Source: https://srax.com/files/filings/5.24.2018/10-QA/web-05-24-2018.html
Timestamp: 2018-12-14 14:59:29
Document Index: 15556931

Matched Legal Cases: ['art 1', 'art 2', 'art 1', 'art 1', 'art 2', 'art 1']

10-Q/A 1 srax_10q.htm AMENDED QUARTERLY REPORT Amended Quarterly Report
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 10,212,738 shares of Class A common stock are issued and outstanding as of May 15, 2018.
We are filing this Amendment No. 1 on Form 10-Q/A to amend our Form 10-Q for the period ended March 31, 2018, filed with the Securities and Exchange Commission on May 15, 2018 (the �Form 10 Q�), solely to amend Note 3 to the Financial Statements thereto in order to clarify that on January 1, 2018, we had adopted Accounting Standards Update 2015-14 (Topic 606) and that the adoption had no material impact on our financial statements.
There are no changes or amendments to the Financial Statements contained in the original Form 10-Q.
the obligation under senior secured convertible debentures in the principal amount of $6,845,157and compliance with the terms and conditions of these obligations;
the possible ratchet adjustments of Series A warrants in our January 2017 financing and the Debenture Warrants issued in the April 2017 and October 2017 financing transactions;
Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part I, Item 1A. - Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on April 2, 2018 and as amended on Form 10K/A on April 27, 2018 as well as other filings with the Securities and Exchange Commission (the �SEC�). Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.
When used in this report, the terms �Social Reality,� refers to Social Reality, Inc., a Delaware corporation, and our subsidiary BigToken, Inc., a Delaware corporation which we refer to as "BigToken," (collectively, �we,� �us,� �our� or �the Company�). In addition, the "first quarter of 2018" refers to the three months ended March 31, 2018, the "first quarter of 2017" refers to the three months ended March 31, 2017, �2018� refers to the year ending December 31, 2018, and "2017� refers to the year ended December 31, 2017.
(21,148,706
(3,209,476
(711,446
(3,920,922
THREE MONTH PERIOD ENDED MARCH 31, 2018 AND 2017
(195,150
(611,442
(135,241
(141,062
(929,431
Social Reality, Inc. ("Social Reality" or �SRAX�) is a Delaware corporation formed on August 2, 2011. These unaudited condensed consolidated financial statements include the consolidated results of Social Reality and its wholly owned subsidiary, Big Token, Inc. (�BigToken�) (collectively referred to as �we�, �us�, �our� or the �Company�). We are headquartered in Los Angeles, California.
The accompanying unaudited condensed consolidated financial statements and notes thereto are unaudited. The unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and note disclosures normally included in the Company�s annual financial statements have been condensed or omitted. The December 31, 2017 condensed balance sheet data was derived from financial statements, but does not include all disclosures required by GAAP. These interim financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim three month period ended March 31, 2018 and 2017. The results for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or for any future period.
Our primary need for liquidity is to fund working capital requirements of our business, development of internally used software and for general corporate purposes, including debt repayment. Our general, selling and administrative expenses decreased from $4,409,807 for the three months ended March 31, 2017 to $4,130,258 for the three months ended March 31, 2018. We incurred a loss of $3,609,620 for the three months ended March 31, 2018 compared to a net loss of $3,920,922 for the three months ended March 31, 2017. At March 31, 2018, we had an accumulated deficit of $24,758,326. As of March 31, 2018, we had $189,888 in cash and cash equivalents and a deficit in working capital of $1,917,197 as compared to $1,017,299 in cash and cash equivalents and a surplus in working capital of $1,124,023 at December 31, 2017. We continue to experience a period of limited liquidity resulting from the complete repayment of senior secured notes associated with a financing agreement previously held by Victory Park Management, LLC and the repurchase of the Series B Warrants, both in April 2017. Additionally, in October 2017 we satisfied all amounts outstanding to Victory Park Management, LLC related to its put right for the repurchase of the Financing Warrant (as defined in Note 8), amounting to $1,500,000 plus accrued interest. See Note 8 for a further discussion of this obligation.
We acknowledge that we continue to face a challenging competitive environment and while we continue to focus on our overall profitability, including managing expenses, we reported losses and have historically required funding of cash used in operating and investing activities with cash provided by financing activities. We expect that the actions initiated in the second half of 2017 will enhance our liquidity and financial flexibility in the first half of 2018. In late 2017, we announced several new revenue initiatives that could provide additional revenue growth opportunities anticipated to begin in the second half of 2018. In late 2017, we also announced that we had engaged outside advisors to evaluate potential strategic opportunities for our SRAXmd product group that could ultimately result in a sale of that product line, potentially adding additional liquidity for the Company.
We believe that the actions discussed above are probable of occurring and will enable us to satisfy our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity or whether such actions would generate the expected liquidity as currently planned. If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, we may not be able to access additional funds and we might need to secure additional sources of funds, which may or may not be available to us under terms and conditions that are favorable to our success. Additionally, a failure to generate additional liquidity could negatively impact our access to services that are important to the operation of our business.
Effect of ASU No. 2017-11 on Previously Issued Financial Statements
In July 2017, the Financial Accounting Standards Board (�FASB�) issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Part 1 � Accounting for Certain Financial Instruments with Down Round Features and Part 2 � Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with Scope Exception (�ASU No. 2017-11�). Part 1 of ASU No. 2017-11 addresses the complexity of accounting for certain financial instruments with down round features. Down round features are provisions in certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of ASU No. 2017-11 addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification�. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
The Company early adopted the guidance under ASU 2017-11 for the year end December 31, 2017, and recognized warrants issued in 2017 with a down round feature as equity. Adjustments to the Company�s previously issued financial statements were required for the retrospective application of this standard. As such the financial statements for three month period ended March 31, 2017 have been reclassified to reflect the adoption of ASU 2017-11.
6,578,747
23,696,704
12,960,933
15,604,714
14,460,933
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued or outstanding at March 31, 2017 and December 31, 2016, respectively
Class A common stock, authorized 50,000,000 shares, $0.001 par value, 8,025,017 and 6,951,077 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively
Class B common stock, authorized 9,000,000 shares, $0.001 par value, no shares issued or outstanding at March 31, 2017 and December 31, 2016, respectively
24,500,328
(16,416,363
(15,272,582
9,235,771
1,894,563
(1,894,563
(2,026,359
Credit is extended to customers based on an evaluation of their financial condition and other factors. Management periodically assesses the Company's accounts receivable and, if necessary, establishes an allowance for estimated uncollectible amounts. Accounts determined to be uncollectible are charged to operations when that determination is made. The Company does not require collateral. Allowance for doubtful accounts was $59,278 and $59,703 at March 31, 2018 and December 31, 2017, respectively.
At March 31, 2018, three customers accounted for more than 10% of the accounts receivable balance for a total of 57.4%. At December 31, 2017, four customers accounted for more than 10% of the accounts receivable balance for a total of 59.5%.
For the three months ended March 31, 2018, two customers accounted for more than 10% of total revenue for a total of 44.9%. For the three months ended March 31, 2017, one customer accounted for 25.9% of total revenue.
The accounting standard for fair value measurements provides a framework for measuring fair value and requires disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company�s principal or, in absence of a principal, most advantageous market for the specific asset or liability.
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 Company's financial instruments, including cash and cash equivalents, net accounts receivable, accounts payable and accrued expenses, are carried at historical cost. At March 31, 2018 and December 31, 2017, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments. Derivative instruments are carried at fair value, generally estimated using the Black Scholes Merton model.
Intangible assets consist of intellectual property, a non-complete agreement, and internally developed software and are stated at cost less accumulated amortization. Amortization is provided for on the straight-line basis over the estimated useful lives of the assets of three to six years. During 2016, the Company began capitalizing the costs of developing internal-use computer software, including directly related payroll costs. The Company capitalizes costs incurred during the application development stage of internal-use software and amortize these costs over the estimated useful life. Upgrades and enhancements are capitalized if they result in added functionality which enable the software to perform tasks it was previously incapable of performing. Software maintenance, training, data conversion, and business process reengineering costs are expensed in the period in which they are incurred. The Company capitalizes the costs of developing internal-use computer software, including directly related payroll costs. The Company amortizes costs associated with its internally developed software over periods up to three years, beginning when the software is ready for its intended use.
Goodwill is comprised of the purchase price of business combinations in excess of the fair value assigned at acquisition to the net tangible and identifiable intangible assets acquired. Goodwill is not amortized. The Company assesses goodwill for impairment at least annually, or when events or changes in the business environment indicate the carrying value may not be fully recoverable. The Company also has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the Company to determine that it is more likely than not (that is, a likelihood of more than 50%) that goodwill is impaired. If the Company chooses to first assess qualitative factors and it is determined that it is not more likely than not goodwill is impaired, the Company is not required to take further action to test for impairment. The Company also has the option to bypass the qualitative assessment and perform only the quantitative impairment test, which the Company may choose to do in some periods but not in others. The Company performs its annual impairment review as of December 31st.
The impairment charge represents the excess of the carrying amount of the goodwill recorded in the acquisition over the implied fair value of the goodwill. The implied fair value of the goodwill is the residual fair value based on an income approach that utilized a discounted cash flow model based on revenue and profit forecasts. The Company performed its annual impairment test and no impairment of goodwill has been recorded during the three months ended March 31, 2018 or 2017, respectively.
No impairments have been recorded regarding its identifiable intangible assets or other long-lived assets during the three months ended March 31, 2018 or 2017, respectively.
There were 5,053,258 common share equivalents at March 31, 2018 and 3,619,331 common share equivalents at March 31, 2017. For the three months ended March 31, 2018 and 2017, respectively, these potential shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would reduce net loss per share.
In connection with certain financing, consulting and collaboration arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date. Warrants issued in conjunction with the issuance of common stock are initially recorded at fair value as a reduction in additional paid-in capital of the common stock issued. All other warrants are recorded at fair value as expense over the requisite service period or at the date of issuance, if there is not a service period. Warrants granted in connection with ongoing arrangements are more fully described in Note 11, Stockholders� Equity.
For a discussion of recent accounting pronouncements, please refer to Recently Issued Accounting Standards as contained in Note 1 in the December 31, 2017 audited consolidated financial statements included in the Company�s annual report on Form 10-K filed with the SEC on April 2, 2018.
In May 2014, the Financial Accounting Standards Board (the �FASB�) issued Accounting Standards Update (�ASU�) 2014-09 �Revenue from Contracts with Customers� to supersede previous revenue recognition guidance under current U.S. GAAP. The guidance presents a single five-step model for comprehensive revenue recognition that requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Two options are available for implementation of the standard which is either the retrospective approach or cumulative effect adjustment approach. The guidance becomes effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company adopted ASU 2014-09 using the modified retrospective transition method in the first quarter of 2018 and such adoption did not have a material impact on the condensed consolidated financial statements.
The Company has established it only earns revenue from contracts with customers for advertising services. Therefore, the disclosure requirement to disaggregate revenue information is not material to the Company�s current business model. These revenue contracts are generally short term in nature, and no more than one year maximum. The transaction price per contract is derived on prenegotiated cost per thousand (�CPM�) impression basis. The Company recognizes its revenue from these contracts when it delivers the quantity of advertising impressions for the current period as stipulated in the customer contract. Once advertising impressions have been delivered, performance under these contracts is satisfied, and there is no ongoing obligation for the Company with regard to returns or warranty.
In July 2017, the Financial Accounting Standards Board (�FASB�) issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Part 1 � Accounting for Certain Financial Instruments with Down Round Features and Part 2 � Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with Scope Exception (�ASU No. 2017-11�). Part 1 of ASU No. 2017-11 addresses the complexity of accounting for certain financial instruments with down round features. Down round features are provisions in certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of ASU No. 2017-11 addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification�. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. For public business entities, the amendments in Part I of this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We early adopted the proposed guidance under ASU 2017-11 for the year end December 31, 2017, and recognized warrants issued in the fourth quarter of 2017 with a down round feature as equity. Adjustments to the Company�s previously issued financial statements were required for the retrospective application of this standard.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (�ASU No. 2017-04�). ASU No. 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. A public business entity that is a SEC filer should adopt the amendments of ASU No. 2017-04 for its annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect any impact from the adoption of this standard on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customer (Topic 606): Principal versus Agent Considerations - Reporting Revenue Gross versus Net, (ASU No. 2016-08) that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU No. 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for ASU No. 2016-08 is the same as the effective date of ASU No. 2014-09. ASU No. 2015-14 defers the effective date of ASU No. 2014-09 by one year, for fiscal years beginning after December 15, 2017. The Company has performed an evaluation of the impact of the adoption of this standard on its consolidated financial statements, and given its revenue recognition practices already in place, this will not have a material impact on the Company�s future presentation of consolidated financial statements. The Company will continue to evaluate new revenue streams as they develop from future new product launches.
On October 30, 2014, we acquired 100% of the capital stock of Steel Media from Richard Steel pursuant to the terms and conditions of a stock purchase agreement, dated October 30, 2014, by and among the Company, Steel Media and Mr. Steel (the "Stock Purchase Agreement").
The Company did not engage in any acquisition activity during the three months ended March 31, 2018 or during the twelve months ended December 31, 2017.
On October 17, 2017, the Company issued a press release announcing it has engaged financial advisors to explore strategic alternatives for the company's SRAXmd business.
Property and equipment consists of the following at March 31, 2018 and December 31, 2017:
Depreciation expense for the three months ended March 31, 2018 and 2017 was $9,441 and $3,234, respectively.
Acquired software - Leapfrog
3,608,983
(1,900,634
During the three months ended March 31, 2018, the Company capitalized $231,774 of costs associated with the development of internal-use software, including directly related payroll costs.
On August 17, 2017, the Company acquired software from Leapfrog Media Trading in exchange for 200,000 shares of Class A common stock and 350,000 warrants with a term of five years and an exercise price of $3.00. This software is currently being integrated into our platform and we estimate launching on July 1, 2018. No other assets, customers, employees, intangibles or business operations were acquired in this transaction.
Amortization expense was $37,800 for intellectual property, $52,083 for the non-compete agreement and $76,301 for the internally developed software for the three months ended March 31, 2018. Amortization expense was $37,800 for intellectual property, $52,083 for the non-compete agreement, and $17,837 for the internally developed software for the three months ended March 31, 2017.
3,145,279
We incurred a total of $3,164,352 of costs related to the Financing Agreement. These costs were amortized to interest expense over the life of the debt. During the three months ended March 31, 2018 and 2017, $0 and $578,140, respectively, of debt issuance costs were amortized as interest expense. As of March 31, 2018, all deferred debt issuance costs have been completely amortized.
During the three months ended March 31, 2018 and 2017, $0 and $0, respectively, were recorded as PIK interest expense.
Pursuant to the Financing Agreement, the Company issued to the lender a five-year warrant to purchase 580,000 shares of its Class A common stock at an exercise price of $5.00 per share (the "Financing Warrant"). The warrant holder was not, however, permitted to exercise the Financing Warrant for shares of Class A common stock that would cause such holder to beneficially own shares of Class A common stock that exceeds 4.99% of the Company's outstanding shares of Class A common stock following such exercise. Pursuant to the Financing Warrant, the warrant holder had the right, at any time after the earlier of April 30, 2016 and the maturity date of the Financing Notes issued, but prior to October 30, 2019, to exercise its put right under the terms of the Financing Warrant, pursuant to which the warrant holder may sell to the Company, and the Company will purchase from the warrant holder, all or any portion of the Financing Warrant that had not been previously exercised. In connection with any exercise of this put right, the purchase price was to equal to an amount based upon the percentage of the Financing Warrant for which the put right is being exercised, multiplied by the lesser of (a) 50% of the total consolidated revenue for the Company for the trailing 12-month period ending with the Company's then-most recently completed fiscal quarter, and (b) $1,500,000. In May 2017, the Company was notified by the warrant holder that it was exercising its put right. We had a period of 45 days from the date of notice to repay the right or negotiate a settlement. If the right remained unpaid after the 45-day period, interest would accrue on the unpaid balance at a rate of 14% per annum. On October 27, 2017, the Company paid the warrant holder $1,567,612, which was comprised of the $1,500,000 warrant value and an additional $67,612 of accrued interest.
In September 2016, the Company executed a Financing and Security Agreement, as amended (collectively, the "FastPay Agreement"). with FastPay Partners, LLC to create an accounts receivable-based credit facility. The FastPay Agreement was further amended in April 2018.
Under the April 2018 amended terms of the FastPay Agreement, FastPay may, at its sole discretion, purchase the Company's eligible accounts receivable. Upon any acquisition of accounts receivable, FastPay will advance the Company up to 80% of the gross value of the purchased accounts, up to a maximum of $4,000,000 in advances. Each account receivable purchased by FastPay will be subject to a factoring fee rate specified in the FastPay Agreement calculated as a percentage of the gross value of the account outstanding and additional fees for accounts outstanding over 30 days. The Company is subject to a concentration limitation on the percentage of debt from any single customer of 25% to the total amount outstanding on its purchased accounts, subject to an increase to 30% for one specific large customer.
The FastPay Agreement contains covenants that are customary for agreements of this type and are primarily related to accounts receivable and audit rights. The Company is also required to provide FastPay with 30-day notice of any transaction that result, or would result in, a �change of control� as defined in the FastPay Agreement. The failure to satisfy covenants under the FastPay Agreement or the occurrence of other specified events that constitute an event of default, as defined, could result in the termination of the FastPay Agreement and/or the acceleration of the Company's obligations. The FastPay Agreement contains provisions relating to events of default that are customary for agreements of this type.
At March 31, 2018, $1,287,176 of accounts receivable purchased by FastPay remain outstanding and are subject to repurchase under the terms of the FastPay Agreement.
As more fully described in Note 11, the Company issued Series A Warrants and Series B Warrants in connection with a securities purchase agreement dated January 4, 2017. At issuance, the Series A Warrants and the Series B Warrants were accounted for utilizing ASC 815 �Derivatives and Hedging�. The Company incurred a liability for the estimated fair value of derivative warrant instruments. The estimated fair value of the derivative warrant instruments was calculated using the Black-Scholes fair value option-pricing model with key input variables provided by management, as of the date of issuance, with the valuation offset against additional paid in capital, and at each reporting date, with changes in fair value recorded as gains or losses on revaluation in other income (expense).
Fair value at March 31, 2017 was estimated to be $1,143,781 and based on a risk-free interest rate of 1.875% for both the Series A Warrants and the Series B Warrants, an expected term of 5.25 years for the Series A Warrants and 4.75 years for the Series B Warrants, an expected volatility of 110% for the Series A Warrants and the Series B Warrants and a 0% dividend yield for the Series A Warrants and the Series B Warrants, respectively.
During the period ended March 31, 2017, the decrease in the fair value of the warrant derivative liability of $1,894,563 was recorded as a gain on change in fair value of derivative liability.
The Company chose to early adopt the guidance under ASU 2017-11 for the year end December 31, 2017, and recognized all warrants issued in 2017 with a down round features as equity. Adjustments to the Company�s previously issued financial statements were required for the retrospective application of this standard. As such the financial statements for three month period ended March 31, 2017 have been reclassified to reflect the adoption of ASU 2017-11.
The put warrant liability is comprised of the following at March 31, 2017:
(3,038,344
In April 2017, the Company repurchased the Series B Warrants for $2,500,000.
The Debentures, which mature three years from the date of issuance, pay interest in cash at the rate of 12.5% per annum, payable quarterly on January 1, April 1, July 1 and October 1, beginning on July 1, 2017. Our obligations under the Debentures are secured by a second position security interest in our accounts receivable and a first position security interest in the balance of our assets, and we are subject to continued compliance with certain financial covenants. The Debentures are convertible at the option of the holder into shares of our Class A common stock at an initial conversion price of $3.00 per share, subject to adjustment as hereinafter set forth. Subject to our compliance with certain equity conditions set forth in the Debentures, upon 20 trading days' notice to the holders we have the right to redeem the Debentures in cash at a 120% premium during the first year and a 110% premium during the remaining term of the Debentures. Upon any optional redemption, we are obligated to issue the holder five-year warrant Series B warrants, the terms of which will be identical to the Debenture Warrants, to purchase a number of shares of our Class A common stock as shall equal 50% of conversion shares issuable on an as-converted basis as if the principal amount of the Debenture had been converted immediately prior to the optional redemption. In the event of future financings by us, subject to certain exempt issuances, the holders have the right to cause us to allocate 20% of the proceeds we may receive as a mandatory redemption of a portion of the principal amount then outstanding. We are also required to redeem the Debentures upon our failure to maintain certain financial covenants which include a minimum monthly current ratio, a maximum quarterly corporate expense ratio, and maintain minimum quarterly revenue and EBITDA related to SRAXmd. As of March 31, 2018, we are in compliance with all financial covenants.
Chardan Capital Markets, LLC (�Chardan Capital�), Noble Capital Markets, Inc. ("Noble") and Aspenwood Capital (an independent branch of Colorado Financial Services Corporation) (�Aspenwood�), all broker-dealers and members of FINRA, acted as either our placement agent or a finder in connection with the sale of the securities pursuant to the Securities Purchase Agreements. In addition, an affiliate of Noble purchased Debentures amounting to $720,000 and was issued Debenture Warrants to purchase 120,000 shares of our Class A common stock in this offering. We paid aggregate cash commissions amounting to $276,700 to these broker-dealers in connection with the sale of the Debentures. Additionally, we issued Chardan Capital placement agent warrants ("Chardan Placement Agent Warrants") to purchase 100,000 shares of our Class A common stock at an exercise price of $3.75 per share which are exercisable for 5.5 years commencing six months from the issuance date. We issued Noble placement agent warrants (�Noble Placement Agent Warrants�) to purchase up to 66,800 shares of our Class A common stock at an exercise price of $3.00 per share which will become exercisable six months from the date of issuance. We also issued Colorado Financial Service Corporation and its designees warrants (�Aspenwood Warrants�) to purchase 7,700 shares of our Class A common stock at an exercise price of $3.75 per share which are exercisable for 5.5 years commencing six months from the issuance date. We included the shares underlying the Chardan Placement Agent Warrants, the Noble Placement Agent Warrants, and the Aspenwood Warrants in the afore-described resale registration statement that was declared effective by the SEC in June 2017.
The net proceeds to us from the offering, after deducting placement agent fees and estimated offering expenses, were approximately $4,566,405. We utilized $2,500,000 of the net proceeds to satisfy a put obligation under the Series B Warrants issued to investors in a registered direct offering that we conducted in January 2017 as described in Note 11. The balance of the net proceeds was used to pay down accounts payable and satisfy other working capital requirements.
On October 26, 2017, the Company entered into definitive securities purchase agreements (the �Securities Purchase Agreement�) with certain prior accredited investors (the �Purchasers�) for the purchase and sale of an aggregate of: (i) $5,180,157.78 in principal amount of 12.5% secured convertible debentures (the "Debentures"); and (ii) five year Series A common stock purchase warrants (the �Series A Warrants�) representing the right to acquire up to 863,365 shares of our Class A common stock (the �Offering�) in a transaction exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on the exemption provided by Rule 506(b) of Regulation D and Section 4(a)(2) of the Securities Act. The Offering includes (i) $2,000,000 of Debentures and Series A Warrants pursuant to the exercise of a green shoe (�Green Shoe�) provision contained in the transaction documents for the purchase and sale of the Prior Debentures (as defined below) and (ii) $3,180,157.78 of additional Debentures. The Debentures and Series A Warrants are being sold for a combination of cash and the cancellation of debt or receivables.
The Debentures, which mature on April 21, 2020, pay interest in cash at the rate of 12.5% per annum, payable quarterly on January 1, April 1, July 1 and October 1, beginning on January 1, 2018. Our obligations under the Debentures are secured pari-passu with the debentures previously issued in April 2017 (�Prior Debentures�). The Debentures are convertible at the option of the holder into shares of our Class A common stock (�Common Stock�) at an initial conversion price of $3.00 per share, subject to adjustment as hereinafter described.
The Debentures were issued in two series, Series A-1 Debentures (�A-1 Debentures�) and Series A-2 Debentures (�A-2 Debentures�). The Company will issue (i) $2,000,000 in A-1 Debentures and (ii) $3,180,157.78 in A-2 Debentures. The A-1 Debentures and A-2 Debentures are substantially the same except that the A-1 Debentures (i) we approved for issuance on June 23, 2017 by the shareholders of the Company pursuant to the Green Shoe and (ii) have a conversion price floor of $1.40 with regard to anti-dilution protection for subsequent equity sales at a price lower than 120% of the then applicable conversion price. The A-2 Debentures have a conversion price floor of $3.00 until such time as the Company receives shareholder approval for the transaction. On December 29, 2007, at our annual meeting of shareholders, we obtained approval of the transaction including the $1.40 floor price of the A-2 Debentures in the event of subsequent equity sales.
Subject to our compliance with certain equity conditions (as more fully set forth in the Debentures), upon 20 trading days' notice to the holders we have the right to redeem the Debentures in cash at a 120% premium during the first year and a 110% premium during the remaining term of the Debentures. Upon any optional redemption, we are obligated to issue the holder Series B Common warrants, the terms of which will be identical to the Series A Warrants, to purchase a number of shares of our Common Stock equal to 50% of the conversion shares issuable on an as-converted basis as if the principal amount of the Debenture had been converted immediately prior to the optional redemption. In the event of future financings by us, subject to certain exempt issuances, the holders have the right to cause us to allocate 20% of the proceeds we receive to redeem a portion of the principal amount of the then outstanding Debentures. We are also required to redeem the Debentures, at the holder�s right, upon our failure to maintain certain financial covenants as further described in the Debentures.
The Series A Warrants are being issued as follows: (i) 333,335 issued pursuant to the Green Shoe and in connection with A-1 Debentures and (ii) 530,030 are being issued in connection with the A-2 Debentures. The Series A Warrants issued pursuant to the A-1 Debentures and A-2 Debentures have the same form. The Series A Warrants are initially exercisable at $3.00 per share and, are subject to cashless exercise after six months if the shares underlying the warrants are not subject to an effective resale registration statement. The Series A Warrants also contain anti-dilution protection for subsequent equity sales for a price lower than the then applicable exercise price, with a floor of $1.40.
The conversion price of the Debentures and the exercise price of the Series A Warrants are subject to adjustments upon certain events, including stock splits, stock dividends, subsequent equity transactions (other than specified exempt issuances), subsequent rights offerings, and fundamental transactions, subject to the $1.40 and $3.00 floor described above). If we fail to timely deliver the shares of our Common Stock upon any conversion of the Debentures or exercise of the Series A Warrants, we will be subject to certain buy-in provisions. Pursuant to the terms of the Debentures and Series A Warrants, a holder will not have the right to convert any portion of the Debentures or exercise any portion of the Series A Warrants if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to such conversion or exercise, as such percentage ownership is determined in accordance with the terms of the Debentures and the Series A Warrants; provided that at the election of a holder and notice to us such percentage ownership limitation may be increased to 9.99%; provided that any increase will not be effective until the 61st day after such notice is delivered from the holder to the Company.
The Company also agreed to use up to approximately $1.57 million in proceeds from the Offering to pay a $1.5 million put obligation of the outstanding Financing Warrant plus $.07 million in accrued interest on the amount outstanding.
As of the date of the Securities Purchase Agreement, the Company had 8,605,018 shares of Common Stock issued and outstanding. As such, under the Nasdaq Market Place Rules, we are authorized to issue up to 19.99% of the issued and outstanding shares, or 1,720,143 shares. The shares of Common Stock underlying the A-2 Debentures and accompanying Series A Warrants are an aggregate of 1,590,081 shares of Common Stock. Notwithstanding, we are obligated to submit the Offering at the Shareholder Meeting for the purpose of reducing the floor conversion price of the A-2 Debentures as discussed above. In connection with this transaction, we will issue to our Placement Agents (as defined below), an aggregate of 183,337 common stock purchase warrants (�PA Warrants�) as follows: (i) 129,176 PA Warrants will have an exercise price of $3.75 per share and (ii) 54,161 PA Warrants will have an exercise price of $4.49 (the consolidated closing bid price of the Common Stock prior to the Securities Purchase Agreement). The PA Warrants are substantially similar to the Series A Warrants, except that the PA Warrants have a term of five and one half (5.5) years, are not exercisable until the six (6) month anniversary of the issuance date, and contain no anti-dilution protection.
Pursuant to a registration rights agreement (�Registration Rights Agreement�), we have agreed to file a registration statement registering the resale of the shares of our common Stock underlying the Debentures and the Series A warrants within thirty (30) days from the date of the Registration Rights Agreement. We also agreed to have the registration statement declared effective within 90 days from the date of the Registration Rights Agreement and keep the registration statement continuously effective until the earlier of (i) the date after which all of the securities to be registered thereunder have been sold, or (ii) the date on which all the securities to be registered thereunder may be sold without volume or manner-of-sale restrictions and without current public information pursuant to Rule 144 under the Securities Act. We are also obligated to pay the Investors, as partial liquidated damages, a fee of 2.0% of each Investor�s subscription amount per month in cash upon the occurrence of certain events, including our failure to file and / or have the registration statement declared effective within the time periods provided. As a result of the registration statement not being declared effective, we have accrued partial liquidated damages of $103,862.16 as of April 30, 2018 (including interest accruing at 18% per annum). We will continue to incur additional liquidated damages on a monthly basis in the event that the registration statement is not declared effective.
Chardan Capital Markets, LLC (�Chardan Capital�) acted as lead placement agent and Aspenwood Capital acted as co-placement agent ("Aspenwood"), in connection with the sale of the securities pursuant to the Securities Purchase Agreement. Pursuant to their respective engagement agreements, we will pay Chardan Capital a cash commission of $149,021.25 and Aspenwood a cash commission of $70,000. Pursuant to the discussion above, we also issued an aggregate of 160,000 PA Warrants to Chardan Capital and an aggregate of 23,337 PA Warrants to Aspenwood. We will include the shares underlying the Placement Agent Warrants in the resale registration statement we expect to file.
During the year ended December 31, 2017, certain holders of convertible debentures exercised their rights to convert amounts of principal totaling $3,335,000 into 1,111,667 shares of the Company�s common equity. During the three month period ended March 31, 2018, the Company made no repayments on secured convertible debentures.
During the three month period ended March 31, 2018, the Company recorded interest expense on the convertible debentures totaling $330,952. During the three month period ended March 31, 2018, the Company also recognized $332,658 of amortization of debt discount and deferred financing costs.
Future minimum principal payments under senior secured convertible notes as of March 31, 2018, were as follows:
Less: debt discount and deferred debt issuance costs
(4,801,353
On September 15, 2017, the Company entered an Investor Relations and Consulting Agreement (�Consulting Agreement�) with Al & J Media, Inc. (�Consultant�). The Company engaged the Consultant to provide certain consulting services on behalf of the Company as are more fully described in the Consulting Agreement. Under the terms of this agreement, which expires on December 15, 2017, the Company engaged Al & J Media, Inc. to provide a variety of advisory and consulting services to the Company, including introducing the Company to potential sources of media, marketing agreement(s) and/or other strategic alliances which may benefit the Company in the performance of implementing its business plan(s), including but not limited to radio and television media spots; various media publications; and internet podcasts. As compensation for such services, the Company issued Al & J Media, Inc. 75,000 shares valued at $97,500 of its Class A common stock on September 15, 2017.
In October 2017, multiple investors in the Company�s April 2017 debenture financing converted an aggregate of $655,000 of debentures into 218,334 shares of Class A common stock.
In October 2017, one investor in the Company�s April 2017 debenture financing exercised 83,334 Series A common stock purchase warrants at an exercise price of $3.00 per share, resulting in gross proceeds to the Company of $250,002.
In January 2018, we issued Al & J Media an additional 150,000 shares for media consulting services pursuant to an extension of their September 2017 Consulting Agreement.
As of March 31, 2018, we have accrued as issuable to William Packer 3,774 shares of Class A common shares valued at $10,000 as payment for 2017 services on our board of directors. The shares will be issued from our 2016 equity compensation plan.
During the three months ended March 31, 2018 and 2017, respectively, there were no new grants of stock awards made nor were any previously issued grants forfeited.
During the three months ended March 31, 2018 and 2017, we recorded stock award expenses of $52,189 and $144,848; respectively.
In November 2016, the Company entered an Investor Relations and Consulting Agreement (�Consulting Agreement�) with Market Street Investor Relations, LLC (�Consultant�). The Company engaged the Consultant to provide certain investor relations and public relations services on behalf of the Company as are more fully described in the Consulting Agreement. The term of the Consulting Agreement is for a period of six-months from the effective date and may be extended for an additional six-month term. In lieu of cash payments for the services rendered by the Consultant, the Company issued the Consultant a three year Class A common stock purchase warrant to purchase 400,000 shares of the Company�s Class A common stock at an exercise price of $7.50 per share. The warrants vest based on specific milestones described within the Consulting Agreement. The value of the warrants at the date of grant was $1,390,264. At the direction of the Consultant, a warrant to purchase 200,000 shares was issued to the Consultant and a warrant to purchase 200,000 shares was issued to Steve Antebi (a principal stockholder in the Company). The Company also advanced the Consultant $100,000 on the effective date to cover anticipated expenses regarding the services to be performed by the Consultant. The Company paid the Consultant an additional $50,000 for expenses incurred during the nine months ended September 30, 2017. The Company is recognizing the value of the services rendered over the term of the Consulting Agreement. As of September 30, 2017, the Consultant had not yet attained any of the milestones contained within the Consulting Agreement and the Company reversed $275,637 of expense related to the Consulting Agreement. It was then determined that the Company would not extend the Consulting Agreement with the Consultant.
During the three months ended March 31, 2017, an aggregate of 662,773 Common Stock purchase warrants, having exercise prices of between $5.00 and $10.00, per share, expired.
During the three months ended March 31, 2018 and 2017, we recorded stock option expense of $83,941 and $33,419, respectively.
On March 20, 2018, as we began to formally review potential strategic options for SRAXMD, we entered into certain retention and bonus agreements with SRAXMD employees, including Erin DeRuggiero, our chief innovations officer. Pursuant to the terms of the agreements with Ms. DeRuggiero, her employment agreement was terminated, and she became a consultant of the Company. The term of the consultancy expires in the second quarter of 2018, or upon the sale of the assets comprising SRAXmd, but may be extended by the parties. The terms of the consultancy are substantially similar to her prior employment agreement except that in the event of a sale of the SRAXmd business unit or substantially all of the assets thereof within 120 days from March 20, 2018, (i) we (or our assignee) have the right and the obligation to purchase all of Ms. DeRuggiero�s outstanding Class A common shares (514,667) at a price of $5.80 per share, or an aggregate of $2,985,069 and (ii) we will pay Ms. DeRuggiero, an amount equal to five percent (5%) of the cash consideration received from the sale of the SRAXmd business. The Company and Ms. DeRuggiero agreed to a customary release from any claims that may have arisen during her employment.
Rent expense for office space amounted to $68,070 and $40,212 for the three month period ended March 31, 2018 and 2017, respectively.
NOTE 14 � FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash and accounts payable, approximate their respective fair values due to the short-term nature of such instruments.
The fair value of the 2017 Senior Secured Convertible Notes was $6,845,257 as of March 31, 2018. The fair value of the Convertible Notes was $6,845,257 as of December 31, 2017. All Convertible Notes fall within Level 3 of the fair value hierarchy as their value is based on the credit worthiness of the Company, which is an unobservable input. The Company used a Tsiveriotis - Fernandes model to value the 2017 Senior Convertible Notes as of March 31, 2018.
The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. The following table summarizes the conclusions reached regarding fair value measurements as of March 31, 2018 and December 31, 2017:
Embedded Warrant Put Option
Embedded Derivatives in Convertible Notes
The Company�s Warrant liability, embedded Warrant Put Option and the contingent consideration payments as well as the securities are measured at fair value on a recurring basis. As of March 31, 2018 and December 31, 2017, the Underwriter Warrant liability, Deerfield Warrant liability, embedded Warrant Put Option and the fundamental change and make-whole interest provisions embedded in the 2021 Notes are reported on the balance sheets in derivative and warrant liability, while the trading securities are reported on the balance sheets in marketable securities and long-term investments. As of December 31, 2016, the embedded Put Option is reported on the balance sheet in derivative and warrant liability. The Company used the settlement value for liability, the Put Option at December 31, 2016. The outstanding put option at December 31, 2016 was settled in January 2017. The Company incurred a warrant put option liability as a result of warrants issued in the January 2017 equity financing. This warrant put option liability was settled in April 2017 as it fair value of $2.5 million. Changes in the fair value of the Put Option liability in the 2016 was reflected in the statements of operations as a change in value adjustment.
A reconciliation of the beginning and ending balances for the derivative and warrant liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows (in thousands):
NOTE 15 � SUBSEQUENT EVENTS
The following discussion of our financial condition and results of operations for the three month periods ended March 31, 2018 and 2017 should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in our Annual Report on Form 10-K for the year ended December 31, 2017, as amended in Form 10-K/A (Amendment No. 1), this report, and our other filings with the Securities and Exchange Commission. We use words such as �anticipate,� �estimate,� �plan,� �project,� �continuing,� �ongoing,� �expect,� �believe,� �intend,� �may,� �will,� �should,� �could,� and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.
During 2017, we launched a new SRAX Social tool for digital marketers and content owners to create posts and promote them beyond their respective Facebook Page communities. This tool is the first of many planned monetization opportunities to be developed and integrated into SRAX Social. We also released a new guide entitled �People-Based Advertising: How to Get Bigger Results by Targeting the Most Precise Audience� which we believe will provide support for our expertise as an Internet advertising resource. We also unveiled the Company�s new SRAX branding, designed to reflect the breadth and depth of the tools that we offer to digital marketers and content owners.
In late 2017, we also announced the launch of the BIGToken project. Presently we are developing BIGToken as a wholly owned subsidiary of Social Reality and eventually anticipate spinning the company out to our shareholders. In March of 2018, we announced the Alpha launch of the BIG platform to a select group of individuals and entities. Users participating in our BIGToken Alpha will be able to create an account, integrate third party accounts and answer serves in order to create an initial data graph. Participants in the Alpha will be awarded points as opposed to a BIGToken. Although the Alpha launch was a major milestone for the BIGToken project, there can be no assurance that we will complete final development of the BIGToken project or if developed, that it will be successful.
At present, we anticipate commencing a closed Beta of the BIGToken platform during the second quarterly of 2018 and then commencing an open Beta during the third quarter of 2018 with the BIGToken platform becoming generally available in early 2019. Notwithstanding the foregoing anticipated development dates, to fully launch BIGToken, not only will we be required to complete development and testing of the platform, but we will also need to comply with both state and federal securities laws and regulations with regard to certain aspects of the platform. There can be no assurances that we will be able to comply with such laws or regulations on a timely basis, if at all. Our failure to adequately comply with such laws and regulations, or comply with them on a timely basis, will greatly impact the value and utility of the BIGToken platform.
The decrease in our revenue during the three months ended March 31, 2018 from the comparable period in 2017 reflect our strategic shift that began in 2017 to focus on higher margin revenue opportunities from buy-side clients as well as decreases in revenue from our SRAXReach product. These revenue declines were partially offset by an increase in revenue from our SRAXmd clients.
Cost of revenue consists of certain labor costs, payments to website publishers and others that are directly related to a revenue-generating event and project and application design costs. Approximately 100% of cost of revenue was attributable to payments to website publishers and other media providers for the first three months 2018 as compared to 100% during the first three months of 2017. Cost of revenue as a percentage of revenue declined to 38.8% for the first quarter of 2018 from 61.6% for the three months ended March 31, 2017. Cost of revenue declined in the first quarter of 2018 due to a strategic shift made by management in the prior year to focus sale efforts on advertising business with substantially higher gross margins.
Our operating expenses are comprised of salaries, commissions, marketing and general overhead expenses. Overall, our net operating expense decreased 21.4% in the first quarter of 2018 from the comparable period in 2017. Since our expense restructuring program was instituted at the end of the first quarter 2017, we expect that our operating expenses will continue to be flat to slightly higher for the remainder of 2018 as we make additional expense investments necessary to expand our new revenue initiatives.
Other income (expense) in the first quarter of 2018 represents factoring fees represents interest due on convertible debentures, factoring fees, and amortization of deferred debt issuance costs. Total interest expense increased 7.9% for the three month period ended March 31, 2018 as compared to the same period in 2017. We expect that our overall interest expense during the balance of 2018 will continue to decease as a result of lower carrying levels of 12.5% secured convertible debentures resulting from conversions that occurred in the third and fourth quarter of 2017.
(3,443,490
(3,408,480
(2,495,758
(1,739,368
Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. Our primary need for liquidity is to fund working capital requirements of our business and other general corporate purposes, including debt repayment. At March 31, 2018, we had an accumulated deficit of $24,758,326. As of March 31, 2018, we had $189,888 in cash and cash equivalents and a net working capital deficit of $1,917,197 as compared to $1,017,299 in cash and cash equivalents and net working capital of $1,124,023 at December 31, 2017. We are currently experiencing a period of limited liquidity resulting from the complete repayment of notes associated with a financing agreement previously held by Victory Park Management, LLC, the repurchase of the Series B Warrants in April 2017, and the satisfaction of amounts due under the Financing Warrant (as defined in Note 8 of the footnotes to the Financial Statements).
During the third quarter of 2017 we launched the BigToken project. To date, we have not segregated the costs and expenses of BigToken from our other operating expenses. We estimate that we have incurred an aggregate of approximately $491,530 of operating expenses related to this project as of March 31, 2018. In addition, we have capitalized software development costs of $51,922 related to BigToken, as of March 31, 2018. We anticipate that BigToken will be financed independently from Social Reality through the sale of the subsidiary�s equity, debt, or equity-linked securities. Based on our current development plans, and assuming there is no revenue for the first twelve months, we estimate that BigToken will require approximately $5 million and $15 million for the initial and subsequent 12-month periods of operations, respectively, provided however that such capital requirements may increase or decrease based on the speed of development, user adoption rates and revenues. In the event that BigToken is not able to secure independent funding, we may nonetheless continue to develop the BigToken project internally albeit on a reduced scope and extended time frame. In such instance, we do not believe the project will initially result in a material increase to our operating expenses as the majority of BigToken�s initial expenses are either duplicative administrative expenses or related to customer acquisition once the platform is successfully launched.
As previously disclosed in October 2017, we engaged outside advisors to review strategic alternatives for SRAXmd. As a result, in late 2017, we commenced an auction process with regard to the SRAXmd assets. We believe that we are now entering the final stage of the auction process. Although management is optimistic regarding the successful completion of the auction process, there can be no assurances that the process will be completed, will be successful, or that if such process is completed, that it will be on terms favorable to us.
Net cash used in operating activities was $574,844 during the three months ended March 31, 2018 compared to net cash used in operating activities of $611,442 for the comparable period in 2017. During the three months ended March 31, 2018, the Company�s accounts receivable decreased by $2,614,247 from the accounts receivable balance at December 31, 2017. Accounts payable and accrued liabilities during the three months ended March 31, 2018 decreased by $178,022 from the period ending December 31, 2017.
During the three months ended March 31, 2018 net cash used in investing activities was $252,567 as compared to $141,062 during the three months ended March 31, 2017. Our principal use of cash in investing activity is to acquire equipment and develop internally used software.
During the three months ended March 31, 2018 net cash provided by financing activities was $0. During the comparable period in 2017, net cash in the amount of $176,927 was used in financing activities which primarily consisted of proceeds from the sale of common stock of $3,820,001 offset by a $3,996,928 repayment of notes payable.
Evaluation of Disclosure Controls and Procedures. We maintain �disclosure controls and procedures� as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were not effective to ensure that the information relating to our company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure as a result of continuing material weaknesses in our internal control over financial reporting identified in our Annual Report on Form 10-K for the year ended December 31, 2017.
Upon default, remedies range from notice and cure, to acceleration of both principal and interest. Our operations may not generate sufficient cash to enable us to service our debt. Upon an event of default under the debentures, if we were unable to cure the default within the prescribed periods, if at all, the holders could accelerate all amounts then due. If we were unable to repay these obligations, the holders could foreclose on our assets, in which case our ability to continue our business and operations as then conducted would be in jeopardy. If the holders should foreclose on our assets, it is likely you would lose your entire investment in our company. These obligations may further adversely impact our business and operations in other areas, including making it more difficult to satisfy our other obligations, increasing our vulnerability in the event of a downturn in our business prospects and limiting our flexibility to plan for, or react to, changes in our markets and possibly placing us at a competitive disadvantage when compared to our competitors who have less debt. We are currently in compliance with the provisions of the debt covenants and are current with our interest payments as of November 5, 2017.
The Company recently announced its intent to develop the BIGToken Platform as a means of securing higher quality user data. The Company anticipates that a material part of the platform will be the issuance of BIGTokens to users. There can be no assurance that it will do so. Should the Company fail to issue the BIGTokens, the attractiveness of the BIGToken Platform may be materially affected and we will not recognize the benefits of the project.
If the BIGTokens are ultimately issued, there is currently no trading market available for the BIGTokens, no Designated Exchange, and peer-to-peer transfers will not be permitted unless and until holders are notified otherwise by the Company and informed of the requirements to and conditions to do so. As a result of recent regulatory developments, conventional crypto exchanges are currently unwilling to list securities tokens, such as the proposed BIGTokens. As a result, if and when issued and they become transferable, BIGTokens may only be tradable on very limited range of venues, including U.S. registered exchanges or regulated alternative trading systems for which a Form ATS has been properly submitted to the SEC. Currently, the Company is unaware of any operational ATS or exchange capable of supporting secondary trading in BIGTokens, if and when issued. Additionally, even if the BIGTokens are issued and become transferable, we may rely on technology, including smart contracts, to implement certain restrictions on transferability in accordance with federal or state securities laws. There can be no assurances that such technology will function properly, which could result in technological limitations on transferability and expose the Company to legal and regulatory issues. As a result of these technological, legal and regulatory considerations, a market for the BIGToken may never be developed and, if developed, may, for a variety of technological, legal and regulatory reasons, never become operational or efficient. In the event that a market for BIGTokens does not develop, the value of the BIGTokens would be materially adversely affected which could also have a materially adverse effect on our BIGToken Platform and the anticipated benefits therefrom.
The following information is given with regard to unregistered securities sold since January 1, 2018. 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(2) thereof, relating to offers of securities by an issuer not involving any public offering:
On March 31, 2018, 122,950 shares of Class A common stock were awarded to one employee for sales performance achievement pursuant to our 2016 equity compensation plan.
Class A Common Stock Warrant issued to Investors in January 2017 Offering (2nd Warrant)
Agreements with Erin DeRuggiero dated March 20, 2018
Amendment to Registration Rights Agreement associated with October 2017 Debenture Financing
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. � 1350
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the Quarterly Report on Form 10-Q/A to be signed on its behalf by the undersigned thereunto duly authorized.