FreeCast, Inc S-1/A, filed Apr 10, 2020
FreeCast, Inc. (CAST)
As filed with the Securities and Exchange Commission on April 10, 2020
Registration No. 333-236482
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FREECAST, INC.
(Exact name of registrant as specified in its charter)
| Florida | 7990 | 45-2787251 | ||
| (State or other jurisdiction of incorporation or organization) | (Primary standard industrial classification code number) | (I.R.S. employer identification number) |
6901 TPC Drive, Suite 200
Orlando, Florida 32822
(407) 374-1607
(Address, including zip code, and telephone
number,
including area code, of registrant’s principal executive offices)
William A. Mobley, Jr., Chief Executive Officer
FreeCast, Inc.
6901 TPC Drive, Suite 200
Orlando, Florida 32801
(407) 374-1607
(Name, address, including zip code, and
telephone number,
including area code, of agent for service)
Copies to:
| Jeffery A. Bahnsen, Esq. | Christopher J. Bellini, Esq. |
| Bahnsen Legal Group, PLLC | Cozen O’Connor LLP |
|
131 NE 1st Avenue, Suite 100 Boca Raton, Florida 33432 |
33 South 6th Street, Suite 3800 Minneapolis, MN 55402 |
| (727) 888-3026 | (612) 260-9029 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer
☒ |
Smaller reporting company ☒ Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Security Being Registered | Proposed Maximum Aggregate Offering Price(1)(2) | Amount of Registration Fee(3) | ||||||
| Common Stock, $0.0001 par value | $ | 17,250,000 | $ | 2,239.05 | ||||
| Common Stock Underlying Representative’s Warrants(4) | $ | 1,080,000 | $ | 140.19 | ||||
| Total | $ | 18,330,000 | $ | 2,379.24 | (5) | |||
| (1) | Includes Common Stock that may be issued upon exercise of a 45-day option granted to the underwriters to cover over-allotments, if any. |
| (2) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act. |
| (3) | Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price. |
| (4) | Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The warrants are exercisable at a per share exercise price equal to 120% of the public offering price. As estimated solely for the purpose of recalculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the Representative’s Warrant is $1,080,000, which is equal to 120% multiplied by 6% of $15,000,000 (120% of $900,000). |
| (5) | Previously paid. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion,
Preliminary Prospectus dated
[______] [__], 2020
FREECAST, INC.
shares of common stock (par value, $0.0001)
This is our initial public offering of common stock. No public market currently exists for our common stock. We anticipate the initial public offering price will be between $ and $ per share.
We are selling shares of common stock.
We have applied to list our common stock on the Nasdaq Capital Market, or Nasdaq, under the symbol “FCST.”
We expect to be a “controlled company” under Nasdaq corporate governance standards because more than 50% of the voting power of our common stock following the completion of this offering will be held by Nextelligence, Inc., which is majority owned and controlled by our Chief Executive Officer. As a “controlled company,” we are permitted to, and will, elect not to comply with certain Nasdaq corporate governance standards, including majority “independent director” requirements and certain requirements relating to independent compensation and nominating committees. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of the Nasdaq Stock Market.
We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced reporting requirements for this prospectus and other filings with the Securities and Exchange Commission after this offering. See “Prospectus Summary—Emerging Growth Company Status.”
Investing in our securities involves a high degree of risk. You should carefully consider the risk factors beginning on page 5 of this prospectus before purchasing shares of our common stock.
|
Price to |
Underwriting |
Proceeds |
||||||||||
| Per Share | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
| (1) | The underwriter will receive compensation in addition to the underwriting discounts and commissions. See “Underwriting” beginning on page 45. |
We have granted the underwriters the right to purchase additional shares of our common stock to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to purchasers on , 2020.
The date of this prospectus is , 2020.
TABLE OF CONTENTS
Neither we nor the underwriter has authorized anyone to provide you with information that is different from that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. When you make a decision about whether to invest in our common stock, you should not rely upon any information other than the information in this prospectus or in any free writing prospectus that we may authorize to be delivered or made available to you. Neither the delivery of this prospectus nor the sale of our common stock means that the information contained in this prospectus or any free writing prospectus is correct after the date of this prospectus or such free writing prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy shares of common stock in any circumstances under which the offer or solicitation is unlawful.
i
Market, Industry and Other Data
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Third-party industry publications and forecasts generally state that the information contained therein has been obtained from sources generally believed to be reliable. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Cautionary Note Regarding Forward-Looking Statements.”
Among others, we refer to estimates compiled by the following industry sources:
| ● | (https://www.emarketer.com/content/us-digital-video-2019) |
| ● | (https://www.rbr.com/wp-content/uploads/Q1-2019-Nielsen-Total-Audience-Report-FINAL.pdf) |
Trademarks and Service Marks
This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
ii
This summary highlights certain information appearing elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the information under “Risk Factors” and our financial statements and the related notes included elsewhere in this prospectus before investing in our common stock.
In this prospectus, unless otherwise stated or the context otherwise requires, references to “FreeCast®,” “Company,” “we,” “us” and “our” or similar references mean FreeCast, Inc.
Our Company
We are an entertainment-based content discovery, aggregation and management company that provides SmartGuide® digital interactive technology for consumers to organize today’s numerous sources of online media similar to a traditional on-screen television, or TV, guide. Memberships to our SmartGuide technology, which beginning in October 2019 became available for purchase online and via TV Infomercials as a retail packaged “cord cutting kit/product” known as SelectTV®, and from 2012 through 2016 as a third party distributed brand known as Rabbit TV. Sales that occurred after 2016 were predominantly a result of legacy Rabbit TV sales, in which we maintained and operated for our existing membership base.
We also distribute numerous licenses to retail, device manufacturers/distributors (mobile, tablets, set top boxes, “smart” TV’s, streaming equipment, gaming systems), as well as private labeling for hotel/hospitality, broadband carriers, telecommunications, and promotion companies.
Since our inception in 2011, we have sold nearly four million memberships including our current and legacy products. Sales that occurred during this period were predominately a result of legacy Rabbit TV sales, which was in line with our expectations, and declined over this time. During the same period, we operated as a “pre-revenue” growth company, and with investment debt, have been able to progress from our dependence on a single license with Telebrands Corp., or Telebrands, for revenue to a multiple license model with many more retail options. Going forward, we intend to generate revenue through multiple avenues, such as membership fees, licensing, advertising and reseller referral fees.
The following table shows the number of active members at the end of each fiscal period presented in this prospectus. Active members are defined as current members who have access to our platform via a paid subscription.
| Year-Ended June 30, | Six-Months Ended December 31, | |||||||||||||||
| Active Members by Service | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Members: | ||||||||||||||||
| Select TV | 11,627 | 17,107 | 8,763 | 14,523 | ||||||||||||
| Rabbit TV | 48,463 | 128,770 | 61,972 | 90,077 | ||||||||||||
| Total Active Members: | 60,090 | 145,877 | 70,735 | 104,600 | ||||||||||||
Immediately following a five-year exclusive Distribution Agreement we had with Telebrands that expired on December 31, 2017, we sought to redevelop our technology services from a single license to a multi-license platform. Over the next two years we experimented with a myriad of online marketing and sales programs yielding varied results. In late 2019, we ultimately settled on a retail solution, evolving the online SelectTV brand into a consumer-packaged cord cutter kit, focusing on sales via TV Infomercials, mail delivery to consumers and positioning for big box retailer distribution. We set the base price for the packaged kit at $19.95 plus shipping, which includes one year of service and optional upgrade years. This price point represents a typical TV Infomercial price point for consumers.
The basis of our service platform is our proprietary content aggregation technology that automatically crawls the Internet to locate commercial-quality entertainment content from thousands of sources, including free, paid and subscription-based content. Additionally, we subscribe to the top entertainment data services such as Gracenote (owned by Nielson) and Guidebox/Reelgood whom provide real-time updates. Our technology then sorts through and manages all available commercial-quality digital media, including both live and on-demand video from free, subscription and pay-per-view (PPV) services. All of this information is then incorporated into our interactive SmartGuide presented to consumers in a familiar easy-to-use cable-like TV guide via the Internet and as a software application, on all Wi-Fi enabled devices.
SmartGuide technology is currently available on computers, “smart” phones, tablets, streaming devices and “smart” TV’s. It is available directly to consumers, branded as SelectTV, and will also be distributed by third parties, both as SelectTV and under other licensed brand names and partnerships.
Additionally, SelectTV is being sold as a part of a cord-cutting kit via TV Infomercials done in partnership with Mel Arthur and Kevin Harrington (of Home Shopping Network and Shark Tank, respectively). Sales via 800-numbers and online affiliates will be followed by distribution through big box retailers.
Our strategy is to grow our SmartGuide membership business domestically and globally via wholesale licensing agreements with: (i) manufacturers of “smart” TVs, mobile phones and streaming devices; (ii) bandwidth providers; (iii) hospitality locations; and (iv) online communities of users. We work constantly to improve the customer experience, with a focus on expanding the content catalogued by our technology, enhancing our user interface and extending our service to even more Internet-connected devices.
1
Relationship with Nextelligence, Inc.
On June 30, 2011, we entered into a Technology License and Development Agreement, which was amended and restated on October 19, 2012, and further amended on July 1, 2013 (as amended, the “Technology Agreement”), with Nextelligence, Inc., or Nextelligence, which is majority owned and controlled by William A. Mobley, Jr., our founder, Chief Executive Officer and Chairman of our board of directors. The Technology Agreement provides us with an exclusive 40-year license to a web-based application that installs in the end-user’s browser and any supported email functions or chat functions with search and certain other features (the “Technology”) from Nextelligence and for Nextelligence to provide all further development, improvement, modification, maintenance, management and enhancement services related to the Technology.
Controlled Company Status
Upon the completion of this offering, we expect that our common stock will be listed on the Nasdaq Stock Market, or Nasdaq. We expect to be a “controlled company” under Nasdaq corporate governance standards because more than 50% of the voting power of our common stock following the completion of this offering will be held by Nextelligence, Inc. A “controlled company” may elect not to comply with certain Nasdaq corporate governance standards, including the requirements that: (i) we have a majority of our board of directors consists of “independent directors,” as defined under Nasdaq rules; (ii) we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and (iii) we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. Following this offering, in reliance upon the foregoing exemptions, a majority of our board of directors will not consist of independent directors, we will not have a nominating and corporate governance committee, and our compensation committee will not be composed entirely of independent directors. Further, the compensation committee will not have a written charter addressing the committee’s purpose and responsibilities We may use any of these exemptions for so long as we are a controlled company. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
Emerging Growth Company Status
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. Accordingly, we have included detailed compensation information for only our three most highly compensated executive officers and have not included a compensation discussion and analysis (CD&A) of our executive compensation programs in this prospectus. In addition, for so long as we are an “emerging growth company,” we will not be required to:
| ● | engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes–Oxley Act of 2002, or Sarbanes–Oxley Act; | |
| ● | comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (PCAOB) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); | |
| ● | submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “say-on-golden parachutes;” or | |
| ● | disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparison of the chief executive officer’s compensation to median employee compensation. |
In addition, the JOBS Act provides that an “emerging growth company” can use the extended transition period for complying with new or revised accounting standards, which we have elected to take advantage of.
We will remain an “emerging growth company” until the earliest to occur of:
| ● | our reporting $1 billion or more in annual gross revenues; | |
| ● | our issuance, in a three year period, of more than $1 billion in non-convertible debt; | |
| ● | the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; or | |
| ● | June 30, 2025. |
Our Corporate Information
We were incorporated on June 21, 2011 in the State of Florida. Our principal executive offices are located at 6901 TPC Drive, Suite 200 Orlando, Florida 32822. Our telephone number is (407) 374-1607. We maintain a website at www.FreeCast.com. The information contained on our website is not, and should not be interpreted to be, a part of this prospectus.
Trademark and Service Mark Notice
FreeCast, SmartGuide and SelectTV are registered service marks of FreeCast, Inc. We use these registered service marks in connection with the operation of our business, including our corporate name, logos and website names. Other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners. Solely for convenience, some of the trademarks, service marks, and trade names referred to in this prospectus are listed without the ® and ™ symbols.
2
| Common stock being offered by us | shares |
| Common stock outstanding after this offering | shares |
| Over-allotment option | shares |
| Use of Proceeds | We intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include financing our growth, developing new products, and funding capital expenditures, acquisitions and investments. |
| Dividend Policy | We do not anticipate paying any cash dividends on our common stock. In addition, we may incur indebtedness in the future that may restrict our ability to pay dividends. See “Dividend Policy” on page 18. |
| Proposed Nasdaq trading symbol | |
| Risk Factors | The securities offered by this prospectus are speculative and involve a high degree of risk and investors purchasing securities should not purchase the securities unless they can afford the loss of their entire investment. See “Risk Factors” beginning on page 5. |
The number of shares of our common stock to be outstanding after this offering is based on the number of shares outstanding as of December 31, 2019. The number of shares of our common stock to be outstanding after this offering does not take into account:
| ● | 24,367,072 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 2019 at a weighted average exercise price of $0.88 per share. | |
| ● | shares of common stock issuable upon the exercise of Representative’s warrants at an exercise price of $ per share. | |
| ● | 4,240,364 shares of common stock issuable upon the exercise of outstanding convertible debt as of December 31, 2019 at a conversion price of $0.25 per share. | |
| ● | 258,850 shares of common stock issuable upon the exercise of outstanding convertible debt as of December 31, 2019 at a conversion price of $0.60 per share. |
Unless otherwise noted, the information in this prospectus assumes that the underwriters do not exercise their over-allotment option.
3
The following table presents our summary historical financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and notes thereto included elsewhere in this prospectus. The statements of operations data for the fiscal years ended June 30, 2019 and 2018 are derived from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the periods ended December 31, 2019 and 2018 are derived from our unaudited financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results to be expected in the future and the results for the six months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the full fiscal year.
| Year Ended June 30, | Six Months Ended December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Statements of Operations Data: | ||||||||||||||||
| Total Revenue | $ | 269,791 | $ | 1,033,443 | $ | 90,006 | $ | 163,015 | ||||||||
| Total Cost of Revenue | 177,967 | 177,088 | 198,423 | 75,365 | ||||||||||||
| Total Operating Expenses | 1,467,271 | 1,835,496 | 1,068,095 | 555,349 | ||||||||||||
| Loss From Operations | (1,375,447 | ) | (979,141 | ) | (1,176,512 | ) | (467,699 | ) | ||||||||
| Total Other Income (Expense) | 289,613 | (581,216 | ) | 471,730 | (28,460 | ) | ||||||||||
| Net Loss | (1,085,834 | ) | (1,560,357 | ) | (704,782 | ) | (496,159 | ) | ||||||||
| Net Loss per share, basic and diluted | (0.04 | ) | (0.05 | ) | (0.02 | ) | (0.02 | ) | ||||||||
The pro forma statement of financial condition data as of December 31, 2019 gives effect to this offering based on an assumed initial public offering price of $ per share, which is the midpoint of the range listed on the cover page of this prospectus.
| As of December 31, 2019 | ||||||||
| Actual | Pro Forma | |||||||
| (unaudited) | (unaudited) | |||||||
| Balance Sheet Data: | ||||||||
| Cash and Cash Equivalents | $ | 817,029 | ||||||
| Accounts Receivable | 48,817 | |||||||
| Total Assets | 924,345 | |||||||
| Total Current Liabilities | 2,377,077 | |||||||
| Total Liabilities | 3,210,639 | |||||||
| Total Shareholders’ Equity (Deficit) | (2,286,294 | ) | ||||||
4
You should carefully consider the risks described below and elsewhere in this report, which could materially and adversely affect our business, results of operations or financial condition. If any of these risks occur, the trading price of our common stock could decline and you may lose all or part of your investment.
Risks Relating to Our Business
We may not be able to continue as a going concern without additional financing, and if such financing is not available to us or is not available to us on acceptable terms, we may be forced to cease operations.
We have a limited operating history and have incurred recurring losses from operations. As of December 2019, we have an accumulated a deficit of $13,535,698, and a stockholders’ deficit of $2,286,294. For the six months ended December 31, 2019 and 2018, we incurred a net loss of $704,782 and $496,159, respectively, and for the fiscal years ended June 30, 2019 and 2018, we incurred net losses of $1,085,834 and $1,560,357, respectively. Our failure to generate sufficient revenues, effectively manage expenses or raise additional capital could adversely affect our ability to achieve our intended business objectives. These matters, among others, raise substantial doubt about our ability to continue as a going concern.
We funded our initial operations primarily through sales of common stock to accredited investors, debt financing, and exchange of common stock for services received by us. We cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that we raise additional funds by issuing equity securities, our shareholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact our ability to conduct business. If we are not able to raise additional capital when required or on acceptable terms, we may have to: (i) significantly delay, scale back or discontinue the development or commercialization of SelectTV; (ii) seek collaborators for further development and commercialization of SelectTV; or (iii) relinquish or otherwise dispose of some or all of our rights to technologies or the products that we would otherwise seek to develop or commercialize.
Our SmartGuide relies on a technology that we license from Nextelligence, and any interruption of our rights as a licensee could have a significant adverse impact on some major aspects of our business, such as product development, customer retention and sales.
Our SmartGuide has been built on technology developed by Nextelligence and used by us pursuant to the Technology Agreement. Nextelligence is principally owned and controlled by William A. Mobley, Jr., our founder, Chief Executive Officer and Chairman of our board of directors. The Technology Agreement provides that Nextelligence is obligated to provide all further development, improvement, modification, maintenance, management and enhancement services related to the technology in exchange for certain payments to Nextelligence by us. The Technology Agreement may be terminated if, among other things, we breach the Technology Agreement, if we become insolvent or subject to the bankruptcy laws, or if there is a change of control (as defined in the Technology Agreement). If we were not able to use the technology for any reason, it could have a significant adverse impact on some major aspects of our business, such as product development, customer retention and sales.
If our efforts to attract and retain members are not successful, our business will be adversely affected.
We have experienced significant member decline over the past several years. As of June 30, 2018, we had 227,198 members, as of June 30, 2019, we had 126,803 members, which includes and accounts for a major fall-off of expiring former Rabbit TV users. Our ability going forward to attract members will depend in part on our ability to consistently provide our newly acquired members with newly launched SelectTV, with a more robust, valuable and quality experience for selecting and viewing TV shows, movies and channels and access to online radio stations. Furthermore, the relative service levels, content offerings, pricing and related features of competitors to our service may adversely impact our ability to attract and retain members. If consumers do not perceive our service offering to be of value, or if we introduce new or adjust existing services that are not favorably received by them, we may not be able to attract members. In addition, many of our members are rejoining our service or originate from word-of-mouth advertising from existing members. Our attracting and retaining members may depend on our ability to:
| ● | offer a secure platform; | |
| ● | provide tools and services that meet the evolving needs of consumers; | |
| ● | provide a wide range of high-quality product and service offerings; | |
| ● | enhance the attractiveness of our platform; | |
| ● | maintain the quality of our customer service; and | |
| ● | continue adapting to the changing demands of the market. |
5
If our efforts to satisfy our existing members are not successful, we may not be able to attract new members, and as a result, our ability to maintain or grow our business will be adversely affected. Members cancel their membership to our service for many reasons, including a perception that they do not use the service sufficiently, the need to cut household expenses, availability of content is limited, competitive services provide a better value or experience and customer service issues are not satisfactorily resolved. We must continually add new members both to replace members who cancel and to grow our business beyond our current member base. If too many of our members cancel our service, or if we are unable to attract new members in numbers sufficient to grow our business, our operating results will be adversely affected. If we are unable to successfully compete with current and new competitors in both retaining our existing members and attracting new members, our business will be adversely affected. Further, if excessive numbers of members cancel our service, we may be required to incur significantly higher marketing expenditures than we currently anticipate in order to replace these members with new members.
If we are not able to continue to innovate or if we fail to adapt to changes in our industry, our business, financial condition and results of operations would be materially and adversely affected.
The market for online video, radio and games is characterized by rapidly changing technology, evolving industry standards, new service and product introductions and changing customer demands. Although we have developed new products and services in order to meet customer demands, new technologies and evolving business models for delivery of entertainment video continue to develop at a fast pace and we may not be able to keep up with all of the changes. Consumers are afforded various means for consuming online video, radio and games. The various economic models underlying these differing means of entertainment video delivery include subscription, pay-per-view, ad-supported and piracy-based models. Several competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do. New entrants may enter the market with unique service offerings or approaches to distributing online video, radio and games and other companies also may enter into business combinations or alliances that strengthen their competitive positions. The changes and developments taking place in our industry may also require us to re-evaluate our business model and adopt significant changes to our long-term strategies and business plan. If we are unable to successfully or profitably compete with current and new competitors, programs and technologies, our business will be adversely affected, and we may not be able to increase or maintain market share, revenues or profitability.
We may not be able to maintain or grow our revenue or our business.
Since the beginning of fiscal year 2019, we have been focused on investing in and developing new technologies, which we anticipate will drive future growth and give us a sustainable revenue stream. In addition, we have transitioned to a “multi license” model from a ’single-license’ model. We believe that the new technology, coupled with our new sales and marketing strategy, will enable us to grow our revenue, as we are no longer limited by a single licensed vendor to sell our products. However, there can be no assurance that we will be able to sell sufficient memberships to fund our operations in the future. In addition, our growth may become stagnant for many other reasons, including decreasing consumer spending, increasing competition, slowing growth of the consumption of online video, radio and games, changes in government policies or general economic conditions.
If we are not able to manage our growth, our business could be adversely affected.
We are currently engaged in an effort to grow our service by introducing online access renewal, developing new products, expanding internationally and to residents of rural areas. As we undertake all these changes, if we are not able to manage the growing complexity of our business, including improving, refining or revising our systems and operational practices, our business may be adversely affected.
If our efforts to build strong brand identity and improve member satisfaction and loyalty are not successful, we may not be able to attract or retain members, and our operating results may be adversely affected.
We must continue to build and maintain strong brand identity for our products and services, which have expanded over time. We believe that strong brand identity will be important in attracting members. If our efforts to promote and maintain our existing brands and brands we develop in the future are not successful, our operating results and our ability to attract members may be adversely affected. From time to time, our members express dissatisfaction with our service, including, among other things, title availability, processing and service interruptions. To the extent dissatisfaction with our service is widespread or not adequately addressed, our brand may be adversely impacted and our ability to attract and retain members may be adversely affected. With respect to our planned international expansion, we will also need to establish our brand and to the extent we are not successful, our business in new markets would be adversely impacted.
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If we are unable to manage the mix of member acquisition sources, our member levels and marketing expenses may be adversely affected.
We utilize a broad mix of marketing programs to promote our service to potential new members. We obtain new members through our online marketing efforts, including paid search listings, banner ads, text links and permission-based e-mails. In addition, we have engaged in various offline marketing programs, including TV and radio advertising, direct mail and print campaigns, consumer package and mailing insertions. We maintain an active public relations program to increase awareness of our service and drive member acquisition. We opportunistically adjust our mix of marketing programs to acquire new members at a reasonable cost with the intention of achieving overall financial goals. If we are unable to maintain or replace our sources of members with similarly effective sources, or if the cost of our existing sources increases, our member levels and marketing expenses may be adversely affected.
If we are unable to continue using our current marketing channels, our ability to attract new members may be adversely affected.
We may not be able to continue to support the marketing of our service by current means if such activities are no longer available to us, become cost prohibitive or are adverse to our business. If companies that currently promote our service decide that we are negatively impacting their business, that they want to compete more directly with our business or enter a similar business or decide to exclusively support our competitors, we may no longer be given access to such marketing through them. In addition, if advertising rates increase, we may curtail marketing efforts or otherwise experience an increase in our marketing costs. Laws and regulations impose restrictions on the use of certain channels, including commercial e-mail and direct mail. We may limit or discontinue use or support of e-mail and other activities if we become concerned that members or potential members deem such activities intrusive, which could affect our goodwill or brand. If the available marketing channels are curtailed, our ability to attract new members may be adversely affected.
Although we do not distribute content through our service, if we are sued for content accessed through our service, our results of operations would be adversely affected.
Although we do not distribute content through our service, we face potential liability for negligence, copyright, patent or trademark infringement or other claims based on content accessed through our service. We also may face potential liability for content uploaded from our users in connection with our community-related content or reviews. If we become liable for such activities, then our business may suffer. Litigation to defend these claims could be costly and the expenses and damages arising from any liability could harm our results of operations. We cannot assure you that we are insured or indemnified to cover claims of these types or liability that may be imposed on us.
We rely upon a number of partners to offer our service.
We currently offer members the ability to easily navigate available sources of online video, radio and games and consume such media through their computers and other Internet-connected devices. If we are not successful in maintaining existing, and creating new, relationships, or if we encounter technological, content licensing or other impediments to our ability to organize content, our ability to grow our business could be adversely impacted. Furthermore, devices are manufactured and sold by entities other than FreeCast and while these entities should be responsible for the devices’ performance, the connection between these devices and FreeCast may nonetheless result in consumer dissatisfaction toward FreeCast and such dissatisfaction could result in claims against us or otherwise adversely impact our business.
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Any significant disruption in our computer systems or those of third-parties that we utilize in our operations could result in a loss or degradation of service and could adversely impact our business.
Members and potential members access our service through our Web site or their TVs, computers, game consoles, or streaming or mobile devices. Our reputation and ability to attract, retain and serve our members is dependent upon the reliable performance of our computer systems and those of third-parties that we utilize in our operations. Interruptions in these systems, or with the Internet in general, including discriminatory network management practices, could make our service unavailable or degraded. Much of our software is proprietary, and we rely on the expertise of our engineering and software development teams for the continued performance of our software and computer systems. Service interruptions, errors in our software or the unavailability of computer systems used in our operations could diminish the overall attractiveness of our service to existing and potential customers.
Our servers and those of third-parties we use in our operations are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead to interruptions and delays in our service and operations as well as loss, misuse or theft of data. Our Web site periodically experiences directed attacks intended to cause a disruption in service. Any attempts by hackers to disrupt our service or our internal systems, if successful, could harm our business, be expensive to remedy and damage our reputation. Our insurance does not cover expenses related to attacks on our Web site or internal systems. Efforts to prevent hackers from entering our computer systems are expensive to implement and may limit the functionality of our services. Any significant disruption to our service or internal computer systems could result in a loss of members and adversely affect our business and results of operations.
We utilize our own communications and computer hardware systems located either in our facilities or in that of a third-party Web hosting provider. In addition, we utilize third-party Internet-based or “cloud” computing services in connection with our business operations. Problems faced by our third-party Web hosting or cloud computing providers, including technological or business-related disruptions, could adversely impact the experience of our members. In addition, fires, floods, earthquakes, power losses, telecommunications failures, break-ins and similar events could damage these systems and hardware or cause them to fail completely. As we do not maintain entirely redundant systems, a disrupting event could result in prolonged downtime of our operations and could adversely affect our business.
We rely upon third parties to host certain aspects of our service and any disruption of, or interference with, our use of such third party services would impact our operations and our business would be adversely impacted.
We make use of a number of services provided by third parties, including distributed computing infrastructure platform for business operations, or what is commonly referred to as a cloud computing service. We have architected our software and computer systems so as to utilize data processing, storage capabilities and other services provided by such third parties. Given this, along with the fact that we cannot easily switch our operations to other providers, any disruption of or interference with our use of current service providers would impact our operations and our business would be adversely impacted.
We rely heavily on our proprietary technology to locate and organize online video, radio and games and to manage other aspects of our operations, and the failure of this technology to operate effectively could adversely affect our business.
We continually enhance or modify the technology used for our operations. We cannot be sure that any enhancements or other modifications we make to our operations will achieve the intended results or otherwise be of value to our members. Future enhancements and modifications to our technology could consume considerable resources. If we are unable to maintain and enhance our technology, our ability to retain existing members and to add new members may be impaired. In addition, if our technology or that of third-parties we utilize in our operations fails or otherwise operates improperly, our ability to retain existing members and to add new members may be impaired. Also, any harm to our members’ personal computers or other devices caused by software used in our operations could have an adverse effect on our business, results of operations and financial condition.
Privacy concerns could limit our ability to leverage our member data and our disclosure of or unauthorized access to member data could adversely impact our business and reputation.
In the ordinary course of business and, in particular, in connection with merchandising our service to our members, we collect and utilize data supplied by our members. We currently face certain legal obligations regarding the manner in which we treat such information. Other businesses have been criticized by privacy groups and governmental bodies for attempts to link personal identities and other information to data collected on the Internet regarding users’ browsing and other habits. Increased regulation of data utilization practices, including self-regulation or findings under existing laws, that limit our ability to use collected data, could have an adverse effect on our business. In addition, if unauthorized access to our member data were to occur or if we were to disclose data about our members in a manner that was objectionable to them, our business reputation could be adversely affected, and we could face potential legal claims that could impact our operating results.
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Our reputation and relationships with members would be harmed if our member data, particularly billing data, were to be accessed by unauthorized persons.
We maintain personal data regarding our members, including names and, in many cases, mailing addresses. With respect to billing data, such as credit card numbers, we rely on licensed encryption and authentication technology to secure such information. We take measures to protect against unauthorized intrusion into our members’ data. If, despite these measures, we, or our payment processing services, experience any unauthorized intrusion into our members’ data, current and potential members may become unwilling to provide the information to us necessary for them to become members, we could face legal claims, and our business could be adversely affected. Similarly, if a well-publicized breach of the consumer data security of any other major consumer Web site were to occur, there could be a general public loss of confidence in the use of the Internet for commerce transactions which could adversely affect our business.
In addition, we do not obtain signatures from members in connection with the use of credit cards by them. Under current credit card practices, to the extent we do not obtain cardholders’ signatures, we are liable for fraudulent credit card transactions, even when the associated financial institution approves payment of the orders. From time to time, fraudulent credit cards are used on our Web site to obtain service. Typically, these credit cards have not been registered as stolen and are therefore not rejected by our automatic authorization safeguards. While we do have a number of other safeguards in place, we nonetheless experience some loss from these fraudulent transactions. We do not currently carry insurance against the risk of fraudulent credit card transactions. A failure to adequately control fraudulent credit card transactions would harm our business and results of operations.
We may not be able to protect our intellectual property rights.
We rely on a combination of trademark, fair trade practice, patent, copyright and trade secret protection laws, as well as confidentiality procedures and contractual provisions, to protect our intellectual property rights. We also enter into confidentiality agreements with our employees and any third parties who may access our proprietary information, and we rigorously control access to our proprietary technology and information.
Intellectual property protection may not be sufficient and confidentiality agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights, including our rights under the Technology Agreement with Nextelligence. In addition, policing any unauthorized use of our intellectual property is difficult, time-consuming and costly and the steps we have taken may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we would prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
Intellectual property claims against us could be costly and result in the loss of significant rights related to, among other things, our Web site, technology, title selection processes and marketing activities.
Trademark, copyright, patent and other intellectual property rights are important to us. Our intellectual property rights extend to our technology, business processes and the content on our Web site. We use the intellectual property of third-parties in merchandising our products and marketing our service through contractual and other rights. From time to time, third-parties allege that we have violated their intellectual property rights. If we are unable to obtain sufficient rights, successfully defend our use, or develop non-infringing technology or otherwise alter our business practices on a timely basis in response to claims against us for infringement, misappropriation, misuse or other violation of third-party intellectual property rights, our business and competitive position may be adversely affected. Many companies are devoting significant resources to developing patents that could potentially affect many aspects of our business. There are numerous patents that broadly claim means and methods of conducting business on the Internet. We have not searched patents relative to our technology. Defending ourselves against intellectual property claims, whether they are with or without merit or are determined in our favor, results in costly litigation and diversion of technical and management personnel. It also may result in our inability to use our current Web site and technology, or our inability to market our service or merchandise our products. As a result of a dispute, we may have to develop non-infringing technology, enter into royalty or licensing agreements, adjust our merchandising or marketing activities or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us.
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If we are unable to protect our domain names, our reputation and brand could be adversely affected.
We currently hold various domain names relating to our brand, including freecast.com. Failure to protect our domain names could adversely affect our reputation and brand and make it more difficult for users to find our Web site and our service. The acquisition and maintenance of domain names generally are regulated by governmental agencies and their designees. The regulation of domain names in the United States may change in the near future. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. We may be unable, without significant cost or at all, to prevent third-parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.
We depend on key management as well as experienced and capable personnel generally, and any failure to attract, motivate and retain our staff could severely hinder our ability to maintain and grow our business.
We rely on the continued service of our senior management, including our founder and Chief Executive Officer and Chairman of our board of directors, William A. Mobley, Jr., other members of our executive team and other key employees to develop our products, services and solutions. In our industry, there is substantial and continuous competition for highly skilled business, product development, technical and other personnel. As a result, our human resources organization focuses significant efforts on attracting and retaining individuals in key technology positions. If we lose the services of any member of management or key personnel, and are unable to attract or locate suitable or qualified replacements, or otherwise hire talented personnel, we may incur additional expenses to recruit and train new staff, making it more difficult to meet our business objectives, which could severely disrupt our business and growth.
We cannot be assured we can obtain or retain third-party contractors for our specific services or development needs, which could disrupt our business operations or growth.
If we experience a substantial loss of, or an inability to attract, talented personnel, we may experience difficulty in meeting our business objectives.
Our brand name and our business may be harmed by aggressive marketing and communications strategies of our competitors.
Due to competition in our industry, we have been and may be the target of incomplete, inaccurate and false statements about our company and our services that could damage our and our management’s reputation and our brand and materially deter consumers from using our service. Our brand name and our business may be harmed if we are unable to promptly respond to our competitors’ misleading marketing efforts.
Risks Related to our Industry
Changes in consumer viewing habits, including more widespread usage of demand methods of entertainment video consumption could adversely affect our business.
The manner in which consumers seek entertainment online is changing rapidly. Digital cable, wireless and Internet content providers are continuing to improve technologies, content offerings, user interfaces and business models that allow consumers to access entertainment video-on-demand with interactive capabilities. The devices through which online video, radio and games can be consumed are also changing rapidly. For example, content from cable service providers may be viewed on laptops and mobile devices and content from Internet content providers may be viewed on TVs. If competitors providing similar services address the changes in consumer habits in a manner that is better able to meet content distributor and consumer needs and expectations, our business could be adversely affected.
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Our business depends on continued and unimpeded access to the Internet at non-discriminatory prices, and Internet access providers and Internet backbone providers may be able to block, limit, degrade or charge for access to certain of our products and services, which could lead to additional expenses and the loss of users.
Our products and services depend on the ability of our customers’ viewers to access the Internet, and certain of our customers’ products require significant bandwidth to work effectively. Currently, this access is provided by companies that have significant and increasing market power in the broadband and Internet access marketplace, including incumbent telephone companies, cable companies and mobile communications companies. Some of these providers have stated that they may take measures that could degrade, disrupt or increase the cost of user access by restricting or prohibiting the use of their infrastructure to support or facilitate offerings, or by charging increased fees to provide offerings, while others, including some of the largest providers of broadband Internet access services, have committed to not engaging in such behavior.
The ability of the FCC to regulate broadband Internet access services was called into question by an April 2010 ruling of the United States Court of Appeals for the D.C. Circuit. The FCC then proposed rules regulating broadband Internet access, but on January 14, 2014, the D.C. Circuit Court of Appeals struck down the net neutrality rules adopted by the FCC, determining that the FCC did not have the authority to issue or enforce net neutrality rules, as it had failed to identify certain service providers as “common carriers.” On February 26, 2015, the FCC approved a new rule that reclassifies broadband Internet access service as a telecommunication service and regulates broadband Internet access as a public utility (Title II Order). In 2016, a divided panel of the D.C. Circuit Court of Appeals upheld the Title II Order, concluding that the FCC’s classification of broadband Internet access service was permissible. However, under President Donald Trump’s administration, the FCC reversed course and in December 2017 adopted a new rule referred to as the Restoring Internet Freedom Order, which went into effect on June 11, 2018. The Restoring Internet Freedom Order (RIFO): (i) reinstated the information service classification of broadband Internet access service; (ii) reinstated the determination that mobile broadband Internet access service is not a commercial mobile service; and (iii) eliminated the Internet conduct standard and the non-exhaustive list of factors intended to guide application of that rule. On October 1, 2019, D.C. Circuit Court of Appeals upheld most provisions of the RIFO. One aspect of the RIFO that the court did not uphold relates to the FCC’s assertion that it could preempt state-level actions involving Net Neutrality and the Open Internet. More than 30 states have introduced bills to add their own net neutrality protections. The U.S. House of Representatives on April 10, 2019 passed a bill, called the Save the Internet Act, requiring internet service providers to treat all online content the same.
Unless either the Court overturns or Congress passes legislation that supersedes the FCC’s new rule, it is possible that broadband service providers could impose restrictions on bandwidth and service delivery that may adversely impact our download speeds or ability to deliver content over those facilities, or impose significant end user or other fees that could impact the cost of our services to end users, or our delivery costs. If no action is taken by the Court or Congress, current and future actions by broadband Internet access providers may also result in limitations on access to our services, a loss of existing users, or increased costs to us, our users or our customers, thereby impairing our ability to attract new users, or limiting our opportunities and models for revenue and growth.
Changes in how network operators handle and charge for access to data that travel across their networks could adversely impact our business.
We rely upon the ability of consumers to access our service through the Internet. To the extent that network operators implement usage based pricing, including meaningful bandwidth caps, or otherwise try to monetize access to their networks by data providers, we could incur greater operating expenses and our member acquisition and retention could be negatively impacted.
Most network operators that provide consumers with access to the Internet also provide these consumers with multichannel video programming. As such, companies like Comcast, Time Warner Cable and Cablevision have an incentive to use their network infrastructure in a manner adverse to our continued growth and success. While we believe that consumer demand, regulatory oversight and competition will help limit these incentives, to the extent that network operators are able to provide preferential treatment to their data as opposed to ours, our industry and business could be negatively impacted.
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Risks Related to the Offering
An active trading market for our common stock may not develop, which may cause our common stock to trade at a discount from the initial offering price and make it difficult for you to sell the shares you purchase.
Prior to this offering, there has been no public trading market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development or maintenance of an active trading market. The initial public offering price per share of our common stock has been determined by agreement among us and the underwriters and may not be indicative of the price at which our common stock will trade in the public trading market after this offering. If an active trading market does not develop, there may be difficulty selling any shares of our common stock.
The offering price of our common stock may not be indicative of future market prices of our common stock.
The offering price of the shares of our common stock has been arbitrarily determined by us and should not be considered an objective indication of our actual value, as it bears no relationship to our assets, earnings, book value or any other objective financial statement criteria of value.
Our management will have considerable discretion as to the use of the net proceeds to be received by us from this offering, and such use may not improve our financial results or increase the trading price of our common stock.
We have not allocated a significant portion of the net proceeds to be received by us in this offering to any particular purpose, and our use of such proceeds will be based on our current growth strategies and business conditions. Our management will have considerable discretion in the application of the net proceeds received by us. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase the trading price of our common stock. The net proceeds from this offering, pending investment in operating assets or businesses, may be placed in investments that do not produce income or that lose value.
After this offering, William A. Mobley, Jr., our founder, Chief Executive Officer and Chairman of our board of directors, individually and through Nextelligence, Inc., which is majority owned and controlled by him, will own or control in excess of % of our outstanding common stock.
After this offering, William A. Mobley, Jr., our Chief Executive Officer and Chairman of our board of directors, individually and through Nextelligence, Inc., which is majority owned and controlled by him, will own or control in excess of % of our outstanding common stock. As a result, Mr. Mobley is able to exercise significant influence over our company, including, but not limited to, any shareholder approvals for the election of our directors and, indirectly, the selection of our senior management, the amount of dividend payments, if any, our annual budget, increases or decreases in our share capital, new securities issuance, mergers and acquisitions and any amendments to our amended and restated articles of incorporation. Furthermore, this concentration of ownership may delay or prevent a change of control or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which could decrease the market price of our shares.
Following this offering, we will be a “controlled company” as such term is defined in the rules of Nasdaq, and, therefore, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
Upon the completion of this offering, we expect that our common stock will be listed on Nasdaq. We expect to be a “controlled company” under Nasdaq corporate governance standards because more than 50% of the voting power of our common stock following the completion of this offering will be held by Nextelligence, Inc. A “controlled company” may elect not to comply with certain Nasdaq corporate governance standards, including the requirements that: (i) we have a majority of our board of directors consists of “independent directors,” as defined under Nasdaq rules; (ii) we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and (iii) we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. Following this offering, in reliance upon the foregoing exemptions, a majority of our board of directors will not consist of independent directors, we will not have a nominating and corporate governance committee, and our compensation committee will not be composed entirely of independent directors. Further, the compensation committee will not have a written charter addressing the committee’s purpose and responsibilities. We may use any of these exemptions for so long as we are a controlled company. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
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The market price of our common stock may be volatile, which could cause the value of your investment to decline.
Securities markets worldwide experience significant price and volume fluctuations. This market volatility, as well as the factors listed below, some of which are beyond our control, could affect the market price of our common stock:
| ● | our failure to achieve actual operating results that meet or exceed guidance that we may have provided due to factors beyond our control, such as currency volatility and trading volumes; |
| ● | future announcements concerning us or our competitors, including the announcement of acquisitions; |
| ● | changes in government regulations or in the status of our regulatory approvals or licensure; |
| ● | public perceptions of risks associated with our services or operations; |
| ● | developments in our industry; and |
| ● | general economic, market and political conditions and other factors that may be unrelated to our operating performance or the operating performance of our competitors. |
If you purchase common stock sold in this offering, you will experience immediate and substantial dilution.
Based upon our unaudited financial statements at December 31, 2019, if you purchase common stock sold in this offering, you will experience immediate and substantial dilution of $ per share based on an offering price of $ , because the price that you pay per share will be greater than the net tangible book value per share. Our existing shareholders will experience an immediate increase in net tangible book value of $ per share. In addition, you may face additional dilution if we issue additional securities in the future to finance our operations.
If securities or industry analysts do not publish research or reports about our business, if they change their recommendations regarding our common stock adversely, or if we fail to achieve analysts’ earnings estimates, the market price and trading volume of our common stock could decline.
The trading market for our common stock may be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts who cover us or our industry make unfavorable comments about our market opportunity or business, the market price of our common stock would likely decline. If one or more of these analysts ceases coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause the market price of our common stock or trading volume to decline. In addition, if we fail to achieve analysts’ earnings estimates, the market price of our common stock would also likely decline.
If we are unable to meet the continued listing requirements of Nasdaq, Nasdaq will delist our common stock.
Upon the consummation of this offering, our common stock will be listed on Nasdaq. In the future, if we are not able to meet Nasdaq’s continued listing standards, we could be subject to suspension and delisting proceedings. A delisting of our common stock and our inability to list on another national securities exchange could negatively impact us by: (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets; and (iv) impairing our ability to provide equity incentives to our employees.
Because we do not intend to pay dividends for the foreseeable future, investors in the offering will benefit from their investment in shares only if our common stock appreciates in value.
We currently intend to retain our future earnings, if any, to finance the operation and growth of our business and do not expect to pay any dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. Our common stock may not appreciate in value or even maintain the price at which investors in this offering have purchased their shares.
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We cannot predict our future capital needs. As a result, we may need to raise significant amounts of additional capital. We may be unable to obtain the necessary capital when we need it, or on acceptable terms, if at all.
Our business depends on the availability of adequate funding and regulatory capital under applicable regulatory requirements. We currently anticipate that our available cash resources will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months. We may need to raise additional funds to:
| ● | support more rapid expansion; |
| ● | develop new or enhanced services and products; |
| ● | respond to competitive pressures; |
| ● | acquire complementary businesses, products or technologies; or |
| ● | respond to unanticipated requirements. |
Additional financing may not be available when needed on terms favorable to us.
For as long as we are an “emerging growth company,” we will not be required to comply with certain reporting requirements, including those relating to accounting standards and disclosure about our executive compensation, that apply to other public companies.
We are an “emerging growth company,” as defined in the Securities Act of 1933, as amended, or the Securities Act. As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes–Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy and information statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and of shareholder approval of any golden parachute payments not previously approved. Because we intend to take advantage of these exemptions, some investors may find our common stock less attractive, which may result in a less active trading market for our common stock and our stock price may be more volatile.
In addition, the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period for complying with new or revised accounting standards.
We could remain an “emerging growth company” until June 30, 2025 or, if earlier: (i) the last day of the first fiscal year in which our annual gross revenues exceed $1 billion; (ii) if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of the second fiscal quarter of any fiscal year, the last day of such fiscal year; or (iii) the date on which we have issued more than $1 billion in non-convertible debt securities during the preceding three-year period. If we are still a smaller reporting company (a company with a public float of less than $75 million) after we no longer qualify as an emerging growth company, we may be able to make use of some of the same exemptions (such as the exemption to the auditor attestation requirements of Section 404(b) of the Sarbanes–Oxley Act) as were available to us when we qualified as an emerging growth company.
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 or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.
We are not currently required to comply with Section 404(a) of the Sarbanes–Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the U.S. Securities and Exchange Commission’s, or SEC’s, rules implementing Sections 302 and 404 of the Sarbanes–Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Although we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. However, as an “emerging growth company,” our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.
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In addition, to comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal control can divert our management’s attention from other matters that are important to the operation of our business. In addition, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. If we identify material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
In the past, we have had weaknesses in our internal control over financial reporting.
Although we are not yet required to assess our internal controls over financial reporting, our Chief Executive Officer and Chief Financial Officer have determined that there have been, in the past, weaknesses in our internal control over financial reporting, relating to our failure to receive documentation prior to paying certain invoices. As is the case with many companies of our size: (i) we did not have written documentation of our internal control policies and procedures; (ii) we did not have sufficient segregation of duties within accounting functions; (iii) we did not have adequate staff and supervision within our accounting function; and (iv) we lacked a sufficient process for periodic financial reporting, including timely preparation and review of financial reports and statements. Our Chief Executive Officer and Chief Financial Officer believe that such weaknesses have been substantially remediated through, among other things, our hiring of the CFO Squad, LLC in December 2018 as a technical accounting expert in financial reporting and controlling function in accordance with the U.S. Generally Accepted Accounting Principles (GAAP).
Shareholders may be diluted by the future issuance of additional common stock in connection with acquisitions or otherwise.
After this offering, we will have approximately shares of common stock authorized but unissued, assuming the underwriters do not exercise their option to purchase additional shares. Our amended and restated articles of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions, in future common stock offerings or otherwise. Any common stock that we issue after this offering will dilute the percentage ownership held by the investors who purchase common stock in this offering.
Substantial future sales or perceived potential sales of our common stock in the public market could cause the price of our common stock to decline significantly.
Sales of our common stock or other equity securities in the public market after this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline significantly. Upon completion of this offering, we will have shares of common stock outstanding, assuming the underwriters do not exercise their option to purchase additional shares, of which shares of our common stock, representing % of our outstanding common stock immediately after this offering, will not be subject to lock-up agreements. All shares of common stock sold in this offering will be freely transferable by persons other than our “affiliates” without restriction or further registration under the Securities Act. The common stock outstanding after this offering will be available for sale, upon the expiration of the lock-up periods described elsewhere in this prospectus beginning from the date of this prospectus (if applicable to such holder), subject to volume and other restrictions as applicable under Rules 144 and 701 under the Securities Act. Any or all of these shares may be released prior to the expiration of the applicable lock-up period at the discretion of one of the designated representatives. To the extent shares are released before the expiration of the applicable lock-up period and sold into the market, the market price of our common stock could decline significantly.
Certain holders of our common stock will have the right to cause us to register under the Securities Act the sale of their shares, subject to the applicable lock-up periods in connection with this offering. Registration of these shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our common stock to decline significantly.
15
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements in this prospectus or in the documents incorporated by reference herein that are not descriptions of historical facts are forward-looking statements that are based on management’s current expectations and are subject to risks and uncertainties that could negatively affect our business, operating results, financial condition and stock price. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will” or the negative of these terms or other comparable terminology. . We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in the section titled “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:
| ● | the online video and entertainment industry; |
| ● | our financial performance; |
| ● | our ability to attract and retain customers; |
| ● | our ability to expand our business; |
| ● | our ability to retain and hire necessary employees and appropriately staff our operations; and |
| ● | our estimates regarding capital requirements and needs for additional financing. |
We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we do not intend to update any of these forward-looking statements after the date of this prospectus or to conform these statements to actual results or revised expectations.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
16
We estimate that we will receive net proceeds from this offering of approximately $ million, based on an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares, we estimate that we will receive an additional $ million in net proceeds.
Each $1.00 increase or decrease in the assumed initial public offering price would increase or decrease, as applicable, the net proceeds to us by approximately $ million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. Each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the net proceeds to us by approximately $ million, assuming that the assumed initial public offering price, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $ million.
Although we have not yet determined with any certainty the manner in which we will allocate these net proceeds, we currently intend to use the net proceeds of this offering primarily to increase our sales and marketing efforts and expand our geographical presence. By hiring additional sales, marketing and technical personnel, we expect to accelerate our growth and take advantage of the momentum that we believe currently exists in the market for services like ours. We also intend to build out our infrastructure to handle the anticipated growth in our membership base and our product offerings.
Our management will retain broad discretion in the allocation and use of the net proceeds from this offering. The amounts and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive and technological developments, and the rate of growth, if any, of our business. For example, if we were to expand our operations more rapidly than anticipated by our current plans, a greater portion of the proceeds would likely be used for the construction and expansion of facilities, working capital and other capital expenditures. Alternatively, if we were to engage in an acquisition that contained a significant cash component, some or all of the proceeds might be used for that purpose.
Pending specific utilization of the net proceeds as described above, we intend to invest the net proceeds of the offering in short-term investment grade and U.S. government securities.
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We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends after the offering or for the foreseeable future. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our common stock will be made at the discretion of our board of directors and will depend upon, among other factors, our financial condition, operating results, current and anticipated cash needs, plans for expansion and other factors that our board of directors may deem relevant. In addition, the terms of our credit facilities contain restrictions on our ability to declare and pay cash dividends on our capital stock.
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The following table sets forth our capitalization as of December 31, 2019:
| ● | On an actual basis; and |
| ● | On a pro forma basis to give effect to the sale of shares of common stock by us in this offering at the initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.
| December 31, 2019 | ||||||||
| (unaudited) | (unaudited) | |||||||
| Actual | Pro Forma(1) | |||||||
| Cash | $ | 817,029 | ||||||
| Shareholders’ Deficit: | ||||||||
| Preferred stock, $0.0001 par value, 5,000,000 shares authorized; no shares issued and outstanding. | $ | - | ||||||
| Common stock, $0.0001 par value, 200,000,000 shares authorized; 33,146,626 shares issued and outstanding; shares issued and outstanding, as adjusted | 3,315 | |||||||
| Additional paid-in capital | 11,264,089 | |||||||
| Accumulated deficit | (13,535,698 | ) | ||||||
| Total shareholders’ deficit | (2,286,294 | ) | ||||||
| Total Capitalization | 2,289,609 | |||||||
| (1) | The pro forma information set forth above is illustrative only and will change based on the actual initial public offering price and number of shares issued in this offering, each determined at pricing. Each $[1.00] increase or decrease in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease pro forma cash, additional paid-in capital, total shareholder’ deficit and total capitalization by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each 1.0 million share increase or decrease in the number of shares offered by us would increase or decrease pro forma cash, additional paid-in capital, total shareholders’ deficit and total capitalization by approximately $ million, assuming that the assumed initial public offering price, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
The pro forma number of shares to be outstanding immediately after this offering as shown above is based on shares outstanding as of December 31, 2019 and does not take into account:
| ● | 24,367,072 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 2019 at a weighted average exercise price of $0.88 per share. | |
● |
shares of common stock issuable upon the exercise of Representative’s warrants at an exercise price of $ per share. | |
● |
4,240,364 shares of common stock issuable upon the exercise of outstanding convertible debt as of December 31, 2019 at a conversion price of $0.25 per share. | |
● |
258,850 shares of common stock issuable upon the exercise of outstanding convertible debt as of December 31, 2019 at a conversion price of $0.60 per share. |
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If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share you will pay in this offering and the pro forma net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of December 31, 2019 was $23,988,706, or $0.62 per share of common stock. Our pro forma net tangible book value per share set forth below represents our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding on December 31, 2019.
After giving effect to our issuance and sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, the mid-point of the estimated price range shown on the cover of this prospectus, after deducting the estimated underwriting discounts and offering expenses payable by us, the pro forma net tangible book value as of December 31, 2019 would have been $ or $ per share. This represents an immediate increase in net tangible book value to existing shareholders of $ per share. The initial public offering price per share will significantly exceed the net tangible book value per share. Accordingly, new investors who purchase shares of common stock in this offering will suffer an immediate dilution of their investment of $___ per share. The following table illustrates this per share dilution to the new investors purchasing shares of common stock in this offering without giving effect to the over-allotment option granted to the underwriters:
| Assumed public offering price per share | $ | |||
| Net tangible book value per share as of December 31, 2019 | (0.62 | ) | ||
| Increase in net tangible book value per share attributable to the offering | ||||
| Pro forma net tangible book value per share as of December 31, 2019 after giving effect to the offering | ||||
| Dilution per share to new investors | $ |
A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the pro forma net tangible book value by $ million, the pro forma net tangible book value per share after this offering by $ per share and the dilution in pro forma net tangible book value per share to investors in this offering by $ per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.
Similarly, a 1.0 million increase or decrease in the number of shares of our common stock offered by us would increase or decrease our pro forma as adjusted net tangible book value by approximately $ per share and the dilution per share to investors in this offering by $ per share, assuming the assumed initial public offering price remains the same and after deducting estimated underwriting discounts and commissions payable by us. If the underwriters exercise their option to purchase additional shares in full, the pro forma as adjusted net tangible book value per share of our common stock would be $ per share, and the dilution in pro forma net tangible book value per share to investors purchasing shares in this offering would be $ per share.
If the underwriters exercise their over-allotment option in full, the pro forma net tangible book value will increase to $ per share, representing an immediate increase to existing shareholders of $ per share and an immediate dilution of $ per share to new investors. If any shares are issued in connection with outstanding options, you will experience further dilution.
The tables above assume no exercise of warrants to purchase, or conversion of debt into, shares of common stock outstanding as of December 31, 2019. At December 31, 2019, there were 24,367,072 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $0.88 per share, 4,240,364 shares of common stock issuable upon the exercise of outstanding convertible debt at a conversion price of $0.25 per share and 258,850 shares of common stock issuable upon the exercise of outstanding convertible debt at a conversion price of $0.60 per share. The tables above also do not take into account shares of common stock issuable upon the exercise of Representative’s warrants at a weighted average exercise price of $ per share.
If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will increase to , or % of the total number of shares of common stock outstanding after this offering.
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SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following table presents our selected historical financial data for the periods presented and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statement and notes thereto included elsewhere in this prospectus. The statements of operations data for the fiscal years ended June 30, 2019 and 2018 and the statements of financial condition data as of June 30, 2019 and 2018 are derived from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the six months ended December 31, 2019 and 2018 and the statements of financial condition data as of December 31, 2019 are derived from our unaudited financial statements included elsewhere in this prospectus.
| Year Ended June 30, | Six Months Ended December 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Statements of Operations Data: | ||||||||||||||||
| Total Revenue | $ | 269,791 | $ | 1,033,443 | $ | 90,006 | $ | 163,015 | ||||||||
| Cost of Revenue | 177,967 | 177,088 | 198,423 | 75,365 | ||||||||||||
| Gross Profit | 91,824 | 856,355 | (108,417 | ) | 87,650 | |||||||||||
| Operating Costs and Expenses: | ||||||||||||||||
| Compensation and benefits | 568,210 | 1,195,877 | 378,366 | 242,526 | ||||||||||||
| Sales and marketing expenses | 41,325 | 70,167 | 77,948 | 37,000 | ||||||||||||
| General and administrative | 857,736 | 569,452 | 611,781 | 275,823 | ||||||||||||
| Total Operating Expenses | 1,467,271 | 1,835,496 | 1,068,095 | 555,349 | ||||||||||||
| Loss From Operations | (1,375,447 | ) | (979,141 | ) | (1,176,512 | ) | (467,699 | ) | ||||||||
| Total Other Income (Expense) | 289,613 | (581,216 | ) | 471,730 | (28,460 | ) | ||||||||||
| Net Loss | $ | (1,085,834 | ) | $ | (1,560,357 | ) | $ | (704,782 | ) | $ | (496,159 | ) | ||||
| Net Loss per share, basic and diluted | $ | (0.04 | ) | $ | (0.05 | ) | $ | (0.02 | ) | $ | (0.02 | ) | ||||
| As of June 30, | As of December 31, | |||||||||||
| 2019 | 2018 | 2019 | ||||||||||
| (unaudited) | ||||||||||||
| Balance Sheet Data: | ||||||||||||
| Cash and Cash Equivalents | $ | 43,094 | $ | 1,023 | $ | 817,029 | ||||||
| Accounts Receivable | 28,487 | 30,142 | 48,817 | |||||||||
| Total Assets | 85,584 | 53,457 | 924,345 | |||||||||
| Total Current Liabilities | 3,368,068 | 4,124,858 | 2,377,077 | |||||||||
| Total Liabilities | 3,470,463 | 4,319,269 | 3,210,639 | |||||||||
| Total Shareholders’ Equity (Deficit) | (3,384,879 | ) | (4,265,812 | ) | (2,286,294 | ) | ||||||
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our audited financial statements and the related notes thereto and other financial information appearing elsewhere in this prospectus. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in the section titled “Risk Factors.”
Overview
Revenue for the six months ended December 31, 2019 decreased by 45%, or $73,009, to $90,006, as compared with the six months ended December 31, 2018, and the net loss increased by 42% to $704,782.
Revenue for the fiscal year ended June 30, 2019 decreased by 74%, or $763,652, to $269,791, as compared with the fiscal year ended June 30, 2018, while our net loss decreased by 30%, or $474,523, to $1.085 million.
The Telebrands “single license” agreement ended on December 31, 2017, opening up the opportunity to raise additional capital for rebuilding our new “multi-license” product platform. Whereby following a two-year technology platform upgrade enabled FreeCast in late 2019 to begin to distribute numerous licenses to retail, device manufacturers/distributors (mobile, tablets, set top boxes, “smart” TV, streaming equipment, gaming systems), including private labeled models for hotel/hospitality, broadband carriers, telecommunications, and promotion companies.
We see opportunities for growth in international sales, free-trial pre-loads in manufactured devices, including mobile devices and laptops, and introducing SelectTV into the in-home market. However, we can only take advantage of these opportunities if we have sufficient capital to do so, are able to recruit the necessary staff, and are able to expand our current infrastructure. We may also face additional challenges from new competitors that may be able to launch new businesses at relatively low cost, with consumers easily being able to shift spending from one provider to another. In order to combat this, we must continue to deliver a product that is more advanced than that of competitors.
The recent outbreak of novel coronavirus (“COVID-19”) originated in Wuhan, China, in December 2019 and has since spread to multiple countries, including the United States and several European countries. On March 11, 2020, the World Health Organization declared the outbreak a pandemic. The COVID-19 pandemic is affecting the United States and global economies, and has forced us to reduce our on-site staff in compliance with Florida Governor’s Executive Order 20-91, which places restrictions on the movement of all Florida citizens. The Order took effect April 3 and will last until April 30, unless extended for a longer duration. We are continuing operations via online workspace software, and with essential on-site shipping personnel to process current sales generated from our TV Infomercials. Also, down trending TV-based spending on advertising during the COVID-19 pandemic may provide further opportunities for us to acquire additional media spots at a reduced rate. The duration and ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business,
Components of our Operating Results
Revenue
Membership Revenue
We generate membership revenue through the sale of subscriptions to our retail facing product SelectTV, a digital interactive SmartGuide that aggregates media content on the Internet and facilitates access for our customers. Sales are originated from nationwide TV Infomercials via 800-number, online website and third-party online resellers.
We also generate “renewal” membership revenue from the surviving Rabbit TV members through our Rabbit TV Plus website. Rabbit TV and Rabbit TV Plus are no longer marketed directly to consumers and serves as a separately operated platform for former Rabbit TV customers who want to maintain service. We anticipate seeking to transition the members of Rabbit TV Plus to SelectTV in the near future to eliminate the cost associated with maintaining that independent platform that continues to decrease in memberships annually.
Membership revenue is recognized ratably on a straight-line basis over the duration of the membership period, generally ranging from one month to five years. All membership fees are collected at the time of purchase. Revenue is recognized when the service has been provided.
The principal drivers of our business are the number of active members and the price paid by members on an annual basis for their membership. We therefore monitor the number of active members as a key performance metric.
In order to monitor the effectiveness of our pricing strategies, we also monitor the average sales price for new and renewing subscriptions. To calculate this metric, sales of membership subscriptions are divided by the number of new and renewing memberships sold. Since our revenue is recognized over the life of the subscription, we believe that membership sales are a better reflection of the growth of our business than GAAP revenue.
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The following table shows the revenue number of membership subscriptions sold and the average sales price per new or renewing subscriber for six-month periods beginning July 1, 2017. Note that the large number of subscription sales in the six month period ended December 31, 2017 was due primarily to a one-time wholesale distribution to a third-party affiliate. Subsequently, on January 1, 2018, we introduced our new direct-to-consumer business sales model.
| For the Six-Months Ended, | Sales of Membership Subscriptions | New and Renewing Memberships Sold | Average Sales Price Per New or Renewing Subscriber | |||||||||
| December 31, 2017 | $ | 274,061 | 75,761 | $ | 3.62 | |||||||
| June 30, 2018 | $ | 135,316 | 10,887 | $ | 12.43 | |||||||
| December 31, 2018 | $ | 64,940 | 5,086 | $ | 12.77 | |||||||
| June 30, 2019 | $ | 56,145 | 3,487 | $ | 16.10 | |||||||
| December 31, 2019 | $ | 88,092 | 5,330 | $ | 16.53 | |||||||
Rabbit TV service continues to decline. Beginning in January 2018 with our new Select TV service and our new direct-to-consumer business sales model, we experimented with a myriad of online marketing and sales programs that yielded varied results. During the periods presented, our average sales price per new or renewing subscription sold was impacted by the mix of monthly, annual and longer-term memberships sold because monthly memberships were sold at a premium to an annual membership, while longer term memberships were sold at a discount to annual memberships.
Other Licensing Revenue
SelectTV is also licensed to device manufacturers, hospitality chains and telecom/broadband providers both as the SelectTV brand and through private labeling. These license arrangements have has not resulted in significant revenue to date.
Advertising and Other Revenue
We generate advertising revenue pursuant to arrangements with advertising agencies and brokers. Under these arrangements, we provide the agencies and brokers the ability to sell advertising on our service directly to advertisers. We report this revenue net of amounts due to agencies and brokers because we are neither the primary obligor under these arrangements, nor do we set the pricing or establish or maintain the relationship with the advertisers.
Premium services are also available, for an additional fee, to allow single or time-limited use of private, decrypted viewing of movies, sporting events, concerts or other types of events.
Deferred revenue
Deferred revenue consists principally of both prepaid but unrecognized membership revenue and advertising fees received or billed in advance of the delivery or completion of the delivery of services. We may pay sales incentives, in cash or by issuing equity instruments, to distributors of our memberships. Such sales incentives are not recognized as deferred revenue. Rather, sales incentives are recognized in current operations when issued, regardless of amounts in deferred revenue, which may have resulted from the distributor’s efforts. Deferred revenue is recognized as revenue when the services are provided and all other revenue recognition criteria have been met.
Cost of Revenue
Cost of revenue consists primarily of hosting, product development, and infrastructure costs and the salaries and benefits related to employees in software engineering, facilities-related expenses, and information technology associated with supporting those functions. Hosting costs consist of content streaming, maintaining our Internet service and creating and serving advertisements through third-party ad servers. We make payments to third-party advertising servers in the period in which the advertising impressions are delivered or click-through actions occur, and accordingly record this as a cost of revenue in the related period. We incur product development expenses primarily for improvements to our website and related apps, development of new advertising products and development and enhancement of the guide and streaming system. Product development costs are generally expensed as incurred.
Operating Expenses
Compensation and Benefits
Compensation and benefits consist primarily of employee-related costs, including salaries and benefits related to employees in finance, accounting, internal information technology and other administrative personnel and stock-based compensation.
Sales and Marketing
Sales and marketing consist primarily of employee-related costs, including salaries, commissions and benefits related to employees in sales, sales support and marketing departments. In addition, sales and marketing expenses include external sales and marketing expenses such as third-party marketing, TV Infomercials, branding, advertising, public relations expenses, commissions, facilities-related expenses, and infrastructure costs.
General and Administrative
General and administrative expenses include professional services costs for outside legal and accounting services, facilities-related expenses, travel costs, third party customer support, and credit card fees.
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Six Months Ended December 31, 2019 Compared to Six Months Ended December 31, 2018
Revenue
We generally have two major components of revenue: membership revenue and other revenue.
Membership revenue decreased by 43%, or $67,424, to $89,920, in the six months ended December 31, 2019, as compared with the same period in the prior year. While revenue from multi-year memberships were still being recognized over a monthly rate based on the subscription’s expiration date, the decrease in membership revenue is attributable to fewer renewals from legacy products for the six month period ending December 31, 2019, relative to 2018. The decrease in membership revenue is also attributable the fact that we did not sell enough Select TV memberships to offset the decline in Rabbit TV membership renewals. Sales of Select TV memberships during the six month period ended December 31, 2019 were limited due to several factors, including the fact that the product was still in the testing and development phase and therefor was not advertised other than in connection with initial testing of the product. As a result, we experienced a decrease of approximately 6,000 memberships during that period.
The following table shows the number of active members by service at the end of the six month period ended December 31, 2019 and 2018.
| Six-Months Ended December 31, | ||||||||
| Active Members by Service | 2019 | 2018 | ||||||
| Members: | ||||||||
| Select TV | 8,763 | 14,523 | ||||||
| Rabbit TV | 61,972 | 90,077 | ||||||
| Total Active Members: | 70,735 | 104,600 | ||||||
Other revenue decreased by 98%, or $5,585, to $86, in the six months ended December 31, 2019, as compared with the same period in the prior year. The decline in other revenue is relatively proportionate to the decrease in paid registered members.
Cost of Revenue
Cost of revenue increased by 163%, or $123,058, to $198,423 in the six months ended December 31, 2019, as compared with the same period in the prior year. The increase in cost of revenue is attributable to higher hosting and development costs as we continue to enhance our products’ functionality and content.
Operating Costs and Expenses
Operating expenses increased by 92%, or $512,746, to $1,068,095 in the six months ended December 31, 2019, as compared with the same period in the prior year. The increase in operating expenses resulted from additional employee headcount, professional service fees related to PCAOB accounting and auditing, and law firms in preparation of this registration statement on Form S-1, plus higher marketing costs relating to regional and national SelectTV cable and television Infomercial media buys, as we continue to initiate new revenues and updated product offerings.
Fiscal Year Ended June 30, 2019 Compared to Fiscal Year Ended June 30, 2018
Revenue
We generally have two major components of revenue: membership revenue and other revenue.
Membership revenue decreased by 74%, or $726,088 to $251,602, in the fiscal year ended June 30, 2019, as compared to the fiscal year ended June 30, 2018. While revenue from multi-year memberships were still being recognized over a monthly rate based on the subscription’s expiration date, the decrease in membership revenue is attributable to several factors, including:
| ● | The one-time recognition of a large deferred revenue liability in 2018 that related to Rabbit TV USB sales that became obsolete on December 31, 2017. |
| ● | We had fewer renewals from legacy products for the fiscal year ending June 30, 2019, relative to 2018. |
| ● | We did not sell enough Select TV memberships to offset the decline in Rabbit TV membership renewals. Sales of Select TV memberships were limited during the fiscal year ended June 30, 2019 due to several factors, including the fact that the product was still in the testing and development phase and therefor was not advertised other than in connection with initial testing of the product. As a result, we experienced a decrease of approximately 5,500 memberships during that period. |
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The following table shows the number of active members by service at the end of the fiscal year ended June 30, 2019 and 2018.
| Year-Ended June 30, | ||||||||
| Active Members by Service | 2019 | 2018 | ||||||
| Members: | ||||||||
| Select TV | 11,627 | 17,107 | ||||||
| Rabbit TV | 48,463 | 128,770 | ||||||
| Total Active Members: | 60,090 | 145,877 | ||||||
Other revenue decreased by 67%, or $37,564, in the fiscal year ended June 30, 2019, as compared to the fiscal year ended June 30, 2018, to $18,189. As we transitioned into the development phase, registered memberships declined as the old Rabbit TV service was phased out and the new SelectTV service was being developed and optimized. As memberships during the fiscal year ended June 30, 2019 declined, traffic to our site also declined, thus generating less other revenue.
Cost of Revenue
Cost of revenue increased by less than 1%, or $879, to $177,967, in the fiscal year ended June 30, 2019, as compared to the fiscal year ended June 30, 2018. Despite a 74% decrease in membership revenue in the fiscal year ended June 30, 2019, our cost of revenue remained comparable with our cost of revenue for the prior fiscal year due to increased hosting costs in fiscal year ended June 30, 2019.
Operating Costs and Expenses
Operating expenses decreased by 20%, or $368,225, to $1,467,271 million, in the fiscal year ended June 30, 2019, as compared to the fiscal year ended June 30, 2018, largely due to the decreased personnel and decreased marketing that supports our growth.
Liquidity and Capital Resources
We have historically financed our liquidity and capital needs primarily through the use of funds generated from operations, the sale of stock and notes payable. We plan to finance our future operating liquidity and regulatory capital needs from operations and the sale of securities. Following this offering, we expect that our personnel and marketing costs will increase as we continue to implement our expansion plan.
We primarily hold and invest our cash at various financial institutions and in various instruments, including cash held at banks and money market funds which invest in short-term U.S. government securities. In general, we believe all of our investments and deposits are of high credit quality and we have more than adequate liquidity to conduct our business.
We had a working capital deficit of $1,473,236 and $3,292,391 as of December 31, 2019 and June 30, 2019, respectively. Our net cash flow for the six months ended December 31, 2019 increased by $773,935. Our net cash flow for the fiscal year ended June 30, 2019 increased by $42,071. Our cash flow for the fiscal year ended June 30, 2018 decreased by $93,127.
Net cash used in operating activities was ($1,175,794) for the six months ended December 31, 2019, as compared with ($588,880) for the six months ended December 31, 2018. The increase in operating expenses resulted from additional employee headcount, professional service fees related to PCAOB accounting and auditing, and law firms in preparation of this registration statement on Form S-1, plus higher marketing costs relating to regional and national SelectTV cable and television Infomercial media buys, as we continue to initiate new revenues and updated product offerings. Net cash used in operating activities was ($1,462,420) for the fiscal year ended June 30, 2019, as compared to net cash used in operating activities of ($740,389) for the year ended June 30, 2018. The increase in net cash used in operating activities is largely a result of the settlement of outstanding debts that were recognized in 2019 as a gain on extinguishment.
In the six months ended December 31, 2019, we sold to unrelated investors a total of 1,655,000 shares of our common stock and warrants to purchase an aggregate of 1,655,000 shares of our common stock for net proceeds of $1,655,000. In the six months ended December 31, 2018, we sold to unrelated investors a total of 785,000 shares of our common stock and warrants to purchase an aggregate of 785,000 shares of our common stock for net proceeds of $785,000.
During the fiscal year ended June 30, 2019, we sold to unrelated investors a total of 1,345,000 shares of our common stock and warrants to purchase an aggregate of 1,345,000 shares of our common stock for net proceeds of $1,345,000. During the fiscal year ended June 30, 2018, we sold to unrelated investors a total of 586,000 shares of our common stock and warrants to purchase an aggregate of 586,000 shares of our common stock for net proceeds of $566,000, after deducting offering costs of $20,000.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. We evaluate these estimates and assumptions on an ongoing basis. We base our estimates on the information currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. As of December 31, 2019, our previous estimates had not materially deviated from our results.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made; if different estimates reasonably could have been used; or if changes in the estimate that are reasonably likely to occur periodically could materially impact the financial statements. While our significant accounting policies are described in more detail in the notes to our financial statements included in this prospectus, we believe the following accounting policies to be critical to the estimates and assumption used in the preparation of our financial statements.
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Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) or ASU 2014-09. The objective of the ASU is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the ASU Topic 606, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. The five-step analysis consists of the following: (i) identifying the contract with a customer; (ii) identifying the performance obligations in the contract; (iii) determining the transaction price; (iv) allocating the transaction price to the performance obligations in the contract; and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. Topic 606 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s ASC. The Company adopted Topic 606 effective July 1, 2018 using the modified retrospective approach. The Company reviewed all contracts that were not completed as of July 1, 2018 and the adoption did not have a material impact on the Company’s consolidated financial statements.
We generate membership revenue through the renewal sales of Rabbit TV, Rabbit TV Plus, new and renewal sales through Select TV, which operates as the successor product to Rabbit TV and Rabbit TV Plus, as well as the SmartGuide, an internet distributed streaming media guide that searches and aggregates media content on the web and facilitates access to its customers through Wi-Fi-enabled devices that support streaming video. The Company both retransmits and “ingests” and distributes content.
Membership revenue is derived from online sales through search engine optimization (SEO), search engine marketing (SEM), various marketing advertising services, the utilization of resellers in the form of publishers that promote upcoming retail promotions and packages, as well as, direct sales to members (Select TV, Rabbit TV Plus). Currently, a Rabbit TV Plus account only generates renewal sales, as 100% of new sales are being met by the Select TV media guide. Select TV and Rabbit TV Plus also include free access to the Rabbit TV Mobile app, for Android and iOS devices.
Membership revenue is recognized ratably on a straight-line basis over the duration of the membership period, generally ranging from one month to five years. If the member renews early, then the expiration date is extended by the renewal period, and the additional membership fee is deferred and amortized over the additional months purchased by the member. All membership fees are collected at the time of purchase.
Cost of Revenue
Cost of revenue consists primarily of hosting, product development, and infrastructure costs and the salaries and benefits related to employees in software engineering, facilities-related expenses, and information technology associated with supporting those functions. Certain website development and internal use software development costs may be capitalized when specific criteria are met. In such cases, the capitalized amounts are amortized to cost of revenue over the useful life of the related application once the application is placed in service.
Fair Value of Financial Instruments
In August 2018, FASB issued ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for the Company beginning July 1, 2020, including interim periods within those annual periods. The Company is currently evaluating the impact this standard will have on its financial statements.
In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The standard is effective for the Company beginning July 1, 2020, including interim periods within those annual periods. We are currently evaluating the impact this standard will have on our financial statements.
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Accounts Receivable
For accounts receivable, the Company performs ongoing credit evaluations of customers to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience with the customer, evaluation of their credit history, and review of the invoicing terms of the contract. Accounts receivables are reported net of an allowance for doubtful accounts when applicable. The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the accounts receivable balance at each reporting date. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. We did not recognize bad debt expense for the six months ended December 31, 2019. The balance of allowance for doubtful accounts at December 31, 2019 and June 30, 2019 was $245,240 and $245,240, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future consequences of events that have been reflected in the financial statements. The Company provides for income taxes using the asset and liability approach. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of June 30, 2019 and 2018, the Company had a full valuation allowance against deferred tax assets.
Jumpstart Our Business Startups Act of 2012
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.
Legal Proceedings
As of the date hereof, we know of no material, existing or pending legal proceedings against us, nor are we the plaintiff in any material proceedings or pending litigation. There are not proceedings in which any of our directors, executive officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest. From time to time, we may be subject to various claims, legal actions and regulatory proceedings arising in the ordinary course of business.
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Overview
We are an entertainment-based content discovery, aggregation and management company that provides SmartGuide® digital interactive technology for consumers to organize today’s numerous sources of online media similar to a traditional on-screen television, or TV, guide. Memberships to our SmartGuide technology, which beginning in October 2019 became available for purchase online and via TV Infomercials as a retail packaged “cord cutting kit/product” known as SelectTV®, and prior from 2012 through 2016 as a third party distributed brand known as Rabbit TV. Sales that occurred after 2016 were predominantly a result of legacy Rabbit TV sales, in which we maintained and operated for our existing membership base.
We also distribute numerous licenses to retail, device manufacturers/distributors (mobile, tablets, set top boxes, “smart” TV’s, streaming equipment, gaming systems), as well as private labeling for hotel/hospitality, broadband carriers, telecommunications, and promotion companies.
Since our inception in 2011, we have sold nearly four million memberships including our current and legacy products. Sales that occurred during this period were predominately a result of legacy Rabbit TV sales, which was in line with our expectations, and declined over this time. During the same period, we operated as a “pre-revenue” growth company, and with investment debt, have been able to progress from our dependence on a single license with Telebrands for revenue to a multiple license model with many more retail options. Going forward, we intend to generate revenue through multiple avenues, such as membership fees, licensing, advertising and reseller referral fees.
The following table shows the number of active members by service at the end of each fiscal period presented in this prospectus.
| Year-Ended June 30, | Six-Months Ended December 31, | |||||||||||||||
| Active Members by Service | 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Members: | ||||||||||||||||
| Select TV | 11,627 | 17,107 | 8,763 | 14,523 | ||||||||||||
| Rabbit TV | 48,463 | 128,770 | 61,972 | 90,077 | ||||||||||||
| Total Active Members: | 60,090 | 145,877 | 70,735 | 104,600 | ||||||||||||
Immediately following a five-year exclusive Distribution Agreement we had with Telebrands that expired on December 31, 2017, we sought to redevelop our technology services from a single license to a multi-license platform. Over the next two years we experimented with a myriad of online marketing and sales programs yielding varied results. In late 2019, we ultimately settled on a retail solution, evolving the online SelectTV brand into a consumer-packaged cord cutter kit, focusing on sales via TV Infomercials, mail delivery to consumers and positioning for big box retailer distribution. We set the base price for the packaged kit at $19.95 plus shipping, which includes one year of service and optional upgrade years. This price point represents a typical TV Infomercial price point for consumers.
The basis of our service platform is our proprietary content aggregation technology that automatically crawls the Internet to locate commercial-quality entertainment content from thousands of sources, including free, paid and subscription-based content. Additionally, we subscribe to the top entertainment data services such as Gracenote (owned by Nielson) and Guidebox/Reelgood whom provide real-time updates. Our technology then sorts through and manages all available commercial-quality digital media, including both live and on-demand video from free, subscription and pay-per-view (PPV) services. All of this information is then incorporated into our interactive SmartGuide presented to consumers in a familiar easy-to-use cable-like TV guide via the Internet and as a software application, on all Wi-Fi enabled devices.
The SmartGuide uses images and related information on customized guide pages to provide members with an easy way to explore all of the available media choices from one centralized account, regardless of the device or location. Upon selecting content to consume, the member is directed to the original source of the content. If content is available for free, the member is transferred to the website providing the content. If content is available through a subscription service (such as Netflix or Hulu), we allow the member to log-in to the service through our SmartGuide and the member is then directed to the subscription service’s website. If the content is PPV, the member is directed to the page requiring payment for the PPV service. We do not manipulate or distribute the source content, and the provider of the content retains all rights to and management of content.
Because we link members directly to third-party content sources and in no way manipulate, store, retransmit or distribute this content, we are not subject to licensing fees or restrictions by third-party content suppliers. We are not responsible for the availability or content of these external websites, nor do we endorse, warrant or guarantee the products, services or information described or offered. All logos and trademarks used in the guide are the sole property of their respective owners. We believe that this is a complementary relationship in which we directly supply free traffic to content suppliers, much like the print-based model employed by TV Guide in past decades.
Our SmartGuide technology is currently available on computers, “smart” phones, tablets, streaming devices and “smart” TV’s. It is available directly to consumers, branded as SelectTV, and will also be distributed by third parties, both as SelectTV and under other licensed brand names and partnerships.
Additionally, SelectTV is being sold as a part of a cord-cutting kit via TV Infomercials done in partnership with Mel Arthur and Kevin Harrington (of Home Shopping Network and Shark Tank, respectively). Sales via 800-numbers and online affiliates will be followed by distribution through big box retailers.
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Our strategy is to grow our SmartGuide membership business domestically and globally via wholesale licensing agreements with: (i) manufacturers of “smart” TVs, mobile phones and streaming devices; (ii) bandwidth providers; (iii) hospitality locations; and (iv) online communities of users. We work constantly to improve the customer experience, with a focus on expanding the content catalogued by our technology, enhancing our user interface and extending our service to even more Internet-connected devices.
Historically, we launched the initial SelectTV service, and displayed an accompanying device that turned any flat-screen TV into what we had branded as “The Smartest TV Ever.” In addition to the usual app manager you get with other set-top boxes, the SelectTV hardware included a fully functional web browser complete with version 1.0 of our initial SmartGuide technology. SelectTV also featured capabilities for media storage, gaming, home automation and home security. This original hardware version of SelectTV launched in November 2017 was soon thereafter discontinued in lieu of the current software-only version which has been developed to operate on most consumer Wi-Fi enabled media devices produced globally by numerous manufacturers.
Industry Overview
The way people consume entertainment has changed dramatically in recent years. The pay TV market, which includes cable and satellite TV as well as Internet-based subscription services like Sling TV, Netflix, Hulu, Disney+, Apple and Amazon, generated revenues worldwide of approximately $265 billion in 2018, based on information released by ABI Research. Due in part to the continued decline of traditional cable and satellite TV households; between 2019 and 2023, they estimate, the number of U.S. pay TV households will decline from 86.5 million to 72.7 million according to eMarketer.
Meanwhile, it is clear that connected TVs (TVs that can be connected to the internet and access content beyond what is available via the normal offering from a cable provider, or other devices that use a TV as a display and can connect to the internet to access content) and OTT (Over-the-Top, which refers to film and television content provided via a high-speed Internet connection rather than a cable or satellite provider) are growing faster than ever. It is expected that the number of digital video viewers in the U.S. will top 235 million in 2019, which represents 71.2% of the country’s population.
Furthermore, while consumers used to be able to watch a particular television program on a particular channel at a particular time (also known as linear video), the majority of consumers now watch television in a non-linear fashion. According to Nielsen’s Total Audience Report for Q1 of 2019, adults 18-34 spend 11 hours and 27 minutes connected to media every day, 66% of that time is spent on Internet-connected devices, such as computers, tablets and “smart” phones. The share of these new devices increased across all age groups with over 5% growth among 35-49 year olds in just Q1 of 2019 alone.
Options are great for consumers when it comes to deciding what to watch, but they are also decidedly complicated for an industry that continues to fragment and search for unique ways to influence consumer behavior. According to the Nielsen MediaTech Trender, 33% of adults have a rough idea what they want to watch, but are not exactly sure, and 22% do not know what they want to watch before tuning in. These habits vary by age; adults 18-34 are most open to browsing for content, as 30% have no idea what to watch and 40% have a rough idea beforehand.
We expect the trends toward non-linear digital video consumption to continue and believe that we are uniquely positioned to take advantage of this market with our products.
Sources of Revenue
FreeCast derives revenue from the following sources:
| ● | For members who sign up with us online via SelectTV .com, we charge a fee of $19.95 each year; |
| ● | For members who purchase our product through third-party licensees, we receive a portion of the retail sales price from the third-party licensee; |
| ● | License fees will be charged to device manufacturers, hospitality locations, broadband providers and telecommunications companies who will use our SmartGuide technology; |
| ● | We receive a fee for advertising on our guide pages provided, and for in-video/pre-roll ads by Google, pursuant to the standard terms and conditions of Google’s AdSense program; |
| ● | We receive fees through affiliate programs for content providers that have such programs for PPV programs that are purchased through our SmartGuide; and |
| ● | We receive fees for third-party related products (such as cables to connect a device to a member’s television) that are purchased through our SmartGuide. |
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In Development
We continue to advance our technology stack with client/customer services, all of which are anticipated to bring value-added features and revenues to the Company, including the following:
Dynamic Ad Insertion (DAI) - The ability to serve ads to visitors on a unique personalized basis, matching their existing advertising identifiers with refined digital advertising based on their known interests.
Media Pay (MP) - Fully integrated virtual wallet system limited exclusively to digital media subscriptions (VOD, PPV, SVOD), enabling users to protect their primary personal and payment credentials. One place to manage all subscriptions and billing with easy cancellation and wallet protection.
Channel Builder (MicroChannels) – End-to-end software solution for development of digital TV channels with robust support for leading advertising formats in addition to distribution technology that allows for integration to all major providers (OTT, Over the Air, etc.). Existing robust integrations with leading DAI solutions and internal DAI solutions enable this platform to monetize at a rate higher than traditional TV.
Our Competitive Strengths
We believe that we have a number of distinct advantages over competitors and are well positioned to fill the gaps in key market segments:
| ● | While traditional TV providers rely on fixed terrestrial hardwired infrastructure and first-party or proprietary devices and software ecosystems, our service is delivered via the Internet. |
| ● | Most of the products of our competitors are often limited in terms of the library of content available. For example, Netflix does not provide the same content as Amazon Prime, and neither will direct a subscriber to content available on the competing service. Because our SmartGuide catalogues content but does not distribute any content, we are able to direct members to any service that has the program they would like to watch available, whether free or fee based. |
| ● | Many of our competitors provide services that are often tied to a single home-based device. Our SmartGuide, however, is device agnostic and may be used on any device with Internet access, thanks to a robust web-based interface and apps available on major platforms including Android TV. |
| ● | Unlike competitors, our members continue to generate post-sale revenue through advertising on our guide pages and payments made to us through affiliate programs if members purchase media or other hardware products through our service. |
Our Growth Strategies
Through SelectTV, the brand or private labeling, we plan to accelerate our licensing platform to device makers and bandwidth providers, giving them a low-cost monetizable means to offer a competitive TV service to their customers without a large investment in new infrastructure.
We also plan to launch our SelectTV retail packaged service (in territory or language specific private label variations) beyond the United States onto global markets by late 2020.
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Relationship with Nextelligence, Inc.
On June 30, 2011, we entered into a Technology License and Development Agreement (as amended, the “Technology Agreement”), with Nextelligence, which is majority owned and controlled by William A. Mobley, Jr., our founder, Chief Executive Officer and Chairman of our board of directors. The Technology Agreement provides us with an exclusive 40 year license to a web-based application that installs in the end-user’s browser and any supported email functions or chat functions with search and certain other features (the “Technology”) from Nextelligence and for Nextelligence to provide all further development, improvement, modification, maintenance, management and enhancement services related to the Technology.
Pursuant to the Technology Agreement we issued 20,004,000 shares of our common stock to Nextelligence. The Technology Agreement also requires us to issue Nextelligence a warrant to purchase 4,000,000 shares of our common stock for each 2,000,000 memberships sold over 10,000,000. The Technology Agreement has a 40 year term unless terminated early based on termination events as defined in the Technology Agreement.
Competition
While there are many players in the online video space, FreeCast’s offering is unique and thus does not currently have direct, analogous competitors. Generally, any provider of online media that may appear to compete with us often in fact enjoys a mutually beneficial relationship, where their offering is captured and catalogued by our SmartGuide, which benefits our service, and we in turn send traffic and eyeballs to them as a result.
There are, however, several entities that provide services that are similar to the individual features or components of our own SmartGuide and SelectTV. They include:
| ● | Amazon Prime Video, through which Amazon also sells packages of content from HBO, Showtime, and others, which appear within the same interface for Prime Video subscribers. |
| ● | Viacom’s recently-acquired PlutoTV business, which assembles online content from various sources into linear channels which are made available online, similar to the Live Channels offering within SelectTV. |
| ● | Websites like Yidio and CanIStream.It that function as basic media search engines and point users to legal streaming sources of specified shows and movies. |
| ● | Roku, TiVo, Amazon’s FireTV and Apple TV, which are devices that aim to serve as media managers, though these are all hardware-centric solutions and little more than app managers, in contrast to our device-agnostic approach and unified media interface for all content. |
As competition in the online television space increases, we expect this to strengthen the value proposition of our product, making it more appealing to potential commercial partners and to consumers as well.
Operations
FreeCast licenses extensive entertainment data from Gracenote (a Nielsen company) and Guidebox/Reelgood. This data is to create the most comprehensive and up-to-date catalog of content from thousands of sources directly available from the World Wide Web by using in combination with FreeCast’s own proprietary aggregation technology. The links are then compiled into our SmartGuide for use by our members. We market our service through various channels, including online advertising, broad-based media, such as television and radio, as well as various strategic partnerships. We utilize the services of third-party cloud computing providers, more specifically, Amazon Web Services.
The initial two-year term of the Gracenote license agreement began on March 25, 2019. The license agreement automatically renews for successive one-year terms, unless either party notifies the other in writing at least 90 days before the end of the initial or renewal term of its desire to not renew, in which event the license agreement expires at the end of the then-current term. Gracenote may also terminate the license agreement in the event of a change of control that results in us controlling, or being controlled by, or being under common control with, any competitor or customer of Gracenote or its affiliates. Gracenote may also terminate the license agreement or cease providing data to us if we fail to pay any invoice within 60 days after we receive such invoice. We pay Gracenote a monthly license fee of $5,000, which increases to $7,500 when we reach 750,001 active monthly users. After the initial two-year term, the monthly license fee increases by five percent with each anniversary of the beginning date.
The initial one-year term of the Guidebox/Reelgood license agreement began on February 1, 2019. The license agreement automatically renews for successive one-year terms, unless either party notifies the other in writing at least 30 days before the end of the initial or renewal term of its desire to not renew, in which event the license agreement expires at the end of the then-current term. Either party may terminate the license agreement if the other party fails to cure a material breach of the license agreement within 30 days after the non-breaching party provides written notice of such breach. Guidebox/Reelgood may also terminate the license agreement upon a change of majority control of our current owners by sale of stock or assets, merger or otherwise. We pay Guidebox/Reelgood a monthly license fee of $5,000.
Seasonality
Our member growth exhibits a seasonal pattern that reflects variations in when consumers buy Internet-connected devices and when they tend to increase video watching. As a consequence, member growth is generally greatest in our fourth and first quarters (October through March), slowing in our second quarter (April through June) and then accelerating in our third quarter (July through September).
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Employees
As of December 31, 2019, we had 9 full-time employees, 1 furloughed employee, and 19 contract employees. Our employees are not covered by a collective bargaining agreement, and we consider our relations with our employees to be good.
Marketing
SelectTV is marketed and sold online through the SelectTV website, and through various affiliates who may sell SelectTV or a branded version of the underlying SmartGuide.
SelectTV is also now marketed via TV Infomercials, which direct consumers to a website and 800-number where sales occur. The product will also be sold at big box retailers in 2020, as the centerpiece of a cord-cutting kit, which will include a SelectTV annual subscription, HDTV antenna, and other cord-cutting accessories.
SelectTV is also sold by third party online resellers such as Stack Commerce, who utilizes informational and news marketing in such online publications as Cnet, Popular Science, Mashable, and others to generate interest in SelectTV whereby the consumer is linked to a purchase option.
SelectTV is sold in license packs to online loyalty program company TLC Relationship Management LTD for points redemption and awards for its clients members of these programs.
The product will also be marketed through traditional pay-per-click, social and online advertising networks such as Google Adwords, Bing, Facebook, Twitter, and others, along with organic search engine optimization, or SEO, methods. We are also establishing licensing partnerships through compatible service providers, such as bandwidth resellers, telecommunications providers, device manufacturers and media marketing partners.
Facilities
Our headquarters are located in approximately 3,360 square feet of a building located in Orlando, Florida for which we will pay between $3,539 and $3,619 per month, which includes the proportionate share of operating expenses (as defined in the lease) through February 29, 2020. UCMS, LLC leases these facilities from a third party landlord, and we sublease these facilities from UCMS.
Intellectual Property
Our intellectual property consists of:
| ● | Our Web Bot Media Crawler which gathers online content, including free, pay-per-view, and membership based media. |
| ● | Our Media & Link Validator which ensures reliability of the content offered by our service. |
| ● | A Content Management System by which we organize and deliver the content to our customers. |
Our Web Bot Media Crawler and Media & Link Validator are licensed to us by Nextelligence, Inc. pursuant to the Technology Agreement described above. The Content Management System is our proprietary technology (which we purchased from Nextelligence on January 2, 2015).
Although we have an exclusive 40-year license to the Technology pursuant to the Technology Agreement, including any improvements or enhancements thereto, the Technology is owned by Nextelligence and we are not permitted to alter or enhance the Technology. Therefore, any alteration or enhancement of the Technology developed by William A. Mobley, Jr. who is both our Chief Executive Officer and the controlling shareholder of Nextelligence, will be owned by Nextelligence. We could lose our right to use such Technology in the event of, among other things, a breach of the Technology Agreement, our bankruptcy or insolvency, or a change of control in us. The Technology Agreement provides that we and Nextelligence must keep the other’s proprietary information confidential.
We rely on a combination of trademark, fair trade practice, copyright and trade secret protection laws, as well as confidentiality procedures and contractual provisions, to protect our intellectual property rights. We also enter into confidentiality agreements with our employees and any third parties who may access our proprietary information, and we rigorously control access to our proprietary technology and information. We may seek to patent certain of our intellectual property in the future.
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Other Information
We were incorporated on June 21, 2011 in the State of Florida. Our principal executive offices are located at 6901 TPC Drive, Suite 200, Orlando, Florida 32822. Our telephone number is (407) 374-1603.
We maintain four websites, www.FreeCast.com, www.SelectTV.com, www.RabbitTVplus.com and www.SmartGuide.tv. The information contained on our websites is not, and should not be interpreted to be, a part of this prospectus.
Emerging Growth Company Status
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. Accordingly, we have included detailed compensation information for only our three most highly compensated executive officers and have not included a compensation discussion and analysis (CD&A) of our executive compensation programs in this prospectus. In addition, for so long as we are an “emerging growth company,” we will not be required to:
| ● | engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes–Oxley Act; |
| ● | comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); |
| ● | submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “say-on-golden parachutes;” or |
| ● | disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparison of the chief executive officer’s compensation to median employee compensation. |
In addition, the JOBS Act provides that an “emerging growth company” can use the extended transition period for complying with new or revised accounting standards, which we have elected to take advantage of.
We will remain an “emerging growth company” until the earliest to occur of:
| ● | our reporting $1 billion or more in annual gross revenues; |
| ● | our issuance, in a three year period, of more than $1 billion in non-convertible debt; |
| ● | the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; and |
| ● | June 30, 2025. |
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DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information about our executive officers, key employees and directors as of the date of this Registration Statement.
| Name | Age | Position | ||
| William A. Mobley, Jr. | 57 | Chief Executive Officer and Chairman of the Board of Directors | ||
| Christopher M. Savine | 61 | Chief Financial Officer; Director | ||
| David Gust | 59 | Director |
None of the events listed in Item 401(f) of Regulation S-K has occurred during the past ten years and that is material to the evaluation of the ability or integrity of any of our directors, director nominees or executive officers.
William A. Mobley, Jr. founded our Company in 2011 and has served as our Chief Executive Officer and Chairman of our board of directors since then. Before founding FreeCast, in 1999, Mr. Mobley formed Nextelligence, Inc., a technology solution and business management expertise provider, of which he is the Chief Executive Officer, a director and majority shareholder. Additionally, between 1993 and 2008, Mr. Mobley founded and was an officer and director of a number of online business solution companies, including Web2 Corp, Personal Portal Online, and World Commerce Online, and online media companies, including MegaMedia Networks and ImageCafe.com. Based on Mr. Mobley’s role as our founder, his position as the chief executive officer, and his executive level experience in Internet-based media industry, our board of directors believes that Mr. Mobley has the appropriate set of skills to serve as a member of the board.
Christopher M. Savine has served as our Chief Financial Officer since April 2014. Mr. Savine was the executive vice president and a segment chief financial officer at Cenveo, Inc., a diverse printing and packaging company, from 2009 to 2013. Prior to joining Cenveo, Mr. Savine served as executive vice president and chief financial officer at Case Interactive Media, Inc. from 2007 to 2009. Prior thereto, he spent five years at RR Donnelley & Sons Company (formerly Moore Wallace, Inc.) as the executive vice president and chief financial officer of an over $4 billion segment. From 2000 to 2002, Mr. Savine was chief financial officer of Netscape Communications Corporation and played an important role in integrating Netscape into AOL. He later served as a senior vice president - finance at AOL. Prior to joining Netscape, Mr. Savine was also chief financial officer at PennNET and Imark Communications and chief financial officer for two subsidiaries of Capital Cities/ABC, Inc., a Walt Disney Company, and was an audit manager at Peat, Markwick, Mitchell & Co. (which later merged with Klynveld Main Goerdeler and became KPMG LLP). Mr. Savine received a master’s degree in business administration in finance and a bachelor’s degree in accounting and economics from Saint Joseph’s University and was previously a Certified Public Accountant licensed in the state of Pennsylvania.
David Gust has served as a member of our board of directors since May 31, 2013. Since October 2006, Mr. Gust has held the position of vice president at Hilton Worldwide, Inc., working in marketing innovation and new product introduction. Prior to Hilton, Mr. Gust was the Chief Executive Officer of MegaMedia Networks/MegaChannels.com, an online streaming video portal for 2 years, Vice President at Hard Rock International, leading the brand management of 104 cafes in 34 countries for almost 4 years, and with the Walt Disney Company for over 13 years, most recently as the Vice President of Business Development, working on such projects as Disney Vacation Club, ESPN Zone, EuroDisney, Walt Disney World Master Planning, and the infrastructure development of various resorts. Mr. Gust received a bachelor’s degree in finance from Eastern Illinois University. Based on Mr. Gust’s extensive experience in and in-depth understanding for marketing, our board of directors believes that Mr. Gust has the appropriate set of skills to serve as a member of the board.
Board of Directors
We anticipate that two additional directors who are independent under Nasdaq rules will be appointed to our board of directors subject to and effective upon the listing of our common stock on Nasdaq.
After this offering, William A. Mobley, Jr., our Chief Executive Officer and Chairman of our board of directors, individually and through Nextelligence, Inc., which is majority owned and controlled by him, will own or control in excess of % of our outstanding common stock, assuming the underwriters do not exercise their option to purchase additional shares. This gives Mr. Mobley effective control of our company through our board of directors and permits him to decide all matters required to be presented to shareholders for vote.
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Term of Office
Our amended and restated articles of incorporation provide that our board of directors will be classified into three classes of directors as nearly equal in number as possible, designated: Class I, Class II and Class III, with each director serving for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected. Mr. Mobley’s current term as a director ends on the date of our annual meeting in 2021, Mr. Gust’s current term as a director ends on the date of our annual meeting in 2022 and Mr. Savine’s current term ends on the date of our annual meeting in 2023.
Director Independence
Upon the completion of this offering, we expect that our common stock will be listed on Nasdaq. We expect to be a “controlled company” under Nasdaq corporate governance standards because more than 50% of the voting power of our common stock following the completion of this offering will be held by Nextelligence, Inc. A “controlled company” may elect not to comply with certain Nasdaq corporate governance standards, including the requirements that: (i) we have a majority of our board of directors consists of “independent directors,” as defined under Nasdaq rules; (ii) we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and (iii) we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. Following this offering, in reliance upon the foregoing exemptions, a majority of our board of directors will not consist of independent directors, we will not have a nominating and corporate governance committee, and our compensation committee will not be composed entirely of independent directors, and we may use any of these exemptions for so long as we are a controlled company. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
The “controlled company” exception does not modify the independence requirements for the audit committee, and we intend to comply with the requirements of Sarbanes-Oxley Act and Nasdaq. The rules of Nasdaq permit the composition of our audit committee to be phased-in as follows: (i) one independent committee member at the time our shares are listed on Nasdaq; (ii) a majority of independent committee members within 90 days of the date of this prospectus; and (iii) all independent committee members within one year of the date of this prospectus. Thereafter, we will be required to have an audit committee comprised entirely of independent directors. We expect to appoint two independent directors to our board subject to and effective upon the listing of our common stock on Nasdaq. If at any time we cease to be a “controlled company” under Nasdaq rules, our board of directors will take all action necessary to comply with the applicable Nasdaq rules, including appointing a majority of independent directors to our board of directors and establishing certain committees composed entirely of independent directors, subject to a permitted “phase-in” period.
Our board of directors has reviewed the independence of our directors, as well as our director nominees who will join our board of directors upon the closing of the offering, based on the listing standards of Nasdaq. Based on this review, our board of directors determined that Mr. David Gust is independent within the meaning of Nasdaq rules. In making this determination, our board of directors considered the relationships that each of these non-employee directors has with us and all other facts and circumstances our board of directors deemed relevant in determining their independence. As required under applicable Nasdaq rules, we anticipate that our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present.
Board Committees
Our board of directors has established standing committees in connection with the discharge of its responsibilities. These committees include an Audit Committee and a Compensation Committee. Our board of directors has adopted a written charter for the Audit Committee, but in reliance on the exemption available for controlled companies the compensation committee will not have a written charter addressing the committee’s purpose and responsibilities. Upon completion of this offering, a copy of the charter for the Audit Committee will be available on our website. Our board of directors may establish other committees as it deems necessary or appropriate from time to time.
Audit Committee
The Audit Committee will be responsible for, among other matters:
| ● | appointing, compensating, retaining, evaluating, terminating, and overseeing our independent registered public accounting firm; |
| ● | discussing with our independent registered public accounting firm the independence of its members from its management; |
| ● | reviewing with our independent registered public accounting firm the scope and results of their audit; |
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| ● | approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm; |
| ● | overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC; |
| ● | reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls, and compliance with legal and regulatory requirements; |
| ● | coordinating the oversight by our board of directors of our code of business conduct and our disclosure controls and procedures |
| ● | establishing procedures for the confidential or anonymous submission of concerns regarding accounting, internal controls or auditing matters; and |
| ● | reviewing and approving related-person transactions. |
Upon completion of this offering, our audit committee will consist of Mr. David Gust. The Nasdaq rules require us to have one independent Audit Committee member upon the listing of our common stock, a majority of independent directors within 90 days of the date of this prospectus and all independent Audit Committee members within one year of the date of this prospectus. Our board of directors has affirmatively determined that Mr. David Gust meets the definition of “independent director” for purposes of serving on an Audit Committee under Rule 10A-3 and Nasdaq rules. Our board of directors has determined that none of our independent directors qualify as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K.
Compensation Committee
The Compensation Committee will be responsible for, among other matters:
| ● | reviewing key employee compensation goals, policies, plans and programs; |
| ● | reviewing and approving the compensation of our directors and executive officers; |
| ● | reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and |
| ● | appointing and overseeing any compensation consultants or advisors. |
Upon completion of this offering, our Compensation Committee will consist of Mr. William A. Mobley, Jr. and Mr. David Gust. As a controlled company, we will rely upon the exemption from the requirement that our Compensation Committee be composed entirely of independent directors.
Risk Oversight
Our board of directors will oversee a company-wide approach to risk management. Our board of directors will determine the appropriate risk level for us generally, assess the specific risks faced by us and review the steps taken by management to manage those risks. While our board of directors will have ultimate oversight responsibility for the risk management process, its committees will oversee risk in certain specified areas.
Specifically, our Compensation Committee will be responsible for overseeing the management of risks relating to our executive compensation plans and arrangements, and the incentives created by the compensation awards it administers. Our Audit Committee will oversee management of enterprise risks and financial risks, as well as potential conflicts of interests. Our board of directors will be responsible for overseeing the management of risks associated with the independence of our board of directors.
Compensation Committee Interlocks and Insider Participation
All compensation and related matters after this offering will be reviewed by our compensation committee.
Code of Business Conduct and Ethics
Upon or prior to completion of this offering, our board of directors will adopt a code of business conduct and ethics that applies to our directors, officers and employees. Upon completion of this offering, a copy of this code will be available on our website. We intend to disclose on our website any amendments to the Code of Business Conduct and Ethics and any waivers of the Code of Business Conduct and Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions.
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Summary Compensation Table
The following table provides information regarding the compensation paid during the years ended June 30, 2019 and June 30, 2018 to our principal executive officer, principal financial officer and certain of our other executive officers, who are collectively referred to as “named executive officers” elsewhere in this prospectus.
| Name and Principal Position | Year | Salary | Bonus | Equity Awards | All Other Compensation | Total | ||||||||||||||||||
| William A. Mobley, Jr. | 2019 | $ | 200,000 | 0 | 0 | $ | 30,000 | (1) | $ | 230,000 | ||||||||||||||
| Chief Executive Officer | 2018 | $ | 200,000 | (2) | 0 | 0 | $ | 30,000 | (1) | $ | 230,000 | |||||||||||||
| Christopher M. Savine | 2019 | $ | 0 | (3) | 0 | 0 | 0 | $ | 0 | |||||||||||||||
| Chief Financial Officer | 2018 | $ | 150,000 | 0 | 0 | 0 | $ | 150,000 | ||||||||||||||||
| (1) | Consists of an automobile allowance. |
| (2) | 100% of compensation to Mr. Mobley was deferred in 2018. |
| (3) | Mr. Savine took a furlough/leave of absence for the entirety of 2019; zero executive compensation was paid/accrued. |
Potential Payments Upon Termination or Change in Control
The following table sets forth potential payments payable to our named executive officers upon a termination of employment without cause or resignation for good reason or termination of employment without cause or resignation for good reason following a change in control. The table below reflects amounts payable to our executive officers assuming their employment was terminated on June 30, 2019 and, if applicable, a change in control also occurred on such date.
| Upon Termination without Cause or Resignation for Good Reason— No Change in Control | Upon Termination without Cause or Resignation for Good Reason— Change in Control | |||||||||||||||||||||||
| Name | Cash Severance | Value of Accelerated Vesting | Total | Cash Severance | Value of Accelerated Vesting | Total | ||||||||||||||||||
| William A. Mobley, Jr. Chief Executive Officer | 0 | 0 | 0 | 0 | $ | 1,850,000 | $ | 1,850,000 | ||||||||||||||||
| Christopher M. Savine Chief Financial Officer | $ | 125,000 | 0 | $ | 125,000 | $ | 125,000 | $ | 0 | $ | 125,000 | |||||||||||||
Overview of Our fiscal 2019 Executive Compensation
Our executive compensation program consisted of the following components of compensation in 2019:
Base Salary. Each named executive officer receives a base salary for the expertise, skills, knowledge and experience they offer to our management team. Base salaries are periodically adjusted to reflect:
| ● | The nature, responsibilities, and duties of the officer’s position; |
| ● | The officer’s expertise, demonstrated leadership ability, and prior performance; |
| ● | The officer’s salary history and total compensation, including annual cash incentive awards and annual equity incentive awards; and |
| ● | The competitiveness of the officer’s base salary. |
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Each named executive officer’s base salary for the fiscal year of 2019 is listed in the 2019 Summary Compensation Table.
Equity Incentive Awards.
We issued Mr. Mobley warrants to purchase an aggregate of 5,000,000 shares of our common stock at an exercise price of $0.25 per share on October 19, 2012 and warrants to purchase 5,000,000 shares of our common stock at an exercise price of $0.25 per share on December 31, 2012. Such warrants expire on October 18, 2022 and December 30, 2022, respectively.
We sold Mr. Savine, for $50.00, warrants to purchase an aggregate of 675,000 shares of our common stock at an exercise price of $0.60 per share on May 3, 2016 and warrants to purchase 675,000 shares of our common stock at an exercise price of $0.60 per share on May 8, 2017. Such warrants expire on April 30, 2027 and April 30, 2028, respectively.
Other Benefits. We are obligated to provide to one or more of the named executive officers with an automobile allowance. In the fiscal year ended June 30, 2019, we paid Mr. Mobley an automobile allowance of $30,000.
Employment Agreements
On July 1, 2013, we entered into an employment agreement with William A. Mobley, Jr., pursuant to which Mr. Mobley agreed to act as our Chief Executive Officer, which employment agreement was initially amended on July 1, 2014 and amended for a second time on July 1, 2019 (as amended, the “Mobley Employment Agreement”). Pursuant to the terms of the Mobley Employment Agreement, Mr. Mobley is entitled to receive an annual salary of $250,000 and an automobile allowance of $2,500 per month. The term of the Mobley Employment Agreement continues until June 30, 2024. An annual cash bonus may be paid at the discretion of our board of directors. Pursuant to the terms of the Mobley Employment Agreement, Mr. Mobley may only be terminated by us upon his death, disability or for cause, as defined in the Mobley Employment Agreement.
Effective April 28, 2017, we entered into a new employment agreement with Mr. Savine which replaced a previous employment agreement (the “Savine Employment Agreement”). The initial term of the Savine Employment Agreement expired on April 27, 2018, after which the Savine Employment Agreement automatically renews on a month-to-month basis until either party terminates it. Under the Savine Employment Agreement, Mr. Savine received an annual salary of $150,000 during the initial one-year term, and he receives $250,000 per annum thereafter until a new extension is executed between the parties. In conjunction with Mr. Savine entering into the Savine Employment Agreement, we sold Mr. Savine, for $50.00, a warrant to purchase 675,000 of our shares of common stock, exercisable at $0.60 per share at any time subsequent to May 1, 2018 and expiring on April 30, 2028. An annual bonus may be paid at the discretion of our board of directors. If Mr. Savine is terminated by us as a result of death or permanent disability or if Mr. Savine terminates his employment for good reason, he shall receive payment in respect of compensation earned but not yet paid. If Mr. Savine is terminated by us other than due to his death or disability or for cause, we would be obligated to pay him at the rate of $250,000 per annum for a period of six months subsequent to the date of termination. Effective July 1, 2018, the Mr. Savine took a voluntary unpaid leave of absence from his role and responsibilities as Chief Financial Officer, and therefore the Company didn’t pay or accrue any executive compensation related to Mr. Savine during 2019.
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Outstanding Equity Incentive Awards At Fiscal Year-End
The following table sets forth certain information regarding all outstanding equity awards held by our named executive officers as of June 30, 2019.
| Name | Number of Securities Underlying Unexercised Warrants (#) Exercisable | Number of Securities Underlying Unexercised Warrants (#) Unexercisable | Warrant Exercise Price ($) | Warrants Expiration Date | Number of Shares of Stock that have not vested (#) | Market value of Shares of Stock that have not vested ($) | ||||||||||||||||
| William A. Mobley, Jr. | 5,000,000 | - | $ | 0.25 | October 18, 2022 | - | - | |||||||||||||||
| 5,000,000 | - | $ | 0.25 | December 30, 2022 | - | - | ||||||||||||||||
| Christopher M. Savine | 675,000 | - | $ | 0.60 | April 30, 2027 | - | - | |||||||||||||||
| 675,000 | - | $ | 0.60 | April 30, 2028 | - | - | ||||||||||||||||
Warrant Exercises and Stock Vested
No officers or directors exercised warrants and no stock vested during the fiscal year of 2019.
Non-Executive Director Compensation
The non-executive members of our board of directors have not received any compensation prior to this offering and no arrangements have been entered into in relating to compensation after this offering. Following this offering, our board of directors will establish a compensation package for the non-executive members of our board of directors.
Compensation Committee Interlocks and Insider Participation
None of our officers currently serves, or has served during the last completed fiscal year, on the compensation committee or the board of directors of any other entity that has one or more officers serving as a member of our board of directors.
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CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
On June 30, 2011, we entered into a Technology License and Development Agreement, which was amended and restated on October 19, 2012, and further amended on July 1, 2013 (as amended, the “Technology Agreement”), with Nextelligence, which is majority owned and controlled by William A. Mobley, Jr., our founder, Chief Executive Officer and Chairman of our board of directors. The Technology Agreement provides us with an exclusive 40 year license to certain technology from Nextelligence and for Nextelligence to provide all further development, improvement, modification, maintenance, management and enhancement services related to such technology. Nextelligence is our parent entity by virtue of its ownership of more than 57% of our outstanding common stock prior to this offering.
Pursuant to the Technology Agreement, we issued 20,004,000 shares of our common stock to Nextelligence. The Technology Agreement also requires us to issue Nextelligence a warrant to purchase 4,000,000 shares of our common stock for each 2,000,000 memberships sold over 10,000,000. The Technology Agreement has a 40-year term unless terminated early based on termination events as defined in the Technology Agreement.
On July 1, 2018, we signed a revolving convertible note agreement with Nextelligence, which was amended and restated as of July 2, 2018, for an amount up to $500,000; with any borrowings on this loan being at our complete discretion. Outstanding principal accrues interest at 12% per annum, and is due and payable on July 12, 2020. In lieu of repayment, at Nextelligence’s option, all or part of the outstanding principal and accrued interest is convertible into shares of our common stock at a conversion price of $0.25 per share. As of December 31, 2019, the outstanding principal and interest due under this loan is $342,701.
In June 2016, William A. Mobley, Jr., our founder, Chief Executive Officer and Chairman of our board of directors, loaned us $111,000, at an interest rate of 12% per annum. The loan matured on December 31, 2017, is in default and remains as an on-demand liability of ours. In December 2016, we repaid $11,000 in outstanding principal. We also repaid approximately $50,000 during the fiscal year-end June 30, 2018. The loan is convertible into shares of common stock at a conversion price of $0.25 per share. As of December 31, 2019, the outstanding principal and interest due to Mr. Mobley was $73,520.
Between July 2017 and December 2018, Public Wire, LLC, a wholly-owned subsidiary of Nextelligence, loaned us in various installments a total of $80,450. The notes representing the loan matured on dates ranging from April 1, 2019 to January 1, 2020. The loan is in default and remains as an on-demand liability of ours. As of December 31, 2019, the outstanding principal and interest due to Public Wire was $80,202.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 3, 2020, certain information concerning the beneficial ownership of our common stock by: (i) each shareholder known by us to own beneficially five percent or more of our outstanding common stock or series a common stock; (ii) each director; (iii) each named executive officer; and (iv) all of our executive officers and directors as a group, and their percentage ownership and voting power.
The information presented below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security. A person is deemed to own beneficially any security as to which such person has the right to acquire sole or shared voting or investment power within 60 days through the conversion or exercise of any convertible security, warrant, option, or other right. More than one person may be deemed to be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within 60 days, by the sum of the number of shares outstanding as of such date. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner. Except as otherwise indicated below and under applicable community property laws, we believe that the beneficial owners of our common stock listed below have sole voting and investment power with respect to the shares shown. As of April 3, 2020, we had 33,501,626 shares of common stock outstanding.
| Name and Address of Beneficial Owner (1) | Number
of Shares Owned | Percentage Total Voting Power Before Offering | Percentage Total Voting Power After Offering | |||||||||
| William A. Mobley, Jr. (2)(5) | 36,324,251 | 73.26 | % | % | ||||||||
| Christopher M. Savine (3) | 2,425,000 | 6.96 | % | % | ||||||||
| David Gust | 0 | 0 | % | 0 | % | |||||||
| All officers and directors as a Group (three persons) | 38,749,251 | 76.08 | % | % | ||||||||
| Nextelligence, Inc. (4) | 21,028,853 | 59.60 | % | % | ||||||||
| Telebrands Corp. (5) | 4,004,000 | 10.67 | % | % | ||||||||
| * | Less than 1%. |
| (1) | Unless otherwise indicated, the address of such individual is c/o FreeCast, Inc., 6901 TPC Drive, Suite 200, Orlando, Florida 32822. |
| (2) | Consists of: (i) 991,138 shares of common stock held of record by Mr. Mobley; (ii) 300,260 shares of common stock underlying an immediately convertible promissory note held by Mr. Mobley; (iii) 19,247,085 shares of common stock held of record by Nextelligence, Inc., for which William A. Mobley, Jr. is an officer, director and majority shareholder; (iv) 10,000,000 shares of common stock underlying immediately exercisable warrants held of record by Mr. Mobley; (v) 1,781,768 shares of common stock underlying an immediately convertible promissory note held by Nextelligence, Inc., for which William A. Mobley, Jr. is an officer, director and majority shareholder; (vi) 4,000 shares of common stock held of record by Telebrands for which Mr. Mobley acts as trustee pursuant to a Voting Trust Agreement; and (vii) 4,000,000 shares of common stock underlying immediately exercisable warrants held of record by Telebrands for which Mr. Mobley acts as trustee pursuant to a Voting Trust Agreement. Mr. Mobley may be deemed to be the beneficial owner of the securities held of record by Telebrands and subject to the Voting Trust Agreement by virtue of his position as trustee thereof. Mr. Mobley disclaims beneficial ownership of the securities held of record by Telebrands for which he acts as trustee pursuant to the Voting Trust Agreement. |
| (3) | Consists of: (i) 1,075,000 shares common stock held of record by Mr. Savine; and (ii) 1,350,000 shares of common stock underlying immediately exercisable warrants held of record by Mr. Savine. |
| (4) | Consists of: (i) 19,247,085 shares of common stock held of record by Nextelligence, Inc.; and (ii) 1,781,768 shares of common stock underlying an immediately convertible promissory note held by Nextelligence, Inc. William A. Mobley, Jr. is an officer, director and majority shareholder of Nextelligence, Inc. |
| (5) | Represents 4,000 shares of common stock and 4,000,000 shares of common stock underlying immediately exercisable warrants held of record by Telebrands for which Mr. Mobley acts as trustee pursuant to a Voting Trust Agreement. Voting and investment power over the securities subject to the Voting Trust Agreement are exercised by Mr. Mobley in his capacity as trustee pursuant to the Voting Trust Agreement. See “ - Voting Trust Agreement” below. |
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Voting Stock
Holders of our common stock are entitled to elect a minority of our board of directors, and each share of our common stock entitles the holder to one vote, either in person or by proxy, at meetings of shareholders. Therefore, holders of our common stock will have little ability to influence our management and operations.
Shareholders are not permitted to vote their shares cumulatively. Accordingly, the holders of more than fifty percent (50%) of our common stock can elect all directors entitled to be elected by the common shareholders.
Voting Trust Agreement
On October 15, 2012, we entered into a Voting Trust Agreement with Telebrands and William A. Mobley, Jr. The Voting Trust Agreement appoints William A. Mobley, Jr. as the trustee of all the shares of our common stock owned by Telebrands at any time (the “Entrusted Shares”). Telebrands currently owns 4,000 shares of our common stock and warrants to purchase up to 20,000,000 shares of our common stock (of which only 4,000,000 are earned and currently exercisable until October 14, 2022). Pursuant to the Voting Trust Agreement, Mr. Mobley is entitled to exercise all rights relating to the voting and disposition of the Entrusted Shares, provided, however, Mr. Mobley is not allowed to effect a disposition or permit registration of the Entrusted Shares with the Securities and Exchange Commission or any state securities administrators unless Nextelligence, Inc., which is majority owned and controlled by Mr. Mobley, simultaneously effects a disposition or permits registration of an identical proportion of our voting securities held by Nextelligence on the same terms and conditions. In addition, Mr. Mobley may not permit a disposition or registration of any voting securities of the Company that Nextelligence holds unless he simultaneously effects a disposition or registration of an identical proportion of the Entrusted Shares on the same terms and conditions.
The term of such trust ends upon the earlier to occur, of: (i) Mr. Mobley ceases to be an affiliate of the Company, as defined in the Voting Trust Agreement; or (ii) the disposition of all of the Entrusted Shares.
We are obligated to indemnify Mr. Mobley against any liabilities, damages, claims, taxes, deficiencies, assessments, losses, penalties, interest, costs and expenses paid or incurred by him in connection with the Voting Trust Agreement, unless those paid or incurred are a result of the gross negligence, willful misconduct or bad faith of Mr. Mobley.
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General
Our charter authorizes the issuance of up to 200,000,000 shares of common stock, par value $0.0001 per share and 5,000,000 shares of preferred stock, par value $0.0001 per share.
Common Stock
As of December 31, 2019, we had 33,146,626 shares of our common stock outstanding. Holders of our common stock are entitled to elect a minority of our board of directors, and each share of our common stock entitles the holder to one vote, either in person or by proxy, at meetings of shareholders. All matters, other than the election of directors, at meetings of shareholders are decided by a majority of the votes cast at such meeting, either in person or by proxy.
Shareholders are not permitted to vote their shares cumulatively. Accordingly, the holders of more than fifty percent (50%) of our common stock can elect all directors entitled to be elected.
Preferred Stock
No shares of preferred stock are currently outstanding. Our board of directors may designate the authorized but unissued shares of the Preferred Stock with such rights and privileges as our board of directors may determine. As such, our board of directors may issue 5,000,000 preferred shares and designate the conversion, voting and other rights and preferences without notice to our shareholders and without shareholder approval.
Transfer Agent
The transfer agent for our common stock is Interwest Transfer Co., Inc., Salt Lake City, Utah.
Listing
We have applied to have our common stock listed on the Nasdaq Capital Market under the symbol “FCST.”
Holders
As of December 31, 2019, there were 33,146,626 shares of common stock outstanding, which were held by approximately 111 record shareholders.
Shares Eligible For Future Sale Pursuant to Rule 144
As of , 2020, an aggregate of shares of our common stock are eligible for immediate resale pursuant to Rule 144 promulgated under the Securities Act. As of , 2020, we will have been a reporting company for 90 days and, accordingly, all shares of our common stock acquired on or prior to , 2020 (including shares of common stock that are issued upon conversion of Preferred Stock acquired on or prior to such date) will become eligible for resale pursuant to Rule 144.
Registration Rights
The following table provides information about certain warrants issued to certain of our executive officers and employees that have registration rights. The registration rights contained in the warrants permit the holder of the warrant, at any time and from time to time, to require us to register the warrant and the shares underlying the warrant. Such persons have entered into lock-up agreements pursuant to which they will not be permitted to sell our securities for 180 days after the closing of this offering.
| Name | Shares Underlying Warrant | Date Exercisable | Exercise Price | Termination Date | ||||||||
| William A. Mobley, Jr. | 2,500,000 | July 16, 2016 | $ | 0.25 | October 18, 2022 | |||||||
| William A. Mobley, Jr. | 2,500,000 | July 16, 2017 | $ | 0.25 | October 18, 2022 | |||||||
| William A. Mobley, Jr. | 2,500,000 | July 16, 2018 | $ | 0.25 | December 30, 2022 | |||||||
| William A. Mobley, Jr. | 2,500,000 | July 16, 2019 | $ | 0.25 | December 30, 2022 | |||||||
| Gary D. Lipson | 2,500,000 | July 16, 2016 | $ | 0.25 | November 15, 2022 | |||||||
| Gary D. Lipson | 2,500,000 | July 16, 2017 | $ | 0.25 | November 15, 2022 | |||||||
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DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our Articles of Incorporation and Bylaws, subject to the provisions of Florida Law, contain provisions which allow the corporation to indemnify any person against liabilities and other expenses incurred as the result of defending or administering any pending or anticipated legal issue in connection with service to us if it is determined that person acted in good faith and in a manner which he reasonably believed was in the best interest of the corporation. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
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Alexander Capital, L.P. is acting as the book running manager of the offering, and we have entered into an underwriting agreement on the date of this prospectus, with them as underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters and the underwriters have agreed to purchase from us, at the public offering price per share less the underwriting discounts set forth on the cover page of this prospectus.
The underwriters are committed to purchase all the shares of common stock offered by us other than those covered by the option to purchase additional shares described below, if they purchase any shares. The obligations of the underwriters may be terminated upon the occurrence of certain events specified in the underwriting agreement. Furthermore, pursuant to the underwriting agreement, the underwriters’ obligations are subject to customary conditions, representations and warranties contained in the underwriting agreement, such as receipt by the underwriters of officers’ certificates and legal opinions.
We have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect thereof.
The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel and other conditions specified in the underwriting agreement. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
Over-allotment Option
We have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of this prospectus, permits the underwriters to purchase a maximum of ___ additional shares (15% of the shares sold in this offering) from us to cover over-allotments, if any. If the underwriters exercise all or part of this option, it will purchase shares covered by the option at the public offering price per share that appears on the cover page of this prospectus, less the underwriting discount. If this option is exercised in full, the total offering price to the public will be $_____ and the total net proceeds, before expenses, to us will be $____.
Discount
The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.
| Per Share | Total
With No Exercise of Over- Allotment Option |
Total
With Full Exercise of Over- Allotment Option |
||||||||||
| Public offering price | $ | $ | $ | |||||||||
| Underwriting discount (9%) | $ | $ | $ | |||||||||
| Proceeds, before expenses, to us | $ | $ | $ | |||||||||
The underwriters propose to offer the shares offered by us to the public at the public offering price per share set forth on the cover of this prospectus. In addition, the underwriters may offer some of the shares to other securities dealers at such price less a concession of $ per share. If all of the shares offered by us are not sold at the public offering price per share, the underwriters may change the offering price per share and other selling terms by means of a supplement to this prospectus.
We will pay the out-of-pocket accountable expenses of the underwriters in connection with this offering. The underwriting agreement, however, provides that in the event the offering is terminated, any advance expense deposits paid to the underwriters will be returned to the extent that offering expenses are not actually incurred in accordance with FINRA Rule 5110(f)(2)(C).
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We have agreed to pay the underwriters’ non-accountable expenses allowance equal to 1% of the public offering price of the shares (excluding shares that we may sell to the underwriters to cover over-allotments). We have also agreed to pay the underwriters’ expenses relating to the offering, including (a) all filing fees incurred in clearing this offering with FINRA; (b) fees, expenses and disbursements relating to background checks of our officers and directors; (c) all fees, expenses and disbursements relating to the registration, qualification or exemption of securities offered under the securities laws of foreign jurisdictions designated by the underwriters; (d) stock transfer or stamp taxes, if any, payable upon the transfer of shares of our common stock to the underwriters; (e) the costs associated with bound volumes of the public offering materials as well as Lucite cube mementos; (f) the cost associated with the underwriter’s use of book-building and compliance software for the offering, (g) the underwriters’ actual accountable road show expenses for the offering; and (h) up to $75,000 for the fees of the underwriters’ counsel; provided, the maximum amount we have agreed to pay the underwriters for items (b), (e), (f), (g) and (h) above is $150,000.
We have granted to the underwriters an irrevocable right of first refusal to act as sole investment banker, sole book-runner or sole underwriter in connection with any public underwriting or private placement of debt or equity securities until twelve (12) months after completion of this offering.
We estimate that the total expenses of the offering payable by us, excluding underwriting discounts and commissions, will be approximately $___.
Discretionary Accounts
The underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary authority.
Underwriter Warrants
We have agreed to issue to the underwriters warrants to purchase up to a total of 6% of the shares of common stock sold in this offering (excluding the shares sold through the exercise of the over-allotment option). The warrants are exercisable at $___ per share (120% of the public offering price) commencing on a date which is one year from the effective date of the offering under this prospectus supplement and expiring on a date which is no more than five (5) years from the effective date of the offering in compliance with FINRA Rule 5110(f)(2)(G). The warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The underwriters (or their permitted assignees under the Rule) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will it engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from effectiveness. In addition, the warrants provide for registration rights upon request, in certain cases. We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend, extraordinary cash dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.
Electronic Offer, Sale and Distribution of Shares
A prospectus in electronic format may be made available on the websites maintained by the underwriters, if any, participating in this offering and the underwriters participating in this offering may distribute prospectuses electronically. The underwriters may agree to allocate a number of shares for sale to its online brokerage account holders. Internet distributions will be allocated by the underwriters that will make Internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on these websites is not part of, nor incorporated by reference into, this prospectus or the Registration Statement of which this prospectus forms a part, has not been approved or endorsed by us or the underwriters in their capacity as underwriters, and should not be relied upon by investors.
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Stabilization
In connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate-covering transactions, penalty bids and purchases to cover positions created by short sales.
| ● | Stabilizing transactions permit bids to purchase shares so long as the stabilizing bids do not exceed a specified maximum and are engaged in for the purpose of preventing or retarding a decline in the market price of the shares while the offering is in progress. |
| ● | Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase. This creates a syndicate short position which may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by exercising their over-allotment option or purchasing shares in the open market. |
| ● | Syndicate covering transactions involve purchases of shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared with the price at which they may purchase shares through exercise of the over- allotment option. If the underwriters sell more shares than could be covered by exercise of the over-allotment option and, therefore, have a naked short position, the position can be closed out only by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that after pricing there could be downward pressure on the price of the shares in the open market that could adversely affect investors who purchase in the offering. |
| ● | Penalty bids permits the underwriters to reclaim a selling concession from a syndicate member when the shares originally sold by that syndicate member are purchased in stabilizing or syndicate covering transactions to cover syndicate short positions. |
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our shares of common stock or preventing or retarding a decline in the market price of our shares of common stock. As a result, the price of our common stock or warrants in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of our common stock. These transactions may be effected on Nasdaq, in the over-the-counter market or otherwise and, if commenced, may be discontinued at any time.
Passive Market Making
In connection with this offering, the underwriters may engage in passive market making transactions in our common stock on Nasdaq in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales of the shares and extending through the completion of the distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid, then that bid must then be lowered when specified purchase limits are exceeded.
Other Relationships
The underwriters and their respective affiliates may, in the future provide various investment banking, commercial banking and other financial services for us and our affiliates for which they have received, and may in the future receive, customary fees. However, except as disclosed in this prospectus, we have no present arrangements with the underwriters for any further services.
Offer Restrictions Outside the United States
Other than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
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Determination of Offering Price
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between the underwriters and us. In determining the initial public offering price of our common stock, the underwriters will consider, among other things:
| ● | the prospects for our company and the industry in which we operate; | |
| ● | our financial information; | |
| ● | financial and operating information and market valuations of publicly traded companies engaged in activities similar to ours; | |
| ● | the prevailing conditions of U.S. securities markets at the time of this offering; | |
| ● | the recent market prices of, and the demand for, publicly traded shares of generally comparable companies; | |
| ● | our past and present financial and operating performance; and | |
| ● | other factors deemed relevant by us and the underwriters. |
Neither we nor the underwriters can assure investors that an active trading market will develop for our common shares, or that the shares will trade in the public market at or above the initial public offering price.
Miscellaneous
A prospectus in electronic format may be made available on websites maintained by the underwriters. These websites and the information contained on these websites, or connected to these websites, are not incorporated into and are not a part of this prospectus. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representative of the underwriters to underwriters that may make Internet distributions on the same basis as other allocations. In connection with the offering, the underwriters or syndicate members may distribute prospectuses electronically. No forms of electronic prospectus other than prospectuses that are printable as Adobe® PDF will be used in connection with this offering.
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The validity of the shares of our common stock offered hereby has been passed upon for us by Bahnsen Legal Group, PLLC, Boca Raton, Florida. Cozen O’Connor P.C., Minneapolis, Minnesota, is acting as counsel to the underwriters.
Sadler, Gibb & Associates, LLC, independent registered public accounting firm, has audited our financial statements at June 30, 2019 and 2018 and for each of the two years in the period ended June 30, 2019 as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Sadler, Gibb & Associates, LLC’s report which includes an explanatory paragraph about the existence of substantial doubt concerning the Company’s ability to continue as a going concern, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, which includes amendments and exhibits, under the Securities Act and the rules and regulations under the Securities Act for the registration of common stock being offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all the information that is in the registration statement and its exhibits and schedules. Certain portions of the registration statement have been omitted as allowed by the rules and regulations of the SEC. Statements in this prospectus that summarize documents are not necessarily complete, and in each case you should refer to the copy of the document filed as an exhibit to the registration statement. You may read and copy the registration statement, including exhibits and schedules filed with it, and reports or other information we may file with the SEC from the SEC’s Internet site at www.sec.gov.
Upon completion of this offering, we will become subject to information and periodic reporting requirements of the Exchange Act and we will file annual, quarterly and current reports, proxy statements, and other information with the SEC.
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FreeCast, Inc.
CONTENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Freecast, Inc.:
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Freecast, Inc. (“the Company”) as of June 30, 2019 and 2018, the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended June 30, 2019 and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph Regarding Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Sadler, Gibb & Associates, LLC
We have served as the Company’s auditor since 2019.
Salt Lake City, UT
December 12, 2019
F-2
FREECAST, INC.
AS OF JUNE 30, 2019 AND 2018
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 43,094 | $ | 1,023 | ||||
| Accounts receivable, net | 28,487 | 30,142 | ||||||
| Other currents assets | 4,096 | 1,508 | ||||||
| Total Current assets | 75,677 | 32,673 | ||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | 9,907 | 17,284 | ||||||
| Intangible assets | - | 3,500 | ||||||
| Total non-current assets | 9,907 | 20,784 | ||||||
| TOTAL ASSETS | $ | 85,584 | $ | 53,457 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Account payable and accrued expenses | $ | 727,346 | $ | 880,929 | ||||
| Accounts payable and accrued expenses - related party | 814,579 | 726,986 | ||||||
| Convertible notes payable – related party | 49,982 | 49,982 | ||||||
| Revolving convertible notes payable, net of debt discount | 30,005 | - | ||||||
| Notes payable – related party | 71,914 | 71,280 | ||||||
| Notes payable | 1,603,472 | 2,268,574 | ||||||
| Current portion of deferred revenue | 70,770 | 127,107 | ||||||
| Total Current Liabilities | 3,368,068 | 4,124,858 | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Deferred revenue, net of current position | 102,395 | 194,411 | ||||||
| Total Long-Term Liabilities | 102,395 | 194,411 | ||||||
| TOTAL LIABILITIES | 3,470,463 | 4,319,269 | ||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized; and zero shares issued and outstanding | - | - | ||||||
| Common stock, $0.001 par value, 200,000,000 authorized, 31,491,626 and 29,978,554 shares issued and outstanding at June 30, 2019 and 2018, respectively | 3,150 | 2,998 | ||||||
| Additional paid-in capital | 9,442,887 | 7,476,272 | ||||||
| Accumulated deficit | (12,830,916 | ) | (11,745,082 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (3,384,879 | ) | (4,265,812 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 85,584 | $ | 53,457 | ||||
The accompanying notes are an integral part of these financial statements
F-3
FREECAST, INC.
| For the Years Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| REVENUES: | ||||||||
| Membership | $ | 251,602 | $ | 977,690 | ||||
| Other Revenue | 18,189 | 55,753 | ||||||
| TOTAL REVENUE | 269,791 | 1,033,443 | ||||||
| COST OF REVENUE: | ||||||||
| Cost of Revenue | 177,967 | 177,088 | ||||||
| TOTAL COST OF REVENUE | 177,967 | 177,088 | ||||||
| GROSS PROFIT | 91,824 | 856,355 | ||||||
| OPERATING COSTS AND EXPENES: | ||||||||
| Compensation and benefits | 568,210 | 1,195,877 | ||||||
| Sales and marketing expense | 41,325 | 70,167 | ||||||
| General and administrative | 857,736 | 569,452 | ||||||
| TOTAL OPERATING EXPENSES | 1,467,271 | 1,835,496 | ||||||
| LOSS FROM OPERATIONS | (1,375,447 | ) | (979,141 | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Interest income (expense), net | (342,138 | ) | (576,062 | ) | ||||
| Other (expense) income, net | 5,289 | (5,154 | ) | |||||
| Gain on the extinguishment of debt | 626,462 | - | ||||||
| TOTAL OTHER INCOME (EXPENSE) | 289,613 | (581,216 | ) | |||||
| NET LOSS BEFORE INCOME TAX | (1,085,834 | ) | (1,560,357 | ) | ||||
| Income tax expense (benefit) | - | - | ||||||
| NET LOSS | $ | (1,085,834 | ) | $ | (1,560,357 | ) | ||
| Loss per common share – basic and diluted | $ | (0.04 | ) | $ | (0.05 | ) | ||
| Weighted average common shares outstanding – basic and diluted | 30,782,473 | 29,685,420 | ||||||
The accompanying notes are an integral part of these financial statements
F-4
FREECAST, INC.
STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED JUNE 30, 2019 AND 2018
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance as of June 30, 2017 | 29,364,554 | $ | 2,936 | $ | 6,374,878 | $ | (10,184,725 | ) | $ | (3,806,911 | ) | |||||||||
| Common stock issued for cash | 614,000 | 62 | 565,939 | - | 566,001 | |||||||||||||||
| Stock based compensation | - | - | 267,438 | - | 267,438 | |||||||||||||||
| Beneficial conversion feature | - | - | 268,017 | - | 268,017 | |||||||||||||||
| Net loss | - | - | - | (1,560,357 | ) | (1,560,357 | ) | |||||||||||||
| Balance as of June 30, 2018 | 29,978,554 | $ | 2,998 | $ | 7,476,272 | $ | (11,745,082 | ) | $ | (4,265,812 | ) | |||||||||
| Common stock issued for cash | 1,345,000 | 135 | 1,344,865 | - | 1,345,000 | |||||||||||||||
| Stock issued for conversion of debt | 153,072 | 15 | 153,057 | - | 153,072 | |||||||||||||||
| Common stock issued for services | 15,000 | 2 | 14,988 | 15,000 | ||||||||||||||||
| Stock based compensation | 32,989 | - | 32,989 | |||||||||||||||||
| Beneficial conversion feature | - | - | 420,706 | - | 420.706 | |||||||||||||||
| Net loss | - | - | - | (1,085,834 | ) | (1,111,583 | ) | |||||||||||||
| Balance as of June 30, 2019 | 31,491,626 | $ | 3,150 | $ | 9,442,887 | $ | (12,830,916 | ) | $ | (3,384,879 | ) | |||||||||
The accompanying notes are an integral part of these financial statements
F-5
FREECAST, INC.
| Year Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITES: | ||||||||
| Net Loss | $ | (1,085,834 | ) | $ | (1,560,357 | ) | ||
| Reconciliation of net loss to net cash used in operating activities | ||||||||
| Depreciation expense | 7,377 | 8,292 | ||||||
| Stock based compensation | 32,989 | 267,438 | ||||||
| Impairment Expense | 3,500 | - | ||||||
| Beneficial conversion feature | - | 268,017 | ||||||
| Gain on the extinguishment of debt | (626,462 | ) | - | |||||
| Amortization of debt discount | 230,860 | 49,758 | ||||||
| Provision for doubtful accounts | - | 16,023 | ||||||
| Note principal increases upon default | - | 102,213 | ||||||
| Common stock issued for services | 15,000 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts Receivable | 1,655 | 8,840 | ||||||
| Other current assets | (2,588 | ) | 1,116 | |||||
| Accounts payable and accrued expenses | 21,843 | 378,064 | ||||||
| Accounts payable and accrued expenses related party | 87,593 | 341,157 | ||||||
| Deferred revenue | (148,353 | ) | (620,950 | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (1,462,420 | ) | (740,389 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| NET CASH USED IN INVESTING ACTIVITES | - | - | ||||||
| CASH FLOWS FROM FINANCING ACTIVITES: | ||||||||
| Proceeds from issuance of common stock | 1,345,000 | 566,001 | ||||||
| Proceeds from notes payable - related party | 471,674 | 85,350 | ||||||
| Repayments on notes payable - related party | (212,183 | ) | (64,088 | ) | ||||
| Proceeds from notes payable | - | 60,000 | ||||||
| Repayments on notes payable | (100,000 | ) | - | |||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES: | 1,504,491 | 647,263 | ||||||
| Net change in cash | 42,071 | (93,127 | ) | |||||
| Cash and cash equivalents, beginning of year | 1,023 | 94,150 | ||||||
| Cash and cash equivalents, end of year | $ | 43,094 | $ | 1,023 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | - | $ | 921 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Note payable used to pay other debts | $ | - | $ | 646,358 | ||||
| Conversion of debt to equity | $ | 153,072 | $ | - | ||||
| Issuance of Beneficial Conversion Features | $ | 420,706 | $ | - | ||||
The accompanying notes are an integral part of these financial statements
F-6
FREECAST, INC.
FOR THE YEARS ENDED JUNE 30, 2019 AND 2018
Note 1 – Organization and Description of Business
FreeCast, Inc. (the “Company”) developed and markets an interactive digital media guide that facilitates access to a virtual library of entertainment media. The Company is based in Orlando, Florida and was founded in 2011 as a Florida Corporation. The Company’s primary products are SmartGuide and Select TV. Both SmartGuide and Select TV utilize the Company-designed proprietary technology that searches, and aggregates internet distributed streaming media into an electronic media guide. SmartGuide is licensable to brands/manufacturers of devices with large online user bases, while Select TV is a retail package that is sold by monthly and/or annual subscriptions.
Going Concern
The Company’s operating history has incurred recurring losses from operations since inception, accumulating a deficit of approximately $12.83 million as of June 30, 2019. For the fiscal years ended June 30, 2019 and 2018, the Company incurred net losses of approximately $1.08 million and $1.56 million, respectively. The Company may incur additional losses and negative operating cash flows in the future. Failure to generate sufficient revenues, reduce spending or raise additional capital could adversely affect the Company’s ability to achieve its intended business objectives. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
Since the inception of the Company in 2011, the operations of the Company have been funded primarily through sales of common stock to private investors, debt financing and exchange of common stock for services received by the Company. Management cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business.
The accompanying financial statements for the fiscal years ended June 30, 2019 and 2018 have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. During the 2020 fiscal year, management intends to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented.
Use of Estimates
The preparation of these financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and disclosure in the accompanying notes. Actual results may differ from those estimates and such differences may be material to the financial statements. The more significant estimates and assumptions by management include among others: accounts receivable realization, the valuation allowance on deferred tax assets, the valuation of the Company’s common stock, operating expense accruals, and revenue recognition.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include bank demand deposits, marketable securities with maturities of three months or less at purchase, and money market funds that invest primarily in certificates of deposits, commercial paper and U.S. government and U.S. government agency obligations. Cash equivalents are reported at fair value.
F-7
Accounts receivable
Accounts receivable are carried at original invoice amount less an estimate made for holdbacks and doubtful receivables based on a review of all outstanding amounts. The Company determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions and set up an allowance for doubtful accounts when collection is uncertain. Customers’ accounts are written off when all attempts to collect have been exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. At June 30, 2019 and 2018, the accounts receivable reserve was approximately $245,240 and $245,240, respectively.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is determined on a straight-line basis over the estimated useful lives of the assets, which generally range from three to five years. Maintenance and repairs are charged against expense as incurred.
Impairment of Long-lived Assets
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable as prescribed by ASC Topic 360-10-05. “Property, Plant and Equipment”. If the carrying amount of the asset, including any intangible assets associated with that asset, exceeds it estimated undiscounted net cash flow, before interest, the Company will recognize an impairment loss equal to the difference between it carrying amount and its estimated fair value. As of June 30, 2019, the Company recognized $3,500, in impairment losses.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) or ASU 2014-09. The objective of the ASU is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the ASU, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. The five-step analysis consists of the following: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s ASC. The Company adopted ASU 2014-09 effective July 1, 2018 using the modified retrospective approach. The Company reviewed all contracts that were not completed as of July 1, 2018 and the adoption did not have a material impact on the Company’s consolidated financial statements.
Membership revenue
The Company generates membership revenue through the renewal sales of Rabbit TV, Rabbit TV Plus, new and renewal sales through Select TV, which operates as the successor product to Rabbit TV and Rabbit TV Plus, as well as the SmartGuide, an internet distributed streaming media guide that searches and aggregates media content on the web and facilitates access to its customers through Wi-Fi-enabled devices that support streaming video. The Company both retransmits and “ingests” and distributes content.
Membership revenue is derived from online sales through search engine optimization (SEO), search engine marketing (SEM), various marketing advertising services, the utilization of resellers in the form of publishers that promote upcoming retail promotions and packages, as well as, direct sales to members (Select TV, Rabbit TV Plus). Currently, a Rabbit TV Plus account only generates renewal sales, as 100% of new sales are being met by the Select TV media guide. Select TV and Rabbit TV Plus also include free access to the Rabbit TV Mobile app, for Android and iOS devices.
Membership revenue is recognized ratably on a straight-line basis over the duration of the membership period, generally ranging from one month to five years. If the member renews early, then the expiration date is extended by the renewal period, and the additional membership fee is deferred and amortized over the additional months purchased by the member. All membership fees are collected at the time of purchase.
Under the previous “Amended Distribution Technology Agreement”, the Company provided the right to Telebrands to market, promote, sell, and distribute memberships to access Rabbit TV and Rabbit TV plus via the internet. Per the agreement, the Company shall pay to Telebrands the greater of (i) (A) the number of memberships sold and funds collected, multiplied by (B) seventy-five cents ($0.75) or (ii) fifty percent (50%) of the Company’s net profits derived from the Company’s sales under the Amended Distribution Agreement and is included in sales and marketing expense in the Company’s Statements of Operations.
F-8
On January 2, 2015, the Company entered into a purchase agreement which transferred the Media Content Management System (“MCMS”) to the Company in consideration for the extinguishment of outstanding debt. Subsequently, the parties entered into a “Revision to the Second Amended and Restated Technology License and Development Agreement” which as of June 30, 2016 terminates all payments to Nextelligence pursuant to the “Second Amended and Restated Technology Agreement” signed and entered into July 31, 2014. After June 30, 2016, Nextelligence no longer has the right to sell, market, and distribute membership access to Rabbit TV and Rabbit TV Plus, either via USB “dongle” or internet.
Prior to the June 30, 2016 “Revision”, the Company evaluated the criteria outlined in ASC Topic 605-45, Principal Agent Considerations, in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Rabbit TV fees paid by customers through Telebrands is reported net of any fees payable to or retained by Telebrands. This is because, although the Company is the primary obligor, the Company does not establish the sales price and does not have credit risk. Rabbit TV Plus fees paid by customers to the Company is reported gross of fees or commissions paid to Telebrands. Since the Company is the primary obligor in the transaction, has latitude in establishing the sales price, and has the credit risk, revenue is recorded on a gross basis. During the first six months of Fiscal Year ending June 30, 2019, the Company recognized the last of deferred revenue related to former relationship with Telebrands.
Advertising and other revenue
The Company generates advertising revenue pursuant to arrangements with advertising affiliates and brokers. Under these arrangements, the Company provides the agencies and brokers the ability to sell advertising inventory on the Company’s service directly to advertisers. The Company reports this revenue net of amounts due to agencies and brokers because the Company is not the primary obligor under these arrangements nor does the Company set the pricing or establish or maintain the relationship with the advertisers.
| Reportable Segments | ||||||||
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| Subscriptions | $ | 251,602 | $ | 965,902 | ||||
| Advertising | 780 | 13,774 | ||||||
| Affiliates | 5,409 | 41,767 | ||||||
| Private Label Setup | 12,000 | 12,000 | ||||||
| Total | $ | 269,791 | $ | 1,033,443 | ||||
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. Cash and cash equivalents of the Company are exposed to credit risk, subject to federal deposit insurance, in the event of default by the financial institutions holding its cash and cash equivalents to the extent of amounts recorded on the condensed balance sheet. The cash accounts are insured by the Federal Deposit Insurance Corporation up to $250,000. At June 30, 2019 and 2018, respectively, the Company has no cash balances in excess of insured limits.
For accounts receivable, the Company performs ongoing credit evaluations of customers to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience with the customer, evaluation of their credit history, and review of the invoicing terms of the contract. Accounts receivables are reported net of an allowance for doubtful accounts when applicable. The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the accounts receivable balance at each reporting date. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. The Company recognized bad debt expense for the fiscal years ended June 30, 2019 and 2018 of $0 and $13,857, respectively. In addition, the balance of allowance for doubtful accounts at June 30, 2019 and 2018 of $245,240 and $245,240, respectively.
F-9
Cost of Revenue
Cost of revenue consists primarily of hosting, product development, infrastructure costs and the salaries and benefits related to employees in software engineering, facilities-related expenses, and information technology associated with supporting those functions. Hosting costs consist of content streaming, maintaining our internet service and creating and serving advertisements through third-party advertising servers. The Company makes payments to third-party advertising servers in the period in which the advertising impressions are delivered or click-through actions occur, and accordingly records this as a cost of revenue in the related period. The Company incurs product development expenses primarily for improvements to the Company’s website, the apps, development of new advertising products and development and enhancement of the guide and streaming system. Product development costs are generally expensed as incurred. Certain website development and internal use software development costs may be capitalized when specific criteria are met. In such cases, the capitalized amounts are amortized to cost of revenue over the useful life of the related application once the application is placed in service.
Sales and Marketing
Sales and marketing consist primarily of contracts with third-party operators as well as employee-related costs, including salaries, commissions and benefits related to employees in sales, sales support and marketing departments. In addition, sales and marketing expenses include external sales and marketing expenses such as third-party marketing, branding, advertising, public relations expenses, commissions, facilities-related expenses, and infrastructure costs. Formally, commissions include amounts paid to Telebrands, however the relationship with other third-party websites for customer acquisition when the customer clicks through to the Company and signs up for service still receive commission.
Fair Value of Financial Instruments
In accordance with the reporting requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 825, “Financial Instruments”, the Company calculates the fair value of its assets and liabilities which qualify as financial instruments under this standard and includes this additional information in the notes to the financial statements when the fair value is different than the carrying value of those financial instruments. Cash, cash equivalents and accounts payable are accounted for at costs which approximates fair value due to the relatively short maturity of these instruments. The carrying value of notes payables also approximate fair value since they bear market rates of interest and other terms. None of these instruments are held for trading purposes.
Income Taxes
The Company provides for income taxes using the asset and liability approach. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. As of June 30, 2019 and 2018, the Company had a full valuation allowance against deferred tax assets.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings (loss) per share is determined in the same manner as basic earnings (loss) per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase would be anti-dilutive.
The following table provides the number of common stock equivalents not included in diluted income per share, because the effects are anti-dilutive, for the years ended June 30, 2019 and 2018, respectively.
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| Convertible debt and liabilities | 4,097,362 | 2,928,466 | ||||||
| Warrants | 22,739,572 | 22,495,533 | ||||||
| Total | 26,836,934 | 25,423,999 | ||||||
Employee Stock Based Compensation
Stock based compensation issued to employees and members of our board of directors is measured at the date of grant based on the estimated fair value of the award, net of estimated forfeitures. The grant date fair value of a stock-based award is recognized as an expense over the requisite service period of the award on a straight-line basis. The Company will recognize compensation expense, measured as the fair value of the stock-based compensation on grant date, when a performance condition is considered probable of occurring. For purposes of determining the variables used in the calculation of stock-based compensation issued to employees, the Company performs an analysis of current market data and historical data to calculate an estimate of implied volatility, the expected term of the option and the expected forfeiture rate. With the exception of the expected forfeiture rate, which is not an input, the Company uses these estimates as variables in the Black-Scholes option pricing model. Depending upon the number of warrants granted any fluctuations in these calculations could have a material effect on the results presented in our Statements of Operations. In addition, any differences between estimated forfeitures and actual forfeitures could also have a material impact on our financial statements.
F-10
Stock Based Compensation Issued to Nonemployees
Stock based awards issued to non-employees for acquiring goods or providing services are recognized at fair value when the goods are obtained or over the service period. If the award contains performance conditions, the measurement date of the award is the earlier of the date at which a commitment for performance by the non-employee is reached or the date at which performance is reached. A performance commitment is reached when performance by the non-employee is probable because of sufficiently large disincentives for nonperformance.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) or ASU 2014-09. The objective of the ASU is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the ASU, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. The five-step analysis consists of the following: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s ASC. The Company adopted ASU 2014-09 effective July 1, 2018 using the modified retrospective approach. The Company reviewed all contracts that were not completed as of July 1, 2018 and the adoption did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for the Company beginning July 1, 2018. Effective in 2019, the Company has evaluated an immaterial impact this standard will have on these financial statements.
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The Company expects to adopt the new standard on July 1, 2019 and use the effective date as the date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before July 1, 2019.
In February 2016, the Financial Accounting Standards Board (FASB) established ASU 2016-02 (Topic 842), Leases, which requires lessees to now recognize operating leases on the balance sheet and disclose key information about leasing arrangements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.
The new standard was effective for the Company on July 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either: (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company adopted the new standard on July 1, 2019 and used the effective date as the date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before July 1, 2019.
F-11
The new standard provides a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits the Company not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.
While the Company assessed all of the effects of adoption, it currently believes the most significant effects relate to: (1) the recognition of new ROU assets and lease liabilities on its balance sheet for its operating leases; (2) providing significant new disclosures about its leasing activities.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for its corporate office leases and garage leases. This means, for those leases that qualify, the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition.
The Company also elected the practical expedient to not separate lease and non-lease components for all of its leases.
All other issued and not yet effective accounting standards are not relevant to our financial statements.
Note 3 – Property and Equipment
Property and equipment consisted of the following:
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| Property and equipment | $ | 43,566 | $ | 43,566 | ||||
| Less accumulated depreciation | (33,659 | ) | (26,282 | ) | ||||
| Property and equipment, net | $ | 9,907 | $ | 17,284 | ||||
Depreciation expense was $7,377 and $8,292 for the fiscal years ended June 30, 2019 and 2018, respectively, and is classified in general and administrative expenses in the Statements of Operations.
Note 4 – Debt
Convertible Notes Payable – Related Parties
In June 2016, the Chief Executive Officer of the Company (“CEO”), William Mobley, loaned the Company $111,000, at an interest rate of 12% per annum. The loan matured on December 31, 2017, is in default and remains as an on-demand liability of the Company. During the years ended June 30, 2019 and 2018, the Company repaid $0 and $50,018, and total accrued interest charges related to this loan were $20,515, and $14,160, respectively. During the year end June 30, 2019 and 2018, the Company did not pay any interest towards this loan. The note is convertible into shares of common stock at a conversion price of $0.25 per share. In accordance with ASC 470, the embedded beneficial conversion is recognized separately and was measured at its intrinsic value (see Note 5). For the year-end June 30, 2019 and 2018, the outstanding principal and interest due to William Mobley was $70,497, and $64,499, respectively.
Notes Payable – Related Parties
During the years ended June 30, 2019 and 2018, a related party, Public Wire (see Note 8), loaned the Company $20,100 and $46,280, respectively, at an interest rate of 12% per annum. The notes representing the loan matured on dates ranging from April 1, 2019 to January 1, 2020. The loan is in default and remains as an on-demand liability of the Company. During the year end June 30, 2019 and 2018, the Company accrued interest charges related to this loan in total of $ $7,082 and $5,554, respectively. During the year end June 30, 2019 and 2018, the Company paid interest related to this loan in total of $2,830, and $0, respectively. For the year-end June 30, 2019 and 2018, the outstanding principal and interest due to Public Wire was $76,186, and $51,834, respectively.
F-12
During 2018, a related party, Marjorie Lieberman (see Note 8), loaned the Company $25,000, at an interest rate of 10% per annum. The loan matured on April 1, 2019, is in default and remains as an on-demand liability of the Company. During the year ended June 30, 2019, the Company repaid $19,466 in principal and $534 in accrued interest associated with the loan. For the year ended June 30, 2019, and June 30, 2018, the Company accrued interest related to this loan in the amount of $924, and $534, respectively. For the year-end June 30, 2019 and 2018, the outstanding principal and interest due to Marjorie Lieberman was $6,458, and $25,534, respectively.
Revolving Convertible Notes Payable – Related Parties
On July 1, 2018, the Company signed a revolving convertible note agreement with a related party, Nextelligence (see Note 8), for an amount up to $500,000, with any withdrawals on this loan being at the complete discretion of the Company. During 2019, the Company in various installments received $451,574 in proceeds from this loan and $2,250 in non-cash additions related to expenses paid by Nextelligence on behalf of the Company. The loan accrues interest at a rate of 12% per annum and is set to mature July 1, 2020. As of year-end June 30, 2019, the Company recognized $6,308 in interest charges related to this loan, in addition, the outstanding principal and interest due is $265,791.
In the event of a “qualified financing”, or the Company issues and sells shares of Equity Securities, regardless of the maturity date, without any further action needed by Nextelligence, the outstanding principal and interest shall be converted into equity securities at a conversion price of $.25 of the per share price paid. In the event no “qualified financing” is consummated prior to the maturity date, Nextelligence can choose to elect, within five days of the maturity date, to have all outstanding principal and interest converted into equity securities at a conversion price of $.25 of the per share price paid. The Company has recognized a beneficial conversion feature related to this note of $353,575 in which $122,472 of that amount was amortized as interest expense during 2019.
Notes Payable
On September 15, 2016, the Company entered into an agreement with U.S. Premium Finance to provide financing in an aggregate amount of $1,967,450 for the insurance premium associated with both D&O and Workers Compensation policies. Both policies commenced September 15, 2016, and provided coverage for the next 36 months, expiring September 15, 2019. The loan bears interest at a floating rate per annum equal to the greater of either (i) 4.99% or (ii) 4.99% plus the Wall Street Journal Prime Rate. During the year ended June 30, 2019 and 2018, the interest rate on the loan was 4.99%. The Company was required to pay monthly principal and interest of approximately $58,957, paid over 36 months, with the final payment on October 15, 2019.
The U.S. Premium Finance agreement dated September 15, 2016 was secured against all rights, title, and interest associated with the D&O and Workers Compensation policies. As part of the legal costs associated with obtaining premium financing, on September 19, 2016 the Company agreed to pay a loan origination fee in the amount of $98,250. The loan origination fee was recorded as a debt discount and amortized over the life on the policy, maturing September 2019. As of June 30, 2019 and 2018, prepaid loan origination fees were $8,187 and $40,938, respectively, and is netted against the note on the Balance Sheet.
On April 18, 2017, the Company entered into an additional agreement with U.S. Premium Finance. The Company received $568,935 in net proceeds from them premium financing agreement. The loan bears interest at a floating rate per annum equal to the greater of either (i) 4.99% or (ii) 4.99% plus the Wall Street Journal Prime Rate. During the year ended June 30, 2019 and 2018, the interest rate on the loan was 4.99%. The Company was required to pay monthly principal and interest of approximately $29,705, paid over 20 months, with the final payment on December 15, 2018.
The U.S. Premium Finance agreement dated April 18, 2017 was secured against all rights, title, and interest associated with the general liability insurance policy. As part of the legal costs associated with obtaining premium financing, on April 18, 2017 the Company incurred and capitalized a loan origination fee in the amount of $28,348. The loan origination fee was amortized over the life of the policy, maturing December 2018. As of June 30, 2019 and 2018, prepaid loan origination fees were $0 and $8,505, respectively, and is classified as debt discount that is netted against the note on the Balance Sheet.
As of June 30, 2019 and 2018, outstanding premium liability due within one year to U.S. Premium Finance was $1,611,659 and $1,611,659. As of June 30, 2019, the Company takes the position that all the outstanding premium liability due after one year is current debt as the balance has been renegotiated by the Company due to a lack of performance obligations not met on behalf of the lender. On November 13, 2019, the Company settled the outstanding liability with U.S. Premium Finance, please see Note 9-Subsequent events for further information.
On December 31, 2017, the Company entered into a Promissory Note in the amount of $153,072. The note had a maturity date of December 31, 2018, and accrued interest at a rate of 10% per annum, compounded annually. For the year ended June 30, 2018, total outstanding principal and interest due to Broad Street Holdings was $153,072 and $12,805, respectively. On January 23, 2019, the Company entered into a promissory note conversion agreement, for consideration of loan, the Company issued 153,072 shares of common stock and 153,072 warrants to purchase common stock with an exercise price of $1.75. In addition, the Company recognized a gain on extinguishment of accrued interest as of June 30, 2019 in the amount of $21,487.
F-13
On December 31, 2017, the Company entered into a Promissory Note with for the amount of $553,286. The note had a maturity date of December 31, 2018, and accrued interest at a rate of 10% per annum, compounded annually. On January 23, 2019, the Company and Robert Schwartz agreed to a settlement of debt in the amount of 100,000. As of June 30, 2018, total outstanding principal and interest due was $590,142. During the year ended, June 30, 2019 the Company recognized a gain on extinguishment of debt and accrued interest for $490,142.
Note 5 – Stockholders’ Equity
Preferred Stock
No shares of preferred stock are currently outstanding. The Board of Directors may designate the authorized but unissued shares of the Preferred Stock with such rights and privileges as the board of directors may determine. As such, our board of directors may issue 5,000,000 preferred shares and designate the conversion, voting and other rights and preferences without notice to our shareholders and without shareholder approval.
Common Stock
Each holder of common stock is entitled to vote on all matters and is entitled to one vote for each share held. No holder of shares of stock of any class shall be entitled as a matter of right to subscribe for or purchase or receive any part of new or additional issue of shares of stock of any class, or of securities convertible into share of stock or any class, whether now hereafter authorized or whether issued for money, for consideration other than money, or by the way of dividend.
As of June 30, 2019 and 2018, the Company authorized to issue 200,000,000 common shares at a par value of $0.001 per share.
As of June 30, 2019, the Company had shares of common stock outstanding 31,491,626 and 29,978,554 outstanding as of June 30, 2018.
During the year ended June 30, 2018, the Company issued 586,000 shares of common stock pursuant to a private placement for $566,000 in proceeds, net of $20,000 in broker fees. In addition, the Company issued 28,000 shares of common stock for broker commission in conjunction with the private placement.
During the year ended June 30, 2019, the Company issued 1,345,000 shares of common stock pursuant to a private placement for $1,345,000 in proceeds. In addition, during 2019 the Company issued 15,000 shares of common stock in exchange for $15,000 in marketing services rendered. Also, in 2019, the Company issued 153,072 shares of common stock in exchange for $153,072 in debt to be converted to equity securities.
Stock Warrants
Following is a summary of outstanding stock warrants at June 30, 2019:
| Number of Shares | Weighted Average Price | Weighted Average Remaining Life (years) | Intrinsic Value | |||||||||||||
| Warrants as of June 30, 2017 | 38,001,553 | $ | 0.29 | 5.3 | $ | 21,394,651 | ||||||||||
| Issued | 614,000 | $ | 1.75 | 2.5 | $ | - | ||||||||||
| Expired and forfeited | (16,120,000 | ) | $ | 0.25 | 4.3 | $ | - | |||||||||
| Exercised | - | $ | - | - | $ | - | ||||||||||
| Warrants as of June 30, 2018 | 22,495,533 | $ | 0.37 | 0.0 | $ | 11,916,091 | ||||||||||
| Issued | 1,748,072 | $ | 1.75 | 2.5 | $ | - | ||||||||||
| Expired and forfeited | (1,504,033 | ) | $ | 1.03 | - | $ | - | |||||||||
| Exercised | - | $ | - | - | $ | - | ||||||||||
| Warrants outstanding and exercisable of June 30, 2019 | 22,739,572 | $ | 0.43 | 3.5 | $ | 11,493,300 | ||||||||||
F-14
| Exercise Price ($) | Warrants outstanding as of June 30, 2019 | Warrants outstanding as of June 30, 2018 | ||||||
| $0.25 | 19,000,000 | 19,719,033 | ||||||
| $0.60 | 1,350,000 | 1,350,000 | ||||||
| $1.75 | 2,389,572 | 1,426,500 | ||||||
| 22,739,572 | 22,495,533 | |||||||
Stock Based Compensation
The Company recognizes compensation expense using a fair-value based method under ASC 718 for costs related to stock-based payments, including stock options. The fair value of options awarded to employees is measured on the date of grant using the Black-Scholes option-pricing model and is recognized as expense over the requisite service period on a straight-line basis. For the year ended June 30, 2019, the Company issued 1,748,072 warrants to purchase common stock as part of the private placement memorandum to non-employees. In addition, on March 24, 2019 the Company issued 250,000 warrants to purchase common stock as partial payment for services rendered.
The Black-Scholes option-pricing model includes the following weighted average assumptions for warrants awarded:
| Years Ended June 30, | ||||||||
| 2019 | 2018 | |||||||
| Assumptions: | ||||||||
| Risk-free interest rate | 2.21 | % | N/A% | |||||
| Expected dividend yield | 0 | % | N/A% | |||||
| Expected volatility | 52.0 | % | N/A% | |||||
| Expected life (in years) | 3.00 | N/A | ||||||
Beneficial Conversion Feature
The Company has embedded conversion features that it accounts for under ASC 470 and is recognized separately at its intrinsic value. Intrinsic value is calculated as the difference between the conversion price and the fair value of the common stock multiplied by the number of shares into which the security is convertible. If the intrinsic value of the beneficial conversion feature is greater than the proceeds allocated to the convertible instrument, the amount of the discount assigned to the beneficial conversion feature shall be limited to the amount of the proceeds allocated to the convertible instrument.
During the year ended June 30, 2018, the Company recorded $268,017 of beneficial conversion features related to loans and accounts payable and accrued expenses that are convertible to shares of the Company’s common stock at a price less than the market price.
During the year ended June 30, 2019, the Company recorded $420,706 of beneficial conversion features related to loans and accounts payable and accrued expenses that are convertible to shares of the Company’s common stock at a price less than the market price. In addition, during the year ended June 30, 2019, the Company recognized $122,472 as a debt discount and interest expense in conjunction with the amortization of the beneficial conversion feature.
Note 6 – Commitments and Contingencies
Operating lease
In August 2015, the Company entered into a lease for approximately 136,000 square feet of office space in Orlando, Florida with an initial term of five years. In addition, in August 2015, the Company subleased executive office space through their related party shareholder, Nextelligence, on a month-to-month basis, ending in October 2018. In addition, in October 2018 the Company terminated their remaining lease with Citadel I L.P. in exchange for two payments of $30,000 made during 2019. The Company recognized approximately $114,000 as a gain on extinguishment of debt attributed to the unpaid lease payments that remain; less the payments mentioned above.
In October 2018, the Company entered into a two-year sublease agreement for approximately 3,360 square feet of office space in Orlando, Florida. As of June 30, 2019, the Company has a future minimum lease payment under a non-cancellable lease of approximately, $36,193 and $0, in 2019 and 2020, respectively.
F-15
Voting Trust Agreement
On October 15, 2012, we entered into a Voting Trust Agreement (“Voting Trust Agreement”) with Telebrands Corp. (“Telebrands”) and William A. Mobley, Jr. The Voting Trust Agreement appoints William A. Mobley, Jr. as the trustee of all the shares of our common stock that Telebrands owns at any time (the “Entrusted Shares”). Telebrands currently owns 4,000 shares of our common stock and warrants to purchase up to 4,000,000 shares of our common stock. Pursuant to the Voting Trust Agreement, Mr. Mobley is entitled to exercise all rights relating to the voting and disposition of the Entrusted Shares, provided, however, Mr. Mobley is not allowed to effect a disposition or permit registration of the Entrusted Shares with the Securities and Exchange Commission or any state securities administrators unless Nextelligence, Inc., which is majority owned and controlled by Mr. Mobley, simultaneously effects a disposition or permits registration of an identical proportion of our voting securities of the Company that Nextelligence holds on the same terms and conditions. In addition, William A. Mobley, Jr. may not permit a disposition or registration of any voting securities of the Company that Nextelligence holds unless he simultaneously effects a disposition or registration of an identical proportion of the Entrusted Shares on the same terms and conditions.
The term of such trust ends upon the earlier of, Mr. Mobley’s ceasing to be an affiliate of our Company, as defined in the Voting Trust Agreement, or the disposition of all of the Entrusted Shares.
We are obligated to indemnify Mr. Mobley against any liabilities, damages, claims, taxes, deficiencies, assessments, losses, penalties, interest, costs and expenses paid or incurred by him in connection with the Voting Trust Agreement, unless those paid or incurred are a result of the gross negligence, willful misconduct or bad faith of Mr. Mobley.
Note 7 – Income Taxes
On December 22, 2017, the new tax legislation, commonly referred to as the Tax Cut and Jobs Act, was enacted, which significantly changed the existing U.S. tax laws, including a reduction in the corporate Federal income tax rate from 34% to 21% effective January 1, 2018. During the second quarter of fiscal year 2018, the Company was required to recognize the effect of tax law changes in the period of enactment even though certain key aspects of the new law became effective January 1, 2018. The Company used a blended statutory Federal income rate of 27.5% based upon a number of days that it will be taxed at the former rate of 34% and the number of days it will be taxed at the new rate of 21% to calculate its most recent effective tax rate.
In December 2017, the SEC issued Staff Accounting Bulletin No, 118, Income Tax Accounting Implications of the Act (“SAB118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment. The Company remeasured its deferred tax assets as of December 31, 2017, applying the reduced corporate income tax rate and recorded a provisional decrease to the deferred tax assets of $1,544,351 with a corresponding adjustment to the valuation allowance. In the fourth quarter of 2018, we completed our analysis to determine the effect of the Tax Act and there were no material adjustments as of June 30, 2018.
At June 30, 2019, the Company has approximately $7,915,320 of operating loss carryforwards for both federal and Florida state
tax purposes that may be applied against future taxable income. Of the $7.9 million of net operating losses, $4.8 million will
begin to expire in the year 2032 if not utilized prior to that date. The remaining amount of $3.1 million will be limited in use
to 80% of current year taxable income but will not have an expiration date. There is no provision for income taxes because the
Company has historically incurred operating losses and maintains a full valuation allowance against its net deferred tax assets.
The valuation allowance increased by approximately $274,622 during the year 2019 and decreased by approximately $796,775 during
the years 2018. The deferred tax assets are approximately $3,127,000 and $2,852,000 at June 30, 2019 and 2018, respectively.
A reconciliation of the statutory U.S. Federal rate to the Company’s effective tax rate is as follows:
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| Federal income tax benefit at statutory rate | 21.0 | % | 27.50 | % | ||||
| State income tax, net of federal benefits | 4.3 | % | 21.70 | % | ||||
| Permanent items | - | - | % | |||||
| Impact of tax law change | - | % | (100.03 | )% | ||||
| Other | - | - | % | |||||
| Change in valuation allowance | (25.3 | )% | 51.10 | % | ||||
| Provision from income taxes | - | |||||||
F-16
The tax effect of temporary differences that gave rise to significant portion of the deferred tax assets were as follows:
| June 30, | ||||||||
| 2019 | 2018 | |||||||
| Net Operating loss carryforwards - Federal | $ | 1,662,317 | $ | 1,412,119 | ||||
| Net Operating loss carryforwards - State | 343,921 | 292,174 | ||||||
| Stock based compensation | 755,624 | 747,263 | ||||||
| Deferred Revenue | 254,303 | 291,903 | ||||||
| Accrued Liabilities | 54,750 | 53,230 | ||||||
| Depreciation and Amortization | 1,845 | 1,349 | ||||||
| Allowance for doubtful accounts | 54,111 | 54,111 | ||||||
| Valuation allowance | (3,126,771 | ) | (2,852,149 | ) | ||||
| Net deferred tax assets | $ | - | $ | - | ||||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The Company’s ability to realize its deferred tax assets depends upon the generation of sufficient future taxable income to allow for the utilization of the deductible temporary difference carryforwards. At this time, based on current facts and circumstances, management believes that is not likely that the Company will realize the benefits for its deferred tax assets, and a valuation allowance has been recorded on the same.
The Company does not have any recorded unrecognized tax benefit for uncertain tax positions as of June 30, 2019 and 2018.
Note 8 – Related Parties
In June 2016, William Mobley, CEO and majority shareholder of Nextelligence, the majority shareholder of the Company, loaned the Company $111,000, at an interest rate of 12% per annum. The loan matured on December 31, 2017, is in default and remains as an on-demand liability of the Company. In December 2016, $11,000 in outstanding principal was repaid. During the year-end June 30, 2018, the Company repaid William Mobley approximately $50,000. Total principal outstanding for June 30, 2019 and 2018 was $49,982, and $49,982, respectively. Total interest charges relating to this loan were $20,515 and $14,517 for the year ended June 30, 2019 and 2018, respectively. As of year-end June 30, 2019, the outstanding principal and interest due to William Mobley was $70,497.
In April 2018, Marjorie Lieberman, mother of William Mobley, CEO, and corporate secretary to FreeCast Inc. loaned the Company $25,000, at an interest rate of 10% per annum. The loan matured on April 1, 2019, is in default and remains as an on-demand liability of the Company. During 2019, the Company repaid $19,466 in principal and $534 in accrued interest. As of year-end June 30, 2019 and 2018, total interest charges related to this loan was $924 and $534. As of year-end June 30, 2019, the outstanding principal and interest due to Marjorie Lieberman was $6,458.
On December 31, 2018, Public Wire, a wholly owned subsidiary of Nextelligence, loaned the Company $20,100, at an interest rate of 12% per annum, adding to an outstanding loan balance of $46,280 as of June 30, 2018. The notes representing the loan matured on dates ranging from April 1, 2019 to January 1, 2020. The loan is in default and remains as an on-demand liability of the Company. As of year-end June 30, 2019 and 2018, total interest charges related to this loan was $7,082 and $5,554, respectively. As of year-end June 30, 2019, the outstanding principal and interest due to Public Wire was $76,186.
On July 1, 2018, the Company signed a revolving convertible note agreement with Nextelligence for an amount up to $500,000, with any withdrawals on this loan being at the complete discretion of the Company. During 2019, the Company in various installments received $451,574 in proceeds from this loan and $2,250 in non-cash additions related to expenses paid by Nextelligence on behalf of the Company. The loan accrues interest at a rate of 12% per annum and is set to mature July 1, 2020. As of year-end June 30, 2019, the Company recognized $6,308 in interest charges related to this loan, in addition, the outstanding principal and interest due is $265,791.
Note 9 – Subsequent Events
The Company has completed an evaluation of all subsequent events through December 12, 2019, the date the financial statements were available for general release, to ensure that this report includes appropriate disclosure of events both recognized in the June 30, 2019 and 2018 financial statements and events which have occurred but were not recognized in the consolidated financial statements. Except as described below, the Company has concluded that no subsequent event has occurred that requires disclosure.
Subsequent to year end, the Company issued 1,070,000 shares of common stock pursuant to a private placement for proceeds of $1,070,000. In addition, the Company issued 1,070,000 warrants to purchase common stock in connection with this private placement. The warrants have an exercise price of $1.75 and expire in three years from issuance.
On November 13, 2019, the Company settled all outstanding debt with U.S. Premium Finance for the amount of $1,000,000. The Company recognized a gain in connection to the extinguishment of an outstanding liability.
F-17
FREECAST, INC.
| December 31, 2019 | June 30, 2019 | |||||||
| ASSETS | (unaudited) | |||||||
| Current assets: | ||||||||
| Cash | $ | 817,029 | $ | 43,094 | ||||
| Accounts receivable, net | 48,817 | 28,487 | ||||||
| Other currents assets | 37,995 | 4,096 | ||||||
| Total Current assets | 903,841 | 75,677 | ||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | 9,410 | 9,907 | ||||||
| Right-of-use assets | 11,094 | - | ||||||
| Total non-current assets | 20,504 | 9,907 | ||||||
| TOTAL ASSETS | $ | 924,345 | $ | 85,584 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Account payable and accrued expenses | $ | 620,389 | $ | 727,346 | ||||
| Accounts payable and accrued expenses - related party | 862,019 | 814,579 | ||||||
| Operating lease obligation | 5,115 | - | ||||||
| Current portion of finance lease obligation | 633 | - | ||||||
| Convertible notes payable – related party | 49,982 | 49,982 | ||||||
| Revolving convertible notes payable, net of debt discount | 173,298 | 30,005 | ||||||
| Notes payable – related party | 71,914 | 71,914 | ||||||
| Notes payable – current | 550,000 | 1,603,472 | ||||||
| Current portion of deferred revenue | 43,727 | 70,770 | ||||||
| Total Current Liabilities | 2,377,077 | 3,368,068 | ||||||
| LONG TERM LIABILITIES: | ||||||||
| Deferred revenue, net of current portion | 127,979 | 102,395 | ||||||
| Notes payable, net of current portion | 700,000 | - | ||||||
| Finance lease obligations, net of current portion | 5,583 | - | ||||||
| Total Long-Term Liabilities | 833,562 | 102,395 | ||||||
| TOTAL LIABILITIES | 3,210,639 | 3,470,463 | ||||||
| STOCKHOLDERS’ DEFICIT: | ||||||||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized; and zero shares issued and outstanding | - | - | ||||||
| Common stock, $0.001 par value, 200,000,000 authorized, 33,146,626 and 31,491,626 shares issued and outstanding, respectively | 3,315 | 3,150 | ||||||
| Additional paid-in capital | 11,246,089 | 9,442,887 | ||||||
| Accumulated deficit | (13,535,698 | ) | (12,830,916 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (2,286,294 | ) | (3,384,879 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 924,345 | $ | 85,584 | ||||
The accompanying notes are an integral part of these condensed financial statements
F-18
FREECAST, INC.
CONDENSED STATEMENTS OF OPERATIONS (unaudited)
| Six Months ended | ||||||||
| December 31, 2019 | December 31, 2018 | |||||||
| REVENUE: | ||||||||
| Membership | $ | 89,920 | $ | 157,344 | ||||
| Other Revenue | 86 | 5,671 | ||||||
| TOTAL REVENUE | 90,006 | 163,015 | ||||||
| COST OF REVENUE: | ||||||||
| Cost of Revenue | 198,423 | 75,365 | ||||||
| TOTAL COST OF REVENUE | 198,423 | 75,365 | ||||||
| GROSS PROFIT (LOSS) | (108,417 | ) | 87,650 | |||||
| OPERATING COSTS AND EXPENSES: | ||||||||
| Compensation and benefits | 378,366 | 242,526 | ||||||
| Sales and marketing expense | 77,948 | 37,000 | ||||||
| General and administrative | 611,781 | 275,823 | ||||||
| TOTAL OPERATING EXPENSES | 1,068,095 | 555,349 | ||||||
| LOSS FROM OPERATIONS | (1,176,512 | ) | (467,699 | ) | ||||
| OTHER INCOME (EXPENSE): | ||||||||
| Interest (expense), net | (302,279 | ) | (147,886 | ) | ||||
| Other (expense) income, net | - | 4,593 | ||||||
| Gain on the forgiveness of debt | 774,009 | 114,833 | ||||||
| TOTAL OTHER INCOME (EXPENSE) | 471,730 | (28,460 | ) | |||||
| NET INCOME (LOSS) BEFORE INCOME TAX | (704,782 | ) | (496,159 | ) | ||||
| Income tax expense (benefit) | - | - | ||||||
| NET INCOME (LOSS) | $ | (704,782 | ) | $ | (496,159 | ) | ||
| Net Income (Loss) per common share – basic and diluted | $ | (0.02 | ) | $ | (0.02 | ) | ||
| Weighted average common shares outstanding – basic and diluted | 32,644,561 | 30,161,924 | ||||||
The accompanying notes are an integral part of these condensed financial statements
F-19
FREECAST, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE SIX MONTHS ENDED DECEMBER 31, 2019 AND 2018 (Unaudited)
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance as of June 30, 2019 | 31,491,626 | $ | 3,150 | $ | 9,442,887 | $ | (12,830,916 | ) | $ | (3,384,879 | ) | |||||||||
| Common stock issued for cash | 1,655,000 | 165 | 1,654,835 | - | 1,655,000 | |||||||||||||||
| Beneficial conversion feature | - | - | 148,367 | - | 148,367 | |||||||||||||||
| Net loss | - | - | - | (704,782 | ) | (704,782 | ) | |||||||||||||
| Balance as of December 31, 2019 | 33,146,626 | $ | 3,315 | $ | 11,264,089 | $ | (13,535,698 | ) | $ | (2,286,294 | ) | |||||||||
| Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
| Balance as of June 30, 2018 | 29,978,554 | $ | 2,998 | $ | 7,476,272 | $ | (11,745,082 | ) | $ | (4,265,812 | ) | |||||||||
| Common stock issued for cash | 785,000 | 78 | 784,922 | - | 785,000 | |||||||||||||||
| Common stock issued for services | 15,000 | 2 | 14,988 | - | 15,000 | |||||||||||||||
| Beneficial conversion feature | - | - | 51,733 | - | 51,733 | |||||||||||||||
| Net loss | - | - | - | (496,159 | ) | (496,159 | ) | |||||||||||||
| Balance as of December 31, 2018 | 30,778,554 | $ | 3,078 | $ | 8,327,925 | $ | (12,241,241 | ) | $ | (3,910,238 | ) | |||||||||
The accompanying notes are an integral part of these condensed financial statements
F-20
FREECAST, INC.
CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
| Six Months Ended | ||||||||
| December 31, 2019 | December 31, 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITES: | ||||||||
| Net Loss | $ | (704,782 | ) | $ | (496,159 | ) | ||
| Reconciliation of net loss to net cash used in operating activities | ||||||||
| Depreciation/Amortization expense | 2,826 | 28,715 | ||||||
| Amortization of right-of-use assets | 15,287 | - | ||||||
| Gain on the extinguishment of debt | (774,009 | ) | (114,832 | ) | ||||
| Amortization of debt discount | 242,531 | 36,414 | ||||||
| Common Stock issued for services | - | 15,000 | ||||||
| Expenses paid by related party | 10,258 | 2,250 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts Receivable | (20,330 | ) | 2,617 | |||||
| Other current assets | (33,896 | ) | (3,486 | ) | ||||
| ROU liabilities | (15,052 | ) | - | |||||
| Accounts payable and accrued expenses | 55,392 | (356 | ) | |||||
| Accounts payable and accrued expenses related party | 47,440 | 39,103 | ||||||
| Deferred revenue | (1,459 | ) | (98,146 | ) | ||||
| NET CASH USED IN OPERATING ACTIVITIES | (1,175,794 | ) | (588,880 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (2,329 | ) | - | |||||
| NET CASH USED IN INVESTING ACTIVITES | (2,329 | ) | - | |||||
| CASH FLOWS FROM FINANCING ACTIVITES: | ||||||||
| Proceeds from issuance of common stock | 1,655,000 | 785,000 | ||||||
| Proceeds from notes payable - related party | 99,742 | 46,674 | ||||||
| Repayments on notes payable - related party | (52,684 | ) | (58,716 | ) | ||||
| Proceeds from notes payable | 250,000 | - | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES: | 1,952,058 | 772,959 | ||||||
| Net change in cash | 773,935 | 184,079 | ||||||
| Cash and cash equivalents, beginning of period | 43,094 | 1,023 | ||||||
| Cash and cash equivalents, end of period | $ | 817,029 | $ | 185,102 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
| Cash paid for interest | $ | - | $ | - | ||||
| Cash paid of income taxes | $ | - | $ | - | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Issuance of Beneficial Conversion Feature | $ | 148,367 | $ | 51,733 | ||||
| Implementation of ASC 842 | $ | 19,861 | $ | - | ||||
| Right of use asset acquired during the period | $ | 6,520 | $ | - | ||||
The accompanying notes are an integral part of these condensed financial statements
F-21
FREECAST, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (unaudited)
DECEMBER 31, 2019
Note 1 – Organization and Description of Business
FreeCast, Inc. (the “Company”) developed and markets an interactive digital media guide that facilitates access to a virtual library of entertainment media. The Company is based in Orlando, Florida and was founded in 2011 as a Florida Corporation. The Company’s primary products are SmartGuide and Select TV. Both SmartGuide and Select TV utilize the Company-designed proprietary technology that searches, and aggregates internet distributed streaming media into an electronic media guide. SmartGuide is licensable to brands/manufacturers of devices with large online user bases, while Select TV is a retail package that is sold by monthly and/or annual subscriptions.
Going Concern
The Company’s has incurred recurring losses from operations since inception, accumulating a deficit of approximately $13.54 million as of December 31, 2019. For the six months ended December 31, 2019 and 2018, the Company incurred a net loss of approximately $704,782 and $496,159, respectively. The Company may incur additional losses and negative operating cash flows in the future. Failure to generate sufficient revenues, reduce spending or raise additional capital could adversely affect the Company’s ability to achieve its intended business objectives. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements.
Since the inception of the Company in 2011, the operations of the Company have been funded primarily through sales of common stock to private investors, debt financing and exchange of common stock for services received by the Company. Management cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business.
The accompanying financial statements for the six months ended December 31, 2019 and 2018 have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. During the remaining 2020 fiscal year, management intends to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The condensed financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted. However, in the opinion of management, all adjustments (which include only normal recurring adjustments, unless otherwise indicated) necessary to present fairly the financial position and result of operations for the periods presented have been made. The results for interim periods are not necessarily indicative of trends or results to be expected for the full year. These financial statements should be read in conjunction with the financial statements of the Company for the year ended June 30, 2019, including the notes thereto.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) or ASU 2014-09. The objective of the ASU is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most of the existing revenue recognition guidance, including industry-specific guidance. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the ASU Topic 606, companies will perform a five-step analysis of transactions to determine when and how revenue is recognized. The five-step analysis consists of the following: (i) identifying the contract with a customer, (ii) identifying the performance obligations in the contract, (iii) determining the transaction price, (iv) allocating the transaction price to the performance obligations in the contract and (v) recognizing revenue when (or as) the entity satisfies a performance obligation. Topic 606 applies to all contracts with customers except those that are within the scope of other topics in the FASB’s ASC. The Company adopted Topic 606 effective July 1, 2018 using the modified retrospective approach. The Company reviewed all contracts that were not completed as of July 1, 2018 and the adoption did not have a material impact on the Company’s consolidated financial statements.
F-22
The Company generates membership revenue through the renewal sales of Rabbit TV, Rabbit TV Plus, new and renewal sales through Select TV, which operates as the successor product to Rabbit TV and Rabbit TV Plus, as well as the SmartGuide, an internet distributed streaming media guide that searches and aggregates media content on the web and facilitates access to its customers through Wi-Fi-enabled devices that support streaming video. The Company both retransmits and “ingests” and distributes content.
Membership revenue is derived from online sales through search engine optimization (SEO), search engine marketing (SEM), various marketing advertising services, the utilization of resellers in the form of publishers that promote upcoming retail promotions and packages, as well as, direct sales to members (Select TV, Rabbit TV Plus). Currently, a Rabbit TV Plus account only generates renewal sales, as 100% of new sales are being met by the Select TV media guide. Select TV and Rabbit TV Plus also include free access to the Rabbit TV Mobile app, for Android and iOS devices.
Membership revenue is recognized ratably on a straight-line basis over the duration of the membership period, generally ranging from one month to five years. If the member renews early, then the expiration date is extended by the renewal period, and the additional membership fee is deferred and amortized over the additional months purchased by the member. All membership fees are collected at the time of purchase.
| Reportable Segments | ||||||||
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Subscriptions | $ | 77,461 | $ | 157,344 | ||||
| Advertising | 29 | 430 | ||||||
| Affiliates | 57 | 5,241 | ||||||
| Private Label Setup | 12,495 | - | ||||||
| Total | $ | 90,006 | $ | 163,015 | ||||
Leases
In February 2016, the FASB issued ASU 2016-02, as amended, Leases (Topic 842), which requires a lessee to record a right-of-use asset and a lease liability for all leases with a term greater than twelve months regardless of whether the lease is classified as an operating lease or a financing lease.
Effective July 1, 2019, the Company adopted the new standard under the modified retrospective approach, applying the current-period adjustment method. Under the transition guidance of the modified retrospective approach there are a number of optional practical expedients made available to simplify the transition of the new standard. The Company has elected the following:
| ● | The condensed consolidated balance sheets for reporting periods beginning on or after July 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with ASC Topic 840, Leases. The Company recognized a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption of $22. |
| ● | The Company has elected to utilize the package of practical expedients permitted under the transition guidance in the standard, which allowed the Company to not reassess (i) whether any expired or existing contracts contain leases, (ii) historical lease classification, and (iii) initial direct costs. |
| ● | The Company has elected to combine lease and non-lease components as a single component for all asset classes. |
| ● | The Company has elected to keep leases with an initial term of 12 months or less off of the balance sheet. |
F-23
Upon adoption, the Company recorded Right-of-use (“ROU”) assets and lease liabilities relating to operating leases of $19,861 and $19,861, respectively. The changes did not have a material impact on our results of operations or cash flows. The discount rates used to calculate the ROU assets and lease liabilities as of the effective date were based on the remaining lease terms as of the effective date. See Note 7 Leases, for the impact on the financial statements and related disclosures from the adoption of this standard.
Accounts Receivable
For accounts receivable, the Company performs ongoing credit evaluations of customers to assess the probability of accounts receivable collection based on a number of factors, including past transaction experience with the customer, evaluation of their credit history, and review of the invoicing terms of the contract. Accounts receivables are reported net of an allowance for doubtful accounts when applicable. The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the accounts receivable balance at each reporting date. Management determines the allowance based on known troubled accounts, historical experience and other currently available evidence. The Company did not recognize bad debt expense for the six months ended December 31, 2019. The balance of allowance for doubtful accounts at December 31, 2019 and June 30, 2019 of $245,240 and $245,240, respectively.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss) attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings (loss) per share is determined in the same manner as basic earnings (loss) per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase would be anti-dilutive.
The following table provides the number of common stock equivalents not included in diluted income per share, because the effects are anti-dilutive, for the six months ended December 31, 2019 and 2018, respectively.
| December 31, | ||||||||
| 2019 | 2018 | |||||||
| Convertible debt and liabilities | 4,499,214 | 2,863,614 | ||||||
| Warrants | 24,367,072 | 21,744,000 | ||||||
| Total | 28,866,286 | 24,607,614 | ||||||
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial position or results of operations upon adoption.
In August 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-13, Changes to Disclosure Requirements for Fair Value Measurements, which will improve the effectiveness of disclosure requirements for recurring and nonrecurring fair value measurements. The standard removes, modifies, and adds certain disclosure requirements, and is effective for the Company beginning July 1, 2020, including interim periods within those annual periods. The Company is currently evaluating the impact this standard will have on its financial statements.
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments. For receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. In addition, an entity will have to disclose significantly more information about allowances, credit quality indicators and past due securities. The standard is effective for the Company beginning July 1, 2020, including interim periods within those annual periods. The Company is currently evaluating the impact this standard will have on its financial statements.
F-24
Note 3 – Debt
Convertible Notes Payable – Related Parties
In June 2016, the Chief Executive Officer of the Company (“CEO”), William Mobley loaned the Company $111,000, at an interest rate of 12% per annum. The loan matured on December 31, 2017, is in default and remains as an on-demand liability of the Company. As of December 31, 2019 and June 30, 2019, accrued interest charges related to this loan were $23,539, and $20,515, respectively. During the six months ended December 31, 2019 and 2018, the Company did not pay any interest towards this loan. The note is convertible into shares of common stock at a conversion price of $0.25 per share. In accordance with ASC 470, the embedded beneficial conversion is recognized separately and was measured at its intrinsic value (see Note 6). As of December 31, 2019 and June 30, 2019, the outstanding principal and interest due to William Mobley was $73,520, and $70,497, respectively.
Notes Payable – Related Parties
Between July 2017 and April 2018, a related party, Public Wire (see Note 6), loaned the Company in various installments a total of $66,380 as of December 31, 2019 and June 30, 2019, at an interest rate of 12% per annum. The notes representing the loan matured on dates ranging from April 1, 2019 to January 1, 2020. The loan is in default and remains as an on-demand liability of the Company. As of December 31, 2019 and June 30, 2019, accrued interest related to this loan was $13,822 and $9,806, respectively. During the six months ended December 31, 2019 and 2018, the Company paid interest related to this loan in total of $0, and $0, respectively. As of December 31, 2019 and June 30, 2019, the outstanding principal and interest due to Public Wire was $80,202, and $76,186, respectively.
During 2018, a related party, Marjorie Lieberman (see Note 6), loaned the Company $25,000, at an interest rate of 10% per annum. The loan matured on April 1, 2019, is in default and remains as an on-demand liability of the Company. As of December 31, 2019 and June 30, 2019, accrued interest related to this loan was $1,203 and $924, respectively. During the six months ended December 31, 2019 and 2018, the Company paid interest related to this loan in total of $0, and $0, respectively. As of December 31, 2019 and June 30, 2019, the outstanding principal and interest due to Marjorie Lieberman was $6,737, and $6,458, respectively.
Revolving Convertible Notes Payable – Related Parties
On July 1, 2018, the Company signed a revolving convertible note agreement with a related party, Nextelligence (see Note 6), for an amount up to $500,000, with any borrowings on this loan being at the complete discretion of the Company. For the six months ended December 31, 2019 and 2018, the Company in various installments borrowed $99,742, and $26,574, respectively, in proceeds from this loan. Additionally, the principal balance was increased by $10,258 and $2,250, respectively, in non-cash additions related to expenses paid by Nextelligence on behalf of the Company. In addition, for the six months ended December 31, 2019 and 2018, the Company repaid approximately $52,684 and $41,750, respectively. The loan accrues interest at a rate of 12% per annum and is set to mature July 1, 2020. As of December 31, 2019 and June 30, 2019, accrued interest was $24,277 and 4,684, respectively, related to this loan. In addition, as of December 31, 2019 and June 30, 2019, the outstanding principal and interest due is $318,423 and $261,107, respectively.
In the event of a “qualified financing”, or the Company issues and sells shares of Equity Securities, regardless of the maturity date, without any further action needed by Nextelligence, the outstanding principal and interest shall be converted into equity securities at a conversion price of $.25 per share. In the event no “qualified financing” is consummated prior to the maturity date, Nextelligence can choose to elect, within five days of the maturity date, to have all outstanding principal and interest converted into equity securities at a conversion price of $.25 of the per share price paid. For the six months ended December 31, 2019 and year-end June 30, 2019, the Company has recognized a beneficial conversion feature related to this note of $148,367 and $353,575, respectively, In which $234,343 and $122,472 of that amount was amortized as interest expense during the six months ended December 31, 2019, and year end June 30, 2019, respectively.
Notes Payable
On September 15, 2016, the Company entered into an agreement with U.S. Premium Finance to provide financing in an aggregate amount of $1,967,450 for the insurance premium associated with both D&O and Workers Compensation policies. Both policies commenced September 15, 2016, and provided coverage for the next 36 months, expiring September 15, 2019. The loan bears interest at a floating rate per annum equal to the greater of either (i) 4.99% or (ii) 4.99% plus the Wall Street Journal Prime Rate. During the year ended June 30, 2019 and 2018, the interest rate on the loan was 4.99%. The Company was required to pay monthly principal and interest of approximately $58,957, paid over 36 months, with the final payment on October 15, 2019.
F-25
The U.S. Premium Finance agreement dated September 15, 2016 was secured against all rights, title, and interest associated with the D&O and Workers Compensation policies. As part of the legal costs associated with obtaining premium financing, on September 19, 2016 the Company agreed to pay a loan origination fee in the amount of $98,250. The loan origination fee was recorded as a debt discount and amortized over the life on the policy, maturing September 2019. As of December 31, 2019 and June 30, 2019, prepaid loan origination fees were $0 and $8,187, respectively, and is netted against the note on the Balance Sheet.
On April 18, 2017, the Company entered into an additional agreement with U.S. Premium Finance. The Company received $568,935 in net proceeds from them premium financing agreement. The loan bears interest at a floating rate per annum equal to the greater of either (i) 4.99% or (ii) 4.99% plus the Wall Street Journal Prime Rate. During the year ended June 30, 2019 and 2018, the interest rate on the loan was 4.99%. The Company was required to pay monthly principal and interest of approximately $29,705, paid over 20 months, with the final payment on December 15, 2018.
The U.S. Premium Finance agreement dated April 18, 2017 was secured against all rights, title, and interest associated with the general liability insurance policy. As part of the legal costs associated with obtaining premium financing, on April 18, 2017 the Company incurred and capitalized a loan origination fee in the amount of $28,348. The loan origination fee was amortized over the life of the policy, maturing December 2018. As of December 31, 2019 and June 30, 2019, there were no prepaid loan origination fees; as the amount was fully amortized.
As of December 31, 2019 and June 30, 2019, outstanding premium liability due within one year to U.S. Premium Finance was $1,000,000 and $1,611,659, respectively. On November 13, 2019 the Company settled the outstanding liability with U.S. Premium Finance, in which the Company agreed to pay $1,000,000 in various installments, with the last payment due on December 5, 2022. During the six months ended December 31, 2019, the Company, in accordance with the agreement, reduced the principal on the balance sheet and recognized a $774,009 gain on forgiveness of debt. In addition, as of November 13, 2019, the Company had accrued approximately $162,050 in interest, which was reduced to zero based on the settlement amount and the Company recognized as a gain on forgiveness of debt, of $162,050.
On October 22, 2019, the Company entered into a promissory note with William H, Valdes for the amount of $250,000. The note earns interest at 6% per annum and has a maturity date of November 1, 2020. As of December 31, 2019, accrued interest charges related to this loan was $2,877. During the six months ended December 31, 2019, the Company did not pay any interest towards this loan. As of December 31, 2019 and June 30, 2019, the outstanding principal and interest due to William H. Valdes was $252,877, and $0, respectively.
Note 4 – Stockholders’ Equity
Preferred Stock
No shares of preferred stock are currently outstanding. The Board of Directors may designate the authorized but unissued shares of the Preferred Stock with such rights and privileges as the board of directors may determine. As such, our board of directors may issue 5,000,000 preferred shares and designate the conversion, voting and other rights and preferences without notice to our shareholders and without shareholder approval.
Private Placement
During the six months ended December 31, 2019; the Company issued 1,655,000 shares of common stock pursuant to a private placement for proceeds of $1,655,000. In addition, the Company issued 1,655,000 warrants to purchase common stock in connection with this private placement. The warrants have an exercise price of $1.75 and expire in three years from issuance.
F-26
Stock Warrants
Following is a summary of outstanding stock warrants as of six months ended December 31, 2019:
| Number of Shares | Weighted Average Price | Weighted Average Remaining Life (years) | Intrinsic Value | |||||||||||||
| Warrants as of June 30, 2019 | 22,739,572 | $ | .43 | 3.5 | $ | 11,493,300 | ||||||||||
| Issued | 1,655,000 | $ | 1.75 | 1.7 | $ | - | ||||||||||
| Expired and forfeited | (27,500 | ) | $ | 1.75 | - | $ | - | |||||||||
| Exercised | - | $ | - | - | $ | - | ||||||||||
| Warrants outstanding and exercisable of December 31, 2019 | 24,367,072 | $ | 0.51 | 2.9 | $ | 11,493,300 | ||||||||||
| Exercise Price ($) | Warrants outstanding as of December 31, 2019 | Warrants outstanding as of June 30, 2019 | ||||||
| $0.25 | 19,000,000 | 19,000,000 | ||||||
| $0.60 | 1,350,000 | 1,350,000 | ||||||
| $1.75 | 4,017,072 | 2,389,572 | ||||||
| 24,367,072 | 22,739,572 | |||||||
Warrants
For the six months ended December 31, 2019, the Company issued 1,655,000 warrants to purchase common stock as part of the private placement memorandum to non-employees.
Beneficial Conversion Feature
The Company has embedded conversion features that it accounts for under ASC 470 and is recognized separately at its intrinsic value. Intrinsic value is calculated as the difference between the conversion price and the fair value of the common stock multiplied by the number of shares into which the security is convertible. If the intrinsic value of the beneficial conversion feature is greater than the proceeds allocated to the convertible instrument, the amount of the discount assigned to the beneficial conversion feature shall be limited to the amount of the proceeds allocated to the convertible instrument.
During the six months ended December 31, 2019, the Company recorded $148,367 of beneficial conversion features related to loans and accounts payable and accrued expenses that are convertible to shares of the Company’s common stock at a price less than the market price. In addition, during the year ended December 31, 2019, the Company recognized $176,600 as a debt discount and interest expense in conjunction with the amortization of the beneficial conversion feature.
Note 5 – Commitments and Contingencies
Operating lease
In August 2015, the Company entered into a lease with Citadel I, L.P. for approximately 136,000 square feet of office space in Orlando, Florida with an initial term of five years. In addition, in August 2015, the Company subleased executive office space through their related party shareholder, Nextelligence on a month to month basis, ending in October 2018. In addition, in October 2018, the Company terminated their remaining lease with Citadel I L.P. in exchange for two payments of $30,000 made during 2019. The Company recognized approximately $114,000 as a gain on extinguishment of debt attributed to the unpaid lease payments that remain; less the payments mentioned above.
F-27
In October 2018, the Company entered into a two-year sublease agreement for approximately 3,360 square feet of office space in Orlando, Florida. As of December 31, 2019, the Company has a future minimum lease payment under a non-cancellable lease of approximately, $5,040 and $0, in 2020 and 2021, respectively.
On August 20, 2019, the Company entered into a 63-month lease agreement for an office copier that is expected to mature on October 20, 2024. As of December 31, 2019, the Company has a future minimum lease payment under a non-cancellable lease of approximately:
| Future Minimum Lease Payments | ||||
| 2020 | $ | 700 | ||
| 2021 | 1,680 | |||
| 2022 | 1,680 | |||
| 2023 | 1,680 | |||
| 2024 | 1,680 | |||
| Thereafter | $ | 560 | ||
Voting Trust Agreement
On October 15, 2012, the Company entered into a Voting Trust Agreement (“Voting Trust Agreement”) with Telebrands Corp. (“Telebrands”) and William A. Mobley, Jr. The Voting Trust Agreement appoints William A. Mobley, Jr. as the trustee of all the shares of our common stock that Telebrands owns at any time (the “Entrusted Shares”). Telebrands currently owns 4,000 shares of our common stock and warrants to purchase up to 4,000,000 shares of our common stock. Pursuant to the Voting Trust Agreement, Mr. Mobley is entitled to exercise all rights relating to the voting and disposition of the Entrusted Shares, provided, however, Mr. Mobley is not allowed to effect a disposition or permit registration of the Entrusted Shares with the Securities and Exchange Commission or any state securities administrators unless Nextelligence, Inc., which is majority owned and controlled by Mr. Mobley, simultaneously effects a disposition or permits registration of an identical proportion of our voting securities of the Company that Nextelligence holds on the same terms and conditions. In addition, William A. Mobley, Jr. may not permit a disposition or registration of any voting securities of the Company that Nextelligence holds unless he simultaneously effects a disposition or registration of an identical proportion of the Entrusted Shares on the same terms and conditions.
The term of such trust ends upon the earlier of, Mr. Mobley’s ceasing to be an affiliate of our Company, as defined in the Voting Trust Agreement, or the disposition of all of the Entrusted Shares.
We are obligated to indemnify Mr. Mobley against any liabilities, damages, claims, taxes, deficiencies, assessments, losses, penalties, interest, costs and expenses paid or incurred by him in connection with the Voting Trust Agreement, unless those paid or incurred are a result of the gross negligence, willful misconduct or bad faith of Mr. Mobley.
Note 6 – Related Parties
In June 2016, William Mobley, CEO and majority shareholder of Nextelligence, the majority shareholder of the Company, loaned the Company $111,000, at an interest rate of 12% per annum. The loan matured on December 31, 2017, is in default and remains as an on-demand liability of the Company. As of December 31, 2019 and June 30, 2019, accrued interest charges related to this loan were $23,539, and $20,515, respectively. During the six months ended December 31, 2019 and 2018, the Company did not pay any interest towards this loan. As of December 31, 2019 and June 30, 2019, the outstanding principal and interest due to William Mobley was $73,520, and $70,497, respectively.
Between July 2017 and April 2018, a related party, Public Wire, a wholly-owned subsidiary of Nextelligence, loaned the Company in various installments a total of $66,380 as of December 31, 2019 and June 30, 2019, at an interest rate of 12% per annum. The notes representing the loan matured on dates ranging from April 1, 2019 to January 1, 2020. The loan is in default and remains as an on-demand liability of the Company. As of December 31, 2019 and June 30, 2019, accrued interest related to this loan was $13,822 and $9,806, respectively. During the six months ended December 31, 2019 and 2018, the Company paid interest related to this loan in total of $0, and $0, respectively. As of December 31, 2019 and June 30, 2019, the outstanding principal and interest due to Public Wire was $80,202, and $76,186, respectively.
During 2018, a related party, Marjorie Lieberman, mother of William Mobley, CEO, and corporate secretary to FreeCast Inc., loaned the Company $25,000, at an interest rate of 10% per annum. The loan matured on April 1, 2019, is in default and remains as an on-demand liability of the Company. As of December 31, 2019 and June 30, 2019, accrued interest related to this loan was $1,203 and $924, respectively. During the six months ended December 31, 2019 and 2018, the Company paid interest related to this loan in total of $0, and $0, respectively. As of December 31, 2019 and June 30, 2019, the outstanding principal and interest due to Marjorie Lieberman was $6,737, and $6,458, respectively.
F-28
On July 1, 2018, the Company signed a revolving convertible note agreement with Nextelligence for an amount up to $500,000, with any borrowings on this loan being at the complete discretion of the Company. For the six months ended December 31, 2019 and 2018, the Company, in various installments, borrowed $99,742, and $26,574, respectively, in proceeds from this loan. Additionally, the principal balance was increased by $10,258 and $2,250, respectively, in non-cash additions related to expenses paid by Nextelligence on behalf of the Company. For the six months ended December 31, 2019 and 2018, the Company repaid approximately $52,684 and $41,750, respectively. The loan accrues interest at a rate of 12% per annum and is set to mature July 1, 2020. As of December 31, 2019 and June 30, 2019, accrued interest was $24,277 and 4,684, respectively, related to this loan. In addition, as of December 31, 2019 and June 30, 2019, the outstanding principal and interest due is $318,423 and $261,107, respectively.
Note 7 – Leases
The Company currently has two active leases, an office lease, as well as an office copier under non-cancellable operating leases with initial terms typically ranging from one to three years. At contract inception, the Company reviews the facts and circumstances of the arrangement to determine if the contract is or contains a lease. The Company follows the guidance in Topic 842 to evaluate whether the contract has an identified asset; if the Company has the right to obtain substantially all economic benefits from the asset; and if the Company has the right to direct use of the underlying asset. When determining if a contract has an identified asset, the Company considers both explicit and implicit assets, and whether the supplier has the right to substitute the asset. When determining if the Company has the right to direct the use of an underlying asset, the Company considers if they have the right to direct how and for what purpose the asset is used throughout the period of use and if they control the decision-making right over the asset.
The Company’s lease terms may include options to extend or terminate the lease. The Company exercises judgment to determine the term of those leases when extension or termination options are present and include such options in the calculation of the lease term when it is reasonably certain that it will exercise those options.
The Company has elected to include both lease and non-lease components in the determination of lease payments. Payments made to a lessor for items such as taxes, insurance, common area maintenance, or other costs commonly referred to as executory costs, are also included in lease payments if they are fixed. The fixed portion of these payments are included in the calculation of the lease liability, while any variable portion would be recognized as variable lease expenses, when incurred. Variable payments made to third parties for these, or similar costs, such as utilities, are not included in the calculation of lease payments.
At commencement, lease-related assets and liabilities are measured at the present value of future lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company exercises judgment in determining the incremental borrowing rate based on the information available at when the lease commences to measure the present value of future payments.
Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease cost includes amortization, which is recognized on a straight-line basis over the expected life of the leased asset, and interest expense, which is recognized following an effective interest rate method.
Operating leases are included in other assets, current operating lease obligations, and operating lease obligations (less current portion) on the Company’s consolidated balance sheet. Finance leases are included in property, plant and equipment and current and long-term portion of finance lease obligations on the Company’s consolidated balance sheet. Short term leases with an initial term of 12 months or less are not presented on the balance sheet with expense recognized as incurred.
F-29
The following table presents lease assets and liabilities and their balance sheet classification:
| Classification | Dec 31, 2019 | |||||
| Operating Leases: | ||||||
| Right-of-use Assets | Right-of-use Assets | $ | 4,878 | |||
| Operating lease current liabilities | Current portion of operating lease obligations | 5,115 | ||||
| Operating lease noncurrent liabilities | Operating lease obligations, less current portion | - | ||||
| Finance Leases: | ||||||
| Right-of-use Assets | Right-of-use Assets | 6,216 | ||||
| Finance current liabilities | Current portion of operating lease obligations | 633 | ||||
| Finance noncurrent liabilities | Operating lease obligations, less current portion | 5,583 | ||||
The components of lease expense for the six month period ended December 31, 2019, are as follows:
| Classification | Dec 31, 2019 | |||||
| Operating Leases: | ||||||
| Operating lease cost | Right-of-use Assets | 15,440 | ||||
| Variable lease cost | Current portion of operating lease obligations | - | ||||
| Short term lease costs | Operating lease obligations, less current portion | - | ||||
| Finance Leases: | ||||||
| Amortization of right-of-use assets | Right-of-use Assets | 304 | ||||
| Interest expense | Current portion of operating lease obligations | 28 | ||||
| Total | Operating lease obligations, less current portion | 15,772 | ||||
The weighted average lease term and discount rates are as follows:
| Dec 31, 2019 | ||||
| Operating Leases: | ||||
| Weighted average remaining lease term (months) | 2 | |||
| Weighted average discount rate | 1.0 | % | ||
| Finance Leases: | ||||
| Weighted average remaining lease term (months) | 59 | |||
| Weighted average discount rate | 11.24 | % | ||
Future payments due under leases reconciled to lease liabilities as follows:
| Finance Lease | Operating Lease | |||||
| For the remaining 6 months of the fiscal year ending June 30: | ||||||
| 2020 | $ | 840 | $5,191 | |||
| For the fiscal years ending June 30: | ||||||
| 2021 | 1,680 | - | ||||
| 2022 | 1,680 | - | ||||
| 2023 | 1,680 | - | ||||
| 2024 | 1,680 | - | ||||
| Thereafter | 560 | - | ||||
| Total undiscounted lease payments | 8,120 | 5,191 | ||||
| Present value discount, less interest | 1,904 | 76 | ||||
| Lease Liability | $ | 6,216 | $5,115 | |||
F-30
Supplemental disclosure of cash flow information related to leases are as follows:
| Six Months Ended December 31, 2019 | ||||
| Other information | ||||
| Cash paid for amounts included in measure of lease liabilities | ||||
| Operating cash flows from finance leases | 304 | |||
| Operating cash flows from operating leases | (237 | ) | ||
| Financing cash flows from finance leases | 21 | |||
| Supplemental non-cash information on lease liabilities arising from obtaining right-of-use assets: | ||||
| Right-of-use assets obtained in exchange for new finance lease liabilities | - | |||
| Right-of-use assets obtained in exchange for operating lease liabilities | - | |||
Note 8 – Subsequent Events
The Company has completed an evaluation of all subsequent events through February 12, 2019, the date the financial statements were available for general release, to ensure that this report includes appropriate disclosure of events both recognized in the December 31, 2019 and 2018 financial statements and events which have occurred but were not recognized in the consolidated financial statements. Except as described below, the Company has concluded that no subsequent event has occurred that requires disclosure.
In January and February of 2020, the Company entered to employment agreements with three executives. As part of each executive compensation package, the Company issued 60,000 warrants to purchase common stock at an exercise price of $1.75 per share. Each warrant vests immediately upon the execution of their respective employment agreement. The warrants are exercisable beginning six months from the vesting date, and expire 12 months thereafter.
Subsequent to year end, the Company issued 105,000 shares of common stock pursuant to a private placement for proceeds of $105,000. In addition, the Company issued 105,000 warrants to purchase common stock in connection with this private placement. The warrants have an exercise price of $1.75 and expire in three years from issuance.
F-31
FreeCast, Inc.
shares of common stock
PROSPECTUS
, 2020
Through and including , 2020 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or membership.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, all of which will be borne by the registrant, in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates except for the SEC registration fee, the FINRA filing fee and the Nasdaq Capital Market listing fee.
| SEC registration fee | $ | 2,379.24 | ||
| FINRA filing fee | $ | 3,249.50 | ||
| Nasdaq Capital Market listing fee | $ | 5,000 | ||
| Accounting fees and expenses* | $ | |||
| Legal fees and expenses* | $ | |||
| Printing and Engraving* | $ | |||
| Transfer agent and registrar fees* | $ | |||
| Miscellaneous* | $ |
| * | To be provided by amendment. |
Item 14. Indemnification of Directors and Officers.
Pursuant to Section 607.0850 of the Florida Revised Statutes, we have the power to indemnify any person made a party to any lawsuit by reason of being a director or officer of the Registrant, or serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. Our Articles of Incorporation and Bylaws provide that the Registrant shall indemnify its directors and officers to the fullest extent permitted by Florida law.
With regard to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of the Corporation in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the common shares being registered, we will, unless in the opinion of our counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act, and will be governed by the final adjudication of such case.
II-1
Item 15. Recent Sales of Unregistered Securities.
The information below lists all of the securities sold by us during the past three years which were not registered under the Securities Act:
On March 31, 2020, we sold an aggregate of 250,000 shares of our common stock to Joyce Peterson at a price of $4.00 per share for an aggregate purchase price of $1,000,000. The offer, sale and issuance of the shares were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. Ms. Peterson acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and represented to us that she could bear the risks of the investment and could hold the securities for an indefinite period of time, and appropriate legends were affixed to the certificate representing the shares issued in this transaction.
On February 10 and 11, 2020, we sold an aggregate of 105,000 shares of our common stock and warrants to purchase 105,000 shares of our common stock, at an exercise price of $1.75 per share, to DS Capital LLC at a price of $1.00 per share for an aggregate purchase price of $105,000. The offer, sale and issuance of the shares and warrants were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. The recipient of our securities acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and represented to us that it could bear the risks of the investment and could hold the securities for an indefinite period of time, and appropriate legends were affixed to the securities issued in these transactions.
We entered into one year employment agreements with Larry Weeks and Roy Labrador, effective January 20, 2020, and Tracy West, effective February 1, 2020. In connection with execution of the employment agreements, and as part of their compensation package, we granted each of them warrants to purchase 60,000 shares of our common stock, at an exercise price of $1.75 per share. All of the warrants vested immediately. For Mr. Weeks and Mr. Labrador, the initial exercise period will begin June 20, 2020 and expire on June 20, 2021. For Ms. West, the initial exercise period will begin July 1, 2020 and expire on July 1, 2021. The warrants were offered and granted in reliance upon the exemption from the registration provisions of the Securities Act set forth in Rule 701 in that the securities were offered and sold pursuant to written contracts relating to compensation.
During the period from July 2018 through December 2019, we sold an aggregate of 3,000,000 shares of our common stock and warrants to purchase 3,000,000 shares of our common stock, at an exercise price of $1.75 per share, to a total of 40 accredited investors at a price of $1.00 per share for an aggregate purchase price of $3,000,000. The offers, sales and issuances of such common stock and warrants were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and represented to us that they could bear the risks of the investment and could hold the securities for an indefinite period of time, and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions represented to us in connection with their purchase that they were an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act.
On January 23, 2019, we issued 153,072 shares of common stock and warrants to purchase 153,072 shares of our common stock, at an exercise price of $1.75 per share, to Broad Street Holdings, an accredited investor who had access to information concerning us and our business prospects and who took them for investment purposes without a view to distribution, pursuant to a promissory note conversion agreement for consideration equal to the principal amount of the loan of $153,072 and accrued and unpaid interest of $0. The offer, sale and issuance of the shares and warrants were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. The recipient of our securities acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and represented to us that it could bear the risks of the investment and could hold the securities for an indefinite period of time, and appropriate legends were affixed to the securities issued in these transactions.
During the period from January 2017 through June 2018, we sold an aggregate of 586,000 shares of our common stock and warrants to purchase 586,000 shares of our common stock, at an exercise price of $1.75 per share, to a total of 13 accredited investors at a price of $1.00 per share for an aggregate purchase price of $586,000. In connection with these sales, we paid aggregate broker commissions of $20,000 and issued 28,000 shares of our common stock. The offers, sales and issuances of such common stock and warrants were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and represented to us that they could bear the risks of the investment and could hold the securities for an indefinite period of time, and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions represented to us in connection with their purchase that they were an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act.
On March 24, 2019, we issued to Mel Arthur Enterprises, LLC as payment for consulting services provided in connection with TV Infomercial production, web, call center and media of our consumer retail product, warrants to purchase 250,000 shares of our common stock at an exercise price of $1.75 per share. The offer, sale and issuance of the warrants were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. The recipient of our securities acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and represented to us that he was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act, could bear the risks of the investment and could hold the securities for an indefinite period of time, and appropriate legends were affixed to the securities issued in these transactions.
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We issued 15,000 shares of our common stock to Irwin Podhajser as payment in full of an invoice dated June 15, 2018 in the amount of $15,000 for advisory services provided in connection with our obtaining many of our current digital channels. The offer, sale and issuance of the shares were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. The recipient of our securities acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and represented to us that he was an accredited investor within the meaning of Rule 501 of Regulation D under the Securities Act, could bear the risks of the investment and could hold the securities for an indefinite period of time, and appropriate legends were affixed to the securities issued in these transactions.
On July 1, 2018, we signed a revolving convertible note agreement with Nextelligence, which was amended and restated as of July 2, 2018, for an amount up to $500,000; with any borrowings on this loan being at our complete discretion. Outstanding principal and accrued is due and payable on July 1, 2020. In lieu of repayment, at Nextelligence’s option, all or part of the outstanding principal and accrued interest is convertible into shares of our common stock at a conversion price of $0.25 per share. As of December 31, 2019, the outstanding principal and interest due under this loan is $342,701. The offer, sale and issuance of this convertible note was deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. Nextelligence took the convertible note for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
On May 8, 2017, we sold to Christopher M. Savine, our Chief Financial Officer, for $50.00, warrants to purchase 675,000 shares of our common stock at an exercise price of $0.60 per share. The offer, sale and issuance of the warrants were deemed to be exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act as transactions by an issuer not involving a public offering. Mr. Savine acquired the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof.
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Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed as part of this Registration Statement:
| * | Previously filed |
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Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Orlando, Florida, on April 10, 2020.
| FREECAST, INC. | ||
| By: | /s/ William A. Mobley, Jr. | |
| Name: William A. Mobley, Jr. | ||
| Title: Chief Executive Officer | ||
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ William A. Mobley, Jr. | Chief Executive Officer and Chairman of the Board of Directors | April 10, 2020 | ||
| William A. Mobley, Jr. | (principal executive officer) | |||
| * | Chief Financial Officer and Director | April 10, 2020 | ||
| Christopher M. Savine | (principal accounting and financial officer) | |||
| * | Director | April 10, 2020 | ||
| David Gust |
| *By: | /s/ William A. Mobley, Jr. | |||
William A. Mobley, Jr., Attorney-in-Fact | ||||
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Exhibit 1.1
UNDERWRITING AGREEMENT
among
FREECAST, INC.
and
ALEXANDER CAPITAL, L.P.,
as Representative of the Several Underwriters
FREECAST, INC.
UNDERWRITING AGREEMENT
New York, New York
[●], 2020
Alexander Capital, L.P.
As Representative of the several Underwriters named on Schedule 1 attached hereto
c/o Alexander Capital, L.P.
17 State Street, 5th Floor
New York, NY 10004
Ladies and Gentlemen:
The undersigned, FreeCast, Inc., a corporation formed under the laws of the State of Florida (collectively with its subsidiaries and affiliates, including, without limitation, all entities disclosed or described in the Registration Statement (as hereinafter defined) and set forth on Schedule 4 attached hereto, as being subsidiaries or affiliates of FreeCast, Inc., the “Company”), hereby confirms its agreement (this “Agreement”) with the Underwriters named in Schedule 1 hereto (the “Representative” and such other underwriters being collectively called the “Underwriters” or, individually, an “Underwriter”) as follows:
1. Purchase and Sale of Shares.
1.1 Firm Shares.
1.1.1 Nature and Purchase of Firm Shares.
(i) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the several Underwriters, an aggregate of [●] shares (the “Firm Shares”) of the Company’s common stock, par value $0.0001 per share (the “Common Stock”).
(ii) The Underwriters, severally and not jointly, agree to purchase from (A) the Company the number of Firm Shares set forth opposite their respective names on Schedule 1 attached hereto and made a part hereof at a purchase price of $[●] per share (91% of the per Firm Share offering price). The Firm Shares are to be offered initially to the public at the offering price set forth on the cover page of the Prospectus (as defined in Section 2.1.1 hereof).
1.1.2 Shares Payment and Delivery.
(i) Delivery and payment for the Firm Shares shall be made at 10:00 a.m., Eastern time, on the third (3rd) Business Day following the effective date (the “Effective Date”) of the Registration Statement (as defined in Section 2.1.1 below) (or the fourth (4th) Business Day following the Effective Date if the Registration Statement is declared effective after 4:01 p.m., Eastern time) or at such earlier time as shall be agreed upon by the Representative and the Company, at the offices of Cozen O’Connor, 33 South 6th Street, Suite 3800, Minneapolis, Minnesota 55402 (“Representative Counsel”), or at such other place (or remotely by other electronic transmission) as shall be agreed upon by the Representative and the Company. The hour and date of delivery and payment for the Firm Shares is called the “Closing Date.”
(ii) Payment for the Firm Shares shall be made on the Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company, upon delivery of the certificates (in form and substance satisfactory to the Underwriters) representing the Firm Shares (or through the facilities of the Depository Trust Company (“DTC”)) for the account of the Underwriters. The Firm Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two (2) full Business Days prior to the Closing Date. The Company shall not be obligated to sell or deliver the Firm Shares except upon tender of payment by the Representative for all of the Firm Shares. The term “Business Day” means any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions are authorized or obligated by law to close in New York, New York.
1.2 Over-allotment Option.
1.2.1 Option Shares. For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares, the Company hereby grants to the Underwriters an option to purchase up to [●] additional shares of Common Stock, representing fifteen percent (15%) of the Firm Shares sold in the offering, from the Company (the “Over-allotment Option”). Such [●] additional shares of Common Stock, the net proceeds of which will be deposited with the Company’s account, are hereinafter referred to as “Option Shares.” The purchase price to be paid per Option Share shall be equal to the price per Firm Share set forth in Section 1.1.1 hereof. The Firm Shares and the Option Shares are hereinafter referred to together as the “Public Securities.” The offering and sale of the Public Securities is hereinafter referred to as the “Offering.”
1.2.2 Exercise of Option. The Over-allotment Option granted pursuant to Section 1.2.1 hereof may be exercised by the Representative as to all (at any time) or any part (from time to time) of the Option Shares within 45 days after the Effective Date. The Underwriters shall not be under any obligation to purchase any Option Shares prior to the exercise of the Over-allotment Option. The Over-allotment Option granted hereby may be exercised by the giving of oral notice to the Company from the Representative, which must be confirmed in writing by overnight mail or electronic transmission setting forth the number of Option Shares to be purchased and the date and time for delivery of and payment for the Option Shares (the “Option Closing Date”), which shall not be later than five (5) full Business Days after the date of the notice or such other time as shall be agreed upon by the Company and the Representative, at the offices of Representative Counsel or at such other place (including remotely other electronic transmission) as shall be agreed upon by the Company and the Representative. If such delivery and payment for the Option Shares does not occur on the Closing Date, the Option Closing Date will be as set forth in the notice. Upon exercise of the Over-allotment Option with respect to all or any portion of the Option Shares, subject to the terms and conditions set forth herein, (i) the Company shall become obligated to sell to the Underwriters the number of Option Shares specified in such notice and (ii) each of the Underwriters, acting severally and not jointly, shall purchase that portion of the total number of Option Shares then being purchased as set forth in Schedule 1 opposite the name of such Underwriter.
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1.2.3 Payment and Delivery. Payment for the Option Shares shall be made on the Option Closing Date by wire transfer in Federal (same day) funds, payable to the order of the Company upon delivery to you of certificates (in form and substance satisfactory to the Underwriters) representing the Option Shares (or through the facilities of DTC) for the account of the Underwriters. The Option Shares shall be registered in such name or names and in such authorized denominations as the Representative may request in writing at least two (2) full Business Days prior to the Option Closing Date. The Company shall not be obligated to sell or deliver the Option Shares except upon tender of payment by the Representative for applicable Option Shares. The Option Closing Date may be simultaneous with, but not earlier than, the Closing Date; and in the event that such time and date are simultaneous with the Closing Date, the term “Closing Date” shall refer to the time and date of delivery of the Firm Shares and Option Shares.
1.3 Representative’s Warrants.
1.3.1 Purchase Warrants. The Company hereby agrees to issue and sell to the Representative (and/or its designee) on the Closing Date a warrant (“Representative’s Warrants”) for the purchase of an aggregate of [●] shares of Common Stock, representing 6% of the Firm Shares (excluding the Option Shares), for an aggregate purchase price of $100.00. The Representative’s Warrant agreement, in the form attached hereto as Exhibit A (the “Representative’s Warrant Agreement”), shall be exercisable, in whole or in part, commencing on a date which is one (1) year after the Effective Date and expiring on the five-year anniversary of the Effective Date at an initial exercise price per share of Common Stock of $[●], which is equal to 120% of the initial public offering price of the Firm Shares. The Representative’s Warrant Agreement and the shares of Common Stock issuable upon exercise thereof are hereinafter referred to together as the “Representative’s Securities.” The Representative understands and agrees that there are significant restrictions pursuant to FINRA Rule 5110 against transferring the Representative’s Warrant Agreement and the underlying shares of Common Stock during the one hundred eighty (180) days after the Effective Date and by its acceptance thereof shall agree that it will not sell, transfer, assign, pledge or hypothecate the Representative’s Warrant Agreement, or any portion thereof, or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of such securities for a period of one hundred eighty (180) days following the Effective Date to anyone other than (i) an Underwriter or a selected dealer in connection with the Offering, or (ii) a bona fide officer or partner of the Representative or of any such Underwriter or selected dealer; and only if any such transferee agrees to the foregoing lock-up restrictions.
1.3.2 Delivery. Delivery of the Representative’s Warrant Agreement shall be made on the Closing Date and shall be issued in the name or names and in such authorized denominations as the Representative may request in writing.
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2. Representations and Warranties of the Company. The Company represents and warrants to the Underwriters as of the Applicable Time (as defined below), as of the Closing Date and as of the Option Closing Date, if any, as follows:
2.1 Filing of Registration Statement.
2.1.1 Pursuant to the Securities Act. The Company has filed with the U.S. Securities and Exchange Commission (the “Commission”) a registration statement, and an amendment or amendments thereto, on Form S-1 (File No. 333-______), including any related prospectus or prospectuses, for the registration of the Public Securities and the Representative’s Securities under the Securities Act of 1933, as amended (the “Securities Act”), which registration statement and amendment or amendments have been prepared by the Company in all material respects in conformity with the requirements of the Securities Act and the rules and regulations of the Commission under the Securities Act (the “Securities Act Regulations”) and will contain all material statements that are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement became effective (including the Preliminary Prospectus included in the registration statement, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of the Effective Date pursuant to paragraph (b) of Rule 430A of the Securities Act Regulations (the “Rule 430A Information”)), is referred to herein as the “Registration Statement.” If the Company files any registration statement pursuant to Rule 462(b) of the Securities Act Regulations, then after such filing, the term “Registration Statement” shall include such registration statement filed pursuant to Rule 462(b). The Registration Statement has been declared effective by the Commission on the date hereof.
Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a “Preliminary Prospectus.” The Preliminary Prospectus, subject to completion, dated [●], that was included in the Registration Statement immediately prior to the Applicable Time is hereinafter called the “Pricing Prospectus.” The final prospectus in the form first furnished to the Underwriters for use in the Offering is hereinafter called the “Prospectus.” Any reference to the “most recent Preliminary Prospectus” shall be deemed to refer to the latest Preliminary Prospectus included in the Registration Statement.
“Applicable Time” means [●]., Eastern time, on the date of this Agreement.
“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433 of the Securities Act Regulations (“Rule 433”), including without limitation any “free writing prospectus” (as defined in Rule 405 of the Securities Act Regulations) relating to the Public Securities that is (i) required to be filed with the Commission by the Company, (ii) a “road show that is a written communication” within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission pursuant to Rule 433(d)(5)(i) because it contains a description of the Public Securities or of the Offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g).
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“Issuer General Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a “bona fide electronic road show,” as defined in Rule 433 (the “Bona Fide Electronic Road Show”)), as evidenced by its being specified in Schedule 2-B hereto.
“Issuer Limited Use Free Writing Prospectus” means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.
“Pricing Disclosure Package” means any Issuer General Use Free Writing Prospectus issued at or prior to the Applicable Time, the Pricing Prospectus and the information included on Schedule 2-A hereto, all considered together.
2.1.2 Pursuant to the Exchange Act. The Company has filed with the Commission a Form 8-A (File Number 001-_____) providing for the registration pursuant to Section 12(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the shares of Common Stock. The registration of the shares of Common Stock under the Exchange Act has been declared effective by the Commission on or prior to the date hereof. The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the shares of Common Stock under the Exchange Act, nor has the Company received any notification that the Commission is contemplating terminating such registration.
2.2 Stock Exchange Listing. The shares of Common Stock have been approved for listing on the NASDAQ Capital Market (the “Exchange”) subject only to official notice of issuance, and the Company has taken no action designed to, or likely to have the effect of, delisting the shares of Common Stock from the Exchange, nor has the Company received any notification that the Exchange is contemplating terminating such listing except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
2.3 No Stop Orders, etc. Neither the Commission nor, to the Company’s knowledge, any state regulatory authority has issued any order preventing or suspending the use of the Registration Statement, any Preliminary Prospectus or the Prospectus or has instituted or, to the Company’s knowledge, threatened to institute, any proceedings with respect to such an order. The Company has complied with each request (if any) from the Commission for additional information.
2.4 Disclosures in Registration Statement.
2.4.1 Compliance with Securities Act and 10b-5 Representation.
(i) Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus, including the prospectus filed as part of the Registration Statement as originally filed or as part of any amendment or supplement thereto, and the Prospectus, at the time each was filed with the Commission, complied in all material respects with the requirements of the Securities Act and the Securities Act Regulations. Each Preliminary Prospectus delivered to the Underwriters for use in connection with this Offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
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(ii) Neither the Registration Statement nor any amendment thereto, at its effective time, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(iii) The Pricing Disclosure Package, as of the Applicable Time, at the Closing Date or at any Option Closing Date (if any), did not, does not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and each Issuer Limited Use Free Writing Prospectus does not conflict in any material respect with the information contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus or the Prospectus, and each such Issuer Limited Use Free Writing Prospectus, as supplemented by and taken together with the Pricing Prospectus as of the Applicable Time, did not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to statements made or statements omitted in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by the Representative expressly for use in the Registration Statement, the Pricing Prospectus or the Prospectus or any amendment thereof or supplement thereto. The parties acknowledge and agree that such information provided by or on behalf of any Underwriter consists solely of the disclosure contained in the “Underwriting” section of the Prospectus (the “Underwriters’ Information”).
(iv) Neither the Prospectus nor any amendment or supplement thereto (including any prospectus wrapper), as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Date or at any Option Closing Date, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to the Underwriters’ Information.
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2.4.2 Disclosure of Agreements. The agreements and documents described in the Registration Statement, the Pricing Disclosure Package and the Prospectus conform in all material respects to the descriptions thereof contained therein and there are no agreements or other documents required by the Securities Act and the Securities Act Regulations to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus or to be filed with the Commission as exhibits to the Registration Statement, that have not been so described or filed. Each agreement or other instrument (however characterized or described) to which the Company is a party or by which it is or may be bound or affected and (i) that is referred to in the Registration Statement, the Pricing Disclosure Package and the Prospectus, or (ii) is material to the Company’s business, has been duly authorized and validly executed by the Company, is in full force and effect in all material respects and is enforceable against the Company and, to the Company’s knowledge, the other parties thereto, in accordance with its terms, except (x) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally, (y) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws, and (z) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, none of such agreements or instruments has been assigned by the Company, and neither the Company nor, to the Company’s knowledge, any other party is in default thereunder and, to the Company’s knowledge, no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default thereunder except for such defaults that would not reasonably be expected to result in a Material Adverse Change (as defined in Section 2.5.1 below). To the best of the Company’s knowledge, performance by the Company of the material provisions of such agreements or instruments will not result in a violation of any existing applicable law, rule, regulation, judgment, order or decree of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its assets or businesses (each, a “Governmental Entity”), including, without limitation, those relating to environmental laws and regulations, except for such violations that would not reasonably be expected to result in a Material Adverse Change.
2.4.3 Prior Securities Transactions. No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by or under common control with the Company, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Preliminary Prospectus.
2.4.4 Regulations. The disclosures in the Registration Statement, the Pricing Disclosure Package and the Prospectus concerning the effects of federal, state, local and all foreign regulation on the Offering and the Company’s business as currently contemplated are correct in all material respects and no other such regulations are required to be disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus which are not so disclosed.
2.5 Changes After Dates in Registration Statement.
2.5.1 No Material Adverse Change. Since the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except as otherwise specifically stated therein: (i) there has been no material adverse change in the financial position or results of operations of the Company, nor to the Company’s knowledge, any change or development that, singularly or in the aggregate, would involve a material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company (a “Material Adverse Change”); and (ii) there have been no material transactions entered into by the Company not in the ordinary course of business, other than as contemplated pursuant to this Agreement.
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2.5.2 Recent Securities Transactions, etc. Subsequent to the respective dates as of which information is given in the Registration Statement, the Pricing Disclosure Package and the Prospectus, and except as may otherwise be indicated or contemplated herein or disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not: (i) issued any securities other than securities issued pursuant to the Company’s existing equity incentive plans or shares issuable upon the exercise of then outstanding options, warrants and convertible securities, which in each case were disclosed in the Prospectus, Pricing Disclosure Package or the Registration Statement, or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) declared or paid any dividend or made any other distribution on or in respect to its capital stock.
2.6 Independent Accountants. To the knowledge of the Company, Marcum LLP (the “Auditor”), whose report is filed with the Commission as part of the Registration Statement, the Pricing Disclosure Package and the Prospectus, is an independent registered public accounting firm as required by the Securities Act and the Securities Act Regulations and the Public Company Accounting Oversight Board. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Auditor has not, during the periods covered by the financial statements included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, provided to the Company any non-audit services, as such term is used in Section 10A(g) of the Exchange Act.
2.7 Financial Statements, etc. The financial statements, including the notes thereto and supporting schedules, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus, fairly in all material respects present the financial position and the results of operations of the Company at the dates and for the periods to which they apply; and such financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”), consistently applied throughout the periods involved (provided that unaudited interim financial statements are subject to year-end audit adjustments that are not expected to be material in the aggregate and do not contain all footnotes required by GAAP); and any supporting schedules included in the Registration Statement present fairly in all material respects the information required to be stated therein. Except as included therein, no historical or pro forma financial statements are required to be included in the Registration Statement, the Pricing Disclosure Package or the Prospectus under the Securities Act or the Securities Act Regulations. The pro forma and pro forma as adjusted financial information and the related notes, if any, included in the Registration Statement, the Pricing Disclosure Package and the Prospectus have been properly compiled and prepared in accordance with the applicable requirements of the Securities Act and the Securities Act Regulations and present fairly in all material respects the information shown therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. All disclosures contained in the Registration Statement, the Pricing Disclosure Package or the Prospectus regarding “non-GAAP financial measures” (as such term is defined by the rules and regulations of the Commission), if any, comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K of the Securities Act, to the extent applicable. Each of the Registration Statement, the Pricing Disclosure Package and the Prospectus discloses all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the Company with unconsolidated entities or other persons that may have a material current or future effect on the Company’s financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, (a) neither the Company nor any of its direct and indirect subsidiaries, including each entity disclosed or described in the Registration Statement, the Pricing Disclosure Package and the Prospectus as being a subsidiary of the Company (each, a “Subsidiary” and, collectively, the “Subsidiaries”), has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions other than in the ordinary course of business, (b) the Company has not declared or paid any dividends or made any distribution of any kind with respect to its capital stock, (c) there has not been any change in the capital stock of the Company or any of its Subsidiaries, or, other than in the course of business, any grants under any stock compensation plan, and (d) there has not been any Material Adverse Change in the Company’s long-term or short-term debt.
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2.8 Authorized Capital; Options, etc. The Company had, at the date or dates indicated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the duly authorized, issued and outstanding capitalization as set forth therein. Based on the assumptions stated in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company will have on the Closing Date the adjusted stock capitalization set forth therein. Except as set forth in, or contemplated by, the Registration Statement, the Pricing Disclosure Package and the Prospectus, on the Effective Date, as of the Applicable Time and on the Closing Date and any Option Closing Date, there will be no stock options, warrants, or other rights to purchase or otherwise acquire any authorized, but unissued shares of Common Stock of the Company or any security convertible or exercisable into shares of Common Stock of the Company, or any contracts or commitments to issue or sell shares of Common Stock or any such options, warrants, rights or convertible securities.
2.9 Valid Issuance of Securities, etc.
2.9.1 Outstanding Securities. All issued and outstanding securities of the Company issued prior to the transactions contemplated by this Agreement have been duly authorized and validly issued and are fully paid and non-assessable; the holders thereof have no rights of rescission with respect thereto, and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. The authorized shares of Common Stock conform in all material respects to all statements relating thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. The offers and sales of the outstanding shares of Common Stock were at all relevant times either registered under the Securities Act and the applicable state securities or “blue sky” laws or, based in part on the representations and warranties of the purchasers of such Shares, exempt from such registration requirements.
2.9.2 Securities Sold Pursuant to this Agreement. The Public Securities and Representative’s Securities have been duly authorized for issuance and sale and, when issued and paid for, will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; the Public Securities and Representative’s Securities are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company; and all corporate action required to be taken for the authorization, issuance and sale of the Public Securities and Representative’s Securities has been duly and validly taken. The Public Securities and Representative’s Securities conform in all material respects to all statements with respect thereto contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus. All corporate action required to be taken for the authorization, issuance and sale of the Representative’s Warrant Agreement has been duly and validly taken; the shares of Common Stock issuable upon exercise of the Representative’s Warrant have been duly authorized and reserved for issuance by all necessary corporate action on the part of the Company and when paid for and issued in accordance with the Representative’s Warrant and the Representative’s Warrant Agreement, such shares of Common Stock will be validly issued, fully paid and non-assessable; the holders thereof are not and will not be subject to personal liability by reason of being such holders; and such shares of Common Stock are not and will not be subject to the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company.
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2.10 Registration Rights of Third Parties. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, no holders of any securities of the Company or any rights exercisable for or convertible or exchangeable into securities of the Company have the right to require the Company to register any such securities of the Company under the Securities Act or to include any such securities in a registration statement to be filed by the Company.
2.11 Validity and Binding Effect of Agreements. This Agreement and the Representative’s Warrant Agreement have been duly and validly authorized by the Company, and, when executed and delivered, will constitute, the valid and binding agreements of the Company, enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under the federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.
2.12 No Conflicts, etc. The execution, delivery and performance by the Company of this Agreement, the Representative’s Warrant Agreement and all ancillary documents, the consummation by the Company of the transactions herein and therein contemplated and the compliance by the Company with the terms hereof and thereof do not and will not, with or without the giving of notice or the lapse of time or both: (i) result in a material breach of, or conflict in any material respect with any of the terms and provisions of, or constitute a material default under, or result in the creation, modification, termination or imposition of any material lien, charge or encumbrance upon any property or assets of the Company pursuant to the terms of any agreement or instrument to which the Company is a party; (ii) result in any violation of the provisions of the Company’s Certificate of Incorporation (as the same may be amended or restated from time to time, the “Charter”) or the by-laws of the Company; or (iii) violate any existing applicable law, rule, regulation, judgment, order or decree of any Governmental Entity as of the date hereof; except in the cases of clause (iii) above, for such breaches, conflicts or defaults that would not reasonably be expected to result in a Material Adverse Change.
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2.13 No Defaults; Violations. No material default exists in the due performance and observance of any term, covenant or condition of any material license, contract, indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the properties or assets of the Company is subject. The Company is not in violation of any term or provision of its Charter or by-laws. The Company is not in violation of any franchise, license, permit, applicable law, rule, regulation, judgment or decree of any Governmental Entity, except for such violations that would not reasonably be expected to result in a Material Adverse Change.
2.14 Corporate Power; Licenses; Consents.
2.14.1 Conduct of Business. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has all requisite corporate power and authority, and has all necessary authorizations, approvals, orders, licenses, certificates and permits (“Permits”) of and from any Governmental Entity that it needs as of the date hereof to conduct its business purpose as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, except for such Permits, the absence of which would not reasonably be expected to have a Material Adverse Change.
2.14.2 Transactions Contemplated Herein. The Company has all corporate power and authority to enter into this Agreement and to carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained. No consent, authorization or order of, and no filing with, any court, government agency or other body is required for the valid issuance, sale and delivery of the Public Securities and the consummation of the transactions and agreements contemplated by this Agreement and the Representative’s Warrant Agreement and as contemplated by the Registration Statement, the Pricing Disclosure Package and the Prospectus, except with respect to applicable federal and state securities laws and the rules and regulations of the Financial Industry Regulatory Authority, Inc. (“FINRA”).
2.15 D&O Questionnaires. To the Company’s knowledge, all information contained in the questionnaires (the “Questionnaires”) completed by each of the Company’s directors and officers immediately prior to the Offering (the “Insiders”) as supplemented by all information concerning the Company’s directors, officers and principal shareholders as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, as well as in the Lock-Up Agreement (as defined in Section 2.24 below), provided to the Underwriters, is true and correct in all material respects and the Company has not become aware of any information which would cause the information disclosed in the Questionnaires to become materially inaccurate or incorrect in any material respect.
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2.16 Litigation; Governmental Proceedings. There is no action, suit, proceeding, inquiry, arbitration, investigation, litigation or governmental proceeding pending or, to the Company’s knowledge, threatened against, or involving the Company or, to the Company’s knowledge, any executive officer or director which has not been disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus or in connection with the Company’s listing application for the listing of the Public Securities on the Exchange, which individually or in the aggregate, if determined adversely to the Company would reasonably be expected to have a Material Adverse Change.
2.17 Good Standing. The Company has been duly organized and is validly existing as a corporation and is in good standing under the laws of the State of Florida as of the date hereof, and is duly qualified to do business and is in good standing in each other jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify, singularly or in the aggregate, would not have or reasonably be expected to result in a Material Adverse Change.
2.18 Insurance. The Company carries or is entitled to the benefits of insurance, with reputable insurers, in such amounts and covering such risks which the Company believes are adequate, and all such insurance is in full force and effect. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not reasonably be expected to result in a Material Adverse Change.
2.19 Transactions Affecting Disclosure to FINRA.
2.19.1 Finder’s Fees. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, there are no claims, payments, arrangements, agreements or understandings relating to the payment of a finder’s, consulting or origination fee by the Company or any Insider with respect to the sale of the Public Securities hereunder or any other arrangements, agreements or understandings of the Company or, to the Company’s knowledge, any of its shareholders that may affect the Underwriters’ compensation, as determined by FINRA.
2.19.2 Payments Within Twelve (12) Months. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company has not made any direct or indirect payments (in cash, securities or otherwise) in connection with the Offering to: (i) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) any FINRA member; or (iii) any person or entity that has any direct or indirect affiliation or association with any FINRA member, within the twelve (12) months prior to the Effective Date, other than the payment to the Underwriters as provided hereunder.
2.19.3 Use of Proceeds. None of the net proceeds of the Offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein.
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2.19.4 FINRA Affiliation. There is no (i) officer or director of the Company, (ii) beneficial owner of 5% or more of any class of the Company’s securities or (iii) beneficial owner of the Company’s unregistered equity securities which were acquired during the 180-day period immediately preceding the filing of the Registration Statement that is an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).
2.19.5 Information. All information provided by the Company in its FINRA questionnaire to Representative Counsel specifically for use by Representative Counsel in connection with its Public Offering System filings (and related disclosure) with FINRA is true, correct and complete in all material respects.
2.20 Foreign Corrupt Practices Act. None of the Company and its Subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any Governmental Entity or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist it in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (ii) if not given in the past, might have caused a Material Adverse Change or (iii) if not continued in the future, might adversely affect the assets, business, operations or prospects of the Company. The Company has taken reasonable steps to ensure that its accounting controls and procedures are sufficient to cause the Company to comply in all material respects with the Foreign Corrupt Practices Act of 1977, as amended.
2.21 Compliance with OFAC. None of the Company and its Subsidiaries or, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company and its Subsidiaries or any other person acting on behalf of the Company and its Subsidiaries, is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”), and the Company will not knowingly, directly or indirectly, use the proceeds of the Offering hereunder, or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.
2.22 Money Laundering Laws. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance in all material respects with applicable financial recordkeeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the “Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Entity involving the Company with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
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2.23 Officers’ Certificate. Any certificate signed by any duly authorized officer of the Company and delivered to you or to Representative Counsel shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby.
2.24 Lock-Up Agreements. Schedule 3 hereto contains a complete and accurate list of the Company’s officers, directors and each owner of at least 5% of the Company’s outstanding shares of Common Stock (or securities convertible or exercisable into shares of Common Stock) (collectively, the “Lock-Up Parties”). The Company has caused each of the Lock-Up Parties to deliver to the Representative an executed Lock-Up Agreement, in the form attached hereto as Exhibit B (the “Lock-Up Agreement”), prior to the execution of this Agreement.
2.25 Subsidiaries. All direct and indirect Subsidiaries of the Company are duly organized and in good standing under the laws of the place of organization or incorporation, and each Subsidiary is in good standing in each jurisdiction in which its ownership or lease of property or the conduct of business requires such qualification, except where the failure to qualify would not have a Material Adverse Change. The Company’s ownership and control of each Subsidiary is as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
2.26 Related Party Transactions. There are no business relationships or related party transactions involving the Company or any other person required to be described in the Registration Statement, the Pricing Disclosure Package and the Prospectus that have not been described as required.
2.27 Board of Directors. The Board of Directors of the Company is comprised of the persons set forth under the heading of the Pricing Prospectus and the Prospectus captioned “Management.” The qualifications of the persons serving as board members and the overall composition of the board comply with the Exchange Act, the Exchange Act Regulations, the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder (the “Sarbanes-Oxley Act”) applicable to the Company and the listing rules of the Exchange. At least one member of the Audit Committee of the Board of Directors of the Company qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange. In addition, at least a majority of the persons serving on the Board of Directors qualify as “independent,” as defined under the listing rules of the Exchange.
2.28 Sarbanes-Oxley Compliance.
2.28.1 Disclosure Controls. The Company has developed and currently maintains disclosure controls and procedures that comply in all material respects with Rule 13a-15 or 15d-15 under the Exchange Act Regulations, and such controls and procedures are effective to ensure that all material information concerning the Company will be made known on a timely basis to the individuals responsible for the preparation of the Company’s Exchange Act filings and other public disclosure documents.
2.28.2 Compliance. The Company is, or at the Applicable Time and on the Closing Date will be, in material compliance with the provisions of the Sarbanes-Oxley Act applicable to it, and has implemented or will implement such programs and taken reasonable steps to ensure the Company’s future compliance (not later than the relevant statutory and regulatory deadlines therefor) with all of the material provisions of the Sarbanes-Oxley Act.
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2.29 Accounting Controls. The Company and its Subsidiaries maintain systems of “internal control over financial reporting” (as defined under Rules 13a-15 and 15d-15 under the Exchange Act Regulations) that comply in all material respects with the requirements of the Exchange Act and have been designed by, or under the supervision of, their respective principal executive and principal financial officers, or persons performing similar functions, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, including, but not limited to, internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company is not aware of any material weaknesses in its internal controls. The Company’s auditors and the Audit Committee of the Board of Directors of the Company have been advised of: (i) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are known to the Company’s management and that have adversely affected or are reasonably likely to adversely affect the Company’ ability to record, process, summarize and report financial information; and (ii) any fraud known to the Company’s management, whether or not material, that involves management or other employees who have a significant role in the Company’s internal controls over financial reporting.
2.30 No Investment Company Status. The Company is not and, after giving effect to the Offering and the application of the proceeds thereof as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, will not be, required to register as an “investment company,” as defined in the Investment Company Act of 1940, as amended.
2.31 No Labor Disputes. No labor dispute with the employees of the Company or any of its Subsidiaries exists or, to the knowledge of the Company, is imminent.
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2.32 Intellectual Property Rights. The Company and each of its Subsidiaries owns or possesses or has valid rights to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and similar rights (“Intellectual Property Rights”) necessary for the conduct of the business of the Company and its Subsidiaries as currently carried on and as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus. To the knowledge of the Company, no action or use by the Company or any of its Subsidiaries necessary for the conduct of its business as currently carried on and as described in the Registration Statement and the Prospectus will involve or give rise to any infringement of, or license or similar fees for, any Intellectual Property Rights of others (other than license or similar fees described or contemplated in the Registration Statement, the Pricing Disclosure Package and the Prospectus). Neither the Company nor any of its Subsidiaries has received any notice alleging any such infringement, fee or conflict with asserted Intellectual Property Rights of others. Except as described in the Registration Statement, the Pricing Disclosure Package and the Prospectus and except as would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change (A) to the knowledge of the Company, there is no infringement, misappropriation or violation by third parties of any of the Intellectual Property Rights owned by the Company; (B) there is no pending or, to the knowledge of the Company, threatened action, suit, proceeding or claim by others challenging the rights of the Company in or to any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim, that would, individually or in the aggregate, together with any other claims referred to in this Section 2.32, reasonably be expected to result in a Material Adverse Change; (C) the Intellectual Property Rights owned by the Company and, to the knowledge of the Company, the Intellectual Property Rights licensed to the Company have not been adjudged by a court of competent jurisdiction invalid or unenforceable, in whole or in part, and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual Property Rights, and the Company is unaware of any facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims referred to in this Section 2.32, reasonably be expected to result in a Material Adverse Change; (D) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company infringes, misappropriates or otherwise violates any Intellectual Property Rights or other proprietary rights of others, the Company has not received any written notice of such claim and the Company is unaware of any other facts which would form a reasonable basis for any such claim that would, individually or in the aggregate, together with any other claims referred to in this Section 2.32, reasonably be expected to result in a Material Adverse Change; and (E) to the Company’s knowledge, no employee of the Company is in or has ever been in violation in any material respect of any term of any employment contract, patent disclosure agreement, invention assignment agreement, non-competition agreement, non-solicitation agreement, nondisclosure agreement or any restrictive covenant to or with a former employer where the basis of such violation relates to such employee’s employment with the Company, or actions undertaken by the employee while employed with the Company and could reasonably be expected to result, individually or in the aggregate, in a Material Adverse Change. To the Company’s knowledge, all material technical information developed by and belonging to the Company which has not been patented has been kept confidential. The Company is not a party to or bound by any options, licenses or agreements with respect to the Intellectual Property Rights of any other person or entity that are required to be set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus and are not described therein. The Registration Statement, the Pricing Disclosure Package and the Prospectus contain in all material respects the same description of the matters set forth in the preceding sentence. None of the technology employed by the Company has been obtained or is knowingly being used by the Company in material violation of any contractual obligation binding on the Company or, to the Company’s knowledge, any of its officers, directors or employees, or otherwise in material violation of the rights of any persons.
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2.33 Taxes. Each of the Company and its Subsidiaries has filed all material returns (as hereinafter defined) required to be filed with taxing authorities prior to the date hereof or has duly obtained extensions of time for the filing thereof. Each of the Company and its Subsidiaries has paid all taxes (as hereinafter defined) shown as due on such returns that were filed and has paid all taxes imposed on or assessed against the Company or such respective Subsidiary. The provisions for taxes payable, if any, shown on the financial statements filed with or as part of the Registration Statement are sufficient for all accrued and unpaid taxes, whether or not disputed, and for all periods to and including the dates of such consolidated financial statements. Except as disclosed in writing to the Underwriters, (i) no material issues have been raised (and are currently pending) by any taxing authority in connection with any of the returns or taxes asserted as due from the Company or its Subsidiaries, and (ii) no waivers of statutes of limitation with respect to the returns or collection of taxes have been given by or requested from the Company or its Subsidiaries. The term “taxes” means all federal, state, local, foreign and other net income, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, lease, service, service use, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, windfall profits, customs, duties or other taxes, fees, assessments or charges of any kind whatever, together with any interest and any penalties, additions to tax or additional amounts with respect thereto. The term “returns” means all returns, declarations, reports, statements and other documents required to be filed in respect to taxes.
2.34 ERISA Compliance. The Company and any “employee benefit plan” (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, “ERISA”)) established or maintained by the Company or its “ERISA Affiliates” (as defined below) are in compliance in all material respects with ERISA. “ERISA Affiliate” means, with respect to the Company, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the “Code”) of which the Company is a member. No “reportable event” (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates. No “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates, if such “employee benefit plan” were terminated, would have any “amount of unfunded benefit liabilities” (as defined under ERISA). Neither the Company nor any of its ERISA Affiliates has incurred or reasonably expects to incur any material liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “employee benefit plan” or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each “employee benefit plan” established or maintained by the Company or any of its ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and, to the knowledge of the Company, nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification.
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2.35 Compliance with Laws. Each of the Company and its Subsidiaries: (A) is and at all times has been in compliance with all statutes, rules, or regulations applicable to the ownership, testing, development, manufacture, packaging, processing, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import, export or disposal of any product manufactured or distributed by the Company (“Applicable Laws”), except as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Change; (B) has not received any warning letter, untitled letter or other correspondence or notice from any other Governmental Entity alleging or asserting noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any such Applicable Laws (“Authorizations”); (C) possesses all material Authorizations and such material Authorizations are valid and in full force and effect and are not in material violation of any term of any such Authorizations; (D) has not received notice of any claim, action, suit, proceeding, hearing, enforcement, investigation, arbitration or other action from any Governmental Entity or third party alleging that any product operation or activity is in violation of any Applicable Laws or Authorizations and has no knowledge that any such Governmental Entity or third party is considering any such claim, litigation, arbitration, action, suit, investigation or proceeding that if brought would result in a Material Adverse Change; (E) has not received notice that any Governmental Entity has taken, is taking or intends to take action to limit, suspend, modify or revoke any Authorizations and has no knowledge that any such Governmental Entity is considering such action; (F) has filed, obtained, maintained or submitted all material reports, documents, forms, notices, applications and records, as required by any Applicable Laws or Authorizations and that all such reports, documents, forms, notices, applications, and records, were complete and correct in all material respects on the date filed (or were corrected or supplemented by a subsequent submission); and (G) has not, either voluntarily or involuntarily, initiated, conducted, or issued or caused to be initiated, conducted or issued, any recall, market withdrawal or replacement, safety alert, post-sale warning, or other notice or action relating to the alleged lack of safety or any alleged product defect or violation and, to the Company’s knowledge, no third party has initiated, conducted or intends to initiate any such notice or action.
2.36 Environmental Matters.
2.36.1 The business and operations of the Company, and each of its Subsidiaries, have been and are being conducted in compliance with all applicable laws, ordinances, rules, regulations, licenses, permits, approvals, plans, authorizations or requirements relating to occupational safety and health, or pollution, or protection of health or the environment (including, without limitation, those relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic substances, materials or wastes into ambient air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, gaseous or liquid in nature) of any governmental department, commission, board, bureau, agency or instrumentality of the United States, any state or political subdivision thereof, or to the knowledge of the Company, any foreign jurisdiction (“Environmental Laws”), and all applicable judicial or administrative agency or regulatory decrees, awards, judgments and orders relating thereto, except where the failure to be in such compliance would not be reasonably expected, individually or in the aggregate, to have a Material Adverse Change; and neither the Company nor any of its Subsidiaries has received any notice from any governmental instrumentality or any third party alleging any material violation thereof or liability thereunder (including, without limitation, liability for costs of investigating or remediating sites containing hazardous substances and/or damages to natural resources).
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2.36.2 There has been no storage, generation, transportation, use, handling, treatment, Release or threat of Release of Hazardous Materials (as defined below) by or caused by the Company or any of its Subsidiaries (or, to the knowledge of the Company, any other entity (including any predecessor) for whose acts or omissions the Company or any of its Subsidiaries is or could reasonably be expected to be liable) at, on, under or from any property or facility now or previously owned, operated or leased by the Company or any of its Subsidiaries, or at, on, under or from any other property or facility, in violation of any Environmental Laws or in a manner or amount or to a location that could reasonably be expected to result in any liability under any Environmental Law, except for any violation or liability which would not, individually or in the aggregate, have a Material Adverse Change. “Hazardous Materials” means any material, chemical, substance, waste, pollutant, contaminant, compound, mixture, or constituent thereof, in any form or amount, including petroleum (including crude oil or any fraction thereof) and petroleum products, natural gas liquids, asbestos and asbestos containing materials, naturally occurring radioactive materials, brine, and drilling mud, regulated or which can give rise to liability under any Environmental Law. “Release” means any spilling, leaking, seepage, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, disposing, depositing, dispersing, or migrating in, into or through the environment, or in, into from or through any building or structure.
2.37 Ineligible Issuer. At the time of filing the Registration Statement and any post-effective amendment thereto, at the time of effectiveness of the Registration Statement and any amendment thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the Securities Act Regulations) of the Public Securities and at the date hereof, the Company was not and is not an “ineligible issuer,” as defined in Rule 405, without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.
2.38 Real and Personal Property. Except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus, the Company and its Subsidiaries have good and marketable title in fee simple to, or have valid rights to lease or otherwise use, all items of real or personal property which are material to the business of the Company and its Subsidiaries taken as a whole, in each case free and clear of all liens, encumbrances, security interests, claims and defects that do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or its Subsidiaries; and all of the leases and subleases material to the business of the Company and its Subsidiaries, considered as one enterprise, and under which the Company or any of its Subsidiaries holds properties described in the Registration Statement, the Pricing Disclosure Package and the Prospectus, are in full force and effect, and neither the Company nor any Subsidiary has received any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any Subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such Subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease.
2.39 Contracts Affecting Capital. There are no transactions, arrangements or other relationships between and/or among the Company, any of its affiliates (as such term is defined in Rule 405 of the Securities Act Regulations) and any unconsolidated entity, including, but not limited to, any structured finance, special purpose or limited purpose entity that could reasonably be expected to materially affect the Company’s or its Subsidiaries’ liquidity or the availability of or requirements for their capital resources required to be described or incorporated by reference in the Registration Statement, the Pricing Disclosure Package and the Prospectus which have not been described or incorporated by reference as required.
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2.40 Loans to Directors or Officers. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees or indebtedness by the Company or its Subsidiaries to or for the benefit of any of the officers or directors of the Company, its Subsidiaries or any of their respective family members, except as disclosed in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
2.41 Smaller Reporting Company. As of the time of filing of the Registration Statement, the Company was a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act Regulations.
2.42 Industry Data. The statistical and market-related data included in each of the Registration Statement, the Pricing Disclosure Package and the Prospectus are based on or derived from sources that the Company reasonably and in good faith believes are reliable and accurate or represent the Company’s good faith estimates that are made on the basis of data derived from such sources.
2.43 Emerging Growth Company. From the time of the initial confidential submission of the Registration Statement to the Commission (or, if earlier, the first date on which the Company engaged directly in or through any Person authorized to act on its behalf in any Testing-the Waters Communication) through the date hereof, the Company has been and is an “emerging growth company,” as defined in Section 2(a) of the Securities Act (an “Emerging Growth Company”). “Testing-the-Waters Communication” means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the Securities Act.
2.44 Testing-the-Waters Communications. The Company has not (i) alone engaged in any Testing-the-Waters Communications, other than Testing-the-Waters Communications with the written consent of the Representative and with entities that are qualified institutional buyers within the meaning of Rule 144A under the Securities Act or institutions that are accredited investors within the meaning of Rule 501 under the Securities Act and (ii) authorized anyone other than the Representative to engage in Testing-the-Waters Communications. The Company confirms that the Representative has been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any Written Testing-the-Waters Communications other than those listed on Schedule 2-C hereto. “Written Testing-the-Waters Communication” means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the Securities Act.
3. Covenants of the Company. The Company covenants and agrees as follows:
3.1 Amendments to Registration Statement. Until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof, the Company shall deliver to the Representative, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date and not file any such amendment or supplement to which the Representative shall reasonably object in writing.
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3.2 Federal Securities Laws.
3.2.1 Compliance. Until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof, the Company, subject to Section 3.2.2, shall comply in all material respects with the requirements of Rule 430A of the Securities Act Regulations, and will notify the Representative promptly, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed; (ii) of the receipt of any comments from the Commission; (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information; (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, or of the suspension of the qualification of the Public Securities and Representative’s Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the Securities Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the Securities Act in connection with the Offering of the Public Securities and Representative’s Securities. The Company shall effect all filings required under Rule 424(b) of the Securities Act Regulations, in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and shall take such steps as it deems reasonably necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company shall use its commercially reasonable efforts to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof at the earliest possible moment.
3.2.2 Continued Compliance. Until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof, the Company shall comply in all material respects with the Securities Act, the Securities Act Regulations, the Exchange Act and the Exchange Act Regulations so as to permit the completion of the distribution of the Public Securities as contemplated in this Agreement and in the Registration Statement, the Pricing Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172 of the Securities Act Regulations (“Rule 172”), would be) required by the Securities Act to be delivered in connection with sales of the Public Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) amend or supplement the Pricing Disclosure Package or the Prospectus in order that the Pricing Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser; or (iii) amend the Registration Statement or amend or supplement the Pricing Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the Securities Act or the Securities Act Regulations, the Company will promptly (A) give the Representative notice of such event; (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the Pricing Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representative with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representative or Representative Counsel shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request. The Company has given the Representative notice of any filings made pursuant to the Exchange Act or the Exchange Act Regulations within 48 hours prior to the Applicable Time. The Company shall give the Representative notice of its intention to make any such filing from the Applicable Time until the later of the Closing Date and the exercise in full or expiration of the Over-allotment Option specified in Section 1.2 hereof and will furnish the Representative with copies of the related document(s) a reasonable amount of time prior to such proposed filing, as the case may be, and will not file or use any such document to which the Representative or counsel for the Underwriters shall reasonably object.
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3.2.3 Exchange Act Registration. For a period of three (3) years after the date of this Agreement, the Company shall use its commercially reasonable efforts to maintain the registration of the shares of Common Stock under the Exchange Act. The Company shall not deregister the shares of Common Stock under the Exchange Act without the prior written consent of the Representative.
3.2.4 Free Writing Prospectuses. The Company agrees that, unless it obtains the prior written consent of the Representative, it shall not make any offer relating to the Public Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise constitute a “free writing prospectus,” or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representative shall be deemed to have consented to each Issuer General Use Free Writing Prospectus hereto and any “road show that is a written communication” within the meaning of Rule 433(d)(8)(i) that has been reviewed by the Representative. The Company represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Underwriters as an “issuer free writing prospectus,” as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Underwriters and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.
3.2.5 Testing-the-Waters Communications. If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company shall promptly notify the Representative and shall promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.
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3.3 Delivery to the Underwriters of Registration Statements. The Company has delivered or made available or shall deliver or make available to the Representative and Representative Counsel, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Underwriters, upon request and without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each of the Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
3.4 Delivery to the Underwriters of Prospectuses. The Company has delivered or made available or will deliver or make available to each Underwriter, without charge, as many copies of each Preliminary Prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the Securities Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
3.5 Events Requiring Notice to the Representative. The Company shall notify the Representative promptly and confirm the notice in writing: (i) of the issuance by any state securities commission of any proceedings for the suspension of the qualification of the Public Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose; (ii) of the mailing and delivery to the Commission for filing of any amendment or supplement to the Registration Statement or Prospectus; (iii) of the receipt of any comments or request for any additional information from the Commission; and (iv) of the happening of any event during the period described in this Section 3.5 that, in the judgment of the Company, makes any statement of a material fact made in the Registration Statement, the Pricing Disclosure Package or the Prospectus untrue or that requires the making of any changes in (a) the Registration Statement in order to make the statements therein not misleading, or (b) in the Pricing Disclosure Package or the Prospectus in order to make the statements therein, in light of the circumstances under which they were made, not misleading.
3.6 Review of Financial Statements. For a period of three (3) years after the date of this Agreement, the Company, at its expense, shall cause its regularly engaged independent registered public accounting firm to review (but not audit) the Company’s financial statements for each of the three fiscal quarters immediately preceding the announcement of any quarterly financial information.
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3.7 Listing. The Company shall use its commercially reasonable efforts to maintain the listing of the shares of Common Stock (including the Public Securities) on the Exchange for at least three (3) years from the date of this Agreement.
3.8 Reports to the Representative.
3.8.1 Periodic Reports, etc. For a period of three (3) years after the date of this Agreement, the Company shall furnish or make available to the Representative copies of such financial statements and other periodic and special reports as the Company from time to time furnishes generally to holders of any class of its securities and also promptly furnish to the Representative: (i) a copy of each periodic report the Company shall be required to file with the Commission under the Exchange Act and the Exchange Act Regulations; (ii) a copy of every press release and every news item and article with respect to the Company or its affairs which was released by the Company; (iii) a copy of each Form 8-K filed by the Company; (iv) five copies of each registration statement filed by the Company under the Securities Act; and (v) such additional documents and information with respect to the Company and the affairs of any future subsidiaries of the Company as the Representative may from time to time reasonably request; provided the Representative shall sign, if requested by the Company, a Regulation FD compliant confidentiality agreement which is reasonably acceptable to the Representative and Representative Counsel in connection with the Representative’s receipt of such information. Documents filed with the Commission pursuant to its EDGAR system shall be deemed to have been delivered to the Representative pursuant to this Section 3.8.1.
3.8.2 Transfer Agent; Transfer Sheets. For a period of one (1) year after the date of this Agreement, the Company shall retain a transfer agent and registrar acceptable to the Representative (the “Transfer Agent”) and shall furnish to the Representative at the Company’s sole cost and expense such transfer sheets of the Company’s securities as the Representative may reasonably request, including the daily and monthly consolidated transfer sheets of the Transfer Agent and DTC. Computershare Trust Company, N.A. is acceptable to the Representative to act as Transfer Agent for the shares of Common Stock.
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3.9 Payment of Expenses
3.9.1 General Expenses Related to the Offering. The Company hereby agrees to pay on each of the Closing Date and the Option Closing Date, if any, to the extent not paid at the Closing Date, all expenses incident to the performance of the obligations of the Company under this Agreement, including, but not limited to: (a) all filing fees and communication expenses relating to the registration of the shares of Common Stock to be sold in the Offering (including the Over-allotment Shares) with the Commission; (b) all Public Filing System filing fees associated with the review of the Offering by FINRA; (c) all fees and expenses relating to the listing of such Public Securities on the Exchange and such other stock exchanges as the Company and the Representative together determine; (d) all fees, expenses and disbursements relating to background checks of the Company’s officers and directors; (e) all fees, expenses and disbursements, if any, relating to the registration or qualification of the Public Securities under the “blue sky” securities laws of such states and other jurisdictions as the Representative may reasonably designate if the Offering is commenced on the Over-the-Counter Bulletin Board; (f) all fees, expenses and disbursements relating to the registration, qualification or exemption of the Public Securities under the securities laws of such foreign jurisdictions as the Representative may reasonably designate; (g) the costs of all mailing and printing of the underwriting documents (including, without limitation, the Underwriting Agreement, any Blue Sky Surveys and, if appropriate, any Agreement Among Underwriters, Selected Dealers’ Agreement, Underwriters’ Questionnaire and Power of Attorney), Registration Statements, Prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final Prospectuses as the Representative may reasonably deem necessary; (h) the costs of preparing, printing and delivering certificates representing the Public Securities; (i) fees and expenses of the transfer agent for the shares of Common Stock; (j) stock transfer and/or stamp taxes, if any, payable upon the transfer of securities from the Company to the Underwriters; (k) the cost associated with the Underwriter’s use of book-building and compliance software for the Offering (l) the costs associated with one set of bound volumes of the public offering materials as well as commemorative lucite mementos, each of which the Company or its designee shall provide within a reasonable time after the Closing Date in such quantities as the Representative may reasonably request up to $2,500; (m) the fees and expenses of the Company’s accountants; (n) the fees and expenses of the Company’s legal counsel and other agents and representatives; (o) the fees and expenses of the Representative Counsel not to exceed $75,000; and (p) the Underwriter’s actual accountable “road show” expenses for the Offering; provided, that the maximum amount that the Company shall pay for items (d), (k), (l), (o) and (p) and shall be $175,000. The Representative may deduct from the net proceeds of the Offering payable to the Company on the Closing Date, or the Option Closing Date, if any, the expenses set forth herein to be paid by the Company to the Underwriters, other than amounts already advanced to the Representative as of the date of this Underwriting Agreement.
3.9.2 Non-accountable Expenses. The Company further agrees that, in addition to the expenses payable pursuant to Section 3.9.1, on the Closing Date it shall pay to the Representative, by deduction from the net proceeds of the Offering contemplated herein, a non-accountable expense allowance equal to one percent (1%) of the gross proceeds received by the Company from the sale of the Firm Shares (excluding the Option Shares), provided, however, that in the event that the Offering is terminated, the Company agrees to reimburse the Underwriters pursuant to Section 8.3 hereof.
3.10 Application of Net Proceeds. The Company shall apply the net proceeds from the Offering received by it in a manner consistent with the application thereof described under the caption “Use of Proceeds” in the Registration Statement, the Pricing Disclosure Package and the Prospectus.
3.11 Delivery of Earnings Statements to Security Holders. The Company shall make generally available to its security holders as soon as practicable, but not later than the first day of the fifteenth (15th) full calendar month following the date of this Agreement, an earnings statement (which need not be certified by independent registered public accounting firm unless required by the Securities Act or the Securities Act Regulations, but which shall satisfy the provisions of Rule 158(a) under Section 11(a) of the Securities Act) covering a period of at least twelve (12) consecutive months beginning after the date of this Agreement.
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3.12 Stabilization. Neither the Company nor, to its knowledge, any of its employees, directors or shareholders (without the consent of the Representative) has taken or shall take, directly or indirectly, any action designed to or that has constituted or that might reasonably be expected to cause or result in, under Regulation M of the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Public Securities.
3.13 Internal Controls. The Company shall use its best efforts to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with GAAP and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
3.14 Accountants. As of the date of this Agreement, the Company has retained an independent registered public accounting firm reasonably acceptable to the Representative, and the Company shall continue to retain a nationally recognized independent registered public accounting firm for a period of at least three (3) years after the date of this Agreement. The Representative acknowledges that the Auditor is acceptable to the Representative.
3.15 FINRA. The Company shall advise the Representative (who shall make an appropriate filing with FINRA) if it is or becomes aware that (i) any officer or director of the Company, (ii) any beneficial owner of 5% or more of any class of the Company’s securities or (iii) any beneficial owner of the Company’s unregistered equity securities which were acquired during the 180 days immediately preceding the filing of the Registration Statement is or becomes an affiliate or associated person of a FINRA member participating in the Offering (as determined in accordance with the rules and regulations of FINRA).
3.16 No Fiduciary Duties. The Company acknowledges and agrees that the Underwriters’ responsibility to the Company is solely contractual in nature and that none of the Underwriters or their affiliates or any selling agent shall be deemed to be acting in a fiduciary capacity, or otherwise owes any fiduciary duty to the Company or any of its affiliates in connection with the Offering and the other transactions contemplated by this Agreement.
3.17 Company Lock-Up Agreements.
3.17.1 Restriction on Sales of Capital Stock. The Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of 180 days after the date of this Agreement (the “Lock-Up Period”), (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with the Commission relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company other than a registration statement on Form S-8; or (iii) complete any offering of debt securities of the Company (other than debt securities convertible into shares of Common Stock of the Company); or (iv) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise.
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The restrictions contained in this Section 3.17.1 shall not apply to (i) the shares of Common Stock to be sold hereunder, (ii) the issuance by the Company of shares of Common Stock upon the exercise of a stock option or warrant or the conversion of a security outstanding on the date hereof, of which the Representative has been advised in writing or (iii) the issuance by the Company of stock options or shares of capital stock of the Company under any equity compensation plan of the Company.
Notwithstanding the foregoing, if (i) during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or (ii) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed by this Section 3.17.1 shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of such material news or material event, as applicable, unless the Representative waives, in writing, such extension; provided, however, that this extension of the Lock-Up Period shall not apply to the extent that FINRA has amended or repealed NASD Rule 2711(f)(4), or has otherwise provided written interpretive guidance regarding such rule, in each case, so as to eliminate the prohibition of any broker, dealer, or member of a national securities association from publishing or distributing any research report, with respect to the securities of an Emerging Growth Company prior to or after the expiration of any agreement between the broker, dealer, or member of a national securities association and the Emerging Growth Company or its shareholders that restricts or prohibits the sale of securities held by the Emerging Growth Company or its shareholders after the initial public offering date.
3.17.2 Restriction on Continuous Offerings. Except as set forth in the Registration Statement, notwithstanding the restrictions contained in Section 3.17.1, the Company, on behalf of itself and any successor entity, agrees that, without the prior written consent of the Representative, it will not, for a period of 12 months after the date of this Agreement, directly or indirectly in any “at-the-market” or continuous equity transaction, offer to sell, sell, contract to sell, grant any option to sell or otherwise dispose of shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company.
3.18 Release of D&O Lock-up Period. If the Representative, in its sole discretion, agrees to release or waive the restrictions set forth in the Lock-Up Agreements described in Section 2.24 hereof for an officer or director of the Company and provides the Company with notice of the impending release or waiver at least three (3) Business Days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit C hereto through a major news service at least two (2) Business Days before the effective date of the release or waiver.
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3.19 Blue Sky Qualifications. The Company shall use its commercially reasonable efforts, in cooperation with the Underwriters, if necessary, to qualify the Public Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Representative may designate and to maintain such qualifications in effect so long as required to complete the distribution of the Public Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.
3.20 Reporting Requirements. The Company, during the period when a prospectus relating to the Public Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the Securities Act, will use its commercially reasonable efforts to file all documents required to be filed with the Commission pursuant to the Exchange Act within the time periods required by the Exchange Act and Exchange Act Regulations. Additionally, the Company shall report the use of proceeds from the issuance of the Public Securities as may be required under Rule 463 under the Securities Act Regulations.
3.21 Emerging Growth Company Status. The Company shall promptly notify the Representative if the Company ceases to be an Emerging Growth Company at any time prior to the later of (i) completion of the distribution of the Public Securities within the meaning of the Securities Act and (ii) fifteen (15) days following the completion of the Lock-Up Period.
3.22 Right of First Refusal. Upon the closing of the Offering and for a period of nine (9) months thereafter, the Representative shall have the right to act as sole investment banker, sole book-runner and/or sole underwriter, at the Representative’s sole discretion, for each and every future public and/or private financing, for the Company, or any successor to or any Subsidiary of the Company.
4. Conditions of Underwriters’ Obligations. The obligations of the Underwriters to purchase and pay for the Public Securities, as provided herein, shall be subject to (i) the continuing accuracy of the representations and warranties of the Company as of the date hereof and as of each of the Closing Date and the Option Closing Date, if any; (ii) the accuracy of the statements of officers of the Company made pursuant to the provisions hereof; (iii) the performance by the Company of its obligations hereunder; and (iv) the following conditions:
4.1 Regulatory Matters.
4.1.1 Effectiveness of Registration Statement; Rule 430A Information. The Registration Statement has become effective not later than 5:00 p.m., Eastern time, on the date of this Agreement or such later date and time as shall be consented to in writing by you, and, at each of the Closing Date and any Option Closing Date, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the Securities Act, no order preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to the Company’s knowledge, contemplated by the Commission. The Company has complied with each request (if any) from the Commission for additional information. The Prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) (without reliance on Rule 424(b)(8)) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.
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4.1.2 FINRA Clearance. On or before the date of this Agreement, the Representative shall have received clearance from FINRA as to the amount of compensation allowable or payable to the Underwriters as described in the Registration Statement.
4.1.3 Exchange Stock Market Clearance. On the Closing Date, the Company’s shares of Common Stock, including the Firm Shares, shall have been approved for listing on the Exchange, subject only to official notice of issuance. On the first Option Closing Date (if any), the Company’s shares of Common Stock, including the Option Shares, shall have been approved for listing on the Exchange, subject only to official notice of issuance.
4.2 Company Counsel Matters.
4.2.1 Closing Date Opinion of Counsel. On the Closing Date, the Representative shall have received the favorable opinion of Fleming PLLC, counsel to the Company, dated the Closing Date and addressed to the Representative, substantially in the form of Exhibit D attached hereto.
4.2.2 Option Closing Date Opinions of Counsel. On the Option Closing Date, if any, the Representative shall have received the favorable opinions of each counsel listed in Section 4.2.1, dated the Option Closing Date, addressed to the Representative and in form and substance reasonably satisfactory to the Representative, confirming as of the Option Closing Date, the statements made by such counsels in their respective opinions delivered on the Closing Date.
4.2.3 Reliance. In rendering such opinions, such counsel may rely: (i) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to the Representative) of other counsel reasonably acceptable to the Representative, familiar with the applicable laws; and (ii) as to matters of fact, to the extent they deem proper, on certificates or other written statements of officers of the Company and officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Representative Counsel if requested. The opinion of Fleming PLLC and any opinion relied upon by Fleming PLLC shall include a statement to the effect that it may be relied upon by Representative Counsel in its opinion delivered to the Underwriters.
4.3 Comfort Letters.
4.3.1 Cold Comfort Letter. At the time this Agreement is executed you shall have received a cold comfort letter containing statements and information of the type customarily included in accountants’ comfort letters with respect to the financial statements and certain financial information contained in the Registration Statement, the Pricing Disclosure Package and the Prospectus, addressed to the Representative and in form and substance satisfactory in all respects to you and to the Auditor, dated as of the date of this Agreement.
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4.3.2 Bring-down Comfort Letter. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received from the Auditor a letter, dated as of the Closing Date or the Option Closing Date, as applicable, to the effect that the Auditor reaffirms the statements made in the letter furnished pursuant to Section 4.3.1, except that the specified date referred to shall be a date not more than three (3) business days prior to the Closing Date or the Option Closing Date, as applicable.
4.4 Officers’ Certificates.
4.4.1 Officers’ Certificate. The Company shall have furnished to the Representative a certificate, dated the Closing Date and any Option Closing Date (if such date is other than the Closing Date), of its Chief Executive Officer, its President and its Chief Financial Officer stating that (i) such officers have carefully examined the Registration Statement, the Pricing Disclosure Package, any Issuer Free Writing Prospectus and the Prospectus and, in their opinion, the Registration Statement and each amendment thereto, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date) did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Pricing Disclosure Package, as of the Applicable Time and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), any Issuer Free Writing Prospectus as of its date and as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the Prospectus and each amendment or supplement thereto, as of the respective date thereof and as of the Closing Date, did not include any untrue statement of a material fact and did not omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances in which they were made, not misleading, (ii) since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus, (iii) to the best of their knowledge, after reasonable inquiry, as of the Closing Date (or any Option Closing Date if such date is other than the Closing Date), the representations and warranties of the Company in this Agreement are true and correct and the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date (or any Option Closing Date if such date is other than the Closing Date), and (iv) there has not been, subsequent to the date of the most recent audited financial statements included or incorporated by reference in the Pricing Disclosure Package, any material adverse change in the financial position or results of operations of the Company, or any change or development that, singularly or in the aggregate, would involve a material adverse change or a prospective material adverse change, in or affecting the condition (financial or otherwise), results of operations, business, assets or prospects of the Company, except as set forth in the Prospectus.
4.4.2 Secretary’s Certificate. At each of the Closing Date and the Option Closing Date, if any, the Representative shall have received a certificate of the Company signed by the Secretary of the Company, dated the Closing Date or the Option Date, as the case may be, respectively, certifying: (i) that each of the Charter and Bylaws is true and complete, has not been modified and is in full force and effect; (ii) that the resolutions of the Company’s Board of Directors relating to the Offering are in full force and effect and have not been modified; (iii) as to the accuracy and completeness of all correspondence between the Company or its counsel and the Commission; and (iv) as to the incumbency of the officers of the Company. The documents referred to in such certificate shall be attached to such certificate.
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4.5 No Material Changes. Prior to and on each of the Closing Date and each Option Closing Date, if any: (i) there shall have been no material adverse change or development involving a prospective material adverse change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (ii) no action, suit or proceeding, at law or in equity, shall have been pending or threatened against the Company or any Insider before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration Statement, the Pricing Disclosure Package and the Prospectus; (iii) no stop order shall have been issued under the Securities Act and no proceedings therefor shall have been initiated or threatened by the Commission; and (iv) the Registration Statement, the Pricing Disclosure Package and the Prospectus and any amendments or supplements thereto shall contain all material statements which are required to be stated therein in accordance with the Securities Act and the Securities Act Regulations and shall conform in all material respects to the requirements of the Securities Act and the Securities Act Regulations, and neither the Registration Statement, the Pricing Disclosure Package nor the Prospectus nor any amendment or supplement thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
4.6 Delivery of Agreements.
4.6.1 Lock-Up Agreements. On or before the date of this Agreement, the Company shall have delivered to the Representative executed copies of the Lock-Up Agreements from each of the persons listed in Schedule 3 hereto.
4.6.2 Representative’s Warrant Agreement. On the Closing Date, the Company shall have delivered to the Representative executed copies of the Representative’s Warrant Agreement.
4.7 Additional Documents. At the Closing Date and at each Option Closing Date (if any) Representative Counsel shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling Representative Counsel to deliver an opinion to the Underwriters, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Public Securities and the Representative’s Securities as herein contemplated shall be satisfactory in form and substance to the Representative and Representative Counsel.
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5. Indemnification.
5.1 Indemnification of the Underwriters.
5.1.1 General. Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless each Underwriter, its affiliates and each of its and their respective directors, officers, members, employees, representatives and agents and each person, if any, who controls any such Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act (collectively the “Underwriter Indemnified Parties,” and each an “Underwriter Indemnified Party”), against any and all loss, liability, claim, damage and expense whatsoever (including but not limited to any and all legal or other expenses reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, whether arising out of any action between any of the Underwriter Indemnified Parties and the Company or between any of the Underwriter Indemnified Parties and any third party, or otherwise) to which they or any of them may become subject under the Securities Act, the Exchange Act or any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in (i) the Registration Statement, the Pricing Disclosure Package, the Preliminary Prospectus, the Prospectus, or in any Issuer Free Writing Prospectus or in any Written Testing-the-Waters Communication (as from time to time each may be amended and supplemented); (ii) any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the Offering, including any “road show” or investor presentations made to investors by the Company (whether in person or electronically); or (iii) any application or other document or written communication (in this Section 5, collectively called “application”) executed by the Company or based upon written information furnished by the Company in any jurisdiction in order to qualify the Public Securities and Representative’s Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, the Exchange or any other national securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, unless such statement or omission was made in reliance upon, and in conformity with, the Underwriters’ Information. With respect to any untrue statement or omission or alleged untrue statement or omission made in the Pricing Disclosure Package, the indemnity agreement contained in this Section 5.1.1 shall not inure to the benefit of any Underwriter Indemnified Party to the extent that any loss, liability, claim, damage or expense of such Underwriter Indemnified Party results from the fact that a copy of the Prospectus was not given or sent to the person asserting any such loss, liability, claim or damage at or prior to the written confirmation of sale of the Public Securities to such person as required by the Securities Act and the Securities Act Regulations, and if the untrue statement or omission has been corrected in the Prospectus, unless such failure to deliver the Prospectus was a result of non-compliance by the Company with its obligations under Section 3.3 hereof.
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5.1.2 Procedure. If any action is brought against an Underwriter Indemnified Party in respect of which indemnity may be sought against the Company pursuant to Section 5.1.1, such Underwriter Indemnified Party shall promptly notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and fees of counsel (subject to the reasonable approval of such Underwriter Indemnified Party) and payment of actual expenses. Such Underwriter Indemnified Party shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Underwriter Indemnified Party unless (i) the employment of such counsel at the expense of the Company shall have been authorized in writing by the Company in connection with the defense of such action, or (ii) the Company shall not have employed counsel to have charge of the defense of such action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Company (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the reasonable fees and expenses of not more than one additional firm of attorneys selected by the Underwriter Indemnified Party (in addition to local counsel) shall be borne by the Company. Notwithstanding anything to the contrary contained herein, if any Underwriter Indemnified Party shall assume the defense of such action as provided above, the Company shall have the right to approve the terms of any settlement of such action, which approval shall not be unreasonably withheld.
5.2 Indemnification of the Company. Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, its directors, its officers who signed the Registration Statement and persons who control the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, against any and all loss, liability, claim, damage and expense described in the foregoing indemnity from the Company to the several Underwriters, as incurred, but only with respect to untrue statements or omissions made in the Registration Statement, any Preliminary Prospectus, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or in any application, in reliance upon, and in strict conformity with, the Underwriters’ Information. In case any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, the Pricing Disclosure Package or Prospectus or any amendment or supplement thereto or any application, and in respect of which indemnity may be sought against any Underwriter, such Underwriter shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the several Underwriters by the provisions of Section 5.1.2. The Company agrees to promptly notify the Representative of the commencement of any litigation or proceedings against the Company or any of its officers, directors or any person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, in connection with the issuance and sale of the Public Securities or in connection with the Registration Statement, the Pricing Disclosure Package, the Prospectus, or any Issuer Free Writing Prospectus or any Written Testing-the-Waters Communication.
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5.3 Contribution.
5.3.1 Contribution Rights. If the indemnification provided for in this Section 5 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 5.1 or 5.2 in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other, from the Offering of the Public Securities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other, with respect to the statements or omissions that resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other, with respect to such Offering shall be deemed to be in the same proportion as the total net proceeds from the Offering of the Public Securities purchased under this Agreement (before deducting expenses) received by the Company, as set forth in the table on the cover page of the Prospectus, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Common Stock purchased under this Agreement, as set forth in the table on the cover page of the Prospectus, on the other hand. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 5.3.1 were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section 5.3.1 shall be deemed to include, for purposes of this Section 5.3.1, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 5.3.1 in no event shall an Underwriter be required to contribute any amount in excess of the amount by which the total underwriting discounts and commissions received by such Underwriter with respect to the Offering of the Public Securities exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
5.3.2 Contribution Procedure. Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is to be made against another party (“contributing party”), notify the contributing party of the commencement thereof, but the failure to so notify the contributing party will not relieve it from any liability which it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or its representative of the commencement thereof within the aforesaid 15 days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution on account of any settlement of any claim, action or proceeding affected by such party seeking contribution without the written consent of such contributing party. The contribution provisions contained in this Section 5.3.2 are intended to supersede, to the extent permitted by law, any right to contribution under the Securities Act, the Exchange Act or otherwise available. Each Underwriter’s obligations to contribute pursuant to this Section 5.3 are several and not joint.
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6. Defaults.
6.1 Default by an Underwriter.
6.1.1 Default Not Exceeding 10% of Firm Shares or Option Shares. If any Underwriter or Underwriters shall default in its or their obligations to purchase the Firm Shares or the Option Shares, if the Over-allotment Option is exercised hereunder, and if the number of the Firm Shares or Option Shares with respect to which such default relates does not exceed in the aggregate 10% of the number of Firm Shares or Option Shares that all Underwriters have agreed to purchase hereunder, then such Firm Shares or Option Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to their respective commitments hereunder.
6.1.2 Default Exceeding 10% of Firm Shares or Option Shares. In the event that the default addressed in Section 6.1 relates to more than 10% of the Firm Shares or Option Shares, the Representative may in its discretion arrange for themselves or for another party or parties to purchase such Firm Shares or Option Shares to which such default relates on the terms contained herein. If, within one (1) Business Day after such default relating to more than 10% of the Firm Shares or Option Shares, the Representative does not arrange for the purchase of such Firm Shares or Option Shares, then the Company shall be entitled to a further period of one (1) Business Day within which to procure another party or parties reasonably satisfactory to the Representative to purchase said Firm Shares or Option Shares on such terms. In the event that neither the Representative nor the Company arrange for the purchase of the Firm Shares or Option Shares to which a default relates as provided in this Section 6, this Agreement will automatically be terminated by the Representative or the Company without liability on the part of the Company (except as provided in Sections 3.8 and 5 hereof) or the several Underwriters (except as provided in Section 5 hereof); provided, however, that if such default occurs with respect to the Option Shares, this Agreement will not terminate as to the Firm Shares; and provided, further, that nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other Underwriters and to the Company for damages occasioned by its default hereunder.
6.1.3 Postponement of Closing Date. In the event that the Firm Shares or Option Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representative or the Company shall have the right to postpone the Closing Date or Option Closing Date for a reasonable period, but not in any event exceeding five (5) Business Days, in order to effect whatever changes may thereby be made necessary in the Registration Statement, the Pricing Disclosure Package or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement, the Pricing Disclosure Package or the Prospectus that in the opinion of counsel for the Underwriter may thereby be made necessary. The term “Underwriter” as used in this Agreement shall include any party substituted under this Section 6 with like effect as if it had originally been a party to this Agreement with respect to such shares of Common Stock.
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7. Additional Covenants.
7.1 Board Composition and Board Designations. The Company shall ensure that: (i) the qualifications of the persons serving as members of the Board of Directors and the overall composition of the Board comply with the Sarbanes-Oxley Act, with the Exchange Act and with the listing rules of the Exchange or any other national securities exchange, as the case may be, in the event the Company seeks to have its Public Securities listed on another exchange or quoted on an automated quotation system, and (ii) if applicable, at least one member of the Audit Committee of the Board of Directors qualifies as an “audit committee financial expert,” as such term is defined under Regulation S-K and the listing rules of the Exchange.
7.2 Prohibition on Press Releases and Public Announcements. The Company shall not issue press releases or engage in any other publicity, without the Representative’s prior written consent (which consent shall not be unreasonably withheld), for a period ending at 5:00 p.m., Eastern time, on the first (1st) Business Day following the forty-fifth (45th) day after the Closing Date, other than normal and customary releases issued in the ordinary course of the Company’s business.
8. Effective Date of this Agreement and Termination Thereof.
8.1 Effective Date. This Agreement shall become effective when both the Company, and the Representative have executed the same and delivered counterparts of such signatures to the other party.
8.2 Termination. The Representative shall have the right to terminate this Agreement at any time prior to any Closing Date, (i) if any domestic or international event or act or occurrence has materially disrupted, or in your reasonable opinion will in the immediate future materially disrupt, general securities markets in the United States; or (ii) if trading on the New York Stock Exchange or the Nasdaq Stock Market LLC shall have been suspended or materially limited, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required by FINRA or by order of the Commission or any other government authority having jurisdiction; or (iii) if the United States shall have become involved in a new war or an increase in major hostilities; or (iv) if a banking moratorium has been declared by a New York State or federal authority; or (v) if a moratorium on foreign exchange trading has been declared which materially adversely impacts the United States securities markets; or (vi) if the Company shall have sustained a material loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your reasonable opinion, make it inadvisable to proceed with the delivery of the Firm Shares or Option Shares; or (vii) if the Company is in material breach of any of its representations, warranties or covenants hereunder; or (viii) if the Representative shall have become aware after the date hereof of such a material adverse change in the conditions or prospects of the Company, or such adverse material change in general market conditions as in the Representative’s reasonable judgment would make it impracticable to proceed with the offering, sale and/or delivery of the Public Securities or to enforce contracts made by the Underwriters for the sale of the Public Securities.
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8.3 Expenses. Notwithstanding anything to the contrary in this Agreement, except in the case of a default by the Underwriters, pursuant to Section 6.1.2 above, in the event that this Agreement shall not be carried out for any reason whatsoever, within the time specified herein or any extensions thereof pursuant to the terms herein, the Company shall be obligated to pay to the Underwriters their actual and accountable out-of-pocket expenses related to the transactions contemplated herein then due and payable (including the fees and disbursements of Representative Counsel) up to $150,000, inclusive of any advance for accountable expenses previously paid by the Company to the Representative (the “Advance”) and upon demand the Company shall pay the full amount thereof to the Representative on behalf of the Underwriters; provided, however, that such expense cap in no way limits or impairs the indemnification and contribution provisions of this Agreement. Notwithstanding the foregoing, any advance received by the Representative will be reimbursed to the Company to the extent not actually incurred in compliance with FINRA Rule 5110(f)(2)(C).
8.4 Indemnification. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Section 5 shall remain in full force and effect and shall not be in any way affected by, such election or termination or failure to carry out the terms of this Agreement or any part hereof.
8.5 Representations, Warranties, Agreements to Survive. All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors or any person controlling the Company or (ii) delivery of and payment for the Public Securities.
9. Miscellaneous.
9.1 Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed (registered or certified mail, return receipt requested), personally delivered or sent by facsimile transmission or email with confirmation and shall be deemed given when so delivered or faxed or emailed with confirmation or if mailed, two (2) days after such mailing.
If to the Representative:
Alexander Capital, L.P.
17 State Street, 5th Floor
New York, NY 10004
with a copy (which shall not constitute notice) to:
Cozen O’Connor
33 South 6th Street, Suite 3800
Minneapolis, Minnesota 55402
Attn: Christopher J. Bellini, Esq.
Email: cbellini@cozen.com
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If to the Company:
FreeCast, Inc.
6901 TPC Drive, Suite 200
Orlando, Florida 32801
Attention: William A. Mobley, Jr., Chief Executive Officer
Email: bmobley@freecast.com
with a copy (which shall not constitute notice) to:
Bahnsen Legal Group, PLLC
131 NE 1st Avenue, Suite 100
Boca Raton, Florida 33432
Attn: Jeffery A. Bahnsen
Email: jeff@bahnsenlaw.com
9.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Agreement.
9.3 Amendment. This Agreement may only be amended by a written instrument executed by each of the parties hereto.
9.4 Entire Agreement. This Agreement (together with the other agreements and documents being delivered pursuant to or in connection with this Agreement) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof and thereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof. Notwithstanding anything to the contrary set forth herein, it is understood and agreed by the parties hereto that all other terms and conditions of that certain engagement letter between the Company and the Representative, dated November 14, 2019 shall remain in full force and effect.
9.5 Binding Effect. This Agreement shall inure solely to the benefit of and shall be binding upon the Representative, the Underwriters, the Company, the controlling persons, directors and officers referred to in Section 5 hereof, and their respective successors, legal representatives, heirs and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. The term “successors and assigns” shall not include a purchaser, in its capacity as such, of securities from any of the Underwriters.
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9.6 Governing Law; Consent to Jurisdiction; Trial by Jury. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Agreement shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 9.1 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company agrees that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
9.7 Execution in Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Delivery of a signed counterpart of this Agreement by facsimile or email/pdf transmission shall constitute valid and sufficient delivery thereof.
9.8 Waiver, etc. The failure of any of the parties hereto to at any time enforce any of the provisions of this Agreement shall not be deemed or construed to be a waiver of any such provision, nor to in any way effect the validity of this Agreement or any provision hereof or the right of any of the parties hereto to thereafter enforce each and every provision of this Agreement. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Agreement shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
[Signature Page Follows]
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If the foregoing correctly sets forth the understanding between the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us.
| Very truly yours, | ||
| FREECAST, INC. | ||
| By: | ||
| William A. Mobley, Jr. | ||
| Chief Executive Officer | ||
Confirmed as of the date first written above mentioned,
on behalf of itself and as Representative of the several
Underwriters named on Schedule 1 hereto:
| ALEXANDER CAPITAL, L.P. | ||
| By: | ||
| [Name] | ||
| [Title] | ||
[SIGNATURE PAGE]
[FreeCast, Inc. – Underwriting Agreement Signature Page]
SCHEDULE 1
| Underwriter | Total Number of Firm Shares to be Purchased | Number of Additional Shares to be Purchased if the Over-Allotment Option is Fully Exercised | ||||||
| Alexander Capital, L.P. | ||||||||
| TOTAL | ||||||||
SCHEDULE 2-A
Pricing Information
Number of Firm Shares: [●]
Number of Option Shares: [●]
Public Offering Price per Share: $[●]
Underwriting Discount per Share: $[●]
Underwriting Non-accountable expense allowance per Share: $[●]
Proceeds to Company per Share (before expenses): $[●]
SCHEDULE 2-B
Issuer General Use Free Writing Prospectuses
[None.]
SCHEDULE 2-C
Written Testing-the-Waters Communications
[None.]
SCHEDULE 3
List of Lock-Up Parties
| Directors & Officers: |
| William A. Mobley, Jr. |
| Christopher M. Savine |
| David Gust |
| Stockholders: |
SCHEDULE 4
Subsidiaries and Affiliates
EXHIBIT A
Form of Representative’s Warrant Agreement
THE REGISTERED HOLDER OF THIS PURCHASE WARRANT BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE WARRANT EXCEPT AS HEREIN PROVIDED AND THE REGISTERED HOLDER OF THIS PURCHASE WARRANT AGREES THAT IT WILL NOT SELL, TRANSFER, ASSIGN, PLEDGE OR HYPOTHECATE THIS PURCHASE WARRANT OR CAUSE IT TO BE THE SUBJECT OF ANY HEDGING, SHORT SALE, DERIVATIVE, PUT, OR CALL TRANSACTION THAT WOULD RESULT IN THE EFFECTIVE ECONOMIC DISPOSITION OF THE PURCHASE WARRANT BY ANY PERSON FOR A PERIOD OF ONE HUNDRED EIGHTY (180) DAYS FOLLOWING THE EFFECTIVE DATE (DEFINED BELOW) TO ANYONE OTHER THAN (I) [__________] OR AN UNDERWRITER OR A SELECTED DEALER IN CONNECTION WITH THE OFFERING, OR (II) A BONA FIDE OFFICER OR PARTNER OF [__________] OR OF ANY SUCH UNDERWRITER OR SELECTED DEALER AND IN ACCORDANCE WITH FINRA RULE 5110(G)(2).
THIS PURCHASE WARRANT IS NOT EXERCISABLE PRIOR TO [ ] [DATE THAT IS ONE (1) YEAR FROM THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT]. VOID AFTER 5:00 P.M., EASTERN TIME, [ ] [DATE THAT IS FIVE (5) YEARS FROM THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT].
COMMON STOCK PURCHASE WARRANT
For the Purchase of [ ] Shares of Common
Stock
of
FREECAST, INC.
1. Purchase Warrant. THIS CERTIFIES THAT, in consideration of funds duly paid by or on behalf of [__________] (“Holder”), as registered owner of this Purchase Warrant, to FreeCast, Inc., a Florida corporation (the “Company”), Holder is entitled, at any time or from time to time from [ ] [DATE THAT IS ONE (1) YEAR FROM THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT] (the “Commencement Date”), and at or before 5:00 p.m., Eastern time, [ ] [DATE THAT IS FIVE (5) YEARS FROM THE EFFECTIVE DATE OF THE OFFERING] (the “Expiration Date”), but not thereafter, to subscribe for, purchase and receive, in whole or in part, up to [ ] shares of common stock of the Company, par value $0.0001 per share (the “Shares”), subject to adjustment as provided in Section 5 hereof. If the Expiration Date is a day on which banking institutions are authorized by law to close, then this Purchase Warrant may be exercised on the next succeeding day which is not such a day in accordance with the terms herein. During the period ending on the Expiration Date, the Company agrees not to take any action that would terminate this Purchase Warrant. This Purchase Warrant is initially exercisable at $[ ] per Share [120% of the price of the Shares sold in the Offering]; provided, however, that upon the occurrence of any of the events specified in Section 5 hereof, the rights granted by this Purchase Warrant, including the exercise price per Share and the number of Shares to be received upon such exercise, shall be adjusted as therein specified. This Warrant is being issued pursuant to the certain Underwriting Agreement (the “Underwriting Agreement”), dated ______, 2020, by and among the Company, the Holder and other underwriters named therein, providing for the public offering (the “Offering”) of shares of common stock, par value $0.0001 per share, of the Company. The term “Effective Date” shall mean the effective date of the Registration Statement on Form S-1 (File No. 333-___________). The term “Exercise Price” shall mean the initial exercise price or the adjusted exercise price, depending on the context.
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1. Exercise.
1.1 Exercise Form. In order to exercise this Purchase Warrant, the exercise form attached hereto must be duly executed and completed and delivered to the Company, together with this Purchase Warrant and payment of the Exercise Price for the Shares being purchased payable in cash by wire transfer of immediately available funds to an account designated by the Company or by certified check or official bank check. If the subscription rights represented hereby shall not be exercised at or before 5:00 p.m., Eastern time, on the Expiration Date, this Purchase Warrant shall become and be void without further force or effect, and all rights represented hereby shall cease and expire.
1.2 Cashless Exercise. If at any time after the Commencement Date there is no effective registration statement registering, or no current prospectus available for, the resale of the Shares by the Holder, then in lieu of exercising this Purchase Warrant by payment of cash or check payable to the order of the Company pursuant to Section 1.1 above, Holder may elect to receive the number of Shares equal to the value of this Purchase Warrant (or the portion thereof being exercised), by surrender of this Purchase Warrant to the Company, together with the exercise form attached hereto, in which event the Company shall issue to Holder, Shares in accordance with the following formula:
|
X = |
Y(A-B) | |
| A |
Where,
X = The number of Shares to be issued to Holder;
Y = The number of Shares for which the Purchase Warrant is being exercised;
A = The fair market value of one Share; and
B = The Exercise Price.
For purposes of this Section 1.2, the fair market value of a Share is defined as follows:
(i) if the Company’s common stock is traded on a securities exchange, the fair market value shall be deemed to be the closing price on such exchange on the trading day immediately prior to the date the exercise form is submitted to the Company in connection with the exercise of the Purchase Warrant; or
(ii) if the Company’s common stock is actively traded over-the-counter, the fair market value shall be deemed to be the closing bid price on the trading day immediately prior to the date the exercise form is submitted to the Company in connection with the exercise of the Purchase Warrant; or
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(iii) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Company’s Board of Directors.
1.3 Legend. Each certificate for the securities purchased under this Purchase Warrant shall bear a legend as follows unless such securities have been registered under the Securities Act of 1933, as amended (the “Act”):
“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Act”), or applicable state law. Neither the securities nor any interest therein may be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act, or pursuant to an exemption from registration under the Securities Act and applicable state law which, in the opinion of counsel to the Company, is available.”
1.4 No Obligation to Net Cash Settle. Notwithstanding anything to the contrary contained in this Purchase Warrant, in no event will the Company be required to net cash settle the exercise of the Purchase Warrant. The holder of the Purchase Warrant will not be entitled to exercise the Purchase Option unless it exercises such Purchase Warrant pursuant to the cashless exercise right or a registration statement is effective, or an exemption from the registration requirements is available at such time and, if the Holder is not able to exercise the Purchase Warrant, the Purchase Warrant will expire worthless.
2. Transfer.
2.1 General Restrictions. The registered Holder of this Purchase Warrant agrees by his, her or its acceptance hereof, that such Holder will not: (a) sell, transfer, assign, pledge or hypothecate this Purchase Warrant for a period of one hundred eighty (180) days following the Effective Date to anyone other than: (i) [__________] (“[Underwriter]”) or another underwriter or a selected dealer participating in the Offering, or (ii) a bona fide officer or partner of [Underwriter] or of any such underwriter or selected dealer, in each case in accordance with FINRA Conduct Rule 5110(g)(1), or (b) cause this Purchase Warrant or the securities issuable hereunder to be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of this Purchase Warrant or the securities hereunder, except as provided for in FINRA Rule 5110(g)(2). On and after one (1) year after the Effective Date, transfers to others may be made subject to compliance with or exemptions from applicable securities laws. In order to make any permitted assignment, the Holder must deliver to the Company the assignment form attached hereto duly executed and completed, together with the Purchase Warrant and payment of all transfer taxes, if any, payable in connection therewith. The Company shall within five (5) Business Days transfer this Purchase Warrant on the books of the Company and shall execute and deliver a new Purchase Warrant or Purchase Warrants of like tenor to the appropriate assignee(s) expressly evidencing the right to purchase the aggregate number of Shares purchasable hereunder or such portion of such number as shall be contemplated by any such assignment.
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2.2 Restrictions Imposed by the Securities Act. The securities evidenced by this Purchase Warrant shall not be transferred unless and until: (i) the Company has received the opinion of counsel for the Holder that the securities may be transferred pursuant to an exemption from registration under the Securities Act and applicable state securities laws, the availability of which is established to the reasonable satisfaction of the Company (the Company hereby agreeing that the opinion of Cozen O’Connor shall be deemed satisfactory evidence of the availability of an exemption), or (ii) a registration statement or a post-effective amendment to the Registration Statement relating to the offer and sale of such securities has been filed by the Company and declared effective by the U.S. Securities and Exchange Commission (the “Commission”) and compliance with applicable state securities law has been established.
3. Registration Rights.
3.1 “Piggy-Back” Registration.
3.1.1 Grant of Right. The Holder shall have the right, for a period of no more than seven (7) years from the Effective Date in accordance with FINRA Rule 5110(f)(2)(G)(v), to include any portion of the Shares underlying the Purchase Warrants (collectively, the “Registrable Securities”) as part of any other registration of securities filed by the Company (other than in connection with a transaction contemplated by Rule 145(a) promulgated under the Securities Act or pursuant to Form S-8 or any equivalent form); provided, however, that if, solely in connection with any primary underwritten public offering for the account of the Company, the managing underwriter(s) thereof shall, in its reasonable discretion, impose a limitation on the number of shares of common stock which may be included in the Registration Statement because, in such underwriter(s)’ judgment, marketing or other factors dictate such limitation is necessary to facilitate public distribution, then the Company shall be obligated to include in such Registration Statement only such limited portion of the Registrable Securities with respect to which the Holder requested inclusion hereunder as the underwriter shall reasonably permit. Any exclusion of Registrable Securities shall be made pro rata among the Holders seeking to include Registrable Securities in proportion to the number of Registrable Securities sought to be included by such Holders; provided, however, that the Company shall not exclude any Registrable Securities unless the Company has first excluded all outstanding securities, the holders of which are not entitled to inclusion of such securities in such Registration Statement or are not entitled to pro rata inclusion with the Registrable Securities.
3.1.2 Terms. The Company shall bear all fees and expenses attendant to registering the Registrable Securities pursuant to Section 3.1.1 hereof, but the Holders shall pay any and all underwriting commissions and the expenses of any legal counsel selected by the Holders to represent them in connection with the sale of the Registrable Securities. In the event of such a proposed registration, the Company shall furnish the then Holders of outstanding Registrable Securities with not less than thirty (30) days written notice prior to the proposed date of filing of such registration statement. Such notice to the Holders shall continue to be given for each registration statement filed by the Company until such time as all of the Registrable Securities have been sold by the Holder. The holders of the Registrable Securities shall exercise the “piggy-back” rights provided for herein by giving written notice within ten (10) days of the receipt of the Company’s notice of its intention to file a registration statement. Except as otherwise provided in this Purchase Warrant, there shall be no limit on the number of times the Holder may request registration under this Section 3.1.2; provided, however, that such registration rights shall terminate upon on the sixth anniversary of the Commencement Date.
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3.2 General Terms.
3.2.1 Indemnification. The Company shall indemnify the Holder(s) of the Registrable Securities to be sold pursuant to any registration statement hereunder and each person, if any, who controls such Holders within the meaning of Section 15 of the Securities Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Securities Act, the Exchange Act or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify the Underwriters contained in Section 5.1 of the Underwriting Agreement between the Underwriters and the Company, dated as of [ ], 2020. The Holder(s) of the Registrable Securities to be sold pursuant to such registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company and its affiliates, against all loss, claim, damage, expense or liability (including all reasonable attorneys’ fees and other expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Securities Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, in writing, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 5.2 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company.
3.2.2 Exercise of Purchase Warrants. Nothing contained in this Purchase Warrant shall be construed as requiring the Holder(s) to exercise their Purchase Warrants prior to or after the initial filing of any registration statement or the effectiveness thereof.
3.2.3 Documents Delivered to Holders. The Company shall furnish to each Holder participating in any underwritten offerings and to each underwriter of any such offering, a signed counterpart, addressed to such Holder and underwriter, of: (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and an opinion dated the date of the closing under any underwriting agreement related thereto), and (ii) a “cold comfort” letter dated the effective date of such registration statement (and a letter dated the date of the closing under the underwriting agreement) signed by the independent registered public accounting firm which has issued a report on the Company’s financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants’ letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer’s counsel and in accountants’ letters delivered to underwriters in underwritten public offerings of securities. The Company shall also deliver promptly to each Holder participating in the underwritten offering requesting the correspondence and memoranda described below and to the managing underwriter copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to the registration statement and permit each Holder and underwriter to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of FINRA. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times as any such Holder shall reasonably request.
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3.2.4 Underwriting Agreement. In the event the Company shall enter into an underwriting agreement with any managing underwriter(s), if any, selected by the Company with respect to the Registrable Securities that are being registered pursuant to this Section 3, which managing underwriter shall be reasonably satisfactory to the Majority Holders. Such agreement shall be reasonably satisfactory in form and substance to the Company and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Registrable Securities and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders, their Shares and their intended methods of distribution.
3.2.5 Documents to be Delivered by Holder(s). Each of the Holder(s) participating in any of the foregoing offerings shall furnish to the Company a completed and executed questionnaire provided by the Company requesting information customarily sought of selling security holders.
3.2.6 Damages. Should the registration or the effectiveness thereof required by Section 3.1 hereof be delayed by the Company or the Company otherwise fails to comply with such provisions, the Holder(s) shall, in addition to any other legal or other relief available to the Holder(s), be entitled to seek specific performance or other equitable (including injunctive) relief against the threatened breach of such provisions or the continuation of any such breach, without the necessity of proving actual damages and without the necessity of posting bond or other security.
4. New Purchase Warrants to be Issued.
4.1 Partial Exercise or Transfer. Subject to the restrictions in Section 2 hereof, this Purchase Warrant may be exercised or assigned in whole or in part. In the event of the exercise or assignment hereof in part only, upon surrender of this Purchase Warrant for cancellation, together with the duly executed exercise or assignment form and funds sufficient to pay any Exercise Price and/or transfer tax if exercised pursuant to Section 1.1 hereto, the Company shall cause to be delivered to the Holder without charge a new Purchase Warrant of like tenor to this Purchase Warrant in the name of the Holder evidencing the right of the Holder to purchase the number of Shares purchasable hereunder as to which this Purchase Warrant has not been exercised or assigned.
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4.2 Lost Certificate. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Purchase Warrant and of reasonably satisfactory indemnification or the posting of a bond, the Company shall execute and deliver a new Purchase Warrant of like tenor and date. Any such new Purchase Warrant executed and delivered as a result of such loss, theft, mutilation or destruction shall constitute a substitute contractual obligation on the part of the Company.
5. Adjustments.
5.1 Adjustments to Exercise Price and Number of Securities. The Exercise Price and the number of Shares underlying the Purchase Warrant shall be subject to adjustment from time to time as hereinafter set forth:
5.1.1 Share Dividends; Split Ups. If, after the date hereof, and subject to the provisions of Section 5.3 below, the number of outstanding Shares is increased by a stock dividend payable in Shares or by a split up of Shares or other similar event, then, on the effective day thereof, the number of Shares purchasable hereunder shall be increased in proportion to such increase in outstanding Shares, and the Exercise Price shall be proportionately decreased.
5.1.2 Aggregation of Shares. If, after the date hereof, and subject to the provisions of Section 5.3 below, the number of outstanding Shares is decreased by a consolidation, combination or reclassification of Shares or other similar event, then, on the effective date thereof, the number of Shares purchasable hereunder shall be decreased in proportion to such decrease in outstanding Shares, and the Exercise Price shall be proportionately increased.
5.1.3 Replacement of Securities upon Reorganization, etc. In case of any reclassification or reorganization of the outstanding Shares other than a change covered by Section 5.1.1 or 5.1.2 hereof or that solely affects the par value of such Shares, or in the case of any share reconstruction or amalgamation or consolidation of the Company with or into another corporation or other entity (other than a consolidation or share reconstruction or amalgamation in which the Company is the continuing corporation and that does not result in any reclassification or reorganization of the outstanding Shares), or in the case of any sale or conveyance to another corporation or entity of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Purchase Warrant shall have the right thereafter (until the expiration of the right of exercise of this Purchase Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property (including cash) receivable upon such reclassification, reorganization, share reconstruction or amalgamation, or consolidation, or upon a dissolution following any such sale or transfer, by a Holder of the number of Shares of the Company obtainable upon exercise of this Purchase Warrant immediately prior to such event; and if any reclassification also results in a change in Shares covered by Section 5.1.1 or 5.1.2, then such adjustment shall be made pursuant to Sections 5.1.1, 5.1.2 and this Section 5.1.3. The provisions of this Section 5.1.3 shall similarly apply to successive reclassifications, reorganizations, share reconstructions or amalgamations, or consolidations, sales or other transfers.
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5.1.4 Changes in Form of Purchase Warrant. This form of Purchase Warrant need not be changed because of any change pursuant to this Section 5.1, and Purchase Warrants issued after such change may state the same Exercise Price and the same number of Shares as are stated in [the Purchase Warrants initially issued pursuant to this Agreement]. The acceptance by any Holder of the issuance of new Purchase Warrants reflecting a required or permissive change shall not be deemed to waive any rights to an adjustment occurring after the Commencement Date or the computation thereof.
5.2 Substitute Purchase Warrant. In case of any consolidation of the Company with, or share reconstruction or amalgamation of the Company with or into, another corporation or other entity (other than a consolidation or share reconstruction or amalgamation which does not result in any reclassification or change of the outstanding Shares), the corporation or other entity formed by such consolidation or share reconstruction or amalgamation shall execute and deliver to the Holder a supplemental Purchase Warrant providing that the holder of each Purchase Warrant then outstanding or to be outstanding shall have the right thereafter (until the stated expiration of such Purchase Warrant) to receive, upon exercise of such Purchase Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or share reconstruction or amalgamation, by a holder of the number of Shares of the Company for which such Purchase Warrant might have been exercised immediately prior to such consolidation, share reconstruction or amalgamation, sale or transfer. Such supplemental Purchase Warrant shall provide for adjustments which shall be identical to the adjustments provided for in this Section 5. The above provision of this Section shall similarly apply to successive consolidations or share reconstructions or amalgamations.
5.3 Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares upon the exercise of the Purchase Warrant, nor shall it be required to issue scrip or pay cash in lieu of any fractional interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up or down, as the case may be, to the nearest whole number of Shares or other securities, properties or rights.
6. Reservation and Listing. The Company shall at all times reserve and keep available out of its authorized Shares, solely for the purpose of issuance upon exercise of the Purchase Warrants, such number of Shares or other securities, properties or rights as shall be issuable upon the exercise thereof. The Company covenants and agrees that, upon exercise of the Purchase Warrants and payment of the Exercise Price therefor, in accordance with the terms hereby, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. The Company further covenants and agrees that upon exercise of the Purchase Warrants and payment of the exercise price therefor, all Shares and other securities issuable upon such exercise shall be duly and validly issued, fully paid and non-assessable and not subject to preemptive rights of any shareholder. As long as the Purchase Warrants shall be outstanding, the Company shall use its commercially reasonable efforts to cause all Shares issuable upon exercise of the Purchase Warrants to be listed (subject to official notice of issuance) on all national securities exchanges (or, if applicable, on the OTC Bulletin Board or any successor trading market) on which the Shares issued to the public in the Offering may then be listed and/or quoted.
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7. Certain Notice Requirements.
7.1 Holder’s Right to Receive Notice. Nothing herein shall be construed as conferring upon the Holders the right to vote or consent or to receive notice as a shareholder for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. If, however, at any time prior to the expiration of the Purchase Warrants and their exercise, any of the events described in Section 7.2 shall occur, then, in one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the shareholders entitled to such dividend, distribution, conversion or exchange of securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of the closing of the transfer books, as the case may be. Notwithstanding the foregoing, the Company shall deliver to each Holder a copy of each notice given to the other shareholders of the Company at the same time and in the same manner that such notice is given to the shareholders.
7.2 Events Requiring Notice. The Company shall be required to give the notice described in this Section 7 upon one or more of the following events: (i) if the Company shall take a record of the holders of its Shares for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company, (ii) the Company shall offer to all the holders of its Shares any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor, or (iii) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or share reconstruction or amalgamation) or a sale of all or substantially all of its property, assets and business shall be proposed.
7.3 Notice of Change in Exercise Price. The Company shall, promptly after an event requiring a change in the Exercise Price pursuant to Section 5 hereof, send notice to the Holders of such event and change (“Price Notice”). The Price Notice shall describe the event causing the change and the method of calculating same and shall be certified as being true and accurate by the Company’s Chief Financial Officer.
7.4 Transmittal of Notices. All notices, requests, consents and other communications under this Purchase Warrant shall be in writing and shall be deemed to have been duly made when hand delivered, or mailed by express mail or private courier service: (i) if to the registered Holder of the Purchase Warrant, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, to following address or to such other address as the Company may designate by notice to the Holders:
If to the Holder:
____________
____________
____________
Attn: [●]
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with a copy (which shall not constitute notice) to:
Cozen O’Connor
33 South 6th Street, Suite 3800
Minneapolis, Minnesota 55402
Attn: Christopher J. Bellini, Esq.
Email: cbellini@cozen.com
If to the Company:
FreeCast, Inc.
6901 TPC Drive, Suite 200
Orlando, Florida 32801
Attention: William A. Mobley, Jr., Chief Executive Officer
Email: bmobley@freecast.com
with a copy (which shall not constitute notice) to:
Bahnsen Legal Group, PLLC
131 NE 1st Avenue, Suite 100
Boca Raton, Florida 33432
Attn: Jeffery A. Bahnsen
Email: jeff@bahnsenlaw.com
8. Miscellaneous.
8.1 Amendments. The Company and [Underwriter] may from time to time supplement or amend this Purchase Warrant without the approval of any of the Holders in order to cure any ambiguity, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, or to make any other provisions in regard to matters or questions arising hereunder that the Company and [Underwriter] may deem necessary or desirable and that the Company and [Underwriter] deem shall not adversely affect the interest of the Holders. All other modifications or amendments shall require the written consent of and be signed by the party against whom enforcement of the modification or amendment is sought.
8.2 Headings. The headings contained herein are for the sole purpose of convenience of reference, and shall not in any way limit or affect the meaning or interpretation of any of the terms or provisions of this Purchase Warrant.
8.3 Entire Agreement. This Purchase Warrant (together with the other agreements and documents being delivered pursuant to or in connection with this Purchase Warrant) constitutes the entire agreement of the parties hereto with respect to the subject matter hereof, and supersedes all prior agreements and understandings of the parties, oral and written, with respect to the subject matter hereof.
8.4 Binding Effect. This Purchase Warrant shall inure solely to the benefit of and shall be binding upon, the Holder and the Company and their permitted assignees, respective successors, legal representative and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Purchase Warrant or any provisions herein contained.
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8.5 Governing Law; Submission to Jurisdiction; Trial by Jury. This Purchase Warrant shall be governed by and construed and enforced in accordance with the laws of the State of New York, without giving effect to conflict of laws principles thereof. The Company hereby agrees that any action, proceeding or claim against it arising out of, or relating in any way to this Purchase Warrant shall be brought and enforced in the New York Supreme Court, County of New York, or in the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it at the address set forth in Section 7 hereof. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim. The Company and the Holder agree that the prevailing party(ies) in any such action shall be entitled to recover from the other party(ies) all of its reasonable attorneys’ fees and expenses relating to such action or proceeding and/or incurred in connection with the preparation therefor. The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates) and the Holder hereby irrevocably waive, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
8.6 Waiver, etc. The failure of the Company or the Holder to at any time enforce any of the provisions of this Purchase Warrant shall not be deemed or construed to be a waiver of any such provision, nor to in any way affect the validity of this Purchase Warrant or any provision hereof or the right of the Company or any Holder to thereafter enforce each and every provision of this Purchase Warrant. No waiver of any breach, non-compliance or non-fulfillment of any of the provisions of this Purchase Warrant shall be effective unless set forth in a written instrument executed by the party or parties against whom or which enforcement of such waiver is sought; and no waiver of any such breach, non-compliance or non-fulfillment shall be construed or deemed to be a waiver of any other or subsequent breach, non-compliance or non-fulfillment.
8.7 Execution in Counterparts. This Purchase Warrant may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement, and shall become effective when one or more counterparts has been signed by each of the parties hereto and delivered to each of the other parties hereto. Such counterparts may be delivered by facsimile transmission or other electronic transmission.
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Purchase Warrant to be signed by its duly authorized officer as of the ______ day of ________________, 2020.
| FREECAST, INC. | ||
| By: | ||
| Name: | ||
| Title: | ||
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[Form to be used to exercise Purchase Warrant]
Date: _______________, 20___
The undersigned hereby elects irrevocably to exercise the Purchase Warrant for shares of common stock, par value $0.0001 per share (the “Shares”), of FreeCast, Inc., a Florida corporation (the “Company”), and hereby makes payment of $ (at the rate of $ per Share) in payment of the Exercise Price pursuant thereto. Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been exercised.
or
The undersigned hereby elects irrevocably to convert its right to purchase ___ Shares of the Company under the Purchase Warrant for ______ Shares, as determined in accordance with the following formula:
|
X = |
Y(A-B) | |
| A |
Where,
X = The number of Shares to be issued to Holder;
Y = The number of Shares for which the Purchase Warrant is being exercised;
A = The fair market value of one Share which is equal to $_____; and
B = The Exercise Price which is equal to $______ per share
The undersigned agrees and acknowledges that the calculation set forth above is subject to confirmation by the Company and any disagreement with respect to the calculation shall be resolved by the Company in its sole discretion.
Please issue the Shares as to which this Purchase Warrant is exercised in accordance with the instructions given below and, if applicable, a new Purchase Warrant representing the number of Shares for which this Purchase Warrant has not been converted.
Signature
Signature Guaranteed
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INSTRUCTIONS FOR REGISTRATION OF SECURITIES
| Name: | ||
| (Print in Block Letters) | ||
| Address: | ||
NOTICE: The signature to this form must correspond with the name as written upon the face of the Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
A-14
[Form to be used to assign Purchase Warrant]
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the within Purchase Warrant):
FOR VALUE RECEIVED, __________________ does hereby sell, assign and transfer unto the right to purchase shares of common stock, par value $0.0001 per share, of FreeCast, Inc., a Florida corporation (the “Company”), evidenced by the Purchase Warrant and does hereby authorize the Company to transfer such right on the books of the Company.
Dated: __________, 20__
Signature
Signature Guaranteed_____________________________
NOTICE: The signature to this form must correspond with the name as written upon the face of the within Purchase Warrant without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank, other than a savings bank, or by a trust company or by a firm having membership on a registered national securities exchange.
A-15
EXHIBIT B
Form of Lock-Up Agreement
[●], 2020
Alexander Capital, L.P.
As Representative of the several Underwriters named on Schedule 1 attached hereto
c/o Alexander Capital, L.P.
17 State Street, 5th Floor
New York, NY 10004
Ladies and Gentlemen:
The undersigned understands that you, as representative (the “Representative”), propose to enter into an Underwriting Agreement (the “Underwriting Agreement”) with FreeCast, Inc., a Florida corporation (the “Company”), providing for the public offering (the “Public Offering”) of shares of common stock, par value $0.0001 per share, of the Company (the “Shares”).
To induce the Representative to continue its efforts in connection with the Public Offering, the undersigned hereby agrees that, without the prior written consent of the Representative, the undersigned will not, during the period commencing on the date hereof and ending 180 days after the date of the final prospectus (the “Prospectus”) relating to the Public Offering (the “Lock-Up Period”), (1) offer, pledge, sell, contract to sell, grant, lend, or otherwise transfer or dispose of, directly or indirectly, any Shares or any securities convertible into or exercisable or exchangeable for Shares, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (collectively, the “Lock-Up Securities”); (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the Lock-Up Securities, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Lock-Up Securities, in cash or otherwise; (3) make any demand for or exercise any right with respect to the registration of any Lock-Up Securities; or (4) publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement relating to any Lock-Up Securities. Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer Lock-Up Securities without the prior written consent of the Representative in connection with (a) transactions relating to Lock-Up Securities acquired in open market transactions after the completion of the Public Offering; provided that no filing under Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), shall be required or shall be voluntarily made in connection with subsequent sales of Lock-Up Securities acquired in such open market transactions; (b) transfers of Lock-Up Securities as a bona fide gift, by will or intestacy or to a family member or trust for the benefit of a family member (for purposes of this lock-up agreement, “family member” means any relationship by blood, marriage or adoption, not more remote than first cousin); (c) transfers of Lock-Up Securities to a charity or educational institution; (d) if the undersigned, directly or indirectly, controls a corporation, partnership, limited liability company or other business entity, any transfers of Lock-Up Securities to any shareholder, partner or member of, or owner of similar equity interests in, the undersigned, as the case may be, (e) if required by the terms of a qualified domestic relations order or (f) in transactions relating to shares of Common Stock that the undersigned may purchase (A) from the Underwriters in the Public Offering or (B) in open market transactions after the Public Offering Date; provided that in the case of any transfer pursuant to the foregoing clauses (b), (c) or (d), (i) any such transfer shall not involve a disposition for value, (ii) each transferee shall sign and deliver to the Representative a lock-up agreement substantially in the form of this lock-up agreement and (iii) no filing under Section 16(a) of the Exchange Act shall be required or shall be voluntarily made. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company’s transfer agent and registrar against the transfer of the undersigned’s Lock-Up Securities except in compliance with this lock-up agreement.
B-1
If (i) during the last 17 days of the Lock-Up Period, the Company issues an earnings release or material news or a material event relating to the Company occurs, or (ii) prior to the expiration of the Lock-Up Period, the Company announces that it will release earnings results or becomes aware that material news or a material event will occur during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed by this lock-up agreement shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of such material news or material event, as applicable, unless the Representative waives, in writing, such extension; provided, however, that this extension of the Lock-Up Period shall not apply to the extent that FINRA has amended or repealed NASD Rule 2711(f)(4), or has otherwise provided written interpretive guidance regarding such rule, in each case, so as to eliminate the prohibition of any broker, dealer, or member of a national securities association from publishing or distributing any research report, with respect to the securities of an Emerging Growth Company prior to or after the expiration of any agreement between the broker, dealer, or member of a national securities association and the Emerging Growth Company or its shareholders that restricts or prohibits the sale of securities held by the Emerging Growth Company or its shareholders after the initial public offering date.
The Representative agrees that, at least three (3) business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of Lock-Up Securities, the Representative will notify the Company of the impending release or waiver; and the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two (2) business days before the effective date of the release or waiver. Any release or waiver granted by the Representative hereunder to any such officer or director shall only be effective two (2) business days after the publication date of such press release. The provisions of this paragraph will not apply if (a) the release or waiver is effected solely to permit a transfer of Lock-Up Securities not for consideration and (b) the transferee has agreed in writing to be bound by the same terms described in this lock-up agreement to the extent and for the duration that such terms remain in effect at the time of such transfer.
No provision in this agreement shall be deemed to restrict or prohibit the exercise, exchange or conversion by the undersigned of any securities exercisable or exchangeable for or convertible into Shares, as applicable; provided that the undersigned does not transfer the Shares acquired on such exercise, exchange or conversion during the Lock-Up Period, unless otherwise permitted pursuant to the terms of this lock-up agreement. In addition, no provision herein shall be deemed to restrict or prohibit the entry into or modification of a so-called “10b5-1” plan at any time (other than the entry into or modification of such a plan in such a manner as to cause the sale of any Lock-Up Securities within the Lock-Up Period).
B-2
The undersigned understands that the Company and the Representative are relying upon this lock-up agreement in proceeding toward consummation of the Public Offering. The undersigned further understands that this lock-up agreement is irrevocable and shall be binding upon the undersigned’s heirs, legal representatives, successors and assigns.
Notwithstanding anything to the contrary contained herein, this Agreement will automatically terminate and the undersigned shall be released from all obligations under this Agreement upon the earliest to occur, if any, of (i) the Underwriting Agreement is executed but is terminated (other than the provisions thereof which survive termination) by the Representative prior to payment for and delivery of the Common Stock to be sold thereunder, or (ii) __________, 2020, if the Underwriting Agreement does not become effective by such date; provided, however, that the Representative may, by written notice to the undersigned prior to such date, extend such date for a period of up to three additional months.
Whether or not the Public Offering actually occurs depends on a number of factors, including market conditions. Any Public Offering will only be made pursuant to an Underwriting Agreement, the terms of which are subject to negotiation between the Company and the Representative.
| Very truly yours, | ||
| (Name - Please Print) | ||
| (Signature) | ||
| (Name of Signatory, in the case of entities - Please Print) | ||
| (Title of Signatory, in the case of entities - Please Print) | ||
| Address: | ||
B-3
EXHIBIT C
Form of Press Release
FreeCast, Inc.
[Date]
FreeCast, Inc. (the “Company”) announced today that Alexander Capital, L.P., acting as representative for the underwriters in the Company’s recent public offering of _______ shares of the Company’s common stock, is [waiving] [releasing] a lock-up restriction with respect to _________ shares of the Company’s common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on _________, 20___, and the shares may be sold on or after such date.
This press release is not an offer or sale of the securities in the United States or in any other jurisdiction where such offer or sale is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the Securities Act of 1933, as amended.
C-1
EXHIBIT D
Form of Opinion of Counsel to the Company
D-1
Exhibit 4.15
PROMISSORY NOTE
FOR VALUE RECEIVED, FREECAST, INC., a Florida corporation (the “Maker”), promises to pay to the order of William A. Mobley, an individual (the “Payee”), the principal amount of One Hundred Thousand Dollars ($100,000.00), together with simple interest on the principal amount of this Promissory Note (the “Note”) from time to time outstanding at the rate of twelve percent (12%) per annum. The entire principal amount of this Note, together with all accrued but unpaid interest thereon, shall be finally due and payable on 12-31-17.
Interest Payments. Interest payments are due on the last day of each month.
Pre-Payment. The principal amount of this Note and any interest accrued thereon may be prepaid in whole or in part at any time prior to maturity without premium or penalty of any kind. Any amount paid to the Payee or other holder of this Note (a “Holder”) shall be applied first to interest accrued to the date of such payment and then to the principal amount hereof then outstanding.
Events of Default. The occurrence of any one or more of the following events or conditions shall constitute an “Event of Default” under this Note:
(a) The Maker shall fail for any reason to make any payment, whether of principal, interest or otherwise, when due and payable pursuant to the provisions of this Note;
(b) The Maker shall (i) admit in writing its inability to pay its debts generally as they become due, (ii) file a voluntary petition under any bankruptcy, insolvency or other law for the relief or aid of debtors, including without limitation the Bankruptcy Code of 1978, as amended, (iii) make any assignment for the benefit of its creditors or (iv) enter into any composition agreement;
(c) An involuntary petition shall be filed against the Maker under any bankruptcy, insolvency or other law for the relief or aid of debtors, including without limitation the Bankruptcy Code of 1978, as amended, which involuntary petition is not dismissed within sixty (60) days after the date of the filing thereof;
(d) Any court of competent jurisdiction shall find that the Maker is insolvent or bankrupt;
(e) A receiver or trustee shall be appointed for the Maker or for all or a substantial portion of its assets and properties.
(f) The Maker shall fail to observe or to perform any or all of its agreements, covenants and obligations, or shall otherwise breach, violate or default under, any material agreement, note, mortgage, lease, contract, guaranty or other instrument to which it is a party or by which it or any or all of its properties or assets are bound;
(g) The Maker shall fail to observe or to perform any or all of its agreements, covenants and obligations, or shall otherwise breach, violate or default in any of its obligations, to the Payee or any of its affiliates;
(h) A final judgment shall be entered against the Maker which is not satisfied or bonded in full within thirty days after the date of the entry thereof;
(i) Any or all of the assets and properties of the Maker shall be levied upon, seized or attached;
(j) All or a substantial portion of the assets and properties of the Maker shall be lost, stolen, damaged or destroyed;
(k) The Maker shall enter into any agreement to, or shall, sell all or substantially all of its assets and properties, or merge or consolidate with or into any other corporation or entity; or
(l) The Maker shall cease to conduct its business, adopt any plan of liquidation, liquidate or dissolve.
Remedies. Upon the occurrence of any Event of Default:
(1) at the option of the Holder, all amounts outstanding hereunder, whether principal, interest or otherwise, shall become immediately due and payable;
(2) simple interest shall accrue on the then outstanding principal amount hereof from the date of any such Event of Default to the date of payment in full of the then outstanding principal amount hereof, together with all interest accrued hereon at the highest rate of interest permitted by the laws of the State of Florida; and
(3) the Maker shall pay all reasonable costs and expenses of collection of this Note, including without limitation reasonable attorneys’ fees, costs and expenses, paid or incurred by the Holder hereof, whether paid or incurred in connection with collection by suit or otherwise.
Waivers. The Maker and each endorser of this Note severally waives demand, protest, presentment and notice of maturity, non-payment or protest and any and all requirements necessary to hold each of them liable as a maker or endorser hereof.
The waiver by the Holder of the Maker’s prompt and complete performance of, or default under, any provision of this Note shall not operate nor be construed as a waiver of any subsequent breach or default and the failure by the Holder to exercise any right or remedy which it may possess hereunder shall not operate nor be construed as a bar to the exercise of any such right or remedy upon the occurrence of any subsequent breach or default.
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Governing Law. This Note shall be governed by, and shall be construed and interpreted in accordance with, the laws of the State of Florida, without giving effect to the principles of conflicts of laws thereof.
Entire Agreement. This Note constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and arrangements, both oral and written, between the parties with respect to such subject matter. This Note may not be modified, amended, altered or changed unless by a written instrument executed and delivered by the Maker.
Benefits; Binding Effect. This Note shall be for the benefit of, and shall be binding upon, the Maker and the Payee and their respective successors and assigns.
Jurisdiction and Venue. Any claim, dispute, action, suit or proceeding arising out of, connected with, or in any way related to this Note shall only be instituted by the complaining party and adjudicated in a court of competent jurisdiction located in Orange County, Florida, and the Maker consents to the personal jurisdiction of, and venue in, such courts. In no event shall the Maker contest the personal jurisdiction of such courts or the venue of such courts. The Maker acknowledges that the provisions of this paragraph constitute a material inducement for the Payee to extend credit to the Maker as evidenced by this Note, and that but for the inclusion of such provision in this Note the Payee would not continue to extend credit to the Maker.
Waiver of Trial by Jury. In any suit for the collection of any amount, whether of principal, interest or otherwise, which shall have become due and payable under this Note, the Maker knowingly, voluntarily and intentionally waives any right which it may have to a trial by jury. The Maker acknowledges that the provisions of this paragraph constitute a material inducement for the Payee to extend credit to the Maker as evidenced by this Note, and that but for the inclusion of such provision in this Note the Payee would not continue to extend credit to the Maker.
Headings. The headings contained in this Note are for reference purposes only and shall not affect in any way the meaning or interpretation of any or all of the provisions hereof.
IN WITNESS WHEREOF, the Maker, by and through its undersigned officer thereunto duly authorized, has executed and delivered this Note as of December 31, 2016.
| FREECAST, INC. | |
| /s/ Christopher M Savine | |
| Christopher M Savine, CFO | |
| /s/ William A Mobley | |
| William A Mobley, CEO |
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Exhibit 5.1
BAHNSEN LEGAL GROUP, PLLC
Attorneys at law
April 10, 2020
FreeCast, Inc.
6901 TPC Drive, Suite 200
Orlando, Florida 32822
| Re: | FreeCast, Inc. | |
| Registration Statement on Form S-1 (Registration No. 333-236482) |
Ladies and Gentlemen:
We have acted as special counsel to FreeCast, Inc., a Florida corporation (the “Company”), in connection with the proposed issuance of up to 3,450,000 shares of common stock, $0.0001 par value per share (the “Shares”). The Shares are included in a registration statement on Form S-1 under the Securities Act of 1933, as amended (the “Act”), initially filed with the Securities and Exchange Commission (the “Commission”) on February 18, 2020 (Registration No. 333-236482) (as amended or supplemented, the “Registration Statement”). This opinion is being furnished in connection with the requirements of Item 601(b)(5) of Regulation S-K under the Act, and no opinion is expressed herein as to any matter pertaining to the contents of the Registration Statement or related prospectus (the “Prospectus”), other than as expressly stated herein with respect to the issue of the Shares.
In rendering the opinion stated herein, we have examined such matters of fact and questions of law as we have considered appropriate in order to render such opinion, including examination of the following: (1) the Company’s Amended and Restated Articles of Incorporation; (2) the Company’s Amended and Restated Bylaws; (3) the Registration Statement, together with the exhibits filed as a part thereof; and (4) the Underwriting Agreement to be entered between the Company and Alexander Capital, L.P. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates and receipts of public officials, certificates of officers or other representatives of the Company and others, and such other documents as to factual matters, including the factual representations and warranties contained in the Underwriting Agreement, without having independently verified such factual matters. We are opining herein as to the Florida Business Corporation Act (the “FBCA”), and we express no opinion with respect to any other laws.
Subject to the foregoing and the other matters set forth herein, it is our opinion that, as of the date hereof, when the Shares shall have been duly registered on the books of the transfer agent and registrar therefor in the name or on behalf of the purchasers and have been issued by the Company against payment therefor in the circumstances contemplated by the form of Underwriting Agreement most recently filed as an exhibit to the Registration Statement, the issue and sale of the Shares will have been duly authorized by all necessary corporate action of the Company, and the Shares will be validly issued, fully paid and nonassessable. In rendering the foregoing opinion, we have assumed that the Company will comply with all applicable notice requirements regarding uncertificated shares provided in the FBCA.
This opinion is for your benefit in connection with the Registration Statement and may be relied upon by you and by persons entitled to rely upon it pursuant to the applicable provisions of the Act. We consent to your filing this opinion as an exhibit to the Registration Statement and to the reference to our firm in the Prospectus under the heading “Legal Matters.” In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Bahnsen Legal Group, PLLC
Bahnsen Legal Group, PLLC 131 NE 1st Avenue, Suite 100, Boca Raton, Florida 33432
Phone: 407-808-5700 Email: jeff@bahnsenlaw.com
Exhibit 10.16
Exhibit 10.17
Exhibit 10.18
LOAN AGREEMENT
Loan Amount: $20,100.00 ($5,500.00 & $14,600.00)
Date: December 31, 2018
I. THE PARTIES. For the above value received by FreeCast, Inc. with a mailing address of 6901 TPC Drive #200, City of Orlando, State of FL, (the “Borrower”), agrees to pay Public Wire, LLC with a mailing address of 6901 TPC Drive #200, City of Orlando, State of FL, (the “Lender”).
II. PAYMENT. This agreement, (the “Note”), shall be due and payable, including the principal and any accrued interest, in one of the following ways:
All payments made by the Borrower are to be applied first (1st) to any accrued interest and then to the principal balance. The total amount of the loan shall be due and payable on the 1st day of January, 2020.
III. INTEREST. The Note shall
☒ - Bear interest at a rate of TWELVE percent (12%) compounded annually. The rate must be equal to or less than the usury rate in the State of the Borrower.
☐ - Not bear interest.
IV. PREPAYMENT. The Borrower has the right to pay back the loan in-full or make additional payments at any time without penalty.
V. REMEDIES. No delay or omission on part of the holder of this Note in exercising any right hereunder shall operate as a waiver of any such right or of any other right of such holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the same or any other right on any future occasion. The rights and remedies of the Lender shall be cumulative and may be pursued singly, successively, or together, in the sole discretion of the Lender.
VI. EVENTS OF ACCELERATION. The occurrence of any of the following shall constitute an “Event of Acceleration” by the Lender under this Note:
(a) Borrower’s failure to pay any part of the principal or interest as and when due under this Note; or
(b) Borrower’s becoming insolvent or not paying its debts as they become due.
VII. ACCELERATION. Upon the occurrence of an Event of Acceleration under this Note, and in addition to any other rights and remedies that Lender’s may have, Lender shall have the right, at its sole and exclusive option, to declare this Note immediately due and payable.
VIII. SUBORDINATION. The Borrower’s obligations under this Promissory Note are subordinated to all indebtedness, if any, of the Borrower, to any unrelated third party lender to the extent such indebtedness is outstanding on the date of this Note and such subordination is required under the loan documents providing for such indebtedness.
IX. WAIVERS BY BORROWER. All parties to this Note including the Borrower and any sureties, endorsers, and guarantors hereby waive protest, presentment, notice of dishonor, and notice of acceleration of maturity and agree to continue to remain bound for the payment of principal, interest and all other sums due under this Note notwithstanding any change or changes by way of release, surrender, exchange, modification or substitution of any security for this Note or by way of any extension or extensions of time for the payment of principal and interest; and all such parties waive all and every kind of notice of such change or changes and agree that the same may be made without notice or consent of any of them.
X. EXPENSES. In the event any payment under this Note is not paid when due, the Borrower agrees to pay, in addition to the principal and interest hereunder, reasonable attorneys’ fees not exceeding a sum equal to the maximum usury rate in the State of Florida of the then outstanding balance owing on the Note, plus all other reasonable expenses incurred by Lender in exercising any of its rights and remedies upon default.
XI. GOVERNING LAW. This Note shall be governed by, and construed in accordance with, the laws of the State of Florida.
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XII. SUCCESSORS. All of the foregoing is the promise of Borrower and shall bind Borrower and Borrower’s successors, heirs and assigns; provided, however, that Lender may not assign any of its rights or delegate any of its obligations hereunder without the prior written consent of the holder of this Note.
IN WITNESS WHEREOF, Borrower has executed this Promissory Note as of the day and year first above written.
| Borrower’s Signature: | /s/ William Mobley | Print: | William Mobley | |
| Lender’s Signature: | /s/ William Mobley | Print: | William Mobley | |
| Witness’s Signature: | /s/ Clara Bevington | Print: | Clara Bevington |
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Registration Statement on Form S-1 Amendment No. 1 of our report dated December 12, 2019, relating to the financial statements of Freecast. Inc. as of and for the years ended June 30, 2019 and 2018. We also consent to the reference of our firm under the caption “Experts” in this registration statement.
SADLER, GIBB AND ASSOCIATES, LLC
Salt Lake City, Utah
April 10, 2020
