As f iled with the Securities and E x change Commission on A ugust 14, 2018

 

R egist r ation N o . 333-             

 

 

 

UNITED S TA TES

SECURITIES AND E X CHANGE COMMISSION

W ashington, D . C . 20549

 

 

 

FORM S-1

REGISTR A TION S TA TEMENT UNDER THE SECURITIES A CT OF 1933

 

 

 

nFüsz, Inc.

(Exact name of r egist r ant as speci f ied in its charter)

 

 

 

N e v ada   7200   90-1118043
(St a te or jurisdiction of   (Primary Standa r d Industri a l   (I.R. S . Empl o y er
incorpo r a tion or o r ganiz a tion)   Classi f ic a tion Code Number)   Identi f ic a tion N o .)

 

344 S . Hauser Bl v d., Suite 414

Los Angeles, Cali f o r nia 90036

(855) 250-2300

(A d d r es s , including zip code and t e lephone n umbe r ,

including a r ea cod e , of r egist r ant s princip a l ex ecut iv e o f f ices)

 

R ory J . Cutaia

Chai r man of the Boa r d, Chief E x ecut i v e Of f ice r , P r esident, Sec r etar y , and Tr easu r er

344 S . Hauser Bl v d., Suite 414

Los Angeles, Cali f o r nia 90036

(855) 250-2300

(Name including zip code and t e lephone n umbe r ,

including a r ea cod e , of a gent f or service)

 

 

 

  W ith copies to:   
     
Randolf W . K atz   D a vid E. Dan o vitch
Ba k er & Hostetler LLP   R obinson B r og Lein w and G r eene Gen o v ese
600 Anton Boul e v a r d, Suite 900   & Gluck P . C .
Costa Mesa, Cali f o r nia 92626   875 Thi r d A v enue, Ninth Floor
(714) 966-8807   N e w Y ork, N e w Y ork 10022
    (212) 603-6300

 

A pp r o ximate date of commencement of p r oposed sale to the public: As soon as p r actic a b le after this Regist r a tion St a tement is decla r ed e f fect iv e.

 

If a n y of the securities being r egiste r ed on this F o r m a r e to be o f fe r ed on a d e l a yed or conti n uous basis pursuant to Rule 415 under the Securities Act, check the f ollowing box. [  ]

 

If this F o r m is f iled to r egister a d dition a l securities f or an offering pursuant to Rule 462(b) under the Securities Act, check the f ollowing box and l i st the Securities Act r egist r a tion st a tement n umber of the ea r lier e f fect iv e r egist r a tion st a tement f or the same o f fering. [  ]

 

If this F o r m is a post-e f fect iv e amendment f iled pursuant to R ule 462(c) under the Securities Act, check the foll o wing b o x and list the Securities Act r egistr a tion st a tement number of the earlier e f fect iv e r egistr a tion st a tement for the same o f fering. [  ]

 

If this F o r m is a post-e f fect iv e amendment f iled pursuant to R ule 462(d) under the Securities Act, check the foll o wing b o x and list the Securities Act r egistr a tion st a tement number of the earlier e f fect iv e r egistr a tion st a tement for the same o f fering. [  ]

 

Indic a te b y check ma r k w hether the r egist r ant is a la r ge acc e le r a ted f iler, an acc e le r a ted f iler, a non-acc e le r a ted f iler, a smaller r eporting comp a ny, or an eme r ging g r o wth company. See the de f initions of “la r ge acc e le r a ted f iler,” “acc e le r a ted f iler,” “smaller r eporting company,” and “eme r ging g r o w t h company” in Rule 12b-2 of the E x change Act. (Check one):

 

  La r ge acc e le r a ted f iler [  ] Acc e le r a ted f iler [  ]
  Non-acc e le r a ted f iler [  ] Sm a ller r eporting compa n y [X]
  (Do not check if a sm a ller r eporting compa n y) Eme r ging g r o wth compa n y [X]

 

If an eme r ging g r o wth compa n y , indic a te b y check ma r k if the r egistrant has e lected not to use the e xtended transition period f or comp l ying with a n y n e w or re vised financial accounting standa r ds p ro vided to Section 7(a)(2)(B) of the Securities Act. [  ]

 

CA L CUL A TION OF REGISTR A TION FEE

 

    Proposed Maximum      
Title of each class of securities to be registered   Aggregate Offering
Price (1)(2)
  Amount of
Registration Fee (3)
 
Common Stock, par value $0.0001 per share (4) $ 20,000,000   $ 2,490  

 

(1) In acco r dance with R ule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”), the n umber of sha r es being r egiste r ed and the proposed maximum offering price per sha r e a r e not included in this ta b le.
(2) The p r oposed maxi m um a gg r eg a te o f fering price has been estim a ted sol e l y f or the purpose of c a lcul a ting the amount of the r egistr a tion fee pursuant to Rule 457(o) under the Securities Act, and includes sha r es of common stock, par v a lue $0.0001 per sha r e, nFüsz, Inc. (the “Common Stock”), th a t the underwriter has an option to pu r chase to c o v er o v e r - a llotments, if a n y.
(3) C a lcul a ted pursuant to R ule 457(o) based on an estim a te of the p r oposed maxi m um a gg r eg a te o f fering price of the securities r egiste r ed he r eunder.
(4) Pursuant to R ule 416 under the Securities Act, the sha r es r egiste r ed he re b y a lso include an indete r minate number of additional sha r es as may from time to time become issu a b le b y r eason of stock splits, distri b utions, r ec a pit a lizations, or other similar transactions.

 

 

 

TH E REGISTRAN T HEREB Y AMEND S THI S REGISTR A TIO N S TA TEMEN T O N SUC H D A T E O R D A TE S A S M A Y B E NECESSA R Y TO DEL A Y IT S EFFECTIV E D A T E UNTI L TH E REGISTRAN T SHAL L FIL E A FU R THE R AMENDMEN T , WHIC H SPECIFICAL L Y S TA TE S TH A T THIS REGISTR A TIO N S TA TEMEN T SHAL L THEREAFTE R BECOM E EFFECTIV E I N A CCOR D ANC E WIT H SECTIO N 8(A ) O F TH E SECURITIE S A C T O F 193 3 O R UNTI L TH E REGISTR A TIO N S TA TEMEN T SHAL L BECOM E EFFECTIV E O N SUC H D A T E A S TH E SECURITIE S AN D E X CHANGE COMMISSIO N, A CTIN G PURS U AN T TO SAI D SECTIO N 8(A) , M A Y DETERMINE.

 

 

 

 
 

 

The in f o r m a tion contained in this p re liminary p r ospectus is not complete and m a y be changed. W e m a y not s e ll these securities until the r egistr a tion st a tement filed with the Securities and Exchange Commission is e f fect iv e. This p re liminary p r ospectus is not an o f fer to s e ll these securities and it is not soliciting an o f fer to buy these securities in a n y jurisdiction whe r e the o f fer or s a le is not pe r mitted.

 

PRELIMI N A R Y P R OSPECTUS SUBJECT T O COMPLETION D A TED A UGUST 14, 2018

 

              Sha r es

Common Stock

 

 

 

W e a r e o f fering ________sha r es of common stock, $0.0001 par v a lue (the “Common Stock”), of nFüsz, Inc., a Ne v ada corpor a tion (the “Company”), in a firm commitment underwritten public o f fering. Our Common Stock is quoted on the O T C Markets Group Inc.’s O T CQB ® tier Venture Market (the “ O T CQB”) under the symbol “FUSZ.”

 

On A ugust 13, 2018, the last r eported s a le price of our Common Stock as r eported on the O T CQB w as $0.5459 per sha r e . The actu a l offering price per sha r e of Common Stock will be as determined between us and A.G.P./Alliance Glob a l P artners Corp. (the “Underwriter”) at the time of pricing and m a y be issued at a discount to the cur r ent market price of our Common Stock. We intend to a pp l y to list our Common Stock on the Nasdaq C a pit a l Market (“ N ASDAQ”) under the symbol “FUSZ,” w hich listing we anticipate will occur si m ultaneous l y with the closing of this offering. We have not yet r eceived a ppro v a l to list our Common Stock on N AS D AQ and the r e is no assurance that our Common Stock will ever be listed on N ASDA Q .

 

This p r ospectus contains or incorpo r a tes b y r efe r ence summaries of certain p ro visions contained in some of the documents described he r ein, b ut r efe r ence is made to the actual documents for complete inform a tion. All the summaries a r e qualified in their enti r ety b y the actual documents. Copies of some of the documents r efer r ed to he r ein have been filed or have been incorpo r a ted b y r efe r ence as exhibits to the r egist r a tion st a tement of w hich this p r ospectus forms a part, and you may obtain copies of those documents as described in this p r ospectus under the heading “ W he r e You Can Find Mo r e Inform a tion.”

 

I n v esting in our securities i n v ol v es a high deg r ee of risk. See “Risk F actors” on page 5 of this p r ospectus f or a discussion of in f ormation that should be conside r ed in connection with an i n v estment in our securities.

 

Neither the Securities and E x change Commission (the “SEC”) nor a n y state securities commission has app r o v ed or disapp r o v ed of these securities or determined if this p r ospectus or the accompa n ying p r ospectus is truthful or complete. A n y r ep r esentation to the cont r ary is a criminal offense.

 

          Total Without     Total With  
          Exercise of     Exercise of  
          Over-Allotment     Over-Allotment  
    Per Share     Option     Option  
Public offering price   $                 $                     $                
Underwriting discounts and commissions (1)   $     $     $  
Offering proceeds, before expenses, to us   $     $     $  

 

(1) See “Underwriting” on p a ge 56 f or a d dition a l in f o r m a tion on the compens a tion p a y a b le to the Underwrite r .

 

W e h a v e g r anted an o v e r - a llotment option to the Underwriter as set f orth b e l o w . Pursuant to this o v e r - a llotment option, the Underwriter m a y e lect to pu r chase up to a maximum of a d ditional sha r es of Common Stock f r om us a t the pu b lic o f fering price a b o v e, less underwriting discounts and commissions, within 45 d a ys of the d a te of this p r ospectus to c o v er o v e r - a llotments, if a n y. If the Underwriter e x e r cises the o v e r - a llotment option in full, the tot a l underwriting discounts and commissions p a y a b le by us will be $             , and the tot a l p r oceeds to us, be f o r e e xpenses, will be $             , assuming an o f fering price of $              per sha r e (the last r eported s a les price of our Common Stock on the O T CQB on                  , 2018).

 

The Underwriter e xpects to d e l iv er the sha r es of common stock to pu r chasers on or be f o r e              , 2018.

 

A. G . P .

 

The date of this p r ospectus is                          , 2018.

 

 
 

 

T ABLE OF CONTENTS

 

P r ospectus Summary 1
Risk F actors 5
Speci a l Note R ega r ding F or w a r d-Looking St a tements 17
Use of P r oceeds 18
Ma r k et Price and D i vidend In f o r m a tion 19
C a pit a liz a tion 20
Dilution 21
Business 23
The P r oposed Sound Concepts Acquisition 28
Business of Sound Concepts 29
Man a gement s Discussion and An a l ysis of Financi a l Condition and R esults of Ope r a tions — nFüs z 30
Man a gement 39
Certain R e l a tionships and R e l a ted P arty T r ansactions and Di r ector Independence 42
E x ecut iv e Compens a tion 45
Security Ownership of Certain Bene f ici a l Owners and Man a gement 49
Description of Securities 50

Material U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders

53
Sha r es A v ail a b le F or Futu r e S a les 55
Underwriting 56
Leg a l M a tters 62
Experts 63
W he r e Y ou Can Find Mo r e In f o r m a tion 64
Ind e x to Financi a l St a tements F-1

 

W e and the Underwriter ha v e not authorized a n y one to p r o vide y ou a n y information other than that contained in this p r ospectus or in a n y f r ee writing p r ospectus p r epa r ed b y or on b e half of us or to which we ha v e r efer r ed y ou. W e ta k e no r esponsibility for, and can p r o vide no assu r ance as to the r e liability o f , a n y other information that othe r s may gi v e y ou. W e and the Underwriter a r e not making an offer to s e ll these securities in a n y jurisdiction w he r e the offer or sale is not permitted. You should assume that the information appearing in this p r ospectus is accu r ate only as of the date on the f r ont c ov er of this p r ospectu s . Our busines s , financial condition, r esults of ope r ation s , and p r ospects may ha v e chan g ed since that date.

 

F or i n v esto r s outside of the United States: w e ha v e not and the Underwriter has not done a n ything that w ould permit this offering or possession or distribution of this p r ospectus in a n y jurisdiction whe r e action for that pu r pose is r equi r ed, other than the United State s . Pe r sons outside of the United States who come into possession of this p r ospectus must inform thems e l v es about, and obser v e a n y r estrictions r e lating t o , the offering of the sha r es of Common Stock and the distribution of this p r ospectus outside of the United State s.

 

i
 

 

 

P R OSPECTUS SUMMA R Y

 

This summa r y hi g hli g hts ce r tain in f ormation about u s , this of f erin g , and selected in f ormation contained in this p r ospectu s . This summa r y is not complete and does not contain all of the in f ormation that y ou should consider be f o r e deciding w hether to i n v est in our Common Sto c k. F or a mo r e complete unde r standing of the Compa n y and this of f erin g , w e encou r a g e y ou to r ead and consider the mo r e detailed in f ormation in this p r ospectu s , in c luding “Risk F acto r s” and the financial statements and r elated note s . Unless w e specify otherwis e , all r e f e r ences in this p r ospectus to “nFüsz,” “ w e,” “our,” “us,” and “the Compa n y” r e f er to nFüsz, In c . and our subsidiarie s .

 

Compa n y O v ervi e w

 

Cutaia Media G r ou p , L L C (“CMG”) w as o r gani z ed on December 12, 2012, as a limited liability compa n y under the laws of the State of Ne v ada. On M a y 19, 2014, bBooth, Inc. w as incorporated under the laws of the State of Ne v ada. On M a y 19, 2014, CMG me r ged into bBooth, Inc. and, thereafter, bBooth, Inc. changed its name to bBooth (USA), Inc., effective as of October 16, 2014. The operations of CMG and bBooth (USA), Inc. became kn o wn as, and are referred to in this prospectus as, “bBoothUSA.”

 

On October 16, 2014, bBoothUSA w as acqui r ed b y Glob a l System Design s , Inc. (“GSD”), pursuant to a Sha r e E x change Ag r eement ente r ed into with GSD (the “Sha r e E x change Ag r eement”). GSD w as incorporated in the state of N e v ada on No v ember 27, 2012. The acquisition w as accounted for as a rev erse merger transaction. In connection with the closing of the transactions contemplated b y the Sha r e E x change Ag r eement, GSD’s man a gement w as r eplaced b y bBoothUSA’s man a gement, and GSD changed its name to bBooth, Inc.

 

E f fect iv e A pril 21, 2017, w e changed our corpo r a te name f r om bBooth, Inc. to nFüsz, Inc. The name change w as e f fected th r ough a pa r ent/subsidiary short-form merger of nFüsz, Inc., our w hol l y-owned N e v ada subsidiary, formed sol e l y for the purpose of the name change, with and into us. We w e r e the surv i ving entity. To e f fectu a te the merger, w e filed Articles of Merger and a Certific a te of Cor r ection ( re l a t iv e to the e f fect iv e d a te of the name change merger) with the Sec r etary of St a te of the St a te of N e v ada on April 4, 2017 and A pril 17, 2017, respectively. The merger became e f fect iv e on A pril 21, 2017. Our boa r d of di r ectors a pp ro v ed the merger, w hich r esulted in the name change on th a t d a te. In acco r dance with Section 92A.180 of the N e v ada R e vised St a tutes, stockholder a pp ro v al of the merger w as not r equi r ed.

 

Our Business

 

We are an applications services provider marketing cloud-based business software products on a subscription basis. Our flagship product, notifiCRM, is a Customer Relationship Management (“CRM”) application that is distinguishable from other CRM programs because it utilizes interactive video as the primary means of communication between sales and marketing professionals and their clients or prospects. notifiCRM allows our users to create, distribute, and post interactive videos that contain on-screen interactive icons, buttons, and other elements, that when clicked, allow their prospects and customers to respond to our users’ call to action in real-time, in the video, while the video is playing, without leaving or stopping the video. Our users report increased sales conversion rates compared to traditional, non-interactive video. W e d eve loped the p r oprietary inte r act iv e video technol o g y , w hich ser v es as the basis f or our cloud, Soft w a r e-as-a-Service (“SaaS”) products and services that w e ma r ket under the b r and name “notifi” and they are accessi b le on all mobile and desktop d e vices. No download is r equi r ed to access and use our a pplications. Our users a lso h a v e access to detailed an a l ytics in the a pplication dashboa r d that r eflect w hen the videos w e r e vi ew ed, b y w hom, how many time s , for how long, and w hat interact iv e e lements w e r e clicked-on in the video, among other thing s , a ll of w hich assist our users in focusing their s a les and marketing efforts b y identifying w hich clients or prospects h a v e inte r est in the subject matter of the vide o .

 

Our notifiCRM pl a t f orm can accommod a te a n y size campaign or s a les organiz a tion, and it is enterprise-class sc a l a b le to meet the needs of tod a y’s glob a l organiz a tions. We are working with our vendors to ensure that it is so scalable based upon our current agreements with them. We o f fer stand- a lone v ersions of our notifiCRM product on a subscription basis to ind i vidu a l consumer s , s a les-based organiz a tions, consumer b r and s , ma r keting and ad v ertising agencie s , as we ll as to artists and soci a l influencers. We a lso o f fer notifiCRM through a netwo r k of partners and r es e llers th a t include O r acle/NetSuite and Ma r k et o , who o f fer notifiCRM to their r espect iv e clients and customers as an upg r ade to their e xisting O r acle/NetSuite or Ma r k eto subscriptions. notifiCRM is fully integ r a ted into each of their pl a t f orms and upon p a yment of the upg r ade fe e , is accessi b le through the r espect iv e dashboa r ds of O r acle/NetSuite and Ma r k eto. We a r e act ive ly d eve loping integ r a tions of notifiCRM into other popular ma r keting, CRM, and Enterprise Resou r ce Management (“ERP”) pl a t f orms.

 

 

1
 

 

 

Our noti f iMED a pplic a tion is designed f or p h ysicians and other he a lthca r e providers to c r e a te mo r e e f f icient and e f fect iv e interact iv e com m unic a tions with p a tients. P a tients a r e a b le to avoid unnecessary and inco n v enient visits to their p h ysicians’ or other he a lthca r e providers’ o f f ices b y vi e wing and r esponding to interact iv e videos through in-video, on-sc r een clicks th a t a r e designed to assess the p a tients’ need f or an o f f ice visit. If the p a tient’s r esponses to the interact iv e video indic a te th a t an o f f ice visit is either necessary or desir a b le, the p a tient can schedule the o f f ice visit right in through video in r e a l tim e . P a tients can a lso download and print p r escription s , ca r e instruction s , and other p h ysician distri b uted documents right from and through the video. noti f iMED is o f fe r ed on a subscription basis.

 

Our noti f iEDU a pplic a tion is designed f or teachers and school administ r a tors f or mo r e e f fect iv e com m unic a tions with students, pa r ents, and faculty. noti f iEDU allows teachers to d e l iv er inte r act iv e lessons to students w hich a r e both mo r e eng a ging and mo r e e f fect iv e. noti f iEDU allows teachers to com m unic a te with students through their mobile d e vices and computers to d e l iv er lessons and tests/quizzes on the sc r een and in the video. The ana l ytics c a pabilities of noti f iEDU a v aila b le on the dashboa r d of the teacher or school administ r a tor allows them to t r ack w hich students w a tched the lesson, w hen, f or how long, how ma n y times, and t r ack and r eport on test/quiz r esults. noti f iEDU is o f fe r ed on a subscription basis.

 

Our noti f iTV and noti f iLIVE p r oducts a r e a lso part of our p r oprietary inte r act iv e video pl a t f o r m th a t a ll o ws vi ew ers to inte r act with p r e- r eco r ded as we ll as l iv e b r oadcast video content by clicking on links embedded in on-sc r een people, objects, g r aphics, or sponsors’ signage. V i ew ers can e xperience our noti f iTV and noti f iLIVE inte r act iv e content and cap a bilities on most d e vices avail a b le in the ma r k et tod a y without the need to d o wnload speci a l softwa r e or p r oprietary video pl a y ers.

 

P r oposed Acquisition of Sound Concepts

 

On J u l y 17, 2018, w e ente r ed into a non-binding letter of intent with Sound Concept s , Inc. (“Sound Concepts”), to memori a li z e discussions re lated to our acquisition (the “Sound Concepts Acquisitio n ”) of a ll of the issued and outstanding sha r es of c a pit a l stock of Sound Concepts (the “Sound Concepts C a pit a l Stock”). We anticipate acquiring the Sound Concepts C a pit a l Stock for an a gg r egate of $25,000,000 of v a lu e , to be pa y a b le th r ough a combination of a cash payment b y us of $15,000,000 (the “Acquisition Cash P ayment”) and the issuance of sha r es of our Common Stock with a fair ma r k et v a lue of $10,000,000 (the “Acquisition Stock”). We anticipate forming an acquisition subsidiary into w hich Sound Concepts will merge in acco r dance with the p ro visions of a th r ee-party merger a g r eement among Sound Concept s , our acquisition subsidiary, and us.

 

The consumm a tion of the p r oposed Sound Concepts Acquisition is subject to the s a tisfaction or w a iv er of certain condition s . In addition to customary closing conditions, our o b lig a tion to complete the p r oposed Sound Concepts Acquisition is conditioned on (i) the p r epar a tion of audited financial st a tements for Sound Concepts for the fiscal years ended December 31, 2017 and 2016, and unaudited financial st a tements for Sound Concepts for all completed interim periods during fiscal 2018 prior to the consumm a tion of the Sound Concepts Acquisition, all of w hich shall ha v e been p r epa r ed in acco r dance with GAAP; and (ii) the negoti a tion, ex ecution, and d e l iv ery of definit iv e transaction documents necessary to consumm a te the p r oposed Sound Concepts Acquisition. The r e can be no assurance th a t w e will enter into definit iv e transaction documents, or th a t the p r oposed Sound Concepts Acquisition will be consumm a ted. Unless and until all conditions set forth in the letter of intent a r e s a tisfied or w a iv ed, neither party has a binding o b lig a tion to enter into definit iv e transaction documents or otherwise consumm a te the transactions contempl a ted b y the letter of intent.

 

 

2
 

 

 

Sound Concepts is an est a b lished 25- y ea r -old b usiness with a pp r o xim a t e l y 60 empl o y ees, based in S a lt L a k e City, Ut a h, p ro viding digit a l ma r k eting and s a les support services, including a video-based s a les a pplic a tion, to the di r ect s a les industry. Cur r ent l y, they ha v e a pp r o xim a t e l y 75 clients in the net w o r k ma r k eting and a f fili a te ma r k eting sector, w hich include Is a genix, Vasay o , Nu Skin, Nerium, Fo rev er L i ving, Seac r et, among many others. Their s a les a pplic a tion, o f fe r ed as a SaaS a pplic a tion, is kn o wn as Brightools and is designed specific a l l y to meet the needs of di r ect s a les r ep r esent a t iv es. Brightools p ro vides r ecruiting tools, s a les r ep r esent a t iv e t r aining, and educ a tion tools, as we ll as instant notific a tion c a p a bilities to notify users w hen a p r ospect has eng a ged in sha r ed content. Brightools a lso t r acks customer pu r chases and a ll o ws corpo r a te to monitor fi e ld act i vity to t r ack the e f fect iv eness of campaigns as we ll as compliance. Brightools is cur r ent l y in use in o v er 48 di f fe r ent countries and has mo r e than 360,000 cur r ent users.

 

W e b e li ev e th a t Sound Concepts’ b usiness is high l y complementary to our o wn, and the combin a tion of their technol o gy, customer base, and human c a pital with our o wn will r esult in inc r eased sha re holder v alue.

 

Corpo r ate In f o r mation

 

W e a r e a N e v ada corpo r a tion. Our princip a l ex ecut iv e/administ r a t iv e o f f ices a r e loc a ted a t 344 South Hauser Boul e v a r d, Suite 414, Los Ang e les, C a lifornia 90036, and our t e lephone n umber is (855) 250-2300. Our we bsite add r ess is https://www.nfusz.com. Info r m a tion on or accessed th r ough our we bsite is not incorpo r a ted into this p r ospectus and is not a part of this p r ospectus.

 

Our Common Stock is not listed on a n y n a tion a l stock e x change b ut is quoted on the O T CQB under the symbol “FUSZ.”

 

 

3
 

 

 

The Offering

 

  Issuer:   nFüsz, Inc.  
         
  Shares offe r ed by us:                 sha r es of Common Stock (or         sha r es of Common Stock if the Underwriter ex e r cises its o v e r - a llotment option in full)  
         
  Offering Price:   $          per sha r e  
         
  Common Stock outstanding prior to this offering:   153,698,043 sha r es  
         
  Common Stock to be outstanding after this offering:            sha r e s , assuming          sha r es a r e issued in this o f fering (or        sha r es if the Underwriter ex e r cises its o v e r - a llotment option in full, assuming           sha r es a r e issued in this o f fering)  
         
  O v e r -allotment option:   W e h a v e g r anted the Underwriter a 45-d a y o v e r - a llotment option to pu r chase up to an additional           sha r es of our Common Stock at the pu b lic offering price less estimated underwriting discounts and commissions.  
         
  Use of p r oceeds:   W e estim a te the net p r oceeds to us f r om this o f fering, after deducting underwriting discounts and commissions and estim a ted o f fering e xpenses paya b le by us, will be app r oxim a t e ly $        million ($          million if the Underwriter’s o v e r -allotment option to pu r chase additional sha r es is ex e r cised in full), assuming a pu b lic o f fering price of $             per sha r e, the last r eported sale price of our Common Stock on the O T CQB on                 , 2018. The actual o f fering price per sha r e will be as determined bet w een us and the Underwriter a t the time of pricing, and may be a t a discount to the cur r ent ma r k et price.  
         
      W e intend to use the net p r oceeds f r om this o f fering f or w o r king c a pital and general corpor a te purposes. W e m a y also use a portion of the net p r oceeds f r om this o f fering to p a y f or all or a portion of the Acquisition Cash P a yment, as we ll as transaction and integr a tion costs incur r ed in connection with the Sound Concepts Acquisition. For a mo r e complete description of our intended use of the net p r oceeds f r om this o f fering, see “Use of P r oceeds” and “The P r oposed Sound Concepts Acquisition.”  
         
  Risk F actors:   This i n v estment i n v ol v es a high deg r ee of risk. See the section entitled “Risk F actors” beginning on page 5 of this prospectus f or a discussion of factors y ou should consider ca r efully be f o r e m a king an i n v estment decision.  
         
  O T CQB Symbol:   Our Common Stock is t r aded under the symbol “FUSZ.” W e intend to a pp l y f or the listing of our Common Stock offe r ed he re b y on N ASDAQ under the symbol “FUSZ,” and anticipate such listing to occur concur r ent l y with this offering.  

 

 

  The number of shares of Common Stock shown above to be outstanding after this offering is based on 153,698,043 shares of Common Stock outstanding as of August 13, 2018, which excludes: (i) 24,534,605 sha r es of Common Stock issu a b le upon ex e r cise of stock options with a w eighted- a v e r a ge ex e r cise price of a pproximat e l y $0.30 per sha r e; (ii) 5,154,047 sha r es of Common Stock r eser v ed for issuance under our 2014 Stock Option Plan (the “Plan”); (iii) 31,854,113 sha r es of Common Stock issu a b le upon the ex e r cise of a ll outstanding w ar r ants with a w eighted- a v e r a ge ex e r cise price of a pproximat e l y $0.14 per sha r e; and ( i v) 11,264,826 sha r es of Common Stock issu a b le upon the con v ersion of a ll outstanding con v erti b le notes.  

 

 

4
 

 

RISK F A C T ORS

 

I n v esting in our securities i n v ol v es a hi g h deg r ee of risk. Y ou should ca r eful l y consider the risks and unce r tainties described bel o w, as w ell as other in f ormation p r esented in this p r ospectus or in a n y other documents incorpo r ated b y r e f e r ence into this p r ospectus, in li g ht of y our pa r ticular i n v estment object i v es and financial ci r cumstance s . Mo r e o v er, the risks so described a r e not the on l y risks w e f ac e . Additional risks not p r esent l y kn o wn to us or that w e cur r ent l y pe r ce i v e as immaterial may ultimate l y p r o v e mo r e significant than e xpected and impair our business ope r ation s . A n y of these risks could ad v e r se l y af f ect our business, financial condition, r esults of ope r ations, and p r ospect s . The t r ading price of our securities could de c line due to a n y of these risks and y ou may lose all or pa r t of y our i n v estment.

 

Risks R elated to Our Business

 

W e ha v e incur r ed significant net losses and cannot assu r e y ou that w e will achie v e or maintain p r ofita b le ope r ation s .

 

T o d a t e , w e h a v e gene r a ted limited rev e n ues f r om our ope r a tions and h a v e incur r ed losses since inception. Our net loss was $7,266,553 for the y ear ended December 31, 2017 and $4,274,105 for the y ear ended December 31, 2016. Our net loss was $6,722,532 for the six months ended J une 30, 2018, compared to net loss of $2,968,585 for the six months ended June 30, 2017. As of J une 30, 2018, w e had a stockholders’ deficit of $2,180,711. We may conti n ue to incur significant losses in the futu r e for a n umber of r eason s , including unfo r eseen e xpense s , di f ficultie s , complic a tion s , and d e lay s , and other unknown ev ents.

 

W e anticip a te th a t our ope r a ting e xpenses will inc r ease substanti a l l y in the f o r esee a b le futu r e as w e underta k e inc r eased technol o gy and p r oduction e f f orts to support our b usiness and inc r ease our ma r keting and s a les e f f orts to dr iv e an inc r ease in the number of customers and clients utilizing our services. These inc r eased e xpenditu r es m a y m a ke it mo r e di f ficult to achi ev e and maintain profitability. In addition, our e f f orts to grow our b usiness m a y be mo r e e xpens iv e than w e e xpect, and w e m a y not be a b le to gene r a te su f ficient rev enue to o f fset inc r eased ope r a ting e xpenses. If w e a r e f o r ced to r educe our e xpenses, our growth st r a tegy could be compromised. To o f fset these anticip a ted inc r eased ope r a ting e xpenses, w e will need to gene r a te and sustain significant rev enue l eve ls in futu r e periods in o r der to become p r ofita b le, and, ev en if w e do, w e m a y not be a b le to maintain or inc r ease our l eve l of profit a bility.

 

Acco r ding l y , w e cannot assu r e y ou th a t w e will achi ev e sustain a b le ope r a ting p r o f its as w e conti n ue to e xpand our inf r astructu r e, r estructu r e our b a lance sheet, further d eve lop our ma r k eting e f f orts, and otherwise implement our g r owth initi a t iv es. A n y failu r e to achi ev e and maintain p r o f itability w ould ha v e a m a teri a l l y a d v erse e f fect on our a bility to implement our b usiness plan, our r esults and ope r a tions, and our f inanci a l condition, and could cause the v a lue of our Common Stock to decline, r esulting in a signi f icant or complete loss of y our i n v estment.

 

Our independent r e giste r ed pu b lic accounting firm s r eports for the fiscal y ea r s ended December 31, 2016 and December 31, 2017 has raised substantial doubt as to our ability to continue as a “going concern.”

 

Our independent r egiste r ed pu b lic accounting f i r m indic a ted in its r eports on our audited consolid a ted f inanci a l st a tements as of and f or the years ended December 31, 2016 and December 31, 2017 th a t the r e is substantial doubt a bout our a bility to continue as a going concern. A “going concern” opinion indic a tes th a t the f inanci a l st a tements ha v e been p r epa r ed assuming w e will continue as a going concern and do not include a n y adjustments to r eflect the possi b le futu r e e f fects on the r eco v er a bility and classi f ic a tion of assets, or the amounts and classi f ic a tion of li a bilities th a t m a y r esult if w e do not continue as a going concern. The r e f o r e, y ou should not re ly on our consolid a ted b a lance sheet as an indic a tion of the amount of proceeds th a t would be avail a b le to s a tisfy claims of c r editors, and potenti a lly be avail a b le f or distribution to stockholders, in the ev ent of liquid a tion. The p r esence of the going concern note to our f inanci a l st a tements m a y ha v e an ad v erse impact on the re l a tionships w e a r e d eve loping and plan to d eve lop with thi r d parties as w e continue the comme r ci a liz a tion of our products and could m a ke it ch a llenging and di f f icult f or us to raise additional f inancing, a ll of which could ha v e a m a teri a l ad v erse impact on our business and prospects and r esult in a signi f icant or complete loss of y our i n v estment.

 

Our ability to g ro w and compete in the futu r e will be ad v e r s e ly affected if adequate capital is not a v aila b le to us or not a v aila b le on terms fa v o r a b le to u s .

 

W e h a v e limited c a pit a l r esou r ce s . T o d a t e , w e h a v e financed our oper a tions enti re l y through equity in v estments b y founders and other in v estors and the incur r ence of d e bt, and w e e xpect to continue to do so in the foreseeable future. Our ability to continue our normal and planned operations, to grow our business, and to compete in our industry will depend on the a v ail a bility of adequ a te c a pit a l.

 

5
 

 

W e cannot assu r e y ou th a t w e will be a b le to obtain a d dition a l funding from those or other sou r ces when or in the amounts needed, on accept a b le term s , or a t a ll. If w e raise capit a l through the s a le of equity, or securities co n v erti b le into equity, it would r esult in dilution to our e xisting stockholders, which could be significant depending on the price a t which w e m a y be a b le to s e ll our securities. If w e raise a d dition a l capit a l through the incur r ence of a d dition a l ind e btednes s , w e would lik e ly become subject to further co v enants r estricting our business act i vitie s , and holders of d e bt instruments m a y ha v e rights and pr i vileges senior to those of our equity i n v estors. In a d dition, servicing the inte r est and princip a l r ep a yment o b lig a tions under d e bt facilities could d iv ert funds th a t would otherwise be avail a b le to support d eve lopment of n e w programs and ma r keting to cur r ent and potenti a l n e w clients. If w e a r e un a b le to raise capit a l when needed or on a ttract iv e term s , w e could be f o r ced to d e l a y, r educ e , or e limin a te d eve lopment of n e w programs or futu r e ma r keting e f f ort s , or r educe or discontinue our oper a tions. A n y of these ev ents could significantly harm our busines s , financi a l condition, and prospects.

 

Our business depends on custome r s inc r easing their use of our services and/or platform, and w e may experience loss of custome r s or decline in their use of our services and/or platform.

 

Our a bility to g r o w and gene r a te rev e n ue depend s , in part, on our a bility to maintain and g r o w our re l a tionships with e xisting customers and convince them to inc r ease their usage of our pl a t f orm. If our customers do not inc r ease their use of our pl a t f orm, then our rev e n ue may not g r o w and our r esults of ope r a tions may be harmed. It is di f ficult to accu r a t e ly p r edict customers’ usage l eve ls and the loss of customers or r eductions in their usage l eve ls may ha v e a neg a t iv e impact on our busines s , r esults of ope r a tions, and financi a l condition. If a significant n umber of customers cease using, or r educe their usage o f , our pl a t f orm, then w e may be r equi r ed to spend significantly mo r e on s a les and ma r k eting than w e cur r ently plan to spend in o r der to maintain or inc r ease rev e n ue f r om customers. These addition a l e xpenditu r es could ad v ers e ly a f fect our busines s , r esults of ope r a tions and financi a l condition. Most of our customers do not ha v e long-term cont r actu a l financi a l commitments to us and, the r efo r e , most of our customers may r educe or cease their use of our pl a tform a t any time without pen a lty or termin a tion cha r ges.

 

T he ma r k et in w hich w e ope r ate is dominated b y la rg e , w e ll esta b lished competito r s .

 

The CRM industry is cur r ent l y domin a ted b y S a les f o r c e .com, Inc., Mic r osoft Corpo r a tion, O r acle Corpo r a tion, and SAP SE, w hich collect ive l y account f or mo r e than 40% of industry s a les. The CRM a pplic a tions o f fe r ed b y these companies, as we ll as b y ma n y others, ha v e n ume r ous di f fe r ences in fe a tu r e sets and function a lity, b ut a ll sha r e certain basic a ttri b utes. Most of them w e r e designed be f o r e the a d v ent and p r olife r a tion of mobile phones, soci a l media, and the technol o gy b e hind the cur r ent ubiquity of video o v er the internet and mo r e r ecent l y on mobile d e vices. W hile ma n y of our competitors ha v e a ttempted to incorpo r a te video c a p a bilities into their r espect iv e CRM pl a t f o r m s , none of them utilizes inte r act iv e video technol o gy similar to th a t of noti f iCRM. In addition, noti f iCRM videos a r e vi e w a b le on both mobile and desktop d e vices r ega r dless of ope r a ting system and without the need to download a p r oprietary pl a y er or p r o g r am.

 

T he ma r k et in w hich w e ope r ate is intens e ly competiti v e and, if w e do not compete effecti ve l y , our ope r ating r esults could be harmed.

 

The ma r k et f or CRM a pplic a tions is intens e l y competit iv e and r a pid l y changing, barriers to entry a r e re l a t ive l y low, ma n y of our competitors a r e larger and ha v e mo r e r esou r ces than w e d o , and with the int r oduction of n e w technol o gies and ma r k et ent r ants, w e e xpect competition to intensify in the futu r e. If w e fail to compete e f fect ive l y, our ope r a ting r esults will be harmed.

 

Notwithstanding the competit iv e edge th a t w e b e li ev e noti f iCRM p ro vide s , ma n y of our competitors enj o y other substanti a l competit iv e a dv ant a ges, such as g r e a ter name r ec o gnition, longer ope r a ting historie s , and larger ma r k eting b udget s , as we ll as substantial l y g r e a ter f inancial, technical, and other r esou r ces. In addition, ma n y of our potential competitors ha v e esta b lished ma r k eting re l a tionships and access to larger customer base s , and ha v e major distri b ution a g r eements with consultant s , system integ r a tors, and r es e llers.

 

As a result, our competitors may be able to respond more effectively than we can to new or changing opportunities, technol o gie s , standa r ds, or customer r equi r ements. Furthe r mo r e, because of these a dv ant a ges, ev en if our service is mo r e e f fect iv e than the p r oducts th a t our competitors o f fer, potential customers might accept competit iv e p r oducts and services in lieu of pu r chasing our service. For all of these r eason s , w e m a y not be a b le to compete successful l y a gainst our cur r ent and futu r e competitors.

 

6
 

 

W e may not be a b le to inc r ease the number of our partne r s or g ro w the r e v enues r ecei v ed f r om our cur r ent partne r ship r e lationship s .

 

The di f fe r ences bet w een noti f iCRM and ma n y of the la r ge r , mo r e est a b lished providers of CRM softwa r e m a y ser v e to highlight the r easons w e ha v e chosen not only to d eve lop our o wn standalone SaaS cloud CRM pl a t f o r m, but a lso to pe r mit incorpor a tion and integr a tion of our interact iv e video technology into thi r d-party pl a t f o r ms. The enterprises th a t o wn or control those pl a t f o r ms can then o f fer noti f iCRM to their clients and customers as an upgrade fe a tu r e. The implement a tion of this str a tegy is e videnced by the partnerships w e cur r ently enjoy with Oracle/NetSuite and Ma r k eto. The r e can be no assurance, h o wev e r , th a t those re l a tionships will r esult in m a teri a l rev enues f or us or th a t w e will be a b le to gener a te a n y other meaningful partnerships.

 

W e may not be a b le to de ve lop enhancements and new featu r es to our e xisting service or accepta b le new services that k eep pace with technol o gical de ve lopment s .

 

E v en though w e b e li ev e th a t our noti f iCRM is cur r ent l y unsurpassed in its fe a tu r es and ease of us e , technol o gy in v aria b l y a dv ances. If w e a r e una b le to d eve lop enhancements to, and n e w fe a tu r es for, noti f iCRM th a t keep pace with r a pid technol o gical d eve lopment s , our b usiness will be ha r med. The success of enhancement s , n e w fe a tu r e s , and services depends on s ev e r al factor s , including the tim e l y completion, introduction, and ma r ket acceptance of the fe a tu r e or edition. Failu r e in this r ega r d may signi f icant l y impair our rev enue growth. We may not be successful in either d eve loping these modi f ic a tions and enhancements or in tim e l y bringing them to ma r ket a t a competit iv e price or a t all. Furthe r mo r e , notwithstanding th a t noti f iCRM videos a r e cur r ent l y vi e w a b le on both mobile and desktop d e vices r ega r dless of ope r a ting system, potential uncertainties about the timing and n a tu r e of n e w netwo r k pl a tfo r ms or technol o gie s , or modi f ic a tions to e xisting pl a tfo r ms or technol o gie s , could inc r ease our r esea r ch and d eve lopment e xpenses. Any failu r e of our service to ope r a te e f fect ive l y with futu r e netwo r k pl a tfo r ms and technol o gies could r educe the demand for our servic e , r esult in customer diss a tisfaction, and ha r m our b usiness.

 

Our ability to d e li v er our services is dependent on the maintenance of the inf r astructu r e of the Internet b y thi r d partie s .

 

The Internet s inf r astructu r e is comprised of ma n y di f fe r ent net w o r ks and services th a t, by design, a r e highly f r agmented and distributed. This inf r astructu r e is run by a series of independent, thi r d-party organiz a tions th a t w o r k together to p ro vide the inf r astructu r e and supporting services of the Internet under the g o v ernance of the Internet Corpo r a tion f or Assigned Numbers and Names (ICANN) and the Internet Assigned Numbers Authority (IANA), which is now re l a ted to ICANN.

 

The Internet has e xperienced, and will conti n ue to e xperienc e , a v ariety of out a ges and other d e lays due to dam a ges to portions of its infrastructu r e, denial-of-service a ttack s , or re l a ted cyber incidents. These scenarios a r e not under our cont r ol and could r educe the a v ailability of the Internet to us or our customers for d e l iv ery of our services. Any r esulting interruptions in our services or the ability of our customers to access our services could r esult in a loss of potential or e xisting customers and harm our b usiness.

 

7
 

 

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

 

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, and personally identifiable information of our customers and employees. The secure processing, maintenance, and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost, or stolen. Advanced attacks are multi-staged, unfolding over time, and utilize a range of attack vectors with military-grade cyber weapons and proven techniques such as spear phishing and social engineering, leaving organizations and users at high risk of being compromised. The vast majority of data breaches, whether conducted by a cyber attacker from inside or outside of the organization, involve the misappropriation of digital identities and user credentials. These credentials are used to gain legitimate access to sensitive systems and high-value personal and corporate data. Many large, well-known organizations have been subject to cyber-attacks that exploited the identity vector, demonstrating that even organizations with significant resources and security expertise have challenges securing their identities. Any such access, disclosure, or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, a disruption of our operations, damage to our reputation, or a loss of confidence in our business, any of which could adversely affect our business, revenues, and competitive position.

 

Organizations face growing regulatory and compliance requirements.

 

New and evolving regulations and compliance standards for cyber security, data protection, privacy, and internal IT controls are often created in response to the tide of cyber-attacks and will increasingly impact organizations. Existing regulatory standards require that organizations implement internal controls for user access to applications and data. In addition, data breaches are driving a new wave of regulation, such as the European Union’s General Data Protection Regulation, with stricter enforcement and higher penalties. Regulatory and policy-driven obligations require expensive and time-consuming compliance measures. The fear of non-compliance, failed audits, and material findings has pushed organizations to spend more to ensure they are in compliance, often resulting in costly, one-off implementations to mitigate potential fines or reputational damage. The high costs associated with failing to meet regulatory requirements, combined with the risk of fallout from security breaches, has elevated this topic from the IT organization to the executive and board level.

 

Our business is highly competitive and any failure to adapt to changing consumer preferences may adversely affect our business and financial results.

 

We operate in a highly competitive, consumer-driven, and rapidly changing environment. Our success will, to a large extent, be dependent on our ability to acquire, develop, adopt, upgrade, and exploit new and existing technologies to address consumers’ changing demands and distinguish our services from those of our competitors. We may not be able to accurately predict technological trends or the success of new products and services. If we choose technologies or equipment that are less effective, cost-efficient, or attractive to our customers than those chosen by our competitors, or if we offer services that fail to appeal to consumers, are not available at competitive prices, or that do not function as expected, our competitive position could deteriorate, and our business and financial results could suffer.

 

The ability of our competitors to introduce new technologies, products, and services more quickly than we do may adversely affect our competitive position. Furthermore, advances in technology, decreases in the cost of existing technologies, or changes in competitors’ product and service offerings may require us in the future to make additional research and development expenditures or to offer products and services at no additional charge or at a lower price. In addition, the uncertainty of our ability, and the costs, to obtain intellectual property rights from third parties could impact our ability to respond to technological advances in a timely and effective manner. If we are unable to successfully compete with existing companies and new entrants to the markets we compete in, our business, results of operations, and financial condition could be adversely affected.

 

We expect that the success of our business will be highly correlated to general economic conditions.

 

We expect that demand for our products and services will be highly correlated with general economic conditions, as we expect a substantial portion of our revenue will be derived from discretionary spending by individuals, which typically falls during times of economic instability. Declines in economic conditions in the United States or in other countries in which we may operate may adversely impact our financial results. Because such declines in demand are difficult to predict, we or our industry may have increased excess capacity as a result. An increase in excess capacity may result in declines in prices for our products and services. Our ability to grow or maintain our business may be adversely affected by sustained economic weakness and uncertainty, including the effect of wavering consumer confidence, high unemployment, and other factors. The inability to grow or maintain our business would adversely affect our business, financial conditions, and results of operations, and thereby an investment in our Common Stock.

 

8
 

 

We do not currently have any patents to protect our technologies and thus, we may not gain market share to our competitors and be unable to operate our business profitably.

 

Our success depends significantly on our ability to protect our rights to the technologies used in our products. We currently do not have pending patent applications and we rely on copyright, trade secrets, and nondisclosure, confidentiality and other contractual arrangements to protect our technology and intellectual property rights. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or maintain any competitive advantage. In addition, we cannot be assured that any future pending patent applications will result in the issuance of a patent to us or that we will have the financial or operational resources successfully to prosecute any patents that we may undertake. The U.S. Patent and Trademark Office, or “PTO”, may deny or require significant narrowing of claims in future patent applications, and patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection or be issued in a form that is advantageous to us. We could also incur substantial costs in proceedings before the PTO. Our pending patent applications may be challenged, which could limit our ability to stop competitors from marketing related technologies. There can also be no assurance that competitors will not be able to design around any patents that may be issued to us in the future. In addition, we rely on unpatented proprietary technology. We cannot assure you that we can meaningfully protect all our rights in our unpatented proprietary technology or that others will not independently develop substantially equivalent proprietary products or processes or otherwise gain access to our unpatented proprietary technology.

 

We seek to protect our know-how and other unpatented proprietary technology with confidentiality agreements and intellectual property assignment agreements with our employees, our partners, independent distributors, and consultants. However, such agreements may not be enforceable or may not provide meaningful protection for our proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements or in the event that our competitors discover or independently develop similar or identical designs or other proprietary information. We currently do not utilize any registered or common law trademarks to protect or brand the name of any of our products.

 

Although we believe that we have a proprietary platform for our technologies and products, we cannot determine with certainty whether any existing third party patents or the issuance of any third party patents would require us to alter our technology, obtain licenses or cease certain activities. We may become subject to claims by third parties that our technology infringes their intellectual property rights.”

 

We do not own any patents relating to our notifiCRM platform.

 

We do not currently own any domestic or foreign patents relating to our notifiCRM platform, nor do we currently have any licenses to use any third-party intellectual property. As such, if we are not successful in obtaining intellectual property rights covering our products, or obtaining licenses to use a third-party’s intellectual property on reasonable and acceptable terms, it could result in lawsuits against us for trademark and/or intellectual property infringement, and we may not be able to counterclaim with our own infringement allegations. Any such infringement, litigation, or adverse proceeding could result in substantial costs and diversion of resources and could seriously harm our business operations or results of operations.

 

If we are unable to protect and enforce our intellectual property rights, we may be unable to compete effectively.

 

We believe that our intellectual property rights are important to our success and our competitive position, and we rely on a combination of copyright and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Although we have devoted substantial resources to the establishment and protection of our intellectual property rights, the actions taken by us may be inadequate to prevent imitation or improper use of our products and services by others or to prevent others from claiming violations of their intellectual property rights by us. We also rely on confidentiality procedures and contractual provisions with our employees, consultants, and corporate partners to protect our proprietary rights, but we cannot assure the compliance by such parties with their confidentiality obligations, which could be very time consuming and expensive to enforce.

 

Legal challenges to our intellectual property rights could adversely affect our financial results and operations.

 

We rely on licenses and other agreements in respect of our intellectual property with our partners and other parties and other intellectual property rights to conduct our operations. Legal challenges to our intellectual property rights and claims of intellectual property infringement by third parties could require that we enter into royalty or licensing agreements on unfavorable terms, incur substantial monetary liability, or be enjoined preliminarily or permanently from further use of the intellectual property in question or from the continuation of our businesses as currently conducted. We may need to change our business practices if any of these events occur, which may limit our ability to compete effectively and could have an adverse effect on our results of operations. Even if we believe any such challenges or claims are without merit, they can be time-consuming and costly to defend and divert management’s attention and resources away from our business.

 

Our success depends, in part, on the capacity, reliability, and security of our information technology hardware and software infrastructure, as well as our ability to adapt and expand our infrastructure.

 

The capacity, reliability, and security of our information technology hardware and software infrastructure are important to the operation of our current business, which would suffer in the event of system failures. Likewise, our ability to expand and update our information technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new service offering initiatives. Our inability to expand or upgrade our technology infrastructure could have adverse consequences, including the delayed provision of services or implementation of new service offerings, and the diversion of development resources. We rely on third parties for various aspects of our hardware and software infrastructure. Third parties may experience errors or disruptions that could adversely impact us and over which we may have limited control. Interruption and/or failure of any of these systems could disrupt our operations and damage our reputation, thus adversely impacting our ability to provide our services, retain our current users, and attract new users. In addition, our information technology hardware and software infrastructure may be vulnerable to unauthorized access, misuse, computer viruses, or other events that could have a security impact. If one or more of such events occur, our customer and other information processed and stored in, and transmitted through, our information technology hardware and software infrastructure, or otherwise, could be compromised, which could result in significant losses or reputational damage. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses, any of which could substantially harm our business and our results of operations.

 

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We are dependent on third parties to, among other things, maintain our servers, provide the bandwidth necessary to transmit content, and utilize the content derived therefrom for the potential generation of revenues.

 

We depend on third-party service providers, suppliers, and licensors to supply some of the services, hardware, software, and operational support necessary to provide some of our products and services. Some of these third parties do not have a long operating history or may not be able to continue to supply the equipment and services we desire in the future. If demand exceeds these vendors’ capacity, or if these vendors experience operating or financial difficulties or are otherwise unable to provide the equipment or services we need in a timely manner, at our specifications and at reasonable prices, our ability to provide some products and services might be materially adversely affected, or the need to procure or develop alternative sources of the affected materials or services might delay our ability to serve our users. These events could materially and adversely affect our ability to retain and attract users, and have a material negative impact on our operations, business, financial results, and financial condition.

 

We may not be able to find suitable software developers at an acceptable cost.

 

We currently rely on certain key suppliers and vendors in the coding and maintenance of our software. We will continue to require such expertise in the future. Due to the current demand for skilled software developers, we run the risk of not being able to find or retain suitable and qualified personnel at an acceptable price. Without these developers, we may not be able to further develop and maintain our software, which is the most important aspect of our business development

 

Our business may be affected by changing consumer preferences or by failure of the public to accept any new product offerings we may pursue.

 

The production and distribution of entertainment content is an inherently risky business because the revenue that may be derived depends primarily on the content’s acceptance by the public, which is difficult to predict. Consumer and audience tastes change frequently, and it is a challenge to anticipate what offerings will be successful at a certain point in time. In addition, competing entertainment content, the availability of alternative forms of entertainment and leisure time activities, general economic conditions, piracy, and increasing digital and on-demand distribution offerings may also affect the audience for our content. Our expenses may increase as we invest in new programming ideas, and there is no guarantee that the new programming will be successful or generate sufficient revenue to recoup the expenditures.

 

Our future success depends on our key executive officers and our ability to attract, retain, and motivate qualified personnel.

 

Our future success largely depends upon the continued services of our executive officers and management team, especially our Chief Executive Officer and President, Mr. Rory J. Cutaia. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Additionally, we may incur additional expenses to recruit and retain new executive officers. If any of our executive officers joins a competitor or forms a competing company, we may lose some or all of our customers. Finally, we do not maintain “key person” life insurance on any of our executive officers. Because of these factors, the loss of the services of any of these key persons could adversely affect our business, financial condition, and results of operations, and thereby an investment in our stock.

 

Our continuing ability to attract and retain highly qualified personnel will also be critical to our success because we will need to hire and retain additional personnel as our business grows. There can be no assurance that we will be able to attract or retain highly qualified personnel. We face significant competition for skilled personnel in our industries. This competition may make it more difficult and expensive to attract, hire, and retain qualified managers and employees. Because of these factors, we may not be able to effectively manage or grow our business, which could adversely affect our financial condition or business. As a result, the value of your investment could be significantly reduced or completely lost.

 

Risks Related to an Investment in Our Securities

 

Our board of directors is authorized to issue additional shares of our Common Stock that would dilute existing stockholders.

 

We are currently authorized to issue up to 200,000,000 shares of Common Stock and 15,000,000 shares of preferred stock, par value $0.0001 per share, of which 153,698,043 shares of Common Stock and no shares of preferred stock are currently issued and outstanding as of August 14, 2018. The number of shares of Common Stock issued and outstanding as of August 14, 2018 excludes 24,534,605 shares of Common Stock issuable upon exercise of stock options, 5,154,047 shares of Common Stock reserved for issuance under the Plan, 31,854,113 shares of Common Stock issuable upon the exercise of all outstanding warrants, and 11,264,826 shares of Common Stock issuable upon the conversion of all outstanding convertible notes. We expect to seek additional financing in order to provide working capital to our business. Our board of directors has the power to issue any or all of such authorized but unissued shares at any price they consider sufficient, without stockholder approval. The issuance of additional shares of Common Stock in the future will reduce the proportionate ownership and voting power of current stockholders, and may negatively impact the market price of our Common Stock.

 

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

 

The initial public offering price of our Common Stock will be substantially higher than the pro forma net tangible book value per share of our Common Stock outstanding immediately following the completion of this offering. Therefore, if you purchase shares of Common Stock in this offering at an assumed public offering price of $________ per share, you will experience immediate dilution of $______ per share, the difference between the price per share you pay for our Common Stock and its pro forma net tangible book value per share as of ______, 2018, after giving effect to the issuance of shares of Common Stock in this offering. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased shares of Common Stock.

 

In addition, as of August 14, 2018, we have issued 31,854,113 shares of Common Stock issuable upon the exercise of all outstanding warrants, 11,264,826 shares of Common Stock issuable upon the conversion of all outstanding convertible notes, and 24,534,605 shares of Common Stock issuable upon the exercise of all outstanding stock options. The exercise or conversion prices to acquire Common Stock upon the exercise or conversion of warrants, notes, or options, are at prices significantly below the public offering price. To the extent outstanding warrants, options, or notes are ultimately exercised or converted, there will be further dilution to investors purchasing our Common Stock in this offering. In addition, if we issue additional equity securities, there is a vesting of employee stock grants, or there are any exercises of future stock options, you will experience additional dilution. Our board of directors has the power to issue any or all of such authorized but unissued shares at any price they consider sufficient, without stockholder approval. The issuance of additional shares of Common Stock in the future will reduce the proportionate ownership and voting power of current stockholders, and may negatively impact the market price of our Common Stock.

 

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We may issue additional securities with rights superior to those of our Common Stock, which could materially limit the ownership rights of our stockholders.

 

We may offer additional debt or equity securities in private and/or public offerings in order to raise working capital or to refinance our debt. Our board of directors has the right to determine the terms and rights of any debt securities and preferred stock without obtaining the approval of our stockholders. It is possible that any debt securities or preferred stock that we sell would have terms and rights superior to those of our Common Stock and may be convertible into shares of our Common Stock. Any sale of securities could adversely affect the interests or voting rights of the holders of our Common Stock, result in substantial dilution to existing stockholders, or adversely affect the market price of our Common Stock.

 

Trading on the OTCQB may be volatile and sporadic, which could depress the market price of our Common Stock and make it difficult for our stockholders to resell their shares.

 

Our Common Stock is quoted on the OTCQB. Trading in stock quoted on over-the-counter markets is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our Common Stock for reasons unrelated to operating performance. Moreover, the OTCQB is not a stock exchange, and trading of securities on this market is often more sporadic than the trading of securities listed on a national securities exchange like NASDAQ or the NYSE. Accordingly, stockholders may have difficulty reselling any of our shares.

 

If NASDAQ approves our application to list our Common Stock and we are not able to comply with the applicable continued listing requirements or standards of NASDAQ, NASDAQ could delist our Common Stock.

 

In conjunction with this offering, we intend to apply to list our Common Stock on NASDAQ. There is no assurance that our Common Stock will ever be quoted on NASDAQ. Should our Common Stock be listed on NASDAQ, in order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply with such applicable listing standards.

 

The market price of our Common Stock has been, and may continue to be, subject to substantial volatility.

 

The market price of our Common Stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including;

 

  volatility in the trading markets generally and in our particular market segment;
     
  limited trading of our Common Stock;
     
  actual or anticipated fluctuations in our results of operations;
     
  the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;
     
  announcements regarding our business or the business of our customers or competitors;
     
  changes in accounting standards, policies, guidelines, interpretations, or principles;
     
  actual or anticipated developments in our business or our competitors’ businesses or the competitive landscape generally;
     
  developments or disputes concerning our intellectual property or our offerings, or third-party proprietary rights;
     
  announced or completed acquisitions of businesses or technologies by us or our competitors;
     
  new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
     
  any major change in our board of directors or management;

 

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  sales of shares of our Common Stock by us or by our stockholders;
     
  lawsuits threatened or filed against us; and
     
  other events or factors, including those resulting from war, incidents of terrorism, or responses to these events.

 

Statements of, or changes in, opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the markets in which we operate or expect to operate could have an adverse effect on the market price of our Common Stock. In addition, the stock market as a whole, as well as our particular market segment, have from time to time experienced extreme price and volume fluctuations, which may affect the market price for the securities of many companies, and which often have appeared unrelated to the operating performance of such companies. Any of these factors could negatively affect our stockholders’ ability to sell their shares of Common Stock at the time and price they desire.

 

A decline in the price of our Common Stock could affect our ability to raise further working capital, which could adversely impact our ability to continue our operations.

 

A prolonged decline in the price of our Common Stock could result in a reduction in the liquidity of our Common Stock and a reduction in our ability to raise capital. We may attempt to acquire a significant portion of the funds we need in order to conduct our planned operations through the sale of equity securities; thus, a decline in the price of our Common Stock could be detrimental to our liquidity and our operations because the decline may adversely affect investors’ desire to invest in our securities. If we are unable to raise the funds we require for all of our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As a result, our business may suffer, and we may be forced to reduce or discontinue operations. We also might not be able to meet our financial obligations if we cannot raise enough funds through the sale of our Common Stock and we may be forced to reduce or discontinue operations.

 

Because we do not intend to pay any cash dividends on our shares of Common Stock in the near future, our stockholders will not be able to receive a return on their shares unless they sell them.

 

We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our Common Stock in the near future. The declaration, payment, and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of operations, cash flows, and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless our board of directors determines to pay dividends, our stockholders will be required to look to appreciation of our Common Stock to realize a gain on their investment. There can be no assurance that this appreciation will occur.

 

If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information, and have a negative effect on the market price for shares of our Common Stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

As a public company, we have significant requirements for enhanced financial reporting and internal controls. We are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and economic and regulatory environments, and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.

 

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We cannot assure you that we will, in the future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue to grow. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information, and have a negative effect on the market price for shares of our Common Stock.

 

We lack sufficient internal controls over financial reporting and implementing acceptable internal controls will be difficult with only two officers and two directors, one of which also serves as our Chief Executive Officer, which will make it difficult to ensure that information required to be disclosed in our reports filed and submitted under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported as and when required.

 

While we have recently identified and extended offers to an experienced controller, as well as to three additional individuals to serve as independent members of our board of directors, one of whom is qualified to chair our audit committee, as of the date of this filing, we currently lack internal controls over our financial reporting and it may be difficult to implement such controls at this time with only two officers and two directors, one of which also serves as our Chief Executive Officer. The lack of such controls makes it difficult to ensure that information required to be disclosed in our reports filed and submitted under the Exchange Act is recorded, processed, summarized, and reported as and when required.

 

The reason we believe that our disclosure controls and procedures are not effective is because:

 

  there is a lack of segregation of duties necessary for a good system of internal control due to insufficient accounting staff due to our size;
     
  the staffing of our accounting department is weak due to the lack of qualifications and training, and the lack of formal review process;
     
  our control environment is weak due to the lack of an effective risk assessment process, the lack of internal audit function and insufficient documentation and communication of the accounting policies; and
     
  failure in the operating effectiveness over controls related to recording revenue.

 

We cannot assure you that we will be able to develop and implement the necessary internal controls over financial reporting. The absence of such internal controls may inhibit investors from purchasing our shares and may make it more difficult for us to raise debt or equity financing.

 

Because our directors and executive officers are among our largest stockholders, they can exert significant control over our business and affairs and have actual or potential interests that may depart from those of investors.

 

Certain of our executive officers and directors own a significant percentage of our outstanding capital stock. We estimate that our executive officers and directors and their respective affiliates beneficially own approximately 36.4% of our outstanding voting stock, on a fully-diluted basis, as of August 14, 2018, and, following the completion of this offering, such persons would beneficially own approximately _______% of our outstanding voting stock, on a fully-diluted basis, assuming that we issued _______shares in this offering and that the number of shares outstanding as of August 14, 2018 remains unchanged. The holdings of our directors and executive officers may increase further in the future upon vesting or other maturation of exercise rights under any of the options or warrants they may hold or in the future be granted, or if they otherwise acquire additional shares of our Common Stock. The interests of such persons may differ from the interests of our other stockholders. As a result, in addition to their board seats and offices, such persons will have significant influence and control over all corporate actions requiring stockholder approval, irrespective of how our other stockholders may vote, including the following actions:

 

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  to elect or defeat the election of our directors;
     
  to amend or prevent an amendment to our Articles of Incorporation (“Articles of Incorporation”) or Bylaws (“Bylaws”);
     
  to effect or prevent a merger, sale of assets, or other corporate transaction; and
     
  to control the outcome of any other matter submitted to our stockholders for a vote.

 

This concentration of ownership by itself may have the effect of impeding a merger, consolidation, takeover, or other business consolidation, or discouraging a potential acquirer from making a tender offer for our Common Stock, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.

 

Our Common Stock is categorized as “penny stock,” which may make it more difficult for investors to sell their shares of Common Stock due to suitability requirements.

 

Our Common Stock is categorized as “penny stock.” The SEC adopted Rule 15g-9, which generally defines “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. The price of our Common Stock is significantly less than $5.00 per share, and is therefore considered “penny stock.” This designation imposes additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer buying our securities, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability and/or willingness of broker-dealers to trade our securities, either directly or on behalf of their clients, may discourage potential investor’s from purchasing our securities, or may adversely affect the ability of our stockholders to sell their shares.

 

The Financial Industry Regulatory Authority, Inc. (“FINRA”), has adopted sales practice requirements that may also limit a stockholder’s ability to buy and sell our Common Stock, which could depress the price of our Common Stock.

 

In addition to the “penny stock” rules described above, FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives, and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. Thus, the FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our Common Stock, which may limit your ability to buy and sell our Common Stock, have an adverse effect on the market for our shares, and thereby depress our price per share of Common Stock.

 

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The elimination of monetary liability against our directors, officers, and employees under Nevada law and the existence of indemnification rights for our obligations to our directors, officers, and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers, and employees.

 

Our Articles of Incorporation and Bylaws contain provisions permitting us to eliminate the personal liability of our directors and officers to us and our stockholders for damages for the breach of a fiduciary duty as a director or officer to the extent provided by Nevada law. We may also have contractual indemnification obligations under any future employment agreements with our officers. The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and the resulting costs may also discourage us from bringing a lawsuit against directors and officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit us and our stockholders.

 

Anti-takeover effects of certain provisions of Nevada state law hinder a potential takeover of us.

 

Nevada has a business combination law that prohibits certain business combinations between Nevada corporations and “interested stockholders” for three years after an “interested stockholder” first becomes an “interested stockholder,” unless the corporation’s board of directors approves the combination in advance. For purposes of Nevada law, an “interested stockholder” is any person who is (i) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares of the corporation or (ii) an affiliate or associate of the corporation and at any time within the three previous years was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition of the term “business combination” is sufficiently broad to cover virtually any kind of transaction that would allow a potential acquirer to use the corporation’s assets to finance the acquisition or otherwise to benefit its own interests rather than the interests of the corporation and its other stockholders.

 

The effect of Nevada’s business combination law is to potentially discourage parties interested in taken control of us from doing so if it cannot obtain the approval of our board of directors. Both of these provisions could limit the price investors would be willing to pay in the future for shares of our Common Stock.

 

Risks Related to the Proposed Sound Concepts Acquisition

 

Cash expenditures associated with the Sound Concepts Acquisition may create significant liquidity and cash flow risks for us.

 

We expect to incur significant transaction costs and some integration costs in connection with the proposed Sound Concepts Acquisition. While we have assumed that this level of expense will be incurred, there are many factors beyond our control that could affect the total amount or the timing of the Sound Concepts Acquisition and integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. To the extent these Sound Concepts Acquisition and integration expenses are higher than anticipated, we may experience liquidity or cash flow issues.

 

Failure to complete the proposed Sound Concepts Acquisition could materially and adversely affect our results of operations and the market price of our Common Stock.

 

Our consummation of the proposed Sound Concepts Acquisition is subject to many contingences and conditions, including the preparation of audited and unaudited financial statements for Sound Concepts, the negotiation, execution, and delivery of the definitive agreements necessary to consummate the Sound Concepts Acquisition, and raising the financing required to pay the Acquisition Cash Payment. We cannot assure you that we will be able to successfully consummate the proposed Sound Concepts Acquisition as currently contemplated or at all. Risks related to the failure of the proposed Sound Concepts Acquisition to be consummated include, but are not limited to, the following:

 

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  we would not realize any of the potential benefits of the transaction, which could have a negative effect on our stock price;
     
  we expect to incur significant fees and expenses regardless of whether the proposed Sound Concepts Acquisition is consummated, including due diligence fees and expenses, accounting fees in connection with the preparation of Sound Concepts’ financial statements, and legal fees and expenses;
     
  if and when we enter into a definitive agreement with Sound Concepts, we may become liable for significant transaction costs;
     
  we may experience negative reactions to the proposed Sound Concepts Acquisition from customers, clients, business partners, lenders, and employees;
     
  the trading price of our Common Stock may decline to the extent that the current market price of our stock reflects a market assumption that the Sound Concepts Acquisition will be completed; and
     
  the attention of our management may be diverted to the Sound Concepts Acquisition rather than to our own operations and the pursuit of other opportunities that could have been beneficial to us.
     

The occurrence of any of these events individually or in combination could materially and adversely affect our results of operations and the market price of our common stock.

 

If the Sound Concepts Acquisition is consummated, the combined company may not perform as we or the market expects, which could have an adverse effect on the price of our Common Stock.

 

Even if the Sound Concepts Acquisition is consummated, the combined company may not perform as we or the market expects. Risks associated with the combined company following the Sound Concepts Acquisition include:

 

  integrating businesses is a difficult, expensive, and time-consuming process, and the failure to integrate successfully our businesses with the business of Sound Concepts in the expected time frame would adversely affect our financial condition and results of operation;
     
  the Sound Concepts Acquisition will materially increase the size of our operations, and if we are not able to manage our expanded operations effectively, our Common Stock price may be adversely affected;
     
  it is possible that our key employees or key employees of Sound Concepts might decide not to remain with us after the Sound Concepts Acquisition is completed, and the loss of such personnel could have a material adverse effect on the financial condition, results of operations, and growth prospects of the combined company;
     
  the success of the combined company will also depend upon relationships with third parties and Sound Concepts’ or our pre-existing customers, which relationships may be affected by customer preferences or public attitudes about the Sound Concepts Acquisition. Any adverse changes in these relationships could adversely affect the combined company’s business, financial condition, and results of operations; and
     
  if government agencies or regulatory bodies impose requirements, limitations, costs, divestitures, or restrictions on the consummation of the Sound Concepts Acquisition, the combined company’s ability to realize the anticipated benefits of the Sound Concepts Acquisition may be impaired.

 

The obligations and liabilities of Sound Concepts, some of which may be unanticipated or unknown, may be greater than we have anticipated, which may diminish the value of Sound Concepts to us.

 

Sound Concepts’ obligations and liabilities, some of which may not have been disclosed to us or may not be reflected or reserved for in Sound Concepts’ historical financial statements, may be greater than we have anticipated. The obligations and liabilities of Sound Concepts could have a material adverse effect on Sound Concepts’ business or Sound Concepts’ value to us or on our business, financial condition, or results of operations. Even in cases where we are able to obtain indemnification, we may discover liabilities greater than the contractual limits or the financial resources of the indemnifying party. In the event that we are responsible for liabilities substantially in excess of any amounts recovered through rights to indemnification or alternative remedies that might be available to us, or any applicable insurance, we could suffer severe consequences that would substantially reduce our earnings and cash flows or otherwise materially and adversely affect our business, financial condition, or results of operations.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are not historical facts but rather are plans and predictions based on current expectations, estimates, and projections about our industry, our beliefs, and assumptions. We use words such as “may,” “will,” “could,” “should,” “anticipate,” “expect,” “intend,” “project,” “plan,” “believe,” “seek,” “estimate,” “assume,” and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in the section above entitled “Risk Factors.” You should not place undue reliance on these forward-looking statements because the matters they describe are subject to certain risks, uncertainties, and assumptions that are difficult to predict. Our forward-looking statements are based on the information currently available to us and speak only as of the date on the cover of this prospectus. Over time, our actual results, performance, or achievements may differ from those expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our security holders. Except as required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. We have identified some of the important factors that could cause future events to differ from our current expectations and they are described in this prospectus under the captions “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and as well as in our most recent Annual Report on Form 10-K, Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, and in other documents that we may file with the SEC, all of which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this prospectus.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds from our issuance and sale of shares of our Common Stock in this offering will be approximately $       million, or approximately $       million if the Underwriter exercises its over-allotment option in full, assuming an offering price of $      per share, the last reported sale price of our Common Stock as quoted on the OTCQB on      , 2018, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

 

A $      increase or decrease in the assumed offering price of $      per share of Common Stock (which was the last reported sale price per share of our Common Stock on      , 2018) would increase or decrease, respectively, the net proceeds to us by approximately $      . A increase or decrease in the assumed number of shares sold in this offering would increase or decrease, respectively, the net proceeds to us by approximately $      .

 

We currently intend to use the net proceeds from the sale of the securities under this prospectus for working capital and general corporate purposes. In the event we enter into a definitive agreement with Sound Concepts with respect to the proposed Sound Concepts Acquisition, which event is currently contemplated by the letter of intent, a material portion of the net proceeds from the sale of the securities under this prospectus may be used to provide funds for all, or a portion of, the Acquisition Cash Payment, as well as to pay transaction expenses and integration costs in connection with the Sound Concepts Acquisition and related transactions. For additional information regarding the proposed Sound Concepts Acquisition and terms of the non-binding letter of intent, see “The Proposed Sound Concepts Acquisition” below.

 

Our expected use of net proceeds from this offering represents our current intentions based upon our present plans and business condition, which could change in the future as our plans and business conditions evolve. As of the date of this prospectus, we cannot specify with certainty all of the particular uses of the proceeds from this offering. Accordingly, we will retain broad discretion over the use of such proceeds.

 

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MARKET PRICE AND DIVIDEND INFORMATION

 

Market Information

 

Our Common Stock is quoted on the OTCQB under the symbol “FUSZ.”

 

Set forth below are the range of high and low closing bid prices for the periods indicated as reported by the OTC Markets Group Inc. The market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commissions and may not necessarily represent actual transactions.

 

Quarter Ended   High Closing Bid Price Per Share     Low Closing Bid Price Per Share  
September 30, 2018   $ 0.78 (1)   $ 0.482 (1)
June 30, 2018   $ 3.04     $ 0.45  
March 31, 2018   $ 2.10     $ 0.08  
December 31, 2017   $ 0.14     $ 0.08  
September 30, 2017   $ 0.23     $ 0.07  
June 30, 2017   $ 0.51     $ 0.09  
March 31, 2017   $ 0.16     $ 0.07  
December 31, 2016   $ 0.17     $ 0.05  
September 30, 2016   $ 0.20     $ 0.08  
June 30, 2016   $ 0.18     $ 0.05  
March 31, 2016   $ 0.10     $ 0.03  

 

 

(1) Through August 13, 2018

 

On August 13, 2018, the closing bid price of our Common Stock as reported by the OTCQB was $0.5459 per share. As of August 14, 2018, there were approximately 84 holders of record of our Common Stock. As of such date, 153,698,043 shares of our Common Stock were issued and outstanding.

 

Dividends

 

We have never declared or paid dividends. We do not intend to pay cash dividends on our Common Stock for the foreseeable future, but currently intend to retain any future earnings to fund the development and growth of our business. The payment of dividends, if any, on our Common Stock will rest solely within the discretion of our board of directors and will depend, among other things, upon our earnings, capital requirements, financial condition, and other relevant factors. The Nevada Revised Statutes (the “NRS”), however, prohibits us from declaring dividends where, after giving effect to the distribution of the dividend:

 

  we would not be able to pay our debts as they become due in the usual course of business; or
     
  our total assets would be less than the sum of our total liabilities plus the amount that would be needed to satisfy the rights of stockholders who have preferential rights superior to those receiving the distribution, unless otherwise permitted under our Articles of Incorporation.

 

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CAPITALIZATION

 

The following table sets forth our capitalization assumed as of June 30, 2018 on an actual basis and on an as adjusted basis to reflect our sale of      shares of Common Stock (assuming no exercise of the Underwriters’ over-allotment option) in this offering at the assumed offering price of $      per share of Common Stock (which was the closing price per share of our Common Stock on      ), after deducting estimated Underwriters’ discounts and commissions and offering expenses payable by us, and the application of the net proceeds from our sale of shares of Common Stock in this offering.

 

You should read this information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes appearing elsewhere in this prospectus.

 

    As of June 30, 2018  
    Actual     As adjusted  
Cash and cash equivalents   $ 1,420,798     $    
Total Current Liabilities   $ 3,686,026     $    
Stockholder’s Equity                
Common Stock, par value $0.0001 per share (200,000,000 shares authorized; 153,698,043 shares issued and outstanding, actual;      shares issued and outstanding, as adjusted)   $ 15,370     $    
Additional paid-in capital   $ 33,066,404     $    
Common Stock issuable, 0 actual;     as adjusted   $ -          
Accumulated deficit   $ (35,262,485 )   $    
Total Stockholders’ Deficit   $ (2,180,711 )   $    
Total Capitalization   $ 1,505,315     $                 

 

The number of shares of our Common Stock outstanding used for existing stockholders is based on 153,698,043 shares of our Common Stock outstanding as of June 30, 2018 and excludes as of such date: (i) 24,534,605 shares of Common Stock underlying outstanding stock options; (ii) 5,154,047 shares of Common Stock reserved for issuance under the Plan; (iii) 29,407,413 shares of Common Stock issuable upon the exercise of the outstanding warrants; and (iv) 11,264,826 shares of Common Stock issuable upon the conversion of certain outstanding notes.

 

A $0.      increase or decrease in the assumed offering price of $      per share of Common Stock (which was the closing price per share of our Common Stock on      ) would increase or decrease, respectively, each of additional paid-in capital, total stockholder’ equity, and total capitalization by approximately $      million, assuming that the assumed offering of      shares of Common Stock remains the same and after deducting the underwriting discounts and commissions.

 

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DILUTION

 

If you invest in our Common Stock in this offering, your ownership interest will be diluted immediately to the extent of the difference between the public offering price per share of our Common Stock and the as-adjusted net tangible book value per share of our Common Stock after this offering.

 

Our historical net tangible book deficit as of June 30, 2018 was $2,180,711, or approximately $0.01 per share of our Common Stock. Historical net tangible book deficit per share represents the amount of our total tangible assets less total liabilities, divided by the number of shares of our Common Stock outstanding as of June 30, 2018.

 

After giving effect to the issuance and sale of      shares of our Common Stock in this offering at an assumed public offering price of $      per share, the last reported sale price of our Common Stock on the OTCQB on      , 2018, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, our as adjusted net tangible book value/deficit as of June 30, 2018 would have been $     million, or $      per share. This represents an immediate decrease in net tangible book deficit/value per share of $      to existing stockholders and immediate dilution of $      per share to new investors purchasing Common Stock in this offering. Dilution per share to new investors is determined by subtracting as adjusted net tangible book value per share after this offering from the public offering price per share paid by new investors. The following table illustrates this dilution on a per share basis:

  

    (unaudited)  
Assumed public offering price per share of Common Stock   $  
Pro forma net tangible book value per share as of June 30, 2018, before this offering     0.01  
Increase in pro forma net tangible book value per share attributable to new investors        
Pro forma net tangible book value per share as of June 30, 2018, after this offering        
Dilution per share to investors in this offering   $  

 

Each $     increase (decrease) in the assumed public offering price of $     per share, the last reported sale price of our Common Stock on the OTCQB on     , 2018, would increase (decrease) our as adjusted net tangible book value per share after this offering by approximately $     million, and the dilution per share to new investors purchasing shares in this offering by $     , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares to be issued in this offering. Each increase (decrease) of shares offered by us would (increase) decrease our net tangible book value per share by $     and the dilution per share to new investors purchasing shares in this offering by $     assuming that the assumed public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

If the Underwriter exercises its over-allotment option to purchase additional shares in full, the net tangible book value per share after this offering would be $     per share, the increase in net tangible book value per share to existing stockholders would be $     per share, and the dilution to new investors purchasing shares in this offering would be $     per share.

 

The information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering as determined between us and the Underwriter at pricing.

 

The number of shares of Common Stock shown above to be outstanding after this offering is based on 153,698,043 shares outstanding as of June 30, 2018 and excludes:

 

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  24,534,605 shares of Common Stock issuable upon exercise of outstanding stock options as of June 30, 2018, with a weighted-average exercise price $0.30 per share;
     
  5,154,047 shares of Common Stock reserved for issuance under the Plan;
     
  31,854,113 shares of Common Stock issuable upon the exercise of warrants outstanding as of June 30, 2018, with a weighted-average exercise price of $0.14 per share; and
     
  11,264,826 shares of Common Stock issuable upon the conversion of notes outstanding as of June 30, 2018.

 

To the extent that these outstanding options or warrants are exercised, these outstanding notes are converted, or we issue additional shares of Common Stock in the future, whether pursuant to the Plan or otherwise, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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BUSINESS

 

Overview

 

CMG was organized as a limited liability company under the laws of the State of Nevada on December 12, 2012. On May 19, 2014, bBooth, Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG merged into bBooth, Inc. and bBooth, Inc., thereafter, changed its name to bBooth (USA), Inc., effective as of October 16, 2014. The operations of CMG and bBooth (USA), Inc. became known as, and are referred to in this prospectus as, “bBoothUSA.”

 

On October 16, 2014, bBoothUSA was acquired by GSD, pursuant to the Share Exchange Agreement entered into with GSD. GSD was incorporated in the state of Nevada on November 27, 2012. The acquisition was accounted for as a reverse merger transaction. In connection with the closing of the transactions contemplated by the Share Exchange Agreement, GSD’s management was replaced by bBoothUSA’s management, and GSD changed its name to bBooth, Inc.

 

Effective April 21, 2017, we changed our corporate name from bBooth, Inc. to nFüsz, Inc. The name change was effected through a parent/subsidiary short-form merger of nFüsz, Inc., our wholly-owned Nevada subsidiary, formed solely for the purpose of the name change, with and into us. We were the surviving entity. To effectuate the merger, we filed Articles of Merger and a Certificate of Correction (relative to the effective date of the name change merger) with the Secretary of State of the State of Nevada on April 4, 2017 and April 17, 2017, respectively. The merger became effective on April 21, 2017. Our board of directors approved the merger, which resulted in the name change on that date. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the merger was not required.

 

Our Business

 

We are an applications services provider marketing cloud-based business software products on a subscription basis. Our flagship product, notifiCRM, is a CRM application that is distinguishable from other CRM programs because it utilizes interactive video as the primary means of communication between sales and marketing professionals and their clients or prospects. notifiCRM allows our users to create, distribute, and post interactive videos that contain on-screen interactive icons, buttons, and other elements, that when clicked, allow their prospects and customers to respond to our users’ call to action in real-time, in the video, while the video is playing, without leaving or stopping the video. Our users report increased sales conversion rates compared to traditional, non-interactive video. We developed proprietary interactive video technology, which serves as the basis for our cloud, SaaS products and services that we market under the brand name “notifi” and they are accessible on all mobile and desktop devices. No download is required to access and use our applications. Our users a lso h a v e access to detailed an a l ytics in the a pplication dashboa r d that r eflect w hen the videos w e r e vi ew ed, b y w hom, how many time s , for how long, and w hat interact iv e e lements w e r e clicked-on in the video, among other thing s , a ll of w hich assist our users in focusing their s a les and marketing efforts b y identifying w hich clients or prospects h a v e inte r est in the subject matter of the vide o

 

Our notifiCRM platform can accommodate any size campaign or sales organization, and it is enterprise-class scalable to meet the needs of today’s global organizations. We are working with our vendors to ensure that it is so scalable based upon our current agreements with them. We offer stand-alone versions of our notifiCRM product on a subscription basis to individual consumers, sales-based organizations, consumer brands, marketing and advertising agencies, as well as to artists and social influencers. We also offer notifiCRM through a network of partners and resellers that include Oracle/NetSuite and Marketo, who offer notifiCRM to their respective clients and customers as an upgrade to their existing Oracle/NetSuite or Marketo subscriptions. notifiCRM is fully integrated into each of their platforms and upon payment of the upgrade fee, is accessible through the respective dashboards of Oracle/NetSuite and Marketo. We are actively developing integrations of notifiCRM into other popular marketing, CRM, and ERP platforms.

 

Our notifiMED application is designed for physicians and other healthcare providers to create more efficient and effective interactive communications with patients. Patients are able to avoid unnecessary and inconvenient visits to their physicians’ or other healthcare providers’ offices by viewing and responding to interactive videos through in-video, on-screen clicks that are designed to assess the patients’ need for an office visit. If the patient’s responses to the interactive video indicate that an office visit is either necessary or desirable, the patient can schedule the office visit right in through video in real time. Patients can also download and print prescriptions, care instructions, and other physician distributed documents right from and through the video. notifiMED is offered on a subscription basis.

 

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Our notifiEDU application is designed for teachers and school administrators for more effective communications with students, parents, and faculty. notifiEDU allows teachers to deliver interactive lessons to students which are both more engaging and more effective. notifiEDU allows teachers to communicate with students through their mobile devices and computers to deliver lessons and tests/quizzes on the screen and in the video. The analytics capabilities of notifiEDU available on the dashboard of the teacher or school administrator allows them to track which students watched the lesson, when, for how long, how many times, and track and report on test/quiz results. notifiEDU is offered on a subscription basis.

 

Our notifiTV and notifiLIVE products are also part of our proprietary interactive video platform that allows viewers to interact with pre-recorded as well as live broadcast video content by clicking on links embedded in on-screen people, objects, graphics, or sponsors’ signage. Viewers can experience our notifiTV and notifiLIVE interactive content and capabilities on most devices available in the market today without the need to download special software or proprietary video players.

 

Revenue Generation

 

We intend to generate revenue from the following sources:

 

  Recurring subscription fees paid by enterprise users for access to our stand-alone applications by enterprise employees or affiliates;
     
  Recurring subscription fees paid by non-enterprise individual users for access to our stand-alone applications;
     
  In-app and online purchases by users to access various premium services, features, functionality, and options of the platform (such as the ability to create, edit, and send interactive videos, among several other interactive video features and functionality);
     
  Recurring subscription fees paid by enterprise users for access to our applications integrated into Oracle/NetSuite and Marketo; and
     
  Recurring subscription fees paid by enterprise users who subscribe to bundled service offerings from our partners and/or their respective value-added resellers.

 

Our Market/Industry

 

Our market is intentionally broad and includes sales-based organizations, consumer brands, ad agencies, online marketers, advertisers, sponsors, social media celebrities, entertainment celebrities and performance artists, enterprise users — large and small, religious organizations, health care providers, network marketing and multi-level marketing companies, media companies, major motion picture studios, social media companies, schools and training facilities, and virtually any other person or organization that seeks to attract, engage, and communicate with prospects, customers, consumers, fans, followers, patients, students, friends, and subscribers, among others, online, utilizing automated, interactive video technology.

 

Distribution Methods

 

Our distribution method is:

 

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  1. Prospective customers and clients can subscribe to our notifiCRM software service on a monthly or annual contract through a simple, web-based sign-up form accessible on our website (www.nFüsz.com), as well as through interactive sign-up links that we distribute via email and text and through social media.
     
  2. Enterprise users can subscribe to our notifiCRM software service and then distribute custom-branded sign-up links to their internal and external staff via email or other electronic means.
     
  3. We enter into license and partnership agreements with other CRM providers to incorporate our notifiCRM technology into such other CRM providers’ software platforms that they offer to their existing and prospective client base for an additional monthly fee, which fee is shared with us. In January 2018, we entered into such an agreement with Oracle America, Inc., to integrate our notifiCRM application into their NetSuite platform on a revenue share basis. In addition, in February 2018, we entered into a similar agreement with Marketo, Inc. to integrate our notifiCRM application into their platform on a revenue share basis.
     
  4. We enter into license or partnership agreements with digital marketing companies and advertising agencies to resell our notifiCRM technology to their existing and prospective client bases, for monthly fees, which fees are shared with us. In March 2018, we entered into such an agreement with Ignite Visibility, LLC both to utilize and to resell our notifiCRM product to their clients on a revenue share basis. In addition, in March 2018, we entered into a similar agreement with DR2Marketing, LLC to both utilize, as well as to resell, our notifiCRM product to their clients on a revenue share basis.
     
  5. We intend to enter into partnership agreements with large cloud services providers, who bundle our application with such providers’ other applications offered to their existing and prospective global customer base in order to drive more data storage and bandwidth utilization fees from such customers. We are currently finalizing contract negotiations with two such cloud services providers for similar partnership relationships.
     
  6. We employ a direct sales team, as well as outside sales consultants.

 

Marketing

 

We utilize our own proprietary interactive video platform as the foundation of our ongoing marketing initiatives. Our initiatives include daily, broad-based social media engagement by a dedicated team of full-time employees and outside consultants; management of our interactive video-based website; interactive video-based email campaigns, television commercials, among many other ongoing initiatives designed to increase awareness of our products and services and drive conversion and adoption rates.

 

Competition

 

CRM software generated more than $40.7 billion in sales in 2017, and has grown to become the largest software segment, overtaking data management software. We are active in the CRM applications industry. We believe that our proprietary notifiCRM interactive video technology provides significant competitive advantages to the CRM applications offered by the long-term leaders in the field: Salesforce.com, Inc., Microsoft Corporation, Oracle Corporation, and SAP SE, which collectively account for more than 40% of industry sales. These companies, as well as many others, have numerous differences in feature sets and functionality, but all share certain basic attributes. Most of them were designed before the advent and proliferation of mobile phones, social media, and the technology behind the current ubiquity of video over the internet and more recently on mobile devices. While many of them have attempted to incorporate video capabilities into their respective CRM platforms, sometimes in ‘‘bolt-on’’ fashion, it is our opinion that none of them have done so in an effective manner, and certainly none of them utilize interactive video technology similar to that of notifiCRM, which places clickable calls to action right in the video, including into users’’ pre-existing sales and product videos. In addition, notifiCRM videos are viewable on both mobile and desktop devices regardless of operating system and without the need to download a proprietary player or program.

 

The differences between notifiCRM and the applications of the larger, more established incumbent providers of CRM software serve to highlight the reasons we have chosen not only to develop our own standalone SaaS cloud CRM platform, but also to permit incorporation and integration of our interactive video technology into third-party platforms. The enterprises that own or control those platforms can then offer notifiCRM to their clients and customers as an upgrade feature. The implementation of this strategy is evidenced by the partnerships we currently enjoy with Oracle/NetSuite and Marketo. Nevertheless, the market share, marketing strength, and competitive advantages of our competitors may preclude our obtaining any material share of this market.

 

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Intellectual Property

 

Our policy is to protect our technology by, among other things, trade secret protection and copyrights. We primarily rely upon trade secrets and copyrighted proprietary software, code, and know-how to protect our notifiCRM technology platform and associated applications. We have taken security measures to protect our trade secrets and proprietary know-how, to the extent possible. Our means of protecting our proprietary rights may not prove to be adequate and our competitors may independently develop technology or products that are similar to ours or that compete with ours. Trade secret and copyright laws afford only limited protection for our technology and products. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain and use information that we regard as proprietary. Third parties may also design around our proprietary rights, which may render our protected technology and products less valuable, if the design around is favorably received in the marketplace. In addition, if any of our products or technology is covered by third-party patents or other intellectual property rights, we could be subject to various legal actions. We cannot assure you that our technology platform and products do not infringe patents held by others or that they will not in the future. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement, invalidity, misappropriation, or other claims.

 

Research and Development

 

We incurred $375,220 and $257,803 of research and development expenses during the fiscal years ended December 31, 2017 and 2016, respectively. We incurred $235,733 of research and development expenses during the six-month period ended June 30, 2018. These funds were primarily used for development of our notifiCRM software.

 

Suppliers

 

We currently rely on a full-time, dedicated, external team of experienced professionals for the coding and maintenance of our software. We believe we have mitigated the associated risks of managing an external team of software development professionals by incorporating internal management and oversight, as well as appropriate systems, protocols, controls, and procedures and ensuring that we have access to additional qualified professionals to provide like or complementary services.

 

Dependence on Key Customers

 

Based on our current business and anticipated future activities as described in this prospectus, we do not have, and do not expect to have, any significant customer concentration. Accordingly, we do not expect to be dependent on any key customers.

 

Government Regulation

 

Government regulation is not of significant concern for our business nor is government regulation expected to become an impediment to the business in the near- or mid-term as management is currently unaware of any planned or anticipated government regulation that would have a material impact on our business. Our management believes it currently possesses all requisite authority to conduct our business as described in this prospectus.

 

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Employees

 

As of August 14, 2018, we had seven full-time statutory employees, and 22 full-time consultants and contractors. We also employ part-time consultants and contractors on an as-needed basis to provide specific expertise in areas of software design, development and coding, content creation, audio and video editing, video production services, and other business functions including marketing and accounting. None of our employees or consultants is covered by a collective bargaining agreement. We have had no prior labor-related work stoppages and believe that our relationship with our employees, consultants, and contractors, both full-time and part-time, is good.

 

Properties

 

Our corporate headquarters is approximately 2,800 square feet and is located at 344 S. Hauser Blvd., Suite 414, Los Angeles, California 90036. Our headquarters houses our executive and administrative operations. The lease expires on April 30, 2019 and the base rent is $4,743. We believe that our facility is sufficient to meet our current needs and that suitable additional space will be available as and when needed.

 

Legal Proceedings

 

On April 24, 2018, EMA Financial, LLC, a New York limited liability company (“EMA”), commenced an action against us, styled EMA Financial, LLC, a New York limited liability company, Plaintiff, against nFUSZ, Inc., Defendant , United States District Court, Southern District of New York, case number 1:18-cv-03634-NRB. The Complaint sets forth four causes of action and seeks relief consisting of: (1) money damages, (2) injunctive relief, (3) liquidated damages, and declaratory relief. All of the claims stem from our refusal to honor EMA’s exercise notice in connection with a common stock purchase warrant that we had granted to it. We believe EMA’s allegations are entirely without merit.

 

The circumstances giving rise to the dispute are as follows: on or about December 5, 2017, we issued a warrant to EMA as part of the consideration we were required to provide in connection with a contemporaneous convertible loan EMA made to us. The loan, which was evidenced by a convertible note, was for a term of one year. Our refusal to honor the warrant exercise notice was due to our good faith belief that EMA’s interpretation of the cashless exercise provision of the warrant was, inter alia , (i) contrary to our direct conversations and agreements made with EMA prior to, and during the preparation of the loan and warrant agreements; (2) wholly inconsistent with industry norms, standards, and practices; (3) was contrary to the cashless exercise method actually adopted by EMA’s co-lender in the same transaction; and (4) was the result of a single letter mistakenly transposed in the cashless exercise formula drafted by EMA which if adopted, would result in a gross and unintended windfall in favor of EMA and adverse to us. Moreover, as set forth in our response to EMA’s allegations, EMA’s interpretation of the cashless exercise provision would have resulted in it being issued more shares of our Common Stock than it would have received if it exercised the warrant for cash (instead of less), and more than the amount of shares reflected on the face of the warrant agreement itself. The loan underlying the transaction was repaid, in full, approximately three months after it was issued, on March 8, 2018, together with all accrued interest, prior to any conversion or attempted conversion of the Note.

 

On July 20, 2018, we filed an Answer to the Complaint, along with certain Affirmative Defenses, as well as Counterclaims seeking, inter alia , to void the entire transaction for violation of New York’s criminal usury laws and, alternatively, for reformation of the warrant conversion formula set forth in the Warrant Agreement so as to be consistent with the parties’ intent and custom and practice in the industry. We intend to vigorously defend the action, as well as vigorously prosecute our counterclaims against EMA. The action is still pending.

 

We know of no other material pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our assets or properties, or the assets or properties of any of our subsidiaries, are subject and, to the best of our knowledge, no adverse legal activity is anticipated or threatened. In addition, we do not know of any such proceedings contemplated by any governmental authorities.

 

We know of no material proceedings in which any of our directors, officers, or affiliates, or any registered or beneficial stockholder is a party adverse to us or any of our subsidiaries or has a material interest adverse to us or any of our subsidiaries.

 

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THE PROPOSED SOUND CONCEPTS ACQUISITION

 

On July 17, 2018, we entered into a non-binding letter of intent with Sound Concepts to memorialize discussions related to the Sound Concepts Acquisition of all of the issued and outstanding shares of Sound Concepts Capital Stock. We anticipate acquiring the Sound Concepts Capital Stock for an aggregate of $25,000,000 of value, to be payable through a combination of a cash payment by us of the $15,000,000 Acquisition Cash Payment and the issuance of the Acquisition Stock with a fair market value of $10,000,000. We anticipate forming an acquisition subsidiary into which Sound Concepts will merge in accordance with the provisions of a three-party merger agreement among Sound Concepts, our acquisition subsidiary, and us.

 

The consummation of the proposed Sound Concepts Acquisition is subject to the satisfaction or waiver of certain conditions. In addition to customary closing conditions, our obligation to complete the proposed Sound Concepts Acquisition is conditioned on (i) the preparation of audited financial statements for Sound Concepts for the fiscal years ended December 31, 2017 and 2016, and unaudited financial statements for Sound Concepts for all completed interim periods during fiscal 2018 prior to the consummation of the Sound Concepts Acquisition, all of which shall have been prepared in accordance with GAAP; and (ii) the negotiation, execution, and delivery of definitive transaction documents necessary to consummate the proposed Sound Concepts Acquisition. There can be no assurance that we will enter into definitive transaction documents, or that the proposed Sound Concepts Acquisition will be consummated. Unless and until all conditions set forth in the letter of intent are satisfied or waived, neither party has a binding obligation to enter into definitive transaction documents or otherwise consummate the transactions contemplated by the letter of intent.

 

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BUSINESS OF SOUND CONCEPTS

 

Sound Concepts is an established 25-year-old business with approximately 60 employees, based in Salt Lake City, Utah, providing digital marketing and sales support services, including a video-based sales application, to the direct sales industry. They currently have approximately 75 clients in the network marketing and affiliate marketing sector, which include Isagenix, Vasayo, Nu Skin, Nerium, Forever Living, Seacret, among many others. Their sales application, offered as a SaaS application, is known as Brightools and is designed specifically to meet the needs of direct sales representatives. Brightools provides recruiting tools, sales representative training and education tools, as well as instant notification capabilities to notify users when a prospect has engaged in shared content. Brightools also tracks customer purchases and allows corporate to monitor field activity to track the effectiveness of campaigns as well as compliance. Brightools is currently in use in over 48 different countries and has more than 360,000 current users.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS — NFÜSZ

 

The following discussion and analysis of the results of operations and financial condition of nFüsz for the fiscal years ended December 31, 2017 and 2016 and three- and six-month periods ended June 30, 2018 and 2017, should be read in conjunction with the financial statements and related notes and the other financial information that are included elsewhere in this prospectus. This discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations, and intentions. Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Forward-looking statements are based upon estimates, forecasts, and assumptions that are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward-looking statements made by us, or on our behalf. We disclaim any obligation to update forward-looking statements. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Special Note Regarding Forward-Looking Statements, and Business sections in this prospectus. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward looking statements.

 

Overview

 

CMG was organized as a limited liability company under the laws of the State of Nevada on December 12, 2012. On May 19, 2014, bBooth, Inc. was incorporated under the laws of the State of Nevada. On May 19, 2014, CMG merged into bBooth, Inc. and, thereafter, bBooth, Inc. changed its name to bBooth (USA), Inc., effective October 16, 2014. The operations of CMG and bBooth (USA), Inc. became known as, and are referred to in this prospectus as, “bBoothUSA.”

 

On October 16, 2014, bBoothUSA was acquired by GSD, pursuant to the Share Exchange Agreement entered into with GSD. GSD was incorporated in the state of Nevada on November 27, 2012. The acquisition was accounted for as a reverse merger transaction. In connection with the closing of the transactions contemplated by the Share Exchange Agreement, GSD’s management was replaced by bBoothUSA’s management, and GSD changed its name to bBooth, Inc.

 

Effective April 21, 2017, we changed our corporate name from bBooth, Inc. to nFüsz, Inc. The name change was effected through a parent/subsidiary short-form merger of nFüsz, Inc., our wholly-owned Nevada subsidiary, formed solely for the purpose of the name change, with and into us. We were the surviving entity. To effectuate the merger, we filed Articles of Merger and a Certificate of Correction (relative to the effective date of the name change merger) with the Secretary of State of the State of Nevada on April 4, 2017 and April 17, 2017, respectively. The merger became effective on April 21, 2017. Our board of directors approved the merger, which resulted in the name change on that date. In accordance with Section 92A.180 of the Nevada Revised Statutes, stockholder approval of the merger was not required.

 

Results of Operation

 

Three Months Ended June 30, 2018 as compared to the Three Months Ended June 30, 2017

 

Revenues

 

Subscription revenues for the three months ended June 30, 2018 were $8,239, compared to $0 for the three months ended June 30, 2017. The increase in subscription revenues were primarily attributable to the Company’s SaaS platform that was launched during the fourth quarter of fiscal 2017. There was no similar transaction in the second quarter of 2017.

 

Operating Expenses

 

Research and development expenses were $105,733 for the three months ended June 30, 2018, as compared to $92,240 for the three months ended June 30, 2017. The increase was primarily due to an increase in fees for coders dedicated to software development enhancements and modifications.

 

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General and administrative expenses for the three months ended June 30, 2018 and 2017 were $(490,145) and $1,352,028, respectively. The decrease was primarily due to a decrease in stock-based compensation expense of $2,096,024 offset by an increase in marketing and labor related costs associated with growth of the Company. The significant decrease in stock-based compensation is attributed to the revaluation of our consultants’ unvested restricted stock and stock options. The price of the Company’s Common Stock decreased significantly from $1.45 per share at March 31, 2018 to $0.60 per share at June 30, 2018.

 

Other expense, net, for the three months ended June 30, 2018 amounted to $(1,379,235), which represented a change in fair value of derivative liability of $(1,444,164) offset by interest expense of $58,788, and other expense of $6,141. The amount of other expense, net, was lower in the second quarter of 2018 due to the change in fair value of derivative liability and $526,871 of 2017 debt extinguishment.

 

Six Months Ended June 30, 2018 compared to the Six Months Ended June 30, 2017

 

Revenues

 

Subscription revenues for the six months ended June 30, 2018 were $16,242, compared to $0 for the six months ended June 30, 2017. The increase in subscription revenues were primarily attributable to the Company’s SaaS platform that was launched during the fourth quarter of fiscal 2017. There was no similar transaction in the first half of 2017.

 

Operating Expenses

 

Research and development expenses were $235,733 for the six months ended June 30, 2018, as compared to $181,840 for the six months ended June 30, 2017. The increase was primarily due to an increase in fees for coders dedicated to software development enhancements and modifications.

 

General and administrative expenses for the six months ended June 30, 2018 and 2017 were $4,779,429 and $1,970,028, respectively. The increase was primarily due to an increase in stock-based compensation expense of $2,249,846 plus an increase in labor related costs, marketing, and professional services associated with growth of the Company. The significant increase in stock-based compensation was due to increase in the price of the Company’s Common Stock. The price of the Company’s Common Stock increased from $0.10 per share at December 31, 2017 to $0.60 per share at June 30, 2018, or an average of $0.82 per share during the period ended June 30, 2018. In the prior period, the average price of the Company’s Common Stock was $0.18 per share.

 

Other expense, net, for the six months ended June 30, 2018 amounted to $1,723,612, which represented a change in fair value of derivative liability of $1,180,723, interest expense for amortization of debt discount of $747,623, interest expense of $262,721 on outstanding notes payable, $171,739 of financing costs attributed to derivative liabilities, and other expense of $12,380. These amounts were offset by a gain on extinguishment of debt, net of $(651,574). The amount of other expense, net, was higher in 2018 due to the payoff of and conversion of debt that did not occur during the first quarter of 2017.

 

Modified EBITDA

 

In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations, or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, financing costs, and changes in fair value of derivative liability.

 

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Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. Readers are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, readers should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

    For the Three Months Ended     For the Six Months Ended  
    June 30, 2018     June 30, 2017     June 30, 2018     June 30, 2017  
Net income (loss)   $ 1,771,886     $ (2,111,301 )   $ (6,722,532 )   $ (2,968,585 )
Adjustments:                                
Stock Compensation Expense     (1,154,361 )     942,463       3,456,593       1,206,737  
Change in fair value of derivative liability     (1,444,164 )           1,180,723        
Amortization of debt discount           53,346       747,623       93,024  
Interest expense     58,788       86,817       262,721       170,822  
Financing costs                 171,739        
Depreciation     5,189       5,363       10,494       10,668  
Gain on debt extinguishment, net           526,871       (651,574 )     552,871  
Total EBITDA adjustments     (2,534,548 )     1,614,860       5,178,319       2,034,122  
Modified EBITDA   $ (762,662 )   $ (496,441 )   $ (1,544,213 )   $ (934,463 )

 

The $265,757 decrease in Modified EBITDA for the three months ended June 30, 2018 compared to the same period in 2017, resulted from the increase in labor-related costs and marketing associated with the growth of the Company.

 

The $609,750 decrease in Modified EBITDA for the six months ended June 30, 2018 compared to the same period in 2017, resulted from the increase in labor-related costs, marketing and professional services associated with the growth of the Company.

 

We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts, and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; and in making compensation decisions and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following:

 

  Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
     
  Modified EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
     
  Modified EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and
     
  Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and the Modified EBITDA does not reflect any cash requirements for such replacements.

 

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Fiscal Year Ended December 31, 2017 compared to the Fiscal Year Ended December 31, 2016

 

The following is a comparison of the results of our operations for the year ended December 31, 2017 and 2016:

 

    For the Year Ended        
    December 31, 2017     December 31, 2016     $ Change  
Net sales   $ 5,914     $     $ 5,914  
Research and development expense     375,220       257,803       117,417  
General and administrative expense     4,327,529       2,873,185       1,454,344  
Loss from operations     (4,696,835 )     (3,130,988 )     (1,565,847 )
Other income     20,099       52,898       (32,799 )
Other expense, net     (2,588,217 )     (1,195,149 )     (1,393,068 )
Loss before income taxes     (7,264,953 )     (4,273,239 )     (2,991,714 )
Income tax provision     1,600       866       734  
Net loss   $ (7,266,553 )   $ (4,274,105 )   $ (2,992,448 )

 

Revenues

 

Subscription revenues for the fiscal year ended December 31, 2017 were $5,914, compared to $0 for fiscal year ended December 31, 2016. The subscription revenues in fiscal 2017 were attributable to the Company’s SaaS platform that was launched during the fourth quarter of fiscal 2017.

 

Operating Expenses

 

Research and development expenses were $375,220 in fiscal 2017, as compared to $257,803 in fiscal 2016. Research and development expenses primarily consist of fees paid to vendors contracted to perform research projects and develop technology. In fiscal 2017 and fiscal 2016, our research and development initiatives supported our cloud-based products, or SaaS platform. Our research and development expenses increased $117,417 in fiscal 2017, as compared to fiscal 2016, due to additional product development and testing.

 

General and administrative expenses for fiscal 2017 were $4,327,529, an increase of $1,454,344 as compared to fiscal 2016. The increase in general and administrative expenses is primarily due to an increase in stock compensation expense of $1,231,843, plus increased labor and creative consulting fees of $241,278 due to growth in our operations.

 

Other expense, net, for fiscal 2017 equaled $2,588,217, which represented $977,203 on loss from debt extinguishment, $643,481 of financing costs driven by derivative liabilities associated with convertible debt, $555,094 of interest expense on outstanding notes payable, and $418,339 of interest expense for amortization of debt discount. Other expense, net, for fiscal 2016 equaled $1,195,149. The amount of other expense, net, was higher in fiscal 2017 due to financing costs of $643,481, an increase in loss on debt extinguishment of $851,228, and increased interest expense of $214,514 due to by additional debt.

 

Other Income

 

We earned $20,099 in other income during fiscal 2017, compared to $52,898 for fiscal 2016. The decrease in other income in fiscal 2017 was due to the transition from the rental of interactive booths as the primary business to our current SaaS business model.

 

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Modified EBITDA

 

In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations, or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, financing costs, and changes in the fair value of derivative liability.

 

Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

    For the Year Ended  
    December 31, 2017     December 31, 2016  
Net loss   $ (7,266,553 )   $ (4,274,105 )
Adjustments:        
Other income     (20,099 )     (52,898 )
Stock compensation expense     2,533,245       1,301,402  
Debt extinguishment     977,203       455,975  
Financing costs     643,481        
Interest expense     555,094       340,580  
Amortization of debt discount     418,339       398,594  
Depreciation     21,512       21,301  
Income tax provision     1,600       866  
Change in fair value of derivative liability     (5,900 )      
Total EBITDA Adjustments     5,124,475       2,465,820  
Modified EBITDA   $ (2,142,078 )   $ (1,808,285 )

 

The $333,793 decrease in Modified EBITDA for the year ended December 31, 2017 compared to the same period in 2016, resulted from the increase in creative consulting fees of $241,278 and research and development expenses of $117,417 in fiscal 2017.

 

We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts, and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; and in making compensation decisions and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following:

 

  Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
     
  Modified EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
     
  Modified EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments on our debts; and
     
  Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Modified EBITDA does not reflect any cash requirements for such replacements.

 

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Liquidity and Capital Resources

 

Going Concern

 

We have incurred operating losses since inception and have negative cash flows from operations. As of June 30, 2018, we had a stockholders’ deficit of $2,180,711. During the period ended June 30, 2018, we incurred a net loss of $6,722,532 and utilized $1,889,395 in cash during the period ended June 30, 2018. During the period ended December 31, 2017, we utilized $15,869,489 in cash. As a result, our continuation as a going concern is dependent on our ability to obtain additional financing until we can generate sufficient cash flows from operations to meet our obligations. We intend to continue to seek additional debt or equity financing to continue our operations.

 

Our condensed consolidated financial statements have been prepared on a going concern basis, which implies we may not continue to meet our obligations and continue our operations for the next fiscal year. The continuation of our Company as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue operations until our Company begins generating positive cash flow.

 

There is no assurance that we will ever be profitable or that debt or equity financing will be available to us in the amounts, on terms, and at times deemed acceptable to us, if at all. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business, as planned, and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.

 

Liquidity and Capital Resources Overview

 

As of June 30, 2018, we had cash of $1,420,798. We estimate our operating expenses for the next three months may continue to exceed any revenues we generate, and we may need to raise capital through either debt or equity offerings to continue operations. We are in the early stages of our business. We are required to fund growth from financing activities, and we intend to rely on a combination of equity and debt financings. Due to market conditions and the early stage of our operations, there is considerable risk that we will not be able to raise such financings at all, or on terms that are not overly dilutive to our existing stockholders. We can offer no assurance that we will be able to raise such funds. If we are unable to raise the funds we require for all of our planned operations, we may be forced to reallocate funds from other planned uses and may suffer a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. As a result, our business may suffer, and we may be forced to reduce or discontinue operations.

 

Cash Flows — Operating

 

For the six months ended June 30, 2018, our cash flows used in operating activities amounted to $1,889,395 compared to cash used during the six months ended June 30, 2017 of $794,754. The change is due to an increase in business activity, which resulted in an additional consulting expenses, salary, and various operating expenses in the first half of 2018 compared to the first half of 2017. In addition, the Company paid accrued interest as part of the convertible debt payoffs in the first quarter of 2018 and paid down accounts payable.

 

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Cash Flows — Financing

 

Our cash provided by financing activities for the six months ended June 30, 2018 amounted to $3,299,633, which represented $2,978,500 of proceeds received from the issuances of our Common Stock, $1,000,000 of proceeds from the issuance of shares of our Common Stock from the exercise of a put option, $130,000 of proceeds from the issuance of convertible debt, $34,133 of proceeds from the exercise of options, and $22,000 of proceeds from the exercise of warrants, offset by $845,000 of convertible debt payments and the repurchase of Common Stock equal to $20,000. Our cash provided by financing activities for the six months ended June 30, 2017 amounted to $805,000, which represented $450,000 of proceeds received from the issuances of Common Stock, $255,000 of proceeds received from the issuance of convertible Series A preferred stock, and $100,000 of proceeds from the issuance of a convertible note. All shares of Series A preferred stock have been converted and we filed a Certificate of Withdrawal with the state of Nevada on August 10, 2018 to formally withdraw the Series A preferred stock.

 

Warrant Liability

 

As of June 30, 2018 total liabilities are $3,686,026, of which $1,014,227 is attributable to certain outstanding warrants to purchase up to 1.7 million shares of Common Stock that are accounted for as derivative liability. Without the derivative liability, total liabilities would have been $2,671,799, of which $1,964,985 is related party debt.

 

As of June 30, 2018, the derivative liability of $1,014,227 relates to outstanding warrants to purchase up to 1.7 million shares of Common Stock issued in December 2017 and January 2018. Due to certain adjustments that may be paid to the exercise price of the warrants if the Company issues or sells rights, options, or warrants to holders of its Common Stock (and not to the warrant holders) entitling them to subscribe for or purchase shares of its Common Stock at a price that is less than the closing price at the record date of such issuance, the warrants have been classified as a liability, as opposed to equity, in accordance with ASC 815-10 as it was determined that the warrants were not indexed to our Common Stock.

 

Notes Payable

 

The Company has the following outstanding notes payable to related parties at June 30, 2018 that are due in the current year:

 

Payable to:   Issuance Date   Maturity Date   Interest
Rate
    Original
Borrowing
    Balance at
June 30, 2018
 
Rory Cutaia (1)   December 1, 2015   August 1, 2018     12.0 %   $ 1,248,883     $ 1,198,883  
Rory Cutaia   December 1, 2015   August 1, 2018     12.0 %     189,000       189,000  
Past Director   December 1, 2015   April 1, 2017     12.0 %     111,901       111,901  
Rory Cutaia (2)   August 4, 2016   December 4, 2018     12.0 %     343,326       343,326  
Rory Cutaia   August 4, 2016   December 4, 2018     12.0 %     121,875       121,875  
Total notes payable – related parties                           $ 1,964,985  

 

 

(1) Per the terms of the note agreement, at Mr. Cutaia’s discretion, he may convert up to $374,665 of outstanding principal, plus accrued interest thereon, into shares of Common Stock at a conversion rate of $0.07 per share.
   
(2) A total of 30% of the principal of the note can be converted to shares of Common Stock at a conversion price of $0.07 per share.

 

Off Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Contractual Obligations

 

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information under this Item.

 

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Critical Accounting Policies

 

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States, which require that we make certain assumptions and estimates that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods. Significant estimates include valuation of derivative liability, valuation of debt and equity instruments, share-based compensation arrangements, and long-lived assets. Amounts could materially change in the future.

 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

 

The Company uses Level 2 inputs for its valuation methodology for the derivative liabilities as their fair values were determined by using a probability weighted average Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect the fair value at the end of each reporting period, with any increase or decrease in the fair value being recorded in the current period’s results of operations as adjustments to the fair value of derivatives.

 

Share Based Payment

 

The Company issues stock options, warrants exercisable for shares of Common Stock, Common Stock, and equity interests as share-based compensation to employees and non-employees.

 

The Company accounts for its share-based compensation to employees in accordance FASB ASC 718 “Compensation — Stock Compensation.” Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period.

 

The Company accounts for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50 “Equity — Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.

 

The Company values stock compensation based on the market price on the measurement date. As described above, for employees the measurement date is the grant date, and for non-employees, this is the date performance is completed.

 

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The Company values stock options using the Black-Scholes option pricing model. Assumptions used in the Black-Scholes model to value options issued during the years ended December 31, 2017 and 2016 are as follows:

 

    Year Ended
December 31, 2017
    Year Ended
December 31, 2016
 
Expected life in years     2.5 to 5.0       2.5 to 5.0  
Stock price volatility     84.36% – 173.92 %     87.19% – 153.07 %
Risk free interest rate     1.22% – 2.23 %     1.22% – 1.24 %
Expected dividends     0 %     0 %
Forfeiture rate     21 %     20 %

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its Common Stock to estimate the future volatility for its Common Stock. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.

 

Concentrations

 

During the year ended December 31, 2017, the Company had a single vendor that accounted for 20.7% of all purchases, and 18.1% of all purchases in the same period in the prior year.

 

Recently Issued Accounting Pronouncements

 

For a summary of our recent accounting policies, refer to Note 2 of our unaudited condensed consolidated financial statements for the three and six months ended June 30, 2018 for a discussion of recent accounting pronouncements.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

We carried out an evaluation under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d- 15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective as of June 30, 2018.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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MANAGEMENT

 

Directors and Executive Officers

 

Each of our directors holds office until the next annual meeting of our stockholders or until his successor has been elected and qualified, or until his death, resignation, or removal. Our executive officers are appointed by our board of directors and hold office until their death, resignation, or removal from office.

 

Our directors and executive officers, their ages, positions held, and duration of such, are as follows:

 

Name   Position Held with Our Company   Age     Date First Elected or
Appointed
Rory J. Cutaia   Chairman of the Board, President, Chief Executive Officer, Secretary, and Treasurer     62     October 16, 2014
                 
Jeffrey R. Clayborne   Chief Financial Officer     47     July 15, 2016
James P. Geiskopf   Director     59     October 16, 2014

 

Business Experience

 

The following is a brief overview of the education and business experience of each of our directors and executive officers during at least the past five years, including their principal occupations or employment during the period, the name and principal business of the organization by which they were employed, and certain of their other directorships:

 

Rory J. Cutaia, Chairman of the Board, President, Chief Executive Officer, Secretary, and Treasurer

 

Rory J. Cutaia has been our Chairman of the Board, Chief Executive Officer, President, Secretary, and Treasurer since the formation of CMG, in which roles he has continued to serve through our October 2014 acquisition of bBooth USA to current. Mr. Cutaia founded CMG in 2012 and bBooth, Inc. in 2014. In May 2014, CMG and bBooth, Inc. merged and became known as bBoothUSA, which entity was acquired in October 2014 by GSD, our predecessor. Prior to that, from October 2006 to August 2011, he was a partner and Entrepreneur-in-Residence at Corinthian Capital Group, Inc. (“Corinthian”), a private equity fund based in New York City that invested in middle-market, U.S. based companies. During his tenure at Corinthian, from June 2008 to October 2011, he was the co-founder and Executive Chairman of Allied Fiber, Inc., a company engaged in the construction of a nation-wide fiber-optic network, and from June 2007 to August 2011, Mr. Cutaia was the Chief Executive Officer of GreenFields Coal Company, a company engaged in the deployment of technology to recycle coal waste and clean-up coal waste sites. Before joining Corinthian, from January 2000 to October 2006, he founded and was the Chairman and Chief Executive Officer of The Telx Group, Inc. (“Telx”), a company engaged in the telecom carrier inter-connection, co-location, and data center business, which he sold in 2006. Before founding Telx, he was a practicing lawyer with Shea & Gould, a prominent New York City law firm. Mr. Cutaia obtained his Juris Doctorate degree from the Fordham University School of Law in 1985 and his Bachelor of Science, magna cum laude , in business management from the New York Institute of Technology in 1982. We believe that Mr. Cutaia is qualified to serve on our board of directors because of his knowledge of our current operations, in addition to his education and business experiences described above.

 

Jeffrey R. Clayborne, Chief Financial Officer

 

Jeffrey R. Clayborne has been our Chief Financial Officer since July 15, 2016. Mr. Clayborne is an experienced finance professional with an entrepreneurial spirit and proven record of driving growth and profit for both Fortune 50 companies, as well as start-up companies. Prior to joining the Company, Mr. Clayborne served as Chief Financial Officer and a consultant with Breath Life Healing Center from August 2015 to July 2016. From September 2014 to August 2015, he served as Vice President of Business Development of Incroud, Inc and from May 2012 to September 2014, Mr. Clayborne served as President of Blast Music, LLC. Prior to this, Mr. Clayborne was employed by Universal Music Group where he served as Vice President, Head of Finance & Business Development for Fontana, where he managed the financial planning and analysis of the sales and marketing division and led the business development department. He also served in senior finance positions at The Walt Disney Company, including Senior Finance Manager at Walt Disney International, where he oversaw financial planning and analysis for the organization in 37 countries. Mr. Clayborne began his career as a CPA at McGladrey & Pullen LLP (now, RSM US LLP), then at KPMG Peat Marwick (now, KPMG). He brings with him more than 20 years of experience in all aspects of strategy, finance, business development, negotiation, and accounting. Mr. Clayborne earned his Master of Business Administration degree from the University of Southern California, with high honors.

 

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James P. Geiskopf, Director

 

James P. Geiskopf has been one of our directors since the formation of bBooth USA, in which role he has continued to serve through our October 2014 acquisition of bBooth USA by GSD, our predecessor, to current. He also serves as the Chairman of our audit committee and our Lead Director. Mr. Geiskopf has 32 years of experience leading companies in the services industry. From 1975 to 1986, Mr. Geiskopf served as the Chief Financial Officer of Budget Rent a Car of Fairfield California and from 1986 to 2007, he served as its President and Chief Executive Officer. In 2007, he sold the franchise. Mr. Geiskopf served on the Board of Directors of Suisun Valley Bank from 1986 to 1993 and also served on the Board of Directors of Napa Valley Bancorp from 1991 to 1993, which was sold to a larger institution in 1993. Since 2014, Mr. Geiskopf has served on the board of directors of ICOx Innovations, Inc., a public company quoted on the OTC Markets Group Inc.’s OTCPK tier. From June 2013 to March 16, 2017, the date of his resignation, Mr. Geiskopf had served as a director of Electronic Cigarettes International Group, Ltd., a Nevada corporation, whose common stock had been quoted on the over-the-counter market (“ECIG”). ECIG filed a voluntary petition for relief under the provisions of Chapter 7 of Title 11 of the United States Code on March 16, 2017.

 

Mr. Geiskopf has significant and lengthy business experience including building, operating, and selling companies, serving on the boards of directors for several banks, and serving as a director and officer of several public companies. In these roles he acquired substantial business management, strategic, operational, human resource, financial, disclosure, compliance, and corporate governance skills. These were the primary reasons that we concluded that he should serve as one of our directors.

 

Family Relationships

 

There are no family relationships among any of our directors or executive officers.

 

Significant Employees

 

We do not currently have any significant employees other than our executive officers.

 

Involvement in Certain Legal Proceedings

 

Other than the matter listed above with respect to Mr. Geiskopf, none of our directors and executive officers has been involved in any of the following events during the past ten years:

 

  (a) any petition under the federal bankruptcy laws or any state insolvency laws filed by or against, or an appointment of a receiver, fiscal agent or similar officer by a court for the business or property of such person, or any partnership in which such person was a general partner at or within two years before the time of such filing, or any corporation or business association of which such person was an executive officer at or within two years before the time of such filing;
     
  (b) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);
     
  (c) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining such person from, or otherwise limiting, the following activities: (i) acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity; engaging in any type of business practice; or (ii) engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of federal or state securities laws or federal commodities laws;

 

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  (d) being the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any federal or state authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (c)(i) above, or to be associated with persons engaged in any such activity;
     
  (e) being found by a court of competent jurisdiction (in a civil action), the SEC to have violated a federal or state securities or commodities law, and the judgment in such civil action or finding by the SEC has not been reversed, suspended, or vacated;
     
  (f) being found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;
     
  (g) being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
     
  (h) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE

 

Related Party Transactions

 

We follow ASC 850, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. When and if we contemplate entering into a transaction in which any executive officer, director, nominee, or any family member of the foregoing would have a direct or indirect interest, regardless of the amount involved, the terms of such transaction are to be presented to our full board of directors (other than any interested director) for approval, and documented in the board minutes.

 

Other than as disclosed below, since January 1, 2017, the beginning of our last full fiscal year, we have had no related party transactions.

 

Notes Payable — Related Parties

 

We had the following outstanding notes payable during the period specified above:

 

Note   Issuance Date   Maturity Date   Interest
Rate
    Original
Borrowing
   

Largest
Aggregate
Amount
Outstanding

Since
January 1,
2017

    Amount
Outstanding
as of
August 14,
2018
   

Interest
Paid Since
January 1,
2018

   

Interest
Paid Since

January 1,

2017

 
Note 1 (1)   December 1, 2015   August 1, 2018     12.0 %   $ 1,248,883     $ 1,198,883     $ 1,198,883     $ 71,341     $ 215,211  
Note 2 (2)   December 1, 2015   August 1, 2018     12.0 %     189,000       189,000       189,000       11,247       33,926  
Note 3 (3)   December 1, 2015   April 1, 2017     12.0 %     111,901       111,901       111,901              
Note 4 (4)   August 4, 2016   December 4, 2018     12.0 %     343,326       343,326       343,326       66,214       92,670  
Note 5 (5)   August 4, 2016   December 4, 2018     12.0 %     121,875       121,875       121,875       32,896       32,896  
Total notes payable – related parties                           $ 1,964,985     $ 1,964,985       $ 181,699     $ 374,703    

 

 

(1) On December 1, 2015, we issued a convertible note in favor of Mr. Cutaia, our majority stockholder and Chief Executive Officer, to consolidate all loans and advances made by Mr. Cutaia to us as of that date. The note bears interest rate of 12% per annum, is secured by our assets, and had an original maturity date of April 1, 2017. Pursuant to the terms of the note, Mr. Cutaia, at his election, may convert up to $374,665 of outstanding principal, plus accrued interest thereon, into shares of Common Stock at a conversion rate of $0.07 per share.
   
  On May 4, 2017, we entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note from April 1, 2017 to August 1, 2018. All other terms of the note remain unchanged. In connection with the extension, we granted to Mr. Cutaia a three-year warrant to purchase up to 1,755,192 shares of Common Stock at a price of $0.355 per share with a fair value of $517,291. Effective August 8, 2018, we entered into an extension agreement with Mr. Cutaia to extend further the maturity date of the note from August 1, 2018 to February 8, 2021. All other terms of the note remain unchanged. In connection with the extension, we granted to Mr. Cutaia a warrant to purchase up to 2,446,700 shares of Common stock at a price of $0.49.
   
(2) On December 1, 2015, we issued a convertible note in favor of Mr. Cutaia in the amount of $189,000, representing a portion of Mr. Cutaia’s accrued salary for 2015. The note is unsecured, bears interest rate of 12% per annum, had an original maturity date of April 1, 2017, and is convertible into shares of Common Stock at a conversion price of $0.07 per share.
   
  On May 4, 2017, we entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note from April 1, 2017 to August 1, 2018. All other terms of the note remain unchanged and there was no additional compensation or incentive given. Effective August 8, 2018, we entered into an extension agreement with Mr. Cutaia to extend further the maturity date of the note from August 1, 2018 to February 8, 2021. All other terms of the note remain unchanged and there was no additional compensation or incentive given.

 

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(3) On December 1, 2015, we issued a note in favor of a former member of our board of directors, in the amount of $111,901, representing unpaid consulting fees as of November 30, 2015. The note is unsecured, bears interest rate of 12% per annum, and had an original maturity date of April 1, 2017. This note is currently past due.
   
(4) On April 4, 2016, we issued a convertible note in favor of Mr. Cutaia, in the amount of $343,326, to consolidate all advances made by Mr. Cutaia to us during the December 2015 through March 2016 period. The note bears interest rate of 12% per annum, is secured by our assets, and had an original maturity date of August 4, 2017. The terms of the note permit Mr. Cutaia to convert up to 30% of the principal into shares of Common Stock at a conversion price $0.07 per share.
   
  On August 4, 2017, we entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note from August 4, 2017 to December 4, 2018. All other terms of the note remain unchanged. In connection with the extension, we granted to Mr. Cutaia a five-year warrant to purchase up to 1,329,157 shares of Common Stock at a price of $0.15 per share with a fair value of $172,456.
   
(5) On April 4, 2016, we issued a convertible note in favor of Mr. Cutaia in the amount of $121,875, which represented his accrued salary from December 2015 through March 2016. The note is unsecured, bears interest at the rate of 12% per annum, compounded annually, and had an original maturity date of August 4, 2017. The note is also convertible into shares of our Common Stock at $0.07 per share.
   
  On August 4, 2017, we entered into an extension agreement with Mr. Cutaia to extend the maturity date of the note from August 4, 2017 to December 4, 2018. All other terms of the note remain unchanged and there was no additional compensation or incentive given.

 

During the year ended December 31, 2017, we recorded total interest expense equal to $232,192 pursuant to the terms of the notes and paid $196,607 in interest.

 

Director Independence

 

Our board of directors is currently composed of two members. Our Common Stock is not currently listed for trading on a national securities exchange and, as such, we are not subject to any director independence standards. However, we determined that one director, James P. Geiskopf, qualifies as an independent director. We determined that Mr. Cutaia, our Chairman of the Board, President, Chief Executive Officer, Treasurer, and Secretary, was not independent. We evaluated independence in accordance with the rules of NASDAQ and the SEC. Mr. Geiskopf also serves on our Audit and Compensation Committees.

 

Our board of directors expects to continue to evaluate its independence standards and whether and to what extent the composition of our board of directors and its committees meets those standards. We ultimately intend to appoint such persons to our board and to the committees of our board as are expected to be required to meet the corporate governance requirements imposed by NASDAQ and the SEC. Therefore, we intend that a majority of our directors will be independent directors, of which at least one director will qualify as an “audit committee financial expert,” within the meaning of Item 407(d)(5) of Regulation S-K, as promulgated under the Securities Act of 1933, as amended (the “Securities Act”).

 

Audit Committee and Audit Committee Financial Expert

 

On August 14, 2018, the board of directors amended and restated the audit committee charter (the “Audit Committee Charter”) to govern the Audit Committee. Currently, Mr. Geiskopf is the sole member of the Audit Committee and meets the independence requirements of NASDAQ and the SEC. The Audit Committee Charter requires that each member of the Audit Committee meet the independence requirements of NASDAQ and the SEC and requires the Audit Committee to have at least one member that qualifies as an “audit committee financial expert.” In addition to the enumerated responsibilities of the Audit Committee in the Audit Committee Charter, the primary function of the Audit Committee is to assist the board of directors in its general oversight of our accounting and financial reporting processes, audits of our financial statements, and internal control and audit functions. The Audit Committee Charter can be found online at http://www.nfusz.com/auditcommittecharter.

 

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Compensation Committee

 

On August 14, 2018, the board of directors approved and adopted a charter (the “Compensation Committee Charter”) to govern the Compensation Committee. Currently, Mr. Geiskopf is the sole member of the Compensation Committee and meets the independence requirements of NASDAQ and the SEC, qualifies as a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act, and qualifies as an outside director within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended. In addition to the enumerated responsibilities of the Compensation Committee in the Compensation Committee Charter, the primary function of the Compensation Committee is to oversee the compensation of our executives, produce an annual report on executive compensation for inclusion in our proxy statement, if and when required by applicable laws or regulations, and advise the board of directors on the adoption of policies that govern our compensation programs. The Compensation Committee Charter may be found online at http://www.nfusz.com/compensationcommittecharter.

 

Governance and Nominating Committee

 

On August 14, 2018, the board of directors approved and adopted a charter (the “Nominating Committee Charter”) to govern the Governance and Nominating Committee (the “Nominating Committee”) it intends to establish in the near term. The Nominating Committee Charter requires that each member of the Nominating Committee meet the independence requirements of NASDAQ and the SEC. In addition to the enumerated responsibilities of the Nominating Committee in the Nominating Committee Charter, the primary function of the Nominating Committee is to determine the slate of director nominees for election to the board of directors, to identify and recommend candidates to fill vacancies occurring between annual stockholder meetings, to review our policies and programs that relate to matters of corporate responsibility, including public issues of significance to us and our stockholders, and any other related matters required by federal securities laws. The charter of the Nominating Committee may be found may be found online http://www.nfusz.com/governanceandnominatingcommittecharter.

 

Code of Ethics

 

In 2014, our board of directors approved and adopted a Code of Ethics and Business Conduct for Directors, Senior Officers, and Employees (the “Code of Ethics”) that applies to all of our directors, officers, and employees, including our principal executive officer and principal financial officer. The Code of Ethics addresses such individuals’ conduct with respect to, among other things, conflicts of interests; compliance with applicable laws, rules, and regulations; full, fair, accurate, timely, and understandable disclosure by us; competition and fair dealing; corporate opportunities; confidentiality; protection and proper use of our assets; and reporting suspected illegal or unethical behavior. The Code of Ethics is available on our website at http://www.nfusz.com/codeofethics.

 

Compensation Committee Interlocks and Insider Participation

 

No interlocking relationship exists between our board of directors and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.

 

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EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table sets forth certain compensation awarded to, earned by, or paid to the following “named executive officers,” which is defined as follows:

 

  (a) all individuals serving as our principal executive officer during the year ended December 31, 2017; and
     
  (b) each of our two other most highly compensated executive officers who were serving as executive officers at the end of the year ended December 31, 2017.

 

We did not have any individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer as of the end of fiscal 2017.

 

Name and Position   Fiscal Year     Salary ($)     Stock Awards ($) (1)     Option Awards ($) (2)     All Other Compensation ($)     Total
($)
 

R ory J. Cutaia (3)

    2017       399,804       709,500       167,083       689,747       1,966,134 (4)

Chairman of the Board, Chief Executive

Officer, President, Secretary, and

    2016       357,500       0       108,603       127,083       593,186 (5)
Treasurer                                                
                                                 
Jeffrey R. Clayborne (6)     2017       95,615       324,500       312,846       0       732,961  
Chief Financial Officer     2016       34,000       0       164,464       0       198,464  

 

 

(1) For valuation purposes, the dollar amount shown is calculated based on the market price of the Common Stock on the grant dates. The number of shares granted, the grant date, and the market price of such shares for each named executive officer is set forth below.
   
(2) For valuation assumptions on stock option awards refer to Note 2 to the audited consolidated financial statements for the year ended December 31, 2017 included as part of this prospectus. The disclosed amounts reflect the fair value of the stock option awards that were earned during fiscal years ended December 31, 2017 and 2016 in accordance with FASB ASC Topic 718.
   
(3) Mr. Cutaia was appointed as Chairman of the Board, President, Chief Executive Officer, Secretary, and Treasurer on October 16, 2014.
   
(4) As of December 31, 2017, Mr. Cutaia had accrued but unpaid compensation equal to $582,333, which consists of deferred salary in fiscal 2017 and fiscal 2016 of $399,804 and $182,529, respectively.
   
(5) As of December 31, 2016, Mr. Cutaia had accrued but unpaid compensation equal to $182,529.
   
(6) Mr. Clayborne was appointed as Chief Financial Officer on July 15, 2016.

 

Narrative Disclosure to Summary Compensation Table

 

The following is a discussion of the material information that we believe is necessary to understand the information disclosed in the foregoing Summary Compensation Table.

 

Rory J. Cutaia

 

On November 1, 2014, we entered into an employment agreement with Mr. Cutaia. The employment agreement is for a five-year term, and can be extended for additional one-year periods. In addition to certain payments due to Mr. Cutaia upon termination of employment, the employment agreement contains customary non-competition, non-solicitation, and confidentiality provisions. Mr. Cutaia is entitled to a base salary of $325,000 per year, with annual increases of 10%. Mr. Cutaia is also entitled to a mandatory increase of not less than $100,000 per annum upon us achieving EBITDA break-even. In addition, Mr. Cutaia is eligible for an annual bonus in an amount of $325,000 upon the achievement of certain performance targets established by the board of directors, as well as an annual stock option grant of 250,000 shares of Common Stock. Finally, Mr. Cutaia is eligible for certain other benefits such as health, vision, and dental insurance, life insurance, and 401(k) Company matching.

 

Mr. Cutaia earned total cash compensation for his services to us in the amount of $399,804 and $357,500 for fiscal years 2017 and 2016, respectively.

 

On August 15, 2017, we issued Mr. Cutaia 3,750,000 shares of Common Stock. The price per share was $0.15, as reported by the OTCQB.

 

On May 12, 2016, we granted Mr. Cutaia a stock option to purchase up to 1,250,000 shares of Common Stock at an exercise price of $0.0950 per share. The option was fully vested when granted and will expire on May 11, 2021. On November 1, 2016, we granted Mr. Cutaia a stock option to purchase up to 250,000 shares of Common Stock at an exercise price of $0.11 per share. The option is now fully vested and will expire on October 31, 2021. On January 10, 2017, we granted Mr. Cutaia a stock option to purchase up to 2,000,000 shares of Common Stock at an exercise price of $0.08 per share. The option is not currently vested, but will vest in full on January 10, 2020, and will expire on January 9, 2022. On December 19, 2017, we granted Mr. Cutaia a stock option to purchase up to 250,000 shares of Common Stock at an exercise price of $0.077 per share. The option was vested as to 125,000 shares on the date of grant and will vest as to the other 125,000 shares on December 18, 2018 and will expire on December 18, 2022.

 

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Mr. Cutaia also received $689,747 in fiscal 2017 as “other compensation”, which was represented by warrants with 3-year terms to purchase up to 3,084,349 shares of our Common Stock. Mr. Cutaia received “other compensation” in fiscal 2016 equal to $127,083, which was represented by warrants with 3-year terms to purchase up to 2,452,325 shares of our Common Stock.

 

Jeffrey R. Clayborne

 

Mr. Clayborne earned total cash compensation for his services to us in the amount of $95,615 and $34,000 for fiscal years 2017 and 2016, respectively.

 

On May 4, 2017, we issued Mr. Clayborne 500,000 shares of Common Stock. The price per share was $0.36, as reported on the OTCQB.

 

On July 15, 2016, we granted Mr. Clayborne a stock option to purchase 1,500,000 shares of Common Stock at an exercise price of $0.11 per share. On the grant date, 100,000 shares vested. The remaining 1,400,000 shares will vest annually in three equal installments. As of August 14, 2018, 1,033,333 shares were vested. On January 10, 2017, we granted Mr. Clayborne a stock option to purchase 2,000,000 shares of Common Stock at an exercise price of $0.08 per share. All of the shares will vest on January 10, 2020. On May 4, 2017, we granted Mr. Clayborne a stock option to purchase 500,000 shares of Common Stock at an exercise price of $0.36 per share. The shares will vest annually in three equal installments. As of August 14, 2018, 166,667 shares were vested.

 

Outstanding Equity Awards at Fiscal Year-End

 

We did not have any stock awards outstanding as at December 31, 2017. The following table sets forth, for each named executive officer, certain information concerning outstanding option awards as of December 31, 2017:

 

Name  

Number of securities underlying unexercised

options (exercisable)
(#)

   

Number of securities underlying unexercised

options (unexercisable) (#)

    Option
exercise
price
($)
    Option expiration date
Rory J. Cutaia     125,000       125,000       0.08     December 18, 2022 (1)
      0       2,000,000       0.08     January 9, 2022 (2)
      250,000       0       0.11     October 31, 2012 (3)
      1,250,000       0       0.10     May 11, 2021 (4)
      250,000       0       0.08     November 1, 2019 (5)
      800,000       0       0.50     May 12, 2019 (6)
                             
Jeffrey R. Clayborne     0       500,000       0.36     May 3, 2022 (7)
      0       2,000,000       0.08     January 9, 2022 (8)
      566,666       933,334       0.11     July 14, 2021 (9)

 

 

(1) 125,000 shares vested on the grant date, and the remaining 125,000 shares will vest on December 19, 2018.
   
(2) 2,000,000 shares will vest on January 10, 2020
   
(3) All shares have fully vested.
   
(4) 1,250,000 shares vested on the grant date.
   
(5) All shares have fully vested.

 

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(6) All shares have fully vested.
   
(7) Shares will vest annually in three equal installments.
   
(8) All 2,000,000 shares will vest on January 10, 2020.
   
(9) 100,000 shares vested on the grant date, and the remaining 1,400,000 shares will vest annually in three equal installments.

 

Retirement or Similar Benefit Plans

 

There are no arrangements or plans in which we provide retirement or similar benefits for our directors or executive officers.

 

Resignation, Retirement, Other Termination, or Change in Control Arrangements

 

Other than as disclosed below, we have no contract, agreement, plan, or arrangement, whether written or unwritten, that provides for payments to our directors or executive officers at, following, or in connection with the resignation, retirement, or other termination of our directors or executive officers, or a change in control of our company or a change in our directors’ or executive officers’ responsibilities following a change in control.

 

Rory J. Cutaia

 

Pursuant to Mr. Cutaia’s employment agreement dated November 1, 2014 (the “Employment Agreement”), Mr. Cutaia is entitled to the following severance package in the event he is “terminated without cause,” “terminated for good reason,” or “terminated upon permanent disability:” (i) monthly payments of $27,083 or such sum equal to his monthly base compensation at the time of the termination, whichever is higher, for a period of thirty-six (36) months from the date of such termination or to the end of the term of the Employment Agreement, whichever is longer; and (ii) reimbursement for COBRA health insurance costs for thirty-six (36) months from the date of such termination or to the end of the term of the Employment Agreement, whichever is longer. In addition, Mr. Cutaia’s unvested equity will immediately vest, without restriction, and any unearned and unpaid bonus compensation, expense reimbursement, and all accrued vacation, personal, and sick days, etc. shall be deemed earned, vested, and paid immediately. For purposes of the Employment Agreement, “terminated without cause” means Mr. Cutaia is terminated for any reason other than a discharge for cause or due to Mr. Cutaia’s death or permanent disability. For purposes of the Employment Agreement, “terminated for good reason” means the voluntary termination of the Employment Agreement by Mr. Cutaia if any of the following occurs without his prior written consent, which consent cannot be unreasonably withheld considering our then current financial condition, and in each case, which continues uncured for 30 days following receipt by us of Mr. Cutaia’s written notice: (i) there is a material reduction by us in (A) Mr. Cutaia’s annual base salary then in effect or (B) the annual target bonus, as set forth in the Employment Agreement, or the maximum additional amount up to which Mr. Cutaia is eligible pursuant to the Employment Agreement; (ii) we reduce Mr. Cutaia’s job title and position such that Mr. Cutaia (A) is no longer our Chief Executive Officer; (B) is no longer the Chairman of our board of directors; or (C) is involuntarily removed from our board of directors; or (iii) Mr. Cutaia is required to relocated to an office location outside of Los Angeles, California or outside of a thirty (30) mile radius of Los Angeles, California. For purposes of the Employment Agreement, “terminated upon permanent disability” means Mr. Cutaia is terminated because he is unable to perform his duties due to a physical or mental condition for (i) a period of one hundred twenty (120) consecutive days or (ii) an aggregate of one-hundred eighty (180) days in any twelve (12)-month period.

 

47
 

 

Director Summary Compensation Table

 

The table below summaries the compensation paid to our sole non-employee director for the fiscal year ended December 31, 2017:

 

Name (1)   Fees earned
or paid in
cash ($)
    Stock
awards
($) (2)
    Option
awards
($)
    Total
($)
 
James P. Geiskopf     0       147,000 (3)(4)     148,777 (3)(5)     295,777  

 

 

(1) Rory J. Cutaia, our Chairman of the Board, Chief Executive Officer, President, Secretary, and Treasurer during fiscal 2017, is not included in this table as he was an employee, and, thus, received no compensation for his services as a director. The compensation received by Mr. Cutaia as an employee is disclosed in the Summary Compensation Table on page 45.
   
(2) Reflects the fair value amount of the stock awards granted for fiscal 2017 in accordance with ASC Topic 718.
   
(3) The aggregate number of stock awards outstanding at the end of fiscal 2017 was 4,164,000 shares. The aggregate number of option awards outstanding at the end of fiscal 2017 was 3,350,000 shares.
   
(4) Represents an award of 1,500,000 shares of Common Stock valued at a price per share of $0.098, which was the closing price as reported on the OTCQB on the grant date.
   
(5) Represents an option award of 2,000,000 shares of Common Stock valued at a price per share of approximately $0.0744, which was the closing price as reported on the OTCQB on the grant date.

 

Narrative Discussion on Director Compensation

 

We have no formal plan for compensating our directors for their services in their capacity as directors. Our directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on their behalf other than services ordinarily required of a director.

 

James P. Geiskopf

 

On January 10, 2017, we granted Mr. Geiskopf a stock option to purchase up to 2,000,000 shares of Common Stock at an exercise price of $0.08 per share. The shares underlying the stock option will vest on January 10, 2020.

 

On March 7, 2018, we granted Mr. Geiskopf a stock award of 1,500,000 shares of Common Stock for services rendered during fiscal year 2017.

 

Golden Parachute Compensation

 

For a description of the terms of any agreement or understanding, whether written or unwritten, between our company and any officer or director concerning any type of compensation, whether present, deferred or contingent, that will be based on or otherwise will relate to an acquisition, merger, consolidation, sale, or other type of disposition of all or substantially all assets of our company, see above under the heading “Executive Compensation” and “Director Compensation.”

 

Risk Assessment in Compensation Programs

 

During fiscal 2017 and 2016, we paid compensation to our employees, including executive and non-executive officers. Due to the size and scope of our business, and the amount of compensation, we did not have any employee compensation policies and programs to determine whether our policies and programs create risks that are reasonably likely to have a material adverse effect on us.

 

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth, as of August 14, 2018, certain information with respect to the beneficial ownership of our Common Stock by (i) each of our current directors, (ii) each of our named executive officers, (iii) our directors and named executive officers as a group, and (iv) each stockholder known by us to be the beneficial owner of more than 5% of our outstanding Common Stock. For purposes of this table, we have also included a column that relates to the potential percent owned by each of our directors, named executive officers, and more than 5% beneficial owners following the Sound Concepts Acquisition, assuming that shares of Common Stock are issued in this offering, which includes the full exercise of the Underwriter’s over-allotment option. We currently do not know how many shares of Common Stock will be offered and sold in the offering.

 

Name and Address   Title of Class  

Amount and

Nature of

Beneficial

Ownership (1)

   

Percent

Owned (%) (Pre-

Offering) (2)

   

Amount and

Nature of

Beneficial

Ownership (1)

(Post-Offering)

   

Percent Owned

(%) (Post-

Offering)

 
Rory J. Cutaia
c/o 344 S. Hauser Drive, Unit 414
Los Angeles, California 90036
  Common Stock     59,418,320 (3)     32.1 %                            
                                     
James P. Geiskopf
c/o 344 S. Hauser Drive, Unit 414
Los Angeles, California 90036
  Common Stock     5,514,000 (4)     3.6 %                
                                     
Jeffrey R. Clayborne
c/o 344 S. Hauser Drive, Unit 414
Los Angeles, California 90036
  Common Stock     3,393,141 (5)     2.2 %                

All executive officers and directors

as a group (3 persons)

  Common Stock     68,325,461       36.4 %                
                                     
Beneficial owner of more than 5%                                    
Chakradhar Reddy
110 3rd Avenue, No. 11B
New York, New York 11103
  Common Stock     9,300,000       6.05 %                

 

 

(1) Except as otherwise indicated, we believe that the beneficial owners of the Common Stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Common Stock subject to options or warrants currently exercisable or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.
   
(2)  Percentage of Common Stock is based on 153,698,043 shares of our Common Stock issued and outstanding as of August 14, 2018.
   
(3) Consists of 23,585,832 shares of Common Stock held directly, 3,603,600 shares of Common Stock held by Cutaia Media Group Holdings, LLC (an entity over which Mr. Cutaia has dispositive and voting authority), and 810,092 shares of Common Stock held by Mr. Cutaia’s spouse (as to which shares, he disclaims beneficial ownership). Also includes 2,675,000 shares of Common Stock underlying stock options held directly and 575,000 shares of Common Stock underlying stock options held by Mr. Cutaia’s spouse that are exercisable within 60 days of the date of this prospectus (as to which underlying shares, he disclaims beneficial ownership) but excludes 2,125,000 shares of Common Stock underlying stock options held by Mr. Cutaia, and 25,000 shares of Common Stock underlying stock options held by Mr. Cutaia’s spouse, as none of such options is exercisable within 60 days of the date of this prospectus. The total also includes 14,457,267 shares of Common Stock underlying warrants granted to Mr. Cutaia, which warrants are exercisable within 60 days of the date of this prospectus, and 11,264,829 shares of Common Stock into which Mr. Cutaia can contractually convert his outstanding notes within 60 days of the date of this prospectus.
   
(4) Includes 4,084,000 shares of Common Stock held directly and 80,000 shares of Common Stock held by Mr. Geiskopf’s children. Also includes 1,350,000 shares of Common Stock underlying stock options exercisable within 60 days of the date of this prospectus. Excludes 2,000,000 shares of Common Stock underlying stock options not exercisable within 60 days of the date of this prospectus.
   
(5) Includes 2,000,000 shares of Common Stock held directly. Also, includes 1,393,141 shares of Common Stock underlying stock options that are exercisable within 60 days of the date of this prospectus. Excludes 2,800,000 shares of Common Stock underlying stock options that are not exercisable within 60 days of the date of this prospectus.

 

We do not know of any arrangements that may, at a subsequent date, result in a change in control.

 

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DESCRIPTION OF SECURITIES

 

The following is a summary of all material characteristics of our capital stock as set forth in our Articles of Incorporation, and our Bylaws. The summary does not purport to be complete and is qualified in its entirety by reference to our Articles of Incorporation and our Bylaws, and to the provisions of the Nevada Revised Statutes. We encourage you to review complete copies of our Articles of Incorporation and our Bylaws. You can obtain copies of these documents by following the directions outlined in “Where You Can Find More Information” and “Incorporation of Certain Information by Reference” elsewhere in this prospectus.

 

General

 

We are currently authorized to issue up to 200,000,000 shares of Common Stock and 15,000,000 shares of preferred stock, par value $0.0001 per share.

 

Common Stock

 

Of the 200,000,000 shares of Common Stock authorized by our Articles of Incorporation, 153,698,043 shares of Common Stock are issued and outstanding as of August 14, 2018. Each holder of Common Stock is entitled to one vote per share on all matters to be voted upon by the stockholders and are not entitled to cumulative voting for the election of directors. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor subject to the rights of preferred stockholders. We have not paid any dividends and do not intend to pay any cash dividends to the holders of Common Stock in the foreseeable future. We anticipate reinvesting our earnings, if any, for use in the development of our business. In the event of liquidation, dissolution, or winding up of the Company, the holders of Common Stock are entitled, unless otherwise provided by law or our Articles of Incorporation, including any certificate of designations for a series of preferred stock, to share ratably in all assets remaining after payment of liabilities and the preferences of preferred stockholders. Holders of our Common Stock do not have preemptive, conversion, or other subscription rights. There are no redemption or sinking fund provisions applicable to our Common Stock.

 

Preferred Stock

 

Of the 15,000,000 shares of preferred stock, par value $0.001 per share, authorized in our Articles of Incorporation, all of which are undesignated. The board of directors is authorized, without further approval from our stockholders, to create one or more series of preferred stock, and to designate the rights, privileges, preferences, restrictions, and limitations of any given series of preferred stock. Accordingly, the board of directors may, without stockholder approval, issue shares of preferred stock with dividend, liquidation, conversion, voting, or other rights that could adversely affect the voting power or other rights of the holders of Common Stock. The issuance of preferred stock could have the effect of restricting dividends payable to holders of our Common Stock, diluting the voting power of our Common Stock, impairing the liquidation rights of our Common Stock, or delaying or preventing a change in control of us, all without further action by our stockholders.

 

Options

 

As of August 14, 2018, we had 25,534,605 shares of our Common Stock underlying outstanding stock options, having a weighted-average exercise price of approximately $0.30 per share.

 

Warrants

 

As of August 14, 2018, we had 31,854,113 shares of our Common Stock underlying outstanding warrants, having a weighted-average exercise price of approximately $0.17 per share.

 

Anti-Takeover Effects of Nevada Law and Our Articles of Incorporation and Bylaws

 

Some provisions of Nevada law, our Articles of Incorporation, and our Bylaws contain provisions that could make the following transactions more difficult: an acquisition of us by means of a tender offer; an acquisition of us by means of a proxy contest or otherwise; or the removal of our incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests, including transactions that provide for payment of a premium over the market price for our shares.

 

50
 

 

These provisions, summarized below, are intended to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of the increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.

 

Undesignated Preferred Stock. The ability of our board of directors, without action by the stockholders, to issue up to 15,000,000 shares of preferred stock, which was previously authorized but remain undesignated, with voting or other rights or preferences as designated by our board of directors could impede the success of any attempt to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of us.

 

Stockholder Meetings. Our Bylaws provide that a special meeting of stockholders may be called only by our president, by all of the directors provided that there are no more than three directors, or if more than three, by any three directors, or by the holder of a majority of our capital stock.

 

Stockholder Action by Written Consent. Our Bylaws allow for any action that may be taken at any annual or special meeting of the stockholders to be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.

 

Stockholders Not Entitled to Cumulative Voting. Our Bylaws do not permit stockholders to cumulate their votes in the election of directors. Accordingly, the holders of a majority of the outstanding shares of our Common Stock entitled to vote in any election of directors can elect all of the directors standing for election, if they choose, other than any directors that holders of our preferred stock may be entitled to elect.

 

Nevada Business Combination Statutes . The “business combination” provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, or NRS, generally prohibit a Nevada corporation with at least 200 stockholders from engaging in various “combination” transactions with any interested stockholder for a period of two years after the date of the transaction in which the person became an interested stockholder, unless the transaction is approved by the board of directors prior to the date the interested stockholder obtained such status or the combination is approved by the board of directors and thereafter is approved at a meeting of the stockholders by the affirmative vote of stockholders representing at least 60% of the outstanding voting power held by disinterested stockholders, and extends beyond the expiration of the two-year period, unless:

 

  the combination was approved by the board of directors prior to the person becoming an interested stockholder or the transaction by which the person first became an interested stockholder was approved by the board of directors before the person became an interested stockholder or the combination is later approved by a majority of the voting power held by disinterested stockholders; or
     
  if the consideration to be paid by the interested stockholder is at least equal to the highest of: (a) the highest price per share paid by the interested stockholder within the two years immediately preceding the date of the announcement of the combination or in the transaction in which it became an interested stockholder, whichever is higher, (b) the market value per share of common stock on the date of announcement of the combination and the date the interested stockholder acquired the shares, whichever is higher, or (c) for holders of preferred stock, the highest liquidation value of the preferred stock, if it is higher.

 

A “combination” is generally defined to include mergers or consolidations or any sale, lease exchange, mortgage, pledge, transfer, or other disposition, in one transaction or a series of transactions, with an “interested stockholder” having: (a) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (b) an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, (c) 10% or more of the earning power or net income of the corporation, and (d) certain other transactions with an interested stockholder or an affiliate or associate of an interested stockholder.

 

51
 

 

In general, an “interested stockholder” is a person who, together with affiliates and associates, owns (or within two years, did own) 10% or more of a corporation’s voting stock. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price.

 

Nevada Control Share Acquisition Statutes . The “control share” provisions of Sections 78.378 to 78.3793, inclusive, of the NRS apply to “issuing corporations” that are Nevada corporations with at least 200 stockholders, including at least 100 stockholders of record who are Nevada residents, and that conduct business directly or indirectly in Nevada. The control share statute prohibits an acquirer, under certain circumstances, from voting its shares of a target corporation’s stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the target corporation’s disinterested stockholders. The statute specifies three thresholds: one-fifth or more but less than one-third, one-third but less than a majority, and a majority or more, of the outstanding voting power. Generally, once an acquirer crosses one of the above thresholds, those shares in an offer or acquisition and acquired within 90 days thereof become “control shares” and such control shares are deprived of the right to vote until disinterested stockholders restore the right. These provisions also provide that if control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other stockholders who do not vote in favor of authorizing voting rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters’ rights.

 

A corporation may elect to not be governed by, or “opt out” of, the control share provisions by making an election in its articles of incorporation or bylaws, provided that the opt-out election must be in place on the 10th day following the date an acquiring person has acquired a controlling interest, that is, crossing any of the three thresholds described above. We have not opted out of the control share statutes, and will be subject to these statutes if we are an “issuing corporation” as defined in such statutes.

 

The effect of the Nevada control share statutes is that the acquiring person, and those acting in association with the acquiring person, will obtain only such voting rights in the control shares as are conferred by a resolution of the stockholders at an annual or special meeting. The Nevada control share law, if applicable, could have the effect of discouraging takeovers of us.

 

Amendment of Charter Provisions. The amendment of any of the above provisions would require approval by holders of at least a majority of the total voting power of all of our outstanding voting stock.

 

The provisions of Nevada law, our Articles of Incorporation, and our Bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our Common Stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in the composition of our board and management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.

 

Transfer Agent and Register

 

Our transfer agent and registrar for our Common Stock is VStock Transfer, LLC, 18 Lafayette Place, Woodmere, New York 11598. Its telephone number is 855-9VSTOCK.

 

52
 

 

MATERIAL U.S. FEDERAL INCOME AND

ESTATE TAX CONSEQUENCES TO NON-U.S. HOLDERS

 

The following is a summary of the material U.S. federal income tax consequences of the ownership and disposition of our Common Stock to Non-U.S. Holders (defined below), but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder, administrative rulings and judicial decisions, all as of the date hereof. These authorities may be changed or subject to differing interpretations, possibly with retroactive effect, so as to result in United States federal income tax consequences different from those set forth below. We have not sought and will not seek any ruling from the Internal Revenue Service, or the IRS, with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS or a court will agree with such statements and conclusions.

 

This summary also does not address the tax considerations arising under the laws of any United States state or local or any non-United States jurisdiction, the 3.8% Medicare tax on net investment income or any alternative minimum tax consequences. In addition, this discussion does not address tax considerations applicable to a Non-U.S. Holder’s particular circumstances or to a Non-U.S. Holder that may be subject to special tax rules, including, without limitation:

 

  banks, insurance companies or other financial institutions;
     
  tax-exempt or government organizations;
     
  brokers of or dealers in securities or currencies;
     
  traders in securities that elect to use a mark-to-market method of accounting for their securities holdings;
     
  persons that own, or are deemed to own, more than five percent of our capital stock;
     
  certain United States expatriates, citizens or former long-term residents of the United States;
     
  persons who hold our common stock as a position in a hedging transaction, “straddle,” “conversion transaction,” synthetic security, other integrated investment, or other risk reduction transaction;
     
  persons who do not hold our common stock as a capital asset within the meaning of Section 1221 of the Code (generally, for investment purposes);
     
  persons deemed to sell our common stock under the constructive sale provisions of the Code;
     
  real estate investment trusts or regulated investment companies;
     
  pension plans;
     
  partnerships, or other entities or arrangements treated as partnerships for United States federal income tax purposes, or investors in any such entities;
     
  persons for whom our stock constitutes “qualified small business stock” within the meaning of Section 1202 of the Code;
     
  integral parts or controlled entities of foreign sovereigns;
     
  tax-qualified retirement plans;
     
  controlled foreign corporations;
     
  passive foreign investment companies and corporations that accumulate earnings to avoid United States federal income tax; or
     
  persons that acquire our Common Stock as compensation for services.

 

In addition, if a partnership, including any entity or arrangement classified as a partnership for United States federal income tax purposes, holds our common stock, the tax treatment of a partner generally will depend on the status of the partner, the activities of the partnership, and certain determinations made at the partner level. Accordingly, partnerships that hold our Common Stock, and partners in such partnerships, should consult their tax advisors regarding the United States federal income tax consequences to them of the purchase, ownership, and disposition of our common stock.

 

You are urged to consult your tax advisor with respect to the application of the United States federal income tax laws to your particular situation, as well as any tax consequences of the purchase, ownership, and disposition of our Common Stock arising under the U.S. federal estate or gift tax rules or under the laws of any United States state or local or any non-United States or other taxing jurisdiction or under any applicable tax treaty.

 

Definition of a Non-U.S. holder

 

For purposes of this summary, a “Non-U.S. Holder” is any beneficial owner of our common stock that is not a “U.S. person,” and is not a partnership, or an entity disregarded from its owner, each for U.S. federal income tax purposes. A U.S. person is any person that, for United States federal income tax purposes, is or is treated as any of the following:

 

  an individual who is a citizen or resident of the United States;
     
  a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States, any state thereof, or the District of Columbia;
     
  an estate, the income of which is subject to United States federal income tax regardless of its source; or
     
  a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a U.S. person for U.S. federal income tax purposes.

 

53
 

 

Distributions

 

As discussed in the section entitled “Market Price and Dividend Information” beginning on page 19 of this prospectus, we do not anticipate paying any dividends on our capital stock in the foreseeable future. If we make distributions on our Common Stock, those payments will constitute dividends for United States income tax purposes to the extent we have current or accumulated earnings and profits, as determined under U.S. federal income tax principles. To the extent those distributions exceed both our current and our accumulated earnings and profits, they will constitute a return of capital and will first reduce a Non-U.S. Holder’s basis in our Common Stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below under the “Gain on Sale or Other Disposition of Common Stock” section. Any such distributions would be subject to the discussions below regarding back-up withholding and Foreign Account Tax Compliance Act, or FATCA.

 

Subject to the discussion below on effectively connected income, any dividend paid to a Non-U.S. Holder generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable income tax treaty. To receive a reduced treaty rate, a Non-U.S. Holder must provide us or our agent with an IRS Form W-8BEN (generally including a United States taxpayer identification number), IRS Form W-8-BEN-E or another appropriate version of IRS Form W-8 (or a successor form), which must be updated periodically, and which, in each case, must certify qualification for the reduced rate. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.

 

Dividends paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a United States trade or business within the United States and that are not eligible for relief from United States (net basis) income tax under the business profits article of an applicable income tax treaty, generally are exempt from the (gross basis) withholding tax described above. To obtain this exemption from withholding tax, the Non-U.S. Holder must provide the applicable withholding agent with an IRS Form W-8ECI or successor form or other applicable IRS Form W-8 certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States. Such effectively connected dividends, if not eligible for relief under the business profits article of a tax treaty, would not be subject to a withholding tax, but would be taxed at the same graduated rates applicable to U.S. persons, net of certain deductions and credits and if, in addition, the Non-U.S. Holder is a corporation, may also be subject to a branch profits tax at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty).

 

If you are eligible for a reduced rate of withholding tax pursuant to a tax treaty, you may be able to obtain a refund of any excess amounts currently withheld if you timely file an appropriate claim for refund with the IRS.

 

Gain on Sale or Other Disposition of Common Stock

 

Subject to the discussion below regarding bac