10-K: SRAX Inc. Annual Report Reveals Ongoing Losses and Restructuring Efforts

SRAX Inc.'s annual report for 2022 highlights significant operating losses, a going concern warning from auditors, and substantial changes in the company's structure and operations.

Summary

• SRAX Inc. reported a net loss of $31.6 million for 2022, compared to a net loss of $41.2 million in 2021.
• The company's accumulated deficit increased to $61.9 million by the end of 2022.
• Operating losses were $31.3 million in 2022 and $34.7 million in 2021.
• The company's auditors have expressed substantial doubt about its ability to continue as a going concern.
• SRAX is heavily reliant on its ability to convert marketable securities into cash, which is subject to legal restrictions and illiquid markets.
• The company sold its LD Micro business in March 2023 and is planning a merger with DNA Holdings Venture, Inc.
• The company is not current in its SEC reporting obligations, which could have material adverse consequences for the company and shareholders.
• The company has incurred an additional $1,010,402 in indebtedness during 2023 and 2024.
• The company has only one director, who is also the sole executive officer.

Sentiment

Score: 2

Explanation: The document presents a very negative outlook due to significant losses, a going concern warning, and ongoing financial and operational challenges. The company's reliance on debt and the need for additional capital raises further contribute to the negative sentiment.

Positives

• The company's net loss decreased by $9.5 million from 2021 to 2022.
• LD Micro conference revenues increased by 123.68% due to additional events in 2022.

Negatives

• The company has a history of operating losses and there are no assurances of future profitability.
• The company's auditors have expressed substantial doubt about its ability to continue as a going concern.
• SRAX is not current in its SEC reporting obligations.
• The company has a working capital deficit of $12.8 million.
• The company has only one director, who is also the sole executive officer.
• The company is heavily reliant on its ability to convert marketable securities into cash, which is subject to legal restrictions and illiquid markets.
• The company has incurred an additional $1,010,402 in indebtedness during 2023 and 2024.

Risks

• The company may not be able to achieve profitable operations in the foreseeable future.
• SRAX may need to raise additional capital to pay its indebtedness as it comes due.
• The company's outstanding loan obligations contain substantial covenants that may impact its business.
• The proposed merger with DNA Holdings Venture, Inc. may not be completed.
• The company's failure to maintain an effective system of internal control over financial reporting has resulted in the need to restate previously issued financial statements.
• Security breaches and improper access to or disclosure of data could harm the company's reputation and adversely affect its business.
• The company's reliance on third-party data sources could be disrupted.
• The company's insurance coverage strategy may not be adequate to protect it from all business risks.
• The company's receipt of securities in lieu of cash may be negatively affected by a downturn in the U.S. and/or global securities markets.
• Conversions of convertible debentures, notes, and warrants may dilute the ownership interest of existing stockholders.
• The market price of the company's common stock may be volatile.
• The company may be subject to securities litigation, which is expensive and could divert management attention.
• Delaware law contains anti-takeover provisions that could deter takeover attempts that could be beneficial to stockholders.

Future Outlook

The company anticipates that it will need to raise additional capital immediately in order to continue to fund its operations. There is no assurance that the Company will be able to obtain additional funds on commercially acceptable terms, if at all. There is also no assurance that the amount of funds the Company might raise will enable the Company to complete its initiatives or attain profitable operations.

Management Comments

• Our future success depends on our ability to continue to assimilate the planned DNA acquisition, grow our revenues, contain our operating expenses and generate profits.
• We do not have any long-term agreements with our customers.
• 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 and pay our obligations as they become due.

Industry Context

The company operates in the technology sector, specifically focusing on enhancing communications between public companies and their shareholders. The company's performance is affected by the overall economic conditions and the demand for advertising products and services. The company's reliance on third-party data sources and the evolving regulatory landscape regarding internet privacy also pose challenges.

Comparison to Industry Standards

• The company's financial performance is significantly below industry standards for profitability and cash flow.
• The company's reliance on marketable securities for revenue is not a common practice among its peers.
• The company's high level of debt and the going concern warning from its auditors are not typical for companies in the technology sector.
• The company's lack of independent directors and board committees is not in line with corporate governance best practices.
• The company's delisting from Nasdaq and trading on the OTC Markets Expert Market is a significant deviation from industry standards for publicly traded companies.

Management Changes

Corporate Governance

Legal Proceedings

• Michael Malone, a former executive officer of the Company, filed a complaint against the Company on August 7, 2023, claiming Breach of Contract, Violations of the Labor Code and Violation of the California Business and Professions Code.
• Stock Market Manger, Inc., filed a complaint against the Company in the Circuit Court of the Sixth Circuit in and for Pinellas County, Florida (Case No. 24-002894) claiming Breach of Contract and Breach of Covenant of Good Fauth and Fair Dealing seeking damages in the minimum amount of $1,246,235.

Related Party Transactions

• The Company subleased a suite at the Sofi Stadium in Los Angeles from an entity wholly owned by Christopher Miglino, our CEO.
• On August 4, 2021, the Board declared a one-time bonus payment of $15,000 to all non-employee directors.
• On January 3, 2022, the Company issued four (4) common stock purchase options to its non-employee directors, pursuant to our amended non-employee director compensation policy.
• On January 6, 2022, the Company issued Michael Malone, our former Chief Financial Officer, a conditional option to purchase 100,000 shares of Class A common stock.
• On January 6, 2022, the Company issued Christopher Miglino, our Chief Executive Officer, an option to purchase 120,000 shares of common stock.
• The Company entered into certain agreements and transactions with BIGtoken, Inc. our former subsidiary since January 1, 2020.
• On May 7, 2024, the Company entered into a definitive Agreement and Plan of Merger with DNA Holdings Venture, Inc.

Stakeholder Impact

• Shareholders face significant risks due to the company's financial instability and potential dilution.
• Employees may be affected by the company's restructuring efforts and potential layoffs.
• Customers may experience disruptions in service due to the company's financial challenges.
• Suppliers and creditors face increased risk of non-payment due to the company's financial instability.

Next Steps

• The company needs to raise additional capital to fund its operations.
• The company needs to complete the merger with DNA Holdings Venture, Inc.
• The company needs to regain compliance with its SEC reporting obligations.
• The company needs to address the material weaknesses in its internal control over financial reporting.

Key Dates

Keywords

SRAX, Sequire, LD Micro, DNA Holdings, financial results, operating losses, going concern, merger, debt, marketable securities, SEC reporting, convertible notes, warrants, stock options, reverse acquisition