Greetings and welcome to Social Reality's 2016 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce Debra Chen, from IRTH Communications. Ms. Chen you may begin..

Good afternoon everyone. I'd like to welcome all of you to Social Reality's second quarter 2016 conference call. With us today are Social Reality's Chief Executive Officer, Christopher Miglino; and Chief Financial Officer, Rahul Thumati.

Before I turn the call over to management, I would like to remind you that on this call, management's prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session.

These forward-looking statements during the Q&A session are subject to risks and uncertainties and actual results may differ materially.

When used in this call, the words anticipate, could, enable, estimate, intend, expect, believe, potential, will, should, project and similar expressions as they relate to Social Reality, Inc., are, as such, a forward-looking statements.

Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated by Social Reality at this time. In addition, other risks are more fully described in Social Reality's public filings with the U.S.

Securities and Exchange Commission, which can be reviewed at www.sec.gov. Finally, please make note that on today's call management will refer to certain non-GAAP financial measures in which Social Reality excludes certain expenses from its GAAP financial results.

Please refer to Social Reality's 2016 10-Q for the period ended June 30, 2016 a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. Earlier today, August 15, the company filed its 10-Q with the SEC and afterwards issued a press release announcing its financial results.

So participants in this call who may not have already done so, may wish to look at these documents as we provide a summary of the results on this call. I would like to now turn the call over to Social Reality's CEO, Christopher Miglino, who will give an overview of the company's business activities and developments for the second quarter 2016.

He will then turn the call over to Rahul Thumati who will provide an overview of the company's operating and financial metrics. We will then open the call for Q&A.

Christopher?.

Thanks Debra. Hi, everyone. And thanks for joining the call today. Really appreciate it. There has been some positive developments in the company over this past quarter. The first half of the year has put us in a position to continue the process of up listing the company to a major exchange which we are working on hard now.

We recorded $14.7 million in revenue for the first six months of the year, which was in line with the first six months of last year. Our net income for the first six months was a loss of $528,000.

Our revenues for the second quarter was $9.2 million with a net income of $1.8 million and we were very close to breakeven for the quarter on an adjusted EBITDA basis and our stockholder equity has increased to $6.7 million.

On this call, I would like to highlight a few factors that continue to drive our revenue and grow our business reinforcing belief that Social Reality is a leading player in the digital advertising space. First, I would like to focus on some of our product development and sales team infrastructure.

In the second quarter, we spent our resources and continuing the development of a number of products that are helping to differentiate us in the digital advertising space. These products include the launch of the newest addition to our SRAX social platform, which is the SRAX social management platform.

The launch of our SRAX genome platform within our SRAX platform, which is a data management platform for customers -- for custom advertising segments and the integration of a number of new supply and demand side partners into our SRAX platform. These are bringing mobile and native and demand to both of our supply and demand partners.

These resources complement our core services across all digital platforms, so we may provide unique tools in improving advertising performance for our clients.

During the third quarter of 2016, we have entered into the last quarter of the Steel Media earn out period, which will allow us to fully integrate our sales teams from the Social Reality side of the business with the sales management of Steel Media side of the business.

We've tripled the size of the sales team on the Social Reality side and we look forward to them being managed on one -- under one consolidated team. While the second quarter last year, we saw a significant contribution from the Steel Media sales, this year we are seeing more of a mix of revenue from our different business units.

It's important for us to continue to diversify service offerings as the industry market opportunity evolves and expands. Tonight, I just want to reiterate our core digital platform offerings. We feel it's important to talk about what different Social Reality from the many point platform providers in the market.

Our core digital offering, it's a solution platform is providing tools that brand marketers and content owners need to be more effective in the competitive digital advertising space.

This allows us to provide an encompassing marketing services platform for our clients; thus far we have been able to successfully achieve superior performance from our proprietary suite of projects, which includes our solution platforms from programmatic buyers and sellers.

Our pharma targeted advertising platforms and social media platform for brands and publishers. Our customer base consists of long-term clients, you see volume, what we provide and we have been able to diversify that into new customer accounts as well.

For those of you that are new to the company it's important to reiterate our core technology and how this solidifies our position amongst our competitors. Our revenue sources include three different segments, SRAX, which is our programmatic solution, for both marketers and content owners.

SRAX is our core engine that drives value for clients and providing the tools needed effectively buy and selling a programmatic space. Secondly, is SRAX MD. SRAX MD which is a healthcare focused programmatic platform that utilizes SRAX solutions platform and allows pharma brands to reach healthcare professionals.

We built a significant database or different types of healthcare professionals and help our clients reach those professionals across many different platforms at a number of locations.

Our SRAX social platform, which is a social media platform and complete management tool that allows branch to launch distribute, track and optimize social and digital media and consumer engagement campaigns. Our tools help brands identify who their true influencers are and then identifies the key characteristics of these consumers.

We are then able to build models against the first party data that can be used and what we call real-time social programmatic fine feature of our SRAX engine. This quarter's operational highlights, I would like to now to talk a little bit about some of the operational highlights worth noting for this past quarter.

This past quarter, we completed our shop for marketing platform for brands and while we say completed they are always evolving, but we have put into place a definitive sharper marketing platform.

SRAX social media management platform entered the beta that's where brands can come in and manage all of their social media accounts Facebook, Instagram, Twitter, Pinterest, LinkedIn all from one location.

We have significant demand has been added to our SRAX sell-side platform, so our partners on the sells-side can benefit from that and we have integrated a number of large mobile providers into the SRAX platforms are true mobile-only providers and also we have integrated a number of true native-only providers into the platform as well.

Looking forward, our entire team has worked diligently to establish the company as a leader in the solutions platform market. From traditional banner advertising to mobile video native and social media, our SRAX engine provides solution that helps brands and publishers maximize returns on their digital assets.

Our offerings provide advertisers a consolidated platform, customer loyalty, applications across platform programs, media buying analysis and more. For publishers, we offer increased revenue yield, a single-platform to manage as access to real-time bidding buyers, retargeting capabilities and content optimization.

We strongly believe that this is a great time to be in the digital advertising space and it's still in infancy and already a multi-billion dollar market.

We also believe that Social Reality is well positioned to capture a growing portion of this spending due to the current size of the programmatic space and social media markets as well as the expected continuation of rapid growth into digital media space.

As many as you know early this year we provided guidance of $40 million for the full year of 2016 that will be a 33% increase over the 2015 revenue guidance which we had. We continue to provide this numbers guidance for 2016 as we see growth in new and existing revenue streams.

I'd now like to turn the call over to our Chief Financial Officer, Rahul Thumati, who'll provide an update on our financial performance.

Rahul?.

Thank you, Chris. I would like to now turn our focus to the year-to-date of the second quarter 2016 financial summary. Revenues for the six months ended June 30, 2016 were approximately $14.7 million compared to $14.8 million reported for the six months ended June 30, 2015.

Gross profit decreased approximately $5.3 million for the six months ended June 30, 2016 compared to $7.4 million for the same period in 2015. Gross margin for the year ended June 30, was 35.8% as compared to 50% for the same period in 2015.

For the six months ended June 30, 2016 adjusted EBITDA loss was approximately $986,000 as compared to adjusted EBITDA income of $1.1 million to the comparable period in 2015. The decrease in the adjusted EBITDA loss was primarily due to lower margins on sales for the period.

Revenues for the three months ended June 30, 2016 were approximately $9.2 million compared to $10.8 million reported for the three months ended June 30, 2015. Gross profit decreased to approximately $3 million for the three months ended compared to $5.6 million for the same period in 2015.

Gross margin for the quarter ended June 30, 2016 was 32.3% as compared to 52% for the same period in 2015. For the quarter ended June 30, 2016, adjusted EBITDA was nearly breakeven at a loss of 5000 compared to an EBITDA income of $1.8 million for the second quarter of the prior year.

The decrease in the adjusted EBITDA loss was due to decreased revenue and lower margin on sales. The company also reported net income of $1.9 million or $0.06 per share for the three months ended June 30, 2016 compared to net income of approximately $400,000 or $0.02 per share for the corresponding period in 2015.

The increase in net income was largely attributed by a reversal of an earn-out consideration for the Steel Media acquisition that will not be achieved.

Our cash and cash equivalents totaled $675,000 at June 30, 2016 current assets and total assets were $9.4 million and $26.6 million respectively and current liabilities and total liabilities was $12.3 million and $19.9 million respectively. At June 30, 2016 the company had stockholders equity of approximately $6.7 million.

We would now like to open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from Darren Aftahi from ROTH Capital Partners. Please go ahead..

Good afternoon. Thanks for taking my questions guys. Just a couple if I may, first of all, high level [acres] [ph], can you talk a little bit about progress you are making on the SRAX MD side, and then, I got a couple of follow ups on the financials..

Yes. So the SRAX MD team is doing pretty well. We're seeing a some growth in that business. We don't break out the separate business unit as you know, but we're really starting to see some growth in that side of the business and we anticipate them continuing to contribute.

I mean there we're building a lot of software right now and we've completed a lot of software that's really beneficial for that group and the meetings that they're getting and the IOs and session orders and partnerships that are coming in are all with major pharmaceutical companies, so they're doing pretty well..

Great. And then -- go ahead..

And the margins on that business are maintaining well..

Fantastic. So couple of thing if I may by reiterating your $40 million in revenue, I think the rough math is 65%, 66% growth in the second half of the year.

I guess my first question is what are you seeing kind of in the pipeline that kind of give you the confidence you kind of hit that $40 million number, I guess it assumes kind of growth acceleration second half of the year?.

Yes. Last year we saw a big slowdown on our sale side of our business and that has picked up significantly into this year. So we're seeing some good pickup in our sale side of our business that we anticipate to continue throughout the year. So we'll revisit that number as we get into the third quarter and the fourth.

And obviously, on the sale side of the business, you start to see a lot more seasonality on the pricing in the sale compared to what we see on our buy side of our business, which historically has been driven into the second quarter of the year.

So that's why we're confident on that number and also some things that we're seeing within the SRAX MD side of the business..

Great. And then, two more if I may.

On your gross margins in the second quarter and then your cost I understand the revenues were down, but can you just give us a sense for what was impacting, was it just lower margin on sale side in 2Q? And then, will your cost continue to ramp, it sounds like you're ramping up your sales force pretty aggressively, will your operating cost in aggregate growth from the 2Q level it seems like they're down pretty materially year-on-year? Thanks..

Yes. We've grown the sales team. We're still looking for some key hires on that sales side of the business. And if we find some good people we'll bring them in. But we think that we'll continue to stabilize here and start to see recognition of revenue from the people that we have hired.

I mean the structure of the earn out with the Steel team was driven around EBITDA, so they weren't incentivized to grow that team at a certain point and so they consolidated on their side and we continue to grow on the social side.

So now we're excited about putting those two things together now that we're coming to an end of that earn-out and have everybody underneath one managed platform. I think it's going to be a lot better for the business.

I think it will prove, it will help us educate the Steel team more about all the technology that's coming to market and the different things that we're working on. So I think it will be good for them to be under consolidated roof as well..

Okay. And then, just on the gross margins..

So the gross margins are; one, we had a big customer that we saw a reduction in gross margins for the quarter. We're working through trying to get back stabilize back to a certain level with them.

I don't know if that's going to be achievable I think our better opportunity is going out to market and finding new customers for the platforms that we have built and helping the sales guys that are here now to bring the platforms that we've built to new advertisers and new marketers just like we're doing.

So that's kind of where you're seeing the biggest impact there and since the second quarter its the biggest run for that particular big customer that's why you are seeing that margin impacted here..

Great. Thank you..

Thank you..

Our next question comes from Michael Kupinski from Noble Financial. Please go ahead..

Thank you and thanks for taking the question. Good afternoon everyone..

Hi. Michael.

How are you?.

Hi, thanks.

I was wondering, if you can chat a little bit about how many active customers you have in the quarter and how that compared with last year?.

Yes. The active customers were consistent with what we had in Q1 of 2016. So I would say what we provided in Q1 2016, we didn't see any normal growth in Q1 and Q2 this year..

Okay. And then, if you were just following up on the gross margin question, do you have any thoughts, I know obviously you're hiring a lot of -- making investments in sales associates and so forth.

Can you talk a little bit about your thoughts on gross margins as you look into, maybe the third quarter, any visibility there especially with the one account that you were talking about it sounds like it's going to kind of continue into the third quarter.

But if you have any thoughts on the third quarter or may be even the full year and then I guess what -- thoughts might be on gross margins as you go into 2017 as your sales associates' kind of ramp?.

Yes. We anticipate that they'll start to pick up as of individual sales. Because if you look at the sales outside of the big customers that are dragging it down the margins are stabilizing and are really good and so we look forward to bringing on more customers with those sales people.

So we think that we're one to two months away from those guys starting to contribute into the platform in a significant way I mean a lot of them already are contributing, but I mean in a consistent manner.

So I don't have any ideas as to where we will be in 2017, it really depends on what happens with our MD business because obviously we see really good margins on the MD side of our business. So it really depends and how much weight comes in from that side of the business. But, we're optimistic about it we're clawing back at that gross profit number..

Okay.

And then, in terms of the number of sales FTEs or fulltime equivalents, what were they in this last quarter versus like the first quarter?.

In this last quarter we had around 105 -- it's a little unique because we don't count our -- in our Q we don't count our Mexico operations as fulltime employees because of the nature of our arrangement was employees in Mexico because they actually sit in a separate Mexico corporation. So they're not counted as FTEs in our Q here in the United States.

But around 105 people there and we've been fluctuating in that area. We've added the sales team that we've added as -- we've added around an additional like seven people to that team so..

Okay.

And then, can you provide a little bit more color on the revenue decline and the year-over-year comparison from the second quarter? Was that related to the Steel media acquisition or something that happened there what, could you just add a little more color?.

Yes. So Steel last year drove a significant amount of revenue in the second quarter and this year it lined up a little bit and so that was the decline. The other business units actually did improve in the corner and did well. But it was the Steel side that declined.

So, last year they had a significant number of more employees than they did this year on the sales side and so over the year they slowly let those guys go in order to try to manage the EBITDA side of the business. And that didn't lead to future sales so and then our -- so that's just to give you some color around what's going on there.

But I think that those guys are -- they'll be excited to be under one consolidated roof and out of the constraints of their earn-out period as well..

So, the function of the decline in revenues was probably a function of the management team trying to get the earn-out for managing EBITDA but not necessarily managing for revenue growth and so at the expense of revenue growth, is what you're saying, right? And so, when we look forward out for the third quarter we should see that kind of reverse?.

Correct. I mean especially into the fourth quarter because we've beefed up the team on our side -- on the social side, which all be underneath one roof here in a couple of months so you're exactly right about that..

Yes.

So the third quarter, do you think that you'll probably show revenue growth than and the Steel Media issues will be largely behind you or do you think it's the fourth quarter before you start seeing that traction?.

I think it's the -- on the Steel side, it's the fourth quarter, but the other pieces the other parts of our business are doing well, so we'll continue to see the growth there which wasn't there last -- wasn't there last year in the third quarter..

Okay, perfect. Thanks. That's all I have. Thank you..

Thank you..

[Operator Instructions] And if there are no further questions, I would like to turn the floor back over to Ms. Chen for any closing comments..

So, with that I would like to thank everyone for Social Reality's participation on today's call and their support for the company. This concludes our second quarter 2016 conference call. Thank you..