Good day. And welcome to the SRAX Fourth Quarter and Full Year 2017 Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Kirsten Chapman of LHA Investor Relations. Please go ahead, Ma’am..

Thank you, John. Good afternoon, everyone. I’d like to welcome all of you to SRAX’s fourth quarter and year-end 2017 conference call. This call is being webcast and is available on the Web site at srax.com/investors. With us today from management are SRAX’s Chairman and CEO, Christopher Miglino and CFO, J.P. Hannan.

Chris Miglino will review the Company’s fourth quarter 2017 highlights, J.P. will discuss the operations and financial metrics and then Chris will provide a summary and call for questions.

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 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, and such forward-looking statements.

Investors are cautioned that all forward-looking statements include risks and uncertainties that may cause actual results to differ materially from those anticipated by SRAX at this time. In addition, other risks are more fully described in SRAX's public filings with the SEC, which can be reviewed at www.sec.gov.

As previously discussed in October 17, we engaged outside advisors to review strategic alternatives for SRAXmd. As a result in late 2017, we commenced an auction process with regards to the SRAXmd assets. We believe that we are now entering the final stages of the auction process.

Although, management is optimistic regarding the successful completion of the auction process, there can be no assurances that the process will be completed, will be successful or that if the process is completed that it will be on favorable terms to us.

Finally, please make note that on today’s call management will refer to certain non-GAAP financial measures in which SRAX excludes stock-based compensation expenses and other one-time items from its GAAP financial results.

Please refer to SRAX's press release for a full reconciliation of 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, Christopher Miglino.

Chris?.

Thanks Kirsten. Good afternoon everyone. It's great to speak to you today. As you know, our team has been focusing on transforming SRAX into a leading consumer and digital marketing and data management technology company, and our efforts are delivering results. First, the fourth quarter was a strong close to the year.

We improved our profitability dramatically, delivering positive net income and positive adjusted EBITDA, which we're really happy about. J.P. will provide more details in a minute. To continue this positive trend and drive top-line growth in the future, we've been investing strategically in product development and sales talent.

As we develop our blockchain identification graph technology, BIGtoken. We're leveraging our existing team and adding more senior engineers in our offices both in United States and Mexico. We're also supporting launches of our new verticals SRAX auto and SRAX SRAXfan.

In sales, we hired a Vice President of Sales who has over 20 years experience building teams at digital media and e-commerce companies. Among many actions, he's been bolstering our consumer packaged goods sales team as well. As announced in October, we've been evaluating options to monetize SRAXmd.

We have a larger response than we had expected to the process and therefore, conducted several bid rounds. After reviewing the final as we narrow the field and we’re in the final stages of the process and are working towards closing the transaction. As lawyers like to say but as stated earlier, there are no guarantees.

For strategy reasons at this time, we cannot discuss this transaction and please refrain from asking any questions about SRAXmd during the Q&A process. The process is moving and we’ll be able to tell you more when we can. With that said, I would I like to review our BIGtoken efforts.

BIGtoken has been established as a wholly-owned subsidiary of SRAX, meaning that ultimately it can function as its own entity. At the moment, we are leveraging our existing infrastructure to support the BIG development. BIG is consumer data platform that will enable transparent data relationships.

It will be comprised of three layers, a blockchain platform layer allowing the secure decentralized and transparent transmission of data, a reward system layer for users and developers and an open source governance layer that determines the direction and integrations in the platform.

BIG is a novel concept based on the fact that the whole digital data ecosystem could benefit from the consumers’ owning, verifying and choosing if and when to have access to their data. Both corporations and consumers deal with challenges in today's digital advertising system and want to improve online experiences.

Technology and system solutions stand to take a significant portion of the digital data market currently valued at over $130 billion according to the IDC. We believe advertisers and marketing companies should have to pay for specific and highly accurate consumer data and that consumers should be compensated for that as well.

BIG gives the consumer the ability to sign up, get their information in the platform ask a variety of different questions from lots of different partners and get paid for access to their data. Then through the blockchain identification graph, you can identify every time that data is accessed so you as consumer will know.

We believe BIG puts consumer data and the commercial Web back into the hands of the consumers by building a decentralized ecosystem that incorporates all players of the digital advertising network, especially the consumer. We believe we’re adding new and unprecedented value to the market.

With BIG, consumers decide which pieces of their information data are shared and bought, how that data is used and who may access it. Advertisers gain with verified personalization and targeting while consumers are rewarded with their participation and benefit from better online experiences.

We believe that the blockchain technology behind BIG ensures privacy, transparency and security for all users. BIG operate autonomously and openly, making all records public so users can verify every transaction. It also cuts out middlemen, speeds of transaction times and reduces the need for human intervention best reducing opportunities for fraud.

After months of hard work and diligence in March we released the alpha version to eliminate by invitation only group or users. And an exciting step in our efforts to build the consumer application and secure data management system with a rewards component.

This is our first direct engagement for BIG with users and the next step is creating the data marketplace where people will own, verify and sell access to their data. This is particularly relevant since consumers are increasingly realizing the true value of the data as they see very large companies benefiting from this information.

Timing could not be better for our efforts in this area with BIGtoken. And now, I’m going to turn the call over to J.P for the financial review..

Thanks Chris. I’ll first review the results for our fourth quarter of 2017.

Gross revenue was $6.5 million compared to $11.5 million in Q4 2016, which as previously reported included revenue from a large non-recurring SRAX Reach customer that was partially offset by an increase in revenue from SRAX buy side and sell side clients as well as continuing growth in SRAXmd.

Now reflecting our focus on high margin revenue and as well our cost of goods sold reversal that's related to our TRNC settlement. Gross profit increased to $5.5 million from $4.7 million in the year ago quarter. Due to the one-time items, fourth quarter gross margin was higher at 85% compared to 41% in the fourth quarter of 2016.

Going forward, we expected to be more in the range of around 50% on a normalized basis. Operating expenses were $5.6 million, which is basically flat with the fourth quarter 2016. 2017 cost reflect the benefit of the first quarter cost management measures and was offset by investment in new product development.

Our loss from operations improved to $67,000, which is up over $780,000 from an operating loss of $849,000 in Q4 of 2016. Our interest expense was $1.1 million, which compares to $494,000 in the fourth quarter of 2016. Our net income improved to $178,000, which compares to a net loss of $1.3 million in the fourth quarter of 2016.

Our adjusted EBITDA gain improved to $1.2 million and that compares to a gain of 581,000 in the fourth quarter of 2016. We ended the quarter with $1 million in cash and cash equivalents compared to $216,000 at September 2017 and $1 million at the end of December 31, 2016.

As you remember in October of 2017, we entered into a definitive securities purchase agreement with our existing investors for the sale of an aggregate of approximately $5.2 million in principle amount of 12.5% secured convertible debentures. Those proceeds were applied to working capital.

As a result, working capital increased to a positive $1.1 million, improving from negative $8.3 million at December 31, 2016. By the end of December 31, 2017, $1.1 million warrants have been retired or expired and $3.3 million of debentures have been converted into common stock, thereby reducing our debt to $6.6 million by the end of the year.

At December 31, 2017, weighted shares outstanding were $8.3 million or 8.3 million shares rather. And at March 31, 2018, there were 10.1 million common shares outstanding. The changes to warrants since the year-end are immaterial. For the year-ended December 31, 2017, gross revenue was $23.3 million and that compares to $35.8 million in 2016.

Our gross profit increased to $14.3 million from $12.5 million in 2016 and our gross margin was 60%, which is up from 35% in 2016. Loss from operations decreased to $3.8 million, which is up $4.8 million or up from $4.8 million in 2016. Our net loss was $6.7 million or $0.81 per share.

2016 net loss included $3.7 million benefit from the contingent consideration that was written-off approximating $4.2 million. We finished 2016 at $0.69 per share loss. Adjusted EBITDA loss improved to $382,000, up from an adjusted EBITDA loss of $1.1 million in 2016.

In summary, we expanded margins dramatically and improved the bottom-line significantly, delivering both positive fourth quarter net income and adjusted EBITDA gain. We’re very pleased with these financial improvements we achieved last year and we’re very excited about 2018.

However with the undetermined timing of the potential SRAXmd’s strategic action and the BIG platform development, as Chris said, we believe it’s prudent to spend guidance until we have additional information there. And now with that, I’ll turn the call back to Chris..

Thanks, J.P. We continue to create avenues to drive long-term growth and shareholder value. As discussed previously in 2017, we set a foundation for growth and 2018 our financial results are demonstrating the improvements we made. We’re optimistic we’ll monetize SRAXmd, which should significantly improve our liquidity and financial strength.

We’re advancing our SRAX verticals and our BIG developments, which we feel greatly expands our future growth opportunities. We believe BIG will benefit everyone in the digital data ecosystem and deliver advantages for our advertising clients while improving the online experience for consumers.

Before I open the call to questions, I’d like to note that you can see us at the NAB even in Las Vegas, the GVC Capital and Trickle Research Rocky Mountain Conference in Denver, the [FSN] Planet Micro Conference in Las Vegas and the Needham Emerging Technology Conference in New York.

Also, I’d like to note that we’re being as transparent as allowed about SRAXmd. However, until we finalize the transaction cannot elaborate further. Therefore, we’ll not take questions about the SRAXmd in general. I’d now like to turn the call over to the operator for Q&A..

Thank you [Operator Instructions]. We’ll take our first question from Michael Kupinski with Noble Capital Markets..

I have a couple of quick questions and I don’t want the goals for the year and so reduce dependence on several larger accounts. And I know that that’s offset by you also getting away from the low margin revenues.

I was just wondering, where do you stand on that effort to reduce the dependency on those large accounts?.

I think what I would point out when we’ve accomplished that and you can see that in the reduction of the revenue but the increase in the gross margin. So we had a lot of business last year that was very low margins and we're able to focus on some of the higher margin businesses for this year..

And does the company cycle through the low margin revenue that begins in the -- that initiative that begins in the second quarter of 2018.

Is that right?.

Yes..

And will the company begin, when will the company begin the outreach program to sign up consumers into work with other rewards programs for BIG.

And also can you give any updates on when -- about financing plans for BIG at this point?.

Can you repeat that, Mike?.

When will you begin the outreach program to sign up consumers? And then also to work with other rewards programs for BIG? I know that that was an initiative that you're going to begin here soon. But I was wondering when you can start that.

And then I think you are looking at trying to, as a wholly owned subsidiary developed for BIG, you're working on the financing plans for BIG. I was just wondering if you can give us any updates on that..

Right now, we're in a close alpha, which is an invite only alpha to a lot of people that are in our ecosystem. We'll probably by the end of April anticipate moving into a closed beta, that close beta people can sign up to join the close beta at BIGtoken.com, and a lot of people have done that.

So we'll invite people from the close beta and then we anticipate that we’ll probably be in that close beta platform probably through the end of June or end of July. And then after that, we'll have an open beta platform where everybody will be able to join.

So we're looking more of a June-July timeframe for the technology, but the technology is looking good and we're really excited about it and we're learning as much as we can and the users are using the platforms.

And at the same time a lot of our business development people, our sales people are out in the marketplace talking to advertisers about the benefit of BIGtoken and bringing their data to the platform. So we haven't announced any of those deals yet but our team is definitely out there doing so.

So I know a while ago we had certain plans about how we were going to finance the SRAX reach business, I mean the BIGtoken business. But as we’ve moved forward with the SRAXmd sale, we've had some different ideas about how we might go about doing that and we're -- not something that we're able to talk about right now.

But it’s definitely put some different ideas in our head about how we'll go ahead and finance that piece of the business..

And I have one more I know that the recent new products offerings, including SRAXfan and SRAXauto are not expected to be significant revenue contributors in 2018.

But can you give us some insight on whether the products are delivering on expectations and some thoughts on how those products are being accepted at this point?.

So similar to the way that we've done in the past with products like Reach and Social and MD, we haven't -- not given any guidance as to each of the individual products. But we believe that each of those individual products have the opportunity to see evaluation similar to that which you would seek from, potentially from an MD businesses.

So we think each of those businesses have significant opportunity..

We will take our next question from James McIlree with Chardan Capital..

Just a follow up a little bit about Mike’s question about san and Auto. I’m not asking you to say how much if any revenues is generating. But can you give us an idea about where it is in the lifecycle relative to whatever you want to talk about, relative to MD right now, relative to where you thought it was where it should be.

I mean, just a progress update on where those two verticals are..

So we didn’t really get it building different products overtime some that have caught on, some that have not. And they have each seen their individual life cycle through the process.

And if you look back at MD, the growth has been substantial over a three-year period and we think the same thing could happen with each of these individual verticals that are out there today.

So I can give you -- there is definitely interest and it’s helping in the sale process to have these individual verticals, same way that having SRAXmd helped in that vertical. And we think that verticalized approach is really important We think that’s been an expert in each of these individual can add a lot of value to a specific vertical.

And that's how we got to the BIGtoken business with understanding that if consumers were owning their own data and in certain verticals even that there would be substantial value and substantial margin in that data and each of these verticals provides an opportunity for us to captivate the individuals that are participating in, say specific sporting events and understand who they are and then attribute value to them and then be able to marks to consumers in the future.

So I can’t give you any metrics that we have prepared for the call today but perhaps in the future, we could get stuff ready for your guys to give you a sense of some metrics that you could hang your head on..

Would it be fair to say that you’re still identifying who and where the customers are or are you beyond that and now you’re at the point of marketing to the advertisers?.

We’re beyond that have sold and engaging, so there are products that are operational and working now..

And then obviously there has been a lot of issues going on with Facebook and the European privacy issues. And just general comment on how that impacts you at all or opens up opportunities for you with all..

I think it's fantastic for us. I think the attention to consumer privacy data is very important and people are becoming much more aware of the value of their data and we've been talking about that for the last year. And the issues that have transpired lately are only going to be beneficial and help the process along for us.

And we think that there is significant demand, I guess in the United States as in relation to consumer data on Facebook.

And then internationally, we've always planned that the rules that are taking place in Europe are very important to BIGtoken and the value of the consumer indicating that they’re willing to sell access to their data to be marketed too.

So if their consumer is opting into that process and saying I'm willing and I'm going to participate in this process and this is what I am okay seeing then there is a lot of value in that..

And I should have been more specific. I mean I see the positive implication for the BIGtoken. I was referring more to the 25 million-ish of revenue that you’re generating. Right now, if there is any impact on that, I don’t want to call it legacy but let's call it the core revenues..

The sales is using it as a tool to go in and talk to our partners and to discuss these additional datasets.

And the good part of that data is that it's very -- the margin is fantastic on data and they are taking that infrastructure and going in and talking to the best advertisers and agencies in the world and saying this is what we're doing, we'd like you to participate and here is why you should participate from a consumer privacy perspective.

So we think over the next year we’ll enhance on our ability to sell each of those individual verticals and also just sell across the board..

And J.P. a couple for you. I know that the cost of sales was lower in the quarter, because of the settlement.

But can you give us a precise amount, how much cost of revenues were impacted by the settlement?.

So there is lot of movement. As we've said, it drove the margins also about 85% and normally there would have been around 55% to 60% ex-those items.

As we said, that's generally where we see things for the foreseeable future that's been about our -- that was our historical high that we worked very hard to get back to and now we’re there and we believe we can hold that..

So looking at the last three quarters, you've been around that let's call it 55% gross margin, excluding the one-time things this quarter….

We have lot of that low margin business towards the end of 2016. And as Mike Kupinski measures what that carried over and then we had a little additional low margin business on the Reach product, but now all of that will flush through and work through all of that rationalization and clean up of our margin profile..

And OpEx ticked up from Q3 and Q2 level, so you were running $3.5 million-ish and now it’s $0.6 million in Q4.

Is there anything special in there or is that a new pace going forward?.

We cut a lot of costs and taken OpEx down. The tick-up you’re seeing now is related to internal investment on new products, more specifically it’s BIGtoken. So that’s going to -- as that evolves, that’s going to -- and slow a little bit but I think this is a normal range for the next few quarters..

It seems like as you move from -- move through development of the product it wouldn’t be unreasonable for that to tick-up at least that part of OpEx, I mean maybe something offsets it. But it seems reasonable to expect that that’s going to ramp up a little bit as we go through the year..

Yes, I mean we’re trying control costs wherever we can so that the dollars we have gets focused on future development and revenue driving products..

And then the last one.

Any near-term financial obligations coming through that we should be aware of, let’s call it, during course of this year?.

No, I mean that was the other big achievement last year, which is cleaning up the balance sheet and all the remnant obligations from old financings. All of that is now addressed. We now have long-term debentures in place that don’t have any amortization requirements until 2020..

We’ll go next to Matthew Larson with Wells Fargo..

I think most of my questions were answered, so I had to another call while you all were talking so if I am covering anything you guys just did then just cut me off. Somebody was asking about fan and the auto verticals and I missed that one but it sounds like there are building and you felt that, it could get to the level of SRAXmd and grow.

Here is my question. I am not an organic expert in your line of business. But clearly your timing is right on with all the Facebook news it was a great initiative when you began over a year ago. But it was foresight of this to say the least.

And ideally, if you can offer proprietary information on individual consumers and then the consumer’s can track that and get some BIGtoken compensation and then the marketers get better target audience, that makes complete sense.

But I say that people ultimately could scrub the Web sphere, the blogosphere or maybe some of the data that’s already out there. And it would seem to me that if you could offer proprietary information versus more detailed information that would be the -- trying to the future.

Is that something that is realistic and is that a firm like you guys could do where if you want me, for example, then you're not going to get me on Facebook, because I am not Facebook or I just have it scrubbed?.

Well, that's obviously the plan. And just from marketers that bring their CRM to build on top of the BIG platform will ask proprietary questions that are relevant to that marketer.

So if I am an e-commerce company that focuses on selling particular types of products online, I would ask you -- I bring my consumers to the table and start asking them specific questions about what do they like to buy and why do they like to buy and that data is very specific to those individuals and gives that marketer much better indication of who they should be marketing to in the future.

As far as blocking ads there’s certainly tools that we're building that will enable us to block certain ads that are not buying the data from the consumer.

So if the consumer is online and seeing ads we'll have tools that will enable them to block ads that are not paying for their data, so that's certainly something that’s in the daily look of what we’re doing. We're not going to be able to block any of the Facebook information that's something that Facebook has.

So what we can do is help the consumers understand what information is out there, what they can do to minimize their footprint and then to help marketers get better information from the consumers that are participating in the platform..

That to me is I'm trying to project out a number of more than a few months but a number of years in the future. And I really think the trend that you are all going is the right trend and hopefully you guys are on the vanguard. And it doesn't some bigger players hasn’t come in and create lot of competition for you guys.

But here is another question I have that might have been covered getting back to the SRAXmd is an asset that you had tremendous interest in the past. And I'll just throw this out for any other people who have been on previous conference calls.

This publicly was disclosed on the last conference call that there was an offer last year basically more than the whole market cap of your company. And so hopefully if that business has grown and I know you're not breaking out the revenues then….

Not to be disrespectful at all, but we don't want to talk about MD at all on the call. Just for strategic reasons it's just really we just want to avoid any conversation around MD today if you don't mind..

Don't mind. Then the last thing I wanted to talk about or ask about was I'm just looking at my notes here and again most of them were covered. So I'm crossing them out. I guess that’s it. I'll just ask this.

I caught something that there was some reversal of some tax thing or some accounting item in the fourth quarter, which accounted for extremely high gross margin of 85%. And the more likely gross margin would be around 50%, which is still better than 41% from last year..

I think it was 36% for the year. J.P.

wasn’t it?.

35% for the full year and we said it would be 55% to 60% and would have been where a more normalized number would have could out, maybe just reversals of media purchases and cost to good sold that we ultimately did not end up having to purchase..

That’s a onetime event, but was that -- that didn’t show up in the revenues, the revenue stream, it was just a one-time reversal that just hit your gross margin. And so the $6 million plus that you did, is that a reasonable run rate. Of course you want to grow going forward and there is this sale that’s pending that might affect it.

But is the $6 million, does that include some reversal of some of revenue or is that what you did on an operating basis?.

The gross revenue is what we did in the operating basis the adjustment that we’re discussing is the cost of revenue, so it net against the gross profits and help the gross margin but the gross revenue is the [$6.4 million]….

[Operator Instructions] We’ll take our next question from Kin Lam with Aegis Capital..

Just a question about the dividends in terms of the BIGtoken. Have you found the whole IOC done already? I am just wondering what you guys put out there..

So we just formed the last quarter form, the wholly on subsidiary of BIGtoken Inc and are working with the transmission on how that distribution is going to be happen.

So there is definitely distribution that’s coming as we have promised in the past and we’re just waiting for that to get set and we’ll have a dividend date once we have that process worked out. So that’s definitely happening, continuing to happen but that’s -- I just don’t have it here for you right now..

How about the ratio terms of how many BIGtokens per share?.

I have that, but I don’t think we can talk about that today. So we’re not -- I think the lawyers that have may had..

That does conclude today’s question and answer session. At this time, I’ll turn the conference back to Christopher Miglino for any closing remarks..

Thanks everybody. We look forward to see you at any of the events that we’re at or if anybody has any questions in between here, J.P or myself are happy to answer any calls or emails that you might have. So thank very much for joining us today and be sure to sign up on BIGtoken.com to participate in the beta platform..

This does conclude today's conference. Thank you all for your participation. You may now disconnect..