Good day and welcome to the SRAX First Quarter 2017 Results Conference Call. Today's call is being recorded. And at this time, I would like to turn the conference over to [Christn] of LHA. Please go ahead..

Thank you, Matt. Good afternoon, everyone. I’d like to welcome you all of you to SRAX’s first quarter 2017 conference call. This call is being webcast and is available on the website. In addition, today we'll use an accompanying slide show to review SRAX’s MD platform. You may view this via the webcast.

With us today are SRAX’s CEO, Christopher Miglino; Chief Innovations Officer, Erin DeRuggiero; and CFO, J.P. Hannan. Christopher will review the company first quarter 2017 highlights, Erin will provide an overview on SRAXmd. J.P. will discuss its operations and financial metrics and Chris will open the call for questions.

Before I turn the call over 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 also make forward-looking statements during the question-and-answer session.

These forward-looking statements 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 SRAX are, as such forward-looking statements.

Investors are cautioned that all forward-looking statements involve risks and uncertainties that may cause actual results to differ from those anticipated by SRAX at this time. In addition, other risks are more fully described in SRAX’s public filings with the U.S. SEC, 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 SRAX’s excludes stock-based compensation expense and other one-time items from its GAAP financial results.

Please refer to SRAX’s press release for a full reconciliation of its non-GAAP performance measures to the most comparable GAAP financial measures. Now it is my pleasure to turn the call over to SRAX’s CEO, Chris Miglino. Please go ahead Chris..

Thanks, Cristin. Good afternoon, everyone. Thanks for joining us today. We're excited about our operational progress of new growth initiatives along with our cost reductions. Our goal is to broaden our customer base and expand our product offerings while targeting more profitable relationships.

While our new offerings like SRAX Reach are doing well, the growth has been offset by a legacy buy side business. The first quarter results did not reflect our strategic measures.

However, as we started reducing relationships with low margin buy side businesses in Q2 2016, we expect the financial benefit of our recent initiatives will be evident in Q2 2017 and build in Q3 and beyond. Further as discussed on the call in late March, we focused on our buy side sales team efficiency.

To foster more growth and reduce expenses, we resized the department and consolidated our operations into our LA headquarters. We continue expect this action to reduce 2017 annual expenses by $1.5 million.

Last week we re-formally branded while our roots are in social media, we've grown tremendously, developed with this -- developed with the future of advertising technology in mind, SRAX tools amplified performance and maximizing profits for brands in the healthcare, CPG, automotive, wellness and lifestyle verticals, we believe SRAX better reflects the breadth and depth of our tools offer digital marketers and content owners and our omnichannel approach that integrates every aspect of the marketing experience into one platform.

In early May, we successfully completed a financing, bringing approximately $4.5 million in net proceeds to the company. We now have additional working capital with which to continue to grow the business, satisfy certain obligations and help our customers execute their digital media marketing needs.

We continue to make advancements on both sides of our business. As many of you know, SRAX serves two primary sets of customers, marketers whom we refer to as the buy side and content owners whom we refer to as the sell side. Turning to the buy side first, SRAXmd continues to be a very strong growth driver.

In a few moments, Erin DeRuggiero, who heads up the SRAXmd efforts will provide us with an overview. Another buy side product SRAX Social, which combines the social media management solution with the power of programmatic technology and big data to grow brand audiences is growing in magnitude.

We've completed the ability for brands and their agencies to utilize our platform to manage all their social media needs and pay to boost their social post all in one platform. On the sell side, there's a few highlights for the quarter. Through SRAX APP, our customers grow, engage with a valuable mobile audience.

Using the product, they're able to create unique niche audience segments based on their interest for example U.S. located audience made up of males who are aged 25 to 40.

They're able to get location data and provide push notifications to create new messaging opportunities to their audience, increase brand engagement and loyalty with exclusive content and launch promotions and contents to drive engagement.

Turning to SRAX Reach, our custom ad unit, through SRAX Reach, you can buy beyond the banner as we like to say, as a combined display ads with native premium advertising, imagery and story content to deliver a compelling brand experience in a single unit. We doubled the number of publishers that we're working with our SRAX Reach product in Q1.

In an effort to have our investors better understand all of our offerings, we intend to invite one of our executives to our earnings call each quarter. Our first area of focus is SRAX MD. I'd now like to turn the call over to Erin -- over to Erin.

Erin is the cofounder and Chief Innovation Officer of SRAX where she spearheads SRAX MD sales and product development. As you may know, Erin and I first began working together in 2008 at the last company that I had started and prior to starting Social Reality together in 2010. Erin, please go ahead..

Thanks Chris. As Cristin, stated at the beginning of the call, we had some slides to accompany the conversation I'll begin on Slide 5. I wanted to give you quick background on the digital and mobile landscape as it exits today, which will help to highlight why what we're doing is unique and powerful.

I'll the overview of the technology high level, since a lot can get quite technical when you get all of the minute detail, but if you have specific questions or would like me to elaborate on any aspect of this, I'll be available for the Q&A at the end of the call and happy to address your questions.

The SRAX MD healthcare platform came to life to service a market need for true advertising automation and innovation within the digital healthcare space.

Pharmaceutical companies are our core customers to SRAX MD who up until very recently didn't have many options to choose from when it came to reaching their intended audience with digital and mobile advertising.

The real standard was if you wanted to reach a doctor, you went to a very specific doctor app or journal and brought advertising there and there is limited scale and fewer opportunity to reach these physicians with a timely deployment of ads, triggered by an outside event what we call an outside event.

This could be a diagnosis, potentially relapsing patient, a rejected insurance and claim just an example.

Our conversations with our Pharma brand customers further solidify that there is a big gap between what they're trying to achieve through digital and mobile ads targeting and what they feel is a real win that they aren’t getting from existing technology and partners and what most advertising agencies and tech companies are able to deliver.

We set out to close that gap with the healthcare IT products we've developed. DOCTRAX, DOCTRAX MATCH, DOME and [Mosi] that were built specifically to meet these needs that weren’t being addressed by agencies and ad tech companies serving healthcare professional media.

While consumers were being targeted and re-targeted with ads across millions of websites, healthcare professionals and in particular, medical doctors were much harder to reach due to legal and regulatory requirements around how and where you can engage a physician.

We knew there was an opportunity to change the way healthcare professionals were targeted and that we could do it in a safe way., while mapping the journey of the physician and showing them ads outside of traditional medically relevant content, not only reaching a doctor outside of a journal but tailoring a list of sites to the specific specialty that we're targeting.

This approach would allow us to give our pharma clients much larger share of voice with that doctor that they care about and at the same time increase the overall level of engagement and conversion rate.

We're seeing three times the click-through rates on our ad serve and nonmedical environments like a wired or ESPN compared to the engagement rates agencies and brands typically see within medical publisher sites. We've the ability to track conversions as well, which means different things for different brands.

It could be that we're tracking whether or not that doctor writes a prescription for the drug being advertised or has watched a video through the completion. We have several goals in our approach to new product development. First and foremost is there a real market need for this product? Yes. Our clients are asking for this, so we check that box.

Does it exist anywhere else? No, not yet. We're breaking new ground, which is always exciting to sell something that no one else is delivering and we knew we needed to create a safe environment for pharmaceutical brands to advertise.

We have a white list of sites and apps that have gone through rigorous med-legal and regulatory reviews and have been deemed safe content-wise for pharma advertising. We partner with brand safety vendors like Integral Ad Science and DoubleVerify to make sure that ads will not serve outside of the proper channels.

Second, we wanted to build a database of first and third-party healthcare professional data, which we've done over the last four years and we continue to build upon every single day. We now have more than 500,000 tag users across 30 specialty areas we can reach on the professional side.

In some specialties like oncology we have 90% of the total oncology universe available to target with ads on a laptop, desktop or mobile device.

Some of our partnerships with third-party data providers is exclusive to SRAXmd, allowing us to tap into timely data feeds that support the deployment to ads to a physician's device within 24 hours of an order being placed by a professional for a particular drug or within 24 hours of a diagnosis.

Lastly, we wanted to focus on mobile where professionals are spending the majority of their time browsing content. Our cross-channel device targeting has ramped up over the last 24 months, which allows us to engage specific physicians on their mobile phones and tablets, when they're at a practice setting of traveling for medical meetings.

We have products at SRAXmd that are designed to reach the healthcare professional, doctors, nurses, nurse practitioners, physician's assistant or non-prescribers and we also have exciting products that target patients and caregivers.

For the purpose of today's call, I wanted to focus on the innovation, on the healthcare professional side, but if you would like to learn more about the patient offerings you can visit the website at SRAXmd.com.

Our core products on the healthcare professional side include DOCTRAX MATCH, is a highly targeted ad campaign utilized by healthcare brands, pharmaceutical agencies who want to reach a certain physician specialty. Most of the advertising messaging we see, related to DOCTRAX comes in the form of a branded pharmaceutical ad.

The offers serve unbranded ads, disease awareness, we recruit physicians for clinical trials. We advertise medical devices and continuing medical education.

DOCTRAX MATCH is a highly targeted ad campaign that will expose only a target list of physicians that a particular client or brand is interested in and we've been working on mapping the physician journey for four years now and we can also share information related to the type of content consumed by a physician, by specialty, which is considered highly valuable to our clients.

We can also share the HCP level data back to clients, integrating into their own internal software systems so that there is a constant loopback of data allowing them to understand when an ad message has been viewed or clicked. DOME is our mobile meeting targeting product.

Hundreds of thousands of medical meetings take place every year across 30 specialty areas in the United States and in Europe. We have the ability to serve ads into mobile devices at hotels, convention centers, where these meetings are taking place.

We can get the ad message to a certain cellular radius, a Wi-Fi network for instance provided by the meeting or isolate the targeting to reach only devices belonging to known physicians in the specialty attending the meeting. Finally, we have MOSI.

This is a product we've been working on for several years now that has a patent filed in process and is entirely unique in the healthcare ad targeting marketplace.

Imagine you have a physician at their office, that physician just diagnosed a patient with a rare disease that they haven't yet decided on a therapy for that patient who might be diagnosed with multiple myeloma or non-Hodgkin's lymphoma.

Our multiplatform can ingest what we call a triggering event like a diagnosis or a rejected claim, or an order placed to distribute product and we can turn around and serve an ad to the location where the triggering event took place within 24 hours.

We're in market now with this product with two of the leading blockbuster oncology drugs across several specialty areas and multiple indications.

Overall, our primary differentiator [AdtraMD] is our ability to deploy highly targeted advertising to the right physician or patient at the right time within a window of time that other healthcare IT companies or ad tech companies aren't able to execute.

We're really excited about the future of our business and what's next for SRAXmd and now I would like to turn the call to J.P. for a discussion on the financials..

Great thanks Erin. Now we review the first quarter of 2017, it's important to remember that some of our initiatives began a year ago and as expected are taking time to full fruition. This resulted noise when compared to the first quarter of 2016.

We're pleased to say next quarter we expect our improvements begin to positively impact our financial position. For the first quarter of 2017 as compared to the first quarter of 2016, revenues were $5.3 million. That compares of $5.5 million in the prior year's first quarter.

This reflects the intentional decrease in revenue from the significant legacy, lower margin customer that we've been discussing in prior quarters and this is partially offset by an increase in revenue from our sell side clients as well as continued growth in SRAXmd.

Gross profit for the quarter was $2 million and that compares to $2.3 million in the first quarter of last year. Our gross margin was 38.4% and that compares to 41.8% in the prior year's first quarter. This is reflective of lower revenue and lower margin profile on our buy side business. First quarter 2017 operating expenses were $5.3 million.

That is included $4.4 million in SG&A which saw the continuation of our enhanced sales initiatives from last year. We were one more quarter before these year-over-year comparisons begin to normalize. There was that $378,000 restructuring charge in quarter that related to our buy side reorganization and a $469,000 write-off for a non-compete agreement.

All total this compared to $3.8 million in the first quarter of 2016. Other income included lower interest expense, greater amortization and a $1.9 million benefit related to the accretion of the political warrants from our issuance in January through quarter end.

We expect this to be partially offset by a charge related to the repurchase of those warrants that happen in conjunction with our recently announced financing in the second quarter. Our net loss was $2 million in the quarter compared to $2.4 million in the first quarter of 2016.

Adjusted EBITDA with a loss of $1.7 million compared to adjusted EBITDA loss of $980,000 in the first quarter of 2016. As Chris mentioned earlier, we've been working on enhancing liquidity and we initiated a debt financing in the first quarter that then closed in the second quarter with net proceeds of approximately $4.5 million.

With regard to equity, there are approximately 8 million common shares of approximately $2.9 million warrants outstanding and I would like to end by saying the quarter performed as expected and we positioned the company for growth in 2017. We are reaffirming 2017 guidance.

We continue to expect 2017 revenue to range between $45 million and $50 million and we reiterate 2017 adjusted EBITDA guidance of between $2 million and $5 million. And now with that, I'd like to turn the call back to Chris..

Thanks J.P. and Erin. Over the past year, we've done a lot of work to improve our revenue base, expand our offerings and establish a better cost structure. We're posed to reap the benefits starting in the second quarter.

Last week, we held our Annual Sales Meeting and I can assure you the team is excited about all the opportunities with these new products. And with that said, we now like to open the call for any questions..

[Operator instructions] At this time, we'll go to James McIlree with Chardan Capital. Please go ahead..

Thank you and good afternoon. Chris, in your comments you said that -- hi, Chris in your comments you said that $4.5 million in you raise is you'll have will give you working capital to grow the business and satisfy certain obligations.

Could you elaborate on what certain obligations are? How much they are? When they're due and I have a couple of others after that..

Sure. So, we had a -- as many of you know there was a put right that M3 had on some of their warrants, which was a financial instrument, which had a benefit as the value of the stock went down, the value of the put warrant went up.

And we used around $2.5 million of the money to buy that put warrant back from Empree and thus there's no more incentive to drive the price of the stock down.

So that was one very important piece that we had to work towards getting taking care of because they actually had the right to put that back to us and if we didn't have the ability to pay them back, they would've had the ability to take that in stock. So, we had to get that taken care of.

So, we did and I think that will be a good thing for the stock and the maximum value that they were able to glean from the put value was right down in the $1, $1.96 range or $0.90 range. So, they maximize the value of that put and we're able to buy that back.

We had certain obligations that were due from just some people that we had owed some money to and continue to owe some money to. So, we took care of some of those -- some of those obligations.

There was also a put right that Victory Park Capital had some warrants that they have in the company, but they have not put that warrant to us although they have the right to do that and once they do that, I think we have around 45 to 60 days to pay them back that money once they put that to us.

So, I will mention that in the financing that we just completed, there is also a green shoe that is available in that financing that can come into effect after a shareholder meeting which has been put in product. So, we anticipate having that meeting in the next, J.P.

what's the date of that meeting if you -- do know the date of the meeting?.

Yeah it was June 23..

June 23. So, we have the ability to -- those investors have the ability to put an additional $3 million into the company as well, which we anticipate that they will do.

Although there's no guarantee that that will happen, they've given us the indications that provided the shareholder approval, there will be an additional $3 million that will come into the company from that..

And J.P., the eight million shares outstanding and $2.9 million warrants that does today or at the quarter end?.

Actually both..

Okay..

So, the shares or both the -- we repurchased 380,000 warrants as part of this financing that Chris just described in the second quarter, so it's slightly lower..

Okay.

And so, are there more -- after you buy the 2.5 million of the put warrants, are there -- is that the entire -- is that the entire amount or the put warrants or are there more out there?.

That is the entirety of their position. The warrants that have put rate features attached to it. They hold every warrants because they're just straight warrants..

Yeah. Okay. Great but then the -- go ahead..

The ability for them to put the -- the ability for them to put anything to us from Empree has gone away..

Right, got it. Okay.

And the intentional reduction in the legacy customer, is that going to continue in Q2 or that all gone now?.

There is some of that in Q2, but that really started a year ago in the second quarter. So, you're starting -- the numbers will start to normalize in the year-over-year disparities, will start to be more clean and be more apples to apples..

If we look at Q1 this year versus Q1 last year, about what is the dollar impact on that intentional reduction?.

I don't have that in front of me. I can definitely get back with you offline on that though..

Okay. Great. That's helpful and then to hit the guidance, at the low end you're talking $40 million for the final three quarters, which is obviously a big jump from where you are now and it sounds like Q2 doesn’t get you back to normal. It gets you kind of to better than Q1 performance.

I am just wondering what's the big driver if we -- if you hit $40 million for the final three quarters, that's $30 per quarter. What's driving that big jump and I know there's a seasonality in Q1, let's ignore that, but even if we compare it to the year-over-year comparisons it's still a pretty big jump.

I would just like understand what you're expecting to grow that quickly?.

Chris, could cover that..

Last year, we didn't have a lot of revenue, coming from a couple of different products. There was no revenue into the second and third quarter for our reach product because we're still in development. Social wasn't fully developed and MD wasn't having the type of year that it is having now.

So, we're definitely benefiting from those and also, we've put a lot of efforts, while we saw a reduction in the buy side customer that we keep talking about, we've done a lot of work in improving and in building up the team on the buy side. So, their contribution is starting to become evident. So….

If I look at that number, it's a decline of $2.9 million, is the number you were looking for and that's what's almost entirely been made up in the quarter of their new products..

Okay. Great.

And I think let me ask one more before I get back in line, can you talk about the percent of revenues coming from buy side versus sell side this quarter versus either -- versus the prior quarter and a year ago quarter?.

We don't generally break that out and the different product lines we've not put that in our financials..

Okay. So, let me ask it, I understand that. Let me ask a different one then.

So, if we looked at the buy side ex this legacy customer, did the buy side grow year-over-year again ex that legacy customer?.

I think that's a number that J.P.

would have to do a little calculating on?.

I don't have that level of detail in front of me right now, but I think it was flat ex that one customer..

Okay. That's great. Thank you. And I'll jump back in line..

[Operator instructions] We'll take a follow-up from Jim McIlree with Chardan Capital..

Yeah, thanks again. So just looking at expenses J.P. I was a little bit, I don't want to say confuse, I just want to make sure I understand what the expense profile is going forward.

So, you talked, I think you had some comment about SG&A \one more quarter before normalizing and I'm just a little bit confused as to what you mean by that?.

Midyear last year as there was a more holistic view of the buy side business. The decision was made to expand the sales team and there were a number of people hired that started in the second and third quarter that they were not there a year ago and so we're just comping through that expanded share of investment..

Okay. Okay. So, you're talking about that year-over-year comparison normalizing.

So, the first half of this year is a bad comparison because we've got those extra salespeople where we didn't had them last year?.

Right..

But in the second half it will be normal because they're in both sides, right?.

Correct. Yes..

Okay. Okay. I get it, that makes sense. All right great. I think that does it. Thank you..

[Operator instructions] That will conclude the Q&A session. I'll turn the call back over to Chris for closing remarks..

Thanks for joining us today. We're really excited about 2017. We think we have some great opportunity, some great products are coming to market and we look forward to talking to you more about that into the next quarter. We'll be meeting with investors later this week in New York City.

If you're interested in talking to us or meeting with us, please contact LHA. We'll also be at the B Riley conference in late May and LD Micro Conference in early June. So again, thank you very much for joining the call today. We really appreciate it..

And again, that does conclude today's conference call. Thank you all for your participation..