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EX-23.1 - Frankly Incex23-1.htm
EX-4.2 - Frankly Incex4-2.htm
EX-3.4 - Frankly Incex3-4.htm
EX-23.4 - Frankly Incex23-4.htm
EX-23.3 - Frankly Incex23-3.htm
EX-23.2 - Frankly Incex23-2.htm
EX-10.10 - Frankly Incex10-10.htm
EX-10.6 - Frankly Incex10-6.htm
EX-10.5 - Frankly Incex10-5.htm
EX-4.5 - Frankly Incex4-5.htm
EX-4.3 - Frankly Incex4-3.htm
EX-3.1 - Frankly Incex3-1.htm

 

As filed with the Securities and Exchange Commission on January 11, 2017

 

Registration No. 333-214578

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

AMENDMENT NO. 1

TO

FORM S-1

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

FRANKLY INC.

(Exact Name of Registrant as Specified in its Charter)

 

British Columbia   7370   98-1230527

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

333 Bryant Street, Suite 240

San Francisco, CA 94107

(415) 861-9797

(Address, including zip code, and telephone number,

including area code, of Registrant’s principal executive offices)

 

Steve Chung

Chief Executive Officer

333 Bryant Street, Suite 240

San Francisco, CA 94107

(415) 861-9797

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

Copies to:

 

Richard I. Anslow, Esq.

Ellenoff Grossman & Schole LLP

1345 Avenue of the Americas

New York, New York 10105

(212) 370-1300 (Phone)

(212) 370-7889 (Fax)

John D. Hogoboom

Lowenstein Sandler LLP

1251 Ave of the Americas

New York, New York 10020

(212) 262-6700 (Phone)

(212) 262-7402 (Fax)

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [  ]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ]

Non-accelerated filer [  ]

(Do not check if a smaller reporting company)

Smaller reporting company [X]

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

   
  

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement related to these securities filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell or a solicitation of an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to completion, dated January 11, 2017

 

Shares

 

 

Frankly Inc.

 

Common Shares

 

This is the initial public offering of our common shares in the United States. We are offering             common shares. Prior to this offering, there has been no public market for our common shares in the United States. Our common shares are listed on the TSX Venture Exchange Inc. (“TSX-V”) under the symbol “TLK”. On January 9, 2017, the last reported sale price of our common shares on the TSX-V was CDN$0.39 per share. We have applied to have our common shares listed on the Nasdaq Capital Market under the symbol “FKLY”. We expect that the public offering price will be between $             and $             per share.

 

Our independent registered public accounting firm has expressed in its report on our audited consolidated financial statements included as part of this prospectus a substantial doubt regarding our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern. See “Risk Factors – Our independent registered public accounting firm has expressed in its report on our audited consolidated financial statements a substantial doubt about our ability to continue as a going concern.” and “Index to Consolidated Financial Statements.”

 

On                , 2017, we effected a one-for-                  reverse split (the “Reverse Stock Split”) of our issued and outstanding common shares. All warrant, option, share and per share information in this prospectus gives retroactive effect to the Reverse Stock Split.

 

We are an “emerging growth company” as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

Investing in our securities involves a high degree of risk. See the section entitled “Risk Factors” beginning on page 8 of this prospectus for a discussion of the risks that you should consider in connection with an investment in our securities.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

   Per Share  Total
Public offering price  $   $ 
Underwriting discount(1)  $     $  
Proceeds, before expenses, to us  $    $  

 

(1) See “Underwriting” on page 97 of this prospectus for a description of the compensation payable to the underwriters.

 

We have granted the underwriters a 45-day option to buy up to an additional         common shares to cover over-allotments, if any.

 

The underwriters expect to deliver the common shares to the purchasers on or about        , 2017.

 

Sole Book-Running Manager

 

Roth Capital Partners

 

Co-Manager

Noble Capital Markets

 

The date of this prospectus is        , 2017

 

   
  

 

TABLE OF CONTENTS

 

    Page
PROSPECTUS SUMMARY   1
RISK FACTORS   8
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS   26
ENFORCEABILITY OF CIVIL LIABILITIES   27
USE OF PROCEEDS   28
PRICE RANGE OF COMMON SHARES   29
DIVIDEND POLICY   30
CAPITALIZATION   31
DILUTION   33
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION   35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS   38
BUSINESS   61
MANAGEMENT   68
EXECUTIVE COMPENSATION   73
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS   80
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT   83
DESCRIPTION OF SECURITIES   84
SHARES ELIGIBLE FOR FUTURE SALE   87
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS   90
CANADIAN TAX CONSIDERATIONS   95
UNDERWRITING   97
MARKET AND OTHER DATA   103
LEGAL MATTERS   103
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   103
EXPERTS   103
WHERE YOU CAN FIND MORE INFORMATION   104
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   F-1

 

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In this prospectus, currency amounts are stated in U.S. dollars (“$”), unless specified otherwise. All references to CDN$ are to Canadian dollars.

 

We have not, and the underwriters have not, authorized anyone to provide you with information that is different from that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. When you make a decision about whether to invest in our securities, you should not rely upon any information other than the information in this prospectus or in any free writing prospectus that we may authorize to be delivered or made available to you. Neither the delivery of this prospectus nor the sale of our securities means that the information contained in this prospectus or any free writing prospectus is correct after the date of this prospectus or such free writing prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful.

 

For investors outside the U.S.: We have not, and the underwriters have not, taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the U.S. Persons outside the U.S. who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the securities covered hereby and the distribution of this prospectus outside the U.S.

 

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PROSPECTUS SUMMARY

 

This summary highlights certain information appearing elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common shares. You should read this entire prospectus carefully, especially the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” sections of this prospectus before making an investment decision. References in this prospectus to “we,” “us,” “our” and “Company” refer to Frankly Inc. and its subsidiaries.

 

Overview

 

Our mission is to help TV broadcasters and media companies transform their traditional business from just delivering content over-the-air via broadcast television to distributing content in multi-platform, digital formats on new platforms such as mobile, tablets, desktop and other connected devices. Our core product is a white-labeled software platform that enables media companies to publish their official content onto multiscreen devices, increase social interaction on those multiscreen experiences, and enable digital advertising. The platform consists of a content management system (“CMS”) platform, native mobile and over-the-top (“OTT”) applications, responsive web framework, digital video solutions and digital advertising solutions. We generate revenues by charging monthly recurring software licensing fees, variable usage fees for our platform and sharing digital advertising revenue with our customers.

 

Our platform is currently being used by approximately 200 U.S. local news stations, mostly affiliated with large broadcasting networks such as NBC, CBS, FOX and ABC. We plan to enhance our platform in the future by expanding our offerings to other media verticals and international markets, together with investments into channel partnerships, sales and marketing, enhanced data analytics and innovative advertising products.

 

Our Products and Services

 

We have had two distinct phases of product evolution in our history. In our first phase from February 2013 until August 2015, we were developers of mobile applications and a next generation server platform. During this phase, we launched, developed and marketed a consumer focused Frankly Chat mobile application, as well as launched a white-labeled, business-to-business mobile communication platform via a software development kit (“SDK”) that was used by retailers such as Victoria’s Secret, professional sport teams such as the Sacramento Kings, non-profits such as the United Nations Foundation and publishers such as the Bleacher Report. Such customers were our primary customers of the mobile app and SDK business which are no longer a material part of our business but the technology became the foundation for our current platform. Through the acquisition of Frankly Media , LLC (“Frankly Media”) in August 2015, we leveraged our existing mobile and platform expertise to become a software-as-a-service (“SaaS”) provider of content management for broadcasters and media companies. Today, we provide a white-labeled, integrated software platform to broadcasters and media companies which use our technology to get their content onto multiscreen devices, increase social interaction on those multiscreen experiences, and enable digital advertising.

 

Our platform consists of the following offerings and features:

 

CMS platform connected white-labeled application frameworks. Our white-labeled application frameworks for mobile applications, connected TV applications and desktop and mobile websites connect back into our CMS platform. They simplify the distribution of content across multiple platforms. Our mobile application framework is a white-labeled Android or iOS mobile application framework that enables our customers to easily publish their official mobile apps to their audience. Our native connected TV framework is a white-labeled Apple TV, Roku and FireTV application framework that enables our customers to easily publish their official connected TV apps to their audience. We also provide a responsive web framework which is a white-labeled desktop and mobile web, collectively, a responsive web, framework that enables our customers to easily publish their official Internet homepages.

 

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Robust Video-on-demand (“VoD”) and live video solution. Our VoD and live video solution ingests live video content into our on-premise server that encodes, transcodes and enables digital VoD clipping and live video publishing in an integrated format that eliminates the need for customers to deal with multiple vendors.

 

Digital advertising solutions. Our digital advertising solutions include both programmatic (automated) and direct agency sales efforts to place digital advertising onto our customer’s digital properties in return for revenue share of the advertising dollars. We also provide local ad sales products and consulting and support services in exchange for monthly fees, and charge our customers for the use of our ad serving platform to serve ads for local and national advertising campaigns. The array of advertising products and services we offer provides our customers with turnkey access to the latest advertising solutions and simplifies the complicated task of monetizing their online properties.

 

Data-as-a-service. Our newest Data-as-a-service product leverages a Data Management Platform (“DMP”) offering our customers access to targeted audience data and user segments in order to increase targeting and higher advertising rates to advertisers on their digital properties. We plan to continue to develop this product to enable our customers to have actionable data to drive increased audience engagement and enhanced user experience.

 

We enter into written contracts with our customers pursuant to which we provide access to our online, software-as-a-service, content management platform. These contracts typically cover the use of the platform and ancillary services such as delivery and storage of video content, and access to ad-serving and analytics functionality. Many of these agreements also grant us the right to sell online advertising inventory on behalf of the customer pursuant to a revenue sharing arrangement with the customer. Our agreements are generally for a three-year term and do not provide for early termination rights. We bill our customers quarterly in advance for the fees associated with the software license, and monthly in arrears for variable usage fees incurred by a customer’s use of our platform. We generally make advertising revenue share payments to our customers on a quarterly basis. As of December 31, 2016, we had approximately 200 TV stations as customers.

 

Recent Developments

 

The August 2016 Refinancing

 

On August 31, 2016, we entered into a $14.5 million credit facility (the “Credit Facility”) under a credit agreement, as amended on December 20, 2016 (the “Credit Agreement”) with Raycom Media, Inc. (“Raycom”). The proceeds of the Credit Facility were used to pay in full the $11 million promissory note (the “GEI Promissory Note”) issued to Gannaway Entertainment Inc. (“GEI”) and $3 million of the $4 million promissory note issued to Raycom (the “Original Raycom Note” and together with the GEI Promissory Note, the “Worldnow Promissory Notes”), each issued in connection with the acquisition of Gannaway Web Holdings, LLC, now Frankly Media. In addition, we issued to Raycom 14,809,720 warrants (the “Warrants”) to purchase one common share per warrant at a price per share of CDN$0.50 ($0.39 based on the exchange rate at August 18, 2016) and repaid in full our $2.0 million outstanding revolving credit facility with Bridge Bank (the “Bridge Bank Loan”). Subject to Raycom’s discretion, we also have an additional $1.5 million available for borrowing under the Credit Facility. We also entered into a share purchase agreement (the “Raycom SPA”) pursuant to which we converted $1 million of the Original Raycom Note into 2,553,400 common shares. We refer to these transactions as the “August 2016 Refinancing”.

 

Securities Purchase Agreement

 

Under the Raycom SPA, we agreed to enlarge our Board to seven (7) directors, subject to shareholder approval, within 90 days of August 31, 2016. In addition, so long as Raycom holds not less than 20% of our issued and outstanding common shares calculated on a fully diluted basis, it has (i) the designation rights to two (2) directors as management’s nominees for election to our Board, one who is our current Board member, Joseph G. Fiveash, III and one who must be an independent director as defined in Rule 5605(a)(2) of the Nasdaq Rules, and (ii) approval rights to one of the independent directors named as management’s nominees for election to our Board outside of the two Raycom designated directors. The two additional Board members were to be identified and approved by the Board by November 30, 2016. Pursuant to the SPA, Raycom has designated Joseph Fiveash as one of its director designees. On December 20, 2016, we entered into an amendment to the Raycom SPA and Credit Agreement, pursuant to which Raycom and we agreed to extend the time period for enlargement of the Board to seven members from 90 days following August 31, 2016, to the earlier of, and subject to shareholder approval: (a) 45 days following the effective date of our Form S-1 registration statement of which this prospectus forms a part, or (b) April 15, 2017.

 

Credit Agreement

 

We will pay interest on each loan outstanding at any time at a rate per annum of 10%. Interest will accrue and be calculated, but not compounded, daily on the principal amount of each loan on the basis of the actual number of days each loan is outstanding and will be compounded and payable monthly in arrears on each interest payment date. To the maximum extent permitted by applicable law, we will pay interest on all overdue amounts, including any overdue interest payments, from the date each of those amounts is due until the date each of those amounts is

 

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paid in full. That interest will be calculated daily, compounded monthly and payable on demand of Raycom at a rate per annum of 12%. We have the option to repay all or a portion of loans outstanding under the Credit Facility without premium, penalty or bonus upon prior notice to Raycom and repayment of all interest, fees and other amounts accrued and unpaid under the Credit Facility.

 

We must also make the following mandatory repayments:

 

(a)        $2 million prior to August 31, 2019;

 

(b)       commencing on November 30, 2019 and on the last day of the month of each three month period thereafter, an amount of $687,500 per three month period;

 

(c)       proceeds (less actual costs paid and income taxes) on any asset sales or issuances of debt or equity;

 

(d)       upon a successful listing of our common shares on Nasdaq with a capital raise of between $8 million to $11 million, mandatory repayment in the amount of $2 million, which will be applied toward the repayment obligation required by (a) above if completed by March 31, 2017;

 

(e)       upon a successful listing of our common shares on Nasdaq with a capital raise of more than $12 million, a mandatory repayment in the amount of $3 million which will be applied toward the $2 million repayment obligation required by (a) above if completed by March 31, 2017 and any amounts raised in excess of $2 million will be applied pro rata to repayment obligations required by (b) above commencing November 30, 2019; and

 

(f)       commencing on the financial year ending December 31, 2017, and each financial year ending thereafter, 100% of the current year excess cash flow amount in excess of $2 million must be paid to Raycom as a mandatory repayment amount no later than May 1 of the following year until a total leverage ratio of not more than 3:1 has been met for such fiscal year, at which point 50% of the current year excess cash amount in excess of $2 million will be paid to Raycom as mandatory repayment amounts. Such excess cash flow payments will be applied pro rata to reduce other mandatory payments due thereunder.

 

The mandatory prepayment provision described in subsection (c) above is not applicable to the December Private Placement (as described below), the SVB Line of Credit (as described below) or a U.S. public offering of equity pursuant to this prospectus resulting in proceeds to us of less than $8 million.

 

In addition, we must maintain certain leverage ratios and interest coverage ratios beginning the fiscal quarter ending December 31, 2017. The leverage ratios range from 4:1 to 2.5:1 and 2:1 to 3.5:1 for the interest coverage ratio. We are also subject to certain covenants regarding, among others, indebtedness, fundamental corporate changes and dispositions and acquisitions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Recent Developments—The August 2016 Financing— The Credit Agreement”.

 

Upon an event of default, Raycom may by written notice terminate the facility immediately and declare all obligations under the Credit Agreement and the related loan documents, whether matured or not, to be immediately due and payable. Raycom may also as and by way of collateral security, deposit and retain in an interest bearing account, amounts received by Raycom from us under the Credit Agreement and the related loan documents and realize upon the Security Interest Agreements, Guaranty Agreements and Pledge Agreement as described below. If we fail to perform any of our obligations under the Credit Agreement and the related loan documents, Raycom may upon 10 days’ notice, perform such covenant or agreement if capable. Any amount paid by Raycom under such covenant or agreement will be repaid by us on demand and will bear interest at 12% per annum.

 

Guaranty Agreements, Security Interest Agreements and Pledge Agreement

 

In connection with the Credit Agreement, our subsidiaries Frankly Co. and Frankly Media LLC have entered into guaranty agreements (the “Guaranty Agreements”) whereby Frankly Co. and Frankly Media LLC have guaranteed our obligations under the Credit Agreement. In addition, each of Frankly Inc., Frankly Co. and Frankly Media LLC have entered into security interest agreements (the “Security Interest Agreements”) and pledge agreements (the “Pledge Agreements”) pursuant to which Raycom has first priority security interests in substantially all of our assets.

 

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Upon an event of default, we will be required to deposit all interests, income, dividends, distributions and other amounts payable in cash in respect of the pledged interests into a collateral account over which Raycom has the sole control and may apply such amounts in its sole discretion to the secured obligations under the Credit Agreement. Upon the cure or waiver of a default, Raycom will repay to us all cash interest, income, dividends, distributions and other amounts that remain in such collateral account. In addition, upon an event of default, Raycom has the right to (i) transfer in its name or the name of any of its agents or nominees the pledged interests, (ii) to exercise all voting, consensual and other rights and power and any and all rights of conversion, exchange, subscription and other rights, privileges or options pertaining to the pledged interests whether or not transferred into the name of Raycom, and (iii) to sell, resell, assign and deliver all or any of the pledged interests. We have also agreed to use our best efforts to cause a registration under the Securities Act and applicable state securities laws of the pledged interests upon the written request from Raycom.

 

Raycom may transfer or assign, syndicate, grant a participation interest in or grant a security interest in, all or any part of its rights, remedies and obligations under the Credit Agreement and the related loan documents, without notice or our consent.

 

December Private Placement

 

In December 2016, we sold 1,447,222 units (“Units”), with each Unit consisting of one common share and one-half warrant to acquire a common share (each whole warrant to purchase one common share, a “Private Placement Warrant”) at a price of CDN$0.45 per Unit for gross proceeds of CDN$651,249.90 and net proceeds of approximately CDN$619,660. Each Private Placement Warrant entitles the holder thereof to purchase one additional common share at an exercise price of CDN$0.56 for a period of 24 months from issuance.  The first tranche of 1,422,222 Units closed on December 19, 2016 and the second tranche of 25,000 Units closed on December 20, 2016. In connection with the sale of Units outside the U.S., we paid finders’ fees of 6% cash totaling CDN$31,590 to Canaccord Genuity Corp. and Industrial Alliance Securities Inc. (the “Private Placement Brokers”). We also issued warrants to purchase 70,200 common shares (the “Broker Warrants” and together with the Private Placement Warrants, the “December Warrants”) to the Private Placement Brokers, representing 6% of the total aggregate Units placed by the Private Placement Brokers. The net proceeds from such offering will be used for general working capital and product development. We have received conditional approval from the TSX-V for the offering, which remains subject to TSX-V’s final approval. We refer to these transactions as the “December Private Placement”.

 

Raycom Advance

 

On December 22, 2016, Raycom pre-paid $3 million of future fees for services (the “Raycom Advance”) to be provided by the Company pursuant to the Website Software and Services Agreement dated October 1, 2011 by and between the Company and Raycom. If we complete an equity raise of at least $5 million before March 31, 2017, then we can either (i) refund the prepayment to Raycom within 30 days of the completion of the equity raise along with an additional $30,000 for fees in connection with the prepayment by Raycom, or (ii) apply the prepayment to services provided by us for the year ending December 31, 2017 in which case Raycom will receive a discount of $300,000 for the services to be provided by us. If we do not complete an equity raise of at least $5 million by March 31, 2017, then the prepayment will be applied to the services to be provided for the year ending December 31, 2017 and Raycom will receive a discount of $300,000 for services to be provided by us for the year ending December 31, 2017.

 

Silicon Valley Bank Line of Credit

 

On December 28, 2016, we, Frankly Media and Frankly Co. entered into a loan and security agreement (the “Loan and Security Agreement”) pursuant to which Silicon Valley Bank (“SVB”) has provided us with a $3 million revolving line of credit (the “SVB Line of Credit”). Borrowings under the SVB Line of Credit accrue interest at a floating per annum rate equal to 2.25% above the Prime Rate published on the Wall Street Journal, which interest will be payable monthly and computed on the basis of a 360-day year for the actual number of days elapsed. The SVB Line of Credit expires on December 28, 2017. The SVB Line of Credit is secured by substantially all of our and our subsidiaries’ assets. Pursuant to an intercreditor agreement dated December 28, 2016 (the “Intercreditor Agreement”) between Raycom, The Teachers’ Retirement Systems of Alabama, as agent for Raycom (“TRS”) and SVB, Raycom has first priority security interest in substantially all of our assets other than accounts receivable, cash, cash accounts, short and long term investments, all bank accounts including, without limitation, all operating accounts, depository accounts, savings accounts, and investment accounts, and all property contained therein, stock, securities, and investment property, and all proceeds arising out of any of the foregoing (the “SVB Priority Collateral”) while SVB will have first priority security interest in the SVB Priority Collateral.

 

Reverse Stock Split

 

On                                 , 2017, we effected the Reverse Stock Split of our issued and outstanding common shares. All warrant, option, share and per share information in this prospectus gives retroactive effect to the Reverse Stock Split.

 

Summary Risks Associated with Our Business

 

An investment in our common shares involves a high degree of risk. You should carefully consider the risks summarized below. The risks are discussed more fully in the “Risk Factors” section of this prospectus immediately following this prospectus summary. These risks include, but are not limited to, the following:

 

● We have a limited operating history which may make it difficult for investors to evaluate our prospects for success.

 

● Since our inception, we have experienced losses and have an accumulated deficit of $47.5 million as of September 30, 2016 and we may incur additional losses in the future.

 

● Our independent registered public accounting firm has expressed in its report on our audited consolidated financial statements a substantial doubt about our ability to continue as a going concern.

 

● Our revenue and operating results may fluctuate, which may make our results difficult to predict and could cause our results to fall short of expectations.

 

● If we are unable in the future to generate new customers for our mobile technology products, our financial performance may be materially and adversely affected.

 

● A significant portion of our projected revenue is generated from the sale of national and local online advertising inventory, which is dependent on available advertising inventory and market demand and prices for such inventory. A decline in available supply of advertising inventory, general demand for advertising inventory and general economic conditions may materially and adversely affect our advertising revenue which may negatively affect our overall financial condition and results of operations.

 

● A significant percentage of our revenue is generated from three large customers. If we are unable to maintain our relationship with these customers, our business and operations may be materially and adversely affected.

 

● We determined that a portion of our goodwill and amortizable intangible assets were impaired as of December 31, 2015 and we recorded an impairment charge of approximately $12.2 million to earnings for the year ended December 31, 2015.

 

● Our degree of leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting operational goals.

 

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● Our debt agreements contain restrictions that limit our flexibility in operating our business. Our obligations under such agreements are secured by liens on substantially all of our assets.

 

● If we are unable to protect our intellectual property, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.

 

● We are a holding company and our only asset is the direct ownership of Frankly Co. and Frankly Media LLC.

 

● We have no operating history as a publicly traded company in the U.S.

 

Corporate Information

 

We were originally formed under the Business Corporations Act (Ontario) (the “OBCA”) in June 2013 under the name WB III Acquisition Corp. (“WB III”) and completed our initial public offering in Canada in October 2013. In December 2014, we completed a reverse triangular merger with Frankly Co. and a wholly-owned subsidiary WB III Subco Inc. and changed our name to Frankly Inc. (the “Qualifying Transaction”). In August 2015, we acquired Frankly Media LLC. Our main offices are located in San Francisco, California and New York, New York. On July 11, 2016, we continued the Company as a British Columbia corporation under the Business Corporations Act (British Columbia) (the “BCBCA”).

 

Frankly Co. (formerly TicToc Planet Inc.) commenced its material business operations in February 2013, and we subsequently acquired Frankly Co. in December 2014 in connection with the Qualifying Transaction. We then acquired Frankly Media LLC in August 2015. We have had two distinct phases of product evolution in our history. From February 2013 until August 2015, we developed mobile applications and a next generation server platform. Through the acquisition of Frankly Media in August 2015, we leveraged our existing mobile and platform expertise to become a SaaS provider of content management for broadcasters and media companies.

 

Our corporate headquarters is located at 333 Bryant Street, Suite 240, San Francisco, CA 94107. Our telephone number is (415) 861-9797. Our Internet website is http://www.franklyinc.com. We have not incorporated by reference into this prospectus any of the information on, or accessible through, our website, and you should not consider our website to be a part of this document. Our website address is included in this document for reference only.

 

The following chart illustrates our organizational structure:

 

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company” (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

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● being permitted to present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus;

 

● not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

 

● reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements; and

 

● exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

 

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We will remain an emerging growth company until the earliest to occur of: (i) our reporting $1 billion or more in annual gross revenues; (ii) the end of fiscal year 2021; (iii) our issuance, in a three year period, of more than $1 billion in non-convertible debt; and (iv) the end of the fiscal year in which the market value of our common shares held by non-affiliates exceeded $700 million on the last business day of our second fiscal quarter.

 

 6 
  

 

The Offering

 

Common shares offered by us           shares
     
Common shares to be outstanding after this offering           shares (       shares if the underwriters’ over-allotment option is exercised in full)
     
Over-allotment option   We will grant the underwriters a 45-day option to acquire up to an additional                       common shares, solely for the purpose of covering over-allotments, if any.
     

Use of proceeds

 

 

We estimate that we will receive net proceeds of approximately $                    million from the sale of the common shares offered in this offering, or approximately $                   million if the underwriters exercise their over-allotment option in full, based on an assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

We intend to use the net proceeds of this offering as follows:

 

     

  $       to increase sales and marketing investments (including channel partnerships) to increase market share and expand into other verticals;
  $      for product development on existing and new products including CMS, mobile and TV apps, and video workflow;
  $      for development of new business lines in big data and digital advertising;
  $2 million to repay a portion of the Credit Facility; and
  the balance for working capital and general corporate purposes.  

See the section entitled “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering.

     
Risk factors   See the section entitled “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common shares.
     
Proposed Nasdaq symbol   FKLY

 

The number of common shares to be outstanding after this offering is based on 34,523,599 common shares outstanding as of December 31, 2016 and excludes as of such date the following:

 

  (i) 1,660,444 outstanding Class A Restricted Voting Shares (the “Restricted Shares”);
     
  (ii) 4,177,954 common shares issuable upon the exercise of outstanding stock options having a weighted average exercise price of $1.15 per share granted under our Amended and Restated Equity Incentive Plan (the “Equity Plan”);
     
  (iii) 1,304,433 common shares issuable pursuant to restricted stock units (“RSUs”) issued and outstanding under our Equity Plan;
     
  (iv) 15,603,531 common shares issuable upon exercise of outstanding warrants having a weighted average exercise price of $0.39 per share (based on the exchange rate at August 18, 2016 and December 19, 2016 for the warrants issued in the August 2016 Refinancing and the December Private Placement, respectively); and
     
  (v) 142,628 additional common shares reserved for future issuance under our Equity Plan as of December 31, 2016.

 

Except as otherwise indicated herein, all information in this prospectus gives effect to the Reverse Stock Split and assumes no exercise of the underwriters’ over-allotment option.

 

 7 
  

 

RISK FACTORS

 

Any investment in our common shares involves a high degree of risk. Investors should carefully consider the risks described below and all of the information contained in this prospectus before deciding whether to purchase our common shares. Our business, financial condition or results of operations could be materially adversely affected by these risks if any of them actually occur. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks we face as described below and elsewhere in this prospectus. See “Cautionary Statement Regarding Forward-Looking Statements.”

 

Risks Related to Our Business

 

We have a limited operating history which may make it difficult for investors to evaluate our prospects for success.

 

Frankly Co. was incorporated under the laws of the State of Delaware on September 10, 2012. Frankly Inc. was incorporated on June 7, 2013 and completed a reverse triangular merger with Frankly Co. and a wholly-owned subsidiary, WB III Subco Inc., in December 2014. In addition, we completed the acquisition of Gannaway Web Holdings, LLC, now Frankly Media LLC, on August 25, 2015. Although Frankly Media LLC has been operating since 1998, we have a limited operating history as a consolidated company. This lack of consolidated operating history may make it difficult for investors to evaluate our prospects for success. There is no assurance that we will be successful and the likelihood of success must be considered in light of our relatively early stage of consolidated operations.

 

Since our inception, we have experienced losses and have an accumulated deficit of approximately $47.5 million as of September 30, 2016 and we may incur additional losses in the future.

 

We have in the past incurred, and we may in the future incur, losses and experience negative cash flow, either or both of which may be significant. We recorded net losses from inception through the year ended December 31, 2015. We recorded a net loss of $4.5 million and $24.7 million for the nine months ended September 30, 2016 and the year ended December 31, 2015, respectively. As of September 30, 2016 and December 31, 2015, our consolidated accumulated deficit was approximately $47.5 million and $42.9 million, respectively. We cannot assure you that we can achieve profitability on a quarterly or annual basis in the future. Failure to become profitable may materially and adversely affect the market price of our common shares.

 

Our independent registered public accounting firm has expressed in its report on our audited consolidated financial statements a substantial doubt about our ability to continue as a going concern.

 

We have not yet generated sufficient revenues from our operations to fund our activities, and we are therefore dependent upon external sources for the financing of our operations. As a result, our independent registered public accounting firm has expressed in its report on the audited consolidated financial statements included as part of this prospectus a substantial doubt regarding our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern. If we are unable to continue as a going concern, holders of our common shares might lose their entire investment.

 

Our revenue and operating results may fluctuate, which may make our results difficult to predict and could cause our results to fall short of expectations.

 

As a result of the rapidly changing nature of the markets in which we compete, our quarterly and annual revenue and operating results may fluctuate from period to period. These fluctuations may be caused by a number of factors, many of which are beyond our control. For example, changes in industry or third-party specifications may alter our development timelines and consequently our ability to deliver and monetize new or updated products and services. Additionally, impending changes to technology standards may cause customers to delay investing in new or additional products and services such as the ones we offer. Other factors that may cause fluctuations in our revenue and operation results include but are not limited to:

 

 8 
  

 

  any failure to maintain strong customer relationships;
  any failure of significant customers to renew their agreements with us;
  our ability to attract and retain current and new customers;
  variations in the demand for our services and products and the use cycles of our services and products by our customers;
  changes in our pricing policies or those of our competitors;
  service outages, other technical difficulties or security breaches;
  limitations relating to the capacity of our networks, systems and processes;
  maintaining appropriate staffing levels and capabilities relative to projected growth;
  the timing of costs related to the development or acquisition of technologies, services or businesses to support our existing users and potential growth opportunities; and
  general economic, industry and market conditions and those conditions specific to internet usage and advertising businesses.

 

For these reasons and because the market for our services and products is relatively new and rapidly changing, it is difficult to predict our future financial results.

 

If we are unable to retain and acquire new CMS platform customers, our financial performance may be materially and adversely affected.

 

Our financial performance and operations are dependent on retaining our current CMS platform customers and acquiring new CMS platform customers. We compete with the other technology providers in the market and increasing competition may affect our ability to retain current and acquire new customers. Any number of factors could potentially negatively affect our customer retention or acquisition. For example, a current customer may request products or services that we currently do not provide and may be unwilling to wait until we can develop or source such additional features. Other factors that affect our ability to retain or acquire new CMS platform customers include:

 

  customers increasingly use competing products or services;
  we fail to introduce new and improved products or if we introduce new products or services that are not favorably received;
  we are unable to continue to develop new products and services that work with a variety of mobile operating systems and networks and/or that have a high level of market acceptance;
  there are changes in customer preference;
  there is consolidation or vertical integration of our customers;
  there are changes in customer sentiment about the quality or usefulness of our products and services;
  there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees;
  technical or other problems prevent us from delivering our products in a rapid and reliable manner;
  we fail to provide adequate customer service to our customers; or
  we, our software developers, or other companies in our industry are the subject of adverse media reports or other negative publicity.

 

If we are unable to retain and acquire new customers, our financial performance may be materially and adversely affected.

 

 9 
  

 

If we are unable in the future to generate new customers for our mobile technology products, our financial performance may be materially and adversely affected.

 

As consumer preferences migrate to accessing news and information content through mobile devices, we expect that an increasing amount of our revenue will be derived from our native mobile technology software applications. Our ability to grow our revenues is dependent, in part, on our ability to increase the number of customers that license our mobile software applications. If we are unable to provide compelling native mobile technology and platforms to our customers or if customer adoption of native mobile technology and platforms is slow to develop, we may be unable to retain our current customers or acquire new customers.

 

A significant portion of our projected revenue is generated from the sale of national and local online advertising inventory, which is dependent on available advertising inventory and market demand and prices for such inventory. A decline in available supply of advertising inventory, general demand for advertising inventory and general economic conditions may materially and adversely affect our advertising revenue.

 

A significant portion of our projected revenue is generated from the sale of national and local online advertising inventory, the majority of which we sell on an automated basis through real-time bidding. We also sell a small portion of our inventory to premium direct advertising customers to whom we provide advertisement inventory on a fixed price and placement basis. Our advertising revenue is dependent on the amount of advertising inventory that is available to us to sell and market demand and prices for such inventory.

 

The amount of advertising inventory available for us to sell is affected by many variables including but not limited to:

 

  the negotiated amount of inventory we receive from our current CMS customers;
  the amount of additional inventory our current CMS customers permit us to sell on their behalf;
  our ability to acquire inventory to sell on behalf of parties that are not customers of our CMS;
  the amount of end-user traffic to our customers’ online properties; and
  the specific type of advertising to be sold, such as display, video or mobile advertising.

 

While we endeavor to maximize the amount of inventory we are able to sell, some of the foregoing variables, and by extension the amount of inventory we may sell, are affected by market forces and other contingencies that we do not control.

 

The other principal component of gross advertising revenue is the price at which advertising inventory may be sold. To a large extent, the prices we are able to achieve for our advertising inventory are a product of the market supply and demand, which may vary based on several factors including ad size, ad type, geographic region and time of year. At a macro level, advertising spending is also sensitive to overall economic conditions, and our advertising revenues will be adversely affected if advertisers respond to weak and uncertain economic conditions by reducing their budgets or changing their spending patterns. There are limitations on the amount that we can compensate for fluctuations in the prevailing market prices for advertising inventory. Any reduction in spending by existing or potential advertisers and a decline in available advertising inventory or demand for such inventory would negatively affect our advertising revenue and could affect our ability to grow our advertising customer base.

 

Some of our customer agreements require us to guarantee certain advertising revenues. If market rates fall below our guaranteed customer agreement rates, we will experience a loss on those advertising inventory units subject to the guarantee.

 

We have entered into agreements with certain of our existing customers, and in the future we may enter into additional customer agreements, that require us to guarantee minimum amounts of revenue per advertising unit sold, for national advertising inventory that we sell on behalf of these customers. In the event that market rates for national advertising inventory fall below the rates we have guaranteed, we will experience a loss on those advertising inventory units subject to the guarantee. If the amount of advertising inventory subject to guarantees and sold at a loss is large enough and/or the margin by which the market rates fall short of the guaranteed rates is great enough, we could experience a material reduction in our advertising revenues, which would materially and adversely affect our overall revenues.

 

 10 
  

 

If we are unable to respond to the rapid technological changes in our industry or develop new products and services in a cost effective manner, we may be unable to compete successfully in the competitive market in which we operate and our financial results could be adversely affected.

 

Business on the internet is characterized by rapid technological change. Accordingly, we continue to upgrade and improve the features of our products and services. Given the high level of competition in our market and the ever changing technology needs of our customers, our ability to successfully compete depends on our successful development of new products and services. If we are unable, for technological, legal, financial or other reasons, to adapt in a timely manner to changing market conditions in our industry or address or satisfy our customers’ requirements or preferences in their technology needs, our business, results of operations and financial condition would be materially and adversely affected. Sudden changes in user requirements and preferences, frequent new product and service introductions embodying new technologies, and the emergence of new industry and regulatory standards and practices such as data privacy and security standards could render our products, services and our proprietary technology and systems obsolete. The rapid evolution of these products and services will require that we continually improve the performance, features and reliability of our products and services. However, the complexity of developing new technology in a rapidly changing marketplace may increase our development costs. If we are unable to develop new products and services in a cost-effective manner, we may be unable to compete successfully in the market in which we operate.

 

We may introduce significant changes to our existing products or develop and introduce new and unproven products. If any of our new products or services, including upgrades to our current products or services, do not meet our customers’ expectations or fail to generate revenue, we could lose our customers or fail to generate any revenue from such products or services and our business may be harmed.

 

We may introduce significant changes to our existing products or develop and introduce new and unproven products or services, including using technologies with which we have little or no prior development or operating experience. If new or enhanced products fail to attract or retain customers or to generate sufficient revenue, operating margin, or other value to justify certain investments, our business may be adversely affected. If we are not successful with new approaches to monetization, we may not be able to maintain or grow our revenue as anticipated or recover any associated development costs.

 

In addition, updating our technology may require significant additional capital expenditures. If any of our upgrades to our current services do not meet our customer’s expectations, we could lose customers and our business may be harmed. If new services require us to grow rapidly, this could place a significant strain on our managerial, operational, technical and financial resources. In order to manage our growth, we could be required to implement new or upgraded operating and financial systems, procedures and controls. Our failure to expand our operations in an efficient manner could cause our expenses to grow, our revenue to decline or grow more slowly than expected.

 

A significant percentage of our revenue is generated from three large customers. If we are unable to maintain our relationship with these customers, our business and operations may be materially and adversely affected.

 

Approximately 36% and 42% of our revenue for the year ended December 31, 2015 and nine months ended September 30, 2016, respectively, was generated in the aggregate from our three largest customers. If we are unable to maintain our relationship with these customers, or if any of these customers reduce their purchase commitments, our business and operations may be materially and adversely affected.

 

The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.

 

We currently depend on the continued services and performance of our key personnel, including Steve Chung, our Chief Executive Officer, Louis Schwartz, our Chief Financial Officer and Chief Operating Officer, and Omar Karim, Head of Engineering. The loss of key personnel, including members of management as well as key engineering, product development, marketing, and sales personnel, could disrupt our operations and have an adverse effect on our business. As we continue to grow, we cannot guarantee that we will continue to attract the personnel we need to maintain our competitive position. In particular, we intend to hire a significant number of personnel in the coming years, and we expect to face significant competition from other companies in hiring such personnel, particularly in the San Francisco Bay Area and New York City markets. As we grow, the incentives to attract, retain, and motivate employees provided by our equity awards or by future arrangements, such as through cash bonuses, may not be as effective as in the past. If we do not succeed in attracting, hiring, and integrating excellent personnel, or retaining and motivating existing personnel, we may be unable to grow effectively.

 

 11 
  

 

We determined that a portion of our goodwill and amortizable intangible assets were impaired as of December 31, 2015 and we recorded an impairment charge of approximately $12.2 million to earnings for the year ended December 31, 2015.

 

Under U.S. generally accepted accounting principles (“U.S. GAAP”), we review our goodwill for impairment at least annually on December 31 and when events or changes in circumstances indicate that the carrying value may not be recoverable. We review our amortizable intangible assets for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, reduced future cash flow estimates, and slower growth rates in our industry. We determined that a portion of our goodwill and amortizable intangible assets were impaired as of December 31, 2015 and we recorded an impairment charge of approximately $12.2 million to earnings for the year ended December 31, 2015. Future assessments may yield different results, and from time to time, we may be required to record a significant charge to earnings in our consolidated financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, resulting in a negative impact on our results of operations.

 

We may expand our business through acquisitions of, or investments in, other companies or new technologies, or joint ventures or other strategic alliances with other companies, which may divert our management’s attention or prove not to be successful or result in equity dilution.

 

In December 2014, we completed a qualifying transaction through a reverse triangular merger with TicToc and WB III Subco Inc. In August 2015, we acquired Frankly Media. We may decide to pursue other acquisitions of, investments in, or joint ventures involving other technologies and businesses in the future. Such transactions could divert our management’s time and focus from operating our business.

 

Integrating an acquired company, business or technology is risky and may result in unforeseen operating difficulties and expenditures, including, among other things, with respect to:

 

  incorporating new technologies into our existing business infrastructure;
  consolidating corporate and administrative functions;
  coordinating our sales and marketing functions to incorporate the new business or technology;
  maintaining morale, retaining and integrating key employees to support the new business or technology and managing our expansion in capacity; and
  maintaining standards, controls, procedures and policies (including effective internal control over financial reporting and disclosure controls and procedures).

 

In addition, a significant portion of the purchase price of companies we may acquire may be allocated to acquired goodwill and other intangible assets, which must be assessed for impairment at least annually. In the future, if our acquisitions do not yield expected returns, we may be required to take charges to our earnings based on this impairment assessment process, which could harm our operating results.

 

Future acquisitions could result in potentially dilutive issuances of our equity securities, including our common shares, or the incurrence of debt, contingent liabilities, amortization expenses or acquired in-process research and development expenses, any of which could harm our business, financial condition and results of operations. Future acquisitions may also require us to obtain additional financing, which may not be available on favorable terms or at all.

 

Finally, our skill at investing our funds in illiquid securities issued by other companies is untested. Although we will review the results and prospects of any such investments carefully, it is possible that such investments could result in a total loss. Additionally, we may have little or no control over the companies in which we may invest, and we may be forced to rely on the management of the companies in which we invest to make reasonable and sound business decisions. If the companies in which we invest are not successfully able to manage the risks facing them, such companies could suffer, and we may lose all or part of our investment in such companies.

 

 12 
  

 

If we fail to manage our growth effectively, our business, financial condition and results of operations may suffer.

 

We have grown rapidly since our incorporation and we plan to continue to grow at a rapid pace. This growth has put significant demands on our processes, systems and personnel. We have made and we expect to make further investments in additional personnel, systems and internal control processes to help manage our growth. In addition, we have sought to, and may continue to seek to, grow through strategic acquisitions. Our growth strategy may place significant demands on our management and our operational and financial infrastructure. Our ability to manage our growth effectively and to integrate new technologies and acquisitions into our existing business will require us to continue to expand our operational, financial and management information systems and to continue to retain, attract, train, motivate and manage key employees. Growth could strain our ability to:

 

  develop and improve our operational, financial and management controls;
  enhance our reporting systems and procedures;
  recruit, train and retain highly skilled personnel;
  maintain our quality standards; and
  maintain our user satisfaction.

 

Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows or if we are unable to successfully manage and support our rapid growth and the challenges and difficulties associated with managing a larger, more complex business, this could cause a material adverse effect on our business, financial position and results of operations, and the market value of our shares could decline.

 

Our degree of leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and prevent us from meeting operational goals.

 

As of September 30, 2016, our total indebtedness was approximately $11.9 million. In December 2016, we , Frankly Co. and Frankly Media also entered into the SVB Line of Credit pursuant to which approximately $1.4 million is outstanding as of the date of this prospectus. Our degree of leverage could have important consequences for the holders of our common shares, including:

 

  increasing our vulnerability to general economic and industry conditions;
  requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;
  restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
  limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and
  limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

 

We may incur substantial additional indebtedness in the future, subject to the restrictions contained in the Credit Facility and the SVB Line of Credit . If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

 

 13 
  

 

Our debt agreements contain restrictions that limit our flexibility in operating our business. Our obligations under such agreements are secured by liens on substantially all of our assets.

 

Amounts outstanding under the Credit Facility and the SVB Line of Credit are secured by first and second priority security interests in substantially all of our assets and are guaranteed by our subsidiaries.

 

The terms of the Credit Agreement, the Credit Facility, the Loan and Security Agreement contain various covenants that limit our ability to engage in specified types of transactions. The covenants limit and restrict our and our subsidiaries’ ability to, among other things:

 

  incur additional indebtedness or issue certain preferred shares;
  pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;
  make certain investments;
  sell or transfer assets;
  create liens;
  amalgamate, consolidate or merge with any other person;
  sell or otherwise dispose of all or substantially all of our assets; and
  enter into certain transactions with our affiliates.

 

We are also required under the Credit Agreement, the Credit Facility and the SVB Line of Credit to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control and we may not meet those ratios and tests. A breach of any of these covenants could result in a default under the Credit Agreement, the Credit Facility or the SVB Line of Credit. Upon the occurrence of an event of default under the Credit Agreement or the SVB Line of Credit, Raycom and SVB, respectively, could elect to declare all amounts outstanding under the Credit Agreement and Credit Facility, or the SVB Line of Credit, respectively, to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, Raycom and/or SVB could proceed against the collateral granted to them to secure the indebtedness.

 

We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

 

Our ability to make scheduled payments on or refinance our debt obligations, depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

 

If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness, including the notes. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, those alternative actions may not allow us to meet our scheduled debt service obligations.

 

We cannot be certain that additional financing will be available on reasonable terms when required, or at all.

 

From time to time, we may need additional financing. Our ability to obtain additional financing, if and when required, will depend on investor demand, our operating performance, the condition of the capital markets, and other factors. To the extent we draw on our credit facilities, if any, to fund certain obligations, we may need to raise additional funds and we cannot assure investors that additional financing will be available to us on favorable terms when required, or at all. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences, or privileges senior to the rights of the common shares issued in this offering, and existing shareholders may experience dilution.

 

 14 
  

 

If we are unable to protect our intellectual property, the value of our brand and other intangible assets may be diminished, and our business may be adversely affected.

 

We rely and expect to continue to rely on a combination of confidentiality and license agreements with our employees, consultants, and third parties with whom we have relationships. In the future we may acquire patents or patent portfolios, which could require significant cash expenditures. However, third parties may knowingly or unknowingly infringe our proprietary rights, third parties may challenge proprietary rights held by us, and pending and future trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we operate or intend to operate our business. In any or all of these cases, we may be required to expend significant time and expense in order to prevent infringement or to enforce our rights. Although we have taken measures to protect our proprietary rights, there can be no assurance that others will not offer products or concepts that are substantially similar to ours and compete with our business. In addition, we occasionally include open source software in our products. As a result of the use of open source in our products, we may license or be required to license innovations that turn out to be material to our business and may also be exposed to increased litigation risk. If the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brand and other intangible assets may be diminished and competitors may be able to more effectively mimic our service and methods of operations. Any of these events could have an adverse effect on our business and financial results.

 

We are a holding company and our only asset is the direct ownership of Frankly Co. and Frankly Media.

 

We are a holding company and have no material non-financial assets other than direct ownership of Frankly Co. and Frankly Media. We have no independent means of generating revenue. To the extent that we will need funds beyond our own financial resources to pay liabilities or to fund operations, and Frankly Co. and/or Frankly Media are/is restricted from making distributions to us under applicable laws or regulations or agreements, or not have sufficient earnings to make these distributions, we may have to borrow or otherwise raise funds sufficient to meet these obligations and operate our business and, thus, our liquidity and financial condition could be materially adversely affected.

 

We may be party to litigation, which can be expensive and time consuming, and, if resolved adversely, could have a significant impact on our business, financial condition, or results of operations.

 

Our business, financial condition, or results of operations could be adversely affected as a result of an unfavorable resolution of future disputes and litigation. Companies in the internet, technology, and media industries own large numbers of patents, copyrights, trademarks, and trade secrets, and frequently enter into litigation based on allegations of infringement, misappropriation, or other violations of intellectual property or other rights. In addition, various “non-practicing entities” that own patents and other intellectual property rights often attempt to aggressively assert their rights in order to extract value from technology companies. Furthermore, from time to time we may introduce new products, including in areas where we currently do not compete, which could increase our exposure to patent and other intellectual property claims from competitors and non-practicing entities.

 

Defending patent and other intellectual property litigation is costly and can impose a significant burden on management and employees, and there can be no assurances that favorable final outcomes will be obtained in all cases. In addition, plaintiffs may seek, and we may become subject to, preliminary or provisional rulings in the course of any such litigation, including potential preliminary injunctions requiring us to cease some or all of our operations. We may decide to settle such lawsuits and disputes on terms that are unfavorable to us. Similarly, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that may not be reversed upon appeal. The terms of such a settlement or judgment may require us to cease some or all of our operations or pay substantial amounts to the other party. In addition, we may have to seek a license to continue practices found to be in violation of a third party’s rights, which may not be available on reasonable terms, or at all, and may significantly increase our operating costs and expenses. As a result, we may also be required to develop alternative non-infringing technology or practices or discontinue the practices. The development of alternative non-infringing technology or practices could require significant effort and expense or may not be feasible.

 

 15 
  

 

Our software is highly technical, and if it contains undetected errors, our business could be adversely affected.

 

Our products incorporate software that is highly technical and complex. Our software may now or in the future contain, undetected errors, bugs, or vulnerabilities. Some errors in our software codes may only be discovered after the codes have been released. Any errors, bugs, or vulnerabilities discovered in our codes after release could result in damage to our reputation, loss of users, loss of revenue, or liability for damages.

 

We rely on third parties to provide the technologies necessary to deliver products and services to our customers, and any change in the licensing terms, costs, availability, or acceptance of these technologies could adversely affect our business.

 

We rely on third parties to provide the technologies that we use to deliver our products and services to our customers. These technologies include software that provides some of the core functionality contained within our CMS, as well as third-party software and services that provide some of the external features of our CMS, such as email functionality, user traffic reporting, ad-serving, content delivery services and ad-exchange services. There can be no assurance that these providers will continue to license their technologies or otherwise make them available to us on reasonable terms, or at all. Providers may change the fees they charge users or otherwise change their business models in a manner that impedes the acceptance of their technologies. In order for our services to be successful, there must be a large base of users of the technologies necessary to deliver our products and services. We have limited or no control over the availability or acceptance of these technologies, and any change in the licensing terms, costs, availability or user acceptance of these technologies could adversely affect our business.

 

Failure to license necessary third party software for use in our products and services, or failure to successfully integrate third party software, could cause delays or reductions in our sales, or errors or failures of our service.

 

We license third party software that we incorporate into our products and services. In the future, we might need to license other software to enhance our products and meet evolving customer requirements. These licenses may not continue to be available on commercially reasonable terms or at all. Some of this technology could be difficult to replace once integrated. The loss of, or inability to obtain, these licenses could result in delays or reductions of our applications until we identify, license and integrate or develop equivalent software, and new licenses could require us to pay higher royalties. If we are unable to successfully license and integrate third party technology, we could experience a reduction in functionality and/or errors or failures of our products, which may reduce demand for our products and services.

 

Third-party licenses may expose us to increased risks, including risks associated with the integration of new technology, the impact of new technology integration on our existing technology, open source software disclosure risks, the diversion of resources from the development of our own proprietary technology, and our inability to generate revenue from new technology sufficient to offset associated acquisition and maintenance costs.

 

Computer malware, viruses, hacking and phishing attacks, and spamming could harm our business and results of operations.

 

Computer malware, viruses, and computer hacking and phishing attacks have become more prevalent in our industry and may occur on our systems in the future. Our main customers are local media companies and given the ability of American news outlets to reach a large user base, our technology and content platform could be the targets of hostile attempts to breach the security and integrity of the platform. A coordinated attack on our infrastructure is a risk to the stability of the platform. Though it is difficult to determine what, if any, harm may directly result from any specific interruption or attack, any failure to maintain the performance, reliability, security, and availability of our products and technical infrastructure to the satisfaction of our customers may harm our reputation and our ability to retain existing customers and attract new customers.

 

System failures or capacity constraints could harm our business and financial performance.

 

The provision of our services and products depends on the continuing operation of our information technology and communications systems. Any damage to or failure of our systems could result in interruptions in our service. Such interruptions could harm our business, financial condition and results of operations, and our reputation could be damaged if people believe our systems are unreliable. Our systems are vulnerable to damage or interruption from extreme weather events, terrorist attacks, floods, fires, power loss, telecommunications failures, security breaches, computer malware, computer hacking attacks, computer viruses, computer denial of service attacks or other attempts to, or events that, harm our systems. Our data centers may also be subject to break-ins, sabotage and intentional acts of vandalism and to potential disruptions if the operators of the facilities have financial difficulties. If we were forced to rely on our system back-ups to restore the systems, we could experience significant delays in restoring the functionality of our platform and could experience loss of data, which could materially harm our business and our operating results. Although we maintain insurance to cover a variety of risks, the scope and amount of our insurance coverage may not be sufficient to cover our losses resulting from system failures or other disruptions to our online operations. Any system failure or disruption and any resulting losses that are not recoverable under our insurance policies may materially harm our business, financial condition and results of operations. To date, we have never experienced any material losses as a result of system failures or online disruptions.

 

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Our business depends on continued and unimpeded access to the Internet by us, our customers and their end users. Internet access providers or distributors may be able to block, degrade or charge for access to our content, which could lead to additional expenses to us and our customers and the loss of end users and advertisers.

 

Products and services such as ours depend on our ability and the ability of our customers’ users to access the Internet. Currently, this access is provided by companies that have, or in the future may have, significant market power in the broadband and internet access marketplace, including incumbent telephone companies, cable companies, mobile communications companies and government-owned service providers. Some of these providers may take, or have stated that they may take, measures that could degrade, disrupt, or increase the cost of user access to products or services such as ours by restricting or prohibiting the use of their infrastructure to support or facilitate product or service offerings such as ours, or by charging increased fees to businesses such as ours to provide content or to have users access that content. Such interference could result in a loss of existing viewers, subscribers and advertisers, and increased costs, and could impair our ability to attract new viewers, subscribers and advertisers, thereby harming our revenues and growth.

 

We may not maintain acceptable website performance for our platform, which may negatively impact our relationships with our customers and harm our business, financial condition and results of operations.

 

A key element to our continued growth is the ability of our customers’ audience to access the platform and other offerings within acceptable load times. We refer to this as website performance. We may in the future experience platform disruptions, outages and other performance problems due to a variety of factors, including infrastructure changes, human or software errors, capacity constraints due to an overwhelming number of users accessing our technology simultaneously, and denial of service or fraud or security attacks.

 

In some instances, we may not be able to identify the cause or causes of these website performance problems within an acceptable period of time. It may become increasingly difficult to maintain and improve website performance, especially during peak usage times, as our solutions become more complex and our user traffic increases. If our platform is unavailable when consumers attempt to access them or do not load as quickly as they expect, our customers seek alternative services or services from our competitors. To the extent that we do not effectively address capacity constraints, upgrade our systems as needed and continually develop our technology and network architecture to accommodate actual and anticipated changes in technology, our business and operating results may be harmed.

 

We may incur liability as a result of information retrieved from or transmitted over the internet or through our customer websites and claims related to our products.

 

We may face claims relating to information that is retrieved from or transmitted over the internet or through our customers’ websites and claims related to our products. In particular, the nature of our business exposes us to claims related to defamation, intellectual property rights, and rights of publicity and privacy. This risk is enhanced in certain jurisdictions outside the U.S. where our protection from liability for third-party actions may be unclear and where it may be less protected under local laws than it is in the U.S. We could incur significant costs investigating and defending such claims and, if we are found liable, significant damages. If any of these events occur, our business and financial results could be adversely affected.

 

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We may expand our operations into international markets where we have limited experience and we will be subject to risks associated with international operations.

 

Although our current primary focus is on the North American market, we may expand our product offerings internationally. We have limited experience in marketing and operating our services and products in international markets, and we may not be able to successfully develop or grow our business in these markets due to local competition and regulations. If we cannot manage these risks effectively, the costs of doing business in some international markets may be prohibitive or our costs may increase disproportionately to our revenue.

 

We have no operating experience as a publicly traded company in the U.S.

 

We have no operating experience as a publicly traded company in the U.S. and we are a relatively new reporting issuer in Canada. Although the individuals who now constitute our management team have experience managing a publicly-traded company, there is no assurance that the past experience of our management team will be sufficient to operate the Company as a publicly traded company in the U.S., including timely compliance with the disclosure requirements of the SEC. Following the completion of this offering, we will be required to develop and implement internal control systems and procedures in order to satisfy the periodic and current reporting requirements under applicable SEC regulations and to comply with the Nasdaq listing standards. This transition could place a significant strain on our management team, infrastructure and other resources. In addition, our management team may not successfully or efficiently manage a public company that is subject to significant regulatory oversight and reporting obligations.

 

We cannot be certain that our net operating loss (“NOL”) carryforwards will be available to offset future taxable income for tax purposes.

 

As of December 31, 2015, we had federal and state NOL carryforwards of approximately $25.9 million and $16.6 million, respectively, which, if unused will expire on various dates in the next 20 years. Additionally, as of December 31, 2015, we had Canadian tax NOL carryforwards of approximately $1.5 million which will begin to expire in 2033. As of December 31, 2015, we had no research and development credit carryforwards. To the extent available, we intend to use these net operating loss carryforwards to offset future taxable income associated with our operations. There can be no assurance that we will generate sufficient taxable income in the carryforward period to utilize any remaining net operating loss carryforwards before they expire.

 

The use of our U.S. federal income tax NOLs (and possibly our state income tax NOLs) may be further limited under applicable tax laws. Under Section 382 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), if a corporation with NOLs undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-ownership change NOL carryforwards and other pre-ownership change tax attributes (such as tax credits) to offset its post-ownership change income may be limited. We believe that this offering, taken together with certain stock offerings and other stock transactions that have occurred over the past three years, may cause us to experience an ownership change. However, we will not make a determination as to whether an ownership change has occurred until we generate taxable income that could be offset by our NOLs. We may also experience ownership changes in the future as a result of subsequent offerings of stock or other changes in our stock ownership. As a result, if we earn net taxable income for U.S. federal income tax purposes, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which potentially could result in increased future tax liability to us.

 

In addition, we may be limited in the use of our NOLs in the United States because of the potential application of the “dual consolidated loss” rules as described below under “Material U.S. Federal Income Tax Considerations.”

 

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The preparation of our financial statements will involve the use of estimates, judgments and assumptions, and our financial statements may be materially affected if such estimates, judgments and assumptions prove to be inaccurate.

 

Financial statements prepared in accordance with U.S. GAAP require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future. Significant areas of accounting requiring the application of management’s judgment include, but are not limited to, determining the fair value of our assets and the timing and amount of cash flows from our assets. These estimates, judgments and assumptions are inherently uncertain and, if they prove to be wrong, we face the risk that charges to income will be required. Any such charges could significantly harm our business, financial condition, results of operations and the price of our securities. Estimates and assumptions are made on an ongoing basis for the following: revenue recognition, capitalization of software development costs, impairment of long-lived assets, impairment of goodwill and stock-based compensation expense. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the accounting estimates, judgments and assumptions that we believe are the most critical to an understanding of our future plan of operations.

 

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial and other public reporting, which would likely negatively affect our business and the market price of our common shares.

 

Effective internal control over financial reporting is necessary for us to provide reliable financial reports and prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing conducted by us, or any testing conducted by our independent registered public accounting firm may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which is likely to negatively affect our business and the market price of our common shares.

 

We will be required to disclose changes made in our internal controls and procedures on a quarterly basis and our management will be required to assess the effectiveness of these controls annually. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). We could be an “emerging growth company” for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.

 

We will incur increased costs as a result of being a U.S. public company.

 

As a publicly traded company in the United States, we will need to comply with new laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act, related regulations of the SEC and the requirements of Nasdaq. Complying with these statutes, regulations and requirements will occupy a significant amount of time of our Board and management and will significantly increase our costs and expenses. We will need to:

 

  institute a more comprehensive compliance function;
  design, establish, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
  comply with rules promulgated by Nasdaq;
  prepare and distribute periodic public reports in compliance with our obligations under the U.S. federal securities laws;
  involve and retain to a greater degree outside counsel and accountants in the above activities; and
  establish a more robust investor relations function

 

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​In addition, being a public company subject to these rules and regulations requires us to incur substantial costs to increase coverage under our director and officer liability insurance. These factors could also make it more difficult for us to attract and retain qualified members of our Board, particularly to serve on our audit committee, and qualified executive officers.

 

We are an “emerging growth company,” and we cannot be certain if the reduced SEC reporting requirements applicable to emerging growth companies will make our common shares less attractive to investors, which could have a material and adverse effect on us, including our growth prospects.

 

We are an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenue equals or exceeds $1 billion, (ii) the last day of the fiscal year following the fifth anniversary of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities and (iv) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. We intend to take advantage of exemptions from various reporting requirements that are applicable to most other public companies, whether or not they are classified as “emerging growth companies,” including, but not limited to, an exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. The JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in the Securities Act for complying with new or revised accounting standards. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. We cannot predict if investors will find our common shares less attractive because we intend to rely on certain of these exemptions and benefits under the JOBS Act. If some investors find our common shares less attractive as a result, there may be a less active, liquid and/or orderly trading market for our common shares and the market price and trading volume of our common shares may be more volatile and decline significantly.

 

Risks Related to Our Industry

 

Our business is highly competitive. Competition presents an ongoing threat to the success of our business.

 

Our current primary focus is the North American market in which we face significant competition from a number of service and software providers, nearly all of whom have greater financial, marketing and technical resources than us. Specifically in the local broadcast segment, our chief competitor is Nexstar Broadcasting’s subsidiary Lakana, LLC (NASDAQ: NXST), which is owned by a larger broadcasting group which provides it with a captive customer base of TV stations owned by its parent company and significant industry contacts. In generalized CMS offerings, we compete against Wordpress VIP and other open source platforms. Open source platforms utilize a developer community in which product innovation and advancements are crowdsourced rather than developed in-house as we do. In video solutions, we compete against providers such as Brightcove, Inc. (NASDAQ: BCOV), Neulion, Inc. (TSE: NLN), MLB Advanced Media and Google’s newly acquired video solutions company, Anvato (NASDAQ: GOOG). These video solution companies are larger publicly listed companies with significantly larger research and development budgets. In mobile app frameworks, we compete with Verve, Accedo and Newscycle’s recently acquired DoApps. In advertising solutions, we compete against a variety of advertising programmatic and agency businesses. In addition, some larger broadcasters have opted for in-house solutions. Many of these competitors focus on singular product lines and thus may have a competitive advantage compared to companies like ours that offer a range of products and services.

 

Additionally, as we introduce new products and as our existing products evolve, or as other companies introduce new products and services, we may become subject to additional competition. Some of our current and potential competitors have significantly greater resources and better competitive positions in certain markets than us. These factors may allow our competitors to respond more effectively than we can to new or emerging technologies and changes in market requirements. Our competitors may also develop products, features, or services that are similar to ours or that achieve greater market acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. Certain competitors could use strong or dominant positions in one or more markets to gain a competitive advantage against us.

 

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We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including:

 

    the usefulness, ease of use, performance, and reliability of our products compared to our competitors;
    the timing and market acceptance of products, including developments and enhancements to our or our competitors’ products;
    our ability to monetize our products;
    customer service and support efforts;
    marketing and selling efforts;
    our financial condition and results of operations;
    our ability to establish and maintain customer interest in building on our platform;
    changes mandated by legislation, regulatory authorities, or litigation, including settlements and consent decrees, some of which may have a disproportionate effect on us;
    acquisitions or consolidation within our industry, which may result in more formidable competitors;
    acquisitions or consolidation within the media industry in which we focus our current customer base, which may result in loss of customers or advertising inventory;
    our ability to attract, retain, and motivate talented employees, particularly software engineers;
    our ability to cost-effectively manage and grow our operations; and
    our reputation and brand strength relative to that of our competitors.

 

If we are not able to effectively compete, we may lose our customer base which will materially and adversely affect our revenue and results of operations.

 

Recent consolidation within the local news broadcasting industry may materially and adversely affect our ability to expand our customer base.

 

The majority of our customers are local television stations that use our white-label CMS to distribute their content online and to mobile devices. The local media industry has experienced consolidation and ownership of local television stations that have news operations is increasingly being concentrated in entities that operate large groups of stations. If the trend of consolidation continues, our customer base may decline which could materially and adversely affect our results of operations.

 

Our business may be subject to the adverse effects of Federal Communications Commission (“FCC”) regulations.

 

The majority of our customers are television broadcasters that are subject to comprehensive regulation by the FCC and the future amendment, repeal or enactment of FCC regulations could affect our customers and/or their demand for our services. Changes in FCC regulations may limit our customers’ ability to acquire other broadcast properties or may require or make it advantageous for them to divest themselves of current broadcast properties. Additionally, in the past, the FCC has and in the future may promulgate additional regulations that govern the online activities of our customers and the websites and other services they provide to end-users. Such regulations may increase the cost and complexity of the services we provide, and we may not be able to recover the full amount of such additional costs from our customers.

 

The adoption of ATSC 3.0 has the potential to disrupt the demand for or composition of the products and services we provide to our customers.

 

The Advanced Television Systems Committee, which determines the industry standards for television signals, is promulgating a revised standard called ATSC 3.0. The revised standard may require or enable our customers to internally adopt in their newsroom operations some of the technology we currently supply or otherwise obviate the need for some of the services we provide. It is not known whether ATSC 3.0, when implemented, will require us to incur additional costs to ensure compatibility and/or may reduce customer demand for some of the services we currently provide.

 

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The broadcast industry is subject to changing demographics and user preferences.

 

Our ability to maintain and grow our business with television broadcasters is subject our customers’ ability to retain and grow online audiences. As technology, audience composition and user preferences change, our customers face the ongoing challenge of competing for online users in a diverse and changing online marketplace for news and information content. Changing end-user demographics, the online availability of alternative sources of news and platform and technology preferences are challenges our broadcast customers face in retaining and developing audiences for their online services. If our customers are not successful in meeting these challenges, our ability to monetize the services we provide may diminish and/or our customers may reduce the amount of services they purchase from us, the foregoing having the potential to reduce the amount of revenue we realize from this category of customers. While we are empowering our customers to meet their online challenges and seeking to diversify our business into other market sectors, we will remain subject to the risk that our customers may experience a reduction in their online business operations and the risk that we may not be able to effectively diversify our current customer base to mitigate this risk.

 

The growth of the market for our services and products depends on the continued growth of the internet and mobile devices as mediums for content, advertising, commerce and communications.

 

Our growth depends on the continued acceptance of the internet and mobile devices as platforms for content, advertising, commerce and communications. The acceptance of the internet and mobile devices as mediums for such uses could be adversely impacted by delays in the development or adoption of new standards and protocols to handle increased demands of internet activity and mobile phone services, security, privacy protection, reliability, cost, ease of use, accessibility and connectivity, and quality of service. The performance of the internet and mobile devices and their acceptance as such mediums has been harmed by connectivity issues, viruses, worms, and similar malicious programs, and the internet and mobile phone services have experienced a variety of outages and other delays as a result of damage to portions of their infrastructure. If for any reason the internet and mobile devices do not remain mediums for widespread content, advertising, commerce and communications, the demand for our services and products would be significantly reduced, which would harm our business.

 

The growth of the market for our services and products depends on the development and maintenance of the internet infrastructure and the mobile phone services and technology.

 

Our business strategy depends on continued internet and high-speed internet access growth and development of mobile device services and technology. Any downturn in the use or growth rate of the internet or high-speed internet access or the quality and connectivity of mobile devices would be detrimental to our business. If the internet and mobile devices continue to experience significant growth in number of users, frequency of use and amount of data transmitted, the internet infrastructure or mobile device services may not be able to support the demands placed on them and the performance or reliability of the internet or mobile device services may be adversely affected. The success of our business therefore depends on the development and maintenance of a sound internet infrastructure and mobile device services. Consequently, as internet and mobile device usage increases, the growth of the market for our products depends upon improvements made to the internet and mobile device services and technology as well as to individual customers’ networking infrastructures to alleviate overloading and congestion. In addition, any delays in the adoption of new standards and protocols required to govern increased levels of internet activity or mobile device activity or increased governmental regulation may have a detrimental effect on the internet infrastructure and mobile device activity and technology.

 

Government regulation of the internet continues to evolve, and new laws and regulations could significantly harm our financial performance.

 

Today, there are relatively few laws specifically directed towards conducting business over the internet. We expect more stringent laws and regulations relating to the internet to be enacted. The adoption or modification of laws related to the internet could harm our business, financial condition and results of operations by, among other things, increasing our costs and administrative burdens. Due to the increasing popularity and use of the internet, many laws and regulations relating to the internet are being debated at the international, federal and state levels, which are likely to address a variety of issues such as:

 

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    user privacy and expression;
    ability to collect and/or share necessary information that allows us to conduct business on the internet;
    export compliance;
    pricing and taxation;
    fraud;
    advertising;
    intellectual property rights;
    consumer protection;
    protection of minors;
    content regulation;
    information security; and
    quality of services and products.

 

Several federal laws that could have an impact on our business have been adopted. The Digital Millennium Copyright Act of 1998 reduces the liability of online service providers of third-party content, including content that may infringe copyrights or rights of others. The Children’s Online Privacy Protection Act imposes additional restrictions on the ability of online services to collect user information from minors. In addition, the Protection of Children from Sexual Predators Act requires online service providers to report evidence of violations of federal child pornography laws under certain circumstances.

 

It could be costly for us to comply with existing and potential laws and regulations, and they could harm our marketing efforts and our attractiveness to advertisers by, among other things, restricting our ability to collect demographic and personal information from consumers or to use or disclose that information in certain ways. If we were to violate these laws or regulations, or if it were alleged that we had, we could face private lawsuits, fines, penalties and injunctions and our business could be harmed.

 

Finally, the applicability to the internet and other online services of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel and personal privacy is uncertain. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the internet and other online services could also increase our costs of doing business, discourage internet communications, reduce demand for our services and expose us to substantial liability.

 

Risks Related to Our Common Shares

 

We do not know whether an active, liquid and orderly trading market for the common shares will be maintained or sustained and what the market price of the common shares will be and as a result it may be difficult for investors to sell their common shares.

 

Trading activity in our common shares is and has been limited. The lack of an active market may impair an investor’s ability to sell their common shares at the time they wish to sell them or at a price that they consider reasonable. The lack of an active market may also reduce the fair market value of our common shares. There can be no assurance that a more active market for our common shares will develop, or if one should develop, there is no assurance that it will be sustained. This could severely limit the liquidity of our common shares, and would likely have a material adverse effect on the market price of our common shares. Further, an inactive market may impair our ability to raise capital by selling common shares and may impair our ability to enter into collaborations or acquire companies or products in the future by using our equity securities as consideration.

 

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The price of our common shares may fluctuate significantly, which may make it difficult for holders of our common shares to sell their common shares at a time or price they find attractive.

 

Our common share price may fluctuate significantly as a result of a variety of factors, many of which are beyond our control. These factors include:

 

    actual or anticipated quarterly fluctuations in our operating results and financial condition;
    changes in financial estimates or publication of research reports and recommendations by financial analysts with respect to us or other financial institutions;
    reports in the press or investment community generally or relating to our reputation or the industry in which we operate;
    strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions, or financings;
    fluctuations in the common share price and operating results of our competitors;
    future sales of our common shares or sales of significant number of common shares by large investors;
    proposed or adopted regulatory changes or developments;
    domestic and international economic factors unrelated to our performance; and
    general market conditions and, in particular, developments related to market conditions for the social media industry.

 

In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to their operating performance. These broad market fluctuations may adversely affect our common share price, notwithstanding our operating results. We expect that the market price of the common shares will fluctuate and there can be no assurances about the levels of the market prices for our common shares.

 

If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common shares, the price of our common shares and their trading volume could decline.

 

The trading market for our common shares may depend in part on the research and reports that research analysts publish about us and our business. If we do not maintain adequate research coverage, or if one or more analysts who covers us downgrades our common shares or publishes inaccurate or unfavorable research about our business, the price of our common shares could decline. If one or more of the research analysts ceases to cover us or fails to publish reports on us regularly, demand for our common shares could decrease, which could cause the price or trading volume to decline.

 

Once the listing of our common shares is approved by Nasdaq, our common shares will be traded on more than one market and this may result in price variations.

 

Once the listing of our common shares is approved by Nasdaq, our common shares will be traded on Nasdaq and the TSX-V. Trading in our common shares on these markets will take place in different currencies (U.S. dollars on Nasdaq and Canadian dollars on the TSX-V) and at different times (due to different time zones, trading days and public holidays in the U.S. and Canada). The trading prices of our common shares on these two markets may differ due to these and other factors. Any decrease in the trading price of our common shares on one of these markets could cause a decrease in the trading price of our common shares on the other market. Differences in trading prices on the two markets could negatively impact our trading price.

 

We may issue additional equity securities, or engage in other transactions that could dilute our book value or affect the priority of our common shares, which may adversely affect the market price of our common shares.

 

Our Articles allow our Board, subject to the provisions of the BCBCA, to issue an unlimited number of common shares and Restricted Shares without shareholder approval. Our Board may determine from time to time that we need to raise additional capital by issuing common shares or other equity securities. Except as otherwise described in this prospectus, we are not restricted from issuing additional securities, including securities that are convertible into or exchangeable for, or that represent the right to receive, common shares. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any future offerings, or the prices at which such offerings may be affected. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common shares, or both. Holders of our common shares are not entitled to pre-emptive rights or other protections against dilution. New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, the then-current holders of our common shares. Additionally, if we raise additional capital by making offerings of debt or preference shares, upon our liquidation, holders of our debt securities and preference shares, and lenders with respect to other borrowings, may receive distributions of our available assets before the holders of our common shares.

 

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The exercise of outstanding options, RSUs, Restricted Shares and warrants may dilute current shareholders.

 

As of December 31, 2016, there were outstanding warrants and Options to purchase a total of 19,781,485 common shares. Additionally, as of December 31, 2016, there were outstanding RSUs that, subject to vesting, are convertible into 1,304,433 common shares and Restricted Shares that are convertible into 1,660,444 common shares. The exercise or conversion of a substantial number of these outstanding warrants, Options, RSUs and Restricted Shares could adversely affect our share price and dilute current shareholders.

 

We have not paid any cash dividends in the past and have no plans to issue cash dividends in the future, which could cause our common shares to have a lower value than that of similar companies which do pay cash dividends.

 

We have not paid any cash dividends on our common shares to date and do not anticipate any cash dividends being paid to holders of our common shares in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our Board. In addition, the Credit Facility contains a negative covenant which prohibits us from paying dividends to our shareholders without the prior written consent of Raycom and the terms of any future debt or credit facility may preclude us from paying any dividends. See “Dividend Policy”.

 

While our dividend policy will be based on the operating results and capital needs of the business, it is anticipated that any earnings will be retained to finance our future expansion. As we have no plans to issue cash dividends in the future, our common shares could be less desirable to other investors and as a result, the value of our common shares may decline, or fail to reach the valuations of other similarly situated companies that pay cash dividends.

 

Two large shareholders have substantial control over us, which will limit an investor’s ability to influence the outcome of important transactions, including a change in control.

 

As of December 31, 2016, two large shareholders own approximately 27.0% and 26.9% of our outstanding common shares, respectively, excluding common shares underlying warrants held by one of the shareholders owning 27.0%. Upon exercise of such warrants, the shareholder holding 27.0% will hold approximately 48.9%. Such shareholders have the ability to control or substantially influence aspects of our business. They may also have interests that differ from other investors and may vote in a manner that is adverse to investors’ interests. This concentration of ownership may discourage, delay or prevent a change in control, which could deprive our shareholders of an opportunity to receive a premium for their common shares as part of a sale of the Company.

 

Risks Related to this Offering

 

We will have broad discretion in the use of the net proceeds from this offering and may fail to apply these proceeds effectively.

 

Our management will have broad discretion in the application of the net proceeds of this offering, including for working capital, general corporate purposes and possible acquisitions. We cannot specify with certainty the actual uses of the net proceeds of this offering. You may not agree with the manner in which our management chooses to allocate and spend the net proceeds. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. The failure by our management to apply these funds effectively could harm our business, financial condition and results of operations.

 

Future sales of our common shares may adversely affect our share price and our ability to raise capital.

 

Sales of substantial amounts of our common shares in the public market, or the perception that these sales could occur, could cause the market price of our common shares to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. In connection with the acquisition of Frankly Media, we issued 3,021,072 Restricted Shares to GEI (the “GEI Shares”) in consideration of their Gannaway Web Holdings, LLC membership interests. 1,510,536 GEI Shares are still subject to a lock-up agreement. The lock-up period with respect to these securities will expire on August 25, 2017, subject to earlier expiry upon the occurrence of certain events that constitute a change of control of the Company. Further, upon expiry of the lock-up periods, the GEI Shares will be converted into common shares. In addition, after the lock-up agreements with our directors, officers and certain shareholders pertaining to this offering expire 180 days from the date of this offering, up to 33,579,615 of the shares that had been locked up will be eligible for future sale in the public market.

 

All the securities sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, except for any shares held by our affiliates, as defined in Rule 144 under the Securities Act. Sales of our common shares by our shareholders and warrant or option holders following this offering could lower the market price of our common shares. Sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that our management deems acceptable or at all. The issuance of approximately 22,746,362 shares issuable upon exercise of outstanding options, warrants, convertible securities as of December 31, 2016 could also lower the market price of our common shares.

 

You will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the future.

 

You will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of common shares in this offering at an assumed public offering price of $      per share (the midpoint of the price range set forth on the cover page of this prospectus), and after deducting the estimated underwriting discount and estimated offering expenses payable by us, investors in this offering would suffer an immediate dilution of $      per share. See “Dilution.”

 

 25 
  

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements, which reflect our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described under the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Forward-looking statements include, but are not limited to, statements with respect to the nature of the usage of our software-as-a-service platform, our strategy and capabilities, changing audience and advertising demand for local news and media, needs for new technology from local news and media industry, the vertical and regional expansion of our market and business opportunities, the expansion of our product offering, and the estimated number of smart device users, local news and media businesses and digital advertisers in the future. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict or are beyond our control. A number of important factors could cause actual outcomes and results to differ materially from those expressed in these forward looking statements. Consequently, readers should not place undue reliance on such forward-looking statements. In addition, these forward-looking statements relate to the date on which they are made.

 

The forward-looking statements reflect our current expectations and are based on information currently available to us and on assumptions we believe to be reasonable. Forward-looking information is subject to known and unknown risks, uncertainties and other factors that may cause our actual results, activities, performance or achievements to be materially different from that expressed or implied by such forward-looking statements. These forward-looking statements include, but are not limited to:

 

  our ability to implement our business strategy;
  our ability to successfully integrate any acquired businesses;
  our overall ability to effectively respond to technology changes affecting the industry and increasing competition from other technology providers;
  our ability to retain existing CMS platform customers or add new ones;
  our ability to generate new customers for our mobile technology products;
  the availability of advertising inventory and the market demand and prices of such inventory;
  our ability to introduce changes to our existing products or develop and introduce new and unproven products and our customers’ or the market’s acceptance of such products;
  our ability to manage our growth effectively;
  the recent consolidation and vertical integration within the local news broadcasting industry;
  the business conditions of our customers particularly in the local news broadcasting and adjacent industries;
  the adoption of ASTC 3.0 and its implications on our customers;
  our ability to expand our customer base to global markets;
  our ability to protect its intellectual property; and
  our ability to access capital markets.

 

Although we have attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking information, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. The forward-looking information contained herein is made as of the date of this prospectus and, other than as required by law, we do not assume any obligation to update any forward-looking information, whether as a result of new information, future events or results or otherwise.

 

You should also read the matters described in “Risk Factors” and the other cautionary statements made in this prospectus as being applicable to all related forward-looking statements wherever they appear in this prospectus. The forward-looking statements in this prospectus may not prove to be accurate and therefore you are encouraged not to place undue reliance on forward-looking statements. You should read this prospectus completely.

 

This prospectus also includes estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.

 

 26 
  

 

Enforcement of Civil Liabilities

 

We are a British Columbia corporation with a registered and records office in British Columbia, Canada. Certain claims may be brought against us in British Columbia. However, it may be difficult for an investor to bring an original action against us or our officers and directors in British Columbia predicated upon the civil liability provisions of the U.S. federal securities laws. Further, it may be difficult for an investor to bring an action against us or our officers and directors in the U.S. to enforce a judgment obtained in British Columbia. Additionally, it may be difficult for an investor to bring an action in British Columbia to enforce a judgment obtained in a U.S. court against us or our officers or directors.

 

Our U.S. subsidiaries are organized under the laws of the state of Delaware. Substantially all of our assets and all of the assets of our U.S. subsidiaries are located in the U.S. Furthermore, most of our and our U.S. subsidiaries’ current officers and directors reside in the U.S.

 

While British Columbia law provides for reciprocal enforcement of judgments from certain enumerated U.S. states, there is uncertainty as to whether British Columbia courts would: (i) enforce judgments of United States courts obtained against us, our U.S. subsidiaries or our, or our U.S. subsidiaries’, directors and officers predicated upon the civil liability provisions of the United States federal securities laws, or (ii) assume jurisdiction of original actions brought in British Columbia against us, our U.S. subsidiaries, or our, or our U.S. subsidiaries’, directors and officers predicated upon the civil liability provisions of the U.S. federal securities laws, as such judgments and laws may, amongst other things, conflict with Canadian laws.

 

 27 
  

 

USE OF PROCEEDS

 

We estimate that we will receive net proceeds of approximately $                    million from our sale of common shares in this offering, or approximately $                    million if the underwriters exercise their over-allotment option in full, based on an assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting the underwriting discount and offering expenses payable by us.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $                    per share would increase (decrease) the net proceeds from this offering by approximately $                    million, assuming that the number of common shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of common shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of common shares we are offering would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

We intend to use the net proceeds of this offering as follows:

 

    $        to increase sales and marketing investments (including channel partnerships) to increase market share and expand into other verticals;
    $        for product development on existing and new products including CMS, mobile and TV apps, and video workflow;
    $        for development of new business lines in big data and digital advertising;
    $2 million to partially repay amounts outstanding under the Credit Facility; and
    the balance for working capital and general corporate purposes.

 

Pending such uses, we intend to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities such as money market funds, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.

 

On August 31, 2016, we entered into agreements with Raycom establishing the Credit Facility. We will pay interest on each loan outstanding at any time at a rate per annum of 10%. Interest will accrue and be calculated, but not compounded, daily on the principal amount of each loan on the basis of the actual number of days each loan is outstanding and will be compounded and payable monthly in arrears on each interest payment date. To the maximum extent permitted by applicable law, we will pay interest on all overdue amounts, including any overdue interest payments, from the date each of those amounts is due until the date each of those amounts is paid in full. That interest will be calculated daily, compounded monthly and payable on demand of Raycom at a rate per annum of 12%. We have the option to repay all or a portion of loans outstanding under the Credit Facility without premium, penalty or bonus upon prior notice to Raycom and repayment of all interest, fees and other amounts accrued and unpaid under the Credit Facility. The Credit Facility matures on August 31, 2021. As of September 30, 2016, $14.5 million in principal was outstanding under the Credit Facility. Amounts outstanding under the Credit Facility are secured by first priority security interests on substantially all of our assets and are guaranteed by our subsidiaries. The Credit Facility was used to effect the August 2016 Refinancing.

 

The expected use of the net proceeds of the offering set forth above represents our estimates based upon our current plans and assumptions regarding industry and general economic conditions, our future revenues and expenditures. The amounts and timing of our actual expenditures will depend upon numerous factors, including market conditions, cash generated by our operations, business developments and related rate of growth. We may find it necessary or advisable to use portions of the proceeds from this offering for other purposes.

 

As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. Accordingly, we will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the proceeds of this offering.

 

 28 
  

 

PRICE RANGE OF COMMON SHARES

 

Our common shares commenced trading on the TSX-V on October 17, 2013 and, since January 5, 2015, have been listed on the TSX-V under the symbol “TLK”. We have applied to have our common shares listed on the Nasdaq Capital Market under the symbol “FKLY”.

 

The table below sets forth the high and low bid prices of our common shares, as reported on the TSX-V for the periods shown , as adjusted for the Reverse Stock Split.

 

   High   Low 
Fiscal Year 2017                    
First Quarter (through January 9, 2017)   CDN$    0.43    CDN$    0.39 
Fiscal Year 2016                    
Fourth Quarter   CDN$    0.56    CDN$    0.40 
Third Quarter   CDN$    0.60    CDN$    0.41 
Second Quarter   CDN$    0.81    CDN$    0.48 
First Quarter   CDN$    0.70    CDN$    0.47 
Fiscal Year 2015                    
Fourth Quarter   CDN$    1.65    CDN$    0.52 
Third Quarter   CDN$    3.10    CDN$    1.40 
Second Quarter   CDN$    3.30    CDN$    2.40 
First Quarter   CDN$    3.20    CDN$    2.42 

 

The closing price of our common shares on the TSX-V on January 9, 2017 was CDN$0.39 per share. As of January 9, 2017, there were approximately 24 record holders of our common shares.

 

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DIVIDEND POLICY

 

Holders of our common shares are entitled to receive such dividends as may be declared by our Board. No dividends have been paid with respect to our common shares and no dividends are anticipated to be paid in the foreseeable future. Any future decisions as to the payment of dividends will be at the discretion of our Board, subject to applicable law. In addition, the Credit Facility contains a negative covenant which prohibits us from paying dividends to our shareholders if an event of default has occurred and be continuing or could reasonably be expected to result from such distribution and without the prior written consent of Raycom. The Credit Facility also prohibits us from making distributions to shareholders that exceed (i) $0 if our total leverage ratio is equal to or more than 3:1, or (ii) $250,000, annually, if our total leverage ratio is less than 3:1. Under the SVB Line of Credit, without SVB’s prior written consent, we cannot pay any dividends or make any distribution or payment to our equityholders.

 

 30 
  

 

CAPITALIZATION

 

The following table sets forth our cash and total capitalization as of September 30, 2016:

 

  on an actual basis;
     
  on a pro forma basis to reflect (i) SVB Line of Credit, (ii) December Private Placement (assuming the warrants issued in the December Private Placement are treated as equity and therefore the value attributable to such warrants is included in additional paid-in-capital), and (iii) the Raycom Advance;
     
  on a pro forma as adjusted basis to further reflect the sale of common shares by us in this offering at an assumed initial public offering price of $ per share which is the midpoint of the price range listed on the cover of this prospectus, after deducting the estimated underwriting discount and estimated offering expenses payable by us and the application of the expected net proceeds therefrom as set forth under “Use of Proceeds”.

 

The information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other final terms of this offering. This table should be read in conjunction with, and is qualified in its entirety by reference to, “Use of Proceeds”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes appearing elsewhere in this prospectus.

 

   As of September 30, 2016 
   Actual   Pro Forma   Pro Forma As Adjusted 
             
Cash and cash equivalents  $2,803,013   $7,798,147     
Debt obligations:               
Revolving credit facility - Silicon Valley Bank    -     1,375,474      
Capital leases, current portion   175,942    175,942      
Total short-term debt obligations  $175,942   $1,551,416      
Non-revolving credit facility, net of discount   11,623,739    11,623,739      
Capital leases, non-current portion   80,461    80,461      
Total long-term debt obligations  $11,704,200   $11,704,200      
Total debt obligations  $11,880,142   $13,255,616      
Shareholders’ Equity               
Common shares, no par value, unlimited shares authorized; 32,893,797 shares outstanding (Actual); 34,341,019 shares outstanding (Pro Forma) (1) ;                  shares outstanding (Pro Forma As Adjusted)    -      -       
Class A restricted voting shares, no par value, unlimited shares authorized; 1,752,934 shares outstanding (Actual); 1,752,934 shares outstanding (Pro Forma);                      shares outstanding (Pro Forma As Adjusted)    -      -       
Additional paid-in capital   64,220,904    64,840,564      
Accumulated deficit   (47,465,106)   (47,465,106)     
Accumulated other comprehensive (loss) income   (34,948)   (34,948)     
Total Shareholders’ Equity  $16,720,850   $17,340,510      
Total Capitalization  $28,600,992   $30,596,126      

 

(1) Excludes 793,811 of common shares issuable upon exercise of the warrants issued in the December Private Placement.

 

 31 
  

 

The outstanding historical share information in the table above is based on common shares outstanding as of September 30, 2016 and excludes as of such date the following:

 

  1,752,934 common shares issuable upon conversion of outstanding Restricted Shares;
     
  4,275,707 common shares issuable upon the exercise of outstanding stock options having a weighted average exercise price of $1.14 per share granted under our Equity Plan;
     
  1,322,895 common shares issuable pursuant to outstanding RSUs issued and outstanding under our Equity Plan; and
     
  116,503 additional common shares reserved for future issuance under our Equity Plan.

 

A $1.00 increase (decrease) in the assumed initial public offering price of $                 per share would increase (decrease) each of cash, total shareholders’ equity and total capitalization by approximately $                 million, assuming the number of common shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of common shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of common shares we are offering would increase (decrease) each of cash, total shareholders’ equity and total capitalization from this offering by approximately $                 million, assuming an initial public offering price of $                 per share, which is the midpoint of the price range as set forth on the cover page of this prospectus, and after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

 32 
  

 

DILUTION

 

If you purchase our common shares in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per common share, and the pro forma as adjusted net tangible book value per common share immediately after this offering.

 

Our historical net tangible book value is the amount of our total tangible assets less our total liabilities. Our historical net tangible book value per share is our historical net tangible book value as of September 30, 2016 divided by the 32,893,797 common shares outstanding as of September 30, 2016. Our historical net tangible book value as of September 30, 2016 was approximately $                 million or approximately $                               per share.

 

Pro forma net tangible book value gives effect to (i) the SVB Line of Credit, (ii) the December Private Placement (assuming the warrants issued in the December Private Placement are treated as equity and therefore the value attributable to such warrants is included in additional paid-in-capital), and (iii) the Raycom Advance. Our pro forma net tangible book value as of September 30, 2016 would have been approximately $                    million or approximately $                     per share.

 

Pro forma as adjusted net tangible book value is our pro forma net tangible book value, after giving effect to the assumed sale of                  common shares in this offering at an assumed initial public offering price of $                 per share, which is the midpoint of the range set forth on the cover of this prospectus, and after deducting the estimated underwriting discount and estimated offering expenses payable by us. Our pro forma as adjusted net book value as of September 30, 2016 would have been approximately $                 million, or approximately $                  per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to our existing shareholders, and an immediate dilution of $                 per share to new investors participating in this offering. Dilution per share to new investors is determined by subtracting the pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors.

 

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share  $  
Historical net tangible book value per share as of September 30, 2016  $  
Pro forma increase in net tangible book value per share  $  
Pro forma net tangible book value per share as of September 30, 2016  $  
Pro forma increase in net tangible book value per share attributable to new investors  $  
Pro forma as adjusted net tangible book value per share, after giving effect to this offering  $  
Dilution of pro forma as adjusted net tangible book value per share to new investors in this offering  $  

 

If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be approximately $                  per share, which amount represents an immediate increase in pro forma as adjusted net tangible book value of approximately $                 per share to existing shareholders and an immediate dilution in pro forma as adjusted net tangible book value of approximately $                 per share to new investors purchasing common shares in this offering. Each $1.00 increase (decrease) in the assumed initial public offering price of $                 per share would increase (decrease) the pro forma net tangible book value, as adjusted to give effect to this offering, by approximately $                  per share and the dilution to new investors by approximately $                  per share, assuming the number of common shares offered by us, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discount and estimated offering expenses payable by us.

 

We may also increase or decrease the number of common shares we are offering. An increase (decrease) of 1,000,000 shares in the number of common shares we are offering would increase (decrease) our pro forma as adjusted net tangible book value by approximately $                  million, or approximately $                  per share, and decrease (increase) the pro forma dilution per share to investors in this offering by approximately $                  per share, assuming an initial public offering price of $                  per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discount and estimated offering expenses payable by us. The pro forma information discussed above is illustrative only and will change based on the actual initial public offering price, number of shares and other terms of this offering determined at pricing.

 

 33 
  

 

If any common shares are issued upon exercise of outstanding options or warrants or conversion of outstanding RSUs or Restricted Shares, you may experience further dilution. The number of common shares reflected in the discussion and tables above is based on 21,998,304 common shares outstanding as of September 30, 2016 and excludes as of such date the following:

 

  1,752,934 common shares issuable upon conversion of outstanding Restricted Shares;
     
  4,275,707 common shares issuable upon the exercise of outstanding stock options having a weighted average exercise price of $1.14 per share granted under our Equity Plan;
     
  1,322,895 common shares issuable pursuant to outstanding RSUs issued and outstanding under our Equity Plan;
     
  116,503 additional common shares reserved for future issuance under our Equity Plan.

 

The following table summarizes, on the pro forma as adjusted basis described above as of September 30, 2016, the number of common shares purchased from us, the total consideration paid to us and the average price per share paid to us by officers, directors, promoters and affiliated persons acquired by them in transactions since January 1, 2011, or which they have the right to acquire, and by new investors purchasing common shares in this offering at the assumed initial public offering price of $                       per share, which is the midpoint of the price range listed on the cover page of this prospectus, before the deduction of the estimated underwriting discount and estimated offering expenses payable by us. Investors purchasing our common shares in this offering will pay an average price per share substantially higher than such persons paid.

 

   Shares Purchased   Total Consideration   Average
Price
 
   Number   Percent   Amount   Percent   Per Share 
Related parties                         
New Investors participating in this offering                    
Total                         

 

A $1.00 increase (decrease) in the assumed initial public offering price of $                        per share would increase (decrease) total consideration paid by new investors by $                        million and increase (decrease) the percent of total consideration paid by new investors by                       %, assuming the number of common shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting the estimated underwriting discount and estimated offering expenses payable by us. We may also increase or decrease the number of common shares we are offering.

 

If the underwriters’ over-allotment option is exercised in full, the percentage of common shares purchased by our related parties will be reduced to                        %, and the number of common shares held by new investors will increase to             shares, or % of the total.

 

 34 
  

 

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

 

Our pro forma condensed consolidated statement of operations and comprehensive loss for the year ended December 31, 2015 has been prepared as if the acquisition of Gannaway Web Holdings, LLC (Worldnow) had occurred on January 1, 2015. Pro forma adjustments are intended to reflect what the effect would have been had we held our ownership interest as of January 1, 2015 on amounts that have been recorded in our historical consolidated statement of operations and comprehensive loss.

 

The unaudited pro forma financial information is for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the acquisition had been completed on the dates indicated, nor is it indicative of our future operating results. The unaudited pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. You should not rely on the unaudited pro forma statement of operations and comprehensive loss for the year ended December 31, 2015 as being indicative of the results of operations that would have been achieved had the business combination been consummated as of January 1, 2015. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with our historical consolidated financial statements and accompanying notes, the historical audited financial statements of Worldnow and accompanying notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each included elsewhere in this prospectus. The unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only.

 

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FRANKLY INC.

 

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE LOSS (UNAUDITED)

 

For the Year Ended December 31, 2015

 

    Historical Financial Results                    
    Frankly Inc.     Worldnow     Combined                 Pro Forma  
    Year Ended December 31, 2015     Period Ended August 25, 2015     Year Ended December 31, 2015       Pro Forma
Adjustments
          Year Ended December 31, 2015  
                                     
Total Revenue   $ 6,877,671     $ 18,117,773     $ 24,995,444     $ -             $ 24,995,444  
                                                 
Costs and operating expenses:                                                
Cost of revenue (excluding depreciation and amortization)     1,408,625       3,426,865       4,835,490       -               4,835,490  
General and administrative (excluding depreciation and amortization)     7,524,273       4,577,916       12,102,189       79,296       A       12,090,835  
                              (90,650 )     B          
Selling and marketing     1,552,549       2,018,626       3,571,175       -               3,571,175  
Research and development (excluding depreciation and amortization)     6,023,697       3,002,785       9,026,482       -               9,026,482  
Depreciation and amortization     1,156,143       2,063,827       3,219,970       (103,432 )     C       3,116,538  
Impairment expense     12,195,985       -       12,195,985       -               12,195,985  
Loss on disposal of assets     25,935       -       25,935       -               25,935  
Transaction costs     1,271,854       1,459,319       2,731,173       (2,731,173 )     D       -  
Other expense     251,987       245,000       496,987       -               496,987  
Income (Loss) from operations     (24,533,377 )     1,323,435       (23,209,942 )     2,845,959               (20,363,983 )
                                                 
Other income     (86,767 )     -       (86,767 )     -               (86,767 )
Foreign exchange gain     (23,442 )     -       (23,442 )     -               (23,442 )
Interest expense, net     300,420       174,992       475,412       500,000       E       975,412  
Income (Loss) before income tax expense     (24,723,588 )     1,148,443       (23,575,145 )     2,345,959               (21,229,186 )
      -                                          
Income tax expense     -       -       -       -               -  
Net Income (Loss)   $ (24,723,588 )   $ 1,148,443     $ (23,575,145 )   $ 2,345,959             $ (21,229,186 )
                                                 
Other Comprehensive Net Income (Loss)                                                
Foreign currency translation     (33,516 )     -       (33,516 )     -               (33,516 )
Comprehensive Net Income (Loss)   $ (24,757,104 )   $ 1,148,443     $ (23,608,661 )   $ 2,345,959             $ (21,262,702 )
                                                 
Basic and Diluted Net Loss Per Share   $ (0.97 )                                   $ (0.66 )
                                                 
Basic and Diluted Weighted-Average Common and Class A Restricted Voting Shares Outstanding     25,574,673                       6,472,145        F       32,046,818  

 

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FRANKLY INC.

NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE LOSS

 

For the Year Ended December 31, 2015 (Unaudited)

 

Basis of Presentation

 

The unaudited pro forma condensed consolidated statement of operations and comprehensive loss for the year ended December 31, 2015 was based on the audited consolidated financial statements of Frankly Inc. (the Company) for the year ended December 31, 2015 and the audited financial statements Gannaway Web Holdings, LLC (Worldnow) for the period ended August 25, 2015. These financial statements are included elsewhere in this prospectus. The unaudited pro forma condensed consolidated statement of operations and comprehensive loss gives effect to our acquisition of Woldnow as if it had been completed on January 1, 2015. Worldnow’s statement of operations for the period ended August 25, 2015 represented their results of operations from January 1, 2015 through August 25, 2015, the date of acquisition. The financial results of Worldnow from the date of acquisition through December 31, 2015 were consolidated and included in Frankly Inc.’s audited consolidated financial statements for the year ended December 31, 2015. A pro forma balance sheet is not presented because the audited balance sheet of Frankly Inc. as of December 31, 2015 already includes the financial position of Worldnow.

 

The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the two companies. Accordingly, these unaudited pro forma results are presented for informational purpose only and are not necessarily indicative of what the actual results of operations of the combined Company would have been if the acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations.

 

Adjustments to Pro Forma Condensed Consolidated Statement of Operations

 

A. Rent Expense

 

The pro forma adjustment reflects inclusion of additional straight-line rent expense of $79,296 as a result of deferred rent being reflected at its fair value of $0 on the date of acquisition.

 

B. Stock-Based Compensation Expense

 

The pro forma adjustment of $90,650 represents the reversal of stock-based compensation expense included in the historical results of operations of Worldnow. All of the outstanding options held by Worldnow employees were canceled without reissuance on the date of acquisition.

 

C. Depreciation and Amortization

 

The pro forma adjustment reflects the reversal of eight months of amortization of capitalized software included in the historical results of operations of Worldnow of $1,574,545 and the inclusion of eight months of amortization of capitalized software of $888,889, based on the fair value of capitalized software of $4 million on the date of acquisition. In addition, the pro forma adjustment includes eight months of amortization of intangibles of $582,224, based on the fair value of broadcast and advertiser customer relationships of $8.8 million on the date of acquisition. No pro forma adjustment has been made for other depreciable assets whose fair values were deemed equal to their carrying values on the date of acquisition.

 

D. Transaction Costs

 

The pro forma adjustment reflects the reversal of combined transaction costs incurred related to the acquisition included in the historical results of operations of Frankly Inc. and Worldnow of $1,271,854 and $1,459,319, respectively.

 

E. Interest Expense, net

 

The pro forma adjustment reflects eight months of interest expense related to the 5%, one-year $15,000,000 promissory notes issued as purchase consideration in the acquisition amounting to $500,000. The historical financial statements of Frankly Inc. already include $250,000 of interest expense related to the promissory notes after the acquisition date.

 

F. Basic and Diluted Weighted-Average Common and Class A Restricted Voting Shares Outstanding

 

The pro forma adjustment reflects an increase of 6,472,145 to the weighted-average Common and Class A restricted voting shares outstanding for the year ended December 31, 2015 to reflect the 9,967,650 shares issued as purchase consideration on August 25, 2015 as if they were issued on January 1, 2015.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis together with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on our current expectations, estimates and projections about our business and operations. See “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and elsewhere in this prospectus.

 

Overview

 

We have had two distinct phases of product evolution in our history. From February 2013 until August 2015, we developed mobile applications and a next generation server platform. Through the acquisition of Frankly Media in August 2015, we leveraged our existing mobile and platform expertise to become a SaaS provider of content management for broadcasters and media companies.

 

Our mission is to help TV broadcasters and media companies transform their traditional business from just delivering content over-the-air via broadcast television to distributing content in multi-platform, digital formats on new platforms such as mobile, tablets, desktop and other connected devices. Our core product is a white-labeled software platform that enables media companies to publish their official content onto multiscreen devices, increase social interaction on those multiscreen experiences, and enable digital advertising. The platform consists of a CMS platform, native mobile and OTT applications, responsive web framework, digital video solutions and digital advertising solutions.

 

We generate revenues by charging monthly recurring software licensing fees, variable usage fees for our platform and sharing digital advertising revenue with our customers. We enter into written contracts with our customers pursuant to which we provide access to our online, software-as-a-service, content management platform. These contracts typically cover the use of the platform and ancillary services such as delivery and storage of video content, and access to ad-serving and analytics functionality. Many of these agreements also grant us the right to sell online advertising inventory on behalf of the customer pursuant to a revenue sharing arrangement with the customer. Our agreements are generally for a three-year term and do not provide for early termination rights. We bill our customers monthly or quarterly for the fees associated with the software license, and monthly in arrears for variable usage fees incurred by a customer’s use of our platform. We generally make advertising revenue share payments to our customers on a quarterly basis.

 

Our platform is currently being used by approximately 200 U.S. local news stations, mostly affiliated with large broadcasting networks such as NBC, CBS, FOX and ABC. We plan to enhance our platform in the future by expanding our offerings to other media verticals and international markets, together with investments into channel partnerships, sales and marketing, enhanced data analytics and innovative advertising products.

 

We acquired Worldnow in August 2015. Since the acquisition, our revenues have increased significantly, primarily as a result of the acquisition and the inclusion of Worldnow’s results in our consolidated financial statements. Our revenues increased from $1.6 million for the nine months ended September 30, 2015 to $16.7 million for the nine months ended September 30, 2016, representing a period-over-period increase of $15.1 million, or 972%. We generated net loss of $13.1 million in 2014 and $24.7 million in 2015. For the nine months ended September 30, 2015 and 2016, we had a net loss of $9.6 million and 4.5 million, respectively.

 

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Trends Affecting Our Business

 

Our primary customers today are local affiliate TV stations, which as an industry, are undergoing consolidation which we believe will continue in the coming years. This would result in a contraction of the number of customers available to use our services in this particular customer segment, although not necessarily in the total aggregate value of the addressable market size of this segment. In parallel, the local affiliate TV stations are facing increasing competition from companies that deliver video content over the internet, commonly referred to as “over-the-top,” or OTT. These new competitors include a range of players from an individual YouTube star at one end, to large well-funded technology enabled companies such as Netflix, Hulu, Google, Apple and Amazon.

 

With such growth of OTT programming, consumers’ video content consumption preferences may shift away from existing viewing habits. As a result, many of our customers and potential customers are compelled to find new ways to deliver services and content to their consumers via the internet. We expect this pressure to become even greater as more video content becomes available online. We expect to benefit from this trend as customers adopt our solutions to enable digital media and OTT services using our multi-platform technology and services. In fact, customers are enhancing / upgrading their websites to use the internet to deliver rich media content, such as newscasts and weather updates, to attract advertisers and to compete with other internet sites and smart phone and tablet device applications and other social media outlets.

 

We also see the growth of non-traditional media players that is driven by the availability of less expensive content production and distribution methods. With technology advances in the tools and platforms that enable content producers to produce content with less people and financial resources, content is further becoming more democratized. We expect our results of operations to benefit from this trend as our software-as-a-service platform further enables content producers to leverage technology to produce, distribute and monetize their content.

 

Another trend affecting our customers and our business is the proliferation of internet-connected devices, especially mobile devices. Smartphones, tablets and connected TVs have made it more convenient for consumers to access services and content online, including television programming. To remain competitive, our customers and potential customers must have the capability to deliver their services and products to consumers on these new devices. Our technology enables them to extend their presence beyond traditional personal computers, and we expect that some portion of our revenue growth will come from traffic on these devices.

 

Our business is also affected by growth in advertising on the internet, for which the proliferation of high-speed internet access and internet-connected devices will be the principal drivers. As such, we expect to see growth in new platforms such as mobile, tablets, Internet-connected TVs, and other emerging platforms that require an advertising solutions like ours. We expect our results of operations will benefit from the growth in the number of new platforms as our customers adopt these new platforms to drive their business growth.

 

Key Metrics

 

In addition to measures of financial performance presented in our consolidated financial statements, we monitor the key metrics set forth below to help us evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts, and assess operational efficiencies.

 

Adjusted EBITDA

 

We monitor Adjusted EBITDA, a non-GAAP financial measure, to analyze our financial results and believe that it is useful to investors, as a supplement to U.S. GAAP measures, in evaluating our ongoing operational performance and enhancing an overall understanding of our past financial performance. We believe that Adjusted EBITDA helps illustrate underlying trends in our business that could otherwise be masked by the effect of the income or expenses that we exclude in Adjusted EBITDA. Furthermore, we use this measure to establish budgets and operational goals for managing our business and evaluating our performance. We also believe that Adjusted EBITDA provides an additional tool for investors to use in comparing our recurring core business operating results over multiple periods with other companies in our industry.

 

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Adjusted EBITDA is not a recognized financial measure under U.S. GAAP and does not have a standardized meaning prescribed by U.S. GAAP. Therefore, it may not be comparable to similar financial measures presented by other issuers. Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. We calculate Adjusted EBITDA as net income (loss) before interest expense, net, income tax expense, depreciation and amortization, further, adjusted to exclude certain non-cash charges and other items that we do not believe are reflective of our ongoing operating results.

 

The following unaudited table presents the reconciliation of net loss to Adjusted EBITDA for the years ended December 31, 2014 and 2015 and the nine months ended September 30, 2015 and 2016.

 

   Year Ended December 31,   Nine Months Ended September 30, 
   2014   2015   2015   2016 
                 
Net Loss  $(13,101,569)  $(24,723,588)  $(9,615,112)  $(4,533,357)
Interest expense, net   180,446    300,420    76,477    749,706 
Income tax expense   -    -    -    - 
Depreciation and amortization   48,009    1,156,143    343,458    2,447,265 
Stock-based compensation   36,037    1,050,916    777,383    859,799 
Impairment expense   -    12,195,985    -    - 
Loss on disposal of assets   2,814    25,935    -    1,093 
Loss on extinguishment of debt   1,670,173    -    -    90,573 
Transaction costs   645,302    1,271,854    968,838    - 
Nasdaq listing fees   -    -    -    410,225 
Other expense   180,000    251,987    -    205,681 
Non-operating income   -    (86,767)   -    - 
Adjusted EBITDA  $(10,338,788)  $(8,557,115)  $(7,448,956)  $230,985 

 

Limitations of Adjusted EBITDA

 

Adjusted EBITDA, non-GAAP financial measure, has limitations as an analytical tool, and should not be considered in isolation from or as a substitute for measures presented in accordance with U.S. GAAP. Some of these limitations are:

 

  Adjusted EBITDA does not reflect certain cash and non-cash charges that are recurring;
     
  Adjusted EBITDA does not reflect income tax payments that reduce cash available to us;
     
  Adjusted EBITDA excludes depreciation and amortization of property and equipment and intangible assets, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future; and
     
  Other companies, including companies in our industry, may calculate Adjusted EBITDA differently or not at all, which reduces their usefulness as a comparative measure.

 

Because of these limitations, Adjusted EBITDA should be considered alongside other financial performance measures, including revenues, net income (loss) and our financial results presented in accordance with U.S. GAAP.

 

 40 
  

 

Components of our Results of Operations

 

Revenue

 

We derive our revenue from three categories: recurring fee based revenue for use of our platform (including license fees and usage fees), revenue generated from digital advertising activities (national and local advertising) and professional services revenue.

 

License fees and usage fees

 

We enter into license agreements with customers for our CMS, video software, and mobile applications. These license agreements, generally non-cancellable and multiyear, provide the customer with the right to use our application solely on a company-hosted platform or, in certain instances, on purchased encoders. The license agreements also entitle the customer to technical support. Revenue from these license agreements, which are accounted for as service arrangements, is recognized ratably over the license term.

 

We charge our customers for the optional use of our content delivery network to stream and store videos. Revenue from these fees is recognized as earned based on actual usage because it has stand-alone value and delivery is in the control of the customer. We also charge our customers for the use of our ad serving platform to serve ads under local advertising campaigns. We report revenue as earned based on the actual usage.

 

National and local advertising

 

Under national advertising agreements with advertisers, we source, create, and place advertising campaigns that run across our network of customers. National advertising revenue, net of third-party costs, is shared with customers based on their respective contractual agreements. We invoice national advertising amounts due from advertisers and remit payments to customers. Depending on the customer arrangement, the obligation to remit payment to the customer is based on either billing to the advertiser or the collection of cash from the advertiser. National advertising revenue is recognized in the period during which the ad impressions are delivered. We report revenue earned through national advertising agreements on a net basis in accordance with ASC Subtopic 605-45, Revenue Recognition - Principal Agent Considerations because we act as agent between the advertiser and the publisher and do not bear the risk of loss in the arrangements with our customers. Beginning in the second quarter of 2016, we began amending certain advertising contracts with our customers to take on additional inventory and credit risk. Revenue recognized under these contracts was previously accounted for on a net basis due to us being identified as an agent. Subsequent to the amendments noted above, we recognized revenue on a gross basis, with amounts billed to advertisers reported as revenue, and amounts due to the publisher being reflected as a revenue sharing expense.

 

Under local advertising agreements with customers, we provide local ad sales consulting and support services in exchange for monthly fees over the term of the agreement. The fees are established in the agreement with the customer in one of three ways: fixed annual amounts for an unlimited number of advertisers, flat fee paid per advertiser, or a commission rate of the local advertising revenue paid by the advertiser. Fixed amounts are recognized as revenue ratably over the contract term, and flat fee and commission-based amounts are recognized as revenue based on the revenue earned for each respective period based on actual delivery of the local advertising campaigns.

 

Professional services

 

Professional services consist primarily of installation and website design services. Installation fees are contracted on a fixed-fee basis. We recognize revenue as services are performed. Such services are readily available from other vendors and are not considered essential to the functionality of the product. Website design services are also not considered essential to the functionality of the product and have historically been insignificant; the fee allocable to website design is recognized as revenue as we perform the services.

 

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Costs and expenses

 

Cost of Revenue (excluding depreciation and amortization)

 

Cost of revenue consists of the following: compensation-related expenses of employees, primarily our client services personnel, and outsourced services that directly service our customers, infrastructure costs, licenses and computer support used directly in the delivery of service, content delivery and storage costs including ad serving costs, fees paid for content and revenue sharing expenses related to national advertising revenue.

 

General and administrative (excluding depreciation and amortization)

 

General and administrative expenses consist primarily of compensation-related expenses for executive management, finance, accounting, legal and human resources, professional fees and other administrative functions. It also includes certain technology overhead expenses that are not considered to be part of research and development expenses.

 

Selling and Marketing

 

Selling and marketing expenses consist primarily of compensation-related expenses to our direct sales and marketing personnel, as well as costs related to advertising, industry conferences, and other sales and marketing programs. Advertising cost is expensed as incurred.

 

Research and Development

 

Research and development expenses consist primarily of compensation-related expenses to employees and outsourced services incurred for the research and development of, enhancements to, and maintenance and operation of our products, equipment and related infrastructure. Research and development expenses are reported net of amounts capitalized as software development costs. We account for our software development costs as internal-use software in accordance with ASC 350-40 – Intangibles, Goodwill and other Internal-Use Software because software usage by our customers is cloud-based. Development costs that do not meet the criteria of ASC 350-40 are expensed as incurred.

 

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Depreciation and Amortization

 

Depreciation and amortization includes depreciation and amortization of our computer hardware and software, office equipment, leasehold improvements, capitalized software development costs and intangible assets.

 

Other expense

 

Other expense is comprised of items that we do not believe are reflective of our ongoing operating results, such as costs incurred in integration efforts and legal or other settlements.

 

Interest Expense, net

 

Interest expense, net consists of interest on debt and capital leases, net of interest income.

 

Income tax expense

 

Income tax expense consists of federal and state income taxes in the United States and taxes in certain foreign jurisdictions, as well as any changes to deferred tax assets or liabilities, and deferred tax valuation allowances.

 

Results of Operations

 

For purposes of the discussion on the results of operation, reference is made to “former business” and “acquired business”. “Former business” is defined as our operations before the acquisition of Worldnow on August 25, 2015 which consisted solely of the operations in San Francisco, California. “Acquired business” is defined as our operations after the acquisition of Worldnow on August 25, 2015, excluding the former business. The segregation noted above is purely for analytical purposes only to assist in identifying variances pre- and post-acquisition of Worldnow. We do not view our operations as two separate businesses.

 

 43 
  

 

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015.

 

   Nine Months Ended September 30, 
   2015   2016   Variance 
             
Total Revenue  $1,554,571   $16,664,579   $15,110,008 
                
Costs and operating expenses:               
Cost of revenue (excluding depreciation and amortization)   357,203    5,758,189    5,400,986 
General and administrative (excluding depreciation and amortization)   4,828,757    6,372,160    1,543,403 
Selling and marketing   808,469    2,249,986    1,441,517 
Research and development (excluding depreciation and amortization)   3,801,965    2,916,119    (885,846)
Depreciation and amortization   343,458    2,447,265    2,103,807 
Loss on disposal of assets   -    1,093    1,093 
Loss on extinguishment of debt   -    90,573    90,573 
Transaction costs   968,838    -    (968,838)
Nasdaq listing fees   -    410,225    410,225 
Other expense   -    205,681    205,681 
Loss from operations   (9,554,119)   (3,786,712)   5,767,407 
                
Foreign exchange (gain) loss   (15,484)   (3,061)   12,423 
Interest expense, net   76,477    749,706    673,229 
Loss before income tax expense   (9,615,112)   (4,533,357)   5,081,755 
                
Income tax expense   -    -    - 
Net Loss  $(9,615,112)  $(4,533,357)  $5,081,755 

 

The following is a breakdown of total revenue for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015:

 

   Nine Months Ended September 30, 
   2015   2016   Variance 
Revenue:               
License fees  $757,507   $8,106,932   $7,349,425 
Advertising   480,107    5,523,774    5,043,667 
Usage fees   219,608    2,189,793    1,970,185 
Professional services and other   97,349    844,080    746,731 
Total Revenue  $1,554,571   $16,664,579   $15,110,008 

 

License fees

 

License fees for the nine months ended September 30, 2016 were $8.1 million compared to $0.8 million for the comparable period of 2015, an increase of $7.3 million. The increase was due to the acquisition of Worldnow which resulted in a revenue increase of $7.3 million attributable to the operations of the acquired business.

 

Advertising

 

Advertising revenue for the nine months ended September 30, 2016 was $5.5 million compared to $0.5 million for the comparable period of 2015, an increase of $5.0 million. The increase was due to the acquisition of Worldnow which resulted in a revenue increase of $5.0 million attributable to the operations of the acquired business. A significant portion of the increase beginning in the third quarter of 2016 was also due to the change in our accounting for advertising revenues described above.

 

 44 
  

 

Usage fees

 

Usage fees for the nine months ended September 30, 2016 were $2.2 million compared to $0.2 million for the comparable period of 2015, an increase of $2.0 million. The increase was due to the acquisition of Worldnow which resulted in a revenue increase of $2.0 million attributable to the operations of the acquired business.

 

Professional services and other

 

Professional services and other for the nine months ended September 30, 2016 was $0.8 million compared to $0.1 million for the comparable period of 2015, an increase of $0.7 million. The increase was partially due to the acquisition of Worldnow which resulted in a revenue increase of $0.4 million attributable to the operations of the acquired business. The remaining increase of $0.3 million attributable to the former business was due to one consulting agreement which began November 2015.

 

Cost of revenue (excluding depreciation and amortization)

 

Cost of revenue for the nine months ended September 30, 2016 was $5.8 million compared to $0.4 million for the comparable period of 2015, an increase of $5.4 million. The increase resulted primarily from an increase of $5.3 million attributable to the operations of the acquired business.

 

General and administrative (excluding depreciation and amortization)

 

General and administrative expense for the nine months ended September 30, 2016 was $6.4 million compared to $4.8 million for the comparable period of 2015, an increase of $1.6 million. The increase resulted primarily from an increase of $3.1 million attributable to the operations of the acquired business, offset in part by a $1.6 million decrease to general and administrative expense of the former business. The decrease attributable to the former business resulted primarily from a reduction of technology overhead required to support the legacy instant messaging apps and decrease in professional fees. Professional fees in the first half of 2015 primarily related to legal, audit and accounting fees associated with our company becoming public in Canada at the end of 2014 and related post-closing matters.

 

Selling and marketing

 

Selling and marketing expense for the nine months ended September 30, 2016 was $2.2 million compared to $0.8 million for the comparable period of 2015, an increase of $1.4 million. The increase resulted primarily from an increase of $1.7 million attributable to the operations of the acquired business, offset in part by a $0.3 million decrease to selling and marketing expense of the former business due to reduction in marketing efforts of the legacy instant messaging apps.

 

Research and development (excluding depreciation and amortization)

 

Research and development expense for the nine months ended September 30, 2016 was $2.9 million compared to $3.8 million for the comparable period of 2015, a decrease of approximately $0.9 million. The decrease resulted primarily from an increase of $1.5 million attributable to the operations of the acquired business, which was more than offset by a $2.4 million decrease attributable to the former business. Research and development expenses are reported net of amounts capitalized as software development costs. Beginning in 2016, upon completion of integration of the former and acquired businesses, employees and consultants of the former business began to work on our software projects which met the capitalization criteria as defined by ASC 350-40 – Intangibles, Goodwill and other Internal-Use Software. Capitalized software development costs for the nine months ended September 30, 2016 of $1.6 million were attributable to the former business. The remaining decrease of $0.8 million was primarily due to reduction in headcount of the technology department and reduction in outsourced research and development relating to the legacy instant messaging apps.

 

Depreciation and amortization

 

Depreciation and amortization expense was $2.4 million for the nine months ended September 30, 2016 compared to $0.3 million for the comparable period of 2015, an increase of approximately $2.1 million. The increase resulted primarily from an increase of $2.1 million attributable to the operations of the acquired business, including amortization of acquired intangible assets.

 

 45 
  

 

Loss on extinguishment of debt

 

Loss on extinguishment of debt was approximately $91,000 for the nine months ended September 30, 2016 compared to $0 for the comparable period of 2015, an increase of $91,000. The increase resulted from the August 2016 Refinancing which closed on September 1, 2016. The refinancing was accounted for as an extinguishment of debt under ASC 470-50 – Modifications and Extinguishments.

 

Transaction costs

 

Transaction costs were $0 for the nine months ended September 30, 2016 compared to $1.0 million for the comparable period of 2015, a decrease of $1.0 million. Transaction costs of $1.0 million incurred in the nine months ended September 30, 2015 related to the acquisition of Worldnow.

 

Nasdaq listing fees

 

Nasdaq listing fees were $410,000 for the nine months ended September 30, 2016 compared to $0 for the comparable period of 2015, an increase of $410,000. We began the process of listing to Nasdaq in the third quarter of 2016. The fees incurred are professional fees which include audit, tax and legal fees, directly related to this process.

 

Other expense

 

Other expense was $206,000 for the nine months ended September 30, 2016 compared to $0 for the comparable period of 2015, an increase of $206,000. The increase resulted primarily from a $178,000 non-cash write-off of a sales tax receivable and $163,000 in integration expenses relating to the integration of the acquired business, offset in part by a decrease of $136,000 relating to a true-up to a sales and use tax settlement accrual upon receipt of the final assessment.

 

Interest expense, net

 

Interest expense, net was $750,000 for the nine months ended September 30, 2016 compared to $76,000 for the comparable period of 2015, an increase of $674,000. The increase was primarily due to the $15 million Worldnow Promissory Notes issued in connection with the acquisition of Worldnow and $14.5 million non-revolving credit facility with Raycom Inc., a related party, which closed on September 1, 2016. The 2015 period included one month interest expense of $62,500 on the $15 million Worldnow Promissory Notes compared to eight months in the 2016 period of $500,000. Further, the 2016 period included one month interest expense on the $14.5 million non-revolving credit facility of $160,000.

 

Income tax expense

 

No income tax expense was recognized during the periods presented.

 

 46 
  

 

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

 

   Year Ended December 31, 
   2014   2015   Variance 
             
Total Revenue  $172,377   $6,877,671   $6,705,294 
                
Costs and operating expenses:               
Cost of revenue (excluding depreciation and amortization)   161,102    1,408,625    1,247,523 
General and administrative (excluding depreciation and amortization)   4,696,573    7,524,273    2,827,700 
Selling and marketing   3,473,762    1,552,549    (1,921,213)
Research and development (excluding depreciation and amortization)   2,200,669    6,023,697    3,823,028 
Depreciation and amortization   48,009    1,156,143    1,108,134 
Impairment expense   -    12,195,985    12,195,985 
Loss on disposal of assets   2,814    25,935    23,121 
Loss on extinguishment of debt   1,670,173    -    (1,670,173)
Transaction costs   645,302    1,271,854    626,552 
Other expense   180,000    251,987    71,987 
Loss from operations   (12,906,027)   (24,533,377)   (11,627,350)
                
Non-operating (income) expense   -    (86,767)   (86,767)
Foreign exchange (gain) loss   15,096    (23,442)   (38,538)
Interest expense, net   180,446    300,420    119,974 
Loss before income tax expense   (13,101,569)   (24,723,588)   (11,622,019)
                
Income tax expense   -    -    - 
Net Loss  $(13,101,569)   (24,723,588)   (11,622,019)

 

The following is a breakdown of total revenue for the year ended December 31, 2015 compared to the year ended December 31, 2014:

 

   Year Ended December 31, 
   2014   2015   Variance 
Revenue:               
License fees  $-   $3,684,078   $3,684,078 
Advertising   -    2,086,831    2,086,831 
Usage fees   -    825,530    825,530 
Professional services and other   172,377    281,232    108,855 
Total Revenue  $172,377   $6,877,671   $6,705,294 

 

License fees

 

License fees for the year ended December 31, 2015 were $3.7 million compared to $0 for the comparable period of 2014, an increase of $3.7 million. The increase was due to the acquisition of Worldnow which resulted in a increase of $3.7 million attributable to the operations of the acquired business.

 

Advertising

 

Advertising revenue for the year ended December 31, 2015 was $2.1 million compared to $0 for the comparable period of 2014, an increase of $2.1 million. The increase was due to the acquisition of Worldnow which resulted in a increase of $2.1 million attributable to the operations of the acquired business.

 

Usage fees

 

Usage fees for the year ended December 31, 2015 were $0.8 million compared to $0 for the comparable period of 2014, an increase of $0.8 million. The increase was due to the acquisition of Worldnow which resulted in a increase of $0.8 million attributable to the operations of the acquired business.

 

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Professional services and other

 

Professional services and other for the year ended December 31, 2015 was $0.3 million compared to $0.2 million for the comparable period of 2014, an increase of $0.1 million. The increase was due to the acquisition of Worldnow which resulted in a increase of $0.1 million attributable to the operations of the acquired business.

 

Cost of revenue (excluding depreciation and amortization)

 

Cost of revenue for the year ended December 31, 2015 was $1.4 million compared to $161,000 for the comparable period of 2014, an increase of $1.2 million. The increase resulted primarily from an increase of $1.4 million attributable to the operations of the acquired business, offset in part by a $105,000 decrease in cost of revenue of the former business.

 

General and administrative (excluding depreciation and amortization)

 

General and administrative expense for the year ended December 31, 2015 was $7.5 million compared to $4.7 million for the comparable period of 2014, an increase of $2.8 million. The increase resulted primarily from an increase of $2.0 million attributable to the operations of the acquired business, with the remaining increase of $847,000 attributable to the former business. The increase attributable to the former business resulted from an increase in technology overhead required to support the legacy instant messaging apps, increase due to growth of former business operations and full year holding company activity in 2015 consisting of normal carrying costs of a publicly traded company such as filing fees, investor relation fees, and insurance, increase in travel and entertainment expenses due to increased travel to support sales, business development, the acquisition of Worldnow and investor relations and increase in office rent due to additional office space in San Francisco. These increases were partially offset by a decrease in professional fees in 2015 compared to 2014 which were associated with the Qualifying Transaction.

 

Selling and marketing

 

Selling and marketing expense for the year ended December 31, 2015 was $1.6 million compared to $3.5 million for the comparable period of 2014, a decrease of $1.9 million. The decrease resulted primarily from an increase of $833,000 attributable to the operations of the acquired business, offset by a $2.8 million decrease to selling and marketing expense of the former business. The decrease attributable to former business was due to the marketing and advertising efforts in 2014 following the official launch of the Frankly Chat application in September 2013. In 2014, we implemented several advertising campaigns and marketing initiatives for Frankly Chat, as well as several mobile and online advertising campaigns. In 2015, our marketing efforts shifted to focus on in-person business development and partnership as well as brand marketing.

 

Research and development (excluding depreciation and amortization)

 

Research and development expense for the year ended December 31, 2015 was $6.0 million compared to $2.2 million for the comparable period of 2014, an increase of $3.8 million. The increase resulted primarily from an increase of $1.5 million attributable to the operations of the acquired business, with the remaining increase of $2.3 million attributable to the former business. The increase attributable to the former business was primarily due to compensation-related expenses to employees and outsourced services related to increased development efforts on our legacy instant messaging apps.

 

Depreciation and amortization

 

Depreciation and amortization expense was $1.2 million for the year ended December 31, 2015 compared to $48,000 for the year ended December 31, 2014, an increase of $1.2 million. The increase resulted primarily from an increase of $1.0 million attributable to the operations of the acquired business, including $736,000 of amortization of acquired intangible assets. The remaining increase of $106,000 attributable to the former business was due to acquisitions of property and equipment and intangible assets during 2015.

 

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Impairment expense

 

Impairment expense was $12.2 million for the year ended December 31, 2015 compared to $0 for the year ended December 31, 2014, an increase of $12.2 million. During the year ended December 31, 2015, we purchased intellectual property for $228,275 for which no royalties were collected and, consequently, the asset was considered fully impaired and a loss equal to the carrying value of $195,000 was recognized later in 2015. Further, as a result of our annual goodwill impairment analysis performed at December 31, 2015, we recorded a goodwill impairment charge of $12.0 million relating to the Worldnow acquisition.

 

Loss on extinguishment of debt

 

Loss on extinguishment of debt was $0 for the year ended December 31, 2015 compared to $1.7 million for the year ended December 31, 2014, a decrease of $1.7 million. During the year ended December 31, 2014, we incurred a loss on extinguishment of debt of $1.7 million upon amendment of our convertible promissory notes on September 12, 2014 to modify the conversion features. As the amended terms included a new substantive conversion option, we accounted for the amendment as an extinguishment of debt. No such loss was incurred in 2015.

 

Transaction costs

 

Transaction costs were $1.3 million for the year ended December 31, 2015 compared to $645,000 for the year ended December 31, 2014, an increase of $627,000. Transaction costs of $645,000 incurred during the year ended December 31, 2014 represent costs in connection with the Qualifying Transaction. Transaction costs of $1.3 million incurred during the year ended December 31, 2015 related to the acquisition of Worldnow.

 

Other expense

 

Other expense was $252,000 for the year ended December 31, 2015 compared to $180,000 for the year ended December 31, 2014, an increase of $72,000. Other expense of $180,000 incurred during the year ended December 31, 2014 related to a legal settlement. Other expense of $252,000 incurred during the year ended December 31, 2015 was comprised of $340,000 in integration expenses relating to the integration of the acquired business, partially offset by a decrease of $88,000 due to a true-up of a sales and use tax liability with New York State.

 

Interest expense

 

Interest expense, net was $300,000 for the year ended December 31, 2015 compared to $180,000 for the year ended December 31, 2014, an increase of $120,000. The increase was primarily due to $250,000 of interest expense incurred on the $15 million in Worldnow Promissory Notes, and an increase of $50,000 attributable to the operations of acquired business which consisted of interest expense on the revolving credit facility and capital leases. The above increases were partially offset by interest expense incurred in 2014 of $180,000 related to the convertible promissory notes.

 

Income tax expense

 

No income tax expense was recognized during the periods presented.

 

Liquidity and Capital Resources

 

Since inception, we have financed our cash requirements primarily through the issuance of securities and convertible promissory notes. Due to our start-up status and limited revenue generated from operations, we have had recurring losses and negative cash flows from operating activities. With the acquisition of Worldnow on August 25, 2015, we have been able to utilize the positive cash flows from operating activities of the acquired business to help finance and support our operations. As of September 30, 2016, we had total current assets of approximately $6.1 million and total current liabilities of approximately $4.6 million. As of September 30, 2016, our principal sources of liquidity were our cash and trade accounts receivable. Our cash and cash equivalents and trade accounts receivable, net balances as of September 30, 2016 were $2.8 million and $2.6 million, respectively.

 

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As of September 30, 2016, we had an accumulated deficit of $47.5 million representative of recurring losses since inception. Additionally, we had not generated positive cash flow from operations since inception, until the third quarter of 2016.

 

These conditions have resulted in material uncertainty that may cast substantial doubt about our ability to continue as a going concern into the foreseeable future. Our ability to continue as a going concern is ultimately dependent upon our ability to achieve sustainable positive cash flow from operations. While improvements in cash flow from operations have been achieved with the acquisition of the Worldnow business, we will likely need additional cash to meet our needs in the next 12 months. In December 2016, we increased our cash resources through (i) borrowings under the SVB Line of Credit, (ii) the net proceeds of the December Private Placement, and (iii) the Raycom Advance. Upon the successful consummation of this offering, we do not anticipate needing additional cash to meet our needs in the next 12 months. However, there can be no assurances that we will be successful in achieving sustainable positive cash flow from operations or that we will be able to raise additional cash needed to finance operations, if required.

 

Operating Activities

 

Net cash provided by (used in) operating activities for the nine months ended September 30, 2016 was $304,000 compared to $(10.3) million for the comparable period of 2015, an increase of $10.6 million. The increase resulted primarily from a decrease in net loss of $5.1 million, an increase of $2.4 million in non-cash adjustments to net income, of which $2.1 million related to depreciation and amortization and an increase of $3.1 million for changes in operating assets and liabilities.

 

Net cash used in operating activities for the year ended December 31, 2015 was $14.1 million compared to $9.1 million for the comparable period of 2014, a decrease of $5.0 million. The decrease resulted primarily from an increase in net loss of $11.6 million, offset by an increase of $12.5 million in non-cash adjustments to net income, of which $12.2 million related to the impairment of intangibles and a decrease of $6.0 million for changes in operating assets and liabilities.

 

Investing Activities

 

Net cash used in investing activities for the nine months ended September 30, 2016 was $3.4 million compared to $5.3 million for the comparable period of 2015, an increase of $1.9 million. The increase resulted primarily from a decrease of $4.5 million of net cash used in the acquisition of Worldnow, partially offset by an increase of $3.2 million in capitalized software costs. Beginning in 2016, upon completion of integration of the former and acquired businesses, employees and consultants of the former business began to work on our capitalized software projects which met the capitalization criteria as defined by ASC 350-40 – Intangibles, Goodwill and other Internal-Use Software. Further, beginning in 2016, we began the process of enhancing and expanding the existing product offerings of the acquired business. This large scale development effort consisted of development of our next-generation content management system, native mobile applications, connected tv applications and mobile responsive web products.

 

Net cash provided by (used in) investing activities for the year ended December 31, 2015 was $(6.0) million compared to $61,000 for the comparable period of 2014, a decrease of $5.9 million. The decrease resulted primarily from $4.5 million of net cash used in the acquisition of Worldnow, an increase in capitalized software costs of $834,000, an increase in purchases of property and equipment of $348,000 and increase in purchases of intangible assets of $278,000.

 

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Financing Activities

 

Net cash used in financing activities for the nine months ended September 30, 2016 was $1.6 million compared to $0.7 million for the comparable period of 2015, an increase of $0.9 million. The increase resulted primarily from an increase of $1.95 million in revolving credit facility payments, partially offset by $500,000 in proceeds from issuance of debt in connection with the August 2016 Refinancing.

 

Net cash provided by (used in) financing activities for the year ended December 31, 2015 was $(1.1) million compared to $37.1 million for the comparable period of 2014, a decrease of $38.2 million. The decrease resulted primarily from a decrease in cash inflows from issuance of common shares, net of share issuance costs, of $30.8 million, primarily due to $30.9 million raised in 2014 from a number of private placements, and decrease in cash inflows from issuance of convertible promissory notes of $6.5 million in 2014.

 

Unit Purchase Agreement and Worldnow Promissory Notes

 

On July 28, 2015, we entered into the Unit Purchase Agreement, pursuant to which we issued the Worldnow Promissory Notes to GEI and Raycom in the aggregate principal amounts of $11 million and $4 million, respectively as partial consideration for their respective membership interests in Gannway Web Holdings, LLC. The Worldnow Promissory Notes bore simple interest at a rate of 5% per year.

 

Raycom Loan

 

On August 31, 2016, we entered into the Raycom SPA, the Credit Agreement and the related promissory note and fully paid the GEI Promissory Note and $3 million of the Original Raycom Note. We also converted $1 million of the Original Raycom Note into 2,553,400 common shares. On December 20, 2016, we entered into an amendment to the Raycom SPA and Credit Agreement, as described more fully below.

 

Securities Purchase Agreement

 

Pursuant to the Raycom SPA, we issued to Raycom an aggregate of 2,553,400 common shares for a purchase price of CDN$1,276,700 (or $1 million based on the exchange rate at August 18, 2016) in repayment of $1 million of the Original Raycom Note. Raycom’s 6,751,132 Restricted Shares were also converted into our common shares on a one-for-one basis. Under the Raycom SPA, we agreed to enlarge our Board to seven (7) directors, subject to shareholder approval, within 90 days of August 31, 2016. In addition, so long as Raycom holds not less than 20% of our issued and outstanding common shares calculated on a fully diluted basis, it has (i) the designation rights to two (2) directors as management’s nominees for election to our Board, one of whom is our current Board member, Joseph G. Fiveash, III and one of which must be an independent director as defined in Rule 5605(a)(2) of the Nasdaq Rules, and (ii) approval rights to one of the independent directors named as management’s nominees for election to our Board outside of the two Raycom designated directors. Pursuant to the SPA, Raycom has designated Joseph Fiveash as one of its director designees. On December 20, 2016, we entered into an amendment to the Raycom SPA and Credit Agreement, Raycom and we agreed to extend the time period for enlargement of the Board to seven members from 90 days following August 31, 2016, to the earlier of, and subject to shareholder approval: (a) 45 days following the effective date of our Form S-1 registration statement of which this prospectus forms a part, or (b) April 15, 2017.

 

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Credit Agreement

 

Pursuant to a Credit Agreement, we entered into a Credit Facility with Raycom in the principal amount of $14.5 million and issued to Raycom Warrants to purchase 14,809,720 common shares at a price per share of CDN$0.50 ($0.39 based on the exchange rate at August 18, 2016). The Credit Facility terminates on August 31, 2021. The Warrants have a 5-year term but will expire on the date which is later of (a) August 31, 2017 or (b) 30 days from the date of each principal repayment. Upon each payment of principal, the number of warrants that will expire will equal the product of the (i) then outstanding number of Warrants and (ii) the principal repayment divided by the then outstanding principal balance of the term loan by 100. The exercise price and the number of shares underlying the Warrants will be subject to adjustment as set forth in the Credit Agreement.

 

Subject to approval of Raycom, at its sole discretion, we may require further loans up to an aggregate amount of $1.5 million. We will pay interest on each loan outstanding at any time at a rate per annum of 10%. Interest will accrue and be calculated, but not compounded, daily on the principal amount of each loan on the basis of the actual number of days each loan is outstanding and will be compounded and payable monthly in arrears on each interest payment date. To the maximum extent permitted by applicable law, we will pay interest on all overdue amounts, including any overdue interest payments, from the date each of those amounts is due until the date each of those amounts is paid in full. That interest will be calculated daily, compounded monthly and payable on demand of Raycom at a rate per annum of 12%. We have the option to repay all or a portion of loans outstanding under the Credit Facility without premium, penalty or bonus upon prior notice to Raycom and repayment of all interest, fees and other amounts accrued and unpaid under the Credit Facility.

 

We must also make the following mandatory repayments:

 

(a) $2 million prior to August 31, 2019;

 

(b) commencing on November 30, 2019 and on the last day of the month of each three month period thereafter, an amount of $687,500 per three month period;

 

(c) proceeds (less actual costs paid and income taxes) on any asset sales or issuances of debt or equity;

 

(d) upon a successful listing of our common shares on Nasdaq with a capital raise of between $8 million to $11 million, mandatory repayment in the amount of $2 million, which will be applied toward the repayment obligation required by (b) above if completed by March 31, 2017;

 

(e) upon a successful listing of our common shares on Nasdaq with a capital raise of more than $12 million, a mandatory repayment in the amount of $3 million which will be applied toward the $2 million repayment obligation required by (a) above if completed by March 31, 2017 and any amounts raised in excess of $2 million will be applied pro rata to repayment obligations required by (b) above commencing November 30, 2019; and

 

(f) commencing on the financial year ending December 31, 2017, and each financial year ending thereafter, 100% of the current year excess cash flow amount in excess of $2 million must be paid to Raycom as a mandatory repayment amount no later than May 1 of the following year until a total leverage ratio of not more than 3:1 has been met for such fiscal year, at which point 50% of the current year excess cash amount in excess of $2 million will be paid to Raycom as mandatory repayment amounts. Such excess cash flow payments will be applied pro rata to reduce other mandatory payments due thereunder.

 

The mandatory prepayment provision described in subsection (c) above is not applicable to the December Private Placement (as described below), the SVB Line of Credit (as described below) or a U.S. public offering of equity pursuant to this prospectus resulting in proceeds to us of less than $8 million.

 

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In addition, we must maintain certain leverage ratios and interest coverage ratios beginning the fiscal quarter ending December 31, 2017. The leverage ratios range from 4:1 to 2.5:1 and 2:1 to 3.5:1 for the interest coverage ratio. We are also subject to the certain covenants relating to, among others, indebtedness, fundamental corporate changes, dispositions, acquisitions and distributions.

 

Upon an event of default, Raycom may by written notice terminate the facility immediately and declare all obligations under the Credit Agreement and the related loan documents, whether matured or not, to be immediately due and payable. Raycom may also as and by way of collateral security, deposit and retain in an interest bearing account, amounts received by Raycom from us under the Credit Agreement and the related loan documents and realize upon the Security Interest Agreements, Guaranty Agreements and Pledge Agreement as described below. If we fail to perform any of our obligations under the Credit Agreement and the related loan documents, Raycom may upon 10 days’ notice, perform such covenant or agreement if capable. Any amount paid by Raycom under such covenant or agreement will be repaid by us on demand and will bear interest at 12% per annum.

 

Guaranty Agreements, Security Interest Agreements and Pledge Agreement

 

In connection with the Credit Agreement, our subsidiaries Frankly Co. and Frankly Media LLC have entered into Guaranty Agreements whereby Frankly Co. and Frankly Media LLC have guaranteed our obligations under the Credit Agreement. In addition, each of Frankly Inc., Frankly Co. and Frankly Media LLC have entered into Security Interest Agreements pursuant to which Raycom has first priority security interests in substantially all of our assets. Under the Security Interest Agreements, we do not have a right to sell or otherwise dispose of all or part of the collateral except in the ordinary course of business that are not material. Frankly Media LLC has also entered into an Intellectual Property Pledge Agreement pursuant to which it has granted a security interest in all of its intellectual property to Raycom. We have also (i) deposited our intellectual property in escrow accounts for the benefit of Raycom, (ii) entered into a control agreement pursuant to which we granted Raycom control of 100% of the equity interest of Frankly Media LLC and (iii) entered into an insurance transfer and consent assigning our rights and payments under insurance policies covering our operations and business naming Raycom as mortgagee, first loss payee and additional named insured.

 

In addition, we have entered into a Pledge Agreement pursuant to which we granted Raycom a security interest on substantially all the assets and securities of our current and future subsidiaries.

 

Upon an event of default, we will be required to deposit all interests, income, dividends, distributions and other amounts payable in cash in respect of the pledged interests into a collateral account over which Raycom has the sole control and may apply such amounts in its sole discretion to the secured obligations under the Credit Agreement. Upon the cure or waiver of a default, Raycom will repay to us all cash interest, income, dividends, distributions and other amounts that remain in such collateral account. In addition, upon an event of default, Raycom has the right to (i) transfer in its name or the name of any of its agents or nominees the pledged interests, (ii) to exercise all voting, consensual and other rights and power and any and all rights of conversion, exchange, subscription and other rights, privileges or options pertaining to the pledged interests whether or not transferred into the name of Raycom, and (iii) to sell, resell, assign and deliver all or any of the pledged interests. We have also agreed to use our best efforts to cause a registration under the Securities Act and applicable state securities laws of the pledged interests upon the written request from Raycom.

 

Raycom may transfer or assign, syndicate, grant a participation interest in or grant a security interest in, all or any part of its rights, remedies and obligations under the Credit Agreement and the related loan documents, without notice or our consent.

 

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Repayment of Bridge Bank Loan

 

As a condition to entering into the Credit Agreement, on August 31, 2016, we fully repaid the Bridge Bank Loan.

 

Western Alliance Bank Letter of Credit

 

On August 31, 2016, in lieu of a security deposit under the lease dated October 26, 2010, with Metropolitan Life Insurance Company, for real property located at 27-01 Queens Plaza North, Long Island City, NY, we entered into a standby letter of credit with Western Alliance Bank for an amount of $500,000 (the “Letter of Credit”). For each advance, interest will accrue at a rate equal to the sum of (i) the Base Rate (as defined below), plus (ii) 3.50%, provided that such interest rate will change from time to time as the Base Rate changes. The “Base Rate” means the rate of interest used as the reference or base rate to establish the actual rates charged on commercial loans and which is publicly announced or reported from time to time by the Wall Street Journal as the “prime rate”. Interest will accrue from the date of the advance until such advance is paid in full. We have granted Western Alliance Bank a security interest in a $524,115 controlled cash deposit account together with (i) all interest, whether now accrued or hereafter accruing; (ii) all additional deposits hereafter made to the account; (iii) any and all proceeds from the account; and (iv) all renewals, replacements and substitutions for any of the foregoing.

 

Intercompany Loan Agreements

 

Pursuant to a loan agreement dated February 17, 2015 by and between Frankly Inc. and Frankly Co., Frankly Co. has agreed to transfer to us up to $15 million to cover expenditures of the Company. The interest rate of the loan is fixed at 3% annually and installments will be made until 2020. Frankly Co. unilaterally determines the number, the amount and the frequency of each installment. As of September 30, 2016, there was approximately $13.8 million outstanding.

 

Recent Developments

 

Raycom Advance

 

On December 22, 2016, Raycom pre-paid $3 million of future fees for services to be provided by the Company pursuant to the Website Software and Services Agreement dated October 1, 2011 by and between the Company and Raycom. If we complete an equity raise of at least $5 million before March 31, 2017, then we can either (i) refund the prepayment to Raycom within 30 days of the completion of the equity raise along with an additional $30,000 for fees in connection with the prepayment by Raycom, or (ii) apply the prepayment to services provided by us for the year ending December 31, 2017 in which case Raycom will receive a discount of $300,000 for the services to be provided by us. If we do not complete an equity raise of at least $5 million by March 31, 2017, then the prepayment will be applied to the services to be provided for the year ending December 31, 2017 and Raycom will receive a discount of $300,000 for services to be provided by us for the year ending December 31, 2017.

 

Silicon Valley Bank Line of Credit

 

On December 28, 2016, we , Frankly Media and Frankly Co. entered into the Loan and Security Agreement pursuant to which SVB has provided us with a $3 million revolving line of credit. Borrowings under the SVB Line of Credit accrue interest at a floating per annum rate equal to 2.25% above the Prime Rate published in the Wall Street Journal, which interest will be payable monthly and computed on the basis of a 360-day year for the actual number of days elapsed.

 

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Events of default include failure to make principal and interest payments; default in covenants under the Loan and Security Agreement; any material adverse change; attachment, levy or restraint on our business; insolvency; default or breach of the August 2016 Refinancing or any other indebtedness in amount in excess of $50,000 or resulting in a material adverse effect on our business; judgments or penalties of at least $50,000 rendered against us; misrepresentations of any representations or warranties under the Loan and Security Agreement; revocation or invalidation or termination of any subordinated debt affecting the seniority of the obligations under the Loan and Security Agreement; and revocation, suspension or modification of any governmental approvals. Immediately upon the occurrence and during the continuance of an event of default, obligations under the line of credit will bear interest at a rate per annum which is 5.0% above the rate that is otherwise applicable thereto (the “Default Rate”). Fees and expenses which are required to be paid by us pursuant to the Loan and Security Agreement and the related documents but are not paid when due will bear interest until paid at a rate equal to the highest rate applicable to the obligations. Upon the occurrence and during the continuance of an event of default, SVB may, among other actions, (i) accelerate all obligations due under the Loan and Security Agreement; (ii) stop advancing money or extending credit under the Loan and Security Agreement; (iii) demand that we (A) deposit cash with SVB in an amount equal to at least (a) 105.0% of the dollar equivalent of the aggregate face amount of all letters of credit denominated in U.S. dollars remaining undrawn, and (b) 110.0% of the dollar equivalent of the aggregate face amount of all letters of credit denominated in a foreign currency remaining undrawn (plus, in each case, all interest, fees, and costs due or to become due in connection therewith (as estimated by SVB in its good faith business judgment)), to secure all of the obligations relating to such letters of credit, as collateral security for the repayment of any future drawings under such letters of credit and that we deposit and pay such amounts, and (B) pay in advance all letter of credit fees scheduled to be paid or payable over the remaining term of any letters of credit; (iv) collect any accounts and general intangibles, settle or adjust disputes and claims directly with account debtors for amounts on terms and in any order that SVB considers advisable; and (v) exercise its rights with respect to the loan collateral.

 

We are subject to certain covenants, including but not limited to periodic reports to SVB regarding our financials and accounts, collection of proceeds from our accounts receivable into a lockbox account which can be used as a reserve by SVB to reduce any obligations under the Loan and Security Agreement, maintenance of insurance, timely tax filings and pension payments, remittance of proceeds from any sale of collateral to SVB to be applied to any obligations under the Loan and Security Agreement and maintenance of our intellectual property. We have also agreed to maintain unrestricted and unencumbered cash at SVB in an aggregate amount of $1 million at all times and maintain an Adjusted Quick Ratio (as defined below) of (i) 1.1 to 1.0 until the earlier of March 31, 2017 and such date our securities are listed or approved for trading on a U.S. national stock exchange or market and (ii) 1.3 to 1.0 at all times thereafter. The Adjusted Quick Ratio means the ratio of our unencumbered and unrestricted cash at SVB plus net billed accounts receivable determined according to GAAP and current liabilities minus the current portion of non-refundable Deferred Revenue. We are also subject to negative covenants relating to dispositions of our or our subsidiaries’ business or property, changes in business, management, control or business location, mergers, amalgamation and acquisitions, indebtedness, certain encumbrances on our property or accounts, dividend payments or other distributions to our equityholders or redemption, retirement or purchase of any capital stock or membership interests and upon terms no less favorable to us than would be obtained in arms’ length transaction with non-affiliated persons (excluding conversion of Restricted Shares into common shares ) or any investment, loan, advance or capital contribution other than permitted investments. We have also agreed not to enter into any transactions with our affiliates outside of ordinary course of business (excluding our intercompany loan agreement with Frankly Co.) and are prohibited from making any payment on subordinated debt except under the terms of the subordinated debt or amend subordinated debt that would adversely affect the subordination of such subordinated debt to the obligations under the Loan and Security Agreement.

 

The line of credit expires on December 28, 2017 (the “Revolving Line Maturity Date”). The line of credit may be terminated earlier than the Revolving Line Maturity Date upon written notice by us. Upon termination of the Loan and Security Agreement or the line of credit prior to the Revolving Line Maturity Date, in addition to the payment of any other amounts then-owing, a termination fee in an amount equal to 1.0% of the Revolving Line is payable by us.

 

The SVB Line of Credit is secured by substantially all of our and our subsidiaries’ assets. We and our subsidiaries have also entered into Intellectual Property Security Agreements pursuant to which we and our subsidiaries have granted a security interest in all of our respective rights, titles and interests in our intellectual property. Pursuant to the Intercreditor Agreement between Raycom, TRS and SVB, Raycom has first priority security interest in substantially all of our assets other than SVB Priority Collateral while SVB will have first priority security interest in the SVB Priority Collateral.

 

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December Private Placement

 

In December 2016, we issued a total aggregate of 1,447,222 Units, with each Unit consisting of one common share and one-half Private Placement Warrant at a price of CDN$0.45 per Unit raising gross proceeds of CDN$651,249.90 and net proceeds of approximately CDN$619,660. Each Private Placement Warrant entitles the holder thereof to purchase one additional common share upon payment of the exercise price of CDN$0.56 for a period of 24 months from issuance. In connection with sale of Units outside of the U.S., we paid finders ’ fees of 6% cash totaling $31,590 to the Private Placement Brokers. We also issued the Broker Warrants to purchase 70,200 common shares to the Private Placement Brokers, representing 6% of the total aggregate Units placed by the Private Placement Brokers. We have received conditional approval from the TSX-V for the offering, which remains subject to TSX-V’s final approval. 1,195,000 Units issued pursuant to the exemption under Regulation S are subject to a one year distribution compliance period and an offer and sale of such securities cannot be not made to a U.S. person or for the account or benefit of a U.S. person until the expiration of the one year distribution compliance period. In addition, the securities issued in this private placement offering are subject to a statutory four-month hold period under National Instrument 45-106 – Prospectus Exemptions expiring in April 2017 and such securities are not freely tradeable prior to that date in Canada without a prospectus exemption.

 

Critical Accounting Policies

 

Our discussion of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. During the preparation of these consolidated financial statements, we were required to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, capitalization of software development costs, impairment of long-lived assets, impairment of intangible assets including goodwill and stock-based compensation expense. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our consolidated financial statements.

 

We consider certain accounting policies to be critical accounting policies when that policy requires management to make significant estimates and assumptions in applying the policy or in determining carrying values. Such critical accounting policies include:

 

Revenue Recognition

 

Revenue is measured as the fair value of the consideration received or receivable, and represents amounts receivable for services rendered. Our primary sources of revenue are license fees for the use of our CMS and video software, and digital advertising revenue. We begin to recognize revenue when all of the following criteria under ASC 605-10 – Revenue Recognition, are met: (i) we have evidence of an arrangement with a customer; (ii) license agreement terms are fixed or determinable and free of contingencies or uncertainties that may alter the agreement such that it may not be complete and final; (iii) we deliver the specified services or products; and (iv) collection is reasonably assured. Revenue is recorded net of applicable sales taxes.

 

We account for the license fees for the use of our content management system in accordance with ASC 605-25 – Multiple Element Arrangements. License fees and maintenance (post-contract support) relating to our video software are accounted for in accordance with ASC 985-605 – Certain Revenue Arrangements that Include Software Elements. As we account for our video software in accordance with the software accounting guidance, we allocate revenue to deliverables based on the Vendor Specific Objective Evidence (“VSOE”) of each element, and if VSOE does not exist revenue is recognized when elements lacking VSOE are delivered.

 

License Fees. We enter into license agreements with customers for our CMS, video software, and mobile applications. These license agreements, generally non-cancellable and multiyear, provide the customer with the right to use our application solely on a company-hosted platform or, in certain instances, on purchased encoders. The license agreements also entitle the customer to technical support. Revenue from these license agreements is recognized ratably over the license term. Early termination fees are recognized when a customer ceases use of agreed upon services prior to the expiration of their contract. These fees are recognized in full on the date the customer has completed their migration off of our solutions and there is no continuing service obligation to the customer.

 

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Usage Fees. We charge our customers for the optional use of our content delivery network to stream and store videos. Revenue from these fees is recognized as earned based on actual usage because it has stand-alone value and delivery is in control of the customer. We also charge our customers for the use of our ad serving platform to serve ads under local advertising campaigns. We report revenue as earned based on the actual usage.

 

Advertising (National Advertising). Under national advertising agreements with advertisers, we source, create, and place advertising campaigns that run across our network of customers. National advertising revenue, net of third-party costs, is shared with customers based on their respective contractual agreements. We invoice national advertising amounts due from advertisers and remit payments to customers. Depending on the customer arrangement, the obligation to remit payment to the customer is based on either billing to the advertiser or the collection of cash from the advertiser. National advertising revenue is recognized in the period during which the ad impressions are delivered. We report revenue earned through national advertising agreements on a net basis in accordance with ASC Subtopic 605-45, Revenue Recognition - Principal Agent Considerations because we act as agent between the advertiser and the publisher and do not bear the risk of loss in the arrangements with our customers. Beginning in the second quarter of 2016, we began amending certain advertising contracts with our customers to take on additional inventory and credit risk. Revenue recognized under these contracts was previously accounted for on a net basis due to us being identified as an agent. Subsequent to the amendments noted above, we recognize revenue on a gross basis, with amounts billed to advertisers reported as revenue, and amounts due to the publisher being reflected as a revenue sharing expense.

 

Advertising (Local Advertising). Under local advertising agreements with customers, we provide local ad sales consulting and support services in exchange for monthly fees over the term of the agreement. The fees are established in the agreement with the customer in one of three ways: fixed annual amounts for an unlimited number of advertisers, flat fee paid per advertiser, or a commission rate of the local advertising revenue paid by the advertiser. Fixed amounts are recognized as revenue ratably over the contract term, and flat fee and commission-based amounts are recognized as revenue based on the revenue earned for each respective period based on actual delivery of the local advertising campaigns.

 

Professional Services and Other. Professional services consist primarily of installation and website design services. Installation fees are contracted on a fixed-fee basis. We recognize revenue as services are performed. Such services are readily available from other vendors and are not considered essential to the functionality of the product. Website design services are also not considered essential to the functionality of the product and have historically been insignificant; the fee allocable to website design is recognized as revenue as we perform the services.

 

Capitalization of Software Development Costs

 

We account for our software development costs as internal-use software in accordance with ASC 350-40 – Intangibles, Goodwill and other Internal-Use Software because software usage by our customers is cloud-based. Costs incurred during the preliminary project stage for internal use software programs are expensed as incurred. External and internal costs incurred during the application development stage of new software development as well as for upgrades and enhancements for software programs that result in additional functionality are capitalized. Internal and external training and maintenance costs are expensed as incurred. Capitalized costs are amortized on a straight-line basis over the software’s estimated useful life, which is three to five years beginning when the software is ready for use. Periodically, we reassess the useful life considering technology, obsolescence, and other factors.

 

We periodically review the carrying amount of our capitalized software to determine if circumstances exist indicating an impairment or if amortization periods should be modified. If facts or circumstances support the possibility of impairment, we will prepare a projection of the undiscounted future cash flows of the specific assets to determine if the assets are recoverable. If impairment exists based on these projections, an adjustment will be made to reduce the carrying amount of the specific assets to fair value. There was no impairment recorded during the years ended December 31, 2014 and 2015 and the nine months ended September 30, 2015 and 2016.

 

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Impairments and Fair Value Measurements

 

Goodwill Impairment. We use a two-step process to evaluate our goodwill for possible impairment at least annually or more frequently if changes in circumstances or the occurrence of events suggest impairment exists. To identify any impairment, the estimated fair value of the reporting unit is compared with its carrying amount, including goodwill. We have one reporting unit, which is the same as our reportable segment. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and no further analysis is required. If the carrying amount of the reporting unit exceeds its estimated fair value, then the second step is performed to determine and measure the amount of the potential impairment charge.

 

For the second step, if it were required, implied fair value of the goodwill for the reporting unit is compared with its carrying amount and an impairment charge equal to the excess of the carrying amount over the implied fair value would be recorded. The implied fair value of the goodwill would be determined by allocating the estimated fair value of the reporting unit to its assets and liabilities. The excess of the estimated fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of the goodwill. In connection with our annual goodwill impairment testing as of December 31, 2015, we determined that under ASC 350-20 – Intangibles, Goodwill and other Internal-Use Software, a portion of the goodwill related to the Worldnow acquisition was impaired and recorded a non-cash goodwill impairment charge of $12.0 million.

 

Significant judgments and estimates are required in assessing the fair value of the reporting unit. These estimates and assumptions are complex and subject to a significant degree of judgment with respect to certain factors including, but not limited to, revenue growth rates, future cash flows, discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions that are consistent with information used by the business for planning purposes and that we believe to be reasonable; however, actual future results may differ from those estimates. Changes in judgments on any of these factors could materially affect the value of the reporting unit.

 

Other Intangible Asset Impairment. Intangible assets with finite lives are assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method are reviewed at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates on a prospective basis.

 

Impairment of Long-Lived Assets, excluding Goodwill and Other Intangible Assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, we first compare undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models or, when available, quoted market values and third-party appraisals.

 

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Fair Value Measurements. We follow the authoritative guidance on fair value measurements and disclosures with respect to assets and liabilities that are measured at fair value on both a recurring and non-recurring basis. Under this guidance, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The authoritative guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels defined as follows:

 

  Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
     
  Level 2 – Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly.
     
  Level 3 – Inputs are unobservable for the asset or liability.

 

As part of our testing of goodwill and intangible assets for impairment, we determine the fair value of our assets and liabilities, many of which were based on discounted cash flows analysis and forecasted future operating results which represent Level 3 inputs.

 

Stock-Based Compensation

 

We record compensation costs related to stock-based awards in accordance with ASC 718, Compensation—Stock Compensation whereby we measure stock-based compensation cost at the grant date based on the estimated fair value of the award. Compensation cost is recognized on a straight-line basis over the requisite service period of the award. We utilize the Black-Scholes option-pricing model to estimate the fair value of stock options granted, which requires the input of highly subjective assumptions including: the expected option life, the risk free interest rate, the dividend yield, the volatility of our stock price and an assumption for employee forfeitures. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term of the option. We have not historically issued any dividends and do not expect to in the near future. There is no forfeiture rate applied to grants in 2014 as there was not sufficient historical data to estimate. Changes in any of these subjective input assumptions can materially affect the fair value estimates and the resulting stock-based compensation recognized.

 

Recent Accounting Pronouncements

 

ASU 2014-09: Revenue from Contracts with Customers (Topic 606). In May 2014, the FASB issued ASU 2014-09 that will replace most existing revenue recognition guidance in U.S. GAAP. In July 2015, the FASB issued a one-year deferral of the effective date of the new revenue recognition standard. In March, April and May 2016, the FASB issued additional amendments to the technical guidance of Topic 606. Topic 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard will be effective for us in 2018 and early application is permitted (unless we choose to delay until 2019 as permitted under our election as an EGC). We are evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures and have not yet selected a transition method.

 

ASU 2014-15: Presentation of Financial Statements – Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. In June 2014, the FASB issued ASU 2014-15. Before the issuance of ASU 2014-15, there was no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. This guidance is expected to reduce the diversity in the timing and content of footnote disclosures. ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards as specified in the guidance. ASU 2014-15 becomes effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter. Early adoption is permitted. We are currently evaluating the effects of adopting ASU 2014-15 on our consolidated financial statements but the adoption is not expected to have a significant impact on our consolidated financial statements.

 

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ASU 2015-17: Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. In November 2015, the FASB issued ASU 2015-17 to simplify the presentation of deferred taxes in the balance sheet. Current guidance requires an entity to separate deferred income tax assets and liabilities into current and noncurrent amounts. The new guidance requires all deferred tax assets and liabilities to be presented as noncurrent. ASU 2015-17 will be effective for us in 2017 and early adoption is permitted. This guidance may be applied either prospectively to all deferred tax assets and liabilities, or retrospectively to all periods presented. We are evaluating the effect that this guidance will have on our consolidated financial statements and related disclosures but the adoption is not expected to have a significant impact on our consolidated financial statements.

 

ASU 2016-02: Leases (Topic 842) — In February 2016, the FASB issued ASU 2016-02, which requires a lessee to recognize assets and liabilities on its consolidated balance sheet for leases with accounting lease terms of more than 12 months. ASU 2016-02 will replace most existing lease accounting guidance in U.S. GAAP when it becomes effective. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. ASU 2016-02 will be effective for us in 2019 and requires the modified retrospective method of adoption. Early adoption is permitted. Although we are currently evaluating the effect that ASU 2016-02 will have on our consolidated financial statements and related disclosures, we expect that most of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon adoption.

 

ASU 2016-09: Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. In March 2016, the FASB issued ASU 2016-09, which is intended to simplify several aspects of the accounting for share-based payment award transactions, including the income tax consequences and classification on the statement of cash flows. ASU 2016-09 will be effective for us in 2017 and early adoption is permitted. We are currently evaluating the guidance to determine the adoption methods and the effect that ASU 2016-09 will have on our consolidated financial statements and related disclosures.

 

Off-Balance Sheet Financing

 

Other than our operating lease obligations, we have no off-balance sheet arrangements such as guarantees, retained or contingent interests in assets transferred to an unconsolidated entity, obligations indexed to our own stock or variable interests in unconsolidated entities. Future obligations under operating leases, capital leases and debt arrangements are detailed in our consolidated financial statements included elsewhere in this prospectus.

 

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BUSINESS

 

Overview

 

Our mission is to help TV broadcasters and media companies transform their traditional business from just delivering content over-the-air via broadcast television to distributing content in multi-platform, digital formats on new platforms such as mobile, tablets, desktop and other connected devices. Our core product is a white-labeled software platform that enables media companies to publish their official content onto multiscreen devices, increase social interaction on those multiscreen experiences, and enable digital advertising. The platform consists of a CMS platform, native mobile and over-the-top (“OTT”) applications, responsive web framework, digital video solutions and digital advertising solutions. We generate revenues by charging monthly recurring software licensing fees, variable usage fees for our platform and sharing digital advertising revenue with our customers.

 

Our platform is currently being used by approximately 200 U.S. local news stations, mostly affiliated with large broadcasting networks such as NBC, CBS, FOX and ABC. We plan to enhance our platform in the future by expanding our offerings to other media verticals and international markets, together with investments into channel partnerships, sales and marketing, enhanced data analytics and innovative advertising products.

 

History and Corporate Structure

 

Capital Pool Company

 

We were originally incorporated pursuant to the OBCA on June 7, 2013, under the name WB III Acquisition Corp. We completed our initial public offering on October 17, 2013, and were listed on the TSX-V as a CPC pursuant to Policy 2.4 - Capital Pool Companies of the TSX-V. As a CPC, our principal business was to identify and evaluate opportunities for the acquisition of assets or businesses for the completion of a qualifying transaction and, once identified and evaluated, to negotiate the acquisition, subject to shareholder and TSX-V approval.

 

Reverse Triangular Merger with TicToc (the “Qualifying Transaction”)

 

On September 30, 2014, we entered into a letter of intent with TicToc Planet, Inc., a Delaware Corporation (“TicToc”) incorporated in September 2012. On December 8, 2014, we entered into a merger agreement with our then wholly-owned subsidiary, WB III Subco Inc., and TicToc, pursuant to which we agreed to complete a qualifying transaction with TicToc by way of a “reverse triangular merger” (the “Qualifying Transaction”). On December 22, 2014, pursuant to articles of amendment, we changed our name to “Frankly Inc.” On December 23, 2014, we completed the Qualifying Transaction, which resulted in a reverse takeover of Frankly Inc. by the shareholders of TicToc, whereby WB III Subco Inc. merged with and into TicToc, TicToc changed its name to Frankly Co. and the security holders of Frankly Co. received securities of Frankly Inc. in exchange for their securities of Frankly Co.

 

Acquisition of Gannaway Web Holdings, LLC

 

On July 28, 2015, we signed an agreement (the “Unit Purchase Agreement”) to purchase the outstanding units of Gannaway Web Holdings, LLC, operating as Worldnow, for total consideration of $45 million. On August 25, 2015 (the “Closing Date”), the Company completed this acquisition of Worldnow. Subsequent to the acquisition, Worldnow changed its name to Frankly Media LLC. Through the acquisition of Frankly Media, we became a SaaS provider of content management and digital publishing software, also offering related digital advertising services for local media sites on the web and mobile.

 

Continuation as British Columbia Corporation

 

On July 11, 2016, we continued the Company as a British Columbia corporation under the BCBCA.

 

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The following chart illustrates our organizational structure:

 

Description: D:\Dropbox (M2 COMPLIANCE)\2016 OPERATIONS\2016 EDGAR\11_November\Frankly\11-10-2016\Form S-1\Draft\Production\image_02.jpg

 

Our Products and Services

 

Our product offerings have evolved as our business has grown and changed. From February 2013 through August 2015, we developed mobile applications and a next generation server platform. During this time, we launched, developed and marketed a consumer focused Frankly Chat mobile application, as well as a white-labeled, business-to-business mobile communication platform via a SDK that was used by retailers such as Victoria’s Secret, professional sport teams such as the Sacramento Kings, non-profits such as the United Nations Foundation and publishers such as the Bleacher Report. Such customers were our primary customers of the mobile app and SDK business are no longer a material part of our business but the technology became the foundation for our current platform. Through the acquisition of Frankly Media in August 2015, we leveraged our existing mobile and platform expertise to become a SaaS provider of content management for broadcasters and media companies. Today, we provide a white-labeled, integrated software platform to broadcasters and media companies. These customers use our technology to get their content onto multiscreen devices, increase social interaction on those multiscreen experiences, and enable digital advertising. The mobile app and SDK business are no longer a material part of our business but the technology became the foundation for our current platform.

 

Our current platform consists of the following offerings and features:

 

CMS platform connected white-labeled application frameworks. Our white-labeled application frameworks for mobile applications, connected TV applications and desktop and mobile websites connect back into our CMS platform. They simplify the distribution of content across multiple platforms. Our mobile framework is an Android or iOS mobile application framework that enables our customers to easily publish their official mobile apps to their audience. Our native connected TV framework is an Apple TV, Roku and FireTV application framework that enables our customers to easily publish their official connected TV apps to their audience. We also provide a responsive web framework which is a white-labeled desktop and mobile web, collectively, a responsive web, framework that enables our customers to easily publish their official Internet homepages.

 

Robust VoD and live video solution. Our VoD live video solution ingests live video content into our on-premise server that encodes, transcodes and enables digital VoD clipping and live video publishing in an integrated format that eliminates the need for customers to deal with multiple vendors.

 

Digital advertising solutions. Our digital advertising solutions include both programmatic (automated) and direct agency sales efforts to place digital advertising onto our customer’s digital properties in return for a revenue share of the advertising dollars. We also provide local ad sales products and consulting and support services in exchange for monthly fees, and charge our customers for the use of our ad serving platform to serve ads for local and national advertising campaigns. The array of advertising products and services we offer provides our customers with turnkey access to the latest advertising solutions and simplifies the complicated task of monetizing their online properties.

 

Data-as-a-service. Our newest Data-as-a-service product leverages a DMP offering our customers access to targeted audience data and user segments in order to increase targeting and higher advertising rates to advertisers on their digital properties. We plan to continue to develop this product to enable our customers to have actionable data to drive increased audience engagement and enhanced user experience.

 

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We designed our platform and offerings to integrate into a holistic and unified platform with one seamless workflow, allowing our broadcasters and media customers to save time, achieve operational efficiency and to save on costs associated with managing an increasingly complex digital landscape. Our platform is designed to enable our customers to manage the full scope of their digital businesses from management, publishing and monetization in one place.

 

Customers and Customer Contracts

 

We enter into written contracts with our customers pursuant to which we provide access to our online, software-as-a-service, content management platform. These contracts typically cover the use of the platform and ancillary services such as delivery and storage of video content, and access to ad-serving and analytics functionality. Many of these agreements also grant us the right to sell online advertising inventory on behalf of the customer pursuant to a revenue sharing arrangement with the customer. Our agreements are generally for a three-year term and do not provide for early termination rights. We bill our customers monthly or quarterly for the fees associated with the software license, and monthly in arrears for variable usage fees incurred by a customer’s use of our platform. We generally make advertising revenue share payments to our customers on a quarterly basis. As of December 31, 2016, we had approximately 200 TV stations as customers.

 

While we have a diversified customer base, and are seeking to further diversify our customer base, our three largest customers, Raycom Media, Inc., Gray Television Group, Inc. and Meredith Corporation, each account for more than ten percent of our revenue, and collectively, for 42% of our revenue for the nine-month period ended September 30, 2016. Raycom Media, Inc. is a customer of our content management platform and mobile apps and is our largest shareholder and creditor. Gray Television Group, Inc. is a customer of our advertising services and Meredith Corporation is a customer of our content management platform.

 

Market Opportunity

 

The current global broadcast and media market participants are facing changes to their market landscape as their audiences are increasingly consuming their content via new platforms and devices. Mobile phones, tablets, connected TV, social media including Facebook, Twitter and Snapchat, and new internet-enabled devices, are beginning to take market share from the traditional television over-the-air broadcasts, radio and print publications.

 

According to Devoncroft’s 2016 NAB research report (the “Devoncroft Report”), the global media market for technology products and services in 2015 was approximately $49 billion and the majority of these products focused on the TV, over-the-air broadcast market. Given the increasing amounts of time the media market’s audience now spends on media consumption through mobile, Internet, and IP connected devices, broadcasters and media companies must also shift their expenditure dollars to their digital platforms. We believe that this shift will accelerate rapidly given today’s quick proliferation of always-on mobile devices and the availability of technology infrastructure to support a substantial digital business for the broadcast and media markets. According to the Devoncroft Report, there is a structural shift happening now in the industry toward IP technology.

 

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As an increasing number of consumers have abandoned cable and over the air access to television programming in favor of online and mobile access, the Big Broadcast 2015 survey cites the overwhelming majority of technology decision-makers in U.S. local news and media groups in stating they will spend more on cloud-based service providers than on other technology categories. The new, younger audience for local news and media content demand social networking and multiscreen experiences. Millennials are consuming and sharing content through new platforms like Snapchat, BuzzFeed and other digital platforms instead of watching, listening to or reading traditional TV or print media. The U.S. local news and media markets have been rapidly adopting OTT publishing and native mobile platforms designed to reach end users on new devices. Local broadcasters are launching their own branded OTT apps to stay ahead of the curve as cable TV subscriptions fall and streaming subscriptions rise. According to Parks Associates, 36% of U.S. broadband households have at least one streaming media player, up from 27% last year. In late 2015, Apple launched the App Store on Apple TV so that media providers can participate in this industry shift. OTT is a fragmented space with many connected TV platforms available to users. However, we believe traditional media companies are at a disadvantage in this cord-cutting, mobile-first and connected devices trend as their consumers continue to flock to the internet and mobile devices. Traditional media companies have no information about their audience beyond age and gender while digital companies such as Netflix, Hulu and HBO Go have direct relationships and deep knowledge of their audience which allows them to have customer information, which in the case of Netflix and Hulu includes email and phone number, as well as billing information users used to sign-up for their services. In addition, traditional media companies have too many systems to effectively manage their digital presence and often lack the skilled personnel required to keep up with the web, mobile, advertising, data analytics and social media demands of their audience

 

We believe the leading market sector for further development is the digital advertising sector both in terms of technology and market size. EMarketer projects worldwide mobile internet ad spending will increase from $19.2 billion in 2013 to $65.5 billion in 2019. In the 2016 edition of KPCB’s annual Internet Trends report, Mary Meeker reported a $22 billion market opportunity in the transition from television to mobile advertising. Local media companies are looking for a better solution to run their digital advertising business, and the overall mobile advertising sector is developing quickly, especially with capabilities to hyper-target local advertising based on data and mobility.

 

We believe our broad reach among local media and our technology can benefit from the future development of the digital advertising markets and we expect to grow along with the digital success of our customers. Our capability to provide our media company customers with a one-stop shop to meet their digital platform needs will become more valuable as they continue to develop and grow the digital aspects of their businesses in response to the changing preferences of their audience customer base. We believe there are significant opportunities to increase the distribution of our products and services in this space.

 

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Strategy

 

We have a three-pronged growth strategy:

 

●      First, we plan to continue to invest in developing our products so we can meet our local broadcasting market customers’ needs with an enhanced, integrated and holistic workflow. We will continue to enhance our current experience in responsive web, native applications, OTT apps and video solutions, and expand into new, emerging platforms where the audience consumes media through new IP-enabled experiences such as Amazon’s Alexa, connected/self-driving cars, artificial intelligence, and new social platforms such as Snapchat, Periscope and Reddit. We believe the value of our core strength in multi-point content ingestion into our consolidated CMS platform and our ability to push out this content on our multi-faceted publishing platform will continue to grow for our customers as we help them meet their challenges in engaging users in a multi-screen/device landscape.

 

●      Second, we are planning to expand our industry verticals to other local media and programmers such as newspapers, radio and bloggers and to national media and programmers, cable channels, film distributors and sports and entertainment content providers, all of which have a growing need for an integrated digital and monetization platform. Our primary customers in this market today are local news broadcasters and media groups in the U.S. However, we see opportunities for growth and expansion in to adjacent verticals such as other local media such as newspapers, radio stations and local bloggers, and international media customers in the future. Whereas traditional media relied on a single medium delivered by only one platform such as television, digital media has become the great equalizer. Digital media puts media providers, including newspapers, TV stations, and Hollywood and Silicon Valley content providers, on the same playing field and forces them to compete for an audience. We believe that our integrated platform can enable anyone, from a single-individual blogger to a multi-network programmer, to manage and operate their digital business seamlessly and profitably. We plan to accelerate our target market expansion with the help of strategic partners who will resell and cross-sell our platform through our channel sales strategy, which relies on leveraging our partners’ customer relationships and sales resources to sell our own products. This will enable us to expand our sales presence efficiently and help us scale sales without incurring significant additional overhead expenses.

 

●      Third, we believe a massive transformation is underway in the use of advertising dollars. Advertising dollars are shifting toward digital and we plan to invest and grow our data and advertising business lines by more aggressively deploying capital and assuming more calculated advertising inventory risk to grow our revenues. According to Mary Meeker’s 2016 State of the Internet report, mobile alone accounts for more than $20 billion of incremental opportunity given the misallocation of advertising dollars versus audience time spent across different platforms. We believe the increased ability to collect data and target advertising in the digital domain will shift the media industry from the legacy TV broadcasting structure where the media content platform and advertising are separate operations to a new digital framework where the content and advertising platforms are tightly coupled. We believe we are uniquely and strategically poised to capture this convergence of the business operations of content and advertising through our integrated platform and capabilities. This uniqueness is achieved as in addition to our content platform, our advertising capabilities include both the team (an established team of advertising technologists and business development professionals) and the advertising technology and partners (such as Google, Rubicon, OpenX, Krux, among others), which all take time, money and expertise to build. We currently have commercial relationships with Google, Rubicon, OpenX and Krux. Google, Rubicon and OpenX provide us with access to large competitive marketplaces in which to locate the highest bidders for our advertising inventory. Google and its affiliates also supply us with ad-serving technology, which we resell to our customers, and advertising analytics tools. We use Krux for data enhancement to help increase revenue we receive on advertising sales.

 

Research and Development

 

In order to support our growth strategy, we plan to continue to invest in research and development. We believe this is an important way to ensure the competitiveness of our product and to take advantage of emerging market opportunities. While we don’t singularly rely on any specific equipment or particular technology, we plan to continue to invest in each area of our product suite, including our CMS platform, video solutions, OTT and mobile app frameworks, our data infrastructure and our advertising technologies. We use a combination of in-house development and external, third-party developers for this development effort because we believe the combination of in-house and third-party development allows us to manage costs and to efficiently develop products. We capitalize our development costs according to our accounting principles, and currently capitalize at the rate of approximately $4 million per year to fund product development. We anticipate these investments will continue and grow as we increase our revenues, but we will be monitoring them closely to ensure cost discipline as market dynamics fluctuate.

 

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Competition

 

We have a diverse set of competitors across the different aspects of our business. In the local broadcast arena, our chief competitor is Nexstar Broadcasting’s subsidiary Lakana (NASDAQ: NXST), which is owned by a larger broadcasting group which provides it with a captive customer base of TV stations owned by its parent company and significant industry contacts. Lakana has slightly more CMS customers than we do, in part due to the fact that it is owned by a large broadcasting group that operates approximately 170 television stations. We are not aware of Lanaka’s revenues or other resources, but we believe Lakana has access to financing from its parent entity and derives other benefits of being owned by a large public company. For more generalized CMS offerings, we compete against Wordpress VIP and other open source platforms. Open source platforms utilize a developer community in which product innovation and advancements are crowdsourced rather than developed in-house as we do. Having the development of our platform in-house gives us full control of development and we are able to provide products and services that are more closely tailored to the needs of our customers. For video solutions, we compete against industry participants including Brightcove (NASDAQ: BCOV), Neulion (TSE: NLN), MLB Advanced Media and Google’s newly acquired video solutions company Anvato (NASDAQ: GOOG). These video solution companies are larger publicly listed companies with significantly larger research and development budgets. Each of these entities is larger than we are, and serves customers in many areas outside of the broadcast television market. On mobile app frameworks, we compete with Verve, Accedo and Newscycle’s recently acquired DoApps, all of which offer their products and services to the broader market, including television broadcasters. On advertising solutions, we compete against a variety of advertising programming and agency businesses that provide their services to the broader market, including the television broadcasters. The providers of mobile apps and advertising services have the advantage of being focused on singular product lines, however, we offer the advantage of convenience by offering these products and services as integrated components of our product and service offering. In addition, some larger broadcasters have opted to build in-house solutions across one or more of these areas. While such solutions may be specifically tailored to the particular requirements of that broadcaster, we believe our integrated platform provides advantages in cost of operation and access to our development and technology resources.

 

We believe we are different from our competitors in that we are able to offer a very comprehensive platform that integrates web, mobile apps, OTT apps, video management, advertising and data services, all in one. Therefore, given the growing fragmentation and complexity of multi-platform digital operations, we are well positioned as a one-stop solution for broadcasters and media companies to scale their digital businesses with a fully integrated workflow that enables them to focus on their core business of content creation instead of having to spend time and resources on technology management. Our integrated offering enables us to build our involvement with our customers and reduce the potential of our customers to move to one of our competitors over time as the cost of switching providers for our services will increase with each new offering to our overall platform.

 

Seasonality

 

Our business is generally not impacted by seasonality, with the exception of our advertising revenue. Revenues from our advertising products and services experience some seasonality as they are dependent on website traffic and market price for advertising inventory both of which are usually low at the beginning of the year and high at the end of the year and during the fall and winter holiday seasons.

 

Intellectual Property

 

Our success depends in part upon our ability to use and protect our core technology and intellectual property. Our principal technology is the software we use to operate our SaaS content management system. The code for this software is maintained in object code format on secure servers under our control and is not exposed to users or otherwise made available for use in third-party environments. For protection, we also rely on U.S. federal, state, international and intellectual property law rights, as well as contractual restrictions. We control access to our services, proprietary technology and intellectual property through license and other business agreements, confidentiality procedures, non-disclosure agreements with third parties and by entering into confidentiality and invention assignment agreements with employees and independent contractor agreements and professional services agreements with consultants, independent contractors and professional services providers. Where appropriate, we pursue the registration of designs, copyright, domain names, trademarks and service marks in the U.S. and in other jurisdictions.

 

In addition, our success is dependent on other identifiable intangible properties, such as the Frankly brand name and reputation. Our business model is contingent on maintaining and expanding our customers and advertisers. Accordingly, protecting and enhancing the goodwill in the Frankly reputation and brand is crucial to our success.

 

We have an issued U.S. patent that protects a specific aspect of frame accurate web editing for our video solution which expires on January 18, 2032. This patent is not material to our present or expected future business.

 

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In connection with the Credit Agreement and Credit Facility, Frankly Media LLC has entered into an Intellectual Property Pledge Agreement pursuant to which it has granted a security interest in all of its intellectual property to Raycom and Frankly Media has deposited its intellectual property in escrow accounts for the benefit of Raycom.

 

Government Regulation

 

As a host of online websites and a distributor of online advertising, we are subject to various federal and state regulations that apply to online activities. Principally, we are subject to FTC regulations regarding online privacy and truth in advertising; we are subject to the CAN-SPAM Act, which addresses the sending of commercial email messages and the Children’s Online Privacy Protection Act (COPPA), which address communications with and collection of information from internet users who are under 13 years old. In some instances, FCC regulations governing closed captioning apply to video content displayed online by our customers. We do not interact with banking or other sensitive personal information of online users, we limit our collection and use of personally identifiable information, and we employ online privacy policies and terms of service. To date, compliance with applicable regulation has not materially hampered our business.

 

Employees

 

As of January 9, 2017, we had 80 employees excluding full-time consultants and contractors. None of the Company’s employees is represented by a labor union or covered by a collective bargaining agreement. The Company has not experienced any work stoppages and considers its relations with its employees to be good.

 

Property

 

Our registered office in British Columbia is located at 2900-550 Burrard Street, Vancouver, British Columbia, Canada V6C 0A3. Our corporate headquarters is located at 333 Bryant Street, Suite 240, San Francisco, California 94107. Our New York offices are located at 27-01 Queens Plaza North, Suite 502, Long Island City, New York 11101. The Company does not own real property and leases the real property it occupies, which is sufficient to meet the Company’s current needs.

 

Legal Proceedings

 

Neither we nor any of our affiliates are the subject of any material legal or regulatory proceedings. We and our affiliates may be involved, from time to time, in legal proceedings that arise in the ordinary course of business.

 

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MANAGEMENT

 

Directors and Executive Officers

 

The directors and executive officers of the Company as of the date of this prospectus are as follows:

 

Name   Age   Position(s) Presently Held
Steve Chung   38   Chief Executive Officer and Director
Louis Schwartz   50   Chief Financial Officer and Chief Operating Officer(1)
Omar Karim   42   Head of Engineering
Choong Sik (Samuel) Hyun   45   Director
Joseph Gardner Fiveash III   54   Director
Steven Zenz   62   Director
Tom Rogers   62   Director

 

(1) Mr. Schwartz was appointed as our Chief Financial Officer on July 14, 2016. Prior to his appointment, Avi Aronovitz served as our Chief Financial Officer from May 16, 2016 to July 12, 2016. From December 31, 2015 to May 15, 2016, Jungsoo Park served as our Interim Chief Financial Officer.

 

Executive Officers

 

Steve Chung has served as a director and our Chief Executive Officer since February 1, 2013, inclusive of the Qualifying Transaction with Frankly Co. in December 2014. Over the past 15 years, Mr. Chung has held senior leadership roles in the media, technology and investment sector. Mr. Chung began his career at Goldman Sachs as an analyst in New York starting July 2001, and served in various media, technology and investment roles subsequently. More recently, Mr. Chung served as Chief Strategy Officer of CDNetworks, a global Internet content delivery network from December 2007 until October 2010, and then left to serve as Executive Vice President of KIT Digital, Inc., a white-labeled OTT video software and services company from October 2010 until January 2012. Mr. Chung then served as Chief Operating Officer of We Heart It, a photo-curation social media platform for millennials from February 2012 until January 2013. Mr. Chung holds a Bachelor of Arts degree from Harvard University, and a Master of Business Administration from Stanford University. We believe Mr. Chung’s deep media industry background, coupled with broad operational and transactional experience, make him well qualified to serve as our Chief Executive Officer and a member of our Board.

 

Louis Schwartz has served as our Chief Operating Officer since February 2016 and Chief Financial Officer since July 2016. Mr. Schwartz joined the Company in August 2015 in connection with the acquisition of Frankly Media and served as President of Frankly Media. Prior to that, Mr. Schwartz was the Chief Digital Officer of World Wrestling Entertainment, Inc., a professional wrestling entertainment company, where he oversaw all digital platforms and helped lead the development of the WWE Network, the first OTT 24/7 streaming network from October 2014. Mr. Schwartz also served as CEO of UUX from November 2012, an OTTP video technology company, where he successfully led the merger of Totalmovie, a leading Latin American retail OTT service, with OTT Networks, an OTT video technology company. From March 2010 to March 2012, Mr. Schwarz served as CEO of the Americas and General Counsel for Piksel, a video production company, and in May 2000, he co-founded Multicast Media Technologies, one of the first Internet video platform companies, which was sold to Piksel in March 2010. Mr. Schwartz graduated from Pennsylvania State University with a Bachelor of Science degree in Real Estate Finance before receiving a Juris Doctorate from the Mississippi College School of Law. We believe Mr. Schwartz’s deep technology and media background and operational and transactional experience make him well qualified to serve as our Chief Operating Officer and Chief Financial Officer.

 

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