UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark one)
For
the Quarterly Period Ended
or
Commission
File Number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: N/A
| N/A | ||||
| (Title of each class) | (Trading Symbol) | (Name of each exchange on which registered) |
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 ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☐ Yes ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
reporting company | |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes
As of March 31, 2025, there were shares of Class A common stock were issued and outstanding.
SRAX, Inc.
Table of Contents
| 2 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are considered to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements include, but are not limited to: any projections of revenues, earnings, or other financial items; any statements of the strategies, plans and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” and any other similar words. These statements represent our expectations, beliefs, anticipations, commitments, intentions, and strategies regarding the future and include, but are not limited to, the risks and uncertainties described in the sections of this Quarterly Report entitled Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations and those discussed in other documents we file with the United States Securities and Exchange Commission (“SEC”). Readers are cautioned that actual results could differ materially from anticipated results or other expectations that are expressed in forward-looking statements within this report. The forward-looking statements included in this report speak only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
We urge you to read this entire Quarterly Report on Form 10-Q, including the “Risk Factors” section, the financial statements and the related notes included therein as well as our Annual Report on Form 10-K for the year ended December 31, 2022, including the “Risk Factors” section contained therein. As used in this Quarterly Report, unless context otherwise requires, the words “we,” “us,” “our,” “the Company,” “SRAX,” “Registrant” refer to SRAX, Inc. and its subsidiaries. LD Micro was divested pursuant to an Agreement and Plan of Merger that closed on March 3, 2023. Any reference to “BIGToken” and “BIGToken, Inc.,” or the “BIGToken Project” refer to the Company’s previously wholly owned subsidiary, BIGToken, Inc. and the assets used in its operations. BIGToken was divested pursuant to a share exchange agreement that closed on February 4, 2021. Also, any reference to “common share” or “common stock,” refers to our $0.001 par value Class A common stock.
Unless otherwise stated, the information which appears on our web sites www.srax.com are not part of this report and are specifically not incorporated by reference.
| 3 |
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SRAX, Inc. and Subsidiaries
| 4 |
SRAX, Inc. and Subsidiary
Consolidated Balance Sheets
For the Six Months Ended June 30, 2023
(Unaudited)
| June 30, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable - net | ||||||||
| Contracts receivable | ||||||||
| Marketable securities | ||||||||
| Designated assets for return of capital | ||||||||
| Due from related party | ||||||||
| Prepaids and other | ||||||||
| Total Current Assets | ||||||||
| Other Assets | ||||||||
| Marketable securities | ||||||||
| Designated assets for return of capital | ||||||||
| Property and equipment - net | ||||||||
| Operating lease - right of use asset - net | ||||||||
| Goodwill | ||||||||
| Total Other Assets | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accounts payable and accrued expenses - related party | ||||||||
| Deferred revenue | ||||||||
| Other | ||||||||
| Operating lease liability | ||||||||
| Convertible notes payable - net | ||||||||
| Series A, redeemable preferred stock | ||||||||
| Total Current Liabilities | ||||||||
| Long Term Liabilities | ||||||||
| Convertible notes payable - net | ||||||||
| Senior secured revolving credit facility - net | ||||||||
| Total Long Term Liabilities | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Deficit | ||||||||
| Series A, preferred stock, $ | ||||||||
| Series B, convertible preferred stock, $ | ||||||||
| Class A, common stock, $ par value, shares authorized, and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 5 |
SRAX, Inc. and Subsidiary
Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Costs and expenses | ||||||||||||||||
| Cost of revenues | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ||||||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Impairment - goodwill | ( | ) | ( | ) | ||||||||||||
| Impairment - intangibles | ( | ) | ( | ) | ||||||||||||
| Loss on sale of fixed assets | ( | ) | ( | ) | ||||||||||||
| Loss on settlement of debt | ( | ) | ( | ) | ||||||||||||
| Realized loss - marketable securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unrealized gain - marketable securities | ( | ) | ||||||||||||||
| Change in fair value - contract assets | ( | ) | ( | ) | ||||||||||||
| Realized gain (loss) - designated assets | ( | ) | ( | ) | ( | ) | ||||||||||
| Unrealized gain (loss) - designated assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value - Series A, redeemable preferred stock | ||||||||||||||||
| Interest income | ||||||||||||||||
| Gain on disposal of subsidiary (LD Micro, Inc.) | ||||||||||||||||
| Other income (expense) | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other income (expense) - net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net income per share - basic and diluted | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of shares outstanding - basic and diluted | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 6 |
SRAX, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Deficit
For the Three and Six Months Ended June 30, 2023
(Unaudited)
| Series A - Preferred Stock | Series B - Convertible Preferred Stock | Common Stock - Class A | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||
| December 31, 2022 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Asset purchase - DNA Holdings, Inc. | - | |||||||||||||||||||||||||||||||||||
| Cashless exercise of warrants for common stock | - | - | ( | ) | ||||||||||||||||||||||||||||||||
| Share based compensation | - | - | - | |||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Share based compensation | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
SRAX, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Deficit
For the Three and Six Months Ended June 30, 2022
(Unaudited)
| Series A - Preferred Stock | Common Stock - Class A | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Share based compensation (benefit) - employees | - | - | ||||||||||||||||||||||||||
| Shares issued for cashless exercise of employee options - net of taxes - related party | ( | ) | ( | ) | ||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ||||||||||||||||||||||||||
| Share based compensation (benefit) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Shares issued for exercise of warrants on a cashless basis | ||||||||||||||||||||||||||||
| Shares issued for exercise of warrants for cash | ||||||||||||||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 7 |
SRAX, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2023
(Unaudited)
For the Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash used in operations | ||||||||
| Impairment of goodwill | ||||||||
| Impairment of intangibles | ||||||||
| Loss on sale of fixed assets | ||||||||
| Realized loss - marketable securities | ||||||||
| Current period change in fair value of marketable securities | ( | ) | ||||||
| Unrealized (gain) loss - marketable securities | ( | ) | ||||||
| Change in fair value - contract assets | ||||||||
| Realized loss - designated assets | ||||||||
| Unrealized (gain) loss - designated assets | ||||||||
| Change in fair value - designated assets | ||||||||
| Change in fair value - Series A, redeemable preferred stock | ( | ) | ( | ) | ||||
| Gain on disposal of subsidiary (LD Micro, Inc.) | ( | ) | ||||||
| Marketable securities received for reset shares | ||||||||
| Amortization of right-of-use assets | ||||||||
| Amortization of debt discount/debt issue costs | ||||||||
| Stock based compensation (benefit) | ( | ) | ||||||
| Loss on debt settlement (issuance of marketable securities) | ||||||||
| Loss on settlement of note receivable | ||||||||
| Bad debt expense | ||||||||
| Depreciation and amortization of intangible assets | ||||||||
| Interest expense incurred in connection with non-cash increase of debt | ||||||||
| Accounts receivable | ||||||||
| Contracts receivable | ( | ) | ||||||
| Due from related party | ||||||||
| Prepaid and other | ( | ) | ||||||
| Marketable securities | ( | ) | ||||||
| Designated assets for return of capital | ||||||||
| Increase (decrease) in | ||||||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Accounts payable and accrued expenses - related party | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Other | ( | ) | ||||||
| Right of use liability | ( | ) | ||||||
| Operating lease liability | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities | ||||||||
| Cash acquired in connection with sale of subsidiary (LD Micro, Inc.) | ||||||||
| Cash acquired in connection with asset purchase (DNA Holdings, LLC) | ||||||||
| Proceeds from sale of digital assets (crypto) | ||||||||
| Proceeds from sale of marketable securities | ||||||||
| Proceeds from sale of designated assets | ||||||||
| Proceeds from sale of note receivable | ||||||||
| Acquisition of property and equipment | ( | ) | ||||||
| Acquisition of intangible assets | ( | ) | ||||||
| Net cash provided by investing activities | ||||||||
| Financing activities | ||||||||
| Repayments on senior secured revolving facility | ( | ) | ||||||
| Proceeds from exercise of common stock warrants | ||||||||
| Payment of Series A, preferred stock distribution | ( | ) | ||||||
| Payment for taxes related to settlement of restricted stock units | ( | ) | ||||||
| Proceeds from factoring facilities, net of repayments | ||||||||
| Net cash provided by financing activities | ( | ) | ||||||
| Net decrease in cash | ( | ) | ( | ) | ||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income tax | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities | ||||||||
| Marketable securities issued in connection with debt settlement | $ | $ | ||||||
| Fair value of marketable securities received for revenue contracts, net | $ | $ | ||||||
| Sale of subsidiary (LD Micro, Inc.) | $ | $ | ||||||
| Issuance of Series B, convertible preferred stock and issuance of Class A, common stock - Asset purchase - DNA Holdings, LLC | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements
| 8 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Note 1 - Organization and Nature of Operations
SRAX, Inc. (“SRAX,” “we,” “us,” “our” or the “Company”) is a Delaware corporation formed on August 2, 2011. SRAX is headquartered in Westlake Village, California but operates as a distributed virtual Company.
As of December 31, 2022, the consolidated financial statements consist of SRAX and its wholly owned subsidiary LD Micro, Inc. (“LD”, “LD Micro”, “LD Micro, Inc.” or “LDMI”). See below regarding the sale and disposition of LD.
Nature of Operations
SRAX is a technology firm focused on enhancing communications between public companies and their shareholders and investors. The Company currently has one reportable and operating segment, which consists of one reporting unit consisting of two distinct business units.
Each of SRAX’s business units deliver valuable insights that assist our clients with their investor relations and communications initiatives.
Sequire
The unique SaaS platform, Sequire, provides users many features which allow issuers to track their shareholders’ behaviors and trends, then use data-driven insights to engage with shareholders across marketing channels.
| 9 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
LD Micro and Related Disposal of Subsidiary
Through LD Micro, Inc., the Company organized and hosted investor conferences within the micro and small cap markets.
Deconsolidation and Gain on Disposal of Subsidiary - LD Micro, Inc.
On March 3, 2023 (“date of disposal”), the Company disposed of its subsidiary LD through a sale to Freedom Holding, Corp. (Nasdaq: “FRHC”).
In
connection with the sale, the Company received aggregate consideration of $
| ● | $ |
| ● |
shares of FRHC, having a fair value of $ |
As
a result of the sale of our subsidiary, we deconsolidated our entire ownership interest in LD from our consolidated financial statements
beginning with the quarter ended March 31, 2023. The financial results of LD have been included in the Company’s operations up
to the date of disposal. Additionally, we recognized a gain on disposal of $
| Consideration | ||||
| Cash | $ | |||
| Marketable securities ( shares of Freedom Holding, Corp. ($/share)) | ||||
| Fair value of consideration received in connection with the sale of LD Micro, Inc. | ||||
| Recognized amounts of identifiable assets sold and liabilities assumed by buyer (FRHC): | ||||
| Goodwill (existing from prior acquisition of LD Micro, Inc.) | ||||
| Total net assets acquired by DNA Holdings, LLC | ||||
| Gain on disposal of LD Micro, Inc. | $ | |||
The disposal did not qualify as a discontinued operation because it did not represent a strategic shift that had a major effect on the Company’s operations and financial results, as defined by ASC 205-20. Additionally, LD Micro, Inc. also did not represent a separate line of business requiring segment disclosure.
| 10 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Basis of Presentation and Rounding
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements (“U.S. GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements.
In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all of the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2023 and the results of operations and cash flows for the periods presented. The results of operations for the six months ended June 30, 2023 are not necessarily indicative of the operating results for the full fiscal year or any future period.
These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on September 20, 2024.
Management acknowledges its responsibility for the preparation of the accompanying unaudited consolidated financial statements which reflect all adjustments, consisting of normal recurring adjustments, considered necessary in its opinion for a fair statement of its consolidated financial position and the consolidated results of its operations for the periods presented.
The amounts in the accompanying unaudited consolidated financial statements and notes are presented in thousands (except per share amounts), unless otherwise stated. As a result, certain totals may not sum due to rounding.
Note 2 - Liquidity and Going Concern
As reflected in the accompanying unaudited consolidated financial statements, for the six months ended June 30, 2023, the Company had:
| ● | Net
loss of $ |
| ● | Net cash used in operations was $ |
Additionally, at June 30, 2023, the Company had:
| ● | Accumulated deficit of $ |
| ● | Stockholders’ deficit of $ |
| ● | Working capital deficit of $ |
| 11 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The Company anticipates that it will need to raise additional capital immediately in order to continue to fund its operations. The Company has relied on third parties for debt based funding of its operations. There is also no assurance that the amount of funds the Company might raise will enable the Company to complete its initiatives or attain profitable operations.
The Company’s operating needs include the planned costs to operate its business, including amounts required to fund working capital and capital expenditures. The Company’s future capital requirements and the adequacy of its available funds will depend on many factors, including the Company’s ability to successfully expand to new markets, competition, and the need to enter into collaborations with other companies or acquire other companies to enhance or complement its service offerings.
There can be no assurances that financing will be available on terms which are favorable, or at all. If the Company is unable to raise additional funding to meet its working capital needs in the future, it will be forced to delay, reduce, or cease its operations.
The Company is heavily reliant on its ability to convert its marketable securities into cash. The ability to sell these investments have inherent limitations such as legal restrictions/holding periods and illiquid markets.
In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months ended June 30, 2024, and our current capital structure including equity-based instruments, obligations and debts. Additionally, this assessment was made as of the date of these unaudited consolidated financial statements.
We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company had cash on hand of $ at June 30, 2023.
The Company has historically incurred significant losses since inception and has not demonstrated an ability to generate sufficient revenues from the sales of its services to achieve profitable operations.
These factors create substantial doubt about the Company’s ability to continue as a going concern within the twelve-month period subsequent to the date that these financial statements are issued.
The unaudited consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
| 12 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Note 3 - Summary of Significant Accounting Policies
Principles of Consolidation and Non-Controlling Interest
These unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly owned subsidiary. All intercompany transactions and balances have been eliminated.
For entities that are consolidated, but not 100% owned, a portion of the income or loss and corresponding equity is allocated to owners other than the Company. The aggregate of the income or loss and corresponding equity that is not owned by us is included in Non-Controlling Interests in the consolidated financial statements.
Business Combinations and Asset Acquisitions
The Company accounts for acquisitions that qualify as business combinations by applying the acquisition method according to Accounting Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”).
Transaction costs related to the acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred.
The identifiable assets acquired, liabilities assumed, and noncontrolling interests in an acquired entity are recognized and measured at their estimated fair values. The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed, and noncontrolling interests in an acquired entity, net of the fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuations require management to make significant estimates and assumptions.
Purchase price allocations may be preliminary, and, during the measurement period not to exceed one year from the date of acquisition, changes in assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined.
Significant judgments are used in determining fair values of assets acquired and liabilities assumed, as well as intangibles. Fair value and useful life determinations are based on, among other factors, estimates of future expected cash flows, and appropriate discount rates used in computing present values. These judgments may materially impact the estimates used in allocating acquisition date fair values to assets acquired and liabilities assumed, as well as the Company’s current and future operating results. Actual results may vary from these estimates which may result in adjustments to goodwill and acquisition date fair values of assets and liabilities during a measurement period or upon a final determination of asset and liability fair values, whichever occurs first.
| 13 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Adjustments to fair values of assets and liabilities made after the end of the measurement period are recorded within the Company’s earnings.
The Company evaluates acquisitions of assets and other similar transactions to assess whether the transaction should be accounted for as a business combination or asset acquisition by first applying a screen test to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets. If so, the transaction is accounted for as an asset acquisition. If not, further determination is required as to whether the Company has acquired inputs and processes that can create outputs that would meet the definition of a business. When applying the screen test, significant judgment is required to determine whether an acquisition is a business combination or an acquisition of assets.
Accounting for asset acquisitions falls under the guidance of Topic 805, Business Combinations, specifically Subtopic 805-50. A cost accumulation model is used to determine an asset acquisition’s cost. Assets acquired are based on their cost, generally allocated to them on a relative fair value basis. Direct acquisition-related costs are included in the cost of the acquired assets.
The distinction between business combinations and asset acquisitions involves judgment, particularly when applying the screen test to determine the nature of the transaction. Incorrect judgments or changes in decisions in these areas could materially affect the determination of goodwill, the recognition and measurement of acquired assets and assumed liabilities, and, consequently, our financial position and results of operations.
Acquisition of DNA Holdings, LLC (“DNA”) (Asset Purchase) – Former Related Party
Summary of Assets Acquired from DNA
On
February 3, 2023, the Company closed an asset purchase agreement and acquired the following assets from DNA, having a fair value of $
| ● | Cash ($ |
| ● | Digital crypto assets ($ |
| ● | Equity
investments in three (3) private companies accounted for under the cost method ($ |
DNA is controlled by a former member of our Board of Directors.
| 14 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Accounting Guidance – Asset Purchase Determination
Under the business combination guidance in ASC 805, an entity applies the screen test to determine whether a transaction constitutes a business combination or an asset acquisition. According to ASC 805-10-55-3A, if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction does not meet the definition of a business and is instead accounted for as an asset acquisition.
Based on this analysis, the Company determined that the screen test was met and that the acquisition did not qualify as a business combination under ASC 805, Business Combinations.
The Company classified the acquired assets into one distinct group:
Financial Assets (Cash, Crypto Assets, and Private Company Investments)
These assets do not constitute a business under ASC 805 as they lack inputs and processes necessary to generate outputs. Specifically:
| ● | Cash acquired – Cash alone is not considered a business and was subsequently used for working capital purposes. | |
| ● | Private company investments (<10% ownership) – These were classified as cost method investments rather than a business. | |
| ● | Digital crypto assets – The Company liquidated these assets for working capital, and they do not function as a business. |
Asset Acquisition Accounting Treatment
Since the primary identifiable assets acquired were a group of similar assets, none of which were deemed to be a business, the Company concluded that this transaction met the screen test and should be classified as an asset acquisition under ASC 805-50.
Under ASC 805-50, asset acquisitions require the acquirer to recognize assets acquired and liabilities assumed based on the cost to the acquiring entity, allocated on a relative fair value basis, which includes consideration given.
Additionally, because this was an asset acquisition rather than a business combination, the transaction did not result in the recognition of goodwill or other identifiable intangible assets.
| 15 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Valuation Considerations
The Company paid aggregate consideration of the following in accordance with the asset purchase agreement:
| ● | shares of common stock; and |
| ● | shares of Series B, Non-Voting, Convertible Preferred Stock |
The Company evaluated the transaction under the guidance of Accounting Standards Codification (ASC) 820, Fair Value Measurement, and ASC 805, Business Combinations, to determine the appropriate valuation approach. Based on this assessment, the Company concluded that this asset purchase was, in substance, an equity offering of its securities at a significant discount rather than a business combination or asset acquisition for accounting purposes.
As a result, the Company measured the fair value of the equity securities issued based on the value of the cash and crypto assets received, as this represented the best available evidence of fair value in accordance with ASC 820-10-30 (Fair Value Measurement – Determining Fair Value in Transactions).
Furthermore, in evaluating the fair value of the acquired assets:
The Company was unable to verify the fair value of the private company positions acquired on the acquisition date or within one year (1) from the acquisition date.
Given
the lack of observable market inputs or a reliable valuation methodology, management determined that these assets should be recorded
at $
The Company determined that this asset purchase was in substance an equity offering of its securities at a significant discount, and therefore has valued the equity securities issued equal to the value of the cash and crypto assets received, which represented the best evidence of fair value in this transaction.
| 16 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price of an acquired business over the amount assigned to the assets acquired and liabilities assumed and the fair value assigned to identifiable intangible assets. Goodwill is not amortized. The Company accounts for goodwill and indefinite-lived intangible assets in accordance with FASB ASC 350, Intangibles Goodwill and Other, and Accounting Standards Update, or ASU, 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The Company’s goodwill and intangible assets are deductible for tax purposes.
The Company annually assesses goodwill for impairment, or more frequently if events or changes in circumstances indicate that goodwill might be impaired.
Goodwill impairment testing consists of an optional qualitative assessment as well as a quantitative test. The quantitative test compares the fair value of a reporting unit to its carrying value. If the carrying value of the reporting unit is greater than zero and its fair value is greater than its carrying amount, there is no impairment. If the carrying value is greater than the fair value, the difference between the two values is recorded as an impairment.
Indefinite-lived and finite-lived intangible assets acquired in business combinations are recorded at fair value on the acquisition date. Finite-lived intangible assets are amortized on a straight-line basis over the estimated useful life of the asset.
The Company reviews its intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If such assets are not recoverable, an impairment loss is recognized to the extent the carrying amount of the assets exceeds the fair value of the assets.
Impairment loss 2023
For the three and six months ended June 30, 2023, the Company recorded impairment losses.
Impairment loss 2022
An
impairment in the amount of $
The impairment was determined as the carrying amount of goodwill and intangible assets exceeded its implied fair value based on a discounted cash flow projection. The transition to accepting only cash as compensation for services will cause a significant decrease in revenue and cash collections, which has a material negative impact on the discounted cash flow projection.
Goodwill
at June 30, 2023 and December 31, 2022, was $ and $
| 17 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Deconsolidation of Subsidiary (Gain or Loss on Disposal)
A subsidiary is deconsolidated from the Company’s financial statements when the Company no longer has a controlling financial interest in the subsidiary. This generally occurs when the Company loses control through a sale, transfer, or other means, including the expiry of a contractual agreement.
Upon deconsolidation, the Company:
Derecognizes the Assets and Liabilities:
| ● | Removes the assets and liabilities of the subsidiary from the consolidated balance sheet at their carrying amounts at the date when control is lost. |
Recognition of Gain or Loss:
| ● | Recognizes any resulting gain or loss in the consolidated statements of operations. This gain or loss is measured as the difference between: |
| ● | The aggregate of the fair value of the consideration received, if any, and the fair value of any retained investment. | |
| ● | The carrying amount of the assets and liabilities of the subsidiary, including any noncontrolling interests. |
Measurement of Retained Investment:
| ● | Any retained noncontrolling equity investment in the former subsidiary is remeasured to its fair value at the date control is lost. This fair value becomes the initial carrying amount of the retained investment. |
See Note 1 for disposal of LD.
Business Segments and Concentrations
The Company determines its reportable segments in accordance with the “management approach” as outlined in ASC 280, Segment Reporting. Under this approach, an entity’s operating segments are identified based on the internal financial information that is regularly reviewed by the Chief Operating Decision Maker (CODM) (the Company’s Chief Executive Officer) to allocate resources and assess performance.
| 18 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
After evaluating the nature of the Company’s operations, the CODM has determined that the Company operates as a single reportable segment because:
| ● | The Company’s business activities are managed and evaluated on a consolidated basis rather than through multiple discrete operating segments. | |
| ● | The CODM reviews a single set of financial information to make key decisions regarding resource allocation and performance assessment. | |
| ● | The Company offers products and services that share similar economic characteristics, customers, and distribution methods, supporting aggregation into a single reportable segment. |
As a result, the Company reports its financial results on a consolidated basis, and no additional segment disclosures are required under ASC 280-10-50.
Use of Estimates
The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP) requires management to make significant estimates and assumptions that impact:
| ● | The reported amounts of assets and liabilities, | |
| ● | The disclosure of contingent assets and liabilities at the financial statement date, and | |
| ● | The recognition of revenues and expenses during the reporting period. |
These estimates are based on management’s best judgment, historical experience, and various other factors, including assumptions about future events. While management believes that these estimates are reasonable, actual results may differ from these estimates, and such differences could be material.
Significant estimates during the three and six months ended June 30, 2023 and 2022, respectively, include:
| ● | revenue recognition (receipt of marketable securities for services to be rendered at fair value), | |
| ● | valuation of marketable securities (including impairment losses), using a third party independent valuation expert, | |
| ● | allowance for doubtful accounts and other receivables, | |
| ● | valuation of loss contingencies, | |
| ● | valuation of goodwill and intangibles and related impairments, | |
| ● | valuation of stock-based compensation (common and preferred stock, stock options and warrants), | |
| ● | estimated useful lives related to intangible assets and related impairments (including goodwill), | |
| ● | estimated useful lives related to property and equipment and related impairments, | |
| ● | implicit interest rate in right-of-use operating leases, | |
| ● | purchase price for acquisitions, | |
| ● | uncertain tax positions; and | |
| ● | valuation allowance on deferred tax assets. |
| 19 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Risks and Uncertainties
The Company operates in a highly competitive industry that is subject to rapid changes in consumer demand, evolving market trends, and technological advancements. As a result, the Company’s operations are exposed to significant financial, operational, and strategic risks, including the potential risk of business failure.
Additionally, the Company has experienced, and may continue to experience, variability in sales and earnings due to several factors, including but not limited to:
| 1. | Industry Cyclicality – The Company operates in an industry that is inherently cyclical, with periods of strong demand followed by potential downturns. | |
| 2. | Macroeconomic Conditions – General economic factors, including inflation, interest rate fluctuations, changes in consumer spending patterns, and potential recessions, may adversely impact demand for the Company’s products and services. | |
| 3. | Market Price Volatility – The Company’s financial performance is influenced by fluctuations in pricing and competitive pressures related to the distribution of its services. | |
| 4. | Regulatory and Compliance Risks – Changes in government regulations, industry standards, or compliance requirements could increase operating costs or limit market opportunities. | |
| 5. | Supply Chain and Operational Disruptions – The Company’s ability to deliver its services may be affected by logistical challenges, supplier constraints, or unforeseen external disruptions. |
Due to these and other risk factors, predicting future operating results with certainty is challenging. The Company continuously evaluates market conditions and implements strategic measures to mitigate these uncertainties; however, there can be no assurance that such measures will be successful in addressing potential risks.
| 20 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Fair Value of Financial Instruments
The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements. ASC 820 provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value.
The three tiers are defined as follows:
| ● | Level 1 – Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; | |
| ● | Level 2 – Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and | |
| ● | Level 3 – Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. |
The determination of fair value and the assessment of a measurement’s placement within the hierarchy requires judgment. Level 3 valuations often involve a higher degree of judgment and complexity. Level 3 valuations may require the use of various cost, market, or income valuation methodologies applied to unobservable management estimates and assumptions.
Management’s assumptions could vary depending on the asset or liability valued and the valuation method used. Such assumptions could include estimates of prices, earnings, costs, actions of market participants, market factors, or the weighting of various valuation methods.
The Company may also engage external advisors to assist us in determining fair value, as appropriate. Although the Company believes that the recorded fair value of our financial instruments is appropriate, these fair values may not be indicative of net realizable value or reflective of future fair values.
| 21 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The availability of valuation techniques and observable inputs can vary from investment to investment and are affected by a wide variety of factors. The determination of fair value requires prudent judgment. Due to the inherent uncertainty of valuation, estimated values may be materially different from values were a ready market available. Inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the item being valued is classified based on the hierarchy category of the lowest significant level input to the fair value measurement.
See Note 11 for Level 1,2 and 3 disclosures.
The Company’s financial instruments, including cash, accounts receivable, and accounts payable and accrued expenses are carried at historical cost.
At June 30, 2023 and December 31, 2022, respectively, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.
Valuation Techniques and Inputs (Marketable Securities)
Investments in securities and securities sold short that are both freely tradable and listed on major securities exchanges are valued at their last reported sales price as of the valuation date.
Many over-the-counter contracts have bid and ask prices that are observable in the marketplace. Bid prices reflect the highest price that the marketplace participants are willing to pay for an asset. Ask prices represent the lowest price that the marketplace participants are willing to accept for an asset.
An integral part of the Company’s fair value measurement process is the assessment of the type of securities as well as the securities’ liquidity and marketability.
The Company initially classifies securities as:
| ● | equity securities, |
| ● | debt securities, |
| ● | warrants, |
| ● | convertible debt; or |
| ● | preferred stock. |
Equity Securities
Equity securities are valued using the quoted prices times the number of shares acquired. The securities are then evaluated based on their marketability (usually based on the restrictions on resale into the securities primary market) and liquidity.
| 22 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Debt Securities
The Company does not have any debt securities as of June 30, 2023 and December 31, 2022, respectively.
Warrants
Warrants are initially valued at cost, if acquired for cash, or at intrinsic value.
Convertible Debt
For convertible debt securities the investor generally should evaluate the security in its current “all-in” form as convertible debt and not use the “if converted” value.
Convertible debt is valued based on an analysis of the implied call option and a discounted cash flow analysis of the debt component.
Active Market Pricing
The Company considers there to be an active market based on the guidance in ASC 820-10-35-54C. In an active market, transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. An orderly transaction assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities. Whether transactions take place with sufficient frequency and volume to constitute an active market is a matter of judgement and depends on the facts and circumstances of the market for the asset or liability. If the Company determines that the trading market for a security is not an active market the Company evaluates the stock price based on other observable or unobservable inputs. A market with limited activity may still provide relevant pricing information when there is no contrary evidence that the pricing information is not relevant to the fair value of the asset. In certain situations, the Company’s security holdings represent share quantities that materially exceed the average daily trading volume of the securities in their primary market. Thus, the Company considers a discount due to the lack of liquidity. If the Company determines it can liquidate its position within 180 days based on 10% of the securities average daily trading volume, no discount is applied. Rule 144 also has an alternative volume limit for affiliates of up to 10% of the tranche (or class) outstanding for debt securities. We believe this provides a reasonable basis to suggest this 10% of trading volume should have minimal impact on market prices.
Securities with a marketability holding period in excess of 180 days is subjected to a discount for marketability. If a security has both a marketability holding period over 180 days and a liquidation period of over 180 days the Company will evaluate the impact of both the marketability and liquidity discounts. The Company utilizes the quoted market price on the date of valuation and calculates a discount for marketability and liquidity based on a protective put option pricing model that factors in both the lack of marketability and liquidity.
| 23 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Independent Valuation Expert
The Company uses a third party specialist to provide guidance around the assumptions, inputs, pricing models utilized valuation calculations into the various Put Option Pricing Models (POPMs) used in the calculations to determine discounts at contract inceptions date and each of the respective balance sheet dates.
If the Company has access to material non-public information regarding an investee, it will consider this information as an input for purposes of valuing the security. In these situations, the Company will consider the impact this information will have on the valuation of the securities on a case-by-case basis. These situations could arise due to the Company being an affiliate of the issuer or an officer or director of the Company is an affiliate of the issuer.
These securities are categorized in Level 1 of the fair value hierarchy to the extent these securities are actively traded. Securities traded on inactive markets or valued by reference to similar instruments are generally categorized in Level 2 of the fair value hierarchy.
Investments in Restricted Securities of Public Companies
Investments in restricted securities of public companies cannot be offered for sale to the public until the company complies with certain statutory requirements. The valuation will not exceed the listed price on any major securities exchange. Investments in restricted securities of public companies are generally categorized in Level 2 of the fair value hierarchy. However, investments in public companies may be categorized in Level 3 of the fair value hierarchy depending on the level of observable liquidity. Specifically, if the Company determines the market activity is not sufficient to conclude the market activity represents an Active Market pursuant to ASC 820 -10 -35 36B.
The Company evaluates the trading activity of each listed security to determine if the trading market is an Active Market for purposes of evaluating Fair Value under ASC 820. The Company evaluated the number of trade observations during the year, the percentage of the total trading days the security traded on its listed market during the full year or the portion of the year if the security was initially listed during the year, and at the dollar value of the trading activity for the full year as a percentage of the market capitalization of the security. If the Company determines the listed securities trading market is not an active market it looks at other transactions reported by the listed company including private equity transactions, non-cash equity transactions, the trading price and other factors. The Company determines a fair value of the stock price based on this analysis. This price is the lower of the listed price or the fair value based on the analysis. The Company also considers the marketability and liquidity discounts on the listed security in determining fair value.
| 24 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Cash and Cash Equivalents and Concentration of Credit Risk
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid instruments with a maturity of three months or less at the purchase date and money market accounts to be cash equivalents.
At June 30, 2023 and December 31, 2022, respectively, the Company did not have any cash equivalents.
The
Company is exposed to credit risk on its cash and cash equivalents in the event of default by the financial institutions to the extent
account balances exceed the amount insured by the FDIC, which is $
At June 30, 2023 and December 31, 2022, respectively, the Company did not experience any losses on cash balances in excess of FDIC insured limits.
At
June 30, 2023 and December 31, 2022, respectively, the Company had $
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding customer balances. Credit is extended to customers based on an evaluation of their financial condition and other factors. Interest is not accrued on overdue accounts receivable. The Company does not require collateral.
Management periodically assesses the Company’s accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. Accounts determined to be uncollectible are charged to operations when that determination is made.
| 25 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Accounts receivable at June 30, 2023 and December 31, 2022, is as follows:
| June 30, 2023 | December 31, 2022 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: allowance for doubtful accounts | ||||||||
| Accounts receivable - net | $ | $ | ||||||
There
was bad debt expense of $
There
was bad debt expense of $
Bad debt expense (recoveries) are recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.
Contracts Receivable
Contracts receivable represents amounts for which non-cancellable revenue contracts with customers have been finalized but the payment in the form of securities issued by the customer have not been received by the Company.
Contracts receivable are also adjusted based on their fair value at each reporting period as an adjustment to the consolidated statements of operations. For the three and six months ended June 30, 2023 and 2022, the Company recorded a loss on fair value of $, respectively.
Allowance
for doubtful contracts receivable was $
There
was bad debt expense (recovery) of $
Bad debt expense (recoveries) is recorded as a component of general and administrative expenses in the accompanying consolidated statements of operations.
At
June 30, 2023 and December 31, 2022, contracts receivables were $ and $
| 26 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Marketable Securities - Classification and Valuation
The Company may classify its marketable securities as either trading, available-for-sale, or held-to-maturity.
Trading securities are recorded at fair value with unrealized gains and losses included in earnings.
Available-for-sale securities are recorded at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income.
Held-to-maturity securities are recorded at amortized cost.
Certain marketable securities with restrictions exceeding 12 months were excluded from current asset classification.
At June 30, 2023 and December 31, 2022, the Company has classified all of its marketable securities as trading, based upon our intent to sell them in the near term.
Impairment of Marketable Securities
The Company evaluates its marketable securities for impairment at each reporting period.
An impairment is considered to be other-than-temporary if the Company (a) intends to sell the security, (b) is more likely than not to be required to sell the security before recovery of its amortized cost basis, or (c) does not expect to recover the entire amortized cost basis of the security.
If a decline in fair value is determined to be other-than-temporary, the impairment loss is recognized in earnings. For debt securities, the amount of the other-than-temporary impairment recognized in earnings depends on the extent to which the security’s fair value is less than its amortized cost and the severity and duration of the decline.
The determination of whether a decline is other-than-temporary involves significant judgment and includes an assessment of various factors including:
| ● | The length of time and the extent to which the fair value has been less than the cost basis; | |
| ● | The financial condition and near-term prospects of the issuer, including any specific events that may influence the issuer’s operations or profitability; | |
| ● | The intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. |
For the three and six months ended June 30, 2023 and 2022, the Company recorded an impairment loss of $, respectively.
| 27 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Marketable
securities were $
See Note 6 for additional disclosure of our marketable securities at fair value.
Long-lived Assets and Related Impairments of Goodwill and Intangible 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, in accordance with the provisions of ASC 360-10-35-15 “Impairment or Disposal of Long-Lived Assets.” 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, 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; 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 to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Impairment
loss for goodwill for the three and six months ended June 30, 2023 and 2022, was $ and $
Impairment
loss for intangible assets for the three and six months ended June 30, 2023 and 2022 was $ and $
Property and Equipment and Related Impairment
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.
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 reviews the carrying value of its property and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable.
Impairment
loss was $
| 28 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Right of Use Assets and Lease Obligations
The Right of Use Asset and Lease Liability reflect the present value of the Company’s estimated future minimum lease payments over the lease term, which may include options that are reasonably assured of being exercised, discounted using a collateralized incremental borrowing rate.
Typically, renewal options are considered reasonably assured of being exercised if the associated asset lives of the building or leasehold improvements exceed that of the initial lease term, and the performance of the business remains strong. Therefore, the Right of Use Asset and Lease Liability may include an assumption on renewal options that have not yet been exercised by the Company. The Company’s operating leases contained renewal options that expire at various dates with no residual value guarantees. Future obligations relating to the exercise of renewal options is included in the measurement if, based on the judgment of management, the renewal option is reasonably certain to be exercised. Factors in determining whether an option is reasonably certain of exercise include, but are not limited to, the value of leasehold improvements, the value of the renewal rate compared to market rates, and the presence of factors that would cause a significant economic penalty to the Company if the option is not exercised. Management reasonably plans to exercise all options, and as such, all renewal options are included in the measurement of the right-of-use assets and operating lease liabilities.
As the rate implicit in leases are not readily determinable, the Company uses an incremental borrowing rate to calculate the lease liability that represents an estimate of the interest rate the Company would incur to borrow on a collateralized basis over the term of a lease within a particular currency environment. See Note 12 regarding operating leases.
Derivative Liabilities
The Company assessed the classification of its derivative financial instruments as of June 30, 2023 and December 31, 2022, which consist of convertible notes payable and has determined that such instruments do not qualify for treatment as derivative liabilities as they do not meet the criteria for liability classification under ASC 815.
The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic No. 480, (“ASC 480”), “Distinguishing Liabilities from Equity” and FASB ASC Topic No. 815, (“ASC 815”) “Derivatives and Hedging”.
Derivative liabilities are adjusted to reflect fair value at each reporting period, with any increase or decrease in the fair value recorded in the results of operations (other income/expense) as change in fair value of derivative liabilities. The Company uses a binomial pricing model to determine fair value of these instruments.
| 29 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Upon conversion or repayment of a debt instrument in exchange for shares of common stock, where the embedded conversion option has been bifurcated and accounted for as a derivative liability, the Company records the shares of common stock at fair value, relieves all related debt, derivatives, and debt discounts, and recognizes a net gain or loss on debt extinguishment. In connection with the debt extinguishment, the Company typically records an increase to net income for debt related instruments and additional paid-in capital for any equity based instruments (i.e.: warrants) for the remaining liability balance extinguished.
Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
The Company has adopted ASU 2017-11, Earnings per share (ASC Topic 260), provided that when determining whether certain financial instruments should be classified as liability or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. If a down round feature on the conversion option embedded in the note is triggered, the Company will evaluate whether a beneficial conversion feature exists, the Company will record the amount as a debt discount and will amortize it over the remaining term of the debt.
If the down round feature in the warrants that are classified as equity is triggered, the Company will recognize the effect of the down round as a deemed dividend, which will reduce the income available to common stockholders.
At
June 30, 2023 and December 31, 2022, respectively, the Company had
Original Issue Discount
For certain notes issued, the Company may provide the debt holder with an original issue discount. The original issue discount is recorded as a debt discount, reducing the face amount of the note, and is amortized to interest expense over the life of the debt, in the Consolidated Statements of Operations.
Debt Issue Cost
Debt issuance cost paid to lenders, or third parties are recorded as debt discounts and amortized to interest expense over the life of the underlying debt instrument, in the Consolidated Statements of Operations.
| 30 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Series A, Redeemable, Preferred Stock Liability
The preferred stock liability represents the obligation to pay dividends to holders of Series A Preferred Stock upon the liquidation of designated marketable securities held specifically for this purpose. These preferred shares do not confer any residual equity interest in the Company beyond the scheduled dividend payments.
In accordance with U.S. GAAP, the Company has classified Series A, Redeemable, Preferred Shares as liability instruments rather than equity, as they effectively represent a contractual obligation to transfer cash (or other financial assets) upon the liquidation of the designated securities. Specifically:
| ● | The preferred shares entitle holders to dividend payments upon liquidation of the specified assets. | |
| ● | Once the payments are made, the designated assets automatically return to the Company, and the holders retain no further rights to equity or residual interests. | |
| ● | Given these characteristics, the Series A shares meet the criteria for liability classification under ASC 480, Distinguishing Liabilities from Equity. |
The Certificate of Designation of Preferences, Rights, and Limitations of Series A Non-Voting Preferred Stock states that dividends shall only be paid if the Board of Directors determines that such distributions comply with the applicable provisions of the Delaware General Corporation Law (DGCL) and other governing laws.
As
of June 30, 2023, and December 31, 2022, the Series A redeemable preferred stock liability was $
For additional details, see Note 16.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 to align revenue recognition more closely with the delivery of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services.
To achieve this core principle, the Company applies the following five steps:
| 31 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Identify the contract with a customer
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
Identify the performance obligations in the contract
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
Determine the transaction price
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts contain a significant financing component and there are no contracts with variable consideration.
| 32 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Allocate the transaction price to performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
Recognize revenue when or as the Company satisfies a performance obligation
The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.
The Company has elected the following practical expedients allowed in accounting for its revenue recognition:
| ● | not adjusting contract consideration for the effects of significant financing components if the period between transfer or service and customer payment is expected to be less than one year; |
| ● | not assessing performance obligations if they are immaterial in the context of the contract; |
| ● | excluding sales and similar taxes from the transaction price; and |
| ● | not disclosing the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. |
| 33 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The Company generates revenue primarily from two (2) sources: its Sequire SaaS platform and its LD Micro, Inc. subsidiary (prior to the disposal of LD in March 2023 – see Note 1).
the Sequire SaaS platform related revenue consists of:
| (i) | licensing subscriptions to access the platform, | |
| (ii) | managed services involving data and marketing initiatives, and | |
| (iii) | ancillary data supplementing the use of the platform. |
LD Micro, Inc. revenues consist of:
| (i) | event attendee fees, and | |
| (ii) | event sponsorship fees related to investor conferences which are organized and hosted by the Company |
For each revenue stream we do not offer any returns, refunds or warranties, and no arrangements are cancellable. Additionally, all contract consideration is fixed and determinable at the initiation of the contract.
Sequire SaaS Platform
The Company derives its revenue primarily from the licensing of our Sequire Platform and Services associated with our customer’s use of the platform, consisting of data insights, marketing, creative, and paid media advertising.
Revenue is recognized at a point in time when control of the goods is transferred to the customer, generally occurring ratably over the contract period. The amount recognized reflects the consideration the Company expects to be entitled to in exchange for the transferred services.
Licensing and Service revenue is generally recognized over time on a ratable basis over the contract term beginning on the date that the service is expected to begin. Service contracts are generally for 12 months in length, billed either monthly or annually and generally in advance. Services revenue are typically recognized using an output measure of progress by looking at the time elapsed as the contracts generally provide the customer equal benefit throughout the contract period because the Company transfers control evenly by providing a stand-ready service.
Prior to 2023 many of the Sequire SaaS platform agreements provide customers the ability to pay for the services with the issuance of the customers’ securities including common stock. For contacts paid with any type of security, management considers whether there is any marketability of liquidity discounts in determining the fair value of the security on the contract date.
| 34 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The amount of consideration for these contracts is based on the estimated fair value of the underlying securities on the contract date.
The Company’s contract with its customers is for a period of one year or less and the Company is applying the practical expedient, therefore, the transaction price is not adjusted for any significant financing component.
The Company evaluates whether there is an existence of a significant financing component in the contract. This is evaluated based on the marketability holding period and liquidity issues than can extend the ability to sell the securities. For any marketability restrictions over 180 days the Company provides a marketability discount. For any liquidity issues that would take the Company in excess of 180 days to liquidate the security the Company applies a liquidity discount. Where there is both a marketability and liquidity issue the Company provides a discount considering both.
ASC 606-10-32-23 indicates the fair value of the noncash consideration may vary after contract inception because of the form of the consideration (for example, a change in the price of a share to which an entity is entitled to receive from a customer). Changes in the fair value of noncash consideration after contract inception that are due to the form of the consideration are not included in the transaction price.
The Company uses significant judgment when estimating variable consideration. These estimates are based on historical data, current and anticipated customer behavior, and other qualitative and quantitative factors. Changes in these estimates can materially affect the amount and timing of revenue recognized.
See Notes 6 and 11 regarding our marketable securities and related fair value discussions.
In 2023 the Company transitioned to accepting only cash as compensation for services. As we transition to accepting only cash as compensation for services there will be a significant decrease in Sequire revenue generated from securities received after the year ended December 31, 2022.
If Sequire SaaS platform contracts contain multiple performance obligations, transaction consideration is allocated to each individual performance obligation based on a relative Stand-Alone Selling Price (“SSP,”) basis. The Company determines SSP based on the price at which the performance obligation would be sold separately.
Subscription revenue is generally non-refundable regardless of the actual use and is recognized ratably over the non-cancellable contract term beginning on the commencement date of each contract, which is the date the Company’s service is first made available to customers.
| 35 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Managed Services and Ancillary Data revenue is typically recognized using an output measure of progress by looking at the time elapsed as the contracts generally provide the customer equal benefit throughout the contract period because the Company transfers control evenly by providing a stand-ready service.
LD Micro, Inc. – Conference Revenues
LD Micro, Inc. agreements cover a specific event and provide for payment in advance or at the time of the event. Conference revenue from attendee fees and sponsorship fees is recognized at the time of the event (i.e., at a point-in-time).
At June 30, 2023 and 2022, for each of our outstanding revenue streams we only had a distinct single performance obligation.
Principal vs. Agent Considerations
In evaluating whether the Company acts as a principal or an agent in its service offerings, the Company applies the guidance in ASC 606-10-55-36 through 55-40. The Company has determined that it is the principal in these transactions based on the following factors:
For the Sequire SaaS platform related revenue:
| ● | The Company controls access to the platform through licensing subscriptions. | |
| ● | The Company has discretion in pricing for managed services, as it sets the fees for data and marketing initiatives. | |
| ● | The Company is responsible for delivering ancillary data that supplements the use of the platform. |
For LD Micro, Inc. revenues:
| ● | The Company controls the organization and delivery of investor conferences, thereby setting event attendee fees. | |
| ● | The Company manages sponsorship arrangements for these events, including determining the sponsorship fees. |
Furthermore, for each revenue stream:
| ● | The Company does not offer any returns, refunds, or warranties. | |
| ● | No arrangements are cancellable. | |
| ● | All contract consideration is fixed and determinable at the initiation of the contract. |
Based on these factors, the Company recognizes revenue on a gross basis as it is the principal in these transactions in accordance with ASC 606-10-55-37A.
| 36 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Contract Liabilities (Deferred Revenue)
Contract liabilities consist of customer advance payments and billings in excess of revenue recognized. We may receive payments from our customers in advance of completing our performance obligations.
We record contract liabilities equal to the amount of payments received in excess of revenue recognized, including payments that are refundable if the customer cancels the contract according to the contract terms.
We have no long-term contract liabilities which would represent the amount of payments received in excess of revenue earned, including those that are refundable, when the time to fulfill the performance obligation is greater than one year.
At
June 30, 2023 and December 31, 2022, the Company had deferred revenue of $
Disaggregation of Revenues
The following represents the Company’s disaggregation of revenues for the six months ended June 30, 2023 and 2022:
For the Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | |||||||||||||||
| Revenue | Revenue | % of Revenues | Revenue | % of Revenues | ||||||||||||
| Sequire SaaS platform revenue | $ | % | $ | % | ||||||||||||
| LD Micro, Inc. - conference revenue | % | % | ||||||||||||||
| Total Revenues | $ | % | $ | % | ||||||||||||
Geographic Concentrations
For the six months ended June 30, 2023 and 2022, the Company earned revenues from customers in various countries as follows:
| Geographic Location | Six Months Ended June 30, | |||||||
| Country | 2023 | 2022 | ||||||
| United States | % | % | ||||||
| Canada | % | % | ||||||
| Other | % | % | ||||||
| % | % | |||||||
| 37 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Cost of Revenues
Cost of revenues consists primarily of marketing/data services as well as content hosting.
Income Taxes
The Company accounts for income tax using the asset and liability method prescribed by ASC 740, “Income Taxes”. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities using enacted tax rates that will be in effect in the year in which the differences are expected to reverse. The Company records a valuation allowance to offset deferred tax assets if based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax assets will not be realized. The effect on deferred taxes of a change in tax rates is recognized as income or loss in the period that includes the enactment date.
The Company follows the accounting guidance for uncertainty in income taxes using the provisions of ASC 740 “Income Taxes”. Using that guidance, tax positions initially need to be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.
As of June 30, 2023 and December 31, 2022, respectively, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
The Company recognizes interest and penalties related to uncertain income tax positions in other expense. No interest and penalties related to uncertain income tax positions were recorded for the three and six months ended June 30, 2023 and 2022, respectively.
Valuation of Deferred Tax Assets
The Company’s deferred income tax assets include certain future tax benefits. The Company records a valuation allowance against any portion of those deferred income tax assets when it believes, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred income tax asset will not be realized.
The Company reviews the likelihood that it will realize the benefit of its deferred tax assets and therefore the need for valuation allowances on a quarterly basis, or more frequently if events indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred tax asset is considered, along with all other available positive and negative evidence.
| 38 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Certain categories of evidence carry more weight in the analysis than others based upon the extent to which the evidence may be objectively verified. The Company looks to the nature and severity of cumulative pretax losses (if any) in the current three-year period ending on the evaluation date, recent pretax losses and/or expectations of future pretax losses.
Other factors considered in the determination of the probability of the realization of the deferred tax assets include, but are not limited to:
| ● | Earnings history; | |
| ● | Projected future financial and taxable income; | |
| ● | The duration of statutory carry forward periods; | |
| ● | Prudent and feasible tax planning strategies readily available that may alter the timing of reversal of the temporary difference; | |
| ● | Nature of temporary differences and predictability of reversal patterns of existing temporary differences; and | |
| ● | The sensitivity of future forecasted results. |
Concluding that a valuation allowance is not required is difficult when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. The Company utilizes a rolling twelve quarters of pre-tax income or loss as a measure of its cumulative results in recent years. However, a cumulative three year loss is not solely determinative of the need for a valuation allowance. The Company also considers all other available positive and negative evidence in its analysis.
At
June 30, 2023 and December 31, 2022, respectively, the Company has recorded a full valuation allowance against its deferred tax assets
resulting in a net carrying amount of $
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs are included as a component of cost of revenues in the consolidated statements of operations.
The
Company recognized $
The
Company recognized $
| 39 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The Company accounts for stock-based compensation in accordance with 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 fair value of the award and is recognized as expense over the service period, typically the vesting period.
ASC 718 establishes accounting standards for transactions in which an entity exchanges its equity instruments for goods or services, as well as for transactions in which an entity incurs liabilities based on the fair value of its equity instruments or that may be settled through the issuance of such instruments.
Fair Value Determination
The Company determines fair value for equity instruments granted to employees and non-employees using the Black-Scholes option pricing model.
The fair value of stock-based compensation is measured as of:
| ● | The grant date (for employee awards), or | |
| ● | The measurement date (for non-employee awards or awards with performance conditions, determined when service is completed). |
The following key assumptions are considered when applying the Black-Scholes model:
| ● | Exercise price | |
| ● | Expected dividend yield | |
| ● | Expected stock price volatility | |
| ● | Risk-free interest rate | |
| ● | Expected life of the option |
Stock Warrants
The Company may issue warrants to purchase shares of common stock in connection with:
| ● | Financing transactions (debt or equity issuance) | |
| ● | Consulting agreements | |
| ● | Collaboration arrangements |
Warrants are considered standalone instruments, are not puttable or mandatorily redeemable, and are generally classified as equity awards.
The Company measures the fair value of warrants using:
| ● | The Black-Scholes option pricing model, for warrants classified as equity instruments. | |
| ● | A binomial pricing model, for warrants that meet the definition of a derivative liability under ASC 815, Derivatives and Hedging. |
| 40 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Accounting Treatment
| ● | Warrants issued in conjunction with common stock issuance → Initially recorded at fair value as a reduction of additional paid-in capital (APIC). | |
| ● | Warrants issued for services → Measured at fair value and expensed over the requisite service period or immediately if no service period exists. |
The Company calculates earnings (loss) per share (EPS) in accordance with ASC 260, Earnings Per Share, specifically following the guidance outlined in ASC 260-10-45.
| ● | Basic earnings (loss) per share is computed in accordance with ASC 260-10-45-10 by dividing net income (loss) attributable to common shareholders by the weighted average number of shares of common stock outstanding during the reporting period. | |
| ● | Diluted EPS is computed in accordance with ASC 260-10-45-15, which requires that diluted EPS be calculated by dividing net income by the weighted average number of shares of common stock, common stock equivalents, and potentially dilutive securities outstanding during the period. |
Potentially Dilutive Securities
In accordance with ASC 260-10-45-19, potentially dilutive securities are considered in the diluted EPS calculation if their inclusion reduces earnings per share (i.e., is dilutive). The Company’s potentially dilutive securities may include:
| ● | Contingently issuable shares – Common stock that may be issued based on future events or performance conditions. | |
| ● | Stock options and warrants – Included using the treasury stock method under ASC 260-10-45-23, which assumes that proceeds from exercised options or warrants are used to repurchase shares at the average market price during the reporting period. | |
| ● | Convertible debt and preferred stock – Evaluated under ASC 260-10-45-21 using the if-converted method, which assumes that all convertible securities were converted into common stock at the beginning of the reporting period. |
| 41 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Anti-Dilution Considerations
In accordance with ASC 260-10-45-17, if a company incurs a net loss, diluted EPS is equal to basic EPS, as including potentially dilutive securities in the calculation would be anti-dilutive (i.e., would reduce the loss per share). This occurs when the convertible securities, stock options, or warrants would result in a higher loss per share if included in the diluted EPS calculation.
Accordingly, for periods in which the Company reports a net loss, all potentially dilutive common stock equivalents are excluded from the diluted EPS calculation.
Potentially Dilutive Equity Securities Outstanding
| Six Months Ended | ||||||||
| June 30, 2023 | June 30, 2022 | |||||||
| Warrants | ||||||||
| Stock options | ||||||||
| Series B, preferred stock | ||||||||
| Convertible debt | ||||||||
| Total common stock equivalents | ||||||||
Warrants and stock options included as commons stock equivalents represent those that are fully vested and exercisable. See Notes 18 and 19.
Based on the potential common stock equivalents noted above at June 30, 2023, the Company has sufficient authorized shares of common stock () to settle any potential exercises of its common stock equivalents.
Related Parties
The Company identifies related parties in accordance with the guidelines established by the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC). Related parties include executive officers, directors, significant shareholders, immediate family members of these individuals, and entities in which these individuals have a significant ownership or control.
The Company believes that all transactions with related parties during the three and six months ended June 30, 2023 and 2022, respectively, were conducted on terms equivalent to those prevailing in arm’s-length transactions with unrelated third parties.
| 42 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The Company has entered into an agreement providing access to a suite at the Sofi Stadium in Los Angeles from an entity wholly owned by Christopher Miglino, our CEO. The agreement entitles the Company to game tickets, optional tickets for other stadium events, and suite and conference room access during business days. The amount charged to the Company is a pass-through of the actual expenses charged by the stadium to the related party, without markup. The agreement terminates in February 2026.
The sublease entitles the Company to game tickets, optional tickets for other stadium events, and suite and conference room access during business days. The Company determined that the sub lease agreement did not meet the definition of a lease in accordance with ASC 842, Leases.
At
June 30, 2023 and December 31, 2022, the Company was owed $
At
June 30, 2023 and December 31, 2022, the Company owed $
Recently Issued Financial Accounting Standards
Changes to accounting principles are established by the FASB in the form of Accounting Standards Updates (“ASU’s”) to the FASB’s Codification. We consider the applicability and impact of all ASU’s on our consolidated financial position, results of operations, stockholders’ equity, cash flows, or presentation thereof. Management has evaluated all recent accounting pronouncements issued through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective accounting pronouncements, when adopted, will have a material impact on the consolidated financial statements of the Company.
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The standard is intended to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid. The guidance is effective for annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In November 2023, the FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The standard is intended to improve reportable segment disclosure requirements for public business entities primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit (referred to as the “significant expense principle”). This guidance is effective for annual periods beginning after December 15, 2023, and for interim periods beginning after December 15, 2024. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
| 43 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our consolidated financial position, results of operations or cash flows.
Reclassifications
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no material effect on the consolidated results of operations, stockholders’ deficit, or cash flows.
Note 4 – Sale and Purchase of Accounts Receivable and Short Term Financings
Sales of Accounts Receivable
In 2020, the Company entered into certain financing agreements providing for the sale, with full recourse, of certain of its accounts receivable. These transactions were accounted for as financing of accounts receivables and the related accounts receivable were not removed from the Company’s consolidated balance sheet at the time of the transaction; rather, a liability was recorded for the proceeds received.
For
the year ended December 31, 2021, the Company entered into agreements with a third-party lender whereby it sold the Company’s right
to future subscription revenues of $
The third-party lender receives a discount on the amount sold and remits the net amount to the Company.
The Company bears the risk of credit loss on the contracts.
These transactions are accounted for as secured borrowing arrangements and not as a sale of financial assets.
During 2022, in connection with obtaining a senior secured revolving credit facility, proceeds from that facility were used to pay off the entire balance of outstanding borrowings.
The
amount of borrowings outstanding at December 31, 2022 was $
| 44 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Contingent Value Rights Agreement
During
the year ended December 31, 2022, the Company entered into an agreement with an institutional investor whereby in exchange for the payment
of $
For the year ended December 31, 2022, all amounts had been repaid.
Note 5 – Note Receivable
In October 2020, the Company entered into unit redemption agreements with two counterparties providing for the counterparties to repurchase from the Company units of the counterparty’s securities owned by the Company.
Pursuant
to the redemption agreements, the counterparties repurchased the units for a combined repurchase price of $
The Company had no cost basis in the units and as a result the note receivable has no cost basis.
The
Company accounts for the note receivable as a loan pursuant to ASC 310 – Loans . The $
During
the year ended December 31, 2022, the Company accepted an offer to settle the outstanding note balance of $
Note
receivable at December 31, 2022 was $
| 45 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Note 6 – Marketable Securities
The Company offers its customers the option to settle the contract price (for services rendered) in the customer’s issued and publicly trading securities or securities convertible into publicly traded securities, which could be in the form of common stock, convertible debt, preferred stock or warrants (see summary table below).
The Company initially values the securities received at the fair market value on the date the contract is executed, which value is used for revenue recognition purposes.
After receipt of the securities, the securities are classified and accounted for as investments in debt and/or equity securities.
The Company’s holdings in marketable securities are subject to a high level of volatility, and can experience significant changes in pricing and related valuations.
The following tables summarize the changes in the Company’s marketable securities during the six months ended June 30, 2023 and the year ended December 31, 2022:
| Common | Convertible | Preferred | ||||||||||||||||||
| Stock | Debt | Stock | Warrants | Total | ||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||
| Transfers | ( | ) | ||||||||||||||||||
| Additions | ||||||||||||||||||||
| Sales of marketable securities | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Realized loss on sale of marketable securities | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Impairment - marketable securities | ( | ) | ( | ) | ||||||||||||||||
| Change in fair value of marketable securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Balance - December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||
| Reclassifications related to prior year balances | ( | ) | ( | ) | ||||||||||||||||
| Acquisitions | ||||||||||||||||||||
| Sales and dispositions | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Realized Loss | ( | ) | ( | ) | ||||||||||||||||
| Change in fair value of marketable securities | # | ( | ) | |||||||||||||||||
| Balance - June 30, 2023 | $ | $ | # | $ | $ | $ | ||||||||||||||
Marketable securities are classified as follows in the accompanying consolidated balance sheets:
| Classification | June 30, 2023 | December 31, 2022 | ||||||
| Short-term | $ | $ | ||||||
| Long-term | ||||||||
| Total | $ | $ | ||||||
The
Company’s sales of its marketable securities for the six months ended June 30, 2023 and 2022 was $
| 46 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Concentration of Risk – Marketable Securities
The Company’s holdings in marketable securities subject the Company to concentrations of market risks since the sale of these securities are a material source of cash flow.
As of June 30, 2023 and December 31, 2022, the Company’s marketable securities holdings by significance are classified as follows:
| Marketable Securities | As of | |||||||
| Investments | June 30, 2023 | December 31, 2022 | ||||||
| Top 1 | % | % | ||||||
| Top 5 | % | % | ||||||
| Top 10 | % | % | ||||||
BIGtoken Investment
On
February 15, 2022, the Company entered into a simple agreement for future equity (the”SAFE”) with its former BIGToken subsidiary.
Pursuant to the SAFE, the Company invested $
Pursuant
to the terms of the SAFE, at any time that BIGtoken sells its securities (a “Financing”) prior to the termination of the
SAFE, the Company may, at its option, convert the SAFE into:
At
December 31, 2022, the SAFE had an aggregate fair value of $
Note 7 – Designated Assets for Return of Capital
In 2021, the Company issued a one-time dividend consisting of one share of Series A Preferred Stock to shareholders, debenture holders, and certain warrant holders.
The Board of Directors designated certain of the Company’s marketable equity securities (“Designated Assets”) to be used when liquidated, as a return of capital to these individuals.
| 47 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The
Company’s sales of its designated assets for the six months ended June 30, 2023 and 2022 was $
See Note 16 - Series A Preferred Stock for additional discussion.
The balance of designated assets for return of capital consisted of the following at June 30, 2023 and December 31, 2022:
| June 30, 2023 | December 31, 2022 | |||||||
| Designate assets for return of capital | $ | $ | ||||||
| $ | $ | |||||||
Designated Assets for Return of Capital are classified as follows in the accompanying consolidated balance sheets:
| Classification | June 30, 2023 | December 31, 2022 | ||||||
| Short-term | $ | $ | ||||||
| Long-term | ||||||||
| Total | $ | $ | ||||||
The following represents the activity related to designated assets for the six months ended June 30, 2023 and the year ended December 31, 2022:
| Balance - December 31, 2021 | $ | |||
| Distribution of cash - designated assets | ( | ) | ||
| Sales of designated assets | ( | ) | ||
| Realized loss | ( | ) | ||
| Change in fair value of designated assets | ( | ) | ||
| Balance - December 31, 2022 | ||||
| Sales of designated assets | ( | ) | ||
| Realized loss | ( | ) | ||
| Change in fair value of designated assets | ( | ) | ||
| Balance - June 30, 2023 | $ |
| 48 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Note 8 - Property and Equipment
Property and equipment consisted of the following:
| Estimated Useful | ||||||||||
| Type | June 30, 2023 | December 31, 2022 | Lives (Years) | |||||||
| Computer, office equipment and furniture | $ | $ | ||||||||
| Less: accumulated depreciation/amortization | ( | ) | ( | ) | ||||||
| Property and equipment - net | $ | $ | ||||||||
During
the year ended December 31, 2022, the Company determined that certain assets were no longer in service and had no future economic benefit.
As a result, an impairment loss of $
Depreciation and amortization expense for the three and six months ended June 30, 2023 and 2022 was as follows:
| Three Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | |||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||
These amounts are included as a component of general and administrative expenses in the accompanying consolidated statements of operations.
Note 9 – Intangibles
At December 31, 2022, the Company performed an evaluation of its intangible assets and determined that all of these assets were deemed fully impaired.
For
the year ended December 31, 2022, the Company recorded an impairment loss of $
At
December 31, 2022, the Company reflected a balance of $
| 49 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Note 10 – Debt
The following represents a summary of the Company’s convertible notes payable and revolving credit facility, key terms, and outstanding balances at June 30, 2023 and December 31, 2022, respectively:
Convertible Notes Payable
General Terms
On
June 25, 2020, the Company executed
Payments Due and Related Extensions
Six
(6) months after the issuance date (December 31, 2021), the Company was required to begin making amortization payments, with each debt
holder (lenders) having the right to delay these payments three (3) separate times. In exchange for these due date extensions, the Company
would have to add an addition
Beginning
on the date that
In the event a lender converts a portion of its notes into shares of the Company’s common stock, the amount converted will be deducted from the next applicable Amortization Payment. In the event any conversions exceed the next applicable Amortization Payment, the excess amount will be deducted, in reverse order, from future Amortization Payments due.
Conversion Rights (Fixed Price) – Convertible Notes Payable
These
notes were initially convertible at the option of the holder at $
| 50 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Right of Redemption
The
Company has the right to redeem the convertible notes in cash at
Warrants Issued with Convertible Notes
In
addition to the convertible notes that were issued, the Company also issued
Conversion Rights (Fixed Price) – Warrants
Initially
exercisable at $
The warrants do not have any price protection or price reset provisions with respect to future issuances of securities.
Equity Blocker Provision
Payment Extensions for Convertible Notes and Warrants and Amended Conversion Prices
During the year ended December 31, 2021, the holders of the remaining convertible notes notified the Company of their election to defer the inception of amortization payments due under the Debentures until June 30, 2022.
Additional extensions for the Company’s convertible notes and warrants were made on February 3, 2023, September 11, 2023, and December 9, 2024, respectively. The new maturity dates were amended to June 30, 2024, November 11, 2014 and now June 30, 2025.
In
connection with the September 11, 2023 extension, the lender is entitled to receive
| 51 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
As
stated previously, in connection with the loan date extensions, the holders are entitled to a
Default
In March 2023, the convertible notes were defaulted upon since the Company failed to maintain an effective registration statement and was delisted from Nasdaq.
The extension to repay the debt in November 2024 and now August 2025 still required the Company to pay the default rate of interest. As noted above, the new maturity date is now June 30, 2025.
The following is a summary of the Company’s convertible notes payable – at June 30, 2023 and December 31, 2022:
| Balance - December 31, 2021 | $ | |||
| 5% principal increases | ||||
| Amortization of debt discount/issue costs | ||||
| Repayments | ( | ) | ||
| Balance - December 31, 2022 | ||||
| Increase of principal - interest expense | ||||
| Amortization of debt discount/issue costs | ||||
| Balance - June 30, 2023 | $ |
The following is a detail of the Company’s convertible notes payable – at June 30, 2023 and December 31, 2022:
| Convertible Notes Payable | ||||||||||||||||||||||
| Note Holders | Issue Date | Maturity Date | Interest Rate | Default Interest Rate | Collateral | June 30, 2023 | December 31, 2022 | |||||||||||||||
| Various | % | % | All assets | $ | $ | |||||||||||||||||
| Less: unamortized debt discount | ||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||
| 52 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Senior Secured Revolving Credit Facility (Revolving Note)
General Terms
In
August 2022, the Company entered into a two (
The
loan maximum amount accessible is limited to $
The loan is secured by all the assets of the Company and is guaranteed by the Company’s wholly owned subsidiary, LD Micro, Inc. The guarantee from LD Micro, Inc. was removed after the sale in March 2023.
The
lender is entitled to receive
In
April 2023, the Company sold shares of Freedom Holding Corp. having a fair value of $
Warrants as Amended
As
part of the transaction (in 2022), the Company also amended and restated the lender’s outstanding warrants to extend the maturity
date of a total of
During
the year ended December 31, 2022, in connection with the extension of the maturity date for these warrants, the Company recorded a warrant
modification expense of $
The fair value of the warrants was determined using a Black-Scholes option pricing model with the following inputs:
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % |
See
Notes 19 and 20 for discussion of warrants and related exercise of
| 53 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Cash Received by Company
In
2022, upon closing, the lender advanced $
In
2022, as a result of converting the bridge note ($
Original Issue Discount
In
connection with this facility, the Company recorded a debt discount of $
Conversion Price of the Facility and Related Conversion Price Amendments
The
facility balance was initially convertible into shares of common stock at a conversion price of $
Additional amendments to the conversion price were made on February 3, 2023 and September 11, 2023, respectively.
As
a result of these amendments,
In
connection with the September 11, 2023 extension, the lender is entitled to received
| 54 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Loan Breakup Fee
In
connection with obtaining this facility (in 2022), the Company was required to issue shares of common stock to an unrelated lender
(due to a failed public offering), as a breakup fee, having a fair value of $
Default
At June 30, 2023, the facility was not in default. However, on December 9, 2024, the facility maturity date was extended to August 9, 2025.
The following is a summary of the Facility at June 30, 2023 and December 31, 2022:
| Balance - December 31, 2021 | $ | |||
| Facility principal | ||||
| Conversion of bridge note into facility | ||||
| Bridge note conversion fee (interest expense) | ||||
| Debt discount | ( | ) | ||
| Amortization of debt discount/issue costs | ||||
| Balance - December 31, 2022 | ||||
| Amortization of debt discount/issue costs | ||||
| Repayments | ( | ) | ||
| Marketable securities issued in connection with debt settlement | ( | ) | ||
| Balance - June 30, 2023 | $ |
The following is a detail of the Facility at June 30, 2023 and December 31, 2022:
| Senior Secured Revolving Credit Facility | ||||||||||||||||||||||
| Note Holder | Issue Date | Maturity Date | Interest Rate | Default Interest Rate | Collateral | June 30, 2023 | December 31, 2022 | |||||||||||||||
| Note #1 | % | % | All assets | $ | $ | |||||||||||||||||
| Less: unamortized debt discount | ||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||
Debt Maturities
The following represents the gross amount of debt maturities (excluding unamortized debt discounts) for the Company’s various debt arrangements (principal balance) as follows:
| For the Year Ended December 31, | Convertible Notes Payable | Senior Secured Credit Facility | Total | |||||||||
| 2025 | $ | $ | $ | |||||||||
| Total | ||||||||||||
| Less: unamortized debt discount | ( | ) | ( | ) | ||||||||
| Debt - net | $ | $ | $ | |||||||||
At June 30, 2023, all of the above debt has been classified as long term on the accompanying consolidated balance sheets.
| 55 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Note 11 – Fair Value of Financial Instruments
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made.
Level 1, 2 and 3 Summary
The Company’s financial assets and liabilities measured at fair value on a recurring basis consisted of the following at June 30, 2023 and December 31, 2022, respectively:
| Quoted Prices | Significant | |||||||||||||||
| in Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Assets | (Level 1) | (Level 2) | (Level 3) | June 30, 2023 | ||||||||||||
| Marketable securities | $ | $ | $ | $ | ||||||||||||
| Designated assets for return of capital | ||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| Quoted Prices | Significant | |||||||||||||||
| in Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | ||||||||||||||
| Liabilities | (Level 1) | (Level 2) | (Level 3) | June 30, 2023 | ||||||||||||
| Series A, redeemable preferred Stock | $ | $ | $ | $ | ||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
| Quoted Prices | Significant | |||||||||||||||||
| in Active | Other | Significant | ||||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||||
| Identical Assets | Inputs | Inputs | December 31, | |||||||||||||||
| Assets | (Level 1) | (Level 2) | (Level 3) | 2022 | ||||||||||||||
| Marketable securities | $ | $ | $ | $ | ||||||||||||||
| Designated assets for return of capital | ||||||||||||||||||
| Contract receivables | * | |||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||
| * |
| Quoted Prices | Significant | |||||||||||||||
| in Active | Other | Significant | ||||||||||||||
| Markets for | Observable | Unobservable | ||||||||||||||
| Identical Assets | Inputs | Inputs | December 31, | |||||||||||||
| Liabilities | (Level 1) | (Level 2) | (Level 3) | 2022 | ||||||||||||
| Series A, redeemable preferred Stock | $ | $ | $ | $ | ||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
| 56 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Changes in Level 3 Assets Measured at Fair Value
The following table presents additional information about Level 3 assets measured at fair value.
Both observable and unobservable inputs may be used to determine the fair value of assets classified within the Level 3 category. As a result, the unrealized gains and losses for the assets and liabilities within the Level 3 category may include changes in fair value that were attributable to both observable and unobservable inputs.
Transfers to/from Levels 1, 2 and 3 are recognized at the beginning of the reporting period in which a change in valuation technique or methodology occurs.
Changes in Level 3 assets measured at fair value for the six months ended June 30, 2023 and the year ended December 31, 2022 were as follows:
| Assets | ||||||||||||||||||||||
| Common Stocks | Convertible Debt | Warrants | Preferred Stocks | Total | ||||||||||||||||||
| Balance - December 31, 2021 | $ | $ | $ | $ | $ | |||||||||||||||||
| Acquisitions | ||||||||||||||||||||||
| Sales and dispositions | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Transfer out of level 3 | A | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||
| Realized loss | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Change in fair value | B | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
| Balance - December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||||
| Assets | ||||||||||||||||||||||
| Common Stocks | Convertible Debt | Warrants | Preferred Stocks | Total | ||||||||||||||||||
| Balance - December 31, 2022 | $ | $ | $ | $ | $ | |||||||||||||||||
| Acquisitions | ||||||||||||||||||||||
| Sales and dispositions | ( | ) | ( | ) | ||||||||||||||||||
| Transfer into level 3 | ||||||||||||||||||||||
| Transfer out of level 3 | A | ( | ) | ( | ) | |||||||||||||||||
| Change in fair value | B | |||||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||||
| A |
| B |
Valuation of Process for Level 2 and 3 Fair Value Measurements
Fair value measurement of certain of our marketable securities fall within Level 2 and 3 of the fair value hierarchy. The fair value measurements are evaluated by management to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.
| 57 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The Company classifies certain assets as Level 3 assets if the estimated fair value was derived from level 3 inputs. The Company utilizes a put option pricing model to arrive at a discount for lack of marketability and liquidity associated with restrictions on sales into the public market. The Company generally classifies restricted securities in public companies as level 2, however in circumstances where the observed level of liquidity is low and the quoted market price is deemed unreliable they may be categorized in Level 3 of the fair value hierarchy. The Company considers marketable securities without sufficient liquidity to sell within 6 months of the date of acquisition and securities that will not be eligible for resale in the public markets through Rule 144 for 1 year from the date acquisition to be valued with Level 2 inputs.
The fair value of the Company’s Series A Preferred Stock may change significantly, impacting the Company’s assumptions used to estimate its fair value. The valuation of the Series A Preferred Stock is primarily based on the valuation of its underlying marketable securities. The marketable securities that are underlying the Series A Preferred Stock are classified as Designated Assets on the Company’s balance sheet and include Level 1 and Level 2 marketable securities and cash.
The following table lists the significant unobservable inputs used to value assets classified as Level 3 of June 30, 2023 and December 31, 2022. The table is not intended to be all-inclusive, but instead identifies the significant unobservable inputs relevant to the determination of fair values. The other Level 3 assets have been valued using unadjusted third-party transactions and, unadjusted historical third-party information, or the unadjusted net asset values of the securities’ issuer. No unobservable inputs internally developed by the Company have been applied to these assets, and therefore are omitted from the following table.
| Six Months Ended June 30, 2023 | ||||||||
| Assets | Valuation Technique | Unobservable Inputs | Range | |||||
| Common Stocks | Put option pricing model | Discount for lack of marketability | % | |||||
| Convertible Preferred Stock | Put option pricing model | Discount for lack of marketability | % | |||||
| Convertible Debt | Discounted cash flow | Maturity | ||||||
| Risk adjusted discount factor | % | |||||||
| Put option pricing model | Volatility | % | ||||||
| Risk-free interest rate | % | |||||||
| Dividend yield | % | |||||||
| Time to maturity | ||||||||
| Year Ended December 31, 2022 | ||||||||
| Assets | Valuation Technique | Unobservable Inputs | Range | |||||
| Common Stocks | Put option pricing model | Discount for lack of marketability | % | |||||
| Convertible Preferred Stock | Put option pricing model | Discount for lack of marketability | % | |||||
| Convertible Debt | Discounted cash flow | Maturity | ||||||
| Risk adjusted discount factor | % | |||||||
| Put option pricing model | Volatility | % | ||||||
| Risk-free interest rate | % | |||||||
| Dividend yield | % | |||||||
| Time to maturity | ||||||||
Sensitivity of Level 3 measurements to changes in significant unobservable inputs
The process of estimating the fair value of securities without active markets involves significant estimates and judgement on behalf of management. These estimated fair values may not be realized in a current sale or immediate settlement of the asset or liability. Additionally, there are inherent uncertainties in any fair value measurement techniques, and changes in the underlying assumptions used could significantly affect the fair value measurement amounts.
| 58 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Changes in each of these significant unobservable valuation inputs will impact the fair value measurement of the financial instrument generally as follows:
| ● | An increase or decrease in the volatility of the common stock that underlies our holdings in convertible debt would result in a directionally similar change in the estimated fair value. | |
| ● | An increase or decrease in the risk-free interest rate or risk adjusted discount factor would result in an inverse change in the estimated fair value of our convertible debt. | |
| ● | An increase in the dividend yield would increase the estimated value of the convertible debt. | |
| ● | A change in the maturity may result in either an increase or decrease in estimated fair value of the convertible debt. | |
| ● | An increase or decrease in the discount for lack of marketability of our common stock holdings and the common stock that underlies our preferred stock would generally result in an inverse change in the estimated fair value. |
Instruments for which unobservable inputs are significant to their fair value measurement (i.e., Level 3) include securities in which we deem their market to be inactive or unreliable. The Company reviews and updates the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next that are related to the observable inputs to a fair value measurement may result in a reclassification from one hierarchy level to another.
Valuation Technique Refinements
During the six months ended June 30, 2023 and the year-ended December 31, 2022, respectively, the Company refined its valuation techniques to enhance consideration of unobservable inputs for the valuation of Level 2 and Level 3 marketable securities.
If quoted market prices are not available for the specific security, or if the observed quoted market price is deemed unreliable, then fair values are estimated by using pricing models, considering third-party transactions, unadjusted historical third-party information, and the unadjusted net asset values of the issuer. The pricing models primarily use market-based or independently sourced market parameters as inputs, including, but not limited to, yield curves, interest rates, equity or debt prices, and credit spreads. In addition to market information, models also incorporate transaction details, such as maturity and cash flow assumptions. Securities valued in this manner would generally be classified within Level 2 and Level 3 of the valuation hierarchy and primarily include such instruments as convertible debt.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with those of other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
| 59 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Note 12 – Commitments and Contingencies
Right-of-Use Asset - Operating Leases
We have entered into various operating lease agreements, including our corporate headquarters. We account for leases in accordance with ASC Topic 842: Leases, which requires a lessee to utilize the right-of-use model and to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the statement of operations. In addition, a lessor is required to classify leases as either sales-type, financing or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risk and rewards or control, the lease is treated as operating. We determine if an arrangement is a lease, or contains a lease, at inception and record the lease in our financial statements upon lease commencement, which is the date when the underlying asset is made available for use by the lessor.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments over the lease term. Lease right-of-use assets and liabilities at commencement are initially measured at the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the information available at commencement to determine the present value of lease payments except when an implicit interest rate is readily determinable. We determine our incremental borrowing rate based on market sources including relevant industry data.
We have lease agreements with lease and non-lease components and have elected to utilize the practical expedient to account for lease and non-lease components together as a single combined lease component, from both a lessee and lessor perspective with the exception of direct sales-type leases and production equipment classes embedded in supply agreements. From a lessor perspective, the timing and pattern of transfer are the same for the non-lease components and associated lease component and, the lease component, if accounted for separately, would be classified as an operating lease.
We have elected not to present short-term leases on the balance sheet as these leases have a lease term of 12 months or less at lease inception and do not contain purchase options or renewal terms that we are reasonably certain to exercise. All other lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because most of our leases do not provide an implicit rate of return, we used our incremental borrowing rate based on the information available at lease commencement date in determining the present value of lease payments.
Our leases, where we are the lessee, do not include an option to extend the lease term. For purposes of calculating lease liabilities, lease term would include options to extend or terminate the lease when it is reasonably certain that we will exercise such options.
Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, included as a component of general and administrative expenses, in the accompanying consolidated statements of operations.
Certain operating leases provide for annual increases to lease payments based on an index or rate, our lease has no stated increase, payments were fixed at lease inception. We calculate the present value of future lease payments based on the index or rate at the lease commencement date. Differences between the calculated lease payment and actual payment are expensed as incurred.
We recognize lease expense on a straight-line basis over the term of our operating leases, as reported within general and administrative expense in the accompanying consolidated statement of operations.
At June 30, 2023 and December 31, 2022, respectively, the Company had no financing leases as defined in ASC 842, “Leases.”
| 60 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The tables below present information regarding the Company’s operating lease assets and liabilities at June 30, 2023 and December 31, 2022, respectively:
| June 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Operating lease - right-of-use asset - non-current | $ | $ | ||||||
| Liabilities | ||||||||
| Operating lease liability | $ | $ | ||||||
| Weighted-average remaining lease term (years) | ||||||||
| Weighted-average discount rate | % | % | ||||||
The components of lease expense were as follows:
| June 30, 2023 | June 30, 2022 | |||||||
| Operating lease costs | ||||||||
| Amortization of right-of-use operating lease asset | $ | $ | ||||||
| Lease liability expense in connection with obligation repayment | ||||||||
| Total operating lease costs | $ | $ | ||||||
Future minimum lease payments for the year ended December 31:
| 2023 | $ | |||
| Total undiscounted cash flows | ||||
| Less: amount representing interest | ||||
| Present value of operating lease liability | ||||
| Less: current portion of operating lease liability | ||||
| Long-term operating lease liability | $ |
Employment Agreements
We have entered employment agreements with key employees. These agreements may include provisions for base salary, guaranteed and discretionary bonuses and option grants. The agreements may contain severance provisions if the employees are terminated without cause, as defined in the agreements.
| 61 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Contingencies – Legal Matters
During the normal course of business, the Company may be exposed to litigation. When the Company becomes aware of potential litigation, it evaluates the merits of the case in accordance with Financial Accounting Standards Board (“FASB”) ASC 450-20-50, “Contingencies”. The Company evaluates its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. If the Company determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals.
As of June 30, 2023 and the date of these financial statements, 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, other than the following matters:
Michael Malone, a former executive officer of the Company, filed a complaint in the Superior Court of the State of California for the County of Los Angeles Northwest District (Case No. 23VECVO3433) against the Company on August 7, 2023, claiming Breach of Contract, Violations of the Labor Code and Violation of the California Business and Professions Code. Mr. Malone, among other items, is seeking amounts due under an Employment Agreement entered between the parties as well as unpaid wages, and general and special damages. The Company filed an Answer on October 9, 2023, denying all claims.. The Company intends to vigorously pursue its rights in this matter.
Stock
Market Manger, Inc., a company believed to be owned by Carl Dilley, filed a complaint against the Company in the Circuit Court of the
Sixth Circuit in and for Pinellas County, Florida (Case No. 24-002894) claiming Breach of Contract and Breach of Covenant of Good Fauth
and Fair Dealing seeking damages in the minimum amount of $
Subsequent
to June 30, 2023, Homeland Insurance Company of New York (“Homeland”) filed a complaint on January 9, 2025 against SRAX.
Homeland is seeking repayment of a deductible for the insurance policy that they made a payment for. They are seeking a repayment of
$
At June 30, 2023 and December 31, 2022, the Company was not aware of any contingent liabilities that should be reflected in the accompanying unaudited consolidated financial statements.
| 62 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Other Commitments
In the ordinary course of business, the Company may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of the Company’s breach of such agreements, services to be provided by the Company, or from intellectual property infringement claims made by third parties. In addition, the Company has entered indemnification agreements with its directors and certain of its officers and employees that will require the Company to, among other things, indemnify them against certain liabilities that may arise due to their status or service as directors, officers or employees.
The Company has also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. The Company maintains director and officer insurance, which may cover certain liabilities arising from its obligation to indemnify its directors and certain of its officers and employees, and former officers, directors and employees of acquired companies, in certain circumstances.
It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each agreement. Such indemnification agreements may not be subject to maximum loss clauses.
Note 13 – Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at June 30, 2023 and December 31, 2022, are as follows:
| June 30, 2023 | December 31, 2022 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Accrued interest payable | ||||||||
| Accrued commissions | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
Note 14 – Other Current Liabilities
At
June 30, 2023 and December 31, 2022, other current liabilities were $
| 63 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Note 15 – Payroll Protection Program Loan
During
the year ended December 31, 2022, the PPP loan in the amount of $
Note 16 – Series A, Redeemable Preferred Stock Liability
On September 27, 2021, the Company issued a one-time dividend of shares of series A preferred stock (“Preferred Stock”) to certain Qualified Recipients (the “Dividend”). The preferred stock entitles the Qualified Recipients with the right to receive the net proceeds from sales of certain marketable securities that the Company received through its Sequire Platform services.
The Company’s management has evaluated its Series A, redeemable preferred stock in accordance with ASC 480 – Distinguishing Liabilities from Equity. Management has determined that the cancellation clause of the preferred stock deems it to be mandatorily redeemable and should be classified as a liability.
The preferred stock is mandatorily redeemable upon the distribution of net proceeds from the sale of the designated marketable securities. Accordingly, it is classified as a liability recorded at fair value, with changes in fair value being reflected in earnings at each reporting period.
Preferred stock liability represents amounts payable to holders of the Preferred Stock Series A shares upon the eventual liquidation of assets designated for the sole purpose of paying dividends. Accordingly, the Company classified the Series A Preferred Shares as liability instruments because in-substance, they represent a right to the payment of dividends upon the liquidation of specified assets, which are automatically returnable to the Company after the payments are made and feature no rights to further equity or residual interests in the Company. The Certificate of Designation of Preferences, Rights and Limitations of Series A Non-Voting Preferred Stock states dividend shall be paid conditioned upon, and subject to a determination by the Board that a distribution is not prohibited pursuant to applicable provisions of the DGCL or other applicable law.
| 64 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The following is a summary of the Company’s Series A, Redeemable, Preferred Stock at June 30, 2023 and December 31, 2022:
| Balance - December 31, 2021 | $ | |||
| Change in fair value of Series A, redeemable preferred stock | ( | ) | ||
| Series A, redeemable preferred stock - cash distribution | ( | ) | ||
| Balance - December 31, 2022 | ||||
| Change in fair value of Series A, redeemable preferred stock | ( | ) | ||
| Balance - June 30, 2023 | $ |
See Note 17.
Note 17 – Stockholders’ Deficit
At June 30, 2023 and December 31, 2022, the Company had three (3) and (2) classes of stock, respectively:
Preferred Stock and Designation of Series A, Preferred Stock
| - | shares authorized | |
| - | designated as Series A, redeemable preferred stock are issued and outstanding at June 30, 2023 and December 31, 2022, respectively. These shares are currently outstanding for the purpose of satisfying a dividend. See Note 16. | |
| - | Par value - $ |
The Company’s 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. The Board of Directors may authorize the issuance of preferred stock, which ranks senior to the Company’s common stock for the payment of dividends and the distribution of assets on liquidation.
In addition, the Board of Directors can fix limitations and restrictions, if any, upon the payment of dividends on both classes of the Company’s common stock to be effective while any shares of preferred stock are outstanding.
| 65 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Preferred Stock and Designation of Series B, Preferred Stock
| - | shares authorized | |
| - | Par value - $ | |
| - | Voting
at | |
| - |
On February 3, 2023, the Company’s Board of Directors adopted certain provisions related to the designation of its Series B, Preferred Stock as follows:
| ● | Stated value - $/share, |
| ● | Convertible - $ |
| ● | Voting rights – |
| ● | Dividends – on an if-converted basis |
In September 2023, in connection with certain debt offerings, the conversion rate was reduced to $/share. See Note 20.
As of June 30, 2023 and December 31, 2022, the Company had and shares issued and outstanding.
As of June 30, 2023 and December 31, 2022, the Company reflected common stock equivalents of and shares, respectively, related to its Series B, preferred stock.
Common Stock – Class A
| - | shares authorized | |
| - | Par value - $ | |
| - | Voting
at |
As of June 30, 2023 and December 31, 2022, the Company has and shares issued and outstanding, respectively.
Share Repurchase Plan
In
August 2021, our Board of Directors approved a share repurchase program pursuant to which we are authorized to repurchase up to $
Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. This includes purchases pursuant to Rule 10b5-1 plans, including accelerated share repurchases. The program does not have an expiration date.
The total remaining authorization for future common share repurchases under our share repurchase program was $ at June 30, 2023 and December 31, 2022, respectively.
| 66 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Securities and Incentive Plans
In January 2012, our board of directors and stockholders authorized the 2012 Equity Compensation Plan, which we refer to as the 2012 Plan, covering shares of our Class A common stock.
On November 5, 2014, our board of directors approved the adoption of our 2014 Equity Compensation Plan (the “2014 Plan”) and reserved shares of our Class A common stock for grants under this plan.
On February 23, 2016, our board of directors approved the adoption of our 2016 Equity Compensation Plan (the “2016 Plan”) and reserved shares of our Class A common stock for grants under this plan.
The purpose of the 2012, 2014 and 2016 Plans is to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to our employees, directors and consultants and to promote the success of our company’s business.
The 2012, 2014 and 2016 Plans are administered by our board of directors.
Plan options may either be:
| ● | incentive stock options (ISO’s), | |
| ● | non-qualified stock options (NSO’s), | |
| ● | awards of our common stock, | |
| ● | stock appreciation rights (SAR’s), | |
| ● | restricted stock units (RSU’s), | |
| ● | performance units | |
| ● | performance shares; and | |
| ● | other stock-based awards. |
Any
option granted under the 2012, 2014 and 2016 Plans must provide for an exercise price of not less than % of the fair market value
of the underlying shares on the date of grant, but the exercise price of any ISO granted to an eligible employee owning more than
The
plans further provide that with respect to ISOs the aggregate fair market value of the common stock underlying the options which are
exercisable by any option holder during any calendar year cannot exceed $
| 67 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
The exercise price of any NSO granted under the 2012, 2014 or 2016 Plans is determined by the Board at the time of grant but must be at least equal to fair market value on the date of grant.
The
term of each plan option and the manner in which it may be exercised is determined by the board of directors or the compensation committee,
provided that no option may be exercisable more than
The terms of grants of any other type of award under the 2012, 2014 or 2016 Plans is determined by the Board at the time of grant. Subject to the limitation on the aggregate number of shares issuable under the plans, there is no maximum or minimum number of shares as to which a stock grant or plan option may be granted to any person.
Equity Transactions for the Six Months Ended June 30, 2023
Stock issued in Asset Purchase of DNA Holdings, LLC
In
February 2023, the Company issued shares of Class A, common stock, along with shares of Class B, common stock, having
a fair value of $
See Note 3.
Exercise of Warrants – Cashless
In
February 2023, the Company issued shares of common stock in connection with the cashless exercises of warrants. These
exercises had a net effect of $
Equity Transactions for the Year Ended December 31, 2022
Exercise of Stock Options – Cashless
The
Company issued shares of common stock (on a net basis) to non-executive employees in connection with the conversion of
stock options. This transaction had a net effect of $
| 68 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Exercise of Stock Options – Cashless – Related Parties
The
Company issued shares of common stock (on a net basis) to its former Chief Executive Officer in connection with the conversion
of stock options. This transaction had a net effect of $
The
Company issued shares of common stock (on a net basis) to an executive in connection with the conversion of stock options.
This transaction had a net effect of $
Exercise of Warrants (Cashless)
The
Company issued shares of common stock in connection with cashless exercises of warrants. These transactions had a net
effect of $
Exercise of Warrants
The
Company issued shares of common stock upon the exercise of warrants for $
Loan Breakup Fee
In
connection with obtaining its senior secured revolving credit facility, the Company was required to issue shares of common stock
to an unrelated former lender, having a fair value of $
| 69 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
| Weighted | Weighted | |||||||||||||||||||
| Weighted | Average | Average | ||||||||||||||||||
| Average | Remaining | Grant | Aggregate | |||||||||||||||||
| Number of | Exercise | Contractual | Date | Intrinsic | ||||||||||||||||
| Stock Options | Options | Price | Term (Years) | Fair Value | Value | |||||||||||||||
| Outstanding - December 31, 2021 | $ | $ | $ | |||||||||||||||||
| Vested and Exercisable - December 31, 2021 | $ | $ | $ | |||||||||||||||||
| Unvested - December 31, 2021 | $ | $ | $ | |||||||||||||||||
| Granted | $ | $ | ||||||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||||||
| Cancelled/Forfeited | ( | ) | $ | |||||||||||||||||
| Outstanding - December 31, 2022 | $ | $ | $ | |||||||||||||||||
| Vested and Exercisable - December 31, 2022 | $ | $ | $ | |||||||||||||||||
| Unvested - December 31, 2022 | $ | $ | $ | |||||||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Cancelled/Forfeited | ( | ) | $ | |||||||||||||||||
| Outstanding - June 30, 2023 | $ | $ | $ | |||||||||||||||||
| Vested and Exercisable - June 30, 2023 | $ | $ | $ | |||||||||||||||||
| Unvested - June 30, 2023 | $ | $ | $ | |||||||||||||||||
Stock Options – Related Parties
In 2022, the Company granted , seven () year stock options to its Chief Executive Officer for services to be rendered, having a fair value of $. These options have an exercise price of $/share. These options vest quarterly over a period of three () years.
In 2022, the Company granted , seven () year stock options to various non-employee directors for services to be rendered, having a fair value of $. These options have an exercise price of $/share. These options vested quarterly over a period of one () year, and were fully vested as of December 31, 2022.
| 70 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Stock Options – Employees
In 2022, the Company granted , five () year stock options to various non-executive employees for services to be rendered, having a fair value of $. These options have an exercise price of $/share. These options vest quarterly over a period of three () years.
Black Scholes Option Pricing Model – Valuation
| Expected term (years) | - | |||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % - | % |
Stock Option Vesting Expense Recognition
During the six months ended June 30, 2023 and 2022, the Company recognized stock based compensation (benefit) of $ and $(), respectively, related to vesting of these stock options.
At June 30, 2023, the weighted average period in which unrecognized stock option compensation of $ will be recognized and vest is years.
Stock Option Compensation
During
the year ended December 31, 2022, the Company reversed $
Additionally, during the year ended December 31, 2022, the Company recorded stock-based compensation for the year totaling $ related to the vesting of its other share based payments.
| 71 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Note 19 - Warrants
Warrant activity for the six months ended June 30, 2023 and the year ended December 31, 2022 are summarized as follows:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Average | Remaining | Aggregate | ||||||||||||||
| Number of | Exercise | Contractual | Intrinsic | |||||||||||||
| Warrants | Warrants | Price | Term (Years) | Value | ||||||||||||
| Outstanding - December 31, 2021 | $ | $ | ||||||||||||||
| Vested and Exercisable - December 31, 2021 | $ | $ | ||||||||||||||
| Unvested - December 31, 2021 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Cancelled/Forfeited | ( | ) | $ | |||||||||||||
| Outstanding - December 31, 2022 | $ | $ | ||||||||||||||
| Vested and Exercisable - December 31, 2022 | $ | $ | ||||||||||||||
| Unvested - December 31, 2022 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Cancelled/Forfeited | ( | ) | $ | |||||||||||||
| Outstanding - June 30, 2023 | $ | $ | ||||||||||||||
| Vested and Exercisable - June 30, 2023 | $ | $ | ||||||||||||||
| Unvested - June 30, 2023 | $ | $ | ||||||||||||||
Warrant Transactions for the Year Ended December 31, 2022
Warrants Modification Expense
See
Note 10 regarding the extension of debt and related warrant modification expense of $
Note 20 – Subsequent Events
Debt Arrangements
Debt Issued in 2023
Original Issue Discount Convertible Notes Payable Issued with Warrants
New Note - Existing Lender – Third Party
In
September 2023, the Company executed a $
| 72 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
On
December 9, 2024, the note was extended to September 29, 2025. There was no consideration paid in exchange for the extension of the maturity
date. The warrants are due five (
New Notes – Other Third Parties
During
the period August 2023 – October 2023, the Company executed several convertible notes aggregating $
Additionally,
these lenders were entitled to
The
Company determined that in addition to the original issue discount recognized for these notes, the warrants provided an additional debt
discount having a fair value of $
Black Scholes Option Pricing Model – Valuation
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | % | |||
| Risk free interest rate | % |
Debt Issued in 2024
Original Issue Discount Convertible Notes Payable
In
March 2024, the Company executed convertible notes for $
| 73 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Stock Option Grants and Repricings
2023 Stock Option Grants
In August 2023, the Company granted , three () year stock options. Of the total, options were granted to our Chief Executive Officer, and the remaining options were granted to various employees for services rendered, having a fair value of $. These options have an exercise price of $/share and vest monthly over a period of one () year.
Black Scholes Option Pricing Model – Valuation
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | ||||
| Risk free interest rate | % |
Modification of 2023 Stock Option Grants
In February 2024, of the stock options granted in August 2023 were modified by reducing the exercise price from $/share to $/share. The Company has determined that there was no incremental fair value associated with these modified awards, and as a result, no additional compensation was recorded.
2024 Stock Option Grant
In January 2024, the Company granted , three () year stock options to an employee for services rendered, having a fair value of $. These options have an exercise price of $/share and were fully vested on the grant date.
Black Scholes Option Pricing Model – Valuation
| Expected term (years) | ||||
| Expected volatility | % | |||
| Expected dividends | ||||
| Risk free interest rate | % |
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SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Stock Issued for Services – Related Parties
In
July 2023, the Company issued shares of common stock, having a fair value of $
Share Cancellation
In March 2024, the Company cancelled shares of common stock. This cancellation will have a net effect of $ on stockholders’ deficit.
Reverse Acquisition, Change in Control, Anticipated Accounting Treatment and Unaudited Pro-Forma Financial Information
Reverse Acquisition and Change in Control
On May 6, 2024, DNA (“accounting acquirer,” a private company, and the entity whose equity interests will be acquired) executed an agreement and plan of merger with SRAX (“legal acquirer,” and the entity that will issue securities for financial reporting purposes), an operating public company.
As of the date of these unaudited consolidated financial statements, the merger transaction has not yet closed.
Prior
to the completion of the merger, DNA currently holds approximately
Upon closing of the merger, DNA will have voting control, and this will be accounted for as a reverse acquisition. Since DNA will acquire a controlling voting interest, it will be deemed the accounting acquirer, while the Company will be deemed the legal acquirer.
Name Change and Stock Symbol Change
Upon completion of the merger, the Company will change its name to DNA and request a ticker symbol change.
| 75 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Financial Accounting and Reporting
The historical financial statements of the Company will become those of DNA and of the consolidated entities from the date of the reverse acquisition and prospectively.
GAAP requires that business combinations are accounted for under the acquisition method of accounting, which requires all of the following steps:
| (a) | identifying the acquirer; |
| (b) | determining the acquisition date; |
| (c) | recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree; and |
| (d) | recognizing and measuring goodwill or a gain from a bargain purchase. |
On the acquisition date, the identifiable assets acquired and liabilities assumed will be measured at fair value, with limited exceptions. The Company cannot yet determine if there will be any recognized goodwill or any intangible assets in connection with the transaction.
In reporting its weighted average shares outstanding and earnings (loss) per share data, all share and per share amounts will be retroactively restated to the earliest period presented.
Transaction
costs associated with the reverse acquisition are expected to be $
Pro-Forma Unaudited Condensed Combined Financial Statements
The Company will file the requisite unaudited pro forma financial information after the merger closes on Form 8-K.
While pro forma adjustments related to SRAX’s assets and liabilities will be based on estimates of fair value determined from preliminary information received from SRAX and initial discussions between DNA and SRAX’s management, due diligence efforts, and information available in the historical audited financial statements of SRAX and the related notes, the detailed valuation studies necessary to arrive at the required estimates of the fair value of the SRAX assets to be acquired and the liabilities to be assumed, as well as the identification of all adjustments necessary to conform DNA and SRAX accounting policies, remain subject to completion.
DNA intends to complete the valuations and other studies upon completion of the transaction and will finalize the purchase price allocation as soon as practicable within the measurement period, but in no event later than one year (1) following the closing date of the transaction. The assets and liabilities of SRAX have been measured based on various preliminary estimates using assumptions that DNA believes are reasonable, based on information that is currently available.
| 76 |
SRAX, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2023
Differences between these preliminary estimates and the final acquisition accounting may occur, and those differences may be material.
DNA Business Description
DNA is a Web3 investment company which provides both advisory services and invests in Web3 infrastructure.
DNA currently has three (3) areas of focus:
Investment funds
| ● | DNA Helix Opportunity Fund |
| ● | DNA Liquid Token Fund |
| ● | DNA High Yield Fund |
| ● | DNA Moonshot Fund |
| ● | DNA Venture Fund |
Web3 Services
Helping companies position themselves to attract investors and creating the marketing attention that the companies need to become recognized in this rapidly growing $2T+ Worldwide market
Community and Events
In collaboration with SRAX - DNA will host events all over the world to help educate investors about Web3 projects and its ecosystem. These events will be in person and virtually through the SEQUIRE virtual platform.
See Form 8-K filed with United States Securities and Exchange Commission on May 12, 2024 for complete details.
Series C, Convertible Preferred Stock
In May 2024, the Company has designated for issuance Series C, Convertible Preferred Stock. These shares have the following rights and preferences:
| ● | Authorized shares – . |
| ● | Par value - $/share. |
| ● | Conversion
rate - equal to |
| ● | Stated value - $/share. |
| ● | Voting
rights – |
| ● | Liquidation
rights – greater of the stated value of $ |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements regarding our business development plans, timing, strategies, expectations, anticipated expenses levels, business prospects and positioning with respect to market, demographic and pricing trends, business outlook, technology spending and various other matters (including contingent liabilities and obligations and changes in accounting policies, standards and interpretations) and express our current intentions, beliefs, expectations, strategies or predictions. These forward-looking statements are based on a number of assumptions and currently available information and are subject to a number of risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Special Note Regarding Forward-Looking Statements” and under “Risk Factors” and elsewhere in our annual report for the year ended December 31, 2022 filed on Form 10-K and this quarterly report. The following discussion should be read in conjunction with our financial statements and related notes thereto included elsewhere in this quarterly report.
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is provided in addition to the accompanying unaudited Consolidated Financial Statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
Business Focus
During 2023, we have focused on the continued growth of our Sequire platform’s functionality. During the six months ended June 30, 2023, the Company disposed of its subsidiary LD Micro, Inc.
Business
We are a technology firm focused on enhancing communications between public companies and their shareholders and investors. For a portion of the six months ended June 30, 2023, we operated two distinct business units; however we operate in one business segment: As noted above, during this period, the Company disposed of its subsidiary LD Micro, Inc.
Our unique SaaS platform, Sequire, which allows issuers to track their shareholders’ behaviors and trends, then use data-driven insights to engage with shareholders across marketing channels. Through Sequire, we offer tools and related data and insight services to allow issuers of publicly traded securities to better understand their position in the market.
We derive our revenues from the following sources:
| ● | Licensing of our proprietary SaaS platform; | |
| ● | Sales of proprietary data; | |
| ● | Attendance and sponsorship fees from investor conferences and events; and | |
| ● | Sales of insight and consulting services. |
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Sequire
The Sequire platform is a central hub where companies can manage certain administrative functions, reach out and engage with shareholders as well as identify potential new investors. The platform utilizes machine learning and advanced analytics to bring our clients actionable information that we believe can be used to maximize ROI through better investor and stockholder communications. Clients then can engage with targeted shareholder groups across marketing channels including email, social media, programming, and hyperlocal.
When interpreting data, clients can see gains and losses over time, buying/selling trends, total outstanding shares, new shareholders, and shareholders broken out by percentage. Based on this data, we can assist our users in developing customized communications campaign utilizing targeted ads and messaging.
Data Targeting
We help our clients build an investor base through targeted advertising and marketing campaigns, tailored to their needs. Using data-driven insights, we help clients meet their unique marketing objectives when messaging existing investors, new investors, or consumers.
Our team of experts takes a deep dive into each company, building out unique messaging to suit their target investors. Once media campaigns are built, they are run through the Sequire platform across multiple target segments. We then track performance and modify the campaign for the best possible results. Our clients have needs to target particular sectors and exchanges, and the value we deliver lies in the hyper-specific investor insights necessary for that kind of focused outreach.
We are maximizing the efficacy of our media campaigns by providing our clients with custom-built landing pages that are crafted to educate, engage, and convert new investors. When a new investor clicks through an ad, they will land on a story-driven page with data-tracking software embedded to collect analytics for later use.
Marketing and sales
We market our services through our in-house sales and marketing team. Our team focuses on social media, including Facebook, LinkedIn and Twitter, public relations (PR), industry events and the creation of white papers which assist in our marketing efforts and are used as lead generation tools.
Intellectual property
We currently rely on a combination of patents, trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary information. We currently have eight (8) US patent applications filed.
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Financial Condition
Liquidity and Going Concern
As reflected in the accompanying unaudited consolidated financial statements, for the six months ended June 30, 2023, the Company had:
| ● | Net loss of $3,390,000; and |
| ● | Net cash used in operations was $6,228,000 |
Additionally, at June 30, 2023, the Company had:
| ● | Accumulated deficit of $65,383,000 |
| ● | Stockholders’ deficit of $11,255,000; and |
| ● | Working capital deficit of $8,974,000 |
The Company anticipates that it will need to raise additional capital immediately in order to continue to fund its operations. The Company has relied on third parties for debt based funding of its operations. There is also no assurance that the amount of funds the Company might raise will enable the Company to complete its initiatives or attain profitable operations.
The Company’s operating needs include the planned costs to operate its business, including amounts required to fund working capital and capital expenditures. The Company’s future capital requirements and the adequacy of its available funds will depend on many factors, including the Company’s ability to successfully expand to new markets, competition, and the need to enter into collaborations with other companies or acquire other companies to enhance or complement its service offerings.
There can be no assurances that financing will be available on terms which are favorable, or at all. If the Company is unable to raise additional funding to meet its working capital needs in the future, it will be forced to delay, reduce, or cease its operations.
The Company is heavily reliant on its ability to convert its marketable securities into cash. The ability to sell these investments have inherent limitations such as legal restrictions/holding periods and illiquid markets.
In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flows and cash usage forecasts for the twelve months ended June 30, 2024, and our current capital structure including equity-based instruments, obligations and debts. Additionally, this assessment was made as of the date of these unaudited consolidated financial statements.
We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. The Company had cash on hand of $0 at June 30, 2023.
The Company has historically incurred significant losses since inception and has not demonstrated an ability to generate sufficient revenues from the sales of its services to achieve profitable operations.
These factors create substantial doubt about the Company’s ability to continue as a going concern within the twelve-month period subsequent to the date that these financial statements are issued.
The unaudited consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
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Results of Operations – Three and Six Months Ended June 30, 2023 and 2022
Revenues
The Company recognizes revenue in accordance with ASC 606 to align revenue recognition more closely with the delivery of the Company’s services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services.
Sequire Platform
Revenue from the Sequire platform is generated through licensing agreements, data services, marketing solutions, and investor insight services. Revenue is recognized using the percentage-of-completion method, primarily based on the duration of service provided to clients.
Conference Revenue
Conference revenue is derived from hosting investor conferences and securing sponsorships. Payments are received from presenting companies and sponsors participating in these events. On March 3, 2023 (“date of disposal”), the Company disposed of its subsidiary LD through a sale to Freedom Holding, Corp. (Nasdaq: “FRHC”).
The following table provides a breakdown of revenues by type for the three and six months ended June 30, 2023, and 2022:
| Three Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | Year over Year Changes | ||||||||||||||||||||||
| Revenue | Revenue | % of Revenues | Revenue | % of Revenues | $ Amount | % Change | ||||||||||||||||||
| Sequire SaaS platform revenue | $ | 1,641,000 | 86 | % | $ | 6,420,000 | 83 | % | $ | (4,779,000 | ) | -74 | % | |||||||||||
| LD Micro - conference revenue | 262,000 | 14 | % | 1,302,000 | 17 | % | (1,040,000 | ) | -80 | % | ||||||||||||||
| Total Revenues | $ | 1,903,000 | 100 | % | $ | 7,722,000 | 100 | % | $ | (5,819,000 | ) | -75 | % | |||||||||||
| Six Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | Year over Year Changes | ||||||||||||||||||||||
| Revenue | Revenue | % of Revenues | Revenue | % of Revenues | $ Amount | % Change | ||||||||||||||||||
| Sequire SaaS platform revenue | $ | 5,645,000 | 297 | % | $ | 13,919,000 | 180 | % | $ | (8,274,000 | ) | -59 | % | |||||||||||
| LD Micro - conference revenue | 272,000 | 14 | % | 1,302,000 | 17 | % | (1,030,000 | ) | -79 | % | ||||||||||||||
| Total Revenues | $ | 5,917,000 | 311 | % | $ | 15,221,000 | 197 | % | $ | (9,304,000 | ) | -61 | % | |||||||||||
Sequire SaaS platform revenues experienced a significant decline in 2023 as compared to 2022. This decrease was primarily due to the Company’s transition from accepting marketable securities as compensation to a cash-only payment model for services rendered. In previous years, a substantial portion of Sequire’s revenue was derived from payments in the form of securities, which allowed for potential capital appreciation. However, this shift to a cash-based model resulted in slower customer acquisition and reduced overall revenue.
Revenue from LD Micro conferences remained minimal in both 2023 and 2022, reflecting the limited number of events held and the Company’s focus on other revenue-generating activities.
Operating Costs and Expenses
The following table presents our operating expenses for the three and six months ended June 30, 2023 and 2022, respectively.
| For the Three Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | Year over Year Changes | ||||||||||||||||||||||
| Operating Expenses | Amount | % of Revenues | Amount | % of Revenues | $ Amount | % Change | ||||||||||||||||||
| Cost of revenues | $ | 138,000 | 7.25 | % | $ | 3,953,000 | 51.19 | % | $ | (3,815,000 | ) | -96.51 | % | |||||||||||
| Depreciation and amortization | 9,000 | 0.47 | % | 199,000 | 2.58 | % | (190,000 | ) | -95.48 | % | ||||||||||||||
| General and administrative expenses | 2,164,000 | 113.72 | % | 3,181,000 | 41.19 | % | (1,017,000 | ) | -31.97 | % | ||||||||||||||
| Total Operating Expenses | $ | 2,311,000 | 121.44 | % | $ | 7,333,000 | 94.96 | % | $ | (5,022,000 | ) | -68.48 | % | |||||||||||
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| For the Six Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | Year over Year Changes | ||||||||||||||||||||||
| Operating Expenses | Amount | % of Revenues | Amount | % of Revenues | $ Amount | % Change | ||||||||||||||||||
| Cost of revenues | $ | 232,000 | 3.92 | % | $ | 8,239,000 | 54.13 | % | $ | (8,007,000 | ) | -97.18 | % | |||||||||||
| Depreciation and amortization | 17,000 | 0.29 | % | 386,000 | 2.54 | % | (369,000 | ) | -95.60 | % | ||||||||||||||
| General and administrative expenses | 5,186,000 | 87.65 | % | 7,532,000 | 49.48 | % | (2,346,000 | ) | -31.15 | % | ||||||||||||||
| Total Operating Expenses | $ | 5,435,000 | 91.85 | % | $ | 16,157,000 | 106.15 | % | $ | (10,722,000 | ) | -66.36 | % | |||||||||||
Analysis of Operating Expenses – Three and Six Months Ended June 30, 2023 vs. 2022
Cost of Revenue
Our cost of revenue primarily includes:
| ● | Third-party media costs and data service fees | |
| ● | Third-party selling costs | |
| ● | Employee-related expenses (salaries, benefits) | |
| ● | Platform maintenance costs (technology and content hosting for Sequire) |
These costs are critical to delivering our platform services and marketing solutions. If, at any point, the estimated revenue expected from a contract is lower than the associated costs required to fulfill our obligations, we record a liability for the excess costs in the period in which this determination is made.
The Company’s cost of revenues are significantly lower in 2023 as compared to 2022.
Key Drivers:
| 1. | Operational Changes: The Company restructured its product mix and discontinued certain high-cost offerings. | |
| 2. | Efficiency Gains: Renegotiation of supplier contracts and improved processes reduced third-party costs. |
Depreciation and Amortization
Depreciation and amortization represent the allocation of costs associated with acquiring long-lived assets over their estimated useful lives. Our long-lived assets primarily include:
| ● | Computer hardware | |
| ● | Office equipment | |
| ● | Furniture |
These expenses can fluctuate based on:
| ● | Capital expenditures (new asset purchases) | |
| ● | Asset disposals (removing assets from service) | |
| ● | Periodic assessments of asset impairments |
Key Drivers:
| 1. | Asset Dispositions or Write-Offs: From time to time the Company sells, abandons, or retires property and equipment, reducing the depreciable base. | |
| 2. | Fully Depreciated Assets: Certain assets reached the end of their useful lives. |
The Company’s depreciation and amortization expense is significantly lower in 2023 as compared to 2022.
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General and Administrative Expenses
General and administrative (G&A) expenses consist of costs related to:
| ● | Human resources and employee benefits | |
| ● | Information technology infrastructure | |
| ● | Professional fees (legal, accounting, and consulting) | |
| ● | Facility overhead and office expenses | |
| ● | Other general corporate costs |
We expect G&A expenses to increase due to the higher costs associated with operating as a stand-alone public company, particularly in relation to professional fees and regulatory compliance. However, G&A costs may fluctuate as a percentage of revenue in future periods based on changes in revenue growth, operational efficiencies, and cost-reduction initiatives.
The Company has implemented organizational streamlining and reduced various costs no longer supporting the business objectives.
Outlook
| 1. | Cost Structure and Profitability |
The Company’s improved cost structure—particularly the dramatic drop in cost of revenues—positions us for enhanced margins.
| 2. | Future G&A Increases |
While absolute G&A expenses decreased, ongoing costs related to regulatory compliance and professional services may rise as the Company matures as a stand-alone public entity. Strategic initiatives to grow revenue and maintain cost discipline will be essential to manage G&A as a percentage of revenue.
| 3. | Asset Management |
With depreciation and amortization now significantly lower, the Company’s asset base may require reinvestment if we intend to scale operations or introduce new services. Future capital expenditures could shift depreciation trends upward again.
| 4. | Risk Factors |
| ○ | Revenue Variability: If revenue growth lags, the percentage of G&A could remain high. | |
| ○ | Market and Competitive Dynamics: Fluctuations in media costs, data fees, or third-party selling costs could impact cost of revenues. | |
| ○ | Regulatory Requirements: Public company compliance obligations may introduce new expenses and risks. |
Management remains focused on optimizing the cost structure, investing in growth, and ensuring operational efficiency to deliver long-term shareholder value. We believe our actions in the first half of 2023 lay the groundwork for more stable profitability, but we continue to monitor cost drivers and revenue opportunities closely.
| 83 |
Other Income (Expense) – Three and Six Months Ended June 30, 2023, and 2022
The following table provides a detailed breakdown of other income (expense) for the three and six months ended June 30, 2023, and 2022.
| For the Three Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | Year over Year Changes | ||||||||||||||||||||||
| Operating Expenses | Amount | % of Revenues | Amount | % of Revenues | $ Amount | % Change | ||||||||||||||||||
| Interest expense | $ | (492,000 | ) | -25.85 | % | $ | (1,264,000 | ) | -16.37 | % | $ | 772,000 | -61.08 | % | ||||||||||
| Impairment - goodwill | - | 0.00 | % | (10,200,000 | ) | -132.09 | % | 10,200,000 | -100.00 | % | ||||||||||||||
| Impairment - intangibles | - | 0.00 | % | (1,481,000 | ) | -19.18 | % | 1,481,000 | -100.00 | % | ||||||||||||||
| Loss on sale of fixed assets | - | 0.00 | % | (47,000 | ) | -0.61 | % | 47,000 | -100.00 | % | ||||||||||||||
| Loss on settlement of debt | (1,138,000 | ) | -59.80 | % | - | 0.00 | % | (1,138,000 | ) | 100.00 | % | |||||||||||||
| Realized loss - marketable securities | (3,621,000 | ) | -190.28 | % | (5,182,000 | ) | -67.11 | % | 1,561,000 | -30.12 | % | |||||||||||||
| Unrealized gain - marketable securities | 1,580,000 | 83.03 | % | (2,588,000 | ) | -33.51 | % | 4,168,000 | -161.05 | % | ||||||||||||||
| Change in fair value - contract assets | - | 0.00 | % | (1,013,000 | ) | -13.12 | % | 1,013,000 | -100.00 | % | ||||||||||||||
| Realized loss - designated assets | 3,000 | 0.16 | % | (783,000 | ) | -10.14 | % | 786,000 | -100.38 | % | ||||||||||||||
| Unrealized gain (loss) - designated assets | (86,000 | ) | -4.52 | % | (1,689,000 | ) | -21.87 | % | 1,603,000 | -94.91 | % | |||||||||||||
| Change in fair value - Series A, redeemable preferred stock | 83,000 | 4.36 | % | 2,472,000 | 32.01 | % | (2,389,000 | ) | -96.64 | % | ||||||||||||||
| Interest income | - | 0.00 | % | 3,000 | 0.04 | % | (3,000 | ) | -100.00 | % | ||||||||||||||
| Other income (expense) | (1,938,000 | ) | -101.84 | % | (1,647,000 | ) | -21.33 | % | (291,000 | ) | 17.67 | % | ||||||||||||
| Total Operating Expenses | $ | (5,609,000 | ) | -294.75 | % | $ | (23,419,000 | ) | -303.28 | % | $ | 17,810,000 | -76.05 | % | ||||||||||
| For the Six Months Ended June 30, | ||||||||||||||||||||||||
| 2023 | 2022 | Year over Year Changes | ||||||||||||||||||||||
| Operating Expenses | Amount | % of Revenues | Amount | % of Revenues | $ Amount | % Change | ||||||||||||||||||
| Interest expense | $ | (791,000 | ) | -13.37 | % | $ | (1,577,000 | ) | -10.36 | % | $ | 786,000 | -49.84 | % | ||||||||||
| Impairment - goodwill | - | 0.00 | % | (10,200,000 | ) | -67.01 | % | 10,200,000 | -100.00 | % | ||||||||||||||
| Impairment - intangibles | - | 0.00 | % | (1,481,000 | ) | -9.73 | % | 1,481,000 | -100.00 | % | ||||||||||||||
| Loss on sale of fixed assets | - | 0.00 | % | (47,000 | ) | -0.31 | % | 47,000 | -100.00 | % | ||||||||||||||
| Loss on settlement of debt | (1,138,000 | ) | -19.23 | % | - | 0.00 | % | (1,138,000 | ) | 100.00 | % | |||||||||||||
| Realized loss - marketable securities | (6,650,000 | ) | -112.39 | % | (6,235,000 | ) | -40.96 | % | (415,000 | ) | 6.66 | % | ||||||||||||
| Unrealized gain - marketable securities | 4,101,000 | 69.31 | % | 3,892,000 | 25.57 | % | 209,000 | 5.37 | % | |||||||||||||||
| Change in fair value - contract assets | - | 0.00 | % | (1,513,000 | ) | -9.94 | % | 1,513,000 | -100.00 | % | ||||||||||||||
| Realized loss - designated assets | (4,000 | ) | -0.07 | % | (899,000 | ) | -5.91 | % | 895,000 | -99.56 | % | |||||||||||||
| Unrealized gain (loss) - designated assets | (120,000 | ) | -2.03 | % | (1,332,000 | ) | -8.75 | % | 1,212,000 | -90.99 | % | |||||||||||||
| Change in fair value - Series A, redeemable preferred stock | 124,000 | 2.10 | % | 2,232,000 | 14.66 | % | (2,108,000 | ) | -94.44 | % | ||||||||||||||
| Interest income | - | 0.00 | % | 12,000 | 0.08 | % | (12,000 | ) | -100.00 | % | ||||||||||||||
| Gain on disposal of subsidiary (LD Micro, Inc.) | 594,000 | 10.04 | % | - | 0.00 | % | 594,000 | 100.00 | % | |||||||||||||||
| Other income (expense) | 12,000 | 0.20 | % | (1,218,000 | ) | -8.00 | % | 1,230,000 | -100.99 | % | ||||||||||||||
| Total Operating Expenses | $ | (3,872,000 | ) | -65.44 | % | $ | (18,366,000 | ) | -120.66 | % | $ | 14,494,000 | -78.92 | % | ||||||||||
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Overall Analysis and Outlook for each period:
| ● | Expense Volatility: The Company’s operating expenses show volatility, mainly due to non-cash items such as impairments, fair value adjustments, and gains/losses on financial instruments. Managing these fluctuations may remain a key focus. |
| ● | Debt Restructuring Impact: While settling debt in 2023 triggered a significant one-time loss, it may improve the Company’s capital structure and liquidity in future periods. |
| ● | Marketable Securities: The positive unrealized gains in 2023 highlight the impact of market conditions on the Company’s portfolio. Ongoing monitoring of investment risk and market volatility remains essential. This activity is the largest driver of the Company’s other income and expense line items. |
| ● | Intangible and Fixed Assets: The absence of impairment and loss on fixed asset sales in 2023 suggests stabilization of asset values, although these items can reoccur if economic conditions or internal strategies change. |
| ● | Gain on sale of subsidiary – The Company sold LD Micro, Inc. in order to generate cash flow while recording a gain in this transaction. |
Looking ahead, management will continue to focus on:
| ● | Optimizing the Balance Sheet to reduce interest expense and mitigate the need for further debt settlements. | |
| ● | Monitoring Fair Value Adjustments to control volatility in reported earnings. | |
| ● | Evaluating Asset Performance to avoid or minimize impairments. |
While the Company recorded a significant loss on settlement of debt in 2023, the overall operating expense profile shows improvement over 2022 when considering the large, non-recurring items in the prior year. Management believes these strategic moves position the Company to strengthen its financial standing in subsequent quarters.
Net Loss
The key components contributing to our net loss are detailed in the preceding sections, including revenues, operating expenses, and other income (expense). These factors collectively influence our overall financial performance for the period.
The table below presents our net income (loss) for the three and six months ended June 30, 2023, and 2022, respectively.
| For the Three Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | Year over Year Changes | ||||||||||||||
| Amount | Amount | $ Amount | % Change | |||||||||||||
| Net Loss | $ | (6,017,000 | ) | $ | (23,030,000 | ) | $ | (17,013,000 | ) | -73.87 | % | |||||
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| For the Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | Year over Year Changes | ||||||||||||||
| Amount | Amount | $ Amount | % Change | |||||||||||||
| Net Loss | $ | (3,390,000 | ) | $ | (19,302,000 | ) | $ | (15,912,000 | ) | -82.44 | % | |||||
Cash Flows
Our cash, cash equivalents and marketable securities on hand at June 30, 2023 and December 31, 2022 were as follows:
| Period over Period Changes | ||||||||||||||||
| Increase (Decrease) | ||||||||||||||||
| June 30, 2023 | December 31, 2022 | $ Amount | % Change | |||||||||||||
| Cash, cash equivalents and marketable securities | $ | 4,629,000 | $ | 9,193,000 | $ | (4,564,000 | ) | -49.65 | % | |||||||
The Company relies exclusively on the liquidation of its marketable securities as its primary source of cash to meet ongoing operational and financial obligations. As a result, the Company’s liquidity position is directly impacted by fluctuations in the market value and liquidity of these securities. The ability to generate sufficient cash flow depends on timing, pricing, and market conditions, which may affect the Company’s ability to efficiently convert these assets into cash as needed.
The following table represents our net cash flows for the six month ended June 30, 2023 and 2022, respectively.
| For the Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | Period over Period Changes | ||||||||||||||
| Increase (Decrease) | ||||||||||||||||
| Net Cash Provided by (Used in) | Amount | Amount | $ Amount | % Change | ||||||||||||
| Operating activities | $ | (6,228,000 | ) | $ | (7,246,000 | ) | $ | 1,018,000 | -14.05 | % | ||||||
| Investing activities | 6,316,000 | 3,597,000 | 2,719,000 | 75.59 | % | |||||||||||
| Financing activities | (95,000 | ) | 2,561,000 | (2,656,000 | ) | -103.71 | % | |||||||||
| Net change in cash and cash equivalents | $ | (7,000 | ) | $ | (1,088,000 | ) | $ | 1,081,000 | -99.36 | % | ||||||
Cash Flows from Operating Activities
The Company’s primary use of cash in operations is to fund payments to media, data, and platform vendors, employee compensation, and various service providers. However, cash flow is significantly impacted by fluctuations in the valuation of marketable securities, which serve as our sole source of liquidity.
Additionally, our operating cash flows are influenced by non-cash transactions, including:
| ● | Amortization of right-of-use assets | |
| ● | Amortization of debt issuance costs and discounts | |
| ● | Stock-based compensation expenses | |
| ● | Bad debt expense |
| ● | Unrealized gains on sales of marketable securities | ||
| ● | Marketable securities received as reset shares | ||
| ● | Loss on settlement |
Changes in operating assets and liabilities—particularly receivables, payables, and deferred revenues—also have a material impact on our operating cash flows.
Given the Company’s transition to cash-based compensation for services rendered, we expect to continue using more cash than we generate from operations in the foreseeable future, as cash payments lack the potential for capital appreciation that marketable securities previously offered.
| 86 |
Cash flows used in operating activities decreased by $1,018,000 in 2023 compared to 2022, primarily due to the following factors:
| For the Six Months Ended June 30, | ||||||||||||
| 2023 | 2022 | Net Change | ||||||||||
| Operating activities | ||||||||||||
| Net loss | $ | (3,390,000 | ) | $ | (19,302,000 | ) | $ | 15,912,000 | ||||
| Adjustments to reconcile net income to net cash used in operations | ||||||||||||
| Impairment of goodwill | - | 10,200,000 | (10,200,000 | ) | ||||||||
| Impairment of intangibles | - | 1,481,000 | (1,481,000 | ) | ||||||||
| Loss on sale of fixed assets | - | 47,000 | (47,000 | ) | ||||||||
| Realized loss - marketable securities | 6,650,000 | 6,235,000 | 415,000 | |||||||||
| Current period change in fair value of marketable securities | - | (3,892,000 | ) | 3,892,000 | ||||||||
| Unrealized (gain) loss - marketable securities | (4,101,000 | ) | - | (4,101,000 | ) | |||||||
| Change in fair value - contract assets | - | 1,513,000 | (1,513,000 | ) | ||||||||
| Realized loss - designated assets | 4,000 | 899,000 | (895,000 | ) | ||||||||
| Unrealized (gain) loss - designated assets | 120,000 | - | 120,000 | |||||||||
| Change in fair value - designated assets | - | 1,332,000 | (1,332,000 | ) | ||||||||
| Change in fair value - Series A, redeemable preferred stock | (124,000 | ) | (2,232,000 | ) | 2,108,000 | |||||||
| Gain on disposal of subsidiary (LD Micro, Inc.) | (594,000 | ) | - | (594,000 | ) | |||||||
| Marketable securities received for reset shares | 1,463,000 | - | 1,463,000 | |||||||||
| Amortization of right-of-use assets | 74,000 | 62,000 | 12,000 | |||||||||
| Amortization of debt discount/debt issue costs | 214,000 | 33,000 | 181,000 | |||||||||
| Stock based compensation | 128,000 | (512,000 | ) | 640,000 | ||||||||
| Loss on settlement | 1,138,000 | - | 1,138,000 | |||||||||
| Loss on settlement of note receivable | - | 35,000 | (35,000 | ) | ||||||||
| Net provision for (recovery of) bad debts | - | - | - | |||||||||
| Bad debt expense | 63,000 | 195,000 | (132,000 | ) | ||||||||
| Depreciation and amortization of intangible assets | 17,000 | 385,000 | (368,000 | ) | ||||||||
| Interest expense incurred in connection with non-cash increase of debt | 79,000 | - | 79,000 | |||||||||
| Accounts receivable | 30,000 | 276,000 | (246,000 | ) | ||||||||
| Contracts receivable | 328,000 | (2,063,000 | ) | 2,391,000 | ||||||||
| Due from related party | 263,000 | - | 263,000 | |||||||||
| Prepaid and other | (10,000 | ) | 132,000 | (142,000 | ) | |||||||
| Marketable securities | - | (11,588,000 | ) | 11,588,000 | ||||||||
| Designated assets for return of capital | - | 686,000 | (686,000 | ) | ||||||||
| Accounts payable and accrued expenses | (1,856,000 | ) | 5,900,000 | (7,756,000 | ) | |||||||
| Accounts payable and accrued expenses - related party | (9,000 | ) | - | (9,000 | ) | |||||||
| Deferred revenue | (5,992,000 | ) | 2,044,000 | (8,036,000 | ) | |||||||
| Other | (649,000 | ) | 950,000 | (1,599,000 | ) | |||||||
| Right of use liability | - | (62,000 | ) | 62,000 | ||||||||
| Operating lease liability | (74,000 | ) | - | (74,000 | ) | |||||||
| Net cash used in operating activities | $ | (6,228,000 | ) | $ | (7,246,000 | ) | $ | 1,018,000 | ||||
| 87 |
Cash Flows from Investing Activities
In 2023, the Company’s primary investing activities were driven by asset sales and liquidity-generating transactions, including:
| ● | Cash received from the asset purchase of DNA Holdings, LLC | |
| ● | Proceeds from the liquidation of digital assets (crypto) acquired from DNA Holdings, Inc. | |
| ● | Proceeds from the sale of marketable securities | |
| ● | Proceeds from the sale of designated assets |
In comparison, 2022 investing activities primarily included:
| ● | Proceeds from the sale of marketable securities | |
| ● | Proceeds from the sale of designated assets | |
| ● | Capital expenditures related to property and equipment acquisitions | |
| ● | Acquisition of intangible assets | |
| ● | Other miscellaneous investing activities |
The increase in cash flows from investing activities by $2,719,000 in 2023 compared to 2022 was primarily driven by:
| ● | The one-time cash proceeds ($4,000,000) from the sale of LD Micro, Inc. | |
| ● | The acquisition of cash ($1,000,000) as well as the monetization of crypto assets ($256,000) acquired through the DNA Holdings, LLC transaction | |
| ● | Marketable securities liquidations ($1,050,000) to meet operational needs.
The above increases in 2023 were not comparable to isolated activities from 2022 related to proceeds from the sale of a note receivable, acquisition of property and equipment and acquisition of intangible assets. |
Cash flows provided by investing activities increased by $2,719,000 in 2023 compared to 2022, primarily due to the following factors:
| For the Six Months Ended June 30, | ||||||||||||
| 2023 | 2022 | Net Change | ||||||||||
| Investing activities | ||||||||||||
| Cash acquired in connection with sale of subsidiary (LD Micro, Inc.) | $ | 4,000,000 | $ | - | $ | 4,000,000 | ||||||
| Cash acquired in connection with asset purchase (DNA Holdings, LLC) | 1,000,000 | - | 1,000,000 | |||||||||
| Proceeds from sale of digital assets (crypto) - acquired from DNA Holdings, Inc. | 256,000 | - | 256,000 | |||||||||
| Proceeds from sale of marketable securities | 1,050,000 | 2,767,000 | (1,717,000 | ) | ||||||||
| Proceeds from sale of designated assets | 10,000 | 426,000 | (416,000 | ) | ||||||||
| Proceeds from sale of note receivable | - | 900,000 | (900,000 | ) | ||||||||
| Acquisition of property and equipment | - | (108,000 | ) | 108,000 | ||||||||
| Acquisition of intangible assets | - | (388,000 | ) | 388,000 | ||||||||
| Net cash provided by investing activities | $ | 6,316,000 | $ | 3,597,000 | $ | 2,719,000 | ||||||
Cash Flows from Financing Activities
In 2023, the Company’s primary financing activity was limited to:
| ● | Repayments on our senior secured revolving credit facility |
By contrast, in 2022, financing activities included:
| ● | Payments for taxes related to the settlement of restricted stock units (RSUs) | |
| ● | Proceeds from our factoring facility, net of repayments |
| ● | Proceeds from exercise of common stock warrants | ||
| ● | Payment of Series A, preferred stock distribution |
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As a result, cash flows from financing activities decreased by $2,656,000 in 2023 compared to 2022, primarily due to:
| ● | The absence of proceeds from the factoring facility in 2023 | |
| ● | Lower financing-related cash inflows compared to the prior year | |
| ● | A shift in reliance toward liquidating marketable securities instead of leveraging financing sources |
Cash flows provided by financing activities decreased by $2,656,000 in 2023 from 2022 related to the following:
| For the Six Months Ended June 30, | ||||||||||||
| 2023 | 2022 | Net Change | ||||||||||
| Financing activities | ||||||||||||
| Repayments on senior secured revolving facility | $ | (95,000 | ) | $ | - | $ | (95,000 | ) | ||||
| Proceeds from exercise of common stock warrants | - | 32,000 | (32,000 | ) | ||||||||
| Payment of Series A, preferred stock distribution | - | (365,000 | ) | 365,000 | ||||||||
| Payment for taxes related to settlement of restricted stock units | - | (101,000 | ) | 101,000 | ||||||||
| Proceeds from factoring facilities, net of repayments | - | 2,995,000 | (2,995,000 | ) | ||||||||
| Net cash provided by financing activities | $ | (95,000 | ) | $ | 2,561,000 | $ | (2,656,000 | ) | ||||
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 guaranteed 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.
Liquidity and Capital Resource Requirements
We believe that our current sources of funds are insufficient to provide the necessary liquidity to meet our operational needs and remaining debt obligations over the next 12 months from the issuance date of these consolidated financial statements.
Our future capital requirements will depend on multiple factors, but our primary source of funding remains the sale of marketable securities received as consideration for the licensing of our Sequire platform and related services.
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Dependence on Marketable Securities Sales
The Company’s ability to generate cash depends largely on the timely sale of its marketable securities. These sales are primarily conducted under Rule 144 of the Securities Act of 1933, which imposes restrictions and holding periods that can be unpredictable, making it difficult to forecast the timing and availability of cash flows.
Additionally, the Company’s marketable securities holdings are subject to:
| ● | Market price volatility, which affects their liquidation value | |
| ● | Legal restrictions, which impact the timing and feasibility of sales | |
| ● | Uncertainty around realization and conversion to cash |
Additional Factors Impacting Cash Flow Uncertainty
Beyond marketable securities, our cash flow uncertainty is influenced by:
| ● | Subscription growth rates and renewal activity | |
| ● | Timing and amount of cash received from customers | |
| ● | Investment in sales and marketing expansion | |
| ● | Development efforts for new and enhanced products | |
| ● | Market adoption trends of the Sequire platform |
Going Concern and Capital Raising Challenges
The Company anticipates that sales of its marketable securities will remain a critical funding source for the foreseeable future. However, this reliance creates substantial doubt about the Company’s ability to continue as a going concern.
To address liquidity challenges, we continually evaluate alternative financing options and may seek to raise additional capital. However, following our delisting from NASDAQ, raising capital through equity or debt offerings has become more difficult, as investors are historically less likely to invest in securities not listed on a national exchange.
Given these factors, the Company is actively exploring strategies to enhance liquidity, optimize cash flow, and mitigate financing risks to sustain ongoing operations.
Financing Arrangements
See Notes 6, 10, 11, 17 and 20 in the accompanying consolidated financial statements for a discussion of relevant financing arrangements.
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Critical Accounting Policies and Estimates
There have been no changes to our critical accounting policies during the year ended December 31, 2022. Our critical accounting policies and significant estimates are regularly reviewed and discussed with our Audit Committee to ensure compliance and accuracy in financial reporting.
A detailed discussion of these policies can be found in Note 3 – Summary of Significant Accounting Policies within the Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K, filed with the SEC on September 20, 2024, for the fiscal year ended December 31, 2022.
Recently Issued Accounting Pronouncements
For additional information regarding recently issued accounting pronouncements and their potential impact on our financial statements, refer to Note 3 – Summary of Significant Accounting Policies in the accompanying notes to Consolidated Financial Statements, included in Part II, Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K filed with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable, as we are a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We evaluated, under the supervision and with the participation of the principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”) as of March 31, 2023, the end of the period covered by this report on Form 10-Q. Based on this evaluation, our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) concluded that our disclosure controls and procedures were not effective at the reasonable assurance level at June 30, 2023 because the Company has not yet completed its remediation of the material weaknesses previously identified and disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, the end of its most recent fiscal year.
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Specifically, management has determined the following:
| ● | a lack of internal valuation experts | |
| ● | a lack of sufficient in-house qualified accounting staff; | |
| ● | a lack of validation of completeness and accuracy of internally prepared data, including key reports generated from systems, utilized in the operations of controls, leading to delays in the Company’s closing process; | |
| ● | inadequate controls and segregation of duties due to limited resources and number of employees; | |
| ● | Lack of internal personnel to properly evaluate the fair value and the associated revenue recognition related to our non-cash revenue contracts; | |
| ● | substantial reliance on manual reporting processes and spreadsheets external to the accounting system for financial reporting leading to delays in the Company’s closing process; | |
| ● | lack of adequate controls in the accounting for internally developed software costs., | |
| ● | products and services; and the recording of sophisticated, material financing transactions which are heavily dependent upon the use of estimates and assumptions and require us using consultants; | |
| ● | and our lack of experience in monitoring and administering, the Company’s internal control over financial reporting |
Our management concluded that considering internal control deficiencies that, in the aggregate, rise to the level of material weaknesses, we did not maintain effective internal control over financial reporting as of June 30, 2023 based on the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
To mitigate the items identified in the assessment, we rely heavily on direct management oversight of transactions, along with the use of legal and accounting professionals/consultants.
Remediation
We are continuing to seek ways to remediate these weaknesses, which stem from our small workforce and limited resources. The Company plans to hire an independent valuation expert to value the securities it receives as consideration for its services.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Due to the inherent limitations of control systems, not all misstatements may be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
Other than the changes noted above, there were no changes in our internal control over financial reporting during the six months ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company is a party to various legal or administrative proceedings arising in the ordinary course of business. While any litigation contains an element of uncertainty, we have no reason to believe the outcome of such proceedings will have a material adverse effect on the financial condition or results of operations of the Company .
ITEM 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below and the risk factors discussed in Part I, “Item 1A. Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on September 20, 2024 (the “Annual Report”), as well as the other information in this Quarterly Report on Form 10-Q (this “Report”), including our financial statements and the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. If any of the risks included in this Quarterly Report and our Annual Report actually occurs, our business, financial condition, results of operations and future prospects could be materially and adversely affected. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. Because of the risks discussed in this Quarterly Report and our Annual Report, as well as other variables affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
There have been no material updates or changes to the risk factors previously disclosed in our Annual Report; provided, however, additional risks not currently known or currently material to us may also harm our business.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent sales of unregistered securities
The following information is given with regard to unregistered securities sold since January 1, 2023. The following securities were issued in private offerings pursuant to the exemption from registration contained in the Securities Act of 1933, as amended (the “Securities Act”) and the rules promulgated thereunder in reliance on Section 4(a)(2) thereof, relating to offers of securities by an issuer not involving any public offering:
On February 3, 2023, the Company closed an asset purchase agreement pursuant to which it acquired certain assets from DNA Holdings LLC (“DNA”). DNA is controlled by a former member of our Board of Directors. The Company paid aggregate consideration of $1,256,000 in accordance with the asset purchase agreement, including the following:
| ● | 1,313,127 shares of common stock. |
| ● | 63,743 shares of Series B, Non-Voting, Convertible Preferred Stock. |
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In February 2023, the Company issued 1,251,684 shares of common stock in connection with the cashless exercises of 2,178,172 warrants. These exercises had a net effect of $0 on stockholders’ deficit. These warrants were exercised by the Company’s senior secured revolving credit facility lender.
Purchases of equity securities by the issuer and affiliated purchasers.
In August 2021, our Board of Directors approved a share repurchase program pursuant to which we are authorized to repurchase up to $10,000,000 of our Class A Common Stock in privately negotiated transactions or in the open market at prices per share not exceeding the then-current market prices.
Under the program, management has discretion to determine the dollar amount of shares to be repurchased and the timing of any repurchases in compliance with applicable law and regulation. This includes purchases pursuant to Rule 10b5-1 plans, including accelerated share repurchases. The program does not have an expiration date.
The total remaining authorization for future common share repurchases under our share repurchase program was $10,000,000 at June 30, 2023 and December 31, 2022, respectively.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
None.
Item 5. Other Information.
None
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Item 6. Exhibits
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| * | Filed herein |
| ** | Management contracts or compensation plans or arrangements in which directors or executive officers are eligible to participate. |
| (1) | The schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K and the Company agrees to furnish supplementally to the SEC a copy of any omitted schedules or exhibits upon request |
| (2) | In accordance with Item 601(b)(10)(iv) of Regulation S-K, certain information (indicated by “[***]”) has been excluded from this exhibit. |
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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.
| SRAX, INC. | ||
| April 29, 2025 | By: | /s/ Christopher Miglino |
| Christopher Miglino, Chief Executive Officer (principal executive officer) and Interim Chief Financial Officer (principal financial and accounting officer) | ||
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