SRAX, Inc. - Quarter Report: 2021 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2021

or

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

For the transition period from ________ to ________

Commission File Number 001-37916

SRAX, INC.

(Exact name of registrant as specified in its charter)

(323) 694-9800

(Registrant’s telephone number, including area code)

(Former Name)

Securities registered pursuant to Section 12(b) of the Act:

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 ☒ NO ☐

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 and post such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

If an emerging growth company, indicate by checkmark 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 ☐ NO ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The issuer had 24,945,963 shares of Class A common stock issued and outstanding as of August 13, 2021.

TABLE OF CONTENTS

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, 2020, 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. Additionally, any reference to (i) “LD Micro” refer to the Company’s wholly owned subsidiary, “LD Micro, Inc.” and the assets used in its operation. Also, any reference to “common share” or “common stock,” refers to our $.001 par value Class A common stock.

Any reference to “BIGToken” or the “BIGToken Project” refers to our previously wholly owned subsidiary, BIGToken, Inc. and the assets used in its operations which we transferred to Force Protection Video Equipment, Inc. (“FPVD”), which became a majority owned subsidiary on February 4, 2021.

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.

PART 1 - FINANCIAL INFORMATION

SRAX, Inc. and Subsidiaries

Index to the Financial Statements

SRAX, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.

SRAX, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.

SRAX, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Six Months Ended June 30, 2021 and 2020

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.

SRAX, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

For the Six Months Ended June 30,

See accompanying notes to these Unaudited Condensed Consolidated Financial Statements.

SRAX, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2021

NOTE 1 – Organization and Basis Of Presentation

Organization

SRAX, Inc. (“SRAX”, “we”, “us”, “our” or the “Company”) is a Delaware corporation formed on August 2, 2011.

The Condensed Consolidated Financial Statements consist of SRAX and its wholly owned subsidiaries LD Micro, Inc. (“LD Micro”) and SRAX’s majority owned subsidiary Force Protection Video Equipment Corporation (“FPVD”) and FPVD’s wholly owned subsidiary BIG Token, Inc. (“BIGToken”) (See Note 9 – Stockholders’ Equity Noncontrolling Interest). All intercompany transactions have been eliminated.

Our business is organized into two reportable segments: Sequire and BIGToken. The Sequire segment includes the operations of LD Micro, and the BIGToken segment includes the operations of our majority owned subsidiary FPVD and its wholly owned subsidiary BIG Token, Inc.

We are a technology firm focused on enhancing communications between public companies and their shareholders and investors. We currently have two distinct business units:

Each of SRAX’s business units deliver valuable insights that assist our clients with their investor relations and communications initiatives.

We are headquartered in Westlake Village, California but work as a distributed virtual Company.

Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements and notes thereto are unaudited. The unaudited interim Condensed Consolidated 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 United States 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, 2020 Condensed Consolidated Balance Sheet was derived from financial statements but does not include all disclosures required by GAAP. These interim unaudited Condensed Consolidated 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 and six-month period ended June 30, 2021 and 2020. The results for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021 or for any future period.

These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and the notes thereto for the year ended December 31, 2020, included in the Company’s annual report on Form 10-K filed with the SEC on March 31, 2021.

RECLASSIFICATIONS—Certain balances included in prior year's financial statements have been reclassified to conform to the current year's presentation

Liquidity and Capital Resources

In connection with preparing the Condensed Consolidated Financial Statements for the six months ended June 30, 2021, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued.

In making this assessment we performed a comprehensive analysis of our current circumstances including: our financial position, our cash flow and cash usage forecasts, and obligations and debts. The analysis used to determine the Company’s ability as a going concern does not include cash sources outside the Company’s direct control that management expects to be available within the next 12 months.

The Company has incurred significant losses since its inception and has not demonstrated an ability to generate sufficient revenues from the sales of its services to achieve profitable operations on a consolidated basis. In addition, BIGToken will continue to generate losses from operations for at least one year, and will require significant additional financing until the operations achieve profitability. These factors could create substantial doubt as to the Company’s ability to continue as a going concern for at least one year after the date that the our unaudited Condensed Consolidated Financial Statements are issued. However, as a result of the Company’s cash on hand of approximately $10,060,000, accounts receivable of approximately $2,172,000 and marketable securities available for sale of approximately $24,130,000, we believe that any substantial doubt about the Company’s ability to continue as a going concern has been alleviated.

We expect that our existing cash and cash equivalents, our accounts receivable and marketable securities as of June 30, 2021, will be sufficient to fund our anticipated level of operations, including our working capital needs, through at least August 2022.

Covid-19

The ultimate impact of the COVID-19 pandemic on the operations of the Company and BIGToken continues to be unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, the Company, or BIGToken, may direct, which may result in an extended period of continued business disruption and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but may have a material impact on both companies’ business, financial condition and results of operations.

Net Loss per Share

We use Accounting Standards Codification (“ASC”) 260, “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. We compute basic earnings (loss) per share by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share is computed based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options and warrants and stock awards. For periods with a net loss, basic and diluted loss per share are the same, in that any potential common stock equivalents would have the effect of being anti-dilutive in the computation of net loss per share.

Recent Accounting Pronouncements

Changes to accounting principles are established by the Financial Accounting Standards Board’s (“FASB”) in the form of Accounting Standards Update (“ASU”) to the FASB’s Codification. We consider the applicability and impact of all ASUs on our financial position, results of operations, cash flows, or presentation thereof. The Company reviewed all recently issued pronouncement in 2021, but not yet effective, and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on the Company’s financial condition or the results of its operations.

NOTE 2 – Acquisition

On February 4, 2021 (“Acquisition Date”), the Company completed a share exchange agreement (“Exchange Agreement”) with FVPD (“Reverse Merger”). Pursuant to the Exchange Agreement the Company exchanged 100% of the issued and outstanding shares of BIGToken for 149,562,566,584 shares of FPVD’s common stock and 5,000,000 shares of FPVD’s series A preferred stock. The transaction has been accounted for as a reverse merger / reverse capitalization wherein FVPD is the legal acquirer, but BIGToken is the accounting acquirer. As such, for reporting purpose, as of December 31, 2020, BIGToken’s total shares outstanding were restated to reflect the 149,562,566,584 shares of common stock and 5,000,000 shares of series A preferred stock.

On the Acquisition date, the assets, liabilities, and net book value of FPVD were as follows:

 Summary of Allocation of Purchase Price to Assets Acquired and Liabilities Assumed

See Note 8 - Series B Preferred Stock for the description of the series B preferred Stock.

FPVD was authorized to issue up to 20,000,000 shares of series A preferred stock (“Series A Preferred”), $0.0001 par value, which was redeemable at the option of the holder, with no fixed redemption date. As of the Acquisition Date there were 5,000,000 shares issued and outstanding, all of which were owned by SRAX, Inc.

FPVD was authorized to issue up to 8,318 shares of series C preferred stock (“Series C Preferred”) with a stated value of $100. The Series C Preferred are not redeemable, but convertible into 1,546,576 shares of common stock for each share of Series C Preferred or 12,864,419,168 shares of common stock. As of the Acquisition Date and June 30, 2021, there were 8,318 shares issued and outstanding.

NOTE 3 – Marketable Securities

During the second quarter of 2020, the Company began offering customers of its Sequire segment who purchase services on the Company’s proprietary SaaS platform the option to pay the contract price in securities issued by the Customer. The customers securities must be publicly quoted. In accordance with ASC 606 - Revenue Recognition, the Company will value the shares received at the fair market value of the date the contract is executed. The shares received will be accounted for in accordance with ASC 320 – Investments – Debt and Equity Securities, as such the shares will be classified as available-for-sale securities and will be measured at each reporting period at fair value with the unrealized gain or (loss) as a component of other income (expense). Upon the sale of the shares, the Company will record the gain or (loss) in the statement of operations as a component of net income (loss).

The movement in this account is as follows:

 Schedule of Movement of Marketable Securities

The Company’s sale of securities for the six months ended June 30, 2021, were approximately $2,903,000, with a book basis of approximately $2,093,000 which represented a gain of $810,000, which the Company recorded as other income included in the gains from marketable securities.

The Company recorded as a component of other income the realized and unrealized gain on marketable securities for the three and six month periods ended June 30:

 Schedule of Component of Other Income Realized and Unrealized Gain (Loss) on Marketable Securities

The Company accounts for its investments in equity securities in accordance with ASC 321-10 Investments - Equity Securities. The equity securities may be classified into two categories and accounted for as follows:

NOTE 4 – Right To Use Asset

The Company’s leases include both lease and non-lease components which are accounted for as a single lease component as we have elected the practical expedient. Some of our operating lease agreements include variable lease costs, primarily taxes, insurance, common area maintenance or increases in rental costs related to inflation. Substantially all of our equipment leases and some of our real estate leases have terms of less than one year and, as such, are accounted for as short-term leases as we have elected the practical expedient.

Operating leases are included in the right-of-use lease assets, other current liabilities and long-term lease liabilities on our Condensed Consolidated Balance Sheet. Right-of-use assets and lease liabilities are recognized at each lease’s commencement date based on the present values of its lease payments over its respective lease term. When a borrowing rate is not explicitly available for a lease, our incremental borrowing rate is used based on information available at the lease’s commencement date to determine the present value of its lease payments. Operating lease payments are recognized on a straight-line basis over the lease term. We had no financing leases as of June 30, 2021.

We have operating leases for office space. Our leases have remaining lease terms of 2.5 years. We consider renewal options in determining the lease term used to establish our right-of-use assets and lease liabilities when it is determined that it is reasonably certain that the renewal option will be exercised.

As of June 30, 2021, there were no material variable lease costs or sublease income. Cash paid for operating leases are classified in operating expenses and were $44,000 and $90,000 for the three and six month periods ended June 30, 2021 and $44,000 and $109,000 for the three and six month periods ended June 30, 2020, respectively. The following tables summarize the lease expense for the three and six months ended June 30:

Three Months Ended June 30

 Schedule of Component of Lease Expense

Six Months Ended June 30

The below table summarizes these lease asset and liability accounts presented on our accompanying Condensed Consolidated Balance Sheets as of:

 Schedule of Operating Lease Assets and Liabilities

Components of Lease Expense

We recognize lease expense on a straight-line basis over the term of our operating leases, as reported within “general and administrative” expense on the accompanying Condensed Consolidated Statement of Operations.

Weighted Average Remaining Lease Term and Applied Discount Rate

 Schedule of Weighted Average Remaining Lease Term and Applied Discount Rate

Future Contractual Lease Payments as of June 30, 2021

The below table summarizes our (i) minimum lease payments over the next five years, (ii) lease arrangement implied interest, and (iii) present value of future lease payments for the years ending December 31:

 Schedule of Future Minimum Contractual Lease Payments

NOTE 5 – Other Current Liabilities

The following table summarizes the composition of other current liabilities presented on our accompanying Condensed Consolidated Balance Sheets:

 Schedule of Other Current Liabilities

NOTE 6 – Deferred Revenue

Deferred revenue represents amounts billed for which revenue has not yet been recognized. Deferred revenue that will be recognized during the succeeding 12-month period is recorded as current deferred revenue, and the remaining portion, if any, is recorded as long-term deferred revenue. Deferred revenue during the six months ended June 30, 2021, increased by $8,344,000 resulting from an increase due to an increase of approximately $18,654,000 from securities received from customers in advance of revenue recognition, offset by a decrease due to revenue recognition in the amount of approximately $10,310,000. The Company expects to recognize revenue on the entire deferred balance next twelve months.

NOTE 7 – OID Convertible Debentures

On June 25, 2020, the Company entered into a definitive securities purchase agreement (the “Securities Purchase Agreement or Transaction”) with certain accredited and institutional investors for the purchase and sale of an aggregate of: (i) $16,101,000 in principal amount of Original Issue Discount Senior Secured Convertible Debenture (the “Debentures”) for $14,169,000 (representing a 12% original issue discount) (“Purchase Price”) and (ii) warrants to purchase up to 6,440,561 shares of the Company’s Class A common stock (the “Warrants”) in a private placement (the “Offering”). The Purchase Price consists of (a) $13,000,000 in cash and (b) the cancellation of $1,169,000 in outstanding debt, consisting of the accounts receivable loans of $510,000 with accrued interest of $184,000, and the short-term promissory notes of $350,000 with accrued interest of $125,000.

The Debentures, mature on December 31, 2021, pay interest in cash at the rate of 12.0% per annum commencing on June 30, 2021, with such interest payable quarterly, beginning on October 1, 2021. Commencing after the six-month anniversary of the issuance of the Debentures, the Company will be required to make amortization payments (“Amortization Payments”) with each Debenture holder having the right to delay such Amortization Payments by a six-month period up to three separate times (each, an “Extension”) in exchange for five percent in principal being added to the balance of such applicable Debenture on each such Extension. Accordingly, upon a holder exercising three Extensions, such Purchaser’s Debenture will mature and be due and payable on June 30, 2023. Beginning on the date that the first Amortization Payment is due, and on a monthly basis thereafter, the Company will be required to pay one hundred fifteen percent of the value of one-twelfth of the outstanding principal plus any additional accrued interest due.

In the event a holder converts a portion of its Debenture into shares of Common Stock, such amount will be deducted from the next applicable Amortization Payment. In the event such conversion exceeds the next applicable Amortization Payment, such excess amount will be deducted, in reverse order, from future Amortization Payments. The Company’s obligations under the Debentures are secured by substantially all the assets of the Company.

The Debentures are convertible at the option of the holder into shares of Common Stock at an initial conversion price of $2.69 per share, subject to adjustment in the event of (i) stock splits and dividends, (ii) subsequent rights offerings, (iii) pro-rata distributions, and (iv) certain fundamental transactions, including but not limited to the sale of the Company, business combinations, and reorganizations. The Debentures do not have any price protection or price reset provisions with respect to future issuances of securities.

Subject to the Company’s compliance with certain equity conditions, upon ten trading days’ notice to the holders, the Company has the right to redeem the Debentures in cash at 115% of their outstanding principal, plus accrued interest. Additionally, in the event that (i) the Company sells or reprices any securities (each, a “Redemption Financing”), or (ii) the Company disposes of assets (except those sold or transferred in the ordinary course of business) (each, an “Asset Sale”), then the Purchasers shall have the right to cause the Company (a) in the event of a Redemption Financing at a price per Common Stock equivalent of $2.50 or less per share, the holders may mandate that 100% of the proceeds be used to redeem the Debentures (b) in the event of a Redemption Financing at a price per Common Stock equivalent of greater than $2.50 per share, the holders may mandate that up to 50% of the proceeds be used to redeem the Debentures, and (c) in the event of an Asset Sale, the holders may mandate that up to 100% of the proceeds be used to redeem the Debentures.

The Debentures also contain certain customary events of default provisions, including, but not limited to, default in payment of principal or interest thereunder, breaches of covenants, agreements, representations or warranties thereunder, the occurrence of an event of default under certain material contracts of the Company, failure to register the shares underlying the Debentures in Warrants (as described below), changes in control of the Company, delisting of its securities from its trading market, and the entering or filing of certain monetary judgments against the Company. Upon the occurrence of any such event of default, the outstanding principal amount of the Debenture plus liquidated damages, interest and other amounts owing in respect thereof through the date of acceleration, shall become, at the Purchaser’s election, immediately due and payable in cash. The Company is also subject to certain negative covenants (unless waived by 67% of the then outstanding Purchasers, and including the lead Purchaser) under the Debentures, including but not limited to, the creation of certain debt obligations, liens on Company assets, amending its charter documents, repayment or repurchase of securities or certain debt of the Company, or the payment of dividends.

The Warrants are initially exercisable at 2.50 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 Warrants are also subject to adjustment in the event of (i) stock splits and dividends, (ii) subsequent rights offerings, (iii) pro-rata distributions, and (iv) certain fundamental transactions, including but not limited to the sale of the Company, business combinations, and reorganizations. The Warrants do not have any price protection or price reset provisions with respect to future issuances of securities.

Pursuant to the terms of the Debentures and Warrants, a holder will not have the right to convert any portion of the Debentures or exercise any portion of the Warrants if the holder (together with its affiliates) would beneficially own in excess of 4.99% or 9.99% (at the holder’s option) 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 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.

In connection with the offering of the Debentures, issue to the Placement Agent (as defined below), an aggregate of 478,854 Common Stock purchase warrants (“PA Warrants”). The PA Warrants are substantially similar to the Warrants, except that the PA Warrants have an exercise price of $3.3625 per share. The fair value of the PA Warrants at issuance was estimated to be $360,000 based on a risk-free interest rate of .11%, an expected term of 2.417 years, an expected volatility of 96% and a 0% dividend yield.

Bradley Woods & Co. Ltd. (“Placement Agent”) acted as the placement agent, in connection with the sale of the Debentures and Warrants. As compensation, we paid the Placement agent: (i) cash commission of $1,040,000 and (ii) an aggregate of 478,854 PA Warrants. Additionally, upon the exercise of Warrants issued in the Offering, the Placement Agent will be entitled to eight percent (8%) of the cash proceeds received from such exercises.

The Transaction closed on June 30, 2020, with approximately $3,800,000 cash proceeds received prior to closing date, $4,200,000 received on the closing date and $5,000,000 received after the closing date. The gross proceeds received from the Offering were approximately $13,000,000 and net proceeds of approximately $9,100,000 after deducting the Placement Agent fees, the repayment of certain debts and other offering expenses. Also, the Company reimbursed the lead investor $75,000 for legal fees, which was deducted from the required subscription amount to be paid.

On February 21, 2021, the Company conducted an inducement offering whereby the warrant holders were given the right to exercise the existing warrants in exchange for replacement warrants. As a result of the inducement, 4,545,440 Warrants were exercised resulting in net proceeds of $11,022,000. See Note 9 – Stockholders’ Equity.

The Company evaluated all of the associated financial instruments in accordance with ASC 815 Derivatives and Hedging. Based on this evaluation, the Company has determined that no provisions required derivative accounting.

In accordance with ASC 470 - Debt, the Company first allocated the cash proceeds to the Debentures and the Warrants on a relative fair value basis, secondly, the proceeds were allocated to the beneficial conversion feature.

During the six months ended June 30, 2021, certain Debenture holders converted $6,423,000 of principal into 2,391,551 shares of the Company’s class A common stock shares. As a result of these conversions, the Company reduced the principal balance by approximately $6,423,000 and reduced the debt discount by approximately $2,275,000 for a net book value of $4,148,000, which was transferred to additional paid-in capital.

The table below summarizes the OID convertible debenture balances for the six months ended June 30, 2021:

 Schedule of OID Convertible Debentures

During the three and six month periods ended June 30, 2021, the Company recognized amortization expense of $154,000 and $686,000, respectively.

During the three months ended June 30, 2021 the holders of the remaining Debentures notified the Company of their election to defer the inception of amortization payments due under the Debentures until June 30, 2022. As a result of their election, the holders are entitled to a 5% increase of their then current principal balance as a fee. The Company recorded this fee as a financing costs during the three and six month periods ended June 30, 2021.

As of June 30, 2021, the Company has classified the Debentures as current liability because management intends to redeem the remaining convertible debentures within the following 12 months.

NOTE 8 – Series B Preferred Stock

On March 12, 2021, FPVD entered into a securities purchase agreements and registration rights agreements with accredited investors pursuant to which investors purchased 47,248 shares of Series B preferred Stock (“Series B Stock”) for an aggregate of $4,725,000 or $100 per share (the. FPVD had previously closed on 10,500 shares of Series B Preferred stock or $1,050,000 in October of 2020. As a result, on March 12, 2021, there were 57,748 shares of Series B Stock outstanding.

Pursuant to the terms of the terms of the Series B Stock, (i) each share has a stated value of $100, (ii) accrues a 5% dividend beginning one year after the original issue date and thereafter on a quarterly basis, (iii) has no voting rights, except as required by law, and (iv) no liquidation preference. On May 11, 2021, upon meeting certain conditions and pursuant to the terms of the Series B Stock, 47,248 shares of Series B Stock converted into 68,583,866,100 shares of FPVD common stock. After the conversion, 10,500 shares of Series B Stock remain outstanding that are convertible into an additional 13,760,043,915 shares of FPVD common stock.

The conversion increases the noncontrolling interest from approximately 13.00% to 37.60%.

NOTE 9 – Stockholders’ Equity

Common Stock Warrants

On February 21, 2021 the Company entered into an agreement with the certain Debenture holders to exercise 4,545,440 of the Warrants issued in the June 2020 Debenture offering. As an inducement for the Warrant holders to exercise the Warrants, the holders receive a new registered warrant (“New Warrant”) to purchase an aggregate of 4,545,440 shares of the Company’s common stock at an exercise price of $7.50 per share. The New Warrants expire on January 31, 2022. Each holder agreed to pay $0.125 for each New Warrant. The Company received net proceeds of approximately $11,022,000, consisted of the exercise price of $11,363,000, $568,000 for the purchase of the New Warrant less solicitation fees of approximately $909,000.

The New Warrants were valued using the Black Scholes option pricing model at a total of $7,737,000 based on a one-year term, implied volatility of 96%, a risk-free equivalent yield of 11%, and stock price of $5.83. The fair value of the New Warrants was expensed and included in Financing Costs.

During the six months ended June 30, 2021, the Company: (i) received cash of approximately $4,774,000, (ii) cancelled 349,197 warrants (as a result of cashless exercises) and (iii) issued an aggregate of 1,710,078 shares of Common Stock, in connection with the exercise of outstanding warrants.

In total the Company issued a total of 6,255,518 shares of common stock, for the exercise of warrants, with net proceeds of $15,796,000.

A summary of the Company’s warrant activity and related information for the six months ended June 30, 2021 is as follows:

 Schedule of Warrants Activity

As part of the Company’s Convertible Debenture offering in June 2020 (as described in Note 7 – OID Convertible Debentures), the Company negotiated the ability to release the BIGToken business, as security for the OID Convertible Debentures, for the purposes of selling BIGToken. As consideration for the release, the Company agreed to require the purchaser of BIGToken to issue warrants in the new entity. The warrants were to represent 13% of the new entities issued and outstanding on a fully diluted basis upon closing. As disclosed in Note 2– Acquisitions, the Company entered into an agreement to merge BIGToken with FPVD on February 4, 2021, which required the issuance of 25,568,064,462 warrants. Based on a valuation from an independent third-party, the fair-market value of the warrants required to be issued was determined to be $885,000 based on implied 3-year volatility of 92.30%, a risk-free equivalent yield of 18% and stock price of $0.00006552.

AT THE MARKET SALES AGREEMENT

During the six months ended June 30, 2021, the Company sold 53,616 shares of common stock, resulting in proceeds of approximately $284,000, through sales under its At the Market (ATM) offering.

STOCK BASED COMPENSATION

During the Quarter ended June 30, 2021, the Company did not issue any new stock-based awards. Stock based compensation expense for the three and six months ended June 30, 2021 was $253,000 and $506,000 respectively.

Noncontrolling Interest

As disclosed in Note 2 – Acquisition, the Company entered into an agreement to merge BIGToken with FPVD on February 4, 2021. Since this was treated as a reverse merger, the transaction created a noncontrolling interest in FPVD. As a result, 8,682,368,578 shares were issued to noncontrolling parties, which was approximately 5.07% of the issued and outstanding shares at the date of the merger. Also, 8,318 shares of Series C Preferred were issued, which were convertible into 12,864,419,168 shares of common stock, or 7.52% of the issued and outstanding shares on the date of the merger. Since the Series C Preferred stock was convertible with no liquidation rights or other preferences, the 12,864,419,168 issuable shares were added to the calculation of the noncontrolling interest. As of the Acquisition Date and June 30, 2021, the noncontrolling interest was calculated to be approximately 13.00% and 37.60%, respectively. Transactions relating to the noncontrolling interest for the six months ended June 30, 2021 are summarized as follows:

 Schedule of Transactions Relating to Noncontrolling Interest

NOTE 10 – Fair Value of Financial Instruments

The carrying amounts of certain financial instruments, including cash and cash equivalents, restricted cash and accounts payable and accrued expenses, approximate their respective fair values due to the short-term nature of such instruments.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level in which to classify them for each reporting period. This determination requires significant judgments to be made. The Company considers marketable securities quoted on the OTC Pink sheets to be fair valued with Level 2 inputs. The Company had the following financial assets of June 30, 2021 and December 31, 2020:

 Schedule of Assets and Liabilities Measured at Fair Value on Recurring Basis

NOTE 11 – Segment Reporting

We have two reportable segments: (i) Investor data analysis technologies (Sequire) and (ii) Consumer based marketing services and data technologies (BIGToken). The Sequire segment includes the licensing of the Company’s proprietary SaaS platform and associated data analysis technologies. Additionally, the Sequire segment comprises consumer and investor targeted marketing solutions to allow users of our SaaS platform to act on the insights obtained through our technologies. Lastly, reported under Sequire is the newly acquired operating segment, LD Micro. The BIGToken segment includes the sale of advertising campaigns and proprietary consumer data obtained through our BIGToken application. The BIGToken segment includes certain operations from our discontinued sales verticals.

Our Chief Operating Decision Maker (CODM) does not evaluate operating segments using asset or liability information. The following table presents revenues and gross profits by reportable segment.

 Schedule of Revenue and Gross Profit by Reportable Segment

Revenue Disaggregation

The following table breaks out the revenue types for Sequire and BIGToken for the three and six months ended June 30:

 Schedule Of Revenue Disaggregation

As of June 30, 2021 and June 30, 2020, revenue contract liabilities were approximately $13,186,000 and $1,094,000, respectively.

NOTE 12 – Subsequent Events

The Company has evaluated all events that occurred after the balance sheet date through the date when the financial statements were issued to determine if they must be reported. The following are the events after the reporting period:

PPP Loan Forgiveness

On July 20, 2021, the Company received notification from its lender that the PPP Loan was forgiven in full by the U.S. Small Business Administration at which time the Company recognized the extinguishment of debt as Other Income.

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 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 condensed 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:

Executive Overview

Our key operating metrics and financial results for the first quarter of 2021 are as follows:

Sequire platform growth:

Financial results:

Reportable Segments

Our current operating business is Sequire, which consists of two components: Sequire and LD Micro. We report our financial performance inclusive of the BIGToken business as we currently hold a majority interest. Our Condensed Consolidated Financial Statements include the following segments: Sequire and BIGToken. The segment amounts included in MD&A are presented on a basis consistent with our internal management reporting. All differences between our internal management reporting basis and accounting principles generally accepted in the United States of America (“GAAP”), along with certain corporate-level and other activity, are included in Corporate and Other.

Business Focus

During the first half of 2021, we have continued to focus on : (i) the continued growth of our Sequire platform user base and (ii) the expansion of the LD micro events and offerings.

Covid-19

Our business has been impacted by the COVID-19 pandemic, which has resulted in authorities implementing numerous preventative measures to contain or mitigate the outbreak of the virus, such as travel bans and restrictions, limitations on business activity, quarantines, and shelter-in-place orders. These measures have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas, both regionally and worldwide, which have significantly impacted our business and results of operations. We are unable to predict the impact of the pandemic on user growth and engagement with any certainty, and we expect these trends to continue to be subject to volatility.

More recently, we believe the pandemic has contributed to an acceleration in the shift of commerce from offline to online, as well as increasing consumer demand for purchasing products as opposed to services, and we experienced increasing demand for our products as a result of these trends. The impact of the pandemic on our overall results of operations, remains highly uncertain for the foreseeable future.

We intend to continue to invest in our business based on our company priorities, and we anticipate that additional investments in our network infrastructure, as well as scaling our headcount to support our growth, will continue to drive expense growth in 2021.

Company Overview

About

We are a technology firm focused on enhancing communications between public companies and their investors. Our unique SaaS platform, among many features, it allows issuers to track their shareholders’ behaviors and trends, then use data-driven insights to engage with investors across marketing channels.

Our endeavor to unlock the value of data for our clients drove us to develop this platform, acquire LD Micro, and begin cultivating the Sequire Community. Each piece of the SRAX puzzle delivers valuable insights that assist our clients with their marketing and advertising efforts.

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.

Through the acquisition of LD Micro, we organize and host investor conferences within the micro and small- cap space, and plan to create several more niche events for the investor community.

We derive our revenues from the:

Sequire

The Sequire platform is a central hub where companies reach out and engage with shareholders, manage their outstanding securities, and identify potential investors.

This powerful software utilizes machine learning and advanced analytics to bring our clients actionable information that can be used to maximize ROI, as an innovative investor communication tool.

We built the Sequire platform to help our customers understand shareholder behavior, including the ability to identify buyers and sellers. Clients then have the ability to engage with targeted shareholder groups across marketing channels including email, social media, programmatic, 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. Every bit of this data helps how we target ads and craft messaging to leverage the desired outcome for a client.

An important part of monitoring shareholders is the greater context of the investment landscape. Sequire features real-time level-two trading data, the ability to monitor competition, news alerts, and more.

We are always seeking ways to improve our clients’ communications with their shareholders, and we built a custom survey feature so that they could ask questions to all their shareholders at once or to specified groups.

The Sequire platform also allows users to manage warrants, attaining high-level insight by year and month, including a list of expiring and outstanding warrants. They can then calculate what their proceeds could be if those warrants were issued before they expire. Clients can also keep tabs on investor relations programs and corporate communication firms, all in one place.

We expanded the functionality of Sequire to include the hosting of virtual events, as more and more networking functions are being held in the digital space. Clients can attend an event held by industry guests or hold a conference themselves. They then have the ability to import contacts from those events directly into their own list for later use and targeting.

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, whether they’re 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.

Virtual Events and LD Micro

LD Micro was originally founded in 2006 as an independent resource for the microcap world. It quickly grew into a premier event platform in the space, successfully connecting investors and promoting small cap businesses. In September of 2020, we acquired LD Micro, and hosted the 2020 Main Event on our Sequire Virtual Events platform. We are proud to say we had over 50K attendees and hosted webinars with 250 companies.

The LD Micro Main Event is one of the most influential conferences in the small-cap space, and our acquisition has been able to provide LD access to our growing database of 5M+ investors.

At our core, we are in the business of helping companies connect to their audience, and creating events where companies are presenting to investors is a great way to execute on our mission. The LD Micro Main Event is just the start.

We are currently expanding our slate of events to include specialty conferences for individual industries such as: EdTech, FinTech, Minerals, Pharma, etc. We have built up a retail investor community of 5M+, and the ability to help educate investors with these events is valuable to our investor community.

We see the Sequire Virtual Events platform growing into the premier investor event tool. With the help of our events team, companies have the ability to create and organize their own webinars at scale. The Covid-19 Pandemic certainly created growth in this space, but we believe that virtual events are the future of targeted investor communication.

Through the events platform, we have the ability to host a variety of virtual events and conferences including: investor conferences, earnings calls, shareholder meetings, annual, investor/analyst days, corporate town halls, roadshows, and more.

We believe functionality is key, and some of the features we offer include multi-presenter capabilities, integrated graphic presentation options, tech support, real-time analytics, audience polling, downloadable resource offerings, and more. Each presentation, when concluded, delivers an analytics report to the client for data-driven review.

We are offering users a seamless, centrally-managed virtual events solution that can be customized to any industry. Sequire Virtual Events has already demonstrated success with the LD Micro Main Event, and we will continue to devote resources to the growth of this area of our business.

Sequire Community

Building a thriving community is often an overlooked aspect of business. With a significant number of investors aware of the LDMicro brand, we are moving to ensure that those people become passionate advocates, engaging with each other on a wide range of topics.

We have plans to develop investor education tools, host professional investment events, and cultivate a mature, educated community. Our vision for the Sequire Community is that it becomes a place where people can communicate and network, to learn and grow as investors, and ultimately become brand advocates.

FINANCIAL CONDITION

Cash, Cash Equivalents, and Investments

Cash, cash equivalents, and marketable securities totaled approximately $34,190,000 and $8,898,000 as of June 30, 2021 and December 31, 2020. Our marketable securities have been obtained through our Sequire business as payment for our services. They consist predominantly of debt and equity securities, diversified among industries and individual issuers. The investments are all U.S. dollar-denominated securities, but also include foreign issuer securities to diversify risk. Cash and cash equivalents consist primarily of highly liquid investments such as money market funds and deposits held at major banks.

Liquidity and Capital Resources

We believe that our existing cash and cash equivalents, marketable securities, and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 months. Our future capital requirements will depend on many factors, including our subscription growth rate, subscription renewal activity, including the timing and the amount of cash received from customers, sales of our marketable securities, the expansion of sales and marketing activities, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of Sequire, and the current uncertainty in the global markets resulting from the ongoing COVID-19 pandemic on our customers’ businesses and operations. We may, in the future, enter into arrangements to acquire or invest in complementary businesses, products, and technologies. We may be required to seek additional equity or debt financing. In the event that we require additional financing, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital or generate cash flows necessary to expand our operations and invest in continued innovation, we may not be able to compete successfully, which would harm our business, operations and financial condition.

A substantial source of our cash from operations and investing activities is from our deferred revenue, which is included in the liabilities section of our condensed consolidated balance sheet. Deferred revenue consists of the unearned portion of our Sequire contracts, which will be recognized as revenue in accordance with our revenue recognition policy. As of June 30, 2021, we had deferred revenue of $13,186,000, all of which is classified as a current liability and expected to be recognized as revenue in the next 12 months, provided all other revenue recognition criteria have been met.

At the Market Sales Agreement

In May 2020, we entered into an at-the-market Sales Agreement with B. Riley FBR, Inc.  (“ATM”). Pursuant to the terms of the ATM, we may issue and sell up to $3,150,000 of our Common Stock, from time to time, through our B. Riley FBR, Inc. During the six months ended June 30, 2021, we sold 53,616 shares of Common Stock at a weighted average sales price of $5.62 and received net proceeds from such sales of $284,000. To date we have sold an aggregate of $302,000 of securities pursuant to our ATM and have future availability of $2,823,000.

Valuation

In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments, such as U.S. government securities, common and preferred stock, and mutual funds. If quoted prices in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or indirectly. Level 3 investments are valued using internally developed models with unobservable inputs. Assets and liabilities measured at fair value on a recurring basis using unobservable inputs are an immaterial portion of our portfolio.

Goodwill

We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (December 31 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The fair value of each reporting unit is estimated primarily through the use of a discounted cash flow methodology. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.

The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results, market conditions, and other factors. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit.

Components of Results of Operations

Sequire Revenues

Sequire Platform: We recognize revenue from the licensing of our Sequire platform, data, marketing and insight services performed in conjunction with the Sequire platform.

Conference Revenue. We recognize revenue from hosting conferences.

Cost of Revenue and Operating Expenses

Cost of revenue. Our cost of revenue consists primarily of expenses associated with the cost of media from third parties.

Employee Related Costs. These are the costs we incur to employ our staff.

Platform costs. Consist of the technology and content hosting of our Sequire platform and BIGToken platform.

Marketing, data services and sales. These are the costs we incur to market our products, data service fees and third-party selling costs.

Depreciation and Amortization. Depreciation and Amortization cost represent an allocation of the costs incurred to acquire the long-lived assets used in our business over their estimated useful lives. Our long-lived assets consist of property and equipment and internally developed software.

General and administrative. General and administrative expense consists primarily of human resources, information technology, professional fees, IT and facility overhead, and other general corporate expense. We expect our general and administrative expense to increase in absolute dollars primarily as a result of the increased costs associated with being a stand-alone public company. However, we also expect our general and administrative expense to fluctuate as a percentage of our revenue in future periods based on fluctuations in our revenue and the timing of such expense.

Results of operations

Selected Segment Financial Data

Quarter Ended June 30, 2021 compared to quarter ended June 30, 2020 (in $’s)