ITEM 1.

DESCRIPTION OF BUSINESS.

We develop platforms that automate the digital advertising market. Our focus is to provide technology tools that enable both publishers and advertisers to maximize their digital advertising initiatives.

As described later in this report, in October 2014 we acquired Steel Media and in December 2014 we acquired Five Delta. In October 2014 we also entered into the financing agreement with Victory Park Management, LLC, as administrative agent and collateral agent for the lenders and holders of notes and warrants issued thereunder, which we refer to as the Financing Agreement, the terms of which are described later in this report. The Financing Agreement facilitated our acquisition of Steel Media. Founded in 1999, Steel Media provides digital advertising services and display, mobile, video and email advertising inventory to both brands and advertising agencies. Five Delta is a managed advertising service that uses proprietary technology and methods to optimize digital advertising for its customers. Five Delta primarily utilizes quality first party data from platforms including Facebook, Yahoo, LinkedIn and Google in optimization decisions. Since closing these transactions we have begun integrating the operations of these two companies into our legacy business. We expect that the Steel Media acquisition will allow us to grow our SRAX buy-side business, and the Five Delta acquisition should provide our clients with options to buy advertising across all social media channels, including Facebook, Twitter, and Instagram.

We derive our revenues from:

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sales of digital advertising campaigns to advertising agencies and brands;

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

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sale and licensing of our GroupAd platform and related media;

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creation of custom platforms for buying media on SRAX for large brands; and

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sales of media to pharmaceutical companies and the publishing partners that service the industry through our SRAX MD platform.

SRAX – Real Time Bidding sell side representation . Our technology assists publishers in delivering their media inventory to the RTB exchanges. An RTB exchange is a method of selling and buying online display advertising, one ad impression at a time, utilizing computer algorithms to automatically buy and sell ads in real-time. Our tools provide reporting to these publishers about the sales of their media inventory on these exchanges. We believe that our tools assist publishers in maximizing their revenue. We contract with web and mobile publishers to sell their media inventory on the RTB exchanges, by having the publisher sign up on our portal to become one of our publishing partners. Once the publisher signs up, the traffic they deliver is evaluated by us for fraud potential. Once the site is approved, we provide the publisher with technology that allows us to deliver advertising to their approved sites or applications. This includes providing the partner with technology from our advertising server that they then place onto their webpage. This “tag” allows us to fill advertising space on the publisher’s website when we have an advertiser that would like to buy the space. Our platform presents all of the media inventory from our publishing partners to many different buyers at the same time, and then those buyers have the ability to bid on the inventory. Our system then takes the highest price offered and sells the space to that bidder. The price that advertisers are willing to pay for any specific placement is determined in real time and we seek to deliver the highest paid ad at any given time.

With the addition of Steel Media, we are providing our SRAX platform to brands and their advertising agencies. We are building custom platforms that allow our agency partners to launch and manage their own RTB campaigns. These efforts involve working with the brand and agencies to understand their marketing objectives and then customizing our buying platform to allow these clients to import their own first party consumer targeting data to maximize their media buys. We are also able to provide the clients access to third party consumer targeting data that allows them to further target their media buys. In some instances we are providing these services on a managed basis where the clients provide us with an insertion order and we launch and manage the program on the SRAX platform on their behalf.

With the integration of Five Delta technology into the SRAX platform, we are enhancing our customers’ ability to buy advertising on all social channels and search products. We are able to measure the effectiveness of a program across display, mobile, video, social and search which permits us to then be able to allocate our client's advertising budget to the most effective medium.

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GroupAd . GroupAd is a social media and loyalty platform that allows brands to launch and manage their social media initiatives. GroupAd allows brand marketers to select from a number of pre-created applications, and then launch these applications and loyalty programs on their social media sites, their mobile sites and their websites. With the addition of the SRAX RTB platform, we are helping brands to identify their influencers and then, utilizing this first party data, we are creating "look alike audiences." Look alike audiences are consumers who match the characteristics of the identified influencers. Once we create the "look alike audience," we are able to reach these consumers across the web and on social networks through our SRAX platform.

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

SRAX DI . We have found that many of our clients need to build a social media presence. SRAX DI provides the tools and services necessary to launch a presence on Facebook, Twitter, Instagram, Pinterest and other social networks. Our team works with customers to identify their needs and then helps them in the creation, deployment and management of their social media presence.

Steel Media . Steel Media serves the needs of brands and advertising agencies by helping its clients to navigate the complex digital advertising marketplace while executing campaigns across online display, email, mobile, and video channels. We believe that this multi-channel approach allows brands to execute cross-channel campaigns in order to reach a target audience at scale. Campaigns may run on one channel or across multiple channels. Steel Media currently focuses on four channels based on a combination of market demand and economics.

Steel Media historically operated much like a consulting or business process outsourcing firm, leveraging well established relationships with technology partners to provide its clients with various ways of engaging and influencing specific consumer and business-to-business audiences. The integration into Social Reality has enabled Steel Media to utilize our SRAX tools to buy and manage their programs. SRAX is also being used as a tool that is client facing to deliver reports and to allow clients to schedule their own media buys. Steel Media engages with its clients on both the sales and campaign management sides of the business. Over the course of its 14-year history, Steel Media has created what we believe to be an advantage in the marketplace by honing its skills in managing digital advertising campaigns, and developing preferred relationships with some of the largest technology partners in the industry. Steel Media has strategically focused its sales efforts on developing relationships with advertising agencies and has worked with dozens of agencies over the years, representing some of the world’s most recognized brands. Proprietary processes are employed to help brands target specific audiences by identifying groups based on age, behavioral patterns, geographic location, ethnicity, household income, or various other attributes. This targeting capability is intended to allow brands to create a direct relationship with consumers.

Marketing and sales

We market our services through our in house sales team, which is divided into two distinct activities. One group is responsible for brand advertisers and advertising agencies, and the other is responsible for publisher acquisition and management. Our in house marketing is focused on social media, including Facebook, LinkedIn and Twitter, public relations (PR), industry events and the creation of white papers which assist in our marketing efforts and are used as lead generation tools for our sales team. We also attend industry specific events such as AdTech, AdExchanger, and Salesforce annual events, and local events in Los Angeles and New York.

We do not generate our own media inventory nor do we currently own or operate websites that drive traffic to our marketing campaigns. We rely on our publishing partners to provide the media inventory that we sell and use to promote our marketing campaigns as well as to assist in driving user traffic to these campaigns.

Intellectual property

We currently rely on a combination of trade secret laws and restrictions on disclosure to protect our intellectual property rights. Our success depends on the protection of the proprietary aspects of our technology as well as our ability to operate without infringing on the proprietary rights of others. We also enter into proprietary information and confidentiality agreements with our employees, consultants and commercial partners and control access to, and distribution of, our software documentation and other proprietary information.

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Competition

We operate in a highly competitive environment. Our competitors include companies who focus on the RTB market and companies who are focused on providing social media applications on a managed and self-service basis. We believe we compete based on both our ability to assist our customers to obtain the best available prices as well as our excellent customer service. The barrier to entry to our industry is low. We believe that in the future we will face increased competition from these companies as they expand their operations, as well as new entrants to our industry. Most of the entities against which we compete, or may compete, are larger and have greater financial resources than our company. Competition for advertising placements among current and future suppliers of Internet navigational and informational services, high-traffic websites and Internet service providers, as well as competition with other media for advertising placements, could result in significant price competition, declining margins and reductions in advertising revenue. In addition, as we continue our efforts to expand the scope of our services, we may compete with a greater number of publishers and other media companies across an increasing range of different services, including vertical markets where competitors may have advantages in expertise, brand recognition and other areas. If existing or future competitors develop or offer products or services that provide significant performance, price, creative or other advantages over those offered by us, our business, results of operations and financial condition could be negatively affected. We also compete with traditional advertising media, such as direct mail, television, radio, cable, and print, for a share of advertisers' total advertising budgets. Many current and potential competitors enjoy competitive advantages over us, such as longer operating histories, greater name recognition, larger customer bases, greater access to advertising space on high-traffic websites, and significantly greater financial, technical, sales, and marketing resources. As a result, we may not be able to compete successfully. If we fail to compete successfully, we could lose customers or media inventory and our revenue and results of operations could decline.

Government regulation

Aspects of the digital marketing and advertising industry and how our business operates are highly regulated. We are subject to a number of domestic and, to the extent our operations are conducted outside the U.S., foreign laws and regulations that affect companies conducting business on the Internet and through other electronic means, many of which are still evolving and could be interpreted in ways that could harm our business. In particular, we are subject to rules of the Federal Trade Commission, or FTC, the Federal Communications Commission, or FCC, and potentially other federal agencies and state laws related to our advertising content and methods, the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, which establishes certain requirements for commercial electronic mail messages and specifies penalties for the transmission of commercial electronic mail messages that follow a recipient’s opt-out request or are intended to deceive the recipient as to source or content, and federal and state regulations covering the treatment of member data that we collect from endorsers.

U.S. and foreign regulations and laws potentially affecting our business are evolving. We have not yet developed an internal compliance program nor do we have policies in place to monitor compliance. Instead, we rely on the policies of our publishing partners and advertising clients. If we are unable to identify all regulations to which our business is subject and implement effective means of compliance, we could be subject to enforcement actions, lawsuits and penalties, including but not limited to fines and other monetary liability or injunction that could prevent us from operating our business or certain aspects of our business. In addition, compliance with the regulations to which we are subject now or in the future may require changes to our products or services, restrict or impose additional costs upon the conduct of our business or cause users to abandon products or aspects of our services. Any such action could have a material adverse effect on our business, results of operations and financial condition.

The FTC adopted Guides Concerning the Use of Endorsements and Testimonials in Advertising on October 5, 2009. These guides recommend that advertisers and publishers clearly disclose in third-party endorsements made online, such as in social media, if compensation was received in exchange for said endorsements. Because some of our marketing campaigns entail the engagement of consumers to refer other consumers in their social networks to view ads or take action, and both we and the consumer may earn cash and other incentives, and any failure on our part to comply with these guides may be damaging to our business. We currently do not take any steps to monitor compliance with these guides. In the event of a violation, the FTC could potentially identify a violation of the guides, which could subject us to a financial penalty or loss of endorsers or advertisers.

In the area of information security and data protection, many states have passed laws requiring notification to users when there is a security breach for personal data, such as the 2002 amendment to California’s Information Practices Act, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any failure on our part to comply with these laws may subject us to significant liabilities.

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We are also subject to federal, state, and foreign laws regarding privacy and protection of user data. Any failure by us to comply with these privacy-related laws and regulations could result in proceedings against us by governmental authorities or others, which could harm our business. In addition, the interpretation of data protection laws, and their application to the Internet is unclear and in a state of flux. There is a risk that these laws may be interpreted and applied in conflicting ways from state to state, country to country, or region to region, and in a manner that is not consistent with our current data protection practices. Complying with these varying requirements could cause us to incur additional costs and change our business practices. Further, any failure by us to adequately protect our members’ privacy and data could result in a loss of member confidence in our services and ultimately in a loss of members and customers, which could adversely affect our business.

We generally only receive user data authorized through the Facebook user API. Access to such information, in addition to being limited in scope by Facebook policies and procedures, requires the affirmative authorization of the participating user, as stipulated by Facebook. In the event of a campaign, we post a privacy policy and user agreement, which describe the practices concerning the use, transmission and disclosure of member data in connection with such campaign. Any failure by us to comply with our privacy policy and user agreement could result in proceedings against us by users, customers, governmental authorities or others, which could harm our business.

Many states have passed laws requiring notification to subscribers when there is a security breach of personal data. There are also a number of legislative proposals pending before the United States Congress, various state legislative bodies and foreign governments concerning data protection. In addition, data protection laws in Europe and other jurisdictions outside the United States may be more restrictive, and the interpretation and application of these laws are still uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have an adverse effect on our business. Furthermore, the Digital Millennium Copyright Act has provisions that limit, but do not necessarily eliminate, our liability for linking to third-party websites that include materials that infringe copyrights or other rights, so long as we comply with the statutory requirements of this act. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

Our users communicate across social and/or web-based channels. These communications are governed by a variety of U.S. federal, state, and foreign laws and regulations. In the United States, the CAN-SPAM Act establishes certain requirements for the distribution of “commercial” email messages for the primary purpose of advertising or promoting a commercial product, service, or Internet website and provides for penalties for transmission of commercial email messages that are intended to deceive the recipient as to source or content or that do not give opt-out control to the recipient. The FTC is primarily responsible for enforcing the CAN-SPAM Act, and the U.S. Department of Justice, other federal agencies, state attorneys general, and Internet service providers also have authority to enforce certain of its provisions.

The CAN-SPAM Act’s main provisions include:

The CAN-SPAM Act preempts most state restrictions specific to email marketing. However, some states have passed laws regulating commercial email practices that are significantly more punitive and difficult to comply with than the CAN-SPAM Act, particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as adult content or content regarding harmful products. Some portions of these state laws may not be preempted by the CAN-SPAM Act.

Violations of the CAN-SPAM Act’s provisions can result in criminal and civil penalties, including statutory penalties that can be based in part upon the number of emails sent, with enhanced penalties for commercial email senders who harvest email addresses, use dictionary attack patterns to generate email addresses, and/or relay emails through a network without permission.

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With respect to text message campaigns, for example, the CAN-SPAM Act and regulations implemented by the FCC pursuant to the CAN-SPAM Act, and the Telephone Consumer Protection Act, also known as the Federal Do-Not-Call law, among other requirements, prohibit companies from sending specified types of commercial text messages unless the recipient has given his or her prior express consent. We, our users and our advertisers may all be subject to various provisions of the CAN-SPAM Act. If we are found to be subject to the CAN-SPAM Act, we may be required to change one or more aspects of the way we operate our business.

If we were found to be in violation of the CAN-SPAM Act, other federal laws, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email, whether as a result of violations by our users or any determination that we are directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our reputation and our business.

In addition, because our services are accessible worldwide, certain foreign jurisdictions may claim that we are required to comply with their laws, including in jurisdictions where we have no local entity, employees, or infrastructure.

Employees

At March 15, 2015 we had 37 full-time employees. There are no collective bargaining agreements covering any of our employees. In January 2013 we entered into an agreement with an unrelated third party under which through the third party provider we co-employ 47 individuals in Mexico. The Mexican service provider assumes all responsibility for payroll, payroll taxes, workers’ compensation coverage and certain other administrative functions for our employees in Mexico and we pay a fee equal to the amount of compensation paid to these employees plus an 8% administrative override amount. The agreement expired by its term in January 2014, however, the arrangement has continued on the same basis following the expiration of the agreement.

Our history

We were originally organized in August 2009 as a California limited liability company under the name Social Reality, LLC, and we converted to a Delaware corporation effective January 1, 2012. Social Reality, LLC began business in May, 2010. Upon the conversion, we changed our name to Social Reality, Inc.

Acquisition of Steel Media

On October 30, 2014, we acquired 100% of the capital stock of Steel Media from Mr. Richard Steel pursuant to the terms and conditions of a Stock Purchase Agreement, dated October 30, 2014, by and among our company, Steel Media and Mr. Steel. As consideration for the purchase of Steel Media, we agreed to pay Mr. Steel up to $20 million, consisting of:

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a cash payment at closing of $7.5 million;

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a cash payment of $2 million which is being held in escrow pursuant to the Escrow Agreement, dated October 30, 2014, by and among Wells Fargo Bank, National Association, our company and Mr. Steel, which we refer to as the Indemnity Escrow Agreement, to satisfy certain indemnification obligations to the extent such arise under the Stock Purchase Agreement;

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a one year secured subordinated promissory note in the principal amount of $2.5 million, which we refer to as the Steel Note, which is secured by the 2,386,863 shares of our Class A common stock, which we refer to as the Escrow Shares; and

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an earn out payment of up to $8 million.

The earn out consideration is payable upon the attainment of EBITDA targets of Steel Media during the two year period following the closing, 60% of which may be satisfied in shares of the our Class A common stock subject to the satisfaction of certain conditions set forth in the Stock Purchase Agreement. Further, in the event of:

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a change of control of our company or Steel Media, or

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Mr. Steel’s termination without “cause” or resignation for “good reason" during the two year period following the closing,

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we are obligated to pay Mr. Steel 100% of the earn out consideration (less any amount previously paid to Mr. Steel). To the extent we are prohibited from paying any earn out consideration in cash and Mr. Steel is prohibited from receiving same under the terms of the Subordination Agreement described earlier in this report, Mr. Steel has the right to request that we pay him the prohibited cash earn out payment in shares of our Class A common stock.

The Steel Note bears interest at the rate of 5% per annum and the principal and accrued interest is due and payable on October 30, 2015. The amounts due under the Steel Note accelerate and become immediately due and payable upon the occurrence of an event of default as described in the Steel Note, and upon an event of default under the Steel Note, the interest rate increases to 10% per annum. The Steel Note may be prepaid upon five days’ notice to Mr. Steel, and the Steel Note must be prepaid upon a change of control of our company or Steel Media. The Steel Note is also subject to certain mandatory partial prepayments for each of the fiscal quarters ending December 31, 2014, March 31, 2015 and June 30, 2015 in an amount equal to 25% of the “Excess Cash Amount” as defined in the Steel Note.

The obligations under the Steel Note are subordinated to our obligations under the Financing Agreement pursuant to the terms of the Subordination Agreement and are secured by the Escrow Shares. Upon an event of default under the Steel Note, if the Escrow Shares are released to Mr. Steel, all amounts due under the Steel Note will be deemed paid and the Steel Note will be satisfied in full, provided that:

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all of the Escrow Shares (or at least 90% of the Escrow Shares, in the case of a cut-back required by the SEC as a result of limitations under SEC Rule 415, as defined in the Registration Rights Agreement described below) are subject to a then effective SEC registration statement having a customary plan of distribution for resale;

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the Escrow Shares are freely tradable by Mr. Steel, without restriction of any kind or nature (other than insider trading laws); and

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the certificates evidencing the Escrow Shares are free of any legend or other restrictive notation.

If these conditions are not each satisfied at the time of release of the Escrow Shares to Mr. Steel, then the principal and interest due under the Steel Note remains outstanding, except that it will be deemed repaid from time to time, dollar for dollar, from the proceeds realized by Mr. Steel from the sale or other disposition of the Escrow Shares. The Escrow Shares are considered issued but not outstanding, and Mr. Steel does not have any voting or other rights as a stockholder to the Escrow Shares during the period they are held in escrow. The Escrow Shares are being held by an escrow agent pursuant to the terms of an Escrow Agreement, dated October 30, 2014, by and among Mr. Steel, Social Reality and Lowenstein Sandler LLP, as escrow agent. Subject to the terms and conditions of the Stock Purchase Agreement and the Subordination Agreement, upon a release of the Escrow Shares to Mr. Steel, Mr. Steel has the right to put the Escrow Shares to us at a per share price of $1.0474.

On October, 30, 2014, in connection with the acquisition of Steel Media, we entered into a Registration Rights Agreement with Mr. Steel pursuant to which we agreed to register any earn out shares issued to him or Escrow Shares released to him. We granted Mr. Steel demand registration rights over the Escrow Shares and the earn out shares which he may exercise 90 days after such shares are issued or released to him. In addition, Mr. Steel has the right to include any earn out shares issued to him or Escrow Shares released to him in registration statements for offerings by us as well as offerings of our Class A common stock held by third parties. The terms of the Registration Rights Agreement contain underwriter and Rule 415 cutback provisions in which the number of either earn out shares or Escrow Shares, or both, that we may include in a subsequent registration statement to be filed with the SEC will be reduced subject to certain allocation provisions as set forth in the Registration Rights Agreement. We agreed to pay all costs and expenses with such registration statement, other than Mr. Steel’s selling expenses. The Registration Rights Agreement contains customary indemnification provisions. Under the terms of the Registration Rights Agreement, Mr. Steel agreed to certain restrictions on the amount of earn out shares that may be sold by him without our consent; provided, however, that these restrictions will automatically terminate upon an event of default under the Steel Note, or our failure to fully pay the earn out consideration if and when due.

Acquisition of Five Delta

On December 19, 2014 we acquired 100% of the outstanding capital stock of Five Delta in exchange for 600,000 shares of our Class A common stock pursuant to the terms and conditions of the Share Acquisition and Exchange Agreement dated December 19, 2014 by and among Social Reality, Five Delta and the stockholders of Five Delta, which we refer to as the Five Delta Agreement.

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Under the terms of the Five Delta Agreement, 300,000 shares of the Class A common stock were deposited in escrow by the holders with the escrow agent pending satisfaction of certain post-closing conditions as described in the agreement. If these post-closing conditions are not satisfied by the second annual anniversary of the closing date, all or a portion of the escrow shares are subject to forfeiture. While the escrow shares remain in escrow, the holders granted Mr. Chris Miglino, our Chief Executive Officer, a voting proxy over the escrow shares. The Five Delta stockholders also granted us a right of first refusal over the shares of our Class A common stock tendered as consideration for a four year period from the closing date.

The Five Delta stockholders also entered into 24 month lock up agreements at the closing of the Five Delta Agreement. The lock up agreements provide that one-half of our shares of Class A common stock acquired in the transaction will be released from the lock up on the one year anniversary of the closing date, with the balance released on the two year anniversary of the closing date. Following the release of any of the shares from the lock up agreement, the holders agreed to limit the resale of such shares based upon a numerical formula tied to the trading volume of our Class A common stock and agreed that all permitted resales will be made at the then current bid price of our Class A common stock. The lock up automatically terminates upon a change of control of our company.

ITEM 1.A

RISK FACTORS.

Before you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected.

Risks Related to our Business

We have a history of losses.  Recent transactions will have material impacts on our financial results in future periods and there are no assurances we will report profitable operations in the foreseeable future.  

We incurred a net loss of $4.4 million for 2014 and a net loss of $1.75 million in 2013.  At December 31, 2014 we had an accumulated deficit of $7.4 million. During the fourth quarter of 2014 we acquired Steel Media and Five Delta, and entered into a Financing Agreement dated October 30, 2014.  While these acquisitions will significantly increase our revenues in future periods, our operating expenses will also significantly increase, as will our interest expense.  Our future success depends upon our ability to grow the revenues and profits in our agency and brand-driven buy-side business which is primarily related to our recently acquired Steel Media subsidiary, as well as our ability to grow the revenues and profits from our publisher and technology-driven sell-side business which is primarily our historical operations.  There are no assurances that we will be able to increase our revenues and cash flow to a level which supports profitable operations.  We may continue to incur losses in future periods until such time, if ever, as we are successful in significantly increasing our revenues and cash flow beyond what is necessary to fund our ongoing operations, pay our obligations under the Financing Agreement and pay any earn out amounts which Mr. Steel may be entitled to receive.  If we are able to significantly increase our revenues in future periods, the rapid growth which we are pursuing will strain our organization and we may encounter difficulties in maintaining the quality of our operations. If we are not able to grow successfully, it is unlikely we will be able to fully benefit from the acquisition of Steel Media, generate sufficient cash from operations to pay our operating expenses and service our debt obligations, or report profitable operations in future periods.

We have a limited operating history.

Our limited operating history means that there is a high degree of uncertainty in our ability to execute our business plan, obtain customers and create new products and services, respond to competition or operate the business, as management has not previously undertaken such actions as a company. Our inability to achieve any of the foregoing could materially and adversely affect our business, financial condition and results of operations in future periods.

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There are no assurances we will successfully integrate Steel Media and/or Five Delta into our business which would adversely affect the combined company’s future results.

In October 2014 we closed our acquisition of Steel Media, and in December 2014 we closed our acquisition of Five Delta.  The success of these acquisitions will depend, in large part, on the ability of the combined company to realize anticipated benefits from combining the businesses of the companies. Our management has limited experience with integrating acquired companies' business and operations.  The failure to successfully integrate and to successfully manage the challenges presented by the integration process may result in the failure to achieve some or all of the anticipated benefits of the transactions, which may have a material adverse effect on our operations and financial condition. Potential difficulties that may be encountered in the integration process include the following:

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the ability of the acquired companies to continue to report revenues and earnings at historic levels;

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possible loss by one or both of the acquired companies of material customers post-closing;

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using the combined company’s cash and other assets efficiently to develop the business of the combined company;

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appropriately managing the liabilities of the combined company;

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potential unknown or currently unquantifiable liabilities associated with the acquisitions and the operations of the combined company;

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certain terms of the Steel Media Stock Purchase Agreement which limit Mr. Steel’s obligations to indemnify us in certain instances which could result in unforeseen expenses to us;

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potential unknown and unforeseen expenses and delays associated with the acquisitions;

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performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by integrating the companies’ operations;

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necessary changes in the operations and culture of the acquired companies post-closing in order to accommodate the changes from privately-held companies to subsidiaries of a public company;

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the impact of the earn out payments Mr. Steel may receive with respect to our results of operations in future periods;

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managing two sales teams with disparate products and compensation plans;

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significant increases in our operating expenses; and

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additional business, financial and operating risks we have yet to identify.

There are no assurances that the acquisitions will ultimately result in the realization of the anticipated benefits.  If we are unable to realize the perceived benefits from these acquisitions, we may be required to impair some or all of the goodwill associated with these acquisitions which would materially adversely impact our results of operations in future periods.

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

The terms of the Financing Agreement include ongoing requirements to, among other actions, meet financial covenants including minimum leverage and current ratios, and interest and fixed charge coverages. The terms of the Financing Agreement create restrictions on how we undertake certain future events, including:

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entering into new debt or equity financing transactions;

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requiring 100% of any capital that we raise in new financings to be used to pay down the amount of the notes issued under the Financing Agreement at a 4% premium, subject to decrease in accordance with the Financing Agreement;

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making certain payments or distributions;

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acquisitions;

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dispositions of assets or business lines;

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affiliate transactions;

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engaging in new lines of business; and

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the investment of cash,

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among other actions.  Our failure to conduct our business within the confines of these contractual restrictions could result in an event of default under the Financing Agreement.  The Financing Agreement contains various other events of default such as:

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failure to pay principal or interest;

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filing of, or proceedings for bankruptcy or reorganization;

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creation of non-permitted liens against company assets or collateral;

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breach or misrepresentation of covenants, representations or warranties;

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the occurrence of a material adverse effect;

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loss of the CEO, or loss and non-timely replacement of the President;

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breaches or material adverse events resulting in excess of a $100,000 liability;

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breaches or defaults not remedied within prescribed cure periods;

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failure of the Class A common stock to be quoted or listed on the OTCQB Tier of the OTC Markets, or if the Class A common stock becomes listed on a national securities exchange, such national securities exchange; and,

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a change in control of our company.

Upon default, remedies range from notice and cure, to acceleration of both principal and interest.  Our operations may not generate sufficient cash to enable us to service our debt. Upon an event of default under the Financing Agreement, if we were unable to cure the default within the prescribed periods, or at all, the lender could increase our interest rates or accelerate all amounts then due.  If we were unable to repay these obligations, the lender could foreclose on our assets and collateral, in which case our ability to continue our business and operations as then conducted would be in jeopardy.  If the lender should foreclose on our assets, it is likely you would lose your entire investment in our company.  A default under the terms of the Financing Agreement would also likely trigger a default under the note we issued to Mr. Steel at the closing of the Steel Media acquisition which would accelerate the obligations owed to Mr. Steel.  

The terms of the promissory note issued in the Steel Media acquisition also contain financial and operating terms, representations and covenants that may restrict our ability to efficiently operate our business, or if breached, could result in acceleration of principal and interest payments and dilution through the release of the Escrow Shares.

On October 30, 2014 we issued the Steel Note, to Mr. Steel as partial consideration for our acquisition of Steel Media.  As collateral, we deposited 2,386,863 Escrow Shares into escrow with a third party escrow agent.  This note is subordinated to the notes issued under the terms of the Financing Agreement.  As with the Financing Agreement, the Steel Note contains certain covenants which may restrict our ability to operate our consolidated business, and contains events of default which, if not cured, could result in the release of the Escrow Shares to Mr. Steel.  An event of default under the Steel Note would in all likelihood result in an event of default under the Financing Agreement.  In that event, it us unlikely we would be able to continue our business and operations as they are presently conducted.  In such event, you could lose your entire investment in our company.  

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

Our debt obligations are currently comprised of a senior note issued under the Financing Agreement in the principal amount of $9 million, which is scheduled to mature in October 2017, and the $2.5 million Steel Note which matures in October 2015.  The terms of both the Financing Agreement and the Steel Note contain certain mandatory prepayment requirements which generally require us to calculate excess cash flow on a quarterly basis, and remit approximately 62.5% of this excess cash to the lenders.  This dramatically reduces cash flow available to the company for working capital, accretion of a cash reserve, growth initiatives, or additional acquisitions.  These obligations may adversely further 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.  In addition, the mandatory prepayments under the Financing Agreement will make it difficult and unlikely that we will accumulate sufficient cash to fully satisfy the Steel Note in cash when due, and could hinder our ability to make the required earn out payments to Mr. Steel, assuming the threshold criteria are met.

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The earn out payments which may be made to Mr. Steel under the terms of the acquisition agreement for Steel Media may adversely impact our cash flows in future periods.  Under certain circumstances we can pay a portion of the earn out payments in shares of our Class A common stock which will be dilutive to our existing stockholders.

To complete the acquisition of Steel Media, we negotiated two annual earn out payments to be made to Mr. Steel based upon the satisfaction of certain targets for Steel Media for the two earn out periods ending October 31, 2015 and October 31, 2016, each up to a maximum of $4 million.  If the earn outs are earned, under certain conditions we can pay up to 60% of each annual earn out in shares of our Class A common stock based upon the fair market value of the stock when issued.  The earn out payments are only required to the extent that Steel Media has achieved certain adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, targets. However, the adjusted EBITDA targets of approximately $4.1 million for the 2015 period and approximately $4.9 million for the 2016 period are only slightly above the earn out amounts, providing little additional cash for other debt service, growth or working capital.  If we elect to satisfy up to 60% of each earn out payment in shares of our Class A common stock, the issuance of these additional shares will be dilutive to our current stockholders and could result in Mr. Steel, who is currently an executive officer and member of our board of directors, obtaining a significant voting interest in our company, thereby increasing his control of our business and operations.  

We may need additional financing which we may not be able to obtain on acceptable terms.  While the Financing Agreement is outstanding, all funds we receive from the issuance of additional securities must be used to repay amounts due the lender under the Financing Agreement, possibly further hindering our ability to raise capital upon acceptable terms.  

We may need to raise additional working capital to fund expected growth in our company and for possible future, as yet unidentified, acquisitions.  Our future capital requirements depend on a number of factors, including our operations, the financial condition of an acquisition target and its need for capital, our ability to internally fund our working capital needs, and our ability to manage the growth of our business.  Given the size of our company and the recently completed acquisitions which we have yet to fully integrate, we expect to incur certain difficulties if we should seek to raise additional capital through the issuance of equity or debt securities.  In addition, under the terms of the Financing Agreement, we are required to use the proceeds from any sales of equity or debt securities to reduce the amounts owed the lender at a 4% premium, subject to decrease in accordance with its terms, which may make it more difficult to attract investments.  We have granted the holder of the Financing Warrant a right to participate in future offerings, however, there are no assurances it will choose to participate.  If, however, we should decide to seek additional working capital and are able to secure commitments upon terms satisfactory to us, and we raise additional capital through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing stockholders will be reduced and those stockholders may experience significant dilution. In addition, new securities may contain certain rights, preferences or privileges that are senior to those of our Class A common stock. We cannot assure you that we will be able to raise the capital as needed in the future on terms acceptable to us, if at all. If we do not raise capital as needed, we may be unable to operate our business or fully implement our acquisition expansion strategy.

Our success is dependent upon our ability to effectively expand and manage our relationships with our publishers.

We do not generate our own media inventory. Accordingly, we are dependent upon our publishing partners to provide the media which we sell. We depend on these publishers to make their respective media inventories available to us to use in connection with our campaigns that we manage, create or market. These relationships are based on both written agreements and project by project orders. Our growth depends, in part, on our ability to expand and maintain our publisher relationships within our network and to have access to new sources of media inventory such as new partner websites and Facebook pages that offer attractive demographics, innovative and quality content and growing Web user traffic volume. Our ability to attract new publishers to our networks and to retain Web publishers currently in our networks will depend on various factors, some of which are beyond our control. These factors include, but are not limited to, our ability to introduce new and innovative products and services, our pricing policies, and the cost-efficiency to Web publishers of outsourcing their advertising sales. In addition, the number of competing intermediaries that purchase media inventory from Web publishers continues to increase. In the event we are not able to maintain effective relationships with our publishers, our ability to distribute our advertising campaigns will be greatly hindered which will reduce the value of our services and adversely impact our results of operations in future periods.

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If we were to lose access to the Facebook platform, our Group Ad and SRAX DI growth would be limited and we could lose our existing revenue from these sources.

Facebook currently provides access to companies to build applications on their platform. We have built our GroupAd platform to use the Facebook application programming interface, or APIs.  While we expect that a material portion of our revenues in the near term will be generated through our Steel Media Group, the loss of access to the Facebook platform would limit our ability to effectively grow a portion of our historical operations.  We are subject to Facebook’s standard terms and conditions for application developers, which govern the promotion, distribution and operation of applications on the Facebook platform. Facebook reserves the right to change these terms and conditions at any time. Our business would be harmed if Facebook:

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discontinues or limits access to its platform by us and other application developers;

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modifies its terms of service or other policies, including fees charged to, or other restrictions on, us or other application developers, or changes how the personal information of its users is made available to application developers on the Facebook platform or shared by users;

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establishes more favorable relationships with one or more of our competitors; or

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develops its own competitive offerings.

We have benefited from Facebook’s strong brand recognition and large user base. Facebook has broad discretion to change its terms of service and other policies with respect to us and other developers, and any changes to those terms of service may be unfavorable to us. Facebook may also change its fee structure, add fees associated with access to and use of the Facebook platform, change how the personal information of its users is made available to application developers on the Facebook platform or restrict how Facebook users can share information with friends on their platform. In the event Facebook makes any changes in the future, we may have to modify the structure of our campaigns which could impact the effectiveness of our campaigns and adversely impact our results of operations in future periods.

In the beginning of 2014 we changed our primary ad server from Google to our proprietary platform. Our technology is newly implemented, and such change adversely impacted our revenue in 2014. We are uncertain that we will be able to maintain the revenue levels that we generated while using the Google ADX platform.

We initially built our technology that runs our SRAX RTB business utilizing Google’s API’s. In the fourth quarter of 2013 we started the development of our own platform that allowed us to bring multiple demand partners into one system. Our intent was to move to a proprietary system that would reduce our reliance on any single demand partner or exchange. During the first quarter of 2014 we made this transition, which caused downtime between ending our reliance on Google ADX and launching our proprietary platform.  Our revenues in the second and third quarters of 2014 continued to be adversely impacted by this transaction.  We have only been operating on our proprietary system for a short period of time and there are no assurances it will operate as effectively as we expect.  We are unable to determine at this time what long-term impact, if any, the usage of our proprietary platform will have on our revenues and it is possible that we will not experience the same level of quarter over quarter growth.

If we lose access to RTB inventory buyers our business may suffer.

In an effort to reduce our dependency on any one provider of advertising demand, in the first quarter of 2014 we created a platform that utilizes feeds from a number of demand sources for our inventory. We believe that our proprietary technology assists us in aggregating this demand, as well as providing the tools needed by our publishing partners to evaluate and track the effectiveness of the demand that we are aggregating for them. In the event that we lose access to a majority of this demand, our revenues would be impacted and our results of operations would be materially adversely impacted until such time, if ever, as we could secure alternative sources of demand for our inventory.

If advertising on the Internet loses its appeal, our revenue could decline.

Our business model may not continue to be effective in the future for a number of reasons, including:

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a decline in the rates that we can charge for advertising and promotional activities;

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our inability to create applications for our customers;

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Internet advertisements and promotions are, by their nature, limited in content relative to other media;

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companies may be reluctant or slow to adopt online advertising and promotional activities that replace, limit or compete with their existing direct marketing efforts;

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companies may prefer other forms of Internet advertising and promotions that we do not offer;

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the quality or placement of transactions, including the risk of non-screened, non-human inventory and traffic, could cause a loss in customers or revenue; and

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regulatory actions may negatively impact our business practices.

If the number of companies who purchase online advertising and promotional services from us does not grow, we may experience difficulty in attracting publishers, and our revenue could decline.

Additional acquisitions may disrupt our business and adversely affect results of operations.

The two recent acquisitions of Steel Media and Five Delta have been a significant element of our business strategy, and we may continue to pursue acquisitions in an effort to increase revenue, expand our market position, add to our technological capabilities, or for other purposes. However, any future acquisitions would likely involve risk, including the following:

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the identification, acquisition and integration of acquired businesses requires substantial attention from management. The diversion of management’s attention and any difficulties encountered in the transition process could hurt our business;

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the anticipated benefits from an acquisition may not be achieved; we may be unable to realize expected synergies from an acquisition or we may experience negative culture effects arising from the integration of new personnel;

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difficulties in integrating the technologies, solutions, operations, and existing contracts of the acquired business;

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we may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company, technology, or solution;

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to pay for future acquisitions, we could issue additional shares of our Class A common stock or pay cash, raised through equity sales or debt issuance. The issuance of any additional shares of our Class A common stock would dilute the interests of our current stockholders, and debt transactions would result in increased fixed obligations and would likely include covenants and restrictions that would impair our ability to manage our operations; and

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new business acquisitions can generate significant intangible assets that result in substantial related amortization charges and possible impairments.

While our general growth strategy includes identifying and closing additional acquisitions, we are not presently a party of any agreements or understandings.  There are no assurances we will acquire any additional companies.  

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We have placed shares in escrow to secure our payment of the $2.5 million note to Mr. Steel.  If we were to default upon the note, the Escrow Shares would be released from escrow and considered outstanding which would be dilutive to our existing stockholders.  In addition, he could exercise his right to put the shares back to us.

As collateral under the note issued to Mr. Steel, we deposited the 2,386,863 Escrow Shares into escrow with a third party escrow agent.  The shares are not currently considered outstanding.  If we were to default under the terms of the note, the shares would be released to Mr. Steel and all amounts due under the note will be deemed paid and the Steel Note will be satisfied in full provided that we have satisfied certain conditions, including the registration of the resale of such shares under an effective registration statement filed with the SEC and Mr. Steel's ability to freely trade such shares, among other conditions.  The release of the Escrow Shares to Mr. Steel will be dilutive to our existing stockholders.  In addition, if these conditions are not each satisfied at the time of release of the Escrow Shares to Mr. Steel, then the principal and interest due under the note remains outstanding except that it will be deemed repaid from time to time, dollar for dollar, from the proceeds realized by Mr. Steel from the sale or other disposition of the Escrow Shares.  In that event, we could remain liable for a significant portion of the obligations due under the note issued to Mr. Steel even though the Escrow Shares were released to him.  Finally, upon the release of the Escrow Shares to Mr. Steel, he has the right to put the shares back to us at a put price of $1.0474 per share.  If Mr. Steel were to exercise the put right and we were obligated to repurchase some or all of the Escrow Shares, our liquidity would be adversely impacted and we may not have sufficient working capital to fund our operating expenses and pay our obligations as they become due, including under the Financing Agreement.  If we do not have sufficient funds to pay the put price to Mr. Steel, we could be subject to additional claims by him in seeking to enforce his rights which would materially and adversely impact our business and operations.

We granted the Financing Warrant holder a put right.  The possible exercise of this put right could materially impact our liquidity in future periods.

Pursuant to the Financing Agreement, we issued to the lender a five year warrant to purchase 2,900,000 shares of our Class A common stock at an exercise price of $1.00 per share, subject to adjustment, which we refer to as the Financing Warrant. Pursuant to the Financing Warrant, the warrant holder has the right, at any time after the earlier of April 30, 2016 and the maturity date of the note(s) issued under the Financing Agreement, but prior to October 30, 2019, to exercise its put right to sell to us all or any portion of the Financing Warrant that has not been previously exercised at a price 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 50% of our total consolidated revenue for the trailing 12-month period ending with our then-most recently completed fiscal quarter, or $1,500,000.  If the holder of the Financing Warrant was to exercise this put right, our liquidity would be adversely impacted and we may not have sufficient working capital to fund our ongoing operations or pay our other obligations as they become due.  

Risk related to our Class A common stock

There is not now, and there may not ever be, an active market for our Class A common stock, which trades in the over-the-counter market in low volumes and at volatile prices.

There currently is a limited market for our Class A common stock. Although our Class A common stock is quoted on the OTCQB Tier of the OTC Markets, an over-the-counter quotation system, trading of our Class A common stock is limited and sporadic and generally at very low volumes. Further, the price at which our Class A common stock may trade is volatile and we expect that it will continue to fluctuate significantly in response to various factors, many of which are beyond our control. The stock market in general, and securities of small-cap companies in our industry in particular, has experienced extreme price and volume fluctuations in recent years. Continued market fluctuations could result in further volatility in the price at which our Class A common stock may trade, which could cause its value to decline.  A more active market for our Class A common stock may never develop. As a result, investors must bear the economic risk of holding their shares of our Class A common stock for an indefinite period of time.

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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential stockholders could lose confidence in our financial reporting, which would harm our business and the trading price of our stock.

As described later in this report, our management has determined that, as of December 31, 2014, we did not maintain effective internal controls over financial reporting based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework as a result of identified material weaknesses in our internal control over financial reporting.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. While we hired a full-time Chief Financial Officer in November 2014, we have yet to fully remediate the previously identified material weaknesses as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, and our management identified additional material weaknesses resulting from our acquisition of Steel Media and the integration of those operations into ours.  Although we have never been required to restate our financial statements, as set forth in our Current Report on Form 8-K as filed on February 20, 2015, we discovered errors in the historic financial statements of Steel Media and we are in the process of having these financials reaudited by our independent registered public accounting firm.  The existence of the continuing material weaknesses in our internal control over financial reporting increases the risk that a future restatement of our financials is possible.

Delaware law contains anti-takeover provisions that could deter takeover attempts that could be beneficial to our stockholders.

Provisions of Delaware law could make it more difficult for a third-party to acquire us, even if doing so would be beneficial to our stockholders. Section 203 of the Delaware General Corporation Law may make the acquisition of our company and the removal of incumbent officers and directors more difficult by prohibiting stockholders holding 15% or more of our outstanding voting stock from acquiring us, without our board of directors' consent, for at least three years from the date they first hold 15% or more of the voting stock.

The two class structure of our common stock could have the effect of concentrating voting control with a limited group.

Our authorized capital includes two classes of common stock which have different voting rights.  Our Class B common stock has 10 votes per share and our Class A common stock has one vote per share. The shares of our Class B common stock were originally held by two of our executive officers who were the founders of our company, but these shares were converted into shares of our Class A common stock in October 2013.  While there are presently no shares of Class B common stock outstanding, in the future our Board could choose to issue shares to one or more individuals or entities.  As a result of the voting rights associated with the Class B common stock, those individuals or entities could have significant influence over the management and affairs of the company and control over matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future. This concentrated voting control could limit your ability to influence corporate matters and could adversely affect the price of our Class A common stock.

Our Class A common stock is a “penny stock,” which makes it more difficult for our investors to sell their shares.

Our Class A common stock is considered a “penny stock” and is subject to the “penny stock” rules adopted under Section 15(g) of the Securities Exchange Act of 1934. These rules require, among other things, that brokers who trade penny stock to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our Class A common stock. If our Class A common stock is subject to the penny stock rules, investors will find it more difficult to dispose of our securities.

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FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer.  Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information.  Under interpretations of these rules, FINRA has indicated its belief that there is a high probability that speculative low priced securities will not be suitable for at least some customers.  These FINRA requirements make it more difficult for broker-dealers to recommend that at least some of their customers buy our Class A common stock, which may limit the ability of our stockholders to buy and sell our Class A common stock and could have an adverse effect on the market for our shares.

Certain of our outstanding warrants contain cashless exercise provisions which means we will not receive any cash proceeds upon their exercise.

At March 15, 2015 we have common stock warrants outstanding to purchase an aggregate of 933,896 shares of our Class A common stock with an average exercise price of $1.10 per share which are exercisable on a cashless basis. This means that the holders, rather than paying the exercise price in cash, may surrender a number of warrants equal to the exercise price of the warrants being exercised or reduce the principal under the term note issued pursuant to the Financing Agreement.  It is possible that the warrant holders will use the cashless exercise feature which will deprive us of additional capital which might otherwise be obtained if the warrants did not contain a cashless feature.

The elimination of monetary liability against our directors and officers under Delaware law and the existence of indemnification rights held by our directors and officers may result in substantial expenditures by us and may discourage lawsuits against our directors and officers.

Our certificate of incorporation eliminates the personal liability of our directors and officers to our company and our stockholders for damages for breach of fiduciary duty as a director or officer to the extent permissible under Delaware law. Further, our bylaws provide that we are obligated to indemnify any of our directors or officers to the fullest extent authorized by Delaware law.  We are also parties to separate indemnification agreements with certain of our directors and our officers which, subject to certain conditions, require us to advance the expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition. Those indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against our directors or officers, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even if such actions, if successful, might otherwise benefit us or our stockholders.

ITEM 1B.