at a purchase price of $5.00 per unit resulting in gross proceeds to us of $3.3 million.  Each unit consisted of one share of our Class A common stock and one three year Class A Common Stock Purchase Warrant to purchase 0.5 shares of our Class A common stock at an exercise price of $7.50 per share.  We agreed to file a registration statement with the Securities and Exchange Commission within 90 days after the final closing in this offering registering for resale the shares of our Class A common stock issuable upon the exercise of the warrants included in the units sold in this offering, together with the shares of our Class A common stock underlying the Placement Agent Warrants.  In the event we fail to timely file this resale registration, or at any time thereafter that the prospectus contained in the effective resale registration is not available for the issuance of the shares to the holder upon the exercise of the warrant for a period of at least 60 days following the delivery by us of a suspension notice, then the warrants are exercisable on a cashless basis. T.R. Winston & Company, LLC, a broker-dealer and member of FINRA, acted as placement agent for us in this offering. We paid the placement agent commissions totaling $266,000 and agreed to issue it three year warrants Placement Agent Warrants to purchase 53,200 shares of our Class A common stock at an exercise price of $7.50 per share.  T.R. Winston & Company, LLC has reallocated a portion of the commissions and Placement Agent Warrants to a selected dealer member of the selling group. We also agreed to pay T.R. Winston & Company, LLC a fee of 4% of the proceeds we may receive upon the exercise of the warrants included in the units.  We used $2.0 million of the net proceeds received by us in this offering to further reduce our obligations which are outstanding under the Financing Agreement, as amended, with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders.  We will use the balance of the proceeds for general working capital.


Stock Awards


In February 2016, we granted an aggregate of 6,786 shares of our Class A common stock awards to four directors. The shares were vested upon grant. We recorded $47,500 of compensation expense related to these awards.


In April 2016, we granted a total of 20,000 shares of our Class A common stock awards to an employee.  During the three and nine months ended September 30, 2016, we have recorded a total of $20,750 and $38,042; respectively, as compensation expense related to these awards.


During the nine months ended September 30, 2016, we recorded expense of $250,088 related to stock awards granted in prior years. During the nine months ended September 30, 2015, we recorded expense of $364,800 related to stock awards granted in prior years.


During the three months ended September 30, 2016 and 2015, we recorded expense relating to stock awards granted in prior years of $40,834 and $60,458, respectively.


Awards in the amount of 6,000 common shares were forfeited during 2016.


Stock Options and Warrants


During nine months ended September 30, 2016, we granted an aggregate of 30,000 stock options to one employee. The options will vest over three years. The options have an exercise price of $1.33 per share and a term of five years. These options have a grant date fair value of $1.07 per option, determined using the Black Scholes method based on the following assumptions: (1) risk free interest rate of 0.35%; (2) dividend yield of 0%; (3) volatility factor of the expected market price of our common stock of 115%; and (4) an expected life of the options of 5 years. We have recorded an expense for the options of $2,671 and $3,116 for the three and nine months ended September 30, 2016, respectively.


During the three months ended September 30, 2016 and 2015, we recorded expense of $66,588 and $2,726 respectively, related to stock options granted in the prior years but vested in current period. During nine months ended September 30, 2016 and 2015, we recorded expense of $181,650 and $142,456, respectively, relating to stock options granted in the prior years but vested in current period.   There were no new grants of stock options made in the third quarter of 2016.


Awards in the amount of 42,000 options were forfeited during 2016.


On September 19, 2016, the Company extended the expiration date of common stock purchase warrants issued and sold in 2013 to purchase an aggregate of 642,000 shares of its Class A common stock at an exercise price of $5.00 per share from between October 8, 2016 and November 6, 2016 to March 31, 2017, for which, the Company applied ASC 718-20-35-3 modification of equity-classified contracts and therefore the incremental fair value from the modification (the change in the fair value of the instrument before and after the modification) of $274,695 is recognized as an expense in the income statement to the extent the modified instrument has a higher fair value.


Reverse Stock Split


On September 20, 2016, the Company completed a reverse stock split. The principal reason for the reverse stock split was to facilitate the up-listing of our Class A common stock to the NASDAQ Capital Market which has a minimum market (bid) price requirement for new applicants of $4.00 per share.


As a result of the reverse stock split, each five shares of the Company's Class A common stock issued and outstanding, or held as treasury shares, immediately prior to the effective date of the reverse stock split became one share of its Class A common stock on the effective date of the reverse stock split. No fractional shares of Class A common stock were issued to any stockholder in connection with the reverse stock split and all fractional shares which might otherwise be issuable as a result of the reverse stock split were rounded up to the nearest whole share. On the effective date of the reverse stock split, all outstanding options and warrants to purchase shares of the Company's Class A common stock were proportionally adjusted based upon the split ratio and became exercisable into one-fifth of the number of shares of the Company's Class A common stock as it was prior to the reverse stock split at an exercise price which is five times the exercise price prior to the reverse stock split.


After the effective date of the reverse stock split, each certificate representing shares of pre-reverse stock split Class A common stock was deemed to represent one-fifth of a share of the post-reverse stock split Class A common stock, subject to rounding for fractional shares, and the records of the Company's transfer agent, Transfer Online, Inc., were adjusted to give effect to the reverse stock split. Following the effective date of the reverse stock split, the share certificates representing the pre-reverse stock split Class A common stock continue to be valid for the appropriate number of shares of post-reverse stock split Class A common stock, adjusted for rounding.


These condensed consolidated financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise specified.

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INTANGIBLE ASSETS
9 Months Ended
Sep. 30, 2016
Goodwill and Intangible Assets Disclosure [Abstract]  
INTANGIBLE ASSETS

NOTE 5 – INTANGIBLE ASSETS.


Intangible assets consist of the following:


 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

 

 

 

 

 

Non-compete agreement

 

$

1,250,000

 

 

$

1,250,000

 

Intellectual property

 

 

756,000

 

 

 

756,000

 

 

 

 

2,006,000

 

 

 

2,006,000

 

Accumulated amortization

 

 

(663,906

)

 

 

(394,256

)

Carrying value

 

$

1,342,094

 

 

$

1,611,744

 


Amortization expense was $37,800 for intellectual property and $52,083 for the non-compete agreement for the three months ended September 30, 2016. Amortization expense was $113,400 for intellectual property and $156,250 for the non-compete agreement for the nine months ended September 30, 2016.  No amortization expense for intellectual property was recorded for the three and nine months ended September 30, 2015. Amortization expense was $190,972 for the non-compete agreement for the three and nine months ended September 30, 2015.

XML 26 R11.htm IDEA: XBRL DOCUMENT v3.5.0.2
RELATED PARTY TRANSACTIONS
9 Months Ended
Sep. 30, 2016
Related Party Transactions [Abstract]  
RELATED PARTY TRANSACTIONS

NOTE 6 – RELATED PARTY TRANSACTIONS.


We are obligated to Mr. Steel for contingent Earn Out Consideration of up to $8.0 million incurred in connection with the acquisition of Steel Media, as described in Note 2 upon Steel Media meeting certain EBITDA measurements. The Company had initially recorded the liability at its present value of $6.6 million. Changes in the value will be recorded through the statement of operations. The Earn Out Consideration target was achieved for the first earn out period ended October 31, 2015 and on January 29, 2016 we paid Mr. Steel $4 million, of which $1.6 million was paid in cash and the balance was paid through the issuance of 256,754 shares of our Class A common stock in accordance with the terms of the Stock Purchase Agreement. As discussed in Note 2, during the nine months ended September 30, 2016 the Company determined the Earn Out Consideration would not be achieved for the second earn out period ended October 31, 2016.  The Company determined the fair value of the second Earn Out Consideration to be zero as of September 30, 2016.


Activity for the contingent consideration payable was:


 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

Balance, beginning of year

 

$

7,585,435

 

 

$

6,732,123

 

Accretion in value

 

 

159,061

 

 

 

853,312

 

Payment made

 

 

(4,000,000

)

 

 

 

Reversal of second year Earn Out Consideration

 

 

(3,744,496

)

 

 

 

Balance, September 30 2016

 

$

 

 

$

7,585,435

 

XML 27 R12.htm IDEA: XBRL DOCUMENT v3.5.0.2
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
9 Months Ended
Sep. 30, 2016
Accounts Payable and Accrued Liabilities [Abstract]  
ACCOUNTS PAYABLE AND ACCRUED EXPENSES

NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES.


Accounts payable and accrued expenses are comprised of the following:


 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

 

 

 

 

 

Accounts payable, trade

 

$

9,757,195

 

 

$

3,003,642

 

Accrued expenses

 

 

1,178,919

 

 

 

45,450

 

Accrued compensation

 

 

182,896

 

 

 

659,262

 

Accrued commissions

 

 

554,959

 

 

 

1,430,453

 

Total

 

$

11,673,969

 

 

$

5,138,807

 


The increase in accounts payable for the period ending September 30, 2016 was primarily due an increase in cost of goods sold due on higher revenue for the period.

XML 28 R13.htm IDEA: XBRL DOCUMENT v3.5.0.2
COMMITMENTS AND CONTINGENCIES
9 Months Ended
Sep. 30, 2016
Commitments and Contingencies Disclosure [Abstract]  
COMMITMENTS AND CONTINGENCIES

NOTE 8 – COMMITMENTS AND CONTINGENCIES.


Operating Leases


The Company leases offices under operating leases with lease terms which expire through September 30, 2021. Rent expense for office space amounted to $200,584 and $118,343 for the nine months ended September 30, 2016 and 2015, respectively.  Rent expense for office space amounted to $73,385 and $42,322 for the three months ended September 30, 2016 and 2015, respectively.


Other Commitments


In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company's breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered into 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 by reason of 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 particular agreement. Such indemnification agreements may not be subject to maximum loss clauses.


Employment agreements


We have entered into employment agreements with a number of our 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.

XML 29 R14.htm IDEA: XBRL DOCUMENT v3.5.0.2
SUBSEQUENT EVENTS
9 Months Ended
Sep. 30, 2016
Subsequent Events [Abstract]  
SUBSEQUENT EVENTS

NOTE 9 – SUBSEQUENT EVENTS.


On October 13, 2016, the Company's Class A common stock began trading on The NASDAQ Stock Market LLC under the symbol "SRAX."


On October 14, 2016 Mr. Rahul Thumati resigned as the Chief Financial Officer of the Company and we appointed Mr. Joseph P. ("JP") Hannan as our Chief Financial Officer.  Mr. Hannan entered an Employment Agreement with the Company, the term of which extends until such time as either party chooses to terminate his employment with the Company.  Under the terms of the Employment Agreement, Mr. Hannan's compensation includes:


·

an annual base salary of $200,000;

·

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

·

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

·

a one time restricted stock award of 100,000 shares of the Company's Class A common stock, vesting 50,000 shares on October 14, 2017 and 50,000 shares on October 14, 2018, subject to continued employment; and

·

annual paid time off of 30 days per year.


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


In connection with Mr. Thumati's resignation, on October 14, 2016 the Company entered into Separation and Release Agreement with Mr. Thumati pursuant to which it agreed to pay him a severance amount of $180,000 and he forfeited all rights to vested and unvested stock awards.  The agreement contained customary cross general releases, confidentiality and trade secret clauses.


On October 31, 2016, the Company sold an aggregate of 255,000 units of its securities to nine accredited investors in a private placement exempt from registration under the Securities Act of 1933, as amended, in reliance on exemptions provided by Section 4(a)(2) and Rule 506(b) of Regulation D.  The units were sold at a purchase price of $5.00 per unit resulting in gross proceeds to us of $1.3 million.  This was the final closing of a private placement commenced in September 2016.  Each unit consisted of one share of our Class A common stock and one three year Class A Common Stock Purchase Warrant to purchase 0.5 shares of our Class A common stock at an exercise price of $7.50 per share.  We agreed to file a registration statement with the Securities and Exchange Commission within 90 days after the final closing in this offering registering for resale the shares of our Class A common stock issuable upon the exercise of the warrants included in the units sold in this offering, together with the shares of our Class A common stock underlying the Placement Agent Warrants.  In the event we fail to timely file this resale registration, or at any time thereafter that the prospectus contained in the effective resale registration is not available for the issuance of the shares to the holder upon the exercise of the warrant for a period of at least 60 days following the delivery by us of a suspension notice, then the warrants are exercisable on a cashless basis.   

 

On October 3, 2016, we made an additional principal repayment to Victory Park in the amount of $2.0 million, bringing our current note payable balance to date to approximately $3.9 million.


T.R. Winston & Company, LLC, a broker-dealer and member of FINRA, acted as placement agent for us in this offering and received, in lieu of a cash placement agent commission totaling $109,956, and in reimbursement of certain expenses, 22,392 units in the offering.  We also agreed to issue it three year warrants Placement Agent Warrants to purchase 15,200 shares of our Class A common stock at an exercise price of $7.50 per share.  T.R. Winston & Company, LLC also reallocated a portion of the gross placement agent commissions and Placement Agent Warrants to a selected dealer member of the selling group resulting in the payment by us of a cash commission of $2,000 and the issuance of an additional 400 Placement Agent Warrants.  We also agreed to pay T.R. Winston & Company, LLC a fee of 4% of the proceeds we may receive upon the exercise of the warrants included in the units.  We are using the net proceeds for general working capital.


On November 14, 2016 the Company entered into an Advisory Agreement with kathy ireland Worldwide LLC ("kiWW").   Under the terms of this agreement, which expires on December 31, 2018, the Company engaged kiWW to provide a variety of advisory and consulting services to the Company, including (i) if the Company forms an Advisory Committee of independent, third party brand, marketing and/or consumer product C-level executives, to serve on such committee on terms no less favorable than the highest compensated person on such committee, (ii) as an advisor, hold the non-executive designation of Chief Branding Advisor, and (iii) provide reasonable input to the Company on various aspects of corporate branding, and (iv) use good faith efforts to introduce the Company to potential business customers.  As compensation for such services, the Company will issue kiWW 100,000 shares of its Class A common stock on January 2, 2017 and reimburse kiWW for expenses incurred in connection with the services to be provided to the Company.  The agreement contains customary confidentiality and indemnification provisions.  

XML 30 R15.htm IDEA: XBRL DOCUMENT v3.5.0.2
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)
9 Months Ended
Sep. 30, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization and Basis of Presentation

Organization and Basis of Presentation


Social Reality, Inc. ("Social Reality", "we", "us" or the "Company") is a Delaware corporation formed on August 2, 2011. Effective January 1, 2012 we acquired all 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 and Class B common stock. The former members of Social Reality, LLC owned all of our common stock after the acquisition.


At Social Reality, we sell digital advertising campaigns to advertising agencies and brands. We have developed technology that allows brands to launch and manage digital advertising campaigns, and we provide the platform that allows website publishers to sell their media inventory to many different digital adverting buyers. Our focus is to provide technology tools that enable both publishers and advertisers to maximize their digital advertising initiatives. We derive our revenues from:


·

sales of digital advertising campaigns to advertising agencies and brands;

·

sales of media inventory owned by our publishing partners through real-time bidding, or RTB, exchanges;

·

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

·

creation of custom platforms for buying media on SRAX for large brands.


The core elements of this business are:


·

Social Reality Ad Exchange or "SRAX" Real Time Bidding sell side and buy side representation is our technology which assists publishers in delivering their media inventory to the real-time bidding, or RTB, exchanges.  The SRAX platform integrates multiple market-leading demand sources. We also build custom platforms that allow our agency partners to launch and manage their own RTB campaigns by enabling them to directly place advertising orders on the platform dashboard and view and analyze results as they occur;

 

 

·

SRAXmd is our ad targeting and data platform for healthcare brands, agencies and medical content publishers. Healthcare and pharmaceutical publishers utilize the platform for yield optimization, audience extension campaigns and re-targeting of their healthcare professional audience. Agencies and brands purchase targeted digital and mobile ad campaigns;

 

 

·

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

 

 

·

 SRAX APP, a recently launched new product, is a platform that allows publishers and content owners to launch native mobile applications through our SRAX platform.


We offer our customers a number of pricing options including cost-per-thousand-impression, or "CPM", whereby our customers pay based on the number of times the target audience is exposed to the advertisement, and on a monthly service fee.

 

Social Reality is also an approved Facebook advertising partner. We sell targeted and measurable online advertising campaigns and programs to brand advertisers and advertising agencies across large Facebook apps and websites, generating qualified Facebook likes and quantifiable engagement for our clients, driving online sales and increased brand equity.


We are headquartered in Los Angeles, California.

Basis of Presentation

Basis of Presentation

 

The accompanying condensed consolidated financial statements are unaudited. The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.

 

These interim financial statements as of and for the three and nine months ended September 30, 2016 and 2015 are unaudited; however, in the opinion of management, such statements include all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations and cash flows of the Company for the periods presented. The results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or for any future period. All references to September 30, 2016 and 2015 in these footnotes are unaudited.

 

These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and the notes thereto for the year ended December 31, 2015, included in the Company's annual report on Form 10-K filed with the SEC on March 16, 2016.


The condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited consolidated financial statements at that date but do not include all disclosures required by GAAP. Certain items have been reclassified to conform to the current period presentation.

Reverse Stock Split

Effect of Reverse Stock Split on Presentation


On September 20, 2016, the Company completed a reverse stock split.  The principal reason for the reverse stock split was to facilitate the up-listing of our Class A common stock to the NASDAQ Capital Market which has a minimum market (bid) price requirement for new applicants of $4.00 per share.  


As a result of the reverse stock split, each five shares of the Company's Class A common stock issued and outstanding, or held as treasury shares, immediately prior to the effective date of the reverse stock split became one share of its Class A common stock on the effective date of the reverse stock split. No fractional shares of Class A common stock were issued to any stockholder in connection with the reverse stock split and all fractional shares which might otherwise be issuable as a result of the reverse stock split were rounded up to the nearest whole share. On the effective date of the reverse stock split, all outstanding options and warrants to purchase shares of the Company's Class A common stock were proportionally adjusted based upon the split ratio and became exercisable into one-fifth of the number of shares of the Company's Class A common stock as it was prior to the reverse stock split at an exercise price which is five times the exercise price prior to the reverse stock split.  


After the effective date of the reverse stock split, each certificate representing shares of pre-reverse stock split Class A common stock was deemed to represent one-fifth of a share of the post-reverse stock split Class A common stock, subject to rounding for fractional shares, and the records of the Company's transfer agent, Transfer Online, Inc., were adjusted to give effect to the reverse stock split. Following the effective date of the reverse stock split, the share certificates representing the pre-reverse stock split Class A common stock continue to be valid for the appropriate number of shares of post-reverse stock split Class A common stock, adjusted for rounding.  


These condensed consolidated financial statements give retroactive effect to the reverse stock split for all periods presented, unless otherwise specified.

Principles of Consolidation

Principles of Consolidation


The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.


The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries from the acquisition date of majority voting control and through the date of disposition, if any.

Use of Estimates

Use of Estimates


GAAP requires management of the Company to make estimates and assumptions in the preparation of these condensed consolidated financial statements that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and 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 and sales credits, stock-based compensation, income taxes, purchase price for acquisition, goodwill, other intangible assets, put rights and valuation of liabilities. The accounting policies for these areas are discussed elsewhere in these unaudited condensed consolidated financial statements.

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.

Revenue Recognition

Revenue Recognition


The Company recognizes revenue when the following criteria have been met: persuasive evidence of an arrangement exists; no significant Company obligations remain; collection of the related receivable is reasonably assured; and the fees are fixed or determinable. The Company acts as a principal in revenue transactions as the Company is the primary obligor in the transactions. As such, revenue is recognized on a gross basis, and media and publisher expenses that are directly related to a revenue-generating event are recorded as a component of cost of revenue.

Cost of Revenue

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-throughs, 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 income statement.

Accounts Receivable

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 $231,695 and $135,442 at September 30, 2016 and December 31, 2015, respectively.

Concentration of Credit Risk, Significant Customers and Supplier Risk

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 in the United States. The balances in the United States held at any one financial institution are generally in excess of Federal Deposit Insurance Corporation ("FDIC") insurance limits. The uninsured cash bank balances were approximately $4.2 million at September 30, 2016. The Company has not experienced any loss on these accounts. The balances are maintained in demand accounts to minimize risk.


At September 30, 2016, two customers accounted for more than 10% of the accounts receivable balance, for a total of 50%. For the nine months ended September 30, 2016 one customer accounted for 49% of total revenue. At September 30, 2015, two customers accounted for more than 10% of the accounts receivable balance, for a total of 61%. For the nine months ended September 30, 2015 one customer accounted for 50% of total revenue.

Fair Value of Financial Instruments

Fair Value of Financial Instruments


The Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At September 30, 2016 and December 31, 2015, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.

Property and equipment

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


Intangible assets consist of intellectual property and a non-complete agreement 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.

Business Combinations

Business Combinations


For all business combinations (whether partial, full or step acquisitions), the Company records 100% of all assets and liabilities of the acquired business, including goodwill, generally at their fair values; contingent consideration, if any, is recognized at its fair value on the acquisition date and, for certain arrangements, changes in fair value are recognized in earnings until settlement and acquisition-related transaction and restructuring costs are expensed rather than treated as part of the cost of the acquisition.

Goodwill and change to annual impairment testing period

Goodwill and change to annual impairment testing period


Our goodwill consists of the excess purchase price paid in business combinations over the fair value of assets acquired. Goodwill is considered to have an indefinite life.


The Company has historically performed its annual goodwill and impairment assessment on September 30th of each year; however, due to the elimination of the need to internally maintain certain segregated accounting records of the Steel Media business that occurred in the third quarter of 2016, following the determination that the second year Earn Out Consideration would not be achieved (See Note 2), this was reevaluated by the Company.  Further, given the seasonal and cyclical nature of advertising sales in general, timing of the Company’s annual budgeting process, and the short-term nature of the Company’s advertising sales contracts, it was determined that it would be more effective and efficient to conduct the annual impairment analysis instead at December 31st of each year.  This would also better align the Company with other advertising sales companies who also generally conduct this annual analysis in the fourth quarter.  The Company does not believe this change will have any material impact on its consolidated financial statements, and continues to evaluate potential interim impairment to goodwill consistent with its historical practices.


The Company employs the non-amortization approach to account for goodwill. Under the non-amortization approach, goodwill is not amortized into the results of operations, but instead is reviewed annually or more frequently if events or changes in circumstances indicate that the asset might be impaired, to assess whether the fair value exceeds the carrying value.


When evaluating the potential impairment of goodwill, we first assess a range of qualitative factors, including but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for the Company's products and services, regulatory and political developments, entity specific factors such as strategy and changes in key personnel, and the overall financial performance for each of the Company's reporting units. If, after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then proceed to a two-step impairment testing methodology using the income approach (discounted cash flow method).


In the first step of the two-step testing methodology, we compare the carrying value of the reporting unit, including goodwill, with its fair value, as determined by its estimated discounted cash flows. If the carrying value of a reporting unit exceeds its fair value, we then complete the second step of the impairment test to determine the amount of impairment to be recognized. In the second step, we estimate an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including any unrecognized intangible assets). If the carrying value of a reporting unit's goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference in that period.


When required, we arrive at our estimates of fair value using a discounted cash flow methodology which includes estimates of future cash flows to be generated by particular 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.


During the nine months ended September 30, 2016, we determined that a portion of the goodwill assigned to Steel Media acquisition has become impaired. Accordingly, we recorded a goodwill impairment charge of $670,000 for the nine months ended September 30, 2016. The impairment charge represents the excess of the carrying amount of the goodwill recorded in the acquisition over the implied fair value of the goodwill. The implied fair value of the goodwill is the residual fair value based on an income approach using discounted cash flow model using revenue and profit forecasts.  No additional impairment of goodwill has been recorded in the three months ended September 30, 2016.

Long-lived Assets

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 in either the nine months ended September 30, 2016 or 2015.

Loss Per Share

Loss 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 2,912,069 common share equivalents at September 30, 2016 and 2,796,803 at September 30, 2015. For the nine months ended September 30, 2016 and 2015 these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.

Income Taxes

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 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.

Stock-Based Compensation

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.

Business Segments

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.

Liquidity

Liquidity


The Company had an accumulated deficit at September 30, 2016 of $(13.0) million. As of September 30, 2016, we had approximately $4.2 million in cash and cash equivalents and a deficit in working capital of $(9.4) million as compared to $(1.1) million in cash and cash equivalents and a deficit in working capital of $(7.0) million at December 31, 2015.  The Company believes it has established an ongoing source of revenue that is sufficient to cover its operating costs over the next twelve months.  In addition, management plans to continue as a going concern could also include raising additional capital through borrowing and/or additional sales of equity or equity linked securities.

Recently Issued Accounting Standards

Recently Issued Accounting Standards


In  October 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-16 - Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The guidance will be effective for the first interim period of our 2019 fiscal year, with early adoption permitted.


In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 provides guidance regarding the classification of certain items within the statements of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 with early adoption permitted.


In connection with its financial instruments project, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments in June 2016 and ASU 2016-01 - Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities in January 2016.


·

ASU 2016-13 introduces a new impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a forward-looking “expected loss” model that will replace the current “incurred loss” model and generally will result in earlier recognition of allowances for losses. The guidance will be effective for the first interim period of our 2021 fiscal year, with early adoption in fiscal year 2020 permitted.


·

ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other provisions, the new guidance requires the fair value measurement of investments in certain equity securities. For investments without readily determinable fair values, entities have the option to either measure these investments at fair value or at cost adjusted for changes in observable prices minus impairment. All changes in measurement will be recognized in net income. The guidance will be effective for the first interim period of our 2019 fiscal year. Early adoption is not permitted, except for certain provisions relating to financial liabilities.


In April 2016, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2016-10, Identifying Performance Obligations and Licensing (Topic 606), which amends certain aspects of the FASB’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customer (Topic 606). ASU 2016-10 identifies performance obligations and provides licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 (Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date) defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.


In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718), which is part of the FASB's Simplification Initiative. The updated guidance simplifies the accounting for share-based payment transactions. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.


In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customer (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), or ASU 2016-08, that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company is still currently evaluating the full impact of the adoption of this standard on its consolidated financial statements.  However, given revenue recognition practices already in place, it does not appear likely that this will have a material impact on the Company’s future presentation of consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. The amended guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.


In April 2015, the FASB issued ASU No. 2015-3, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-3”) which changes the presentation of debt issuance costs in financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset.  ASU 2015-3 became effective for public companies during interim and annual reporting periods beginning after December 15, 2015.  The Company adopted this ASU on January 1, 2016. The adoption of this ASU did not have a material impact to our consolidated financial statements.


Management does not believe that any other recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.

XML 31 R16.htm IDEA: XBRL DOCUMENT v3.5.0.2
NOTES PAYABLE (Tables)
9 Months Ended
Sep. 30, 2016
Notes Payable [Abstract]  
Schedule of notes payable

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

 

 

 

 

 

Current portion of note payable

 

$

5,933,805

 

 

$

2,455,000

 

Non-current portion of note payable

 

 

-

 

 

 

8,033,898

 

Total note payable including PIK interest

 

 

5,933,805

 

 

 

10,488,898

 

Less deferred financing costs

 

 

(838,069

)

 

 

(1,654,773

)

Notes payable and PIK interest accrued, net of deferred costs

 

$

5,095,736

 

 

$

8,834,125

 

Schedule of put liability

 

 

December 31,

2015

 

 

Activity

During

the Period

 

 

Accretion

in Value

 

 

September 30,

2016

 

Put liability

 

$

1,436,282

 

 

$

 

 

$

63,718

 

 

 $

1,500,000

 

Total

 

$

1,436,282

 

 

$

 

 

$

63,718

 

 

 $

1,500,000

 

XML 32 R17.htm IDEA: XBRL DOCUMENT v3.5.0.2
INTANGIBLE ASSETS (Tables)
9 Months Ended
Sep. 30, 2016
Goodwill and Intangible Assets Disclosure [Abstract]  
Schedule of Intangible assets

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

 

 

 

 

 

Non-compete agreement

 

$

1,250,000

 

 

$

1,250,000

 

Intellectual property

 

 

756,000

 

 

 

756,000

 

 

 

 

2,006,000

 

 

 

2,006,000

 

Accumulated amortization

 

 

(663,906

)

 

 

(394,256

)

Carrying value

 

$

1,342,094

 

 

$

1,611,744

 

XML 33 R18.htm IDEA: XBRL DOCUMENT v3.5.0.2
RELATED PARTY TRANSACTIONS (Tables)
9 Months Ended
Sep. 30, 2016
Related Party Transactions [Abstract]  
Schedule of contingent consideration payable

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

Balance, beginning of year

 

$

7,585,435

 

 

$

6,732,123

 

Accretion in value

 

 

159,061

 

 

 

853,312

 

Payment made

 

 

(4,000,000

)

 

 

 

Reversal of second year Earn Out Consideration

 

 

(3,744,496

)

 

 

 

Balance, September 30 2016

 

$

 

 

$

7,585,435

 

XML 34 R19.htm IDEA: XBRL DOCUMENT v3.5.0.2
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Tables)
9 Months Ended
Sep. 30, 2016
Accounts Payable and Accrued Liabilities [Abstract]  
Schedule of Accounts payable and accrued expenses

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

 

 

 

 

 

Accounts payable, trade

 

$

9,608,508

 

 

$

3,003,642

 

Accrued expenses

 

 

1,178,919

 

 

 

45,450

 

Accrued compensation

 

 

182,896

 

 

 

659,262

 

Accrued commissions

 

 

554,959

 

 

 

1,430,453

 

Total

 

$

11,525,282

 

 

$

5,138,807

 

XML 35 R20.htm IDEA: XBRL DOCUMENT v3.5.0.2
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details)
1 Months Ended 3 Months Ended 9 Months Ended
Jan. 31, 2012
shares
Sep. 30, 2016
USD ($)
shares
Sep. 30, 2015
USD ($)
shares
Sep. 30, 2016
USD ($)
Item
$ / shares
shares
Sep. 30, 2015
USD ($)
shares
Dec. 31, 2015
USD ($)
Dec. 31, 2014
USD ($)
Minimum NASDAQ bid price requirement | $ / shares       $ 4      
Reverse stock split ratio       5      
Allowance for doubtful accounts   $ 231,695   $ 231,695   $ 135,442  
Uninsured cash bank balance   $ 4,200,000   $ 4,200,000      
Number of operating segments | Item       1      
Antidilutive common share equivalents | shares   2,912,069 2,796,803 2,912,069 2,796,803    
Goodwill impairment   $ 670,000    
Impairment of long-lived assets          
Accumulated deficit   (13,046,069)   (13,046,069)   (10,141,771)  
Cash and cash equivalents   4,241,230 $ 1,032,958 4,241,230 $ 1,032,958 1,091,186 $ 1,843,393
Working capital deficit   $ 9,400,000   $ 9,400,000   $ 7,000,000  
Minimum [Member]              
Property and equipment estimated useful life       3 years      
Intangible assets estimated useful life       5 years      
Maximum [Member]              
Property and equipment estimated useful life       7 years      
Intangible assets estimated useful life       6 years      
Sales Revenue, Net [Member] | Customer Concentration Risk [Member]              
Concentration risk percentage       49.00% 61.00%    
Accounts Receivable [Member] | Customer Concentration Risk [Member]              
Concentration risk percentage       50.00% 50.00%    
Social Reality Llc [Member]              
Effective date of business acquisition Jan. 01, 2012            
Social Reality Llc [Member] | Class A and Class B Common Stock [Member]              
Shares issued in business acquisition | shares 2,465,753            
XML 36 R21.htm IDEA: XBRL DOCUMENT v3.5.0.2
ACQUISITIONS (Acquisition of Steel Media) (Details) - USD ($)
3 Months Ended 9 Months Ended 12 Months Ended
Dec. 19, 2014
Oct. 30, 2014
Sep. 30, 2016
Sep. 30, 2016
Dec. 31, 2015
Jan. 29, 2016
Dec. 31, 2014
Business Acquisition [Line Items]              
Earnout consideration     $ 7,600,000   $ 6,732,123
Reversal of second earnout liability     $ 3,744,496 $ (3,744,496)    
Steel Media [Member]              
Business Acquisition [Line Items]              
Ownership acquired (as a percent)   100.00%          
Cash payment   $ 7,500,000          
Cash payment held in escrow   2,000,000          
Contingent Earnout Consideration paid           $ 4,000,000  
Earnout consideration paid in cash           $ 1,600,000  
Earnout consideration paid in shares           256,754  
Steel Media [Member] | Maximum [Member]              
Business Acquisition [Line Items]              
Purchase consideration   20,000,000          
Earnout consideration   $ 8,000,000          
Steel Media [Member] | Senior Subordinated Notes [Member]              
Business Acquisition [Line Items]              
Notes term   1 year          
Notes issued   $ 2,500,000          
Steel Media [Member] | Senior Subordinated Notes [Member] | Common Class A [Member]              
Business Acquisition [Line Items]              
Escrow shares   477,373          
Five Delta Inc [Member]              
Business Acquisition [Line Items]              
Ownership acquired (as a percent) 100.00%            
Purchase consideration $ 756,000            
Five Delta Inc [Member] | Common Class A [Member]              
Business Acquisition [Line Items]              
Number of common stock issued 120,000            
XML 37 R22.htm IDEA: XBRL DOCUMENT v3.5.0.2
NOTES PAYABLE (Financing Agreement with Victory Park Management, LLC) (Details) - USD ($)
3 Months Ended 9 Months Ended
Aug. 22, 2016
Feb. 16, 2016
Jan. 26, 2016
Oct. 26, 2015
Jul. 06, 2015
Oct. 30, 2014
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Debt Instrument [Line Items]                      
Present value of put liability             $ 1,500,000 $ 1,389,653 $ 1,500,000 $ 1,389,653 $ 1,436,282
Amortization of debt issue costs             250,100 $ 297,242 816,705 925,612  
Costs related to agreement                   1,982,124  
Repayments of note payable                 1,763,077 1,162,519  
PIK interest expense accrued to principal                 447,738 $ 279,216  
Capitalized debt costs             838,069   838,069   1,600,000
Note payable             5,095,736   5,095,736   $ 1,378,367
Financing Agreement [Member] | Victory Park Management, LLC [Member]                      
Debt Instrument [Line Items]                      
Notes issued   $ 500,000 $ 1,600,000 $ 1,400,000 $ 1,500,000 $ 9,000,000          
Percentage of equity interest pledged           100.00%          
Interest rate (as a percent) 10.00%         10.00%          
Increase in interest rate 3.00%                    
Paid-in-kind interest rate (as a percent) 7.00%         4.00%          
Exercise period of warrants           5 years          
Exercise price of warrants           $ 1.00          
Percentage of revenue used as base to calculate purchase price           50.00%          
Amount used as base to calculate purchase price           $ 1,500,000          
Costs related to agreement           $ 3,100,000          
Maturity date Dec. 31, 2016 Oct. 30, 2017 Oct. 30, 2017 Oct. 30, 2017 Oct. 30, 2017            
Amount of forbearance fee $ 115,322                    
Note payable             $ 5,930,000   $ 5,930,000    
Financing Agreement [Member] | Victory Park Management, LLC [Member] | Common Class A [Member]                      
Debt Instrument [Line Items]                      
Number of shares to be issued           29,000,000          
Financing Agreement [Member] | Victory Park Management, LLC [Member] | Maximum [Member]                      
Debt Instrument [Line Items]                      
Notes issued           $ 20,000,000          
Paid-in-kind interest rate (as a percent)           4.00%          
Legal fees $ 25,000                    
Financing Agreement [Member] | Victory Park Management, LLC [Member] | Minimum [Member]                      
Debt Instrument [Line Items]                      
Paid-in-kind interest rate (as a percent)           2.00%          
XML 38 R23.htm IDEA: XBRL DOCUMENT v3.5.0.2
NOTES PAYABLE (Schedule of Notes Payable) (Details) - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Notes Payable [Abstract]    
Current portion of note payable $ 5,933,805 $ 2,455,000
Non-current portion of note payable 8,033,898
Total note payable including PIK interest 5,933,805 10,488,898
Less deferred financing costs (838,069) (1,654,773)
Notes payable and PIK interest accrued, net of deferred costs $ 5,095,736 $ 8,834,125
XML 39 R24.htm IDEA: XBRL DOCUMENT v3.5.0.2
NOTES PAYABLE (Schedule of Activity for the put liability) (Details) - USD ($)
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Put liability December 31, 2015 $ 1,436,282  
Activity During the Period  
Accretion in Value 63,718 $ 129,643
Put liability June 30, 2016 1,500,000 $ 1,389,653
Put Liability Notes Payable [Member]    
Put liability December 31, 2015 1,436,282  
Activity During the Period  
Accretion in Value 63,718  
Put liability June 30, 2016 $ 1,500,000  
XML 40 R25.htm IDEA: XBRL DOCUMENT v3.5.0.2
NOTES PAYABLE (Financing Agreement with Fast Pay Partners, LLC) (Details) - Financing Agreement [Member] - Fast Pay Partners, LLC [Member]
$ in Millions
Sep. 19, 2016
USD ($)
Debt Instrument [Line Items]  
Notes issued $ 5.5
Percentage of accounts receivable pledged 80.00%
Maximum amount of advances pledged $ 8.0
Concentration limitation on percentage of debt from any single customer 25.00%
Concentration limitation on percentage of debt from larger customer 50.00%
Initial term 1 year
XML 41 R26.htm IDEA: XBRL DOCUMENT v3.5.0.2
STOCKHOLDERS' EQUITY (Preferred and Common Stock) (Details) - $ / shares
Sep. 30, 2016
Dec. 31, 2015
Aug. 16, 2013
Class of Stock [Line Items]      
Preferred Stock, shares authorized 50,000,000 50,000,000  
Preferred Stock, par value per share $ 0.001 $ 0.001  
Common Class A [Member]      
Class of Stock [Line Items]      
Common Stock, shares authorized 250,000,000 250,000,000  
Common Stock, par value per share $ 0.001 $ 0.001  
Common Stock, shares outstanding 5,622,052 28,110,229  
Common Class B [Member]      
Class of Stock [Line Items]      
Common Stock, shares authorized 9,000,000 9,000,000  
Common Stock, par value per share $ 0.001 $ 0.001  
Common Stock, shares outstanding 0 0  
Series 1 Preferred Stock [Member]      
Class of Stock [Line Items]      
Preferred Stock, shares authorized     200,000
Liquidation preference per share     $ 0.001
XML 42 R27.htm IDEA: XBRL DOCUMENT v3.5.0.2
STOCKHOLDERS' EQUITY (2016 Transactions) (Details)
1 Months Ended 2 Months Ended 3 Months Ended 9 Months Ended
Sep. 30, 2016
USD ($)
$ / shares
shares
Sep. 22, 2016
shares
Sep. 16, 2016
$ / shares
shares
Aug. 16, 2016
USD ($)
shares
Feb. 29, 2016
USD ($)
shares
Feb. 29, 2016
USD ($)
shares
Sep. 30, 2016
USD ($)
$ / shares
shares
Sep. 30, 2015
USD ($)
Sep. 30, 2016
USD ($)
$ / shares
shares
Sep. 30, 2015
USD ($)
Jan. 29, 2016
USD ($)
shares
Sale of common stock                 $ 3,550,815  
Expense related to stock awards             $ 2,671   3,116    
Stock option compensation expense             $ 66,588 $ 2,726 $ 181,713 142,456  
Stock options forfeited during period | shares                 42,000    
Proceeds from warrant offering                 6,921  
Granted during period | shares                 30,000    
Share-based compensation, vesting period                 3 years    
Granted during period, exercise price | $ / shares                 $ 1.33    
Stock options granted, grant date fair value | $ / shares                 $ 1.07    
Award term                 5 years    
Share-based compensation, risk free interest rate                 0.35%    
Share-based compensation, expected dividend yield                 0.00%    
Share-based compensation, expected volatility rate                 115.00%    
Share-based compensation, expected life                 5 years    
Repayments of note payable                 $ 1,763,077 1,162,519  
Minimum NASDAQ bid price requirement | $ / shares                 $ 4    
Reverse stock split ratio                 5    
Steel Media [Member]                      
Earnout consideration paid in shares | shares                     256,754
Earnout consideration paid in shares, Amount                     $ 2,400,000
Common Class A [Member]                      
Number of shares reserved under 2016 Plan | shares 600,000           600,000   600,000    
Sale of common stock           $ 500,000          
Stock issued | shares   6       100,000          
Common Class A [Member] | Director [Member]                      
Common stock issued for services, shares | shares       3,077 10,000            
Common stock issued for services       $ 20,000 $ 70,000            
Common Class A [Member] | Employee [Member]                      
Stock option compensation expense             $ 20,750   $ 38,042    
Granted during period | shares                    
Private Placement [Member]                      
Sale of common stock $ 3,300,000                    
Stock issued | shares 665,000                    
Warrants to purchase shares of common stock, number of shares of common stock | shares 53,200           53,200   53,200    
Exercise price of warrant | $ / shares $ 7.50           $ 7.50   $ 7.50    
Purchase price per share | $ / shares $ 5.00           $ 5.00   $ 5.00    
Repayments of note payable $ 2,000,000                    
Warrant fee percentage 4.00%                    
Placement agent commissions $ 266,000                    
Common Stock Awards [Member]                      
Expense related to stock awards             $ 40,834 $ 60,458 $ 250,088 $ 364,800  
Stock options forfeited during period | shares                 42,000    
Warrants to purchase shares of common stock, number of shares of common stock | shares     642,000                
Exercise price of warrant | $ / shares     $ 5.00                
Exercise period of warrants     3 years                
Common Stock Awards [Member] | Four Directors [Member]                      
Shares issued for stock awards that have vested | shares         6,786            
Stock option compensation expense         $ 47,500            
Employee Stock Option [Member] | Employee [Member]                      
Stock option compensation expense                 $ 38,042    
XML 43 R28.htm IDEA: XBRL DOCUMENT v3.5.0.2
INTANGIBLE ASSETS (Schedule of Intangible assets) (Details) - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Intangible assets $ 2,006,000 $ 2,006,000
Accumulated amortization (663,906) (394,256)
Carrying value 1,342,094 1,611,744
Non-compete agreement [Member]    
Intangible assets 1,250,000 1,250,000
Intellectual Property [Member]    
Intangible assets $ 756,000 $ 756,000
XML 44 R29.htm IDEA: XBRL DOCUMENT v3.5.0.2
INTANGIBLE ASSETS (Narrative) (Details) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Intellectual Property [Member]        
Amortization expense $ 37,800 $ 0 $ 113,400 $ 0
Non-compete agreement [Member]        
Amortization expense $ 52,083 $ 190,972 $ 156,250 $ 190,972
XML 45 R30.htm IDEA: XBRL DOCUMENT v3.5.0.2
RELATED PARTY TRANSACTIONS (Narrative) (Details) - USD ($)
Sep. 30, 2016
Jan. 29, 2016
Dec. 31, 2015
Dec. 31, 2014
Oct. 30, 2014
Related Party Transaction [Line Items]          
Contingent Earnout Consideration   $ 7,600,000 $ 6,732,123  
Steel Media [Member]          
Related Party Transaction [Line Items]          
Earnout consideration paid in cash   $ 1,600,000      
Present value of consideration 0        
Contingent Earnout Consideration paid   $ 4,000,000      
Earnout consideration paid in shares   256,754      
Steel Media [Member] | Maximum [Member]          
Related Party Transaction [Line Items]          
Contingent Earnout Consideration         $ 8,000,000
Steel Media [Member] | Maximum [Member] | Richard Steel [Member]          
Related Party Transaction [Line Items]          
Contingent Earnout Consideration $ 0        
XML 46 R31.htm IDEA: XBRL DOCUMENT v3.5.0.2
RELATED PARTY TRANSACTIONS (Schedule of contingent consideration payable) (Details) - USD ($)
3 Months Ended 9 Months Ended 12 Months Ended
Sep. 30, 2016
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Activity for the contingent consideration payable [Roll Forward]        
Beginning of period   $ 7,600,000 $ 6,732,123 $ 6,732,123
Accretion in value   (3,585,388) $ 692,674 853,312
Payment made   (4,000,000)  
Reversal of second year Earn Out Consideration $ 3,744,496 (3,744,496)  
End of period   $ 7,600,000
XML 47 R32.htm IDEA: XBRL DOCUMENT v3.5.0.2
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Details) - USD ($)
Sep. 30, 2016
Dec. 31, 2015
Accounts Payable and Accrued Liabilities [Abstract]    
Accounts payable, trade $ 9,608,508 $ 3,003,642
Accrued expenses 1,178,919 45,450
Accrued compensation 182,896 659,262
Accrued commissions 554,959 1,430,453
Total $ 11,525,282 $ 5,138,807
XML 48 R33.htm IDEA: XBRL DOCUMENT v3.5.0.2
COMMITMENTS AND CONTINGENCIES (Details) - USD ($)
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Commitments and Contingencies Disclosure [Abstract]        
Lease expiration period     Sep. 30, 2021  
Rent expense $ 73,385 $ 42,322 $ 200,584 $ 118,343
XML 49 R34.htm IDEA: XBRL DOCUMENT v3.5.0.2
SUBSEQUENT EVENTS (Details) - USD ($)
2 Months Ended 9 Months Ended
Oct. 31, 2016
Oct. 14, 2016
Oct. 03, 2016
Sep. 30, 2016
Sep. 22, 2016
Oct. 30, 2014
Feb. 29, 2016
Sep. 30, 2016
Sep. 30, 2015
Dec. 31, 2015
Sale of common stock               $ 3,550,815  
Repayments of note payable               1,763,077 $ 1,162,519  
Note payable       $ 5,095,736       5,095,736   $ 1,378,367
Financing Agreement [Member] | Victory Park Management, LLC [Member]                    
Exercise price of warrant           $ 1.00        
Exercise period of warrants           5 years        
Note payable       5,930,000       $ 5,930,000    
Common Class A [Member]                    
Sale of common stock             $ 500,000      
Stock issued, shares         6   100,000      
Common Class A [Member] | Financing Agreement [Member] | Victory Park Management, LLC [Member]                    
Warrants to purchase shares of common stock, number of shares of common stock           29,000,000        
Private Placement [Member]                    
Sale of common stock       $ 3,300,000            
Stock issued, shares       665,000            
Purchase price per share       $ 5.00       $ 5.00    
Exercise price of warrant       $ 7.50       $ 7.50    
Warrants to purchase shares of common stock, number of shares of common stock       53,200       53,200    
Placement agent commissions       $ 266,000            
Warrant fee percentage       4.00%            
Repayments of note payable       $ 2,000,000            
Subsequent Event [Member] | Financing Agreement [Member] | Victory Park Management, LLC [Member]                    
Repayments of note payable     $ 2,000,000              
Note payable     $ 3,900,000              
Subsequent Event [Member] | Chief Financial Officer [Member]                    
Officer salary   $ 200,000                
Severance costs   180,000                
Subsequent Event [Member] | Chief Financial Officer [Member] | Bonus [Member]                    
Officer salary   100,000                
Subsequent Event [Member] | Common Class A [Member] | Chief Financial Officer [Member] | Bonus [Member]                    
Restricted stock grant   $ 100,000                
Restricted shock grant, shares   100,000                
Subsequent Event [Member] | Common Class A [Member] | Chief Financial Officer [Member] | Bonus [Member] | Vesting on October 14, 2017 [Member]                    
Restricted shock grant, shares   50,000                
Subsequent Event [Member] | Common Class A [Member] | Chief Financial Officer [Member] | Bonus [Member] | Vesting on October 14, 2018 [Member]                    
Restricted shock grant, shares   50,000                
Subsequent Event [Member] | Private Placement [Member]                    
Stock issued for reimbursement of expenses, shares 22,392                  
Placement agent commissions $ 109,957                  
Placement agent commissions - cash $ 2,000                  
Warrant fee percentage 4.00%                  
Subsequent Event [Member] | Private Placement [Member] | Common Class A [Member]                    
Sale of common stock $ 1,300,000                  
Stock issued, shares 225,000                  
Purchase price per share $ 5.00                  
Exercise price of warrant $ 7.50                  
Warrants to purchase shares of common stock, number of shares of common stock 15,200                  
Warrants to purchase shares of common stock, number of shares of common stock - additional 400                  
Exercise period of warrants 3 years                  
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