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
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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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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.
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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
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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:
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● | $ 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.
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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:
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● | 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.
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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.
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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.
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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.
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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.
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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.
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.
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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.
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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.”
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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 |
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, $14.5 million in principal was outstanding under the Credit Facility. Amounts outstanding under the Credit Facility are secured by first priority security interests on substantially all of our assets and are guaranteed by our subsidiaries. The Credit Facility was used to effect the August 2016 Refinancing.
The expected use of the net proceeds of the offering set forth above represents our estimates based upon our current plans and assumptions regarding industry and general economic conditions, our future revenues and expenditures. The amounts and timing of our actual expenditures will depend upon numerous factors, including market conditions, cash generated by our operations, business developments and related rate of growth. We may find it necessary or advisable to use portions of the proceeds from this offering for other purposes.
As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. Accordingly, we will have broad discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the proceeds of this offering.
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Our common shares commenced trading on the TSX-V on October 17, 2013 and, since January 5, 2015, have been listed on the TSX-V under the symbol “TLK”. We have applied to have our common shares listed on the Nasdaq Capital Market under the symbol “FKLY”.
The table below sets forth the high and low bid prices of our common shares, as reported on the TSX-V for the periods shown , as adjusted for the Reverse Stock Split.
High | Low | |||||||||||||||
Fiscal Year 2017 | ||||||||||||||||
First Quarter (through January 9, 2017) | CDN$ | 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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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 |
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 |
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.
35 |
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 |
36 |
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.
37 |
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.
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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.
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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.
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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.
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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.
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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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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:
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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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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Omar Karim has served as our Head of Engineering since October 2015. Mr. Karim served as the Chief Technology Officer of Gannaway Web Holdings, LLC d/b/a Worldnow from May of 1999 through August of 2005 and served as Worldnow’s Chief Technology Advisor from September 2005 through December of 2011. In March 2008, Mr. Karim founded Mobdub LLC (“Mobdub”), a company that created mobile applications but currently functions only as an intellectual property holding company. Mr. Karim has served as the Chief Executive Officer of Mobdub since its formation. Mr. Karim devotes 100% of his business time to the affairs of our Company as he performs his duties at Mobdub outside of the Company’s work hours. Mr. Karim attended Hampshire College, where he received a Bachelor of Arts in Computer Science and Political Philosophy. We believe Mr. Karim’s deep technology background makes him well qualified to serve as our Head of Engineering.
Non-Employee Directors
Choong Sik (Samuel) Hyun has served as a director on our Board since April 2016. Mr. Hyun joined SK Group, South Korea’s third-largest conglomerate in 1998 and held increasingly senior positions, culminating in his service as Manager of SK Networks from January 1998 to May 2012, as Project Leader of M&A office for SK Planet Co., Ltd., an Internet services and e-Commerce company (“SK Planet”) from June 2012 to December 2012, and currently as Head of Global Planning Team of SK Planet Co., Ltd. since January 2013. Mr. Hyun has been involved in several M&A deals and strategic partnerships with globally-renowned players like Shopkick, a leading Silicon Valley-based mobile commerce and shopping service, Suning Commerce Group, one of the largest retailers in China, and Megabox, a top-tier multiplex cinema company in Korea. Mr. Hyun holds a Master of Education in Pedagogy and Bachelor of Science from Seoul National University, South Korea and a MBA degree from China Europe International Business School. Mr. Hyun has over 20 years in strategic long/short term planning, mergers & acquisitions, strategic consulting and securities trading which enables him to contribute important skills to our Board.
Joseph Gardner Fiveash III has served as a director on our Board since August 2015. Mr. Fiveash has been the Senior Vice President of Digital Media and Strategy at Raycom since 2013 and was Executive Vice President/General Manager of Interactive Media at The Weather Channel from 1999 to 2010. Mr. Fiveash has also been President of Vertical Acuity, a venture-backed content marketing platform, from February 2011 to August 2012, and was a Senior Vice President of Ecommerce for CafePress Services, an ecommerce platform, from November 2012 to December 2013. Mr. Fiveash received a Bachelor of Arts from Princeton University in Politics and a JD and MBA from University of Virginia. We believe Mr. Fiveash’s 10 plus years in the media industry make him well qualified to serve as a member of our Board.
Steven Zenz has served as a director on our Board since October 3, 2016. Mr. Zenz has served as a consultant since January 2011, advising companies on matters including merger and acquisition transactions and SEC offerings and filings. From 1976 until 2010, he was with KPMG LLP, where he was a partner for 22 years. At KPMG, he served in various leadership capacities, including partner in charge of the audit group and partner in charge of the firm’s SEC and technical accounting practices for KPMG’s Minneapolis and Des Moines offices. He also served as the lead audit partner for publicly held companies. Mr. Zenz also has been a member of the board of directors of Insignia Systems, Inc., a company that manufactures point of sale in-store signage and promotional advertising media for consumer packaged goods companies and retailers since October 2013, and serves as the audit committee chair and is a member of the compensation committee. He also serves as a director and audit committee chair of Redbrick Health, a venture-backed private health technology company, as well as several other privately held emerging companies. Mr. Zenz holds a Bachelor of Science degree in accounting and a Masters of Business Taxation from the University of Minnesota. We believe Mr. Zenz’s extensive experience in advising public companies on SEC offerings and filings make him well qualified to serve as a member of our Board.
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Tom Rogers has served as a director on our Board since October 3, 2016. Mr. Rogers has served since June 2016 and is currently still serving as Executive Chairman of WinView, Inc., a company that operates at the intersection of TV sports, social media, gaming and mobility, and with 28 patents, is the leading player in the application of games in which viewers can engage while simultaneously watching live TV sports. Mr. Rogers also has served since June 2003 and is currently still serving as Chairman and Chief Executive Officer of TRget Media, LLC, a media investment and operations advisory firm. From May 1981 to December 1986, Mr. Rogers served as Senior Counsel to the U.S. House of Representatives Telecommunications, Consumer Protection and Finance Subcommittee, where he was responsible for drafting a number of communications laws, including the Cable Act of 1984, which established a federal framework to replace a patchwork of local regulatory burdens. Thereafter, Mr. Rogers served as President of NBC Cable from August 1988 to October 1999 and served as Executive Vice President of The National Broadcasting Company (“NBC”) as well as NBC’s Chief Strategist from September 1992 to October 1999. At NBC, Mr. Rogers oversaw the creation of CNBC, the NBC/Microsoft cable channel and Internet joint venture, MSNBC. In addition, he served as Co-Chairman of the Arts and Entertainment and History Channels, and was responsible for overseeing many other cable channels, including Court TV, Bravo, American Movie Classics, Independent Film Channel, the National Geographic Channel, and numerous regional sports channels. From November 1999 to April 2003, Mr. Rogers served as Chairman and CEO of Primedia (NYSE: PRM) which at the time was the leading targeted media company in the US, where he oversaw such diverse properties as New York Magazine, Motor Trend, Seventeen, and Cable World. Mr. Rogers drove the digital development and online presence of scores of the company’s print properties. From July 2005 and September 2016, when the company was sold, Mr. Rogers served as CEO and then as Chairman of TiVo, Inc. (“TiVo”). Under Mr. Roger’s leadership, TiVo emerged as the leader in providing cable operators worldwide with an advanced television user experience while also providing consumers the only retail cable set top box and the media industry with an array of unique audience research data solutions. Mr. Rogers has also served as Chairman of the Board of Teleglobe (NASDAQ: TLGB), a leading international telecommunications, voice-over-internet, and mobile telephony provider from 2004 to 2006. He was also Chairman of the Board and a board member of Supermedia (NASDAQ: SPMD), the print and digital yellow pages spin off of Verizon. Mr. Rogers also served on the board of Dex Media (NASDAQ: DXM), a print and digital marketing company and successor company to Supermedia. Mr. Rogers is a graduate of Columbia Law School and Wesleyan University. He has also been inducted into the Broadcasting Hall of Fame, as well as the Cable Hall of Fame. We believe Mr. Rogers’ deep background and extensive experience in the media industry make him well qualified to serve as a member of our Board.
Leadership Structure and Risk Oversight
Mr. Chung serves as the Chairman of the Board and Chief Executive Officer. The Board has reviewed its current leadership structure and has determined that the combined Chairman and CEO position is currently the most appropriate and effective leadership structure for the Company. Mr. Chung has been involved in the media, technology and investment sectors for more than 15 years. As the individual primarily responsibility for the day-to-day management of business operations, he is best positioned to chair regular Board meetings as the directors discuss key business and strategic issues.
The Board is actively involved in overseeing our risk management processes. The Board focuses on our general risk management strategy and ensures that appropriate risk mitigation strategies are implemented by management. Further, operational and strategic presentations by management to the Board include consideration of the challenges and risks of our businesses, and the Board and management actively engage in discussion on these topics. In addition, each of the Board’s committees considers risk within its area of responsibility. For example, the Audit Committee provides oversight to legal and compliance matters and assesses the adequacy of our risk-related internal controls. The Compensation Committee considers risk and structures our executive compensation programs to provide incentives to reward appropriately executives for growth without undue risk taking.
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Independence of Directors
The Board has determined that Messrs. Zenz, Rogers and Hyun are “independent” as defined in Rule 5605(a)(2) of the Nasdaq Stock Market Rules (the “Nasdaq Rules”). Our board currently consists of 3 independent directors and 2 non-independent directors.
Board Committees
The Board has the following committees, each of which meets at scheduled times:
Audit Committee. The Audit Committee is appointed by the Board to assist the Board in its duty to oversee the Company’s accounting, financial reporting and internal control functions and the audit of the Company’s financial statements. The role of the Audit Committee is to oversee management in the performance of its responsibility for the integrity of the Company’s accounting and financial reporting and its systems of internal controls, the performance and qualifications of the company’s independent auditor, including the independent auditor’s independence, the performance of the Company’s internal audit function; and the Company’s compliance with legal and regulatory requirements. The Audit Committee has a charter which will be revised prior to the closing of this offering in accordance with the rules of Nasdaq and the SEC.
The current members of the Audit Committee are: Steven Zenz (Chairperson), Choong Sik (Samuel) Hyun and Tom Rogers. Mr. Zenz satisfies the requirements for being designated an audit committee financial expert as defined in SEC regulations because of his financial and accounting expertise. Upon the appointment of Mr. Zenz and Mr. Rogers on September 28, 2016, Mr. Fiveash was removed from the Audit Committee. The Audit Committee met four times during the fiscal year ended December 31, 2015.
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Choong Sik (Samuel) Hyun (Chairperson), Steven Zenz and Tom Rogers. We intend to adopt a Nominating and Corporate Governance Committee charter prior to the listing of our common shares on Nasdaq.
Compensation Committee. The Compensation Committee reviews and recommends to the full Board (i) the adequacy and form of compensation of the Board; (ii) the compensation of Chief Executive Officer, including base salary, incentive bonus, stock option and other grant, award and benefits upon hiring and on an annual basis; and (iii) after obtaining the recommendation of the Chief Executive Officer, the compensation of other senior management, including Chief Financial Officer and Chief Technology Officer, upon hiring and on an annual basis. The Compensation Committee has a charter that will be revised prior to the closing of this offering in accordance with the rules of the Nasdaq and the SEC.
The current members of the Compensation Committee are: Tom Rogers (Chairperson), Steven Zenz and Choong Sik (Samuel) Hyun. Upon the appointment of Mr. Zenz and Mr. Rogers on September 28, 2016, Mr. Fiveash was removed from the Compensation Committee. The Compensation Committee met 3 times during the fiscal year ended December 31, 2015.
Compensation Committee Interlocks and Insider Participation
None of the members of our Compensation Committee is or has been an officer or employee of our Company. None of our executive officers currently serves, or in the past year has served, as a member of the Board or Compensation Committee (or other Board committee performing equivalent functions) of any entity that has one or more of its executive officers serving on our Board or Compensation Committee. See “Certain Relationships and Related Party Transactions” for information about related party transactions involving members of our Compensation Committee or their affiliates.
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Code of Ethics
Prior to the closing of this offering, we will adopt a written code of ethics that applies to all of our directors, officers and employees in accordance with the rules of Nasdaq and the SEC. Prior to the closing of this offering, we will post a copy of our code of ethics, and intend to post amendments to this code, or any waivers of its requirements, on our Company website.
Director Compensation
The following table summarizes the compensation paid to directors, other than directors who are also named executive officers and whose compensation as directors is reflected in the Summary Compensation Table in the “Executive Compensation” section of this prospectus, for the fiscal year ended December 31, 2016.
Name | Fees | Share- | Option- | Non-equity | Pension | All
other | Total ($) | |||||||||||||||||||||
Tom Rogers(1) | - | 9,300 | (2) | - | - | - | - | 9,300 | ||||||||||||||||||||
Steven Zenz(1) | - | 9,300 | (2) | - | - | - | - | 9,300 |
(1) | In connection with their appointment as directors in October 2016, Mr. Rogers and Mr. Zenz each received 30,000 RSUs that will vest on March 31, 2017. Under the terms of their appointments, each of Mr. Rogers and Mr. Zenz are entitled to receive an additional 90,000 RSUs. The remaining 90,000 RSUs will vest in one-third amounts on June 30, 2017, September 30, 2017 and December 31, 2017. | |
(2) | Based on the fair value of 30,000 RSUs which was based on the closing price of common shares on the date of issuance November 4, 2016 of CDN$0.41 (or $0.31 based on the exchange rate at November 4, 2016). |
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As of the date of this prospectus, the Company had two executive officers: Steve Chung, Chief Executive Officer; and Louis Schwartz, Chief Financial Officer and Chief Operating Officer. See “Management” above for biographical information of our executive officers.
Summary Compensation Table
The following table sets forth the compensation awarded to, earned by or paid to, our executive officers for the years ended December 31, 2016 and 2015.
Name and Principal Position | Year | Salary ($) | Share- based awards ($) | Option-based awards ($)(1) | Non-Equity Incentive plan compensation | Pension Value ($) | All other compensation ($)(2) | Total compensation ($) | |||||||||||||||||||||||||
(f) Annual Incentive Plan |
Long- Term Incentive Plan | ||||||||||||||||||||||||||||||||
Steve Chung | 2016 | 310,000 | (3) | 73,153 | (4) | 189,180 | (5) | - | - | - | 8,024 | 580,357 | |||||||||||||||||||||
Chief Executive Officer and a Director of the Company | 2015 | 360,000 | 530,027 | (6) | 820,846 | (7) | 79,200 | - | - | 18,364 | 1,808,437 | ||||||||||||||||||||||
Louis Schwartz | 2016 | 251,040 | (8) | 159,415 | (9) | 94,550 | (10) | - | - | - | 0 | 505,005 | |||||||||||||||||||||
Chief Operating Officer & Chief Financial Officer | 2015 | 120,000 | (11) | 400,000 | (12) | 96,683 | (13) | - | - | - | 725,000 | (12) | 1,341,683 | ||||||||||||||||||||
Harrison Shih | 2016 | 290,000 | (14) | 14,630 | (15) | 94,550 | (16) | - | - | - | 8,024 | 407,204 | |||||||||||||||||||||
Chief Product Officer | 2015 | 250,000 | (17) | - | 163,019 | (18) | 55,000 | - | - | 7,708 | 475,727 | ||||||||||||||||||||||
Jungsoo Park(12) | 2016 | 220,000 | (19) | 7,315 | (20) | 31,066 | (21) | - | - | - | 23,703 | 282,084 | |||||||||||||||||||||
Interim Chief Financial Officer | 2015 | 222,917 | (22) | - | 163,019 | (23) | 42,188 | - | - | 25,209 | 453,333 |
(1) | The weighted average fair value price per option was estimated using the Black-Scholes option pricing model. |
(2) | Based on medical and insurance benefits and 401K. |
(3) | Pursuant to an Amendment of Employment Agreement dated August 15, 2016, Mr. Chung’s annual base salary was temporarily adjusted to an annual rate of $226,667 for the period from August 16, 2016 to December 31, 2016. His annual base salary returns to the $360,000 annual rate in January, 2017. |
(4) | The fair value of 192,507 RSUs was estimated based on a closing price of the common shares of CDN$0.49 (or $0.38 based on the exchange rate at September 8, 2016) on September 8, 2016, the date of issuance. |
(5) | Based on fair value on the date of grant. Includes 700,000 stock options which are exercisable within 10 years after February 10, 2016. |
(6) | The fair value of 247,676 RSUs was estimated based on a closing price of the common shares of CDN$2.70 (or $2.14 based on the exchange rate at April 1, 2015) on April 1, 2015, the date of issuance. In February 2016, all RSUs were cancelled. |
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(7) | Based on fair value on the date of grant. Includes 403,211 stock options which are exercisable within 10 years after January 29, 2015 and 215,979 which are exercisable within 10 years after April 1, 2015. |
(8) | Pursuant to a Management Services Agreement dated April 1, 2015, as amended on August 1, 2105 (the “Management Services Agreement”) between Gannaway Web Holdings, LLC (d/b/a Worldnow and now Frankly Media) and Schwartz & Associates for which Mr. Schwartz is managing partner, Schwartz & Associates was due the annual rate of $360,000 for 2016. At August 15, 2016, pursuant to an Amendment of Management Services Agreement, the fee was temporarily adjusted to an annual rate of $33,120 for the period from August 16, 2016 to December 31, 2016. The annual compensation rate returns to the $360,000 in January, 2017. |
(9) | The fair value of 419,512 RSUs was estimated based on a closing price of the common shares of CDN$0.49 (or $0.38 based on the exchange rate at September 8, 2016) on September 8, 2016, the date of issuance. |
(10) | Based on fair value on the date of grant. Includes 350,000 stock options which are exercisable within 10 years after February 10, 2016. |
(11) | Mr. Schwartz was appointed President of Frankly Media on August 24, 2015, Chief Operating Officer on December 22, 2015 and Chief Financial Officer on July 14, 2016. The amount shown is the prorated amount covering the period beginning his initial appointment in August 24, 2015 to December 31, 2015. |
(12) | Pursuant to the Management Services Agreement between Gannaway Web Holdings, LLC (d/b/a Worldnow and now Frankly Media) and Schwartz & Associates for which Mr. Schwartz is managing partner, Schwartz & Associates was due the amount of $1,125,000 in connection with, and upon the closing of, the Worldnow acquisition as an incentive fee. $310,464 of the incentive fee was paid in 195,446 common shares. The Management Services Agreement expired on December 31, 2015. However, the terms of Mr. Schwartz’s compensation currently reflect the terms of his compensation pursuant to the Management Services Agreement. See “Certain Relationships and Related Party Transactions—Management Services Agreement with Schwartz & Associates, PC”. |
(13) | Based on fair value on the date of grant. Includes 147,745 stock options which are exercisable within 10 years after October 16, 2015. |
(14) | Pursuant to an Amendment of Employment Agreement dated August 15, 2016, Mr. Shih’s annual base salary was temporarily adjusted to an annual rate of $273,333 for the period from August 16, 2016 to December 31, 2016. Effective January 11, 2016, Mr. Shih no longer acts as our Chief Products Officer and his employment agreement was amended to change his position from Chief Products Officer to advisor to Chief Executive Officer effective January 11, 2016. |
(15) | The fair value of 38,501 RSUs was estimated based on a closing price of the common shares of CDN$0.49 (or $0.38 based on the exchange rate at September 8, 2016) on September 8, 2016, the date of issuance. |
(16) | Based on fair value on the date of grant. Includes 350,000 stock options which are exercisable within 10 years after February 10, 2016. |
(17) | Mr. Shih earned $225,000 from January 1, 2015 to August 30, 2015 and his salary increased to $300,000 starting September 1, 2015. The amount shown is the prorated amount. |
(18) | Based on fair value on the date of grant. Includes 117,745 stock options which are exercisable within 10 years after January 29, 2015. |
(19) | Pursuant to an Amendment of Employment Agreement dated August 15, 2016, Mr. Park’s annual base salary was temporarily adjusted to an annual rate of $211,667 for the period from August 16, 2016 to December 31, 2016. His annual base salary returns to the $225,000 annual rate in January, 2017. |
(20) | The fair value of 19,251 RSUs was estimated based on a closing price of the common shares of CDN$0.49 (or $0.38 based on the exchange rate at September 8, 2016) on September 8, 2016, the date of issuance. |
(21) | Based on fair value on the date of grant. Includes 115,000 stock options which are exercisable within 10 years after February 10, 2016. |
(22) | Mr. Park earned a salary of $200,000 which increased to $225,000 beginning February 1, 2015. The amount shown is the prorated amount. Mr. Park was appointed Interim Chief Financial Officer on December 31, 2015 and was replaced in May 2016. |
(23) | Based on fair value on the date of grant. Includes 117,745 stock options which are exercisable within 10 years after January 29, 2015. |
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Employment Agreements
Our executive officers do not have employment agreements with Frankly Inc. but have employment agreements in place with either Frankly Co. or Frankly Media.
Steve Chung
Mr. Chung, our Chief Executive Officer, had entered into an “at-will” employment agreement with Frankly Co. dated January 9, 2013 pursuant to which Mr. Chung received 215,980 stock options of Frankly Co. The stock options were then converted into 215,980 stock options of Frankly Inc. pursuant to a Stock Option Substitution Agreement by and between WB III and TicToc Planet, Inc. date December 23, 2014 in connection with the Qualifying Transaction. On March 23, 2015, Mr. Chung’s employment agreement was amended and restated. The employment agreement sets forth his annual salary, annual bonus, initial option grant, performance-based RSUs (“PB RSU”), and participation in the employee benefit plans. Mr. Chung’s employment agreement has a termination date of February 1, 2017 and we intend to amend the employment agreement to extend the term of the agreement. Mr. Chung may terminate his employment agreement upon providing 4 weeks’ written notice. Mr. Chung was granted an initial stock option award (“Option”) to purchase 619,190 voting common shares of Frankly Inc. at a price per share of not less than the fair market value of the shares on the date of grant. The Option will be subject to Frankly Inc.’s Equity Plan and will vest over a four year period commencing on February 1, 2015 and is contingent on his employment at the time of vesting with Frankly Co. The Option will immediately fully vest upon termination of his employment in the event of a change of control of Frankly Inc. or Frankly Co. Subject to the approval of board of directors of both Frankly Inc. and Frankly Co. and the shareholders of Frankly Inc., Mr. Chung was eligible to receive 247,676 PB RSU under the Equity Plan, which were issued to him in April 2015 but were cancelled in February 2016. Upon termination of Mr. Chung’s employment for any reason, Frankly Co. will pay Mr. Chung any base salary actually earned but not paid for any period prior to the termination date and any approved but unreimbursed expenses.
On August 15, 2016, Mr. Chung’s employment agreement was amended to (i) decrease Mr. Chung’s salary from an annual rate of $360,000 to an annual rate of $226,667 for the period commencing August 16, 2016 and ending December 31, 2016, and (ii) return Mr. Chung’s annual salary rate to $360,000 commencing January 1, 2017.
Louis Schwartz
On April 1, 2015, Gannaway Web Holdings, LLC (now Frankly Media) entered into a Management Services Agreement (the “Management Services Agreement”) with Schwartz and Associates, PC (“Schwartz & Associates”), a Georgia professional corporation for which Mr. Schwartz, our Chief Financial Officer and Chief Operating Officer is the managing partner. Pursuant to the Management Services Agreement, Gannaway Web Holdings, LLC engaged Schwartz & Associates to provide management services and Mr. Schwartz was appointed Chief Strategy Officer of Gannaway Web Holdings, LLC. Under the Management Services Agreement, Schwartz & Associates received for their services a base compensation of $12,500 per month, paid semi-monthly. Mr. Schwartz was also entitled to participate in any employee benefit programs, plans and practices on the same terms as other salaried employees on a basis consistent with other senior executives. Upon termination for any reason, we were to pay Mr. Schwartz all accrued and unpaid fees through the terminated date. Upon termination without cause or resignation for good reason, Mr. Schwartz was also entitled to a separation fee equal to the balance of the months remaining under the term of the agreement. On August 1, 2015, the Management Services Agreement was amended to extend the term of the agreement to December 31, 2015. On December 31, 2015, the Management Services Agreement expired and was verbally renewed on an at-will basis. The Management Services Agreement will terminate upon the execution of a new employment agreement which we intend to enter into with Mr. Schwartz prior to the closing of this offering.
On August 15, 2016, we entered into an Amendment to the Management Agreement, whereby for the period commencing on August 16, 2016 and ending on December 31, 2016, the fees payable to Schwartz & Associates was reduced from the annual rate of $360,000 to an annual rate of $333,120. Commencing January 1, 2017, the fees will return to an annual rate of $360,000. The reduction in fees will not be factored into the calculation of any bonus eligible under the Management Agreement.
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Outstanding Equity Awards at 2016 Fiscal Year End
The following table sets forth, for each of the named executive officers, information with respect to unexercised options as of the Company’s fiscal year at December 31, 2016:
Option awards | Stock awards | |||||||||||||||||||||||||
Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercisable | Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares of units of stock that have not vested ($) |
Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) | |||||||||||||||||
Steve Chung | 499,794 | (1) | N/A | 1,035,396 | (2) | 129,588 at $0.45 | 129,588 on August 7, 2023
|
N/A | N/A | 192,507 | (3) | 63,527 | (4) | |||||||||||||
N/A | 86,392 at $0.45
|
86,392 on August 7, 2023
|
N/A | N/A | ||||||||||||||||||||||
N/A | 117,745 at CDN$3.05 (or $2.68 based o .S. dollar equivalent pricing for the transaction) |
117,745 on January 29, 2025
|
N/A | N/A | ||||||||||||||||||||||
N/A | 285,466at CDN$2.99 (or $2.36 based on the exchange rate at January 29, 2015)
|
285,466 on January 29, 2025 | N/A | N/A | ||||||||||||||||||||||
N/A
|
215,979 at CDN$2.64
(or $2.09 based on the exchange rate at April 1, 2015) 700,000 at CDN$1.00 (or $0.72 based on the exchange rate at February10, 2016) |
215,979
on April 1, 2025
ry 10, 2026 |
N/A
|
N/A
|
||||||||||||||||||||||
Louis Schwartz | 49,248 | (5) | N/A
|
448,497 | (6) | 147,745 at CD$1.43
(or $1.11 based on the exchange rate at October 16, 2015) 350,000 at CDN$1.00 (or $0.72 based on the exchange rate at February 10, 2016) |
147,745
on October 16, 2025
|
N/A
|
N/A
|
419,512 | (7) | 138,439 | (4) | |||||||||||||
Harrison Shih | 71,466 | (8) | N/A | 426,279 | (9) | 30,000 at $2.39
|
30,000 on August 29, 2024
|
N/A | N/A | 38,501 | (10) | 12,705 | (4) | |||||||||||||
N/A
|
117,745 at CDN$2.99
(or $2.36 based on the exchange rate at January 29, 2015) 350,000 at CDN$1.00 (or $0.72 based on the exchange rate at February 10, 2016) |
117,745
on January 29, 2025
|
N/A
|
N/A
|
|
|||||||||||||||||||||
Jungsoo Park | (11) | 64,278 | (12) | N/A
|
|
183,467 | 15,000 at $0.83 117,745 at CDN$3.05 (or $2.68 based on U.S. dollar equivalent pricing for the transaction) 115,000 at CDN$1.00 (or $0.72 based on the exchange rate at February 10, 2016) |
15,000 on March 26, 2024
117,745 on January 29, 2025
115,000 on February 10, 2026
|
N/A
|
N/A
|
19,251 | (13) | 6,353 | (4) |
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(1) | Mr. Chung received 215,980 options to purchase common shares on August 7, 2013, 403,211 options on January 29, 2015, and 215,979 options on April 1, 2015. |
(2) | Includes 403,211 options granted on January 29, 2015, 215,979 granted on April 1, 2015, and 700,000 options granted on February 10, 2016. |
(3) | Mr. Chung was granted 192,507 RSUs on September 8, 2016. The 247,676 RSUs that were awarded on April 1, 2015 were cancelled on February 3, 2016. |
(4) | Based on the last trading price of the common shares on the TSX-V which as of December 31, 2016 was CDN$0.44 per common share (or $0.33). For consistency purposes, the value of the awards are converted from Canadian dollars to U.S. dollars as of the December 31, 2016 Bank of Canada noon exchange rate at $1 for each CDN$1.3427. |
(5) | Schwartz & Associates for which Mr. Schwartz is managing partner received 147,475 options to purchase common shares on October 16, 2015. |
(6) | Includes 147,475 options granted on October 16, 2015 and 350,000 options on February 10, 2016. |
(7) | Schwartz & Associates for which Mr. Schwartz is managing partner was granted 419,512 RSUs on September 8, 2016. |
(8) | Mr. Shih received 30,000 options to purchase common shares on October 1, 2014, 117,745 options on January 29, 2015, and 350,000 options on February 10, 2016. |
(9) | Includes 30,000 options granted on October 1, 2014, 117,745 options on January 29, 2015, and 350,000 options on February 10, 2016. |
(10) | Mr. Shih was granted 38,501 RSUs on September 8, 2016. |
(11) | Mr. Park served as Interim Chief Financial Officer from December 31, 2015 to May 15, 2016. |
(12) | Mr. Park received 15,000 options to purchase common shares on March 26, 2014, 117,745 options on January 29, 2015, and 115,000 options on February 10, 2016. |
(13) | Mr. Park was granted 19,251 RSUs on September 8, 2016. |
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Equity Compensation Plan Information
The following table provides information, as of December 31, 2016, with respect to all compensation arrangements maintained by the Company, including individual compensation arrangements, under which shares are authorized for issuance. The chart below does not include RSUs.
Plan Category (a) | Number of Securities to be issued upon exercise of outstanding options and rights (b) | Weighted-average exercise price of outstanding options and rights (c) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in columns (a) and (c)) | |||||||||
Equity compensation plans approved by shareholders under the Incentive Stock Option Plan | 4,177,954 | $ | 1.15 | 142,628 | ||||||||
Equity compensation plans not approved by shareholders | - | - | - | |||||||||
Total | 4,177,954 | $ | 1.15 | 142,628 |
Equity Incentive Plan
On April 1, 2015, we adopted an amended and restated equity incentive plan, which amends and restates the equity incentive plan, which was previously established as of December 23, 2014. On January 22, 2016, we and our Board amended the plan (as so amended and restated, the “Equity Plan”) to fix the number of shares reserved for issuance of both stock options and RSUs at 5,715,105. On October 14, 2016, the authorized amount was decreased by 90,090 shares after RSUs issued and outstanding had vested and converted into 90,090 common shares, decreasing the authorized amount to 5,625,015. The Equity Plan requires removal of such shares from the authorized amount under the Equity Plan upon conversion of RSUs into common shares. Our Equity Plan allows our officers, employees, directors and consultants to acquire proprietary interests in the Company. The Equity Plan is administered by our Board and permits the grant of options to acquire our common shares and RSUs that may be exchanged for our common shares. As of December 31, 2016, 4,177,954 options and 1,304,433 RSUs were issued and outstanding. Upon vesting, the options are exercisable and the RSUs are convertible into common shares on a 1:1 basis.
Options. Options may be exercised over periods of up to 10 years as determined by the Board and the exercise price shall not be less than the fair market value of the shares on the effective date of the option grant. Option awards generally vest over four years with one year cliff vesting. The aggregate number of awards granted to any one Participant (and any companies owned by that Participant) in a twelve month period must not exceed 5% of the issued and outstanding common shares and Restricted Shares, calculated on the date upon which an award is granted to any such Participant. The aggregate number of awards granted to any one consultant in a twelve month period must not exceed 2% of the issued and outstanding common shares and Restricted Shares, calculated at the date an award is granted to the consultant. The aggregate number of awards granted to all Participants retained to provide investor relations activities must not exceed 2% of the issued and outstanding common shares and Restricted Shares in any twelve month period, calculated at the date an award is granted to any such Participant. Awards issued to Participants retained to provide investor relations activities shall vest in stages over a period of not less than twelve months with no more than 25% of the awards vesting in any three month period.
All awards awarded are covered by a stock option agreement and vest in accordance with the vesting schedule set forth in such stock option agreement. The Board may choose to accelerate the vesting schedule upon a change of control. The exercise price for Options granted under our Equity Plan shall not be less than the fair market value of the shares on the effective date of the option grant; provided, however, that no Option granted to a Participant holding 10% or more of the common shares shall have an exercise price per common share that is less than one hundred ten percent (110%) of the fair market value of a common share on the effective date of grant of the Option. The term of each Option shall be fixed by the Board, but no Option shall be exercisable more than ten years after the date the Option is granted. In the case of an Option that is granted to a Participant who, on the grant date, owns 10% of the voting power of common shares, the term of such Option shall be no more than five years from the date of grant.
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All Options are non-assignable and non-transferable. The Equity Plan provides that, during the lifetime of a Participant, an Option shall be exercisable only by a Participant or a Participant’s guardian or legal representative. An Option shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of a Participant or a Participant’s beneficiary, except transfer by will or by the laws of descent and distribution.
Options will be evidenced by certificates that set forth the terms, conditions and limitations for each Option which may include, without limitation, the term and the provisions applicable in the event employment or service terminates.
Restricted Stock Units. RSUs may be granted upon such terms and conditions as the Board shall determine. RSUs shall be evidenced by award agreements (“RSU Award Agreements”) in such form as the Board shall from time to time establish. RSU Award Agreements will specify the number of RSUs awarded (“RSU Award”) and will provide for the adjustment of such number in accordance with the Equity Plan. The purchase price, if any, for common shares issuable under each RSU Award shall be established by the Board. No monetary payment shall necessarily be required as a condition of receiving an RSU Award, except as may be required by applicable law or the requirements of any applicable stock exchange. Common shares issued pursuant to any RSU may (but need not) be made subject to vesting conditions based upon the satisfaction of such requirements, conditions, restrictions, time periods or performance goals, as shall be established by the Board. Until the RSU Awards are settled and the common shares issuable thereunder are delivered, no Shareholder rights shall exist with respect to the RSU. Rights to acquire common shares pursuant to an RSU Award shall not be subject in any manner to creditors of the Participant or the Participant’s beneficiary, except as transferred by will or the laws of descent and distribution. All rights with respect to an RSU Award shall be exercisable during the lifetime of the Participant. Each RSU Award Agreement shall specify the consequences of a Participant ceasing to be a service provider, employee or Director of the Company prior to the settlement of an RSU Award.
The Equity Plan contains customary provisions to adjust the grants of RSUs and other awards in the event of any corporate transaction or event such as a stock dividend, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, spin-off, combination or other similar corporate transaction or event affecting the common shares, or other interests subject to the awards under the Equity Plan. In the event of a Change of Control (as defined in the Equity Plan) of the Company, the Board may, in its discretion, take any of the following actions, either singly or in combination: (i) fully vest and/or accelerate the restriction period of any awards; (ii) require that the award be assumed by any successor corporation or that awards for shares of other interests in the company or any other entity be substituted for such award; or (iii) cash-out outstanding awards.
Future Amendments. The Board may amend, suspend or terminate the Equity Plan at any time. However, without disinterested shareholder approval there shall be: (a) no increase in the maximum aggregate number of common shares that may be issued under the Equity Plan except as for the adjustments for changes in capital structure provided for in the Equity Plan; (b) no change in the class of persons eligible to receive Options; and; (c) no other amendment that would require approval of the Shareholders under any applicable law, regulation or rule, including the rules of any stock exchange or market system upon which the common shares may then be listed.
No amendment, suspension or termination of the Equity Plan shall affect any then outstanding Award unless expressly provided by the Board. The Board may, in its sole and absolute discretion, amend the Equity Plan or any Award agreement with a Participant to take effect retroactively or otherwise, as it deems necessary or advisable for the purpose of conforming the Equity Plan or such Award Agreement to any present or future law, regulation or rule applicable to the Equity Plan.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a summary of transactions and series of similar transactions, since our inception, to which we were a party or will be a party, in which:
● | the amount involved exceeded or will exceed $120,000; and | |
● | a director, executive officer, holder of more than 5% of our capital stock or any member of their immediate family had or will have a direct or indirect material interest. |
We also describe below certain other transactions with our directors, executive officers and stockholders. Although we have had no formal written policy, we plan to implement a written policy prior to the closing of this offering.
Raycom Transactions and Agreements
Raycom is a holder of more than 5% of our capital stock. In addition, one of directors of our Board, Mr. Fiveash, is the Senior Vice President of Digital Media and Strategy of Raycom and is one of Raycom’s Board designees. On the earlier of 45 days following the effective date of our Form S-1 registration statement of which this prospectus forms a part, or April 15, 2017, Raycom will appoint another Board designee subject to shareholder approval. Below are descriptions of agreements that we currently have in place with Raycom.
Website Software and Services Agreement and Local Sales Products Agreement
Frankly Media entered into a Website Software and Services Agreement with Raycom (the “Service Agreement”), dated October 1, 2011 and amended on October 1, 2014 and August 25, 2015. Pursuant to the Service Agreement, Frankly Media provides website software, platform and advertising services to Raycom. The Service Agreement expires on December 31, 2017 unless terminated earlier upon written notice. Frankly Media also entered into a local sales products agreement, dated August 1, 2015 (the “LSP Agreement”) with Raycom, pursuant to which Frankly Media provides targeted display and video advertising services. The LSP Agreement will expire on August 1, 2017. During the fiscal year of 2015, we recognized revenue of $946,383 under the Service Agreement and LSP Agreement and for the nine months ended September 30, 2016, we recognized revenue of $3,262,516.
On December 22, 2016, Raycom pre-paid $3 million of future fees for services to be provided by the Company pursuant to the Service Agreement. 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.
Unit Purchase Agreement and Original Raycom Note
On July 28, 2015, we entered into a Unit Purchase Agreement pursuant to which we issued the Original Raycom Note in the aggregate principal amount of $4 million. The Original Raycom Note accrued simple interest at a 5% annual rate and was payable on August 31, 2016. We incurred interest expense under the Original Raycom Note due to Raycom during the year ended December 31, 2015 and the nine months ended September 30, 2016 of $66,667 and $133,333, respectively. On August 31, 2016, in connection with the Raycom SPA and the Credit Agreement with Raycom, each as described below under the heading “—Raycom Loan”, we fully paid $3 million of the Original Raycom Note and converted $1 million of the Original Raycom Note into 2,553,400 common shares.
Raycom Loan
On August 31, 2016, we entered into Raycom SPA and the Credit Agreement with Raycom, both of which were amended on December 20, 2016 as described more fully below.
Securities Purchase Agreement. Pursuant to the Raycom SPA, Raycom agreed to accept an aggregate of 2,553,400 common shares and 14,809,720 warrants to purchase one common share per warrant at a price per common share equal to CDN$0.50 ($0.39 based on the exchange rate at August 18, 2016) for a purchase price of CDN$1,276,700 (or $1 million based on the exchange rate at August 18, 2016) in settlement of $1 million of the Original Raycom Loan.
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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 5-year warrants (the “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.
Subject to approval of Raycom, at its sole discretion, we may require further loans for working capital or general operating requirements from time to time upon written notice by minimum increments of $500,000 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 certain mandatory repayments, are required to maintain certain leverage and interest coverage ratios and subject to certain restrictions, including but not limited to indebtedness, change of control and distributions. See “Management’s Discussion and Analsysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Raycom Loan.”
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 have entered into Guaranty Agreements whereby Frankly Co. and Frankly Media have guaranteed our obligations under the Credit Agreement. In addition, each of Frankly Inc., Frankly Co. and Frankly Media have entered into Security Interest Agreements pursuant to which Raycom has first priority security interests in substantially all of our assets. Frankly Media 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 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 of the assets of our current and future subsidiaries.
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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Management Services Agreement with Schwartz & Associates, PC
On April 1, 2015, Gannaway Web Holdings, LLC (now Frankly Media) entered into a Management Services Agreement (the “Management Services Agreement”) with Schwartz and Associates, PC (“Schwartz & Associates”), a Georgia professional corporation for which Mr. Schwartz, our Chief Financial Officer and Chief Operating Officer is the managing partner. Pursuant to the Management Services Agreement, Gannaway Web Holdings, LLC engaged Schwartz & Associates to provide management series and Mr. Schwartz was appointed Chief Strategy Officer of Gannaway Web Holdings, LLC. Under the Management Services Agreement, Schwartz & Associates received for their services a base compensation of $12,500 per month, paid semi-monthly. The Management Services Agreement also provided for special incentive compensation in the following:
● In a sale to a third party of the Company or substantially all of the Company’s assets, Mr. Schwartz was entitled to receive (i) if the transaction was originated by Mr. Schwartz, $500,000 or 2.5% of the total consideration of the transaction, or (ii) if the transaction was originated by a third party, $250,000 and 2% of the total amounts received in such transaction in excess of $50 million.
● In a sale to an existing Company investor, Mr. Schwartz was entitled to receive (i) if the transaction was originated by Mr. Schwartz, $250,000 or 2.5% of the total Company valuation in excess of $40 million, or (ii) if the transaction was originated by a third party, $250,000 and 5% of total the amounts received in excess of $22,500,000.
● In a third party investment in the Company, Mr. Schwartz was entitled to receive (i) if the transaction was originated by Mr. Schwartz, 2.5% of the total amount invested, or (ii) if the transaction was originated by a third party, 2.5% of the total amount invested.
Mr. Schwartz was also entitled to participate in any employee benefit programs, plans and practices on the same terms as other salaried employees on a basis consistent with other senior executives. Upon termination for any reason, we were to pay Mr. Schwartz all accrued and unpaid fees through the terminated date. Upon termination without cause or resignation for good reason, Mr. Schwartz was also entitled to a separation fee equal to the balance of the months remaining under the term of the agreement. On August 1, 2015, the Management Services Agreement was amended to extend the term of the agreement to December 31, 2015. On December 31, 2015, the Management Services Agreement expired and was not renewed. However, the terms of Mr. Schwartz’ s compensation currently reflect the terms of his compensation pursuant to the Management Services Agreement. We intend to enter into an employment agreement with Mr. Schwartz prior to the closing of this offering.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 2016, the total number of common shares owned beneficially by (i) each of our named executive officers, (ii) each of our directors, (iii) all of our current directors and officers as a group and (iv) each person who beneficially owns 5% or more of our outstanding common shares. For purposes of calculating beneficial ownership, the applicable percentage of ownership is based upon 34,523,599 common shares outstanding as of December 31, 2016, which excludes (i) 1,660,444 Restricted Shares, (ii) 4,177,954 options issued and outstanding under our Equity Plan, and (iii) 1,304,433 RSUs issued and outstanding under our Equity Plan. Shares issuable pursuant to options or warrants exercisable within 60 days after the date of this prospectus are deemed outstanding for purposes of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage of ownership for any other person. Unless otherwise indicated in the footnotes to this table, beneficial ownership of our common shares represents sole voting and investment power with respect to those shares.
Name | Before Offering | After Offering | ||||||||||||||
Number
of common shares |
%
of common shares |
Number
of common shares |
%
of common shares |
|||||||||||||
Directors and Named Executive Officers | % | |||||||||||||||
Steve Chung(1) | 538,474 | 1.5 | % | |||||||||||||
Louis Schwartz(2) | 244,694 | * | ||||||||||||||
Omar Karim(3) | 45,045 | * | ||||||||||||||
Choong Sik Hyun | - | - | ||||||||||||||
Joseph Gardner Fiveash III | - | - | ||||||||||||||
Steven Zenz(4) | - | * | ||||||||||||||
Tom Rogers(5) | - | * | ||||||||||||||
All directors and executive officers as a group (7 persons) | 828,123 | 2.4 | % | |||||||||||||
5% Owners (not included above) | ||||||||||||||||
SKP America, LLC(6) | 9,269,917 | 26.9 | % | |||||||||||||
Raycom Media, Inc.(7)(8) | 24,114,252 | (9) | 48.9 | % |
* Less than one percent. |
(1) | Includes 538,474 stock options that will vest by March 1, 2017. Excludes 996,696 options and 192,507 RSUs that will vest after March 1, 2017. |
(2) | Includes 49,248 common shares and 43,092 stock options that will vest by March 1, 2017. Excludes 448,497 stock options and 419,512 RSUs that will vest after March 1, 2017. |
(3) | Excludes 32,000 stock options and 135,135 RSUs that will vest after March 1, 2017. |
(4) | Excludes 120,000 RSUs issuable to Mr. Zenz in connection with his appointment to the Board on October 3, 2016 of which 30,000 RSUs have been issued and will vest on March 31, 2017. |
(5) | Excludes 120,000 RSUs issuable to Mr. Rogers in connection with his appointment to the Board on October 3, 2016 of which 30,000 RSUs have been issued and will vest on March 31, 2017. |
(6) | The business address for SKP America, LLC is 900 Middlefield Road, Redwood City, California 94063. Mr. Sang Won Kim, Head of Growth Office (Corporate Development) holds the voting power and dispositive power with respect to such shares. |
(7) | The business address for Raycom Media, Inc. is 201 Monroe Street, RSA Tower, 20th Floor. Warren Spector, Raycom’s Chief Financial Officer, holds the voting power and dispositive power with respect to such shares. |
(8) | Includes 14,809,720 warrants to purchase one common share per warrant at a price per common share equal to CDN$0.50 ($0.39 based on the exchange rate at August 18, 2016). |
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General
As of the date of this prospectus, our authorized capital stock consisted of an unlimited number of common shares, no par value per share and an unlimited number of Restricted Shares with no par value per share. As of December 31, 2016, there are 34,523,599 common shares and 1,660,444 Restricted Shares issued and outstanding.
Common Shares
Holders of common shares are entitled to receive notice of and to attend all meetings of shareholders of the Company and to one vote per share at the shareholder meetings. Except as otherwise set out herein or as required by law, holders of common shares and Restricted Shares shall vote as one class at all meetings of shareholders of the Company. The holders of common shares are entitled to receive dividends as and when declared by the Board on the common shares as a class, provided that no dividend may be declared or paid in respect of the common shares unless concurrently therewith the same dividend is declared or paid on the Restricted Shares. The holders of the common shares shall be entitled, in the event of any liquidation, dissolution or winding up, whether voluntary or involuntary, or any other distribution of assets among our shareholders for the purpose of winding up its affairs, (collectively, a “Liquidation Event”) to share ratably, together with the holders of Restricted Shares in such of our assets as are available for distribution. The common shares shall not be subdivided, consolidated, reclassified or otherwise changed unless contemporaneously therewith the Restricted Shares are adjusted proportionately.
Restricted Shares
Holders of Restricted Shares are entitled to receive notice of and to attend all meetings of shareholders and to one vote per share. Notwithstanding the foregoing, holders of Restricted Shares are not entitled to vote for the election or removal of our directors. Except as otherwise set out herein or as required by law, holders of common shares and Restricted Shares shall vote as one class at all meetings of shareholders. The holders of Restricted Shares will also be entitled to receive dividends as and when declared by the Board on the Restricted Shares as a class, provided that no dividend may be declared or paid in respect of Restricted Shares unless concurrently therewith the same dividend is declared or paid on common shares. The holders of Restricted Shares shall be entitled, in the event of any Liquidation Event to share ratably, together with the holders of common shares in such of our assets as are available for distribution. No Restricted Share shall be transferred by any holder thereof pursuant to an offer which must be made, by reason of applicable security legislation or by the rules or policies of a stock exchange on which any share of the company are listed, to all or substantially all of the holders of Restricted Shares, unless concurrently with such an offer, an offer to acquire common shares is made that is identical in terms of price per share, percentage of outstanding shares to be taken up (excluding those held by the offeror) and in all other material respects.
Each Restricted Share is convertible into one common share , without payment of additional consideration, at the option of the holder thereof as follows:
a) | at any time that is not a time at which the Board reasonably believes that we would become a Domestic Issuer (as such term is defined in Rule 902(e) of Regulation S under the Securities Act (“Regulation S”)) as a result of the conversion of the Restricted Shares into common shares; | |
b) | if we determine that we have ceased to be a Foreign Issuer (as such term is defined in Rule 902(e) of Regulation S) and have notified the holders of the Restricted Shares of such determination; or | |
c) | if there is an offer to purchase the common shares which must be made by reason of applicable securities legislation or the rules or policies of a stock exchange to all or substantially all of the holders of common shares any of whom are in, or whose last address as shown on the books of the corporation is in, a province or territory of Canada to which the relevant requirement applies. |
In addition, each Restricted Share may be converted into one common share at any time and from time to time at our option upon notice to the holder thereof.
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The Restricted Shares will not be subdivided, consolidated, reclassified or otherwise changed unless contemporaneously therewith the common shares are adjusted proportionately.
Stock Options and Restricted Share Units
Our Equity Plan addresses the granting, administration and exercising of options to purchase common shares (the “Options”) and, subject to approval of disinterested shareholders, restricted share units (“RSUs”). Under the Equity Plan, the maximum aggregate number of common shares that may be issued pursuant to the exercise of Options and RSUs is 5,715,105 shares. As at December 31, 2016, there were Options to acquire 4,177,954 common shares at a weighted average exercise price of $1.15 per share and 1,304,433 RSUs issued and outstanding.
All Options awarded are covered by a stock option agreement and vest in accordance with the vesting schedule set forth in such stock option agreement. The exercise price for Options granted under the Equity Plan shall not be less than the Discounted Market Price (as defined in the policies of the TSX-V), or such other price as permitted pursuant to a waiver obtained from the TSX-V; provided, however, that no Option granted to a participant holding 10% or more of the common shares shall have an exercise price per common share that is less than one hundred ten percent (110%) of the fair market value of a common share on the effective date of grant of the Option. The term of each Option shall be fixed by the Board, but no Option shall be exercisable more than ten years after the date the Option is granted. In the case of an Option that is granted to a participant who, on the grant date, owns 10% of the voting power of common shares, the term of such Option shall be no more than five years from the date of grant.
Under the Equity Plan, RSUs may be awarded to our officers, employees, directors and consultants upon such conditions as the Board may establish, including the attainment of performance goals recommended by the compensation committee of the Board. The purchase price for common shares issuable under each RSU award, if any, shall be established by the Board in its discretion. common shares issued pursuant to any RSU award may (but need not) be made subject to vesting conditions based upon the satisfaction of service requirements, conditions, restrictions, time periods or performance goals, as shall be established by the Board.
Warrants
As of the date of this prospectus, 15,603,531 warrants to purchase one common share per warrant which are currently exercisable, with a weighted average price of CDN$0.5 (or $0.37 based on the exchange rate at December 31, 2016) per share.
Pursuant to the Credit Agreement with Raycom, we entered into a Credit Facility pursuant to which we issued 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 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 upon the following events:
(i) | issuance of shares or securities exchangeable for or convertible into our common shares to holders of all or substantially all of our outstanding common shares by way of stock dividend or other distribution; | ||
(ii) | forward and reverse splits of our common shares; | ||
(iii) | any issue or distribution of rights, options or warrants to all or substantially all of holders of our common shares; | ||
(iv) | any special distributions of securities or cash to all or substantially all of holders of our common shares; and | ||
(v) | any capital reorganization. |
In December 2016, we sold 1,447,222 Units , each Unit consisting of one common share and one-half Private Placement Warrant to acquire a common share at a price of CDN$0.45 per Unit. 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. In connection with sale of Units outside of the U.S., we issued Broker Warrants to purchase 70,200 common shares to the Private Placement Brokers, representing 6% of the total aggregate Units. The December Warrants have weighted average anti-dilution protection in the case of (i) any share reorganization, including consolidations, splits, dividends or distributions, (ii) any rights offering offered to holders of our common shares at a price less than 95% of the applicable current market price, and (iii) any special distributions of the Company securities, cash , property or other assets or evidences of indebtedness to all or substantially all of the holders of our common shares. Anti-dilution adjustments are cumulative and will be made successively whenever an event referred to above occurs ; provided however, no adjustment in the exercise price will be required if the adjustment would result in change of at least 1% in the prevailing exercise price and no adjustment shall be made in the number of common shares purchasable upon exercise of a December Warrant unless it would result in a change of at least one one-hundredth of a common share. No adjustment will be made which would result in an increase in the exercise price or a decrease in the number of the underlying common shares (except in respect of a consolidation of the outstanding common shares).
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Registration Rights
In connection with the Credit Agreement, we have entered into a Pledge Agreement pursuant to which we granted Raycom a security interest on substantially all of the assets of our current and future subsidiaries. Upon an event of default, 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.
Indemnification of Officers and Directors
Our Articles contain provisions to indemnify the directors, officers, employees or other agents to the fullest extent permitted by the BCBCA. These provisions may have the practical effect in certain cases of eliminating the ability of shareholders to collect monetary damages from directors. We are also a party to director agreements with two of our new directors, Messrs. Zenz and Rogers that contain indemnification provisions. We believe that these provisions will assist us in attracting or retaining qualified individuals to serve as our directors.
Transfer Agent and Registrar
Our U.S. transfer agent and registrar for our common shares is VStock Transfer, LLC. Our Canadian transfer agent and registrar for our common shares and Restricted Shares is TSX Trust Company.
Listing
Our common shares are currently 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”.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of our common shares, including shares issued upon the exercise of outstanding options, RSUs, Restricted Shares or warrants, in the public market after this offering, or the perception that those sales may occur, could cause the prevailing market price for our common shares to fall or impair our ability to raise equity capital in the future. As described below, only a portion of our common shares will be available for sale in the public market for a period of time after completion of this offering due to contractual and legal restrictions on resale described below. Future sales of our common shares in the public market either before (to the extent permitted) or after restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price of our common shares at such time and our ability to raise equity capital at a time and price we deem appropriate.
Sales of Restricted Shares
Based on the number of shares of our common shares outstanding as of , upon the closing of this offering we will have outstanding an aggregate of approximately common shares. Of these shares, common shares to be sold in this offering and any shares sold to the underwriters pursuant to their option to purchase additional shares, will be freely tradable in the public market without restriction or further registration under the Securities Act, except for any of such shares that are held by our “affiliates” as such term is defined in Rule 144 of the Securities Act, in which case they are eligible for public sale but subject to certain restrictions applicable to sales of such shares by affiliates under Rule 144. The remaining common shares outstanding are “restricted securities” as such term is defined in Rule 144 and Regulation S under the Securities Act. These restricted securities were issued and sold by us in transactions not involving a public offering in the U.S. and are eligible for public sale only if registered under the Securities Act or if they qualify for an exemption from registration under the Securities Act, including the exemptions provided by Rule 144, Rule 701 or Regulation S, which rules are summarized below.
As a result of contractual restrictions described below and the provisions of Rules 144, 701 and Regulation S, the shares sold in this offering and the restricted securities will be available for sale in the public market as follows:
● | the shares sold in this offering will be eligible for immediate sale upon the completion of this offering; | |
● | approximately Restricted Shares and common shares will be eligible for sale in the public market 90 days after the date of this prospectus, subject to the volume, manner of sale and other limitations under Rule 144 and Rule 701; | |
● | approximately Restricted Shares will be eligible for sale in the public market upon expiration of lock-up agreements 180 days after the date of this prospectus, subject in certain circumstances to the volume, manner of sale and other limitations under Rule 144 and Rule 701; and | |
● | approximately 1,195,000 common shares will be eligible for sale in the public market in the U.S. in December 2018, so long as we comply with the current public information requirements of Rule 144(c). |
Rule 144
Pursuant to Rule 144, a person who has beneficially owned restricted common shares or warrants for at least six months would be entitled to sell their securities provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the three months preceding, a sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least three months before the sale and have filed all required reports under Section 13 or 15(d) of the Exchange Act during the 12 months (or such shorter period as we were required to file reports) preceding the sale. We are also subject to restrictions on the use of Rule 144 by shell companies or former shell companies as we were originally formed as a shell company, or a CPC pursuant to Policy 2.4 - Capital Pool Companies of the TSX-V in June 2013. See “—Restrictions on the Use of Rule 144 by Shell Companies or Former Shell Companies”.
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Persons who have beneficially owned restricted common shares or warrants for at least six months but who are our affiliates at the time of, or at any time during the three months preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of:
● | 1% of the total number of common shares then outstanding; or | |
● | the average weekly reported trading volume of the common shares during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. |
Sales by our affiliates under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us.
For purposes of the six-month holding period requirement of Rule 144, a person who beneficially owns restricted common shares issued pursuant to a cashless exercise of a warrant shall be deemed to have acquired such shares, and the holding period for such shares shall be deemed to have commenced on the date the warrant was originally issued.
Restrictions on the Use of Rule 144 by Shell Companies or Former Shell Companies
Rule 144 is not available for the resale of securities initially issued by shell companies (other than business combination related shell companies) or issuers that have been at any time previously a shell company. However, Rule 144 also includes an important exception to this prohibition if the following conditions are met:
● | the issuer of the securities that was formerly a shell company has ceased to be a shell company; | |
● | the issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; | |
● | the issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding 12 months (or such shorter period that the issuer was required to file such reports and materials), other than Form 8-K reports; and | |
● | at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company. |
We believe that the registration statement of which this prospectus forms a part constitutes “ Form 10 type information ” within the meaning of Rule 144 (i) and, accordingly, that holders of our common shares will be eligible to sell common shares in accordance with Rule 144(i) from and after the one year anniversary of the effectiveness of the registration statement subject to the conditions described above.
December Private Placement
The 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, all the securities issued in the December Private Placement 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.
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Lock-Up Agreements
In connection with this offering, we and our officers, directors, and certain of our shareholders have agreed to enter into lock-up agreements with the underwriter. See “Underwriting”.
In connection with our acquisition of Frankly Media, we paid as part of the consideration under the Unit Purchase Agreement, $20 million in Restricted Shares (the “Share Consideration”). The number of Restricted Shares comprising the Share Consideration was 9,772,204 shares, of which 3,021,072 shares were issued to GEI (the “GEI Shares”) and 6,751,132 shares were issued to Raycom (the “Raycom Share Consideration Shares”). All of the Restricted Shares composing the Share Consideration were subject to a lock-up agreement. The lock-up period with respect to securities representing 50% of the value of the Share Consideration expired in August 2016 the first anniversary of the Closing Date of the transaction. The lock-up period with respect to the remainder of the Share Consideration will expire upon the second anniversary of Closing Date of the transaction in August 2017. The lock-up period is 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 period, the Restricted Shares will be converted into common shares on a 1:1 basis. In August 2016, all of the Raycom Share Consideration Shares were converted into 6,751,132 common shares, upon waiver by us of the lock-up restriction for the Raycom Restricted Shares and half of the GEI Shares were converted into 1,510,536 common shares for a total of 8,261,668 common shares. The remaining 1,510,536 GEI Shares are subject to lock-up until August 2017.
Equity Incentive Plans
We intend to file a registration statement on Form S-8 under the Securities Act after the closing of this offering to register the common shares that are issuable pursuant to our Equity Plan. The registration statement is expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under the registration statements will be available for sale in the open market following their effective dates, subject to Rule 144 volume limitations and the lock-up arrangement described above, if applicable.
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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the U.S. federal income tax considerations generally applicable to the ownership and disposition of our common shares and is based upon U.S. federal income tax law and relevant interpretations thereof in effect as of the date of this prospectus, all of which are subject to change, possibly with retroactive effect. This summary does not discuss all aspects of U.S. federal income taxation that may be important to you in light of your individual circumstances, including if you are subject to special tax rules that apply to certain types of investors (e.g., financial institutions, insurance companies, broker-dealers, partnerships or other pass-through entities for U.S. federal income tax purposes, tax-exempt organizations (including private foundations), taxpayers that have elected mark-to-market tax accounting, S corporations, regulated investment companies, real estate investment trusts, investors that will hold our securities as part of a straddle, hedge, conversion, or other integrated transaction for U.S. federal income tax purposes, or investors that have a functional currency other than the U.S. dollar), all of whom may be subject to tax rules that differ materially from those summarized below. In addition, this summary does not discuss other U.S. federal tax consequences (e.g., estate or gift tax), any state, local, or non-U.S. tax considerations or the Medicare tax or alternative minimum tax.
This summary is limited to investors that will hold our securities as “capital assets” (generally, property held for investment) within the meaning of Section 1221 of the Internal Revenue Code of 1986, as amended, (the “Code”), and that acquired the securities pursuant to this offering. We have not sought, and will not seek, a ruling from the Internal Revenue Service (the “IRS”) regarding any matter discussed herein, and no assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax aspects set forth below.
For purposes of this summary, a “U.S. holder” is a beneficial holder of securities who or that, for U.S. federal income tax purposes is:
● | an individual who is a United States citizen or resident of the United States; | |
● | a corporation or other entity treated as a corporation for United States federal income tax purposes that is created or organized (or treated as created or organized) in or under the laws of the United States or any state or political subdivision thereof; | |
● | an estate the income of which is subject to United States federal income taxation regardless of its source; or | |
● | a trust if (A) the administration of which is subject to the primary supervision of a United States court and which has one or more United States persons (within the meaning of the Code) who have the authority to control all substantial decisions of the trust or (B) it has in effect a valid election under applicable Treasury regulations to be treated as a United States person. |
An individual may be a resident alien for U.S. federal income tax purposes in any calendar year if the individual was present in the United States for at least 31 days in that calendar year and for an aggregate of at least 183 days during the three-year period ending with the current calendar year. For purposes of this calculation, all of the days present in the current year, one-third of the days present in the immediately preceding year and one-sixth of the days present in the second preceding year are counted. Residents are taxed for U.S. income tax purposes as if they were United States citizens.
A “Non-U.S. holder” is a beneficial holder of shares who or that is neither a U.S. holder nor a partnership for U.S. federal income tax purposes.
If a partnership (including an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our securities, the tax treatment of a partner in such partnership will generally depend upon the status of the partner, the activities of the partnership and certain determinations made at the partner level. If you are a partner of a partnership holding our securities, you are urged to consult your tax advisor regarding the tax consequences of the ownership and disposition of our securities.
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THIS DISCUSSION OF U.S. FEDERAL INCOME TAX CONSIDERATIONS IS FOR GENERAL INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. WE URGE YOU TO CONSULT YOUR TAX ADVISOR CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES TO YOU OF INVESTING IN OUR SECURITIES, AS WELL AS THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL AND NON-U.S. TAX LAWS AND OTHER TAX CONSIDERATIONS.
Our Classification under U.S. Federal Income Tax Law
Pursuant to certain provisions of the Code, a non-U.S. corporation (such as ourselves) that acquires substantially all of the shares of a U.S. corporation in exchange for its own shares will be treated as a U.S. corporation for U.S. federal income tax purposes if certain conditions are satisfied (we refer to such a non-U.S. corporation as an “Inverted U.S. Corporation”). As a result of our 2014 acquisition of TicToc (now Frankly Co.), we believe we became an Inverted U.S. Corporation at the time of such acquisition, and the remainder of this discussion assumes we will be treated as an Inverted U.S. Corporation since such time. Because we are an Inverted U.S. Corporation, we are subject to U.S. federal corporate income taxes on our worldwide income (including the income of our U.S. operating subsidiaries). However, we may also be subject to income taxes in Canada because of our status as a British Columbia registered corporation. A Canadian corporation such as ourselves that is treated as an Inverted U.S. Corporation may not be able to avail itself fully of some or all of the tax benefits that otherwise might be available to it under the Canada-U.S. Income Tax Convention (the “Canada-U.S. Tax Treaty”). In addition, because of our status as an Inverted U.S. Corporation, under Section 1503(d) of the Code, our net operating losses may be classified as “dual consolidated losses” (as defined in such Code section) because they may potentially be used to offset taxable income in both the United State and Canada. If the dual consolidated loss rules apply to us, and no exception is available, then we may be limited in our ability to use our net operating losses to offset our U.S. taxable income. Therefore, our total income tax liabilities may be higher than they would otherwise be if we were not treated as an Inverted U.S. Corporation. In addition, any shareholder of ours who might otherwise be eligible for the benefits of the Canada-U.S. Tax Treaty and who receives payments from us that are subject to Canadian and/or U.S. withholding taxes may not be entitled to claim the application of such treaty to reduce the amount of such withholding taxes because of our status as an Inverted U.S. Corporation. Because of our status as an Inverted U.S. Corporation, there may be other adverse income tax consequences to holders of our common shares that are not described in the following discussion. Potential investors in our common shares are urged to consult with their own tax advisers regarding the particular tax consequences to them arising from our status as an Inverted U.S. Corporation.
U.S. Holders
Distributions. If we pay distributions to U.S. holders of common shares, such distributions generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of current and accumulated earnings and profits generally will constitute a return of capital that will be applied against and reduce (but not below zero) the U.S. holder’s adjusted tax basis in its common shares. Any remaining excess will be treated as gain realized on the sale or other disposition of such common shares (taxed as described below under “U.S. Holders — Sale, Taxable Exchange or Other Taxable Disposition of Common Shares”).
Dividends we pay to a U.S. holder that is a taxable corporation generally will qualify for the dividends received deduction if the requisite holding period is satisfied. With certain exceptions (including dividends treated as investment income for purposes of investment interest deduction limitations), and provided certain holding period requirements are met, dividends we pay to a non-corporate U.S. holder generally will constitute “qualified dividends” that will be taxed at the applicable rate for long-term capital gains.
Sale, Taxable Exchange or Other Taxable Disposition of Common Shares. A U.S. holder generally will recognize gain or loss on the sale, taxable exchange or other taxable disposition of common shares. Any such gain or loss generally will be capital gain or loss and generally will be long-term capital gain or loss if the U.S. holder’s holding period for such common shares exceeds one year. The amount of gain or loss recognized by a U.S. holder on such disposition of common shares generally will be equal to the difference between (i) the sum of the amount of cash and the fair market value of any property received in such disposition and (ii) the U.S. holder’s adjusted tax basis in such common shares. A U.S. holder’s adjusted tax basis in its common shares will generally equal the U.S. holder’s acquisition cost reduced by any prior distributions treated as a return of capital. The deductibility of capital losses is subject to limitations.
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Redemption of Common Shares. In the event that we redeem a U.S. holder’s common shares, the treatment of the transaction for U.S. federal income tax purposes will depend on whether the redemption qualifies as sale of the common shares under Section 302 of the Code. If the redemption qualifies as a sale of common shares under the tests described below, the tax consequences to the U.S. holder will be as described above under “U.S. Holders — Sale, Taxable Exchange or Other Taxable Disposition of Common Shares.” If the redemption does not qualify as a sale of common shares, the U.S. holder will be treated as receiving a distribution, the tax consequences of which are described above under “U.S. Holders — Distributions”. Whether a redemption qualifies for sale treatment will depend primarily on the total number of common shares treated as held by the U.S. holder before and after the redemption. A redemption of common shares generally will be treated as a sale of common shares (rather than as a distribution) if the redemption (i) is “substantially disproportionate” with respect to the U.S. holder, (ii) results in a “complete termination” of the U.S. holder’s interest in us or (iii) is “not essentially equivalent to a dividend” with respect to the U.S. holder.
A redemption of common shares generally will be “substantially disproportionate” with respect to the U.S. holder if the percentage of our outstanding voting shares actually and constructively owned by the U.S. holder immediately following the redemption of common shares is, among other requirements, less than 80% of the percentage of our outstanding voting shares actually and constructively owned by the U.S. holder immediately before such redemption. There will be a complete termination of a U.S. holder’s interest if either (i) all of the common shares actually and constructively owned by the U.S. holder are redeemed or (ii) all of the common shares actually owned by the U.S. holder are redeemed and the U.S. holder is eligible to waive, and effectively waives in accordance with specific rules, the attribution of shares owned by certain family members and the U.S. holder does not constructively own any other shares. A redemption of common shares will not be essentially equivalent to a dividend if such redemption results in a “meaningful reduction” of the U.S. holder’s proportionate interest in us. Whether a redemption will result in a “meaningful reduction” in a U.S. holder’s proportionate interest in us will depend on the particular facts and circumstances. The IRS has indicated in a published ruling that even a small reduction in the proportionate interest of a small minority shareholder in a publicly held corporation who exercises no control over corporate affairs may constitute such a “meaningful reduction.”
In applying the above tests, a U.S. holder takes into account not only common shares actually owned by the U.S. holder, but also common shares that are constructively owned by it. A U.S. holder may constructively own, in addition to common shares owned directly, common shares owned by certain related individuals and entities in which the U.S. holder has an interest or that have an interest in such U.S. holder, as well as any common shares the U.S. holder has a right to acquire by exercise of an option. A U.S. holder is urged to consult its tax advisor as to the tax consequences of a redemption, including the application of the constructive ownership rules described above.
If none of the above tests is satisfied, the redemption will be treated as a distribution (taxed as described above under “U.S. Holders — Distributions”). After the application of those rules, any remaining tax basis of the U.S. holder in the redeemed common shares should be added to the U.S. holder’s adjusted tax basis in its remaining shares, or, if it has none, possibly in other shares constructively owned by it.
Information Reporting and Backup Withholding. In general, information reporting requirements may apply to dividends paid to a U.S. holder and to the proceeds of the sale or other disposition of our securities unless the U.S. holder is an exempt recipient. Backup withholding may apply to such payments if the U.S. holder fails to provide a taxpayer identification number or a certification of exempt status or has been notified by the IRS that it is subject to backup withholding (and such notification has not been withdrawn). Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a U.S. holder’s U.S. federal income tax liability provided the required information is timely furnished to the IRS.
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Non-U.S. Holders
Distributions. In general, any distributions we make to a Non-U.S. holder of common shares, to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), will constitute dividends for U.S. federal income tax purposes and, provided such dividends are not effectively connected with the Non-U.S. holder’s conduct of a trade or business within the United States, we will be required to withhold tax from the gross amount of the dividend at a rate of 30%, unless such Non-U.S. holder is eligible for a reduced rate of withholding tax under an applicable income tax treaty and provides proper certification of its eligibility for such reduced rate (usually on an IRS Form W-8BEN or W-8BEN-E, as applicable). Any distribution not constituting a dividend will be treated first as reducing (but not below zero) the Non-U.S. holder’s adjusted tax basis in its common shares and, to the extent such distribution exceeds the Non-U.S. holder’s adjusted tax basis, as gain realized from the sale or other disposition of the common shares (taxed as described below under “Non-U.S. Holders — Sale, Taxable Exchange or Other Taxable Disposition of common shares”). In addition, if we determine that we are classified as a “United States real property holding corporation” (see “Non-U.S. Holders — Sale, Taxable Exchange or Other Taxable Disposition of Common Shares ” below), we may withhold 15% of any distribution that exceeds our current and accumulated earnings and profits.
Dividends that we pay to a Non-U.S. holder that are effectively connected with such Non-U.S. holder’s conduct of a trade or business within the United States (or if a tax treaty applies, are attributable to a U.S. permanent establishment or fixed base maintained by the Non-U.S. holder) generally will not be subject to U.S. withholding tax, provided such Non-U.S. holder complies with certain certification and disclosure requirements (usually by providing an IRS Form W-8ECI). Instead, such dividends generally will be subject to U.S. federal income tax, net of certain deductions, at the same graduated individual or corporate rates applicable to U.S. holders. If the Non-U.S. holder is a corporation, dividends that are effectively connected income may also be subject to a “branch profits tax” at a rate of 30% (or such lower rate as may be specified by an applicable income tax treaty).
Sale, Taxable Exchange or Other Taxable Disposition of Common Shares . A Non-U.S. holder generally will not be subject to U.S. federal income or withholding tax on gain recognized on a sale, taxable exchange or other taxable disposition of common shares, unless:
● | the gain is effectively connected with the conduct of a trade or business by the Non-U.S. holder within the United States (and, under certain income tax treaties, is attributable to a United States permanent establishment or fixed base maintained by the Non-U.S. holder); | |
● | the Non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met; or | |
● | we are or have been a “United States real property holding corporation” for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the Non-U.S. holder held our common shares, and, in the case where common shares are regularly traded on an established securities market, the Non-U.S. holder has owned, directly or constructively, more than 5% of our common shares at any time within the shorter of the five-year period preceding the disposition or such Non-U.S. holder’s holding period for the common shares. There can be no assurance that our common shares will be treated as regularly traded on an established securities market for this purpose. |
Gain described in the first bullet point above generally will be subject to tax at generally applicable U.S. federal income tax rates. Any gains described in the first bullet point above of a Non-U.S. holder that is a foreign corporation may also be subject to an additional “branch profits tax” at a 30% rate (or lower applicable treaty rate). Gain described in the second bullet point above (and that is not effectively connected with the conduct of a trade or business by the Non-U.S. holder in the United States) will be subject to a flat 30% U.S. federal income tax (or such lower rate as may be specified by an applicable income tax treaty). Non-U.S. holders are urged to consult their tax advisors regarding possible eligibility for benefits under income tax treaties.
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If the third bullet point above applies to a Non-U.S. holder, gain recognized by such holder on the sale, exchange or other disposition of common shares generally will be treated as effectively connected with the conduct of a trade or business within the United States by the Non-U.S. holder and subject to tax at generally applicable U.S. federal income tax rates. In addition, a buyer of common shares from a Non-U.S. holder may be required to withhold U.S. federal income tax at a rate of 15% of the amount realized upon such disposition. We will be classified as a United States real property holding corporation if the fair market value of our “United States real property interests” equals or exceeds 50% of the sum of the fair market value of our worldwide real property interests plus our other assets used or held for use in a trade or business, as determined for U.S. federal income tax purposes.
Redemption of common shares. The characterization for U.S. federal income tax purposes of the redemption of a Non-U.S. holder’s common shares generally will correspond to the U.S. federal income tax characterization of such a redemption of a U.S. holder’s common shares, as described under “U.S. Holders — Redemption of common shares” above, and the consequences of the redemption to the Non-U.S. holder will be as described above under “Non-U.S. Holders — Distributions” and “Non-U.S. Holders — Sale, Taxable Exchange or Other Taxable Disposition of common shares,” as applicable.
Foreign Account Tax Compliance Act. Sections 1471 through 1474 of the Code and the Treasury Regulations and administrative guidance promulgated thereunder (commonly referred as the “Foreign Account Tax Compliance Act” or “FATCA”) generally impose withholding at a rate of 30% in certain circumstances on dividends (including constructive dividends) in respect of, and, after December 31, 2018, gross proceeds from the sale or other disposition of, our securities which are held by or through certain “foreign financial institutions” (including investment funds), unless any such institution (i) enters into, and complies with, an agreement with the IRS to report, on an annual basis, information with respect to interests in, and accounts maintained by, the institution that are owned by certain U.S. persons and by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments, or (ii) if required under an intergovernmental agreement between the United States and an applicable foreign country, reports such information to its local tax authority, which will exchange such information with the U.S. authorities. An intergovernmental agreement between the United States and an applicable foreign country may modify these requirements. Accordingly, the entity through which our securities are held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and, after December 31, 2018, gross proceeds from the sale or other disposition of, our securities held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exceptions will generally be subject to withholding at a rate of 30%, unless such entity either (i) certifies to us or the applicable withholding agent that such entity does not have any “substantial United States owners” or (ii) provides certain information regarding the entity’s “substantial United States owners,” which will in turn be provided to the U.S. Department of Treasury. You are urged to consult your tax advisor regarding the possible implications of FATCA on your investment in our securities.
Information Reporting and Backup Withholding. Information reporting requirements generally will apply to payments of dividends and proceeds from the sale of our securities to Non-U.S. holders that are not exempt recipients (such as corporations). We must report annually to the IRS and to each such holder the amount of dividends or other distributions we pay to such Non-U.S. holder on our common shares and the amount of tax withheld with respect to those distributions, regardless of whether withholding is required. The IRS may make copies of the information returns reporting those dividends and amounts withheld available to the tax authorities in the country in which the Non-U.S. holder resides pursuant to the provisions of an applicable income tax treaty or exchange of information treaty. The gross amount of dividends and proceeds from the disposition of our common shares paid to a Non-U.S. holder that fails to provide the appropriate certification in accordance with applicable U.S. Treasury regulations generally will be subject to backup withholding at the applicable rate.
Information reporting and backup withholding generally are not required with respect to the amount of any proceeds from the sale by a Non-U.S. holder of common shares outside the United States through a foreign office of a foreign broker that does not have certain specified connections to the United States. However, if a Non-U.S. holder sells common shares through a U.S. broker or the U.S. office of a foreign broker, the broker will be required to report to the IRS the amount of proceeds paid to such holder, unless the non-U.S. Holder provides appropriate certification (usually on an IRS Form W-8BEN or W-8BEN-E) to the broker of its status as a Non-U.S. holder or such Non-U.S. holder is an exempt recipient. In addition, for information reporting purposes, certain non-U.S. brokers with certain type of relationships with the United States will be treated in a manner similar to U.S. brokers.
Backup withholding is not an additional tax. Any amounts we withhold under the backup withholding rules may be refunded or credited against the Non-U.S. holder’s U.S. federal income tax liability, if any, by the IRS if the required information is furnished in a timely manner to the IRS.
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The following is, as of the date of this prospectus, a summary of the principal Canadian federal income tax considerations pursuant to the Income Tax Act (Canada) and the regulations thereunder (the “Tax Act”) that generally apply to the acquisition, holding and disposition of common shares by a person who is neither resident nor deemed to be resident in Canada for purposes of the Tax Act, is a resident of the U.S. for purposes of the Canada - U.S. Income Tax Convention (“Treaty”) and acquires a beneficial interest in the common shares (a “U.S. Holder”).
This summary applies only to a U.S. Holder who, at all relevant times, for purposes of the Tax Act:
● | holds the common shares as capital property; | |
● | does not, and is not deemed to, use or hold the common shares in the course of carrying on a business in Canada; | |
● | deals at arm’s length and is not affiliated with us; and | |
● | is a “qualifying person” or otherwise entitled to benefits under the Treaty. |
Special rules, which are not discussed in this summary, may apply to a U.S. Holder that is an insurer that carries on an insurance business in Canada and elsewhere.
This summary is based on the current provisions of the Tax Act, all specific proposals to amend the Tax Act publicly announced by or on behalf of the Minister of Finance (Canada) prior to the date hereof (“Tax Proposals”), and an understanding of the current administrative policies and assessing practices of the Canada Revenue Agency (the “CRA”) made publicly available prior to the date hereof. This summary assumes the Tax Proposals will be enacted in the form proposed, however, no assurance can be given that the Tax Proposals will be enacted in the form proposed, or at all. Except for the Tax Proposals, this summary does not take into account or anticipate any changes in law or administrative policies or assessing practices of the CRA, whether by legislative, governmental or judicial action, nor does it take into account other federal or any provincial, territorial or foreign income tax legislation or considerations, which may differ significantly from those discussed herein.
This summary is not exhaustive of all possible Canadian federal income tax considerations that apply to an investment in common shares. Moreover, the income and other tax consequences of acquiring, holding or disposing of common shares will vary depending on an investor’s particular circumstances. Accordingly, this summary is of a general nature only and is not intended to be, nor should it be construed to be, legal or tax advice to any investor. Consequently, investors should consult their own tax advisors for advice with respect to the income tax consequences of an investment in common shares based on their particular circumstances.
Dividends on common shares
Dividends paid or credited on the common shares (or deemed to be paid or credited on the common shares) to a U.S. Holder will generally be subject to Canadian withholding tax at the rate of 15%.
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Dispositions of common shares
A U.S. Holder will not be subject to tax under the Tax Act on any capital gain realized on a disposition or deemed disposition of common shares (other than a disposition to us, unless purchased by us in the open market in the manner in which shares are normally purchased by any member of the public in the open market, in which case other considerations may arise), unless the common shares are “taxable Canadian property” of the U.S. Holder for purposes of the Tax Act and the U.S. Holder is not entitled to relief under the Treaty.
Generally, the common shares will not constitute “taxable Canadian property” of a U.S. Holder at a particular time provided that the common shares are listed at that time on a “designated stock exchange” for purposes of the Tax Act (which currently includes the TSX-V and Nasdaq), unless at any particular time during the 60-month period that ends at that time both of the following are true:
1. (a) the U.S. Holder, (b) persons with whom the U.S. Holder does not deal with at arm’s length, (c) partnerships in which the U.S. Holder or a person described in (b) holds an interest directly or indirectly through one or more partnerships, or (d) any combination of (a) to (c) owned 25% or more of the issued shares of any class or series of our capital stock; and
2. more than 50% of the fair market value of the common shares was derived directly or indirectly from one or any combination of: (a) real or immovable properties situated in Canada, (b) “Canadian resource properties” (as defined in the Tax Act), (c) “timber resource properties” (as defined in the Tax Act), and (d) options in respect of, or interests in, or for civil law rights in, property in any of the foregoing whether or not the property exists.
Notwithstanding the foregoing, in certain circumstances set out in the Tax Act, common shares may be deemed to be taxable Canadian property. U.S. Holders whose common shares may constitute taxable Canadian property should consult their own tax advisors.
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We have entered into an underwriting agreement with Roth Capital Partners, LLC, acting as the representative of the several underwriters named below, with respect to the common shares subject to this offering. Subject to certain conditions, we have agreed to sell to the underwriters, and the underwriters have severally agreed to purchase, the number of common shares provided below opposite their respective names.
Underwriter | Number of Shares | |||
Roth Capital Partners, LLC | ||||
Noble Capital Markets | ||||
Total |
The underwriters are offering the common shares subject to their acceptance of the common shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the common shares offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the common shares if any such shares are taken. However, the underwriters are not required to take or pay for the common shares covered by the underwriters’ over-allotment option described below.
Over-Allotment Option
We have granted the underwriters an option, exercisable for 45 days from the date of this prospectus, to purchase up to an aggregate of additional common shares to cover over-allotments, if any, at the public offering price set forth on the cover page of this prospectus, less the underwriting discount. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the common shares offered by this prospectus. If the underwriters exercise this option, each underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares proportionate to that underwriter’s initial purchase commitment as indicated in the table above for which the option has been exercised..
Discount, Commissions and Expenses
The underwriters have advised us that they propose to offer the common shares to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $ per share. The underwriters may allow, and certain dealers may reallow, a discount from the concession not in excess of $ per share to certain brokers and dealers. After this offering, the initial public offering price, concession and reallowance to dealers may be changed by the representative. No such change shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common shares are offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters have informed us that they do not intend to confirm sales to any accounts over which they exercise discretionary authority.
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The following table shows the underwriting discount payable to the underwriters by us in connection with this offering. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ over-allotment option to purchase additional shares.
Per share1 | Total Without Exercise of Over- Allotment Option | Total With Exercise of Over- Allotment Option | ||||||||||
Public offering price | $ | $ | $ | |||||||||
Underwriting discount | $ | $ | $ |
(1) | Does not include the warrants to purchase common shares equal to 6.5% of the number of common shares sold in the offering to be issued to the underwriters at the closing. |
We estimate that expenses payable by us in connection with this offering, other than the underwriting discount referred to above, will be approximately $ . We have agreed to reimburse the underwriters for certain out-of-pocket expenses not to exceed $85,000 without our prior approval.
Underwriters’ Warrants
We have also agreed to issue to the underwriters warrants to purchase a number of common shares equal to an aggregate of 6.5% of the common shares sold in this offering. The warrants will have an exercise price equal to 120% of the public offering price of the common shares sold in this offering and may be exercised on a cashless basis. The warrants will expire on the fifth anniversary of the effective date of this offering. The warrants are not redeemable by us. The warrants also provide for one demand registration of the common shares underlying the warrants at our expense, an additional demand at the warrant holder’s expense and unlimited “piggyback” registration rights at our expense with respect to the underlying common shares during the five year period commencing on the date of effectiveness or the commencement of sales of the offering. The warrants will provide for adjustment in the number and price of such warrants (and the common shares underlying such warrants) in the event of recapitalization, merger or other fundamental transaction. The warrants and the underlying common shares have been deemed compensation by FINRA and are therefore subject to FINRA Rule 5110(g)(1). In accordance with FINRA Rule 5110(g)(1), neither the underwriter warrants nor any of our common shares issued upon exercise of the underwriter warrants may be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of such securities by any person for a period of 180 days immediately following the date of effectiveness or commencement of sales of the offering pursuant to which the underwriter warrants are being issued, except the transfer of any security:
● | by operation of law or by reason of our reorganization; | |
● | to any FINRA member firm participating in this offering and the officers or partners thereof, if all securities so transferred remain subject to the lock-up restriction described above for the remainder of the time period; | |
● | if the aggregate amount of our securities held by either an underwriter or a related person do not exceed 1% of the securities being offered; | |
● | that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member manages or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10% of the equity in the fund; or | |
● | the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction set forth above for the remainder of the time period. |
In addition, in accordance with FINRA Rule 5110(f)(2)(G), the underwriter warrants may not contain certain terms.
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No Public Market
Prior to this offering, there has not been a public market for our common shares in the United States and the initial public offering price for our common shares will be determined through negotiations between us and the underwriters. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development, the trading prices of our common shares on the TSX-V and other factors deemed relevant.
No assurance can be given that the initial public offering price will correspond to the price at which our common shares will trade in the public market subsequent to this offering or that an active trading market for our common shares will develop and continue after this offering.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”), and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.
Lock-up Agreements
We, our officers and directors and certain of our shareholders have agreed, subject to limited exceptions, for a period of 180 days after the date of the underwriting agreement, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any common shares or any option, warrant, right or other security exercisable or exchangeable for, convertible into or otherwise giving the holder thereof the right to obtain common shares, subject to certain exceptions.
Price Stabilization, Short Positions and Penalty Bids
In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act:
● | Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. | |
● | Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market. | |
● | Syndicate covering transactions involve purchases of common shares in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. | |
● | Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common shares originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
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These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common shares or preventing or retarding a decline in the market price of the common shares. As a result, the price of our common shares may be higher than the price that might otherwise exist in the open market. Neither we nor the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common shares. In addition, neither we nor the underwriters make any representations that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.
Passive Market Making
In connection with this offering, the underwriters and any selling group members may engage in passive market making transactions in our common shares on The NASDAQ Stock Market in accordance with Rule 103 of Regulation M under the Exchange Act, during a period before the commencement of offers or sales of common shares and extending through the completion of the distribution. A passive market maker must display its bid at a price not in excess of the highest independent bid of that security. However, if all independent bids are lowered below the passive market maker’s bid that bid must then be lowered when specified purchase limits are exceeded.
Listing and Transfer Agent
Our common shares are 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”. Our U.S. transfer agent and registrar for our common shares is VStock Transfer, LLC. Our Canadian transfer agent and registrar for our common shares and Restricted Shares is TSX Trust Company.
Electronic Distribution
This prospectus in electronic format may be made available on websites or through other online services maintained by one or more of the underwriters, or by their affiliates. Other than this prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter, and should not be relied upon by investors.
Other
From time to time, certain of the underwriters and/or their affiliates have provided, and may in the future provide, various investment banking and other financial services for us for which services they have received and, may in the future receive, customary fees. In the course of their businesses, the underwriters and their affiliates may actively trade our securities or loans for their own account or for the accounts of customers, and, accordingly, the underwriters and their affiliates may at any time hold long or short positions in such securities or loans. Except for services provided in connection with this offering, no underwriter has provided any investment banking or other financial services to us during the 180-day period preceding the date of this prospectus and we do not expect to retain any underwriter to perform any investment banking or other financial services for at least 90 days after the date of this prospectus.
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NOTICE TO INVESTORS
In the United Kingdom
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any securities which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State except that an offer to the public in that Relevant Member State of any such securities may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
(a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43 million and (3) an annual net turnover of more than €50 million, as shown in its last annual or consolidated accounts;
(c) by the underwriter to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or
(d) in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of these securities shall result in a requirement for the publication by the issuer or the underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an “offer to the public” in relation to any of the securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any such securities to be offered so as to enable an investor to decide to purchase any such securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
Each underwriter has represented, warranted and agreed that:
(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the FSMA)) received by it in connection with the issue or sale of any of the securities in circumstances in which section 21(1) of the FSMA does not apply to the issuer; and
(b) it has complied with and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the securities in, from or otherwise involving the United Kingdom.
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European Economic Area
In particular, this document does not constitute an approved prospectus in accordance with European Commission’s Regulation on Prospectuses no. 809/2004 and no such prospectus is to be prepared and approved in connection with this offering. Accordingly, in relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (being the Directive of the European Parliament and of the Council 2003/71/EC and including any relevant implementing measure in each Relevant Member State) (each, a Relevant Member State), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) an offer of securities to the public may not be made in that Relevant Member State prior to the publication of a prospectus in relation to such securities which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of securities to the public in that Relevant Member State at any time:
● | to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; | |
● | to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43 million; and (3) an annual net turnover of more than €50 million, as shown in the last annual or consolidated accounts; or | |
● | in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive. |
For the purposes of this provision, the expression an “offer of securities to the public” in relation to any of the securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe for the securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State. For these purposes the shares offered hereby are “securities.”
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Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Cautionary Statement Regarding Forward-Looking Statements.”
The validity of the securities that may be offered by this prospectus has been passed upon for us by Ellenoff Grossman & Schole LLP, New York, New York. Lowenstein Sandler LLP, New York, New York, is acting as counsel for the underwriters in connection with this offering.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Prior to the Qualifying Transaction, Collins Barrow Toronto LLP was engaged as WB III Acquisition Corp.’s (“WB III”) independent accountants with the recommendation and approval of WB III’s audit committee. Upon consummation of the Qualifying Transaction, Collins Barrow Toronto LLP resigned as our independent accountants on February 17, 2015 and we engaged KPMG LLP, the Canadian member firm of KPMG International, (“KPMG Canada”) as our independent registered public accounting firm on February 17, 2015 to audit our financial statements as of December 31, 2014 and the year ended December 31, 2014.
On May 1, 2015, we dismissed KPMG Canada as our independent accountants with the recommendation and approval of our audit committee and we engaged Collins Barrow Toronto LLP as our independent registered public accounting firm on December 16, 2015 to audit our financial statements as of December 31, 2015 and for the year then ended. We engaged Baker Tilly Virchow Krause LLP to audit our consolidated financial statements as of and for the year ended December 31, 2014, which had been previously audited by KPMG Canada.
The reports of Collins Barrow Toronto LLP as independent accountants to WB III prior to the Qualifying Transaction on WB III’s consolidated financial statements did not contain any adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principles.
During the period beginning June 7, 2013 to December 23, 2014 (the date of the Qualifying Transaction), Collins Barrow Toronto LLP did not have any disagreement with WB III on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of Collins Barrow Toronto LLP, would have caused it to make reference to the subject matter of the disagreement in connection with its report on our financial statements.
The report of KPMG Canada on our consolidated financial statements did not contain any adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principles.
During the year ended December 31, 2014, KPMG Canada did not have any disagreement with us on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement, if not resolved to the satisfaction of KPMG Canada, would have caused it to make reference to the subject matter of the disagreement in connection with its report on our financial statements.
We delivered a copy of this disclosure to Collins Barrow Toronto LLP and KPMG Canada and requested that they furnish us a letter addressed to the SEC stating whether they agree with the above statements. In their respective letters to the SEC each dated November 10, 2016, attached as Exhibit 16.1 and Exhibit 16.2, respectively, to the Registration Statement of which this prospectus is a part, Collins Barrow Toronto LLP and KPMG Canada state that they agree with the statements above concerning their respective firm.
The consolidated financial statements as of and for the year ended December 31, 2014 for Frankly Inc. and for the period beginning January 1, 2015 to August 25, 2015 of Frankly Media (formerly Gannaway Web Holdings, LLC d/b/a Worldnow) included in this prospectus have been audited by Baker Tilly Virchow Krause LLP, independent registered public accounting firm, and independent accountants, repectively, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
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The consolidated financial statements as of and for the year ended December 31, 2015 for Frankly Inc. included in this prospectus have been audited by Collins Barrow Toronto LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements as of and for the year ended December 31, 2014 for Gannaway Web Holdings, LLC, d/b/a Worldnow included in this prospectus have been audited by KPMG LLP (“KPMG”), who acted as independent accountants for Gannaway Web Holdings, LLC, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
Frankly Media LLC, formerly Gannaway Web Holdings, LLC has agreed to indemnify and hold KPMG harmless against and from any and all legal costs and expenses incurred by KPMG in successful defense of any legal action or proceeding that arises as a result of KPMG’s consent to the inclusion of its audit report on Gannaway Web Holdings, LLC’s financials statements as of and for the year ended December 31, 2014 included in this prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to this offering of our securities. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement, some items of which are contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our securities, we refer you to the registration statement, including the exhibits and schedules thereto. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete. If a contract or document has been filed as an exhibit to the registration statement, please see the copy of the contract or document that has been filed. Each statement in this prospectus relating to a contract or document filed as an exhibit is qualified in all respects by the filed exhibit. The exhibits to the registration statement should be referenced for the complete contents of these contracts and documents. You may obtain copies of this information by mail from the Public Reference Section of the SEC, 100 F Street, N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
As a result of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act and will file periodic reports and other information with the SEC. These periodic reports and other information will be available for inspection and copying at the SEC’s public reference facilities and the website of the SEC referred to above.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||
FRANKLY INC and Subsidiaries | ||
Reports of Independent Registered Public Accounting Firms | F-2 | |
Consolidated Balance Sheets | F-4 | |
Consolidated Statements of Operations and Comprehensive Loss | F-5 | |
Consolidated Statements of Shareholder’s Equity | F-6 | |
Consolidated Statements of Cash Flows | F-7 | |
Notes to Consolidated Financial Statements | F-8 | |
GANNAWAY WEB HOLDINGS, LLC | ||
Independent Auditor’s Reports | F-34 | |
Balance Sheets | F-36 | |
Statements of Income | F-37 | |
Statements of Preferred Units and Members’ Deficit | F-38 | |
Statements of Cash Flows | F-39 | |
Notes to Financial Statements | F-40 |
F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Audit Committee and Board of Directors of Frankly Inc.
We have audited the accompanying consolidated balance sheet of Frankly Inc. and its subsidiaries as of December 31, 2015, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Frankly Inc. and its subsidiaries as of December 31, 2015 and the results of its operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, since its incorporation the company has suffered recurring losses from operations and has negative cash flows from operating activities. These factors raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The consolidated financial statements as at and for the year ended December 31, 2014 were audited by another auditor who expressed an unmodified opinion on those financial statements.
/s/ Collins Barrow Torronto LLP | |
Chartered Professional Accountants | |
Licensed Public Accountants | |
November 10, 2016 | |
Toronto, Ontario |
Toronto, Ontario
F-2 |
Frankly Inc. and Subsidiaries
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders, Audit Committee and Board of Directors
Frankly Inc. and Subsidiaries
San Francisco, CA
We have audited the accompanying consolidated balance sheet of Frankly Inc. and its subsidiaries as of December 31, 2014, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Frankly Inc. and its subsidiaries as of December 31, 2014 and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles in the United States of America.
/s/ Baker Tilly Virchow Krause, LLP | |
Minneapolis, Minnesota | |
November 10, 2016 |
F-3 |
Consolidated Balance Sheets
December 31, | September 30, | |||||||||||
2014 | 2015 | 2016 | ||||||||||
(Unaudited) | ||||||||||||
Assets | ||||||||||||
Current Assets | ||||||||||||
Cash and cash equivalents | $ | 28,839,964 | $ | 7,554,128 | $ | 2,803,013 | ||||||
Accounts receivable, net | 11,903 | 3,028,034 | 2,570,171 | |||||||||
Prepaid expenses and other current assets | 145,380 | 1,467,934 | 706,049 | |||||||||
Total Current Assets | 28,997,247 | 12,050,096 | 6,079,233 | |||||||||
Property & equipment, net | 72,207 | 2,133,372 | 1,635,445 | |||||||||
Software development costs, net | - | 4,366,338 | 6,495,704 | |||||||||
Intangible assets, net | - | 8,508,888 | 7,853,886 | |||||||||
Goodwill | - | 10,755,581 | 10,755,581 | |||||||||
Other assets | 87,820 | 364,985 | 352,005 | |||||||||
Total Assets | $ | 29,157,274 | $ | 38,179,260 | $ | 33,171,854 | ||||||
Liabilities and Shareholders’ Equity | ||||||||||||
Current Liabilities | ||||||||||||
Accounts payable | $ | 181,481 | $ | 2,164,597 | $ | 3,542,630 | ||||||
Accrued expenses | 2,028,717 | 1,910,640 | 833,414 | |||||||||
Revolving credit facility | - | 1,950,000 | - | |||||||||
Capital leases, current portion | - | 195,940 | 175,942 | |||||||||
Deferred revenue | - | 82,439 | 28,580 | |||||||||
Due to related parties | 7,781 | 85,537 | 46,571 | |||||||||
Total Current Liabilities | 2,217,979 | 6,389,153 | 4,627,137 | |||||||||
Promissory notes, net | - | 15,000,000 | - | |||||||||
Non-revolving credit facility, net of discount | - | - | 11,623,739 | |||||||||
Capital leases, non-current portion | - | 208,083 | 80,461 | |||||||||
Deferred rent | - | 32,410 | 44,563 | |||||||||
Other liabilities | - | 49,566 | 75,104 | |||||||||
Total Liabilities | 2,217,979 | 21,679,212 | 16,451,004 | |||||||||
Commitments and Contingencies (Note 9) | ||||||||||||
Shareholders’ Equity | ||||||||||||
Common shares, no par value, unlimited shares authorized, 21,695,321, 21,998,304 and 32,893,797 shares outstanding as of December 31, 2014 and 2015, and September 30, 2016 (unaudited), respectively | - | - | - | |||||||||
Class A restricted voting shares, no par value, unlimited shares authorized, 362,401, 10,095,027 and 1,752,934 shares outstanding as of December 31, 2014 and 2015, and September 30, 2016 (unaudited), respectively | - | - | - | |||||||||
Additional paid-in capital | 45,144,563 | 59,462,420 | 64,220,904 | |||||||||
Accumulated deficit | (18,208,161 | ) | (42,931,749 | ) | (47,465,106 | ) | ||||||
Accumulated other comprehensive (loss) income | 2,893 | (30,623 | ) | (34,948 | ) | |||||||
Total Shareholders' Equity | 26,939,295 | 16,500,048 | 16,720,850 | |||||||||
Total Liabilities and Shareholders’ Equity | $ | 29,157,274 | $ | 38,179,260 | $ | 33,171,854 |
See accompanying notes to the consolidated financial statements.
F-4 |
Consolidated Statements of
Operations and Comprehensive Loss
Year Ended December 31, | Nine Months Ended September 30 | |||||||||||||||
2014 | 2015 | 2015 | 2016 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Total Revenue | $ | 172,377 | $ | 6,877,671 | $ | 1,554,571 | $ | 16,664,579 | ||||||||
Costs and operating expenses: | ||||||||||||||||
Cost of revenue (excluding depreciation and amortization) | 161,102 | 1,408,625 | 357,203 | 5,758,189 | ||||||||||||
General and administrative (excluding depreciation and amortization) | 4,696,573 | 7,524,273 | 4,828,757 | 6,372,160 | ||||||||||||
Selling and marketing | 3,473,762 | 1,552,549 | 808,469 | 2,249,986 | ||||||||||||
Research and development (excluding depreciation and amortization) | 2,200,669 | 6,023,697 | 3,801,965 | 2,916,119 | ||||||||||||
Depreciation and amortization | 48,009 | 1,156,143 | 343,458 | 2,447,265 | ||||||||||||
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 | ||||||||||||
Loss from operations | (12,906,027 | ) | (24,533,377 | ) | (9,554,119 | ) | (3,786,712 | ) | ||||||||
Non-operating income | - | (86,767 | ) | - | - | |||||||||||
Foreign exchange (gain) loss | 15,096 | (23,442 | ) | (15,484 | ) | (3,061 | ) | |||||||||
Interest expense, net | 180,446 | 300,420 | 76,477 | 749,706 | ||||||||||||
Loss before income tax expense | (13,101,569 | ) | (24,723,588 | ) | (9,615,112 | ) | (4,533,357 | ) | ||||||||
Income tax expense | - | - | - | - | ||||||||||||
Net Loss | $ | (13,101,569 | ) | $ | (24,723,588 | ) | $ | (9,615,112 | ) | $ | (4,533,357 | ) | ||||
Other Comprehensive Net (Loss) Income | ||||||||||||||||
Foreign currency translation | 2,893 | (33,516 | ) | (22,020 | ) | (4,325 | ) | |||||||||
Comprehensive Net Loss | $ | (13,098,676 | ) | $ | (24,757,104 | ) | $ | (9,637,132 | ) | $ | (4,537,682 | ) | ||||
Basic and Diluted Net Loss Per Share | $ | (1.58 | ) | $ | (0.97 | ) | $ | (0.41 | ) | $ | (0.14 | ) | ||||
Basic and Diluted Weighted-Average Common and Class A Restricted Voting Shares Outstanding | 8,277,570 | 25,574,673 | 23,386,683 | 32,363,581 |
See accompanying notes to the consolidated financial statements.
F-5 |
Consolidated Statements of
Shareholders’ Equity
Common Shares | Class A Restricted Voting Shares | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Shareholders' Equity | |||||||||||||||||||
Balance, December 31, 2013 | 3,995,598 | - | $ | 6,002,907 | $ | (5,106,592 | ) | $ | - | $ | 896,315 | |||||||||||||
Issuance of common shares, net of issuance costs | 13,830,324 | - | 30,755,000 | - | - | 30,755,000 | ||||||||||||||||||
Exchange of common shares for restricted voting shares | (362,401 | ) | 362,401 | - | - | - | - | |||||||||||||||||
Recapitalization | 737,715 | - | - | - | - | - | ||||||||||||||||||
Conversion of convertible promissory notes | 3,494,085 | - | 8,350,619 | - | - | 8,350,619 | ||||||||||||||||||
Stock-based compensation | - | - | 36,037 | - | - | 36,037 | ||||||||||||||||||
Net loss | - | - | - | (13,101,569 | ) | - | (13,101,569 | ) | ||||||||||||||||
Other comprehensive income | - | - | - | - | 2,893 | 2,893 | ||||||||||||||||||
Balance, December 31, 2014 | 21,695,321 | 362,401 | 45,144,563 | (18,208,161 | ) | 2,893 | 26,939,295 | |||||||||||||||||
Exercise of options | 37,959 | - | 44,807 | - | - | 44,807 | ||||||||||||||||||
Vesting of restricted share units | 30,000 | - | - | - | - | - | ||||||||||||||||||
Exchange of restricted voting shares for common shares | 39,578 | (39,578 | ) | - | - | - | - | |||||||||||||||||
Shares issued in acquisition of Worldnow | 195,446 | 9,772,204 | 13,388,640 | - | - | 13,388,640 | ||||||||||||||||||
Share issuance costs | - | - | (166,506 | ) | - | - | (166,506 | ) | ||||||||||||||||
Stock-based compensation | - | - | 1,050,916 | - | - | 1,050,916 | ||||||||||||||||||
Net loss | - | - | - | (24,723,588 | ) | - | (24,723,588 | ) | ||||||||||||||||
Other comprehensive loss | - | - | - | - | (33,516 | ) | (33,516 | ) | ||||||||||||||||
Balance, December 31, 2015 | 21,998,304 | 10,095,027 | 59,462,420 | (42,931,749 | ) | (30,623 | ) | 16,500,048 | ||||||||||||||||
Issuance of common shares, net of issuance costs | 2,553,400 | - | 977,278 | - | - | 977,278 | ||||||||||||||||||
Issuance of warrants | - | - | 2,921,407 | - | - | 2,921,407 | ||||||||||||||||||
Exchange of restricted voting shares for common shares | 8,342,093 | (8,342,093 | ) | - | - | - | - | |||||||||||||||||
Stock-based compensation | - | - | 859,799 | - | - | 859,799 | ||||||||||||||||||
Net loss | - | - | - | (4,533,357 | ) | - | (4,533,357 | ) | ||||||||||||||||
Other comprehensive loss | - | - | - | - | (4,325 | ) | (4,325 | ) | ||||||||||||||||
Balance, September 30, 2016 (unaudited) | 32,893,797 | 1,752,934 | $ | 64,220,904 | $ | (47,465,106 | ) | $ | (34,948 | ) | $ | 16,720,850 |
See accompanying notes to the consolidated financial statements.
F-6 |
Consolidated Statements of
Cash Flows
Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2015 | 2015 | 2016 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net loss | $ | (13,101,569 | ) | $ | (24,723,588 | ) | $ | (9,615,112 | ) | $ | (4,533,357 | ) | ||||
Adjustments to reconcile net loss to net cash flows used in operating activities: | ||||||||||||||||
Depreciation and amortization | 48,009 | 1,156,143 | 343,458 | 2,447,265 | ||||||||||||
Amortization of debt discount | - | - | - | 45,146 | ||||||||||||
Stock-based compensation expense | 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 convertible debt | 1,670,173 | - | - | - | ||||||||||||
Interest expense on convertible debt | 180,446 | - | - | - | ||||||||||||
Other non-cash asset writeoff | - | - | - | 178,147 | ||||||||||||
Unrealized foreign exchange loss and other | (13,376 | ) | - | - | - | |||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Accounts receivable | 2,893 | 492,002 | 1,110,565 | 457,862 | ||||||||||||
Prepaid expenses and other current assets | 37,769 | (258,335 | ) | 31,821 | 592,949 | |||||||||||
Other assets | (45,788 | ) | (66,013 | ) | (32,962 | ) | 12,980 | |||||||||
Accounts payable | 162,487 | (1,635,436 | ) | (1,806,772 | ) | 1,373,998 | ||||||||||
Accrued expenses | 2,028,717 | (118,077 | ) | 45,248 | (1,077,226 | ) | ||||||||||
Deferred revenue | - | (1,417,561 | ) | (732,409 | ) | (53,858 | ) | |||||||||
Due to related parties | (49,785 | ) | 77,756 | 510,010 | (38,966 | ) | ||||||||||
Deferred rent and other liabilities | (19,775 | ) | 81,975 | 57,668 | 37,692 | |||||||||||
Severance liability | - | (1,000,000 | ) | (1,000,000 | ) | - | ||||||||||
Net cash provided by (used in) operating activities | (9,060,948 | ) | (14,138,298 | ) | (10,311,102 | ) | 303,524 | |||||||||
Cash flows from investing activities | ||||||||||||||||
Acquisition of Worldnow, net of cash acquired | - | (4,512,698 | ) | (4,512,698 | ) | - | ||||||||||
Capitalized software costs | - | (834,073 | ) | (158,269 | ) | (3,384,631 | ) | |||||||||
Purchases of property & equipment | (51,347 | ) | (399,392 | ) | (386,748 | ) | (42,275 | ) | ||||||||
Purchases of intangible assets | - | (278,275 | ) | (278,275 | ) | - | ||||||||||
Proceeds from sale of intangible assets or equipment | - | 50,000 | - | 2,111 | ||||||||||||
Other | - | 1,189 | - | - | ||||||||||||
Net cash acquired in recapitalization | 112,742 | - | - | - | ||||||||||||
Net cash (used in) provided by investing activities | 61,395 | (5,973,249 | ) | (5,335,990 | ) | (3,424,795 | ) | |||||||||
Cash flows from financing activities | ||||||||||||||||
Revolving credit facility payments | - | (950,000 | ) | (600,000 | ) | (1,950,000 | ) | |||||||||
Transaction costs on recapitalization | (112,742 | ) | - | - | ||||||||||||
Capital lease payments | - | (69,150 | ) | (17,176 | ) | (147,619 | ) | |||||||||
Proceeds from issuance of common stock | 32,881,843 | 44,807 | 45,879 | - | ||||||||||||
Stock issuance costs | (2,126,843 | ) | (166,506 | ) | (177,972 | ) | (22,722 | ) | ||||||||
Proceeds from issuance of debt | 6,500,000 | - | - | 500,000 | ||||||||||||
Net cash (used in) provided by financing activities | 37,142,258 | (1,140,849 | ) | (749,269 | ) | (1,620,341 | ) | |||||||||
Effect of exchange rate changes on cash | 15,691 | (33,440 | ) | (31,500 | ) | (9,502 | ) | |||||||||
Net change in cash and cash equivalents | 28,158,396 | (21,285,836 | ) | (16,427,861 | ) | (4,751,114 | ) | |||||||||
Cash and cash equivalents at beginning of period | 681,568 | 28,839,964 | 28,839,964 | 7,554,127 | ||||||||||||
Cash and cash equivalents at end of period | $ | 28,839,964 | $ | 7,554,128 | $ | 12,412,103 | $ | 2,803,013 | ||||||||
Supplemental cash flow disclosure | ||||||||||||||||
Cash paid for interest | $ | - | $ | 303,891 | $ | 15,811 | $ | 714,554 | ||||||||
Cash paid for income taxes | 800 | 45,780 | 28,265 | 54,114 | ||||||||||||
Increase in additional paid-in capital from convertible notes | 8,350,619 | - | - | - | ||||||||||||
Exchange of promissory notes for common shares | - | - | - | 1,000,000 | ||||||||||||
Shares issued in acquisition of Worldnow | - | 13,388,640 | 13,388,640 | - | ||||||||||||
Promissory notes issued in acquisition of Worldnow | $ | - | $ | 15,000,000 | $ | 15,000,000 | $ | - |
See accompanying notes to the consolidated financial statements.
F-7 |
Notes to Consolidated Financial Statements
1. | Description of Business and Going Concern |
Organization
Frankly Inc. (Frankly), has been operating since the incorporation of its predecessor, TicToc Planet Inc. (TicToc), on September 10, 2012. These consolidated financial statements include Frankly and its subsidiaries (Frankly Co. and Frankly Media LLC), together referred to as the "Company.” The Company provides an integrated software platform for brands and media companies primarily in the United States to create, distribute, analyze and monetize their content across all of their digital properties on web, mobile, and television.
As described in Note 3, (i) on December 23, 2014, the Company became a publicly-traded company when TicToc merged with WB III Subco Inc., a wholly-owned subsidiary of WB III Acquisition Corp (WB III) in a transaction referred to as the Recapitalization; and (ii) on August 25, 2015, the Company completed the purchase of the outstanding units of Gannaway Web Holdings LLC, operating as Worldnow, in a transaction referred to as the acquisition of Worldnow.
Business and Reportable Segment
The Company has fully integrated its acquisition of Worldnow and operates under one reportable segment. Frankly is a solutions service provider which provides digital publishing software as a service and related advertising services for local media sites on the internet. Frankly’s software enables site owners to design, build, and host sites to publish local content and information on digital platforms.
Frankly’s website publishing and management system allows the customer to manage media assets on all digital platforms and interact with its consumers. Frankly also sources national and local advertising for its customers to distribute over multiple consumer devices.
Going Concern
These consolidated financial statements have been prepared on the assumption that the Company is a going concern, which contemplates the realization of its assets and the settlement of its liabilities in the normal course of operations.
As of September 30, 2016, the Company has an accumulated deficit of $47.5 million, representative of recurring losses since inception. Additionally, the Company had not generated positive cash flow from operations since inception, until the third quarter of 2016. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is ultimately dependent upon its 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, the Company will likely need additional cash to meet its needs in the next 12 months. In December 2016, the Company’s cash position was significantly improved with the closing of (i) SVB Line of Credit, (ii) December Private Placement, and (iii) the Raycom Advance. However, there can be no assurances that the Company will be successful in achieving sustainable positive cash flow from operations or that it will be able to raise additional cash needed to finance operations, if required. These consolidated financial statements do not include any adjustments related to the carrying values and classifications of assets and liabilities that would be necessary should the Company be unable to continue as a going concern.
2. | Summary of Significant Accounting Policies |
Basis of Presentation and Use of Estimates
The accompanying consolidated audited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP), as defined in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 205 – Presentation of Financial Statements.
F-8 |
The accompanying balance sheet as of September 30, 2016, the consolidated statements of operations and comprehensive loss and cash flows for the nine months ended September 30, 2015 and 2016, and the consolidated statements of shareholders’ equity as of September 30, 2016, are unaudited. The consolidated financial data and other information disclosed in these notes to the consolidated financial statements related to September 30, 2016, and the nine months ended September 30, 2015 and 2016, are also unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position as of September 30, 2016, and the results of its operations and cash flows for the nine months ended September 30, 2015 and 2016, respectively. The results for the nine months ended September 30, 2016 are not necessarily indicative of results to be expected for the year ending December 31, 2016, or for any other interim period or for any future year. The Company’s business is generally not impacted by seasonality, with the exception of advertising revenue. Revenues from 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.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Although these estimates are based on management’s knowledge of current events and actions it may undertake in the future, these estimates may ultimately differ from actual results. Significant items subject to such estimates and assumptions include: (i) the useful lives and expected future cash flows of long-lived assets, including capitalized software costs and other intangibles, (ii) the valuation of assets acquired in business combinations, (iii) share-based compensation, and (iv) the fair value of the Company’s reporting unit.
Basis of Consolidation
These consolidated financial statements include the accounts of Frankly Inc. and its wholly-owned subsidiaries Frankly Co. and Frankly Media LLC. Subsidiaries are consolidated from the date on which control is transferred to the Company. All intercompany balances and transactions have been eliminated on consolidation.
Revenue Recognition
Revenue is measured as the fair value of the consideration received or receivable, and represents amounts receivable for services rendered. The Company’s primary sources of revenue are license fees for the use of its content management system and video software, and digital advertising revenue. The Company begins to recognize revenue when all of the following criteria under ASC 605-10 – Revenue Recognition, are met: (i) the Company has 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) the Company delivers the specified services or products; and (iv) collection is reasonably assured.
The Company accounts for the license fees for the use of its content management system in accordance with ASC 605-25 – Multiple Element Arrangements. License fees and maintenance (post-contract support) relating to the Company’s video software are accounted for in accordance with ASC 985-605 – Certain Revenue Arrangements that Include Software Elements. As video software is accounted for in accordance with the software accounting guidance, the Company allocates 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 — The Company enters into license agreements with customers for its content management system, video software, and mobile applications. These license agreements, generally non-cancellable and multiyear, provide the customer with the right to use the Company’s 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 contact. These fees are recognized in full on the date the customer has completed their migration off of the Company’s solutions and there is no continuing service obligation to the customer. |
F-9 |
● | Advertising (National Advertising) — Under national advertising agreements with advertisers, the Company sources, creates, and places advertising campaigns that run across the Company’s network of customers. National advertising revenue, net of third-party costs, is shared with customers based on their respective contractual agreements. The Company invoices national advertising amounts due from advertisers and remits 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. The Company reports revenue earned through national advertising agreements on a net basis in accordance with ASC Subtopic 605-45, Revenue Recognition - Principal Agent Considerations because the Company does not bear the risk of loss in the arrangements with its customers. Beginning in the second quarter of 2016, the Company began amending certain advertising contracts with its customers to take on additional inventory and credit risk. Revenue recognized under these contracts was previously accounted for on a net basis due to the Company being identified as an agent. Subsequent to the amendments noted above, the Company 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. | |
● | Advertising (Local Advertising) — Under local advertising agreements with customers, the Company provides 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. | |
● | Usage Fees — The Company charges its customers for the optional use of its content delivery network to stream and store videos. The revenue is recognized as earned based on the actual usage because it has stand-alone value and delivery is in control of the customer. The Company also charges its customers for the use of its ad serving platform to serve ads under local advertising campaigns. The Company reports revenue as earned based on the actual usage. | |
● | Professional Services and other — Professional services consist primarily of installation and website design services. Installation fees are contracted on a fixed-fee basis. The Company recognizes 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 the Company performs the services. |
Business Combinations
A business acquired is reflected in the results of the Company effective from its date of acquisition through the end of the reporting period. The Company applies the provisions of ASC Topic 805, Business Combinations, in the accounting for its acquisitions. It requires the Company to recognize separately from goodwill the identifiable assets acquired and the liabilities assumed at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Company’s consolidated statements of operations and comprehensive loss.
The determination of estimated fair values of acquired intangible assets, as well as the useful economic life ascribed to finite lived intangible assets, requires the use of significant judgment. The use of different estimates and assumptions to those used by the Company could result in a materially different valuation of acquired intangible assets, which could have a material effect on the Company’s consolidated results of operations.
F-10 |
Capitalization of Software Development Costs
The Company accounts for its software development costs as internal-use software in accordance with ASC 350-40 – Intangibles, Goodwill and other Internal-Use Software because software usage by its 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. During the years ended December 31, 2014 and 2015 and the nine months ended September 30, 2015 and 2016, the Company capitalized $0, $834,073, $158,269 and $3,384,631, respectively, of combined internal and external costs related to the application development stage. 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, the Company reassesses the useful life considering technology, obsolescence, and other factors.
The Company periodically reviews the carrying amount of its 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, the Company 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.
Research and Development Costs
Research and development expenses consist primarily of compensation-related expenses to employees and non-employee contractor costs 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.
Impairments and Fair Value Measurements
Goodwill Impairment — The Company recorded goodwill of approximately $22.8 million in its acquisition of Worldnow (Note 3). The Company uses a two-step process to evaluate its 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. The Company has one reporting unit, which is the same as its 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 the Company’s annual goodwill impairment testing as of December 31, 2015, the Company 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. The Company bases its fair value estimates on assumptions that are consistent with information used by the business for planning purposes and that it believes 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.
F-11 |
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. During the year ended December 31, 2015, the Company recorded an impairment charge of $194,985 related to a joint licensing agreement (Note 5).
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, the Company first compares 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.
Fair Value Measurements — The Company follows 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 its testing of goodwill and intangible assets for impairment, the Company determines the fair value of its 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
The Company records compensation costs related to stock-based awards in accordance with ASC 718, Compensation—Stock Compensation, whereby the Company measures 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. The Company utilizes 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 the Company’s 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. The Company has not historically issued any dividends and does not expect to in the near future. There was 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. See Note 7 for more information about the Company’s stock-based compensation for the periods presented.
F-12 |
Cash and Cash Equivalents — The Company considers all short-term, highly-liquid investments that are both readily convertible to cash and have an original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents for any of the periods presented. Cash is held in the custody of several financial institutions. The Company seeks to mitigate credit risk by depositing funds only with major financial institutions.
Accounts Receivable and Concentration – Accounts receivable are amounts due from customers for services performed in the ordinary course of business and are presented net of an allowance for doubtful accounts. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is regularly evaluated by the Company for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. Accounts receivable are considered past due when not paid by the due date agreed upon with the customer, which ranges from 15 to 60 days beyond the invoice date. The Company does not accrue interest on past due accounts receivable. Receivables are written off only after all collection attempts have failed and are based on individual credit evaluation and the specific circumstances of the customer. The allowance for doubtful accounts was $0, $57,723 and $29,974 at December 31, 2014 and 2015 and September 30, 2016, respectively.
Accounts receivable are subject to credit risk and at December 31, 2015 and September 30, 2016, two customers each accounted for greater than 10% of the Company’s accounts receivable balance. In total, these two customers accounted for 36% and 22% of the Company’s accounts receivable balance at December 31, 2015 and September 30, 2016, respectively. Additionally, approximately 36% and 42% of our revenue for the year ended December 31, 2015 and nine months ended September 30, 2016 was generated from our three largest customers, respectively, each accounted for greater than 10% of the Company’s total revenue.
Income Taxes — Deferred income tax assets and liabilities are determined based on temporary differences between the financial statement and income tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted income tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established to the extent necessary to reduce deferred income tax assets to amounts that more likely than not will be realized.
The Company accounts for uncertain tax positions using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax benefits that meet the more-likely-than-not recognition threshold should be measured as the largest amount of tax benefits, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement in the consolidated financial statements. It is the Company’s policy to recognize interest and penalties related to income tax matters in income tax expense.
Property and Equipment — Property and equipment are measured at cost less accumulated depreciation. Property and equipment acquired in business combinations are measured at fair value less accumulated depreciation.
Depreciation is recognized on a straight-line basis over estimated useful lives as follows:
● | Leasehold improvements | Lesser of 10 years or remaining life of the lease | |||
● | Computer equipment | 2 to 5 years | |||
● | Office equipment and furniture | 5 to 7 years |
Stock Issuance Costs — The Company charges incremental costs incurred in respect of raising capital against the equity proceeds raised, including legal, accounting, agent and investment banking fees.
Foreign Currency — The local currency of Frankly Inc., the parent holding entity, is the Canadian dollar; however, the Company’s functional currency is the U.S. dollar. The assets and liabilities of the holding entity are translated into the Company’s reporting currency using the exchange rate at the reporting date except for shareholders’ equity, which is translated using historical rates. The income and expenses of the holding entity are translated into the Company’s reporting currency at average exchange rates prevailing throughout the reporting period. The gains or losses resulting from such translation are reported as other comprehensive income or loss. A transaction gain or loss realized upon settlement of a foreign currency transaction generally will be included in the consolidated statement of operations and comprehensive loss for the period in which the transaction is settled.
F-13 |
Earnings (Loss) Per Share—Basic earnings (loss) per share is calculated in accordance with ASC 260, Earnings per Share, using the weighted-average number of common shares outstanding during each period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. For purposes of this calculation, stock options, warrants and restricted stock units (RSUs) are considered to be potential common shares and are only included in the calculation of diluted earnings (loss) per share when their effect is dilutive. For the years ended December 31, 2014 and 2015 and the nine months ended September 30, 2015 and 2016, 996,707, 3,001,791, 2,613,876 and 20,408,322, potential common shares, respectively, were omitted from the calculation of loss per share because their effect was anti-dilutive.
Accounts Payable and Accrued Expenses – Accounts payable consists of trade accounts payable to vendors as well as amounts due to customers under national advertising arrangements. Accrued expenses consists of accrued compensation and benefits, accrued sales and use tax settlement, accrual for amounts due to customers under national advertising arrangements and accrued professional fees including audit, tax and legal.
Other Assets and Other Liabilities — Other assets include rental deposits and long-term portion of unbilled revenue and other liabilities include deposits related to subleases.
Recently Issued 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 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 the Company in 2018 and early application is permitted (unless we choose to delay until 2019 as permitted under our election as an EGC) . The Company is evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures and has 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 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. The Company is currently evaluating the effects of adopting ASU 2014-15 on its consolidated financial statements but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.
ASU 2015-03: Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs — In April 2015, the FASB issued ASU 2015-03, which changes the required presentation of debt issuance costs from an asset on the balance sheet to a deduction from the related debt liability. ASU 2015-03 was adopted in 2016 and did not have a material effect on the consolidated financial statements.
ASU 2015-16: Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments — In September 2015, the FASB issued ASU 2015-16, which removes the requirement to retrospectively account for adjustments to preliminary amounts recognized in a business combination. ASU 2015-16 requires the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. ASU 2015-16 was adopted in 2016 and did not have a material effect on the consolidated financial statements.
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 the Company 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. The Company is evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures but the adoption is not expected to have a significant impact on the Company’s consolidated financial statements.
F-14 |
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 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 the Company in 2019 and requires the modified retrospective method of adoption. Early adoption is permitted. Although the Company is currently evaluating the effect that ASU 2016-02 will have on its consolidated financial statements and related disclosures, the Company expects that most of its 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 the Company in 2017 and early adoption is permitted. The Company is currently evaluating the guidance to determine the adoption methods and the effect that ASU 2016-09 will have on its consolidated financial statements and related disclosures.
3. | Acquisition and Recapitalization |
Acquisition of Worldnow
Description of Transaction
On July 28, 2015, the Company signed an agreement (the Purchase Agreement) to purchase all of the outstanding units of Gannaway Web Holdings LLC, operating as Worldnow, for total consideration of $45,000,000. On August 25, 2015 (the Closing Date), the Company completed the acquisition of Worldnow. Subsequent to the acquisition, Worldnow changed its name to Frankly Media LLC. The acquisition of Worldnow was made primarily to extend the reach of Frankly to Worldnow’s existing customer base within the local broadcast marketplace.
Under the terms of the Purchase Agreement, the Company paid $10,000,000 in cash, issued $20,000,000 in Class A restricted voting shares of the Company (the Share Consideration) and executed promissory notes to two shareholders of Worldnow bearing simple interest at a rate of 5 percent per year and agreed to pay $15,000,000 on August 31, 2016 (See Note 6 and Note 10). The number of restricted voting shares comprising the Share Consideration was 9,772,204, determined with reference to the volume-weighted average price of the common shares of the Company on the TSX-V for the five days prior to the date of the Purchase Agreement (CDN$2.6471 or $ 2.0466). For purposes of the purchase price allocation, the Share Consideration, prior to discount for lack of marketability, was reflected at fair value as of the Closing Date which amounted to $15,523,058.
All of the securities comprising the Share Consideration are subject to a lock-up agreement. The lock-up period with respect to securities representing 50 percent of the value of the Share Consideration expired August 25, 2016; and the lock-up period with respect to the remainder of the Share Consideration will expire upon August 25, 2017. The lock-up periods are 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 (Note 10), the restricted voting shares will be converted into common shares.
F-15 |
Purchase Price Allocation
The following summarizes the purchase price allocation relating to the acquisition of Worldnow:
Shares | Amount | |||||||
Purchase Consideration | ||||||||
Cash | $ | 10,000,000 | ||||||
Promissory notes | 15,000,000 | |||||||
Class A restricted voting shares issued | 9,772,204 | 15,523,058 | ||||||
Class A restricted voting shares - discount for lack of marketability | (2,444,882 | ) | ||||||
Common shares issued to settle liability | 195,446 | 310,464 | ||||||
9,967,650 | $ | 38,388,640 | ||||||
Purchase Price Allocation | ||||||||
Cash | $ | 5,487,302 | ||||||
Accounts receivable | 3,508,133 | |||||||
Prepaid expenses and other current assets | 1,136,553 | |||||||
Intangible assets | 8,800,000 | |||||||
Software development costs | 4,000,000 | |||||||
Property and equipment | 2,002,903 | |||||||
Other assets | 211,152 | |||||||
Accounts payable and accrued expenses | (3,640,811 | ) | ||||||
Revolving credit facility | (2,900,000 | ) | ||||||
Deferred revenue | (1,500,000 | ) | ||||||
Capital leases | (473,173 | ) | ||||||
Severance liability | (1,000,000 | ) | ||||||
Fair value of identifiable net assets acquired | 15,632,059 | |||||||
Goodwill | 22,756,581 | |||||||
Net assets acquired | $ | 38,388,640 |
In connection with the acquisition, additional units of Worldnow were issued to Frankly Inc. for the assumption of a liability of Worldnow due to a third-party vendor. Frankly Inc. satisfied the liability by granting 195,446 common shares to the vendor reflecting the same price for the share consideration described above; however, for purposes of the purchase price allocation, this additional investment was reflected at fair value of the shares issued by Frankly Inc. as of the Closing Date which amounted to $310,464.
Significant judgments and assumptions related to the valuation and useful lives of certain classes of assets acquired are as follows:
● | Intangible Assets, Software Development Costs — Worldnow had certain proprietary technology used in its products, which the Company expects will contribute to future cash flow. The fair value of the software development costs intangible asset was determined based on the relief from royalty method under the income approach. The software development costs intangible asset was valued using Level 3 inputs (described further under “Fair Value Measurements” below) which consisted of the following key inputs: (i) cash flow projections; (ii) royalty rate; (iii) technology replacement rate; and (iv) present value factor. This asset is amortized on a straight-line basis over the estimated useful life of 3 years. |
F-16 |
● | Intangible Assets, Broadcast Relationships — Worldnow had established relationships with local broadcasters and TV stations which are expected to result in future sales. The fair value of the broadcast relationships intangible asset was determined based on the excess earnings method under the income approach. The broadcast relationships intangible asset was valued using Level 3 inputs which consisted of the following key inputs: (i) cash flow projections; (ii) customer attrition rate / probability of renewal rate; (iii) charges for use of assets; and (iv) present value factor. This asset is amortized on a straight-line basis over the estimated useful life of twelve years. | |
● | Intangible Assets, Advertiser Relationships — Worldnow had established relationships with advertising agencies which are expected to result in future sales. The fair value of the advertiser relationships intangible asset was determined based on the lost profits method under the income approach. The “With” scenario assumed that the advertiser relationships are in place and the “Without” scenario assumes the advertiser relationships do not exist at the time of the valuation and must be re-created post valuation. The advertiser relationships cash flows were calculated by taking the difference in after-tax cash flows between the With and Without scenarios. The advertiser relationships intangible asset was valued using Level 3 inputs which consisted of the following key inputs: (i) cash flow projections under the With scenario; (ii) probability of success to be applied to the Without scenario; and (iii) present value factor. This asset is amortized on a straight-line basis over the estimated useful life of five years. |
The difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed represents goodwill of $22,756,581. All of the goodwill is expected to be deductible for tax purposes as the acquisition was considered an asset deal for tax purposes. The goodwill recorded represents the following:
● | Cost savings and operating synergies expected to result from combining the operations of Worldnow with those of the Company | |
● | Intangible assets that do not qualify for separate recognition such as the assembled workforce |
The Company incurred fees of $1,271,854 which were recognized separately from the acquisition and included as transaction costs on the consolidated statement of operations and comprehensive loss. The Company also incurred approximately $166,506 of share issuance costs related to the Share Consideration and shares issued to settle the liability assumed from Worldnow as described above. These costs were not expensed, but rather are included as a reduction to additional paid-in capital in the consolidated statements of shareholders’ equity.
Revenue and net loss of the acquired business from the Closing Date through December 31, 2015 included in the consolidated statements of loss and comprehensive loss amounted to $6,720,251 and $279,791, respectively.
Unaudited Pro Forma Disclosures
The following unaudited pro forma information presents the combined results of operations as if the acquisition of Worldnow had been completed on January 1, 2014, the beginning of the comparable prior annual reporting period. The unaudited pro forma results include adjustments to reflect: (i) historical revenue and expenses of Worldnow prior to the date of acquisition based on Worldnow’s audited financial statements; (ii) the elimination of amortization of capitalized software from Worldnow’s historical financial statements and the inclusion of amortization based on the fair values at acquisition of Worldnow’s capitalized software and intangible assets; (iii) the inclusion of a full year of interest expense incurred on the one-year, 5% $15,000,000 promissory notes during the year ended December 31, 2014 and elimination of interest expense on these promissory notes during the year ended December 31, 2015; (iv) additional rent expense due to elimination of deferred rent which existed at the closing date; (v) the elimination of stock-based compensation during 2014 and 2015 related to options issued by Worldnow that were canceled in connection with the transaction; (vi) the elimination of transaction costs totaling $2,731,173 incurred during the year ended December 31, 2015 by Worldnow and Frankly and the inclusion of such expenses of Frankly in 2014; and (vii) an adjustment to the weighted-average shares outstanding to reflect the 9,967,650 shares of Frankly Inc. issued as consideration as if they had been issued on January 1, 2014.
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 periods presented, nor are they indicative of future results of operations.
Nine Months | ||||||||||||
Year Ended December 31, | Ended September 30, | |||||||||||
2014 | 2015 | 2015 | ||||||||||
Pro forma revenues | $ | 26,627,597 | $ | 24,995,444 | $ | 19,672,344 | ||||||
Pro forma net loss | (13,479,692 | ) | (20,479,186 | ) | (5,861,226 | ) | ||||||
Pro forma net loss per share | $ | (0.74 | ) | $ | (0.64 | ) | $ | (0.18 | ) | |||
Pro forma weighted-average shares outstanding | 18,245,220 | 32,046,818 | 32,039,918 |
F-17 |
Recapitalization
On December 23, 2014, WB III, a Canadian public shell company traded on the Toronto Stock Exchange, completed a merger with TicToc whereby WB III Subco Inc., a wholly-owned subsidiary of the WB III, merged with TicToc. The transaction, referred to as the Recapitalization, was structured as a reverse triangular merger under the Delaware General Corporation Law, which resulted in TicToc becoming a wholly-owned Canadian subsidiary of WB III. Subsequent to the completion of the Recapitalization, WB III changed its name to Frankly Inc. and TicToc changed its name to Frankly Co.
In the Recapitalization, Frankly Inc. issued: (i) 21,695,321 no par value common shares including 737,715 common shares in exchange for all then outstanding common shares of WB III and 20,957,606 shares in exchange for all then outstanding $0.0001 par value common shares of TicToc; (ii) 362,401 no par value Class A common restricted voting shares to existing holders of TicToc restricted common shares; and (iii) 98,360 options to holders of WB III options. Immediately prior to the Recapitalization, certain holders of TicToc common shares exchanged 362,401 common shares for an equal number of TicToc Class A restricted voting shares. The options had a fair value of $98,360 and the common shares issued to former holders of WB III had a fair value of $1,935,177 for an aggregate of $2,033,537.
The fair value of TicToc’s common shares was determined by the market value of the concurrent private placement, or $2.67 per share. The estimated fair value of the options re-issued to option holders of WB III were calculated using the Black-Scholes option pricing model. TicToc also incurred transaction costs totaling $758,044.
These transactions were accounted for as a recapitalization because WB III was not an operating business, and, therefore, these transactions had no impact on additional paid-in capital. The excess of the $758,044 in transaction fees incurred over the cash acquired of $112,742 was recorded as transaction costs on the consolidated statement of operations and comprehensive loss.
4. | Related Party Transactions and Balances |
The Company has several significant shareholders as follows: SKP America LLC (SKP America), Raycom Media Inc. (Raycom), and Gannaway Entertainment Inc. (GEI) who each owned approximately 28.9%, 21.0% and 9.4%, respectively, as of December 31, 2015 and 26.8%, 26.9% and 8.7%, respectively, as of September 30, 2016, of the aggregate Common Shares and Class A restricted voting shares. As of December 31, 2014, SKP America owned approximately 42.7% of the Company’s aggregate Common Shares and Class A restricted voting shares. SKP America LLC is the former parent of TicToc and a subsidiary of SK Planet Co. Ltd. (SK Planet).
F-18 |
The following table summarizes related party balances in the consolidated balance sheets for the periods presented:
December 31, | ||||||||||||
Amounts Due (to) from Related Parties | 2014 | 2015 | September 30, 2016 | |||||||||
(Unaudited) | ||||||||||||
Promissory notes: | ||||||||||||
GEI | $ | - | $ | (11,000,000 | ) | $ | - | |||||
Raycom | - | (4,000,000 | ) | - | ||||||||
Total promissory notes, net | $ | - | $ | (15,000,000 | ) | $ | - | |||||
Non-revolving credit facility, net of discount | ||||||||||||
Raycom | $ | - | $ | - | $ | 11,623,739 | ||||||
Due (to) from Raycom: | ||||||||||||
Trade accounts receivable | - | 86,112 | 244,725 | |||||||||
Unbilled revenue | - | - | 25,000 | |||||||||
Trade accounts payable | - | (92,089 | ) | (296,406 | ) | |||||||
Deferred revenue | - | (79,560 | ) | (19,890 | ) | |||||||
Total due to Raycom | - | (85,537 | ) | (46,571 | ) | |||||||
Due to SK Planet: | ||||||||||||
Services agreements | (7,781 | ) | - | - | ||||||||
Total due to related parties | $ | (7,781 | ) | $ | (85,537 | ) | $ | (46,571 | ) |
The following table summarizes related party transactions in the consolidated statements of operations and comprehensive loss for the periods presented:
Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||
Revenue (Expense) from Related Parties | 2014 | 2015 | 2015 | 2016 | ||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Raycom: | ||||||||||||||||
Revenue | $ | - | $ | 946,383 | $ | 231,809 | $ | 3,262,516 | ||||||||
Interest on promissory notes | - | (66,667 | ) | (16,667 | ) | (133,333 | ) | |||||||||
Interest on non-revolving credit facility | - | - | - | (160,037 | ) | |||||||||||
- | 879,716 | 215,142 | 2,969,146 | |||||||||||||
GEI: | ||||||||||||||||
Interest on promissory notes | - | (183,333 | ) | (45,833 | ) | (366,667 | ) | |||||||||
SK Planet: | ||||||||||||||||
Revenue | 161,501 | - | - | - | ||||||||||||
Interest on convertible promissory notes | (180,446 | ) | - | - | - | |||||||||||
Consulting fees | (52,366 | ) | (108,587 | ) | (108,587 | ) | - | |||||||||
Rent | (22,500 | ) | - | - | - | |||||||||||
(93,811 | ) | (108,587 | ) | (108,587 | ) | - | ||||||||||
$ | (93,811 | ) | $ | 587,796 | $ | 60,722 | $ | 2,602,479 |
SK Planet
SK Planet through its subsidiary, SKP America LLC, holds common shares in the Company.
Services Agreements
The Company entered into a services agreement with SK Planet in January 2014. Pursuant to the services agreement, the Company provided access to certain members of its mobile development team in connection with the general development of mobile applications and related products. The agreement terminated in October 2014. The Company recorded revenues during the year ended December 31, 2014 in connection with this services agreement. The Company also had services agreements with SK Planet’s Korean and U.S. subsidiaries, whereby the affiliated companies provided market research, mobile application development, and support for the Company’s back office operations as requested. The agreements provided that all intellectual property interest in all works completed by the affiliated company will be transferred to the Company. The agreements terminated in September 2015. Pursuant to the agreements, the Company incurred consulting fees during the years ended December 31, 2014 and 2015.
F-19 |
Acquisition of Shares
In January 2014, SKP America LLC acquired 2,536,232 common shares for gross proceeds of $3,500,000, recorded net of stock issuance costs of $34,400 (Note 7).
Convertible Promissory Notes
The Company issued a convertible promissory note to SKP America LLC in exchange for $6,500,000 in cash on March 14, 2014 as further discussed in Note 6. The note was amended on September 12, 2014 to modify the conversion features and the note was also bifurcated into two tranches (the “notes”) of $4,928,019 and $1,571,981. As the amended terms included a new substantive conversion option, the Company accounted for the amendment as an extinguishment of debt and recorded the amended notes at $8,170,173 representing their fair value on the date of amendment. The difference between the carrying value of the debt and the new fair value was $1,670,173, representing a loss on extinguishment of debt. The first tranche plus accrued coupon interest was converted into 2,643,087 common shares at a price of $2.912 per share on September 15, 2014 and the second tranche plus accrued coupon interest was converted into 850,998 shares at a price of $2.912 per share on November 24, 2014. The conversions of the principal related to the first and second tranches as well as the accrued coupon interest were recorded as additional paid-in capital aggregating $8,350,619 during the year ended December 31, 2014. Interest recorded on the convertible promissory notes during the year ended December 31, 2014 was $180,446, representing interest expense on the convertible promissory notes at the coupon rate, which was 5%.
Raycom
As partial consideration for the acquisition of Worldnow on August 25, 2015, the Company issued a $4,000,000 promissory note to Raycom and 6,751,132 Class A restricted voting shares (Note 3). The note bears interest at 5% per annum and is due on August 31, 2016 (Note 6). Raycom was a customer and significant shareholder of Worldnow and, subsequent to the acquisition of Worldnow, remains a customer and significant shareholder of Frankly. Accordingly, during the year ended December 31, 2015, revenue-related transactions and balances with Raycom arose in the ordinary course of business.
On September 1, 2016, the Company completed the closing of its financing with Raycom Media Inc. (Note 6). The Company received a non-revolving term line of credit from Raycom in the principal amount of $14.5 million and, subject to approval of Raycom, an additional available $1.5 million non-revolving line of credit (collectively, the Loan). The proceeds were used to pay down $14 million of the $15 million outstanding promissory notes. In addition, Raycom converted the remaining $1.0 million of its existing $4.0 million promissory note from the Company into 2,553,400 common shares of the Company and the Company issued 14,809,720 warrants to Raycom. The Loan was recorded at fair value of $11,578,593 with the remaining $2,921,407 being allocated to the warrants. The carrying value of the Loan at September 30, 2016, net of debt discount, was $11,623,739. Interest expense on the Loan amounted to $160,037 for the nine months ended September 30, 2016, and is presented within interest expense, net on the consolidated statements of operations and comprehensive loss.
GEI
As partial consideration for the acquisition of Worldnow on August 25, 2015, the Company issued an $11,000,000 promissory note to GEI and 3,021,072 Class A restricted voting shares (Note 3). The note bears interest at 5% per annum and is due on August 31, 2016 (Note 6, Note 10). On September 1, 2016, the promissory note to GEI was paid in full using the proceeds from the Raycom financing transaction discussed above.
F-20 |
5. | Long-Lived Assets |
All of the Company’s long-lived assets are domiciled in the U.S. Depreciation and amortization expense for long-lived assets was as follows for the periods presented:
Year Ended December 31, | Nine Months Ended September 30, | |||||||||||||||
2014 | 2015 | 2015 | 2016 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Depreciation of property and equipment | $ | 48,009 | $ | 339,005 | $ | 119,559 | $ | 536,998 | ||||||||
Amortization of capitalized software | - | 467,735 | 112,654 | 1,255,265 | ||||||||||||
Amortization of other intangibles | - | 349,403 | 111,245 | 655,002 | ||||||||||||
Total depreciation and amortization | $ | 48,009 | $ | 1,156,143 | $ | 343,458 | $ | 2,447,265 |
Property and Equipment, Net
The following table summarizes property and equipment, net, including assets held under capital lease:
December 31, | September 30, | |||||||||||
2014 | 2015 | 2016 | ||||||||||
(Unaudited) | ||||||||||||
Cost: | ||||||||||||
Office and computer equipment and software | $ | 115,268 | $ | 1,933,615 | $ | 1,971,280 | ||||||
Leasehold Improvements | - | 578,782 | 578,782 | |||||||||
115,268 | 2,512,397 | 2,550,062 | ||||||||||
Accumulated depreciation and amortization: | ||||||||||||
Office and computer equipment and software | (43,061 | ) | (335,037 | ) | (789,290 | ) | ||||||
Leasehold Improvements | - | (43,988 | ) | (125,327 | ) | |||||||
(43,061 | ) | (379,025 | ) | (914,617 | ) | |||||||
$ | 72,207 | $ | 2,133,372 | $ | 1,635,445 |
Balances as of December 31, 2015 and September 30, 2016 include $1,620,005 of office and computer equipment and software and $382,898 of leasehold improvements from the Worldnow acquisition (Note 3). Depreciation expense for assets held under capital lease was $0, $57,749, $13,687 and $123,186, for the year ended December 31, 2014 and 2015 and the nine months ended September 30, 2015 and 2016, respectively. The net carrying value of assets held under capital lease was $0, $568,594 and $445,408 as of December 31, 2014 and 2015 and September 30, 2016, respectively (Note 9).
Software Development Costs, Net
The following table summarizes software development costs, net for the periods presented:
December 31, | September 30, | |||||||||||
2014 | 2015 | 2016 | ||||||||||
(Unaudited) | ||||||||||||
Cost | $ | - | $ | 4,834,073 | $ | 8,218,704 | ||||||
Accumulated amortization | - | (467,735 | ) | (1,723,000 | ) | |||||||
$ | - | $ | 4,366,338 | $ | 6,495,704 |
Balances as of December 31, 2015 and September 30, 2016 include $4,000,000 from the Worldnow acquisition (Note 2, Note 3). During the year ended December 31, 2014 and 2015 and the nine months ended September 30, 2015 and 2016, the Company capitalized software development costs of $0, $834,073, $158,269 and $3,384,631, respectively.
F-21 |
Goodwill
The following table summarizes the changes in goodwill for the periods presented:
Carrying Value | ||||
Balance, January 1, 2014 | $ | - | ||
Activity | - | |||
Balance, December 31, 2014 | - | |||
Worldnow acquisition (Note 3) | 22,756,581 | |||
Impairment | (12,001,000 | ) | ||
Balance, December 31, 2015 | $ | 10,755,581 | ||
Unaudited interim activity: | ||||
Balance, January 1, 2016 | $ | 10,755,581 | ||
Activity | - | |||
Balance, September 30, 2016 | $ | 10,755,581 |
The Company completed the step one goodwill impairment analysis as of December 31, 2015 after concluding it was more likely than not the fair value of its reporting unit was below its carrying amount due to decline in the Company’s share price subsequent to the acquisition of Worldnow. As the estimated fair value of the Company’s reporting unit was less than its carrying amount, the second step was completed to determine and measure the amount of the potential impairment charge. The fair value of the Company’s reporting unit was determined using the Company’s common share price as of the valuation date.
For step two of the goodwill impairment analysis, the implied fair value of goodwill of the Company’s reporting unit was compared with its carrying amount and an impairment charge of $12,001,000 was recorded. The implied fair value of goodwill was determined by allocating the estimated fair value of the reporting unit to its identifiable assets and liabilities. The excess of the estimated fair value of the reporting unit over the amounts assigned to its identifiable assets and liabilities was the implied fair value of goodwill.
The Company assessed triggering events through September 30, 2016 and concluded no events or circumstances existed that would more likely than not reduce the fair value of the Company’s reporting unit below its carrying amount.
Other Intangible Assets, Net
The following table summarizes intangible assets, net for the periods presented:
December 31, | September 30, | |||||||||||
2014 | 2015 | 2016 | ||||||||||
(Unaudited) | ||||||||||||
Cost: | ||||||||||||
Broadcast relationships, 12-year useful life | $ | - | $ | 7,600,000 | $ | 7,600,000 | ||||||
Advertiser relationships, 5-year useful life | - | 1,200,000 | 1,200,000 | |||||||||
- | 8,800,000 | 8,800,000 | ||||||||||
Accumulated amortization: | ||||||||||||
Broadcast relationships | - | (211,112 | ) | (686,114 | ) | |||||||
Advertiser relationships | - | (80,000 | ) | (260,000 | ) | |||||||
- | (291,112 | ) | (946,114 | ) | ||||||||
$ | - | $ | 8,508,888 | $ | 7,853,886 |
The broadcast and advertiser relationships were acquired in the Worldnow acquisition (Note 2, Note 3) on August 25, 2015. Also during the year ended December 31, 2015, the Company (i) purchased software rights for $100,000 and sold them later in the year for $50,000, recognizing a loss of $25,000 (net of accumulated amortization); and (ii) 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 $194,985 was recognized later in 2015.
F-22 |
Based on the intangible assets recorded at December 31, 2015, scheduled annual amortization of software development costs and other intangible assets for each of the next five calendar years following December 31, 2015, and thereafter is as follows:
Years Ending December 31, | Total | ||||
2016 | $ | 2,484,690 | |||
2017 | 2,484,690 | ||||
2018 | 2,016,957 | ||||
2019 | 873,333 | ||||
2020 | 793,333 | ||||
Thereafter | 4,222,223 | ||||
Total | $ | 12,875,226 |
6. | Debt |
Non-revolving Credit Facility, Extinguishment of Promissory Notes and Revolving Credit Facility
On September 1, 2016, the Company completed the closing of its financing with Raycom, a related party (Note 4).
The Company received a non-revolving term line of credit from Raycom in the principal amount of $14.5 million and, subject to approval of Raycom, an additional available $1.5 million non-revolving line of credit (collectively, the Loan). In addition, Raycom converted $1.0 million of its existing $4.0 million promissory note from the Company into 2,553,400 common shares of the Company and the Company issued 14,809,720 warrants to Raycom entitling the holder of each warrant to acquire one common share of the Company upon exercise of each warrant at a price per common share equal to CDN$0.50. The warrants will expire on the earlier of: (i) the repayment of the Loan in accordance with its terms; and (ii) 5 years. To the extent that there is a mandatory repayment of any portion of the principal balance of the Loan within the first year of its term, a proportionate number of the warrants will have their term reduced to the later of one year from issuance and 30 days from the date of such repayment. The common shares and warrants issued to Raycom were subject to a four-month statutory hold period, which expired on January 1, 2017.
The warrants were recorded within shareholder’s equity in accordance with ASC 470-20 - Debt With Conversion and Other Options. Proceeds from the sale of a debt instrument with stock purchase warrants (detachable call options) shall be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at time of issuance. The value allocated to the Loan with Raycom was $11,578,593 with the remaining $2,921,407 being allocated to the warrants.
The debt discount of $2,921,407, equal to the difference between the fair value of the Loan of $11,578,593 and principal amount of $14.5 million, is being amortized to interest expense, net on the consolidated statement of operations and comprehensive loss using the effective-interest method. Amortization of debt discount included in interest expense, net for the nine month period ended September 30, 2016 amounted to $45,146.
Prior to the completion of the financing arrangements, Raycom held 6,751,132 voting shares of the Company, which represented approximately 21% of the issued and outstanding voting shares of the Company. Immediately following the completion of the financing arrangement transactions, Raycom held 9,304,532 voting shares of the Company and 14,809,720 warrants, which collectively represents approximately 27% of the issued and outstanding voting shares of the Company on a non-diluted basis.
The proceeds of the Loan were used to pay off the outstanding $15.0 million of promissory notes issued by the Company in connection with the 2015 acquisition of Worldnow, including $3.0 million of the $4.0 million of such notes issued to Raycom, with the remaining $1.0 million promissory note balance owed to Raycom being converted to common shares of the Company as described above.
The Loan has a five-year term and is secured by the grant of a security interest in the Company’s assets, a pledge of shares of the Company’s subsidiaries and a guarantee by the Company’s subsidiaries secured by their assets. Simultaneously, the Company and Raycom also entered into a software code escrow agreement.
Interest on outstanding balances of the Loan will accrue at a rate of 10% per annum, with a default interest rate of 12% per annum. The Loan is subject to certain scheduled mandatory principal repayments, with additional mandatory repayments occurring upon the Company’s raising of additional financing, sales of assets and excess cash flow.
F-23 |
On August 31, 2016, in connection with the above refinancing transaction, the Company utilized cash on hand to extinguish the Revolving Credit Facility.
Promissory Notes Payable to Related Parties
In connection with the acquisition of Worldnow on August 25, 2015 (Note 3), the Company executed unsecured promissory notes, bearing a simple interest at a rate of 5 percent per year, to pay an aggregate of $15,000,000 in cash on August 31, 2016. The holders of the promissory notes were Raycom ($4,000,000) and GEI ($11,000,000), former shareholders of Worldnow (Note 4). Interest expense on the promissory notes amounted to $250,000 for the year ended December 31, 2015 and is presented within interest expense, net on the consolidated statements of operations and comprehensive loss. The total amount outstanding under these promissory notes was $15,000,000 as of December 31, 2015. On September 1, 2016, the promissory notes were extinguished in connection with the refinancing transaction discussed above.
Revolving Credit Facility
The Company, through its Frankly Media subsidiary, had a revolving credit facility which was assumed in the Worldnow acquisition (Note 3) and provided for a $3,000,000 revolving line of credit and a $500,000 letter of credit (collectively, the Revolving Credit Facility). Borrowings on the revolving line of credit were limited to the lesser of $3,000,000 or a percentage of eligible accounts receivable (the “advance rate”). The advance rate is 85% of eligible accounts receivable, unless the dilution rate from items such as credits and billing adjustments is 3.5% but less than 5%, in which case it will be reduced to 80%. The lender may reduce the advance rate below 80% in the event the lender determines that dilution as to the Company’s receivables exceeds 5.0%. Eligible accounts receivable exclude, among other things, past-due invoices, and customer balances where more than 35% of the amounts owed by the customer are past due. The Revolving Credit Facility was renewed in April 2015 for two years. It expires in April 2017 and requires monthly interest payments. The interest rate applicable to the Revolving Credit Facility is the greater of 3.25% or the lender’s prime rate, plus 2.50%. The Revolving Credit Facility was collateralized by the assets of Frankly Media. As of December 31, 2015, $1,950,000 was outstanding under the revolving line of credit, and the applicable interest rate was 6.00%. On August 31, 2016, in connection with the above refinancing transaction, the Company utilized cash on hand to extinguish the Revolving Credit Facility.
The Revolving Credit Facility contains financial covenants applicable to Frankly Media for which compliance must be measured monthly and before each advance. These covenants include an asset coverage ratio of not less than 1.05 to 1.0, revised to 1.4 to 1.0 as of November 10, 2015, defined as unrestricted cash maintained at lender plus eligible receivables less contra-accounts, counterclaims, and offsets, which include liabilities of Frankly Media to its customers for their share of advertising revenue, divided by the credit facility balance, including the letter of credit. Beginning November 10, 2015, Frankly Media has an additional covenant to maintain a minimum unrestricted cash balance of at least $1,000,000. Frankly Media was in compliance with all covenants at December 31, 2015.
In the event there is an event of default under the Revolving Credit Facility, the interest rates on the revolving line of credit will be subject to an additional 5%.
Convertible Promissory Notes Payable to Related Party
As disclosed in Note 4, the Company issued an unsecured convertible promissory note to SKP America LLC in exchange for $6,500,000 in cash on March 14, 2014. At the time of issuance, the convertible promissory note contained various contingent conversion features that allowed for conversion of principal and interest to either common or preferred shares of the Company based on market prices in effect at the time of conversion and contingent upon various triggering events. These features were evaluated for bifurcation accounting treatment by the Company. The Company, which was not publicly traded during the year ended December 31, 2014, determined that the features were not derivatives because its shares, which had limited trading volume during the year ended December 31, 2014, were not readily convertible to cash and that bifurcation was not required. Furthermore, the features were considered related to those of an equity instrument and not the debt host contract. Therefore, the debt component of the instrument was initially accounted for at its face value of $6,500,000.
F-24 |
The note was amended on September 12, 2014 and the most significant modification resulted in a change that allowed the holder the option to convert the principal and interest to common shares of the Company at a price equal to 80% of $2.39 (the price of a concurrent private placement) after September 15, 2014. The Company evaluated the amendment and determined that the modification to the arrangement was material such that the amendment required extinguishment accounting. To reflect the amendment, as the amended terms included a new substantive conversion option, the Company accounted for the amendment as an extinguishment of debt and recorded the amended notes at $8,170,173 representing their fair value on the date of amendment. The difference between the carrying value of the debt and the new fair value was $1,670,173, representing a loss on extinguishment of debt and was recorded in the consolidated statements of operations and comprehensive loss.
The first tranche plus accrued coupon interest was converted into 2,643,087 common shares at a price of $2.912 per share on September 15, 2014 and the second tranche plus accrued coupon interest was converted into 850,998 shares at a price of $2.912 per share on November 24, 2014. The conversions of the principal related to the first and second tranches as well as the accrued coupon interest were recorded as additional paid-in capital aggregating $8,350,619 during the year ended December 31, 2014. Interest recorded on the convertible promissory notes during the year ended December 31, 2014 was $180,446 representing interest expense on the convertible promissory notes at the coupon rate, which was 5%.
Debt Maturities
Scheduled debt principal payments during each of the next five calendar years following December 31, 2015 and thereafter are as follows:
Payments Due During the Years Ending December 31, | Total | ||||
2016 | $ | 15,000,000 | (a) | ||
2017 | 1,950,000 | (b) | |||
Total | $ | 16,950,000 |
(a) On September 1, 2016, the promissory notes payable to related parties were refinanced.
(b) The revolving credit facility was scheduled to expire in April 2017 unless renewed pursuant to its terms; however, it was extinguished on August 31, 2016.
7. | Shareholders’ Equity |
Common Shares and Class A Restricted Voting Shares
Subsequent to the Recapitalization on December 23, 2014 (Note 3), all common and Class A restricted voting shares and related stock-based grants have been denominated in Canadian dollars and have been translated to U.S. dollars using the exchange rate in effect at the date of transaction or grant, as applicable.
The Class A restricted voting shares have the same voting rights as common shares except for voting for the election and removal of directors of the Company. The Class A restricted voting shares participate in dividends and liquidation events in the same manner as common shares. In terms of restrictions on transfer, no Class A restricted voting shares shall be transferred to another party unless an offer to acquire common shares is concurrently made that is identical to the offer for the Class A restricted voting shares in terms of price per share, percentage of outstanding shares to be transferred and in all other material respects.
Shares Issued During the Nine Months Ended September 30, 2016
On September 1, 2016, the Company completed the closing of its financing with Raycom (Note 6). Raycom converted $1.0 million of its existing $4.0 million promissory note from the Company into 2,553,400 common shares of the Company. The common shares were partially offset by share issuance costs of $22,722.
Pursuant to the provisions of the lockup agreement described in Note 3, 1,510,536 Class A restricted voting shares held by GEI were exchanged for an equal number of common shares during August 2016. In addition, in connection with the Raycom refinancing transaction (Note 6), 6,751,132 Class A restricted voting shares held by Raycom were exchanged for an equal number of common shares.
F-25 |
Shares Issued During the Year Ended December 31, 2015
As part of the consideration in the acquisition of Worldnow on August 25, 2015 (Note 3), the Company issued to Raycom and GEI, two former shareholders of Worldnow (Note 4), a total of 9,772,204 Class A restricted voting shares with a fair value less discount for marketability of $13,078,176. In addition, in connection with the acquisition the Company also issued 195,446 common shares with a fair value of $310,464 to a third-party vendor. These amounts were partially offset by aggregate share issuance costs of $166,506 related to the transaction.
Also during the year ended December 31, 2015, the Company issued a total of 67,959 common shares for employee and agent option exercises and director RSUs that vested. In addition, the Company exchanged one investor’s 39,578 Class A restricted shares for common shares.
Shares Issued During the Year Ended December 31, 2014
As part of the Recapitalization (Note 3) on December 23, 2014, the Company issued 737,715 common shares and options for 98,360 common shares (see below) with an aggregate fair value of $2,033,537 (Note 2). In addition, 362,401 common shares were exchanged on a one-for-one basis for Class A restricted shares. Because these transactions were accounted for as a recapitalization, these transactions had no impact on additional paid-in capital. The excess of the $758,044 in fees incurred over the cash acquired of $112,742, was recorded as transaction costs on the consolidated statement of operations and comprehensive loss.
During the year ended December 31, 2014, the Company made various private placements aggregating 11,294,092 common shares for gross proceeds of $29,381,843, which were offset in part by offering costs totaling $2,428,708. In addition, the Company issued 515,802 agent compensation options with a fair value of $336,265 to a third party in settlement of offering costs (see below and Note 2).
Also during the year ended December 31, 2014, SKP America LLC, a related party (Note 4), (i) acquired 2,536,232 common shares for gross proceeds of $3,500,000, which was recorded net of issuance costs of $34,400; and (ii) converted principal and coupon interest totaling $6,680,446, which related to the first and second tranches of its $6,500,000 convertible promissory notes to 3,494,085 common shares (Note 3, Note 6).
Stock-Based Compensation
Description of the Plan
On April 1, 2015, the Company adopted an amended and restated equity incentive plan, which amends and restates the equity incentive plan, or the Plan, which was previously established as of December 23, 2014. On January 22, 2016, the Company and its Board of Directors (the Board) amended the Plan to fix the number of shares reserved for issuance of both stock options and RSUs at 5,715,105. Based on the number of outstanding options and RSUs at September 30, 2016, the Company had 116,503 options or RSUs remaining for issuance under the Plan.
Options may be exercised over periods of up to 10 years as determined by the Board and the exercise price shall not be less than the closing price of the shares on the day preceding the award date. Option awards generally vest over four years with one year cliff vesting. On December 23, 2014, all stock options outstanding prior to the Recapitalization were exchanged for identical options which may be settled with Frankly Inc. shares.
The restated Plan allows the Company to award RSUs to officers, employees, directors and consultants of Frankly and its subsidiaries upon such conditions as the Board may establish, including the attainment of performance goals recommended by the Company’s compensation committee. The purchase price for common shares of the Company issuable under each RSU award, if any, shall be established by the Board at its discretion. Shares issued pursuant to any RSU award may be made subject to vesting conditions based upon the satisfaction of service requirements, conditions, restrictions, time periods or performance goals established by the Board.
The Company did not recognize any tax benefits for stock-based compensation during any of the periods presented.
F-26 |
Stock Options
The following table sets forth the activity for the Company’s stock options during the periods presented:
Weighted Average | ||||||||||||||||
Remaining | ||||||||||||||||
Grant Date | Contractual | |||||||||||||||
Shares | Exercise Price | Fair Value | Term (Years) | |||||||||||||
Balance, January 1, 2014 | 348,943 | $ | 0.45 | $ | 0.35 | 9.68 | ||||||||||
Granted | 705,500 | 2.41 | 0.69 | |||||||||||||
Exercised | - | - | - | |||||||||||||
Forfeited or canceled | (57,736 | ) | 0.48 | 0.23 | ||||||||||||
Balance, December 31, 2014 | 996,707 | 1.84 | 0.60 | 4.37 | ||||||||||||
Granted | 1,850,979 | 2.20 | 1.27 | |||||||||||||
Exercised | (37,959 | ) | 1.24 | 0.67 | ||||||||||||
Forfeited or canceled | (415,972 | ) | 2.10 | 1.21 | ||||||||||||
Balance, December 31, 2015 | 2,393,755 | $ | 2.09 | $ | 1.01 | 7.12 | ||||||||||
Vested and expected to vest, December 31, 2015 | 2,314,614 | $ | 2.08 | $ | 1.01 | 7.05 | ||||||||||
Exercisable, December 31, 2015 | 810,942 | $ | 1.96 | $ | 0.59 | 3.01 | ||||||||||
Unaudited interim activity: | ||||||||||||||||
Balance, January 1, 2016 | 2,393,755 | $ | 2.09 | $ | 1.01 | 7.12 | ||||||||||
Granted | 2,884,500 | 0.72 | 0.27 | |||||||||||||
Exercised | - | - | - | |||||||||||||
Forfeited or canceled | (1,002,548 | ) | 2.17 | 0.77 | ||||||||||||
Balance, September 30, 2016 | 4,275,707 | $ | 1.14 | $ | 0.57 | 8.96 | ||||||||||
Vested and expected to vest, September 30, 2016 | 4,098,746 | $ | 1.15 | $ | 0.57 | 8.95 | ||||||||||
Exercisable, September 30, 2016 | 736,496 | $ | 1.74 | $ | 1.02 | 7.93 |
Options granted during the year ended December 31, 2014 include (i) 515,802 options granted to the Company’s agent as compensation for the agent’s commission upon completion of a private placement; (ii) 98,360 options granted to former shareholders of WB III in the Recapitalization (Note 3); and (iii) 91,338 options granted to employees of the Company. At December 31, 2015, of the 810,942 vested and exercisable options, 515,802 were the agent’s options described above, which expired unexercised in June 2016.
The aggregate intrinsic value of outstanding and exercisable stock options as of September 30, 2016 is $0.
During the years ended December 31, 2014 and 2015, the following stock options were granted to directors, officers and employees of the Company. The fair values of the options granted were estimated based on the Black-Scholes option pricing model, using the following assumptions:
Year Ended December 31, | ||||||||
2014 | 2015 | |||||||
Number of options granted | 91,338 | 1,850,979 | ||||||
Dividend yield | 0 | % | 0 | % | ||||
Risk-free interest rate | 1.38%~2.06% | 0.65%~1.25% | ||||||
Volatility | 34.34%~40.49% | 63.96%~68.01% | ||||||
Expected term in years | 5~6.25 | 5~6.25 | ||||||
Forfeitures | 0 | % | 5 | % |
On December 23, 2014, as the part of an agent’s commission upon completion of a private placement (Note 7), the Company issued 515,802 fully-vested agent compensation options, which entitle the holder to acquire one common share upon payment of CAD 3.05 (USD 2.67) for a period of eighteen months. The estimated fair value of the compensation options of $336,265 was calculated using the Black-Scholes option pricing model with the following assumptions: (i) expected option life of 1.5 years; (ii) risk free interest rate of 1.88%; (iii) dividend yield of nil; and (iv) expected volatility of 48.1%; and (v) forfeitures of zero.
F-27 |
As a part of the Recapitalization (Note 3), the Company issued replacement stock options to option holders of WB III. The estimated fair value of the 98,360 options issued to option holders of WB III was calculated using the Black-Scholes option pricing model with the following assumptions: (i) expected option life of 1 year (for 73,770 options) and 5 years (for 24,590 options); (ii) risk free interest rate of 0.13% (for 73,770 options) and 1.69% (for 24,590 options); (iii) dividend yield of nil; (iv) expected volatility of 48.1%; and (v) forfeitures of zero.
Restricted Share Units
The following table sets forth the activity for the Company’s RSUs for the periods presented:
Weighted-Average | ||||||||
Grant Date | ||||||||
Shares | Fair Value | |||||||
Balance, January 1, 2014 | - | $ | - | |||||
Granted | - | - | ||||||
Vested | - | - | ||||||
Forfeited or canceled | - | - | ||||||
Balance, December 31, 2014 | - | - | ||||||
Granted | 638,036 | 1.29 | ||||||
Vested | (30,000 | ) | 2.14 | |||||
Forfeited or canceled | - | - | ||||||
Balance, December 31, 2015 | 608,036 | $ | 1.25 | |||||
Unaudited interim activity: | ||||||||
Balance, January 1, 2016 | 608,036 | $ | 1.25 | |||||
Granted | 962,535 | 0.38 | ||||||
Vested | - | - | ||||||
Forfeited or canceled | (247,676 | ) | 2.14 | |||||
Balance, September 30, 2016 | 1,322,895 | $ | 0.45 |
In connection with the extension of the CEO’s employment agreement, the Company granted an aggregate of 247,676 RSUs during the year ended December 31, 2015, all of which were canceled during the nine months ended September 30, 2016. In addition, to compensate its two independent directors, the Company granted them a total of 30,000 RSUs in the year ended December 31, 2015, which vested upon the one-year anniversary of their election to the Board. In November 2015, the Company granted a total of 360,360 RSUs to compensate two key employees, which vest 25% per annum over four years from the date of grant. In August 2016 the Company granted an aggregate of 962,535 RSUs to certain executive and non-executive officers and members of its management team. Each RSU entitles the holder thereof to receive one common share of the Company and will vest in accordance with the following schedule: (i) 2/3 of the RSUs vest on the 12-month anniversary of the RSU grant date; and (ii) the remaining RSUs will vest on the 18-month anniversary of the RSU grant date, subject to full or partial acceleration upon the occurrence of a change of control or termination of employment.
The RSUs granted during the year ended December 31, 2015 and the nine months ended September 30, 2016 had an aggregate fair value of $824,534 and $364,822, respectively, based on the closing price for common shares on the date of grant. Unrecognized compensation cost related to the Company’s non-vested RSUs was CDN$843,103 and CDN$604,936 as of December 31, 2015 and September 30, 2016, respectively.
F-28 |
8. | Income Taxes |
Reconciliation of Effective Tax Rate
The reconciliation of the federal statutory tax rate to the Company’s effective tax rate is as follows:
Year Ended December 31, | ||||||||
2014 | 2015 | |||||||
Loss before income taxes | $ | (13,101,569 | ) | $ | (24,723,588 | ) | ||
US Federal statutory income tax rate | 34.0 | % | 34.0 | % | ||||
Expected income tax benefit based on Federal income tax rate | $ | (4,454,533 | ) | $ | (8,406,020 | ) | ||
Reconciling items: | ||||||||
Permanent differences | 871,455 | 324,325 | ||||||
Valuation allowance | 3,583,078 | 8,081,695 | ||||||
Income tax expense | $ | - | $ | - |
Deferred Taxes
The Company had the following temporary differences that would ordinarily give rise to deferred taxes:
December 31, | ||||||||
2014 | 2015 | |||||||
Deferred tax assets | ||||||||
Professional Services | $ | 316,253 | $ | 46,309 | ||||
Net Operating Loss Carryforwards | 5,503,971 | 9,226,849 | ||||||
Credits | 7,967 | 7,325 | ||||||
Other | 278,940 | 920,033 | ||||||
Intangible Assets | - | 4,305,741 | ||||||
6,107,131 | 14,506,257 | |||||||
Valuation Allowance | (6,107,131 | ) | (14,506,257 | ) | ||||
$ | - | $ | - |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company regularly assesses the likelihood that the deferred tax assets will be recovered from future taxable income. The Company considers projected future taxable income and ongoing tax planning strategies, then records a valuation allowance to reduce the carrying value of the net deferred taxes to an amount that is more likely than not able to be realized. Based upon the Company’s assessment of all available evidence, including the previous three years of U.S. based taxable income and loss after permanent items, estimates of future profitability, and the Company’s overall prospects of future business, the Company determined that it is more likely than not that the Company will not be able to realize a portion of the deferred tax assets in the future. The Company will continue to assess the potential realization of deferred tax assets on an annual basis, or an interim basis if circumstances warrant. If the Company’s actual results and updated projections vary significantly from the projections used as a basis for this determination, the Company may need to change the valuation allowance against the gross deferred tax assets. On the basis of this evaluation, as of December 31, 2015, a valuation allowance of $14.5 million was recorded reduce the net deferred tax assets to their estimated realizable value.
The Company had U.S. federal and state income tax net operating loss carry-forwards of approximately $25.9 million and $16.6 million, respectively, as of December 31, 2015 to apply against future taxable income. If not utilized, these net operating losses will expire on various dates in the next 20 years. Additionally, the Company had Canadian income tax net operating loss carry-forwards of approximately $1.5 million which will begin to expire in 2033. These net operating loss carry-forward balances might be subject to annual limitations in their use in accordance with U.S. Internal Revenue Code (“IRC”) section 382. The Company has not undertaken the effort of performing the IRC Section 382 study as it has not had the need to utilize the net operating loss carry-forward balances to offset taxable income. However, should the facts change the Company will perform such a study.
F-29 |
9. | Commitments and Contingencies |
Operating Lease Commitments
The Company is obligated under several non-cancellable operating leases for office space, expiring in 2017 through 2023. The Company has one sublease for excess office space as of December 31, 2015.
The future aggregate minimum lease payments under these non-cancellable operating leases, without regard to subleases, are payable as follows as of December 31, 2015:
Payments Due During the Years Ending December 31, | Total | |||||
2016 | $ | 1,668,446 | ||||
2017 | 1,403,958 | |||||
2018 | 1,381,158 | |||||
2019 | 1,076,658 | |||||
2020 | 852,908 | |||||
Thereafter through 2023 | 1,847,968 | |||||
Total | $ | 8,231,096 |
Capital Lease Commitments
The Company is party to various computer-related equipment leases that qualify as capital lease obligations, expiring in 2016 through 2018. As a result, the present value of the remaining future minimum lease payments is recorded as a capitalized asset within property and equipment (Note 5) with the related capital lease obligation as a liability in the accompanying consolidated balance sheets.
Future minimum capital lease payments were payable as follows as of December 31, 2015:
Payments Due During the Years Ending December 31, | Total | |||
2016 | $ | 210,084 | ||
2017 | 173,224 | |||
2018 | 40,742 | |||
Total | 424,050 | |||
Amount representing interest | (20,027 | ) | ||
Present value of minimum lease payments | 404,023 | |||
Less current portion | (195,940 | ) | ||
Non-current portion | $ | 208,083 |
Litigation Matter
On May 19, 2014, an individual filed a punitive class action complaint against TicToc in the U.S. District Court for the Northern District of California. The plaintiff asserted a single cause of action against the Company for violation of the Telephone Consumer Protection Act (TCPA). The complaint alleged that the Company violated the TCPA when it enabled users of its Frankly messaging service to send short message service (SMS) text message invitations to the users’ friends and other contacts via a short code assigned to the Company. The complaint alleged that the Company was the sender of those messages, and that the messages violated the TCPA, because the recipients had not given prior express consent to receive SMS messages. The plaintiff sought to represent a putative nationwide class of persons who allegedly received SMS message invitations from a short code assigned to the Company, and the plaintiff seeks actual or statutory damages in the amount of $500 per message.
F-30 |
On June 13, 2014, the Company filed a motion to dismiss the complaint for failure to state a claim, on the ground that the complaint does not sufficiently allege that the Company sent plaintiff any SMS message using an automated telephone dialing system - that is, a system with the present capacity to store or produce, and dial, numbers generated by a random or sequential number generator. In the alternative, the Company asked the court to stay the action pending rulings by the Federal Communications Commission (FCC) on four pending petitions for declaratory rulings concerning the interpretation of the TCPA. The court denied the Company’s motion on March 11, 2015, and the Company answered the complaint on March 26, 2015.
On August 18, 2015, the parties reached a confidential settlement agreement in the amount of $180,000, which is reflected in the consolidated statement of operations and comprehensive income for the year ended December 31, 2014. The parties filed a joint stipulation to dismiss the case on August 21, 2015.
Employee Benefit Plan
The Company’s subsidiaries, Frankly Co. and Frankly Media, each have a 401(k) plan (the Plans), which cover all eligible employees. Under the Plans, employees may contribute from their gross salaries on a before tax basis up to annual statutory limitation determined each year. The Company’s matching contributions amounted to $12,429, $21,224, $15,076 and $0 for the years ended December 31, 2014 and 2015 and the nine months ended September 30, 2015 and 2016, respectively.
10. | Subsequent Events |
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 the Company completes an equity raise of at least $5 million before March 31, 2017, then the Company 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) such prepayment of $3.0 million will apply to services provided by the Company for the year ending December 31, 2017 and Raycom will receive a discount of $300,000 for the services provided by the Company. If the Company does 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 provided by the Company for the year ending December 31, 2017.
Silicon Valley Bank Line of Credit
On December 28, 2016, the Company , Frankly Co. and Frankly Media entered into the Loan and Security Agreement pursuant to which SVB has issued to the Company a revolving line of credit. Amounts borrowed under the revolving line of credit may be repaid and, prior to the Revolving Line Maturity Date (as defined below), reborrowed, subject to the applicable terms and conditions of the Loan and Security Agreement. Upon entry into the Loan and Security Agreement, the Company paid SVB a revolving line commitment fee of $15,000. Subject to the completion of SVB’s inspection of the Company’s books, accounts and the collateral for the line of credit (as described below), the aggregate amount of advances outstanding at any time will not exceed $1.5 million. If, at any time, the outstanding principal amount of any advances exceeds the lesser of either the revolving line of $3 million (the “Revolving Line”) or the Borrowing Base (as defined below ), the Company must immediately pay to SVB in cash the excess amount of such excess (the “Overadvance”). The Borrowing Base means a percentage ranging from 80 to 85% based on the dilution rate with respect to the Company’s accounts receivable and other sums owing to the Company (the “Applicable Borrowing Base Percentage”) of the Company’s eligible accounts. The Applicable Borrowing Base Percentage may be decreased by SVB in its sole discretion under certain conditions. Without limiting the Company’s obligation to repay any Overadvance, the Company has agreed to pay SVB interest on the outstanding amount of any Overadvance, on demand, at a per annum rate equal to the rate that is otherwise applicable to advances plus five percent (5.0%).
F-31 |
Subject to any adjustments upon an event of default, the principal amount outstanding under the line of credit will 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.
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 the Company’s business; judgments or penalties of at least $50,000 rendered against the Company; 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 the Company 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 the Company (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.
The Company is subject to certain covenants, including but not limited to periodic reports to SVB regarding the Company’s financials and accounts, collection of proceeds from the Company’s 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 the Company’s intellectual property. The Company has 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 the Company’s 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 the Company’s 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. The Company is also subject to negative covenants relating to dispositions of the Company or its subsidiaries’ business or property, changes in business, management, control or business location, mergers, amalgamation and acquisitions, indebtedness, certain encumbrances on the Company’s property or accounts, dividend payments or other distributions to the Company’s equityholders or redemption, retirement or purchase of any capital stock or membership interests and upon terms no less favorable to the Company than would be obtained in arms’ length transactions with non-affiliated persons (excluding conversion of Restricted Shares into Common Shares) or any investment, loan, advance or capital contribution other than permitted investments. The Company has also agreed not to enter into any transactions with its affiliates outside of ordinary course of business (excluding its 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 principal amount of all advances, the unpaid interest thereon, and all other obligations relating to the line of credit will be immediately due and payable on the Revolving Line Maturity Date. The line of credit may be terminated earlier than the Revolving Line Maturity Date upon written notice by the Company. 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 the Company.
F-32 |
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.
December Private Placement
In December 2016, the Company sold aggregate of 1,447,222 Units, consisting of one common share and one-half 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. 1,195,000 Units were issued for an aggregate purchase price of CDN$537,750 to non-U.S. purchasers in reliance on the exemption from registration set forth in Section 904 of Regulation S under the Securities Act and 252,222 Units were issued for an aggregate purchase price of CDN$113,499 to U.S. purchasers in reliance on the exemption from registration set forth in Section 4(a)(2) of the Securities Act. In connection with the sale of Units outside of the U.S., the Company paid finder’s fees of 6% cash totaling $31,590 to the Private Placement Brokers. The Company also issued 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. The Company has 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 holding 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.
F-33 |
To the Board of Managers
Gannaway Web Holdings, LLC (dba Worldnow)
New York, New York
We have audited the accompanying financial statements of Gannaway Web Holdings, LLC (dba Worldnow) (the “Company”), which comprise the balance sheet as of August 25, 2015, and the related statements of income, preferred units and members’ deficit, and cash flows for the year then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gannaway Web Holdings, LLC (dba Worldnow) as of August 25, 2015, and the results of its operations and its cash flows for the year then ended, in accordance with accounting principles generally accepted in the United States of America.
/s/ Baker Tilly Virchow Krause, LLP
Minneapolis, Minnesota
September 19, 2016
F-34 |
Independent Auditor’s Report
The Board of Managers
Gannaway Web Holdings, LLC (dba Worldnow):
Report on the Financial Statements
We have audited the accompanying financial statements of Gannaway Web Holdings, LLC (dba Worldnow) (the Company), which comprise the balance sheet as of December 31, 2014, and the related statements of income, changes in preferred units and members’ deficit, and cash flows for the year then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal controls relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal controls. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gannaway Web Holdings, LLC (dba Worldnow) as of December 31, 2014, and the results of its operations and its cash flows for the year then ended, in accordance with U.S. generally accepted accounting principles.
/s/ KPMG LLP
May 22, 2015
New York, NY
F-35 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Balance Sheets
August 25, 2015 | December 31, 2014 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 5,487,302 | $ | 2,926,534 | ||||
Accounts receivable, net of allowance for doubtful accounts of $57,724 in 2015 and $52,407 in 2014 | 3,508,133 | 4,757,277 | ||||||
Prepaid expenses and other current assets | 1,136,553 | 875,907 | ||||||
Total current assets | 10,131,988 | 8,559,718 | ||||||
Property and equipment, net of accumulated depreciation of $5,098,910 in 2015 and $4,609,627 in 2014 | 2,002,903 | 1,758,240 | ||||||
Software development costs, net of accumulated amortization of $9,163,862 in 2015 and $7,589,318 in 2014 | 7,306,614 | 7,390,431 | ||||||
Deferred financing costs | — | 17,820 | ||||||
Other assets | 211,152 | — | ||||||
Total assets | $ | 19,652,657 | $ | 17,726,209 | ||||
Liabilities, Preferred Units and Members’ Deficit | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 3,640,813 | $ | 4,549,883 | ||||
Revolving credit facility | 2,900,000 | 3,000,000 | ||||||
Deferred revenue, current portion | 2,530,636 | 2,987,669 | ||||||
Term loan, current portion | — | 800,000 | ||||||
Capital leases, current portion | 200,788 | 96,229 | ||||||
Other liabilities, current portion | 1,000,000 | 441,968 | ||||||
Total current liabilities | 10,272,237 | 11,875,749 | ||||||
Deferred revenue | 3,430,372 | 208,778 | ||||||
Term loan | — | 533,333 | ||||||
Capital leases | 272,385 | 55,301 | ||||||
Deferred rent | 896,299 | 910,777 | ||||||
Other liabilities | — | 1,000,000 | ||||||
Total liabilities | 14,871,293 | 14,583,938 | ||||||
Commitments and contingencies | ||||||||
Preferred units (Liquidation preference: A units $11,188,316; B units $12,984,743) | 22,362,159 | 22,362,159 | ||||||
Members’ deficit: | ||||||||
Common units – unlimited units authorized; issued and outstanding 99,352,941 units as of August 25, 2015 and 100,000,000 units as of December 31, 2014 | 38,318,472 | 37,827,822 | ||||||
Accumulated deficit | (55,899,267 | ) | (57,047,710 | ) | ||||
Total members’ deficit | (17,580,795 | ) | (19,219,888 | ) | ||||
Total liabilities, preferred units and members’ deficit | $ | 19,652,657 | $ | 17,726,209 |
See accompanying notes to financial statements.
F-36 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Statements of Income
Period Ended August 25, 2015 | Year Ended December 31, 2014 | |||||||
Revenues: | ||||||||
License fees | $ | 12,411,128 | $ | 16,806,248 | ||||
National advertising, net | 3,210,521 | 5,613,030 | ||||||
Local advertising, net | 1,332,646 | 2,341,984 | ||||||
Local ad serving | 870,353 | 1,413,276 | ||||||
Other revenue | 293,125 | 280,682 | ||||||
18,117,773 | 26,455,220 | |||||||
Operating expenses: | ||||||||
General and administrative | 12,976,192 | 19,962,225 | ||||||
Other general expenses | 1,754,319 | 1,540,000 | ||||||
Depreciation and amortization | 2,063,827 | 2,813,163 | ||||||
Income before interest expense, net | 1,323,435 | 2,139,832 | ||||||
Interest expense | 174,992 | 302,094 | ||||||
Net income | $ | 1,148,443 | $ | 1,837,738 |
See accompanying notes to financial statements.
F-37 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Statements of Preferred Units and Members’ Deficit
Period Ended August 25, 2015 and Year Ended December 31, 2014
Total | ||||||||||||||||||||||||||||
Preferred | Preferred | Preferred | Common | Common | Accumulated | members’ | ||||||||||||||||||||||
Class A | Class B | units | units | units | deficit | deficit | ||||||||||||||||||||||
Balance at December 31, 2013 | 11,188,316 | 12,984,743 | $ | 22,362,159 | 100,000,000 | $ | 37,778,382 | $ | (58,885,448 | ) | $ | (21,107,066 | ) | |||||||||||||||
Equity-based compensation | — | — | — | — | 49,440 | — | 49,440 | |||||||||||||||||||||
Net income | — | — | — | — | — | 1,837,738 | 1,837,738 | |||||||||||||||||||||
Balance at December 31, 2014 | 11,188,316 | 12,984,743 | 22,362,159 | 100,000,000 | 37,827,822 | (57,047,710 | ) | (19,219,888 | ) | |||||||||||||||||||
Issuance of common units | — | — | — | 2,352,941 | 400,000 | — | 400,000 | |||||||||||||||||||||
Forfeiture of common units | — | — | — | (3,000,000 | ) | — | — | — | ||||||||||||||||||||
Equity-based compensation | — | — | — | — | 90,650 | — | 90,650 | |||||||||||||||||||||
Net income | — | — | — | — | — | 1,148,443 | 1,148,443 | |||||||||||||||||||||
Balance at August 25, 2015 | 11,188,316 | 12,984,743 | $ | 22,362,159 | 99,352,941 | $ | 38,318,472 | $ | (55,899,267 | ) | $ | (17,580,795 | ) |
See accompanying notes to financial statements.
F-38 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Statements of Cash Flows
Period Ended August 25, 2015 | Year Ended December 31, 2014 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,148,443 | $ | 1,837,738 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,063,827 | 2,813,163 | ||||||
Bad debt | 7,350 | 1,625 | ||||||
Equity-based compensation | 90,650 | 49,440 | ||||||
Amortization of deferred financing costs | 17,820 | 26,499 | ||||||
Transaction fee settled by issuance of common units | 400,000 | — | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 1,241,794 | (466,887 | ) | |||||
Prepaid expenses and other current assets | (260,646 | ) | 711,486 | |||||
Other assets | (211,152 | ) | — | |||||
Deferred revenue | 2,764,561 | 1,600,024 | ||||||
Accounts payable, accrued expenses, and deferred rent | (923,548 | ) | (1,072,221 | ) | ||||
Other liabilities | (441,968 | ) | 1,441,968 | |||||
Net cash provided by operating activities | 5,897,131 | 6,942,835 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (276,344 | ) | (636,221 | ) | ||||
Capitalized software costs | (1,490,727 | ) | (2,872,299 | ) | ||||
Net cash used in investing activities | (1,767,071 | ) | (3,508,520 | ) | ||||
Cash flows from financing activities: | ||||||||
Revolving credit facility repayments | (100,000 | ) | — | |||||
Term loan payments | (1,333,333 | ) | (666,667 | ) | ||||
Payments on capital leases | (135,959 | ) | (238,565 | ) | ||||
Net cash used in financing activities | (1,569,292 | ) | (905,232 | ) | ||||
Net increase in cash and cash equivalents | 2,560,768 | 2,529,083 | ||||||
Cash and cash equivalents at beginning of period | 2,926,534 | 397,451 | ||||||
Cash and cash equivalents at end of period | $ | 5,487,302 | $ | 2,926,534 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest during the period | $ | 163,441 | $ | 278,035 | ||||
Insurance proceeds received during the period | $ | — | $ | 200,000 | ||||
Supplemental disclosures of noncash investing and financing activities: | ||||||||
Leasehold improvements, furniture and equipment acquired through capital leases | $ | 457,602 | $ | 112,388 |
See accompanying notes to financial statements.
F-39 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
(1) | Organization, Description of Business, and Basis of Presentation |
(a) | Organization |
Gannaway Web Holdings, LLC (dba Worldnow) is a Delaware limited liability company (the Company) and is a majority-owned subsidiary of a domestic corporation, Gannaway Entertainment, Inc. (GEI). The Company began operations on July 17, 1998 concurrent with the purchase of the assets of an entity operating as “Worldnow Online.” On August 25, 2015, the Company was purchased by Frankly, Inc. (the Acquirer, note 11).
(b) | Description of Business |
The Company is a solutions service provider that provides digital publishing software as a service and related advertising services for local media sites on the Internet. The Company’s software enables site owners to design, build, and host sites to publish local content and information on digital platforms. The Company also sources national and local advertising for its customers to distribute over multiple consumer devices. The Company’s website publishing and management system (the Producer) allows the customer to manage media assets on all digital platforms and to interact with its consumers. Additionally, the Company licenses or provides other technologies and services.
(c) | Basis of Presentation |
The accompanying financial statements have been prepared assuming that Worldnow will continue as a going concern. Management believes that cash on hand, cash to be generated from operations, and cash available under the credit facility (note 10) will be sufficient to meet the Company’s needs. However, circumstances such as the loss of significant customers or deterioration in the economy, particularly in the media and advertising industries, could require the Company to obtain other sources of liquidity and there can be no assurances that such sources will be available.
The financial results for 2015 are presented from January 1, 2015 through the date the Company was sold on August 25, 2015 (period ended August 25, 2015). All amounts as of August 25, 2015 presented herein reflect the Company’s accounts immediately prior to the sale of the Company (note 11).
The Company has revised its previously issued balance sheets as of August 25, 2015 and December 31, 2014 to reclassify $2.5 million and $3.0 million, respectively, of the deferred revenue liability balance to current liabilities. These revisions are considered immaterial to the financial statements.
(2) | Summary of Significant Accounting Policies |
(a) | Cash and Cash Equivalents |
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. The cash presented in the accompanying balance sheets consists of cash collections not yet applied to reduce the outstanding revolving credit facility balance and would not be available to fund disbursements in the event the bank determines, in its sole discretion, that a material adverse change has occurred.
(b) | Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported and the disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates.
F-40 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
(c) | Revenue Recognition |
The Company’s primary sources of revenue are license fees for use of its content management systems and video software and fees from national and local advertising revenue earned by the customers.
The Company enters into license agreements with customers for its Producer, video, and mobile applications. These license agreements, generally non-cancelable and multiyear, depending on the application, provide the customer the right to use the Company’s application solely on a Company-hosted platform or on the purchased encoders. The license agreements also entitle the customer to technical support. Revenue from these license agreements is recognized ratably over the license term. In accordance with the contingent revenue provisions of ASC Subtopic 605-25, the Company delays recognition of revenue until contractual amounts become due and payable. During the period ended August 25, 2015 and the year ended December 31, 2014, the Company received payments of $4.6 million and $1 million related to customer contract terminations. As of August 25, 2015, the unearned portion was included in deferred revenue and will be recognized upon cessation of services to the customers in the remainder of 2015. License fee revenue represented approximately 69% and 64% of total revenue for the period ended August 25, 2015 and the year ended December 31, 2014, respectively.
Under national advertising agreements, the Company sources, creates, and places advertising campaigns that run across the Company’s network of website participants. National advertising revenue, net of the Company’s sales commission, is shared 0%–75% with customers based on their respective contribution to overall network traffic. The Company invoices national advertising amounts due from advertisers and remits payments to website participants. 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 and represented approximately 18% and 21% of total revenue for the period ended August 25, 2015 and the year ended December 31, 2014, respectively.
Under local advertising agreements with customers, the Company provides 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 approximately 10% to 20% 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. The costs and expenses incurred by the Company to provide consulting and support services are expensed as incurred. Local advertising revenue represented approximately 7% and 9% of total revenue for the period ended August 25, 2015 and the year ended December 31, 2014, respectively.
F-41 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
The Company reports revenue earned through national advertising agreements on a net basis. Gross billings from national advertising agreements (including mobile billings) of approximately $9,160,000 and $16,050,000 resulted in net revenue from national advertising agreements of approximately $3,210,000 and $5,600,000 for the period ended August 25, 2015 and the year ended December 31, 2014, respectively.
Revenue from Raycom Media Inc., a significant shareholder and broadcast group customer, accounted for approximately 15% and 14% of the Company’s total revenue for the period ended August 25, 2015 and the year ended December 31, 2014, respectively.
(d) | Property and Equipment |
Property and equipment are recorded at cost. Depreciation expense includes amortization of assets held under capital leases and is calculated on a stra’ight-line basis over the lesser of the estimated useful lives of the related assets or the term of the lease. The estimated useful lives used to compute depreciation expense are as follows:
Leasehold improvements | Lesser
of 10 years or remaining life of lease | |
Computer equipment | 2–5 years | |
Office equipment and furniture | 5–7 years |
Expenditures for maintenance and repairs are expensed as incurred.
(e) | Software Development Costs |
Capitalized software development costs consist of costs to purchase and develop proprietary software for license to customers and for internal use. Development costs are expensed until the Company has determined that the software will result in probable future economic benefit and technological feasibility has been established. Thereafter, costs are capitalized until the point at which the product is ready for release or use.
Capitalized software is amortized using the straight-line method over its estimated useful life, which generally does not exceed five years. Impairment of the capitalized cost of software developed for license to customers is evaluated by comparing the unamortized cost to its estimated realizable value and recording the asset at the lower of these amounts. Other capitalized software costs are evaluated for impairment by a comparison of their carrying value to future estimated undiscounted net cash flows expected to be generated by their use. If the carrying value is greater than the estimated undiscounted future cash flows, impairment may exist and is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
The Company assesses the carrying value of software development costs whenever events or changes in circumstances, such as significant declines in revenue, earnings or cash flows, or material adverse changes in the business climate, indicate that the carrying amount of an asset may be impaired.
F-42 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
(f) | Advertising Costs |
The Company’s advertising costs were immaterial for the period ended August 25, 2015 and the year ended December 31, 2014.
(g) | Concentration of Credit Risk |
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. Cash is primarily maintained with one financial institution and deposits may exceed the amount of insurance provided on such deposits. The Company’s accounts receivable are concentrated among customers in the media and broadcasting industry, which may be similarly affected by adverse economic factors impacting that industry. The Company performs ongoing credit evaluations of its major customers, maintains reserves for potential credit losses, and does not require any collateral deposits.
(h) | Equity-Based Compensation |
The Company accounts for its employee equity-based compensation awards in accordance with Accounting Standards Codification (ASC) Topic 718, Compensation – Stock Compensation. ASC Topic 718 requires that all employee equity-based compensation is recognized as a cost in the financial statements and that for equity-classified awards, such cost is measured at the grant date fair value of the award. The Company estimates grant date fair value using the Black-Scholes-Merton option pricing model.
Compensation expense for awards is recognized over the requisite service period based on the grant date fair value of those options.
(i) | Allowance for Doubtful Accounts |
Accounts receivable consist of amounts owed to the Company under its license fee, local advertising, and national advertising agreements with customers. As of August 25, 2015 and December 31, 2014, the allowance for doubtful accounts was approximately $58,000 and $50,000, respectively. Such allowance is based on the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience, as well as an assessment of the existing economic environment. Balances outstanding over 90 days and over a specified amount are reviewed individually for collectability. All other balances are reviewed on a pooled basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
(j) | Loss Contingencies |
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
F-43 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
(k) | Other General Expenses |
In 2014, the Company incurred approximately $1,500,000 of expense related to the settlement of a legal matter, which was offset by $200,000 of insurance proceeds. The Company recorded the liability related to this settlement in the other liabilities, current portion and other liabilities line items, of which $1,000,000 related to this matter as of August 25, 2015.
For the period ended August 25, 2015 and the year ended December 31, 2014, the Company incurred approximately $1,459,000 (note 11) and $140,000, respectively of investment banking and due diligence fees. In addition, the Company incurred $245,000 and $100,000 for sales and use taxes for the period ended August 25, 2015 and the year ended December 31, 2014, respectively.
(3) | Long-lived Assets |
(a) | Property and Equipment |
As of August 25, 2015 and December 31, 2014, property and equipment, including assets held under capital lease, consisted of the following:
August 25, 2015 | December 31, 2014 | |||||||
Computer equipment | $ | 6,197,676 | $ | 5,463,730 | ||||
Leasehold improvements | 654,299 | 654,299 | ||||||
Office equipment and furniture | 249,838 | 249,838 | ||||||
7,101,813 | 6,367,867 | |||||||
Less accumulated depreciation and amortization | (5,098,910 | ) | (4,609,627 | ) | ||||
$ | 2,002,903 | $ | 1,758,240 |
Depreciation and amortization expense on property and equipment was approximately $489,000 and $731,000 for the period ended August 25, 2015 and the year ended December 31, 2014, respectively. Depreciation expense for assets held under capital lease was approximately $63,000 and $82,000 for the period ended August 25, 2015 and the year ended December 31, 2014, respectively, (note 4(b)).
F-44 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
(b) | Software development costs |
As of August 25, 2015 and December 31, 2014, software development costs consisted of the following:
August 25, 2015 | December 31, 2014 | |||||||
Cost | $ | 16,054,021 | $ | 13,592,014 | ||||
Less accumulated amortization | (9,163,862 | ) | (7,589,318 | ) | ||||
6,890,159 | 6,002,696 | |||||||
Cost - in process | 416,455 | 1,387,735 | ||||||
$ | 7,306,614 | $ | 7,390,431 |
During the period ended August 25, 2015 and the year ended December 31, 2015, amortization expense for software development costs was approximately $1,575,000 and $2,082,000, respectively.
As of August 25, 2015, scheduled annual amortization of software development costs is as follows:
Period ending August 25: | ||||
2016 | $ | 3,648,102 | ||
2017 | 2,435,115 | |||
2018 | 806,942 | |||
$ | 6,890,159 |
(4) | Commitments and Contingencies |
(a) | Operating Leases |
The Company leases certain office facilities and office equipment under no cancelable operating lease agreements that expire at various dates through the year 2023. As of August 25, 2015, future minimum lease payments required under such no cancelable lease agreements were payable as follows:
Period ending August 25: | ||||
2016 | $ | 801,000 | ||
2017 | 853,000 | |||
2018 | 853,000 | |||
2019 | 853,000 | |||
2020 | 853,000 | |||
Thereafter | 2,132,000 | |||
$ | 6,345,000 |
F-45 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
The Company recognized income of approximately $141,000 and $276,000 in 2015 and 2014, respectively, under the New York City Relocation Employment Assistance Program (REAP), which provides incentives to Manhattan-based companies to relocate to certain areas of the outer boroughs of New York City.
Rent expense, net of REAP income, included in general and administrative expenses in the accompanying statements of income for the period ended August 25, 2015 and the year ended December 31, 2014, was approximately $409,000 and $530,000, respectively.
(b) | Capital Leases |
The Company has entered into various computer-related equipment leases that qualify as capital lease obligations. As a result, the present value of the remaining future minimum lease payments is recorded as a capitalized asset and a related capital lease obligation in the accompanying balance sheets. Assets recorded under capital lease obligations totaled approximately $678,000 and $428,000 as of August 25, 2015 and December 31, 2014, respectively. Related accumulated depreciation totaled approximately $142,000 and $187,000 as of August 25, 2015 and December 31, 2014, respectively. Future minimum capital lease payments as of August 25, 2015 are payable as follows:
Period ending August 25: | ||||
2016 | $ | 218,198 | ||
2017 | 186,898 | |||
2018 | 95,067 | |||
Total | 500,163 | |||
Amount representing interest | (26,990 | ) | ||
Present value of minimum lease payments | 473,173 | |||
Less current portion | (200,788 | ) | ||
Total noncurrent portion | $ | 272,385 |
(c) | Letter of Credit |
As of August 25, 2015 and December 31, 2014, the Company had $500,000 of outstanding letters of credit relating to its lease of office space.
(d) | Legal Contingencies |
The Company is involved in various claims and legal actions. In the opinion of the Company, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
F-46 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
(5) | Related-Party Transactions |
The Company recorded revenue from Raycom Media Inc., a significant shareholder, of approximately $2,686,000 and $3,572,000 for the period ended August 25, 2015 and the year ended December 31, 2014, respectively. Breakdown of revenue recorded from Raycom Media Inc. is as follows:
Period Ended | Year Ended | |||||||
August 25, 2015 | December 31, 2014 | |||||||
License fees | $ | 2,165,000 | $ | 2,244,000 | ||||
National advertising, net | 265,000 | 1,080,000 | ||||||
Local advertising, net | 33,000 | 26,000 | ||||||
Local ad serving | 167,000 | 222,000 | ||||||
Other revenue | 56,000 | 0 | ||||||
$ | 2,686,000 | $ | 3,572,000 |
Related-party transactions with this affiliate in the accompanying balance sheet as of August 25, 2015 and December 31, 2014 include trade accounts payable of approximately $41,000 and $390,000, deferred revenue of approximately $1,158,000 and $1,757,000, and trade accounts receivable of approximately $99,000 and $90,000, respectively.
(6) | Equity-Based Incentive Plan |
The Company has a nonqualified incentive plan (the Plan), which provides employees, directors, and certain consultants the option to purchase common units of the Company. The grant date, exercise price, number of units, and vesting period for each grant is determined at the discretion of the Company’s board of managers. Grantees typically vest in the options at the rate of 33% for each full year of service to the Company from the option grant date. On occasion, certain option grants may vest immediately. The majority of grants in 2015 and 2014 vest 33% per year for 3 years. The Company is authorized to grant options for up to 17,647,000 units under the Plan, and as of August 25, 2015, approximately 8,927,000 units remained available for grant. The options expire 10 years after the grant date.
F-47 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
The following transactions occurred with respect to options under the Plan for the period ended August 25, 2015 and the year ended December 31, 2014:
Weighted | ||||||||
Number of | average | |||||||
Options | exercise price | |||||||
Balance outstanding at January 1, 2014 | 9,291,772 | $ | 0.17 | |||||
Granted | 1,022,000 | 0.15 | ||||||
Exercised | - | - | ||||||
Forfeited or canceled | (1,406,826 | ) | 0.29 | |||||
Balance outstanding at December 31, 2014 | 8,906,946 | 0.15 | ||||||
Granted | 345,000 | 0.15 | ||||||
Exercised | - | - | ||||||
Forfeited or canceled | (531,750 | ) | 0.21 | |||||
Balance outstanding at August 25, 2015 | 8,720,196 | $ | 0.15 |
The Company utilizes the Black-Scholes-Merton option-pricing model to estimate the fair value of options granted, which requires the input of highly subjective assumptions including: the expected option life, the risk-free interest yield, the dividend yield and the volatility of the Company’s common unit price. The risk-free interest yield is estimated based on constant maturity U.S. Treasury rates at the date of grant. Volatility is estimated based on historical volatility of comparable companies. The Company has not historically issued any dividends and does not expect to in the near future. The expected option life is estimated based on historical experience and knowledge of future events. The options granted in 2015 were assumed to have an expected life of 0.2 years given knowledge of the planned sale of the Company (note 11) at the date of grant.
The fair value of option grants during the period ended August 25, 2015 and the year ended December 31, 2014 was estimated on the date of grant using the following range of assumptions and estimates:
Assumption | August 25, 2015 | December 31, 2014 | ||||||
Volatility | 57 | % | 57 | % | ||||
Risk-free interest yield | 1.7 | % | 1.6 | % | ||||
Dividend yield | - | - | ||||||
Average life | 0.2 years | 2 years | ||||||
Weighted average fair value of common units | $ | 0.15 | $ | 0.15 | ||||
Weighted average grant date fair value | $ | 0.02 | $ | 0.05 |
The Company amortizes the fair value of option grants on a straight-line basis over their respective vesting periods. Approximately $91,000 and $49,000 of compensation expense was recognized for the period ended August 25, 2015 and the year ended December 31, 2014, respectively. In connection with the sale of the Company (note 11), all unvested options became fully vested. As of August 25, 2015, there was no unrecognized equity-based compensation on outstanding options.
F-48 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
The following table summarizes information about unit options outstanding as of August 25, 2015:
Weighted | ||||||||||||
average | ||||||||||||
remaining | ||||||||||||
Options | Options | contractual | ||||||||||
Exercise Price | Outstanding | Vested | life | |||||||||
0.12 | 5,856,946 | 5,856,946 | ||||||||||
0.15 | 2,688,250 | 2,688,250 | ||||||||||
1.00 | 175,000 | 175,000 | ||||||||||
0.15 | 8,720,196 | 8,720,196 | 6.1 years |
(7) | 401(k) Plan |
The Company offers its qualified employees the opportunity to participate in a defined-contribution plan qualifying under the provisions of Section 401(k) of the Internal Revenue Code. Employees qualify for the plan after three months of service and attaining the age of 21. The Company does not match employee contributions.
(8) | Income Taxes |
The Company is treated as a partnership for federal income tax purposes and does not incur federal or state income taxes. Instead, its earnings and losses are included in the income tax returns of the members whose tax impact depends on their respective tax situations. Therefore, the financial statements do not reflect a provision for federal or state income taxes.
The Company is subject to income taxes in New York City. Deferred income taxes in this jurisdiction consist principally of net operating loss carryforwards of approximately $1,600,000 and $1,700,000 as of August 25, 2015 and December 31, 2014, respectively. The Company has recorded a full valuation allowance against its deferred tax asset due to the uncertainty of realizing the related benefits. Additionally, utilization of this carryforward to offset taxable income in future periods is limited to common ownership that exists between the year the taxable income is generated and the year the loss carryforward was generated.yeah
(9) | Common Units and Preferred Units |
Common Units
In May 2015 a member of the Company agreed to forfeit their 3,000,000 common units held in the Company. No consideration was given as a result of this forfeiture.
In connection with the sale of the Company (note 11) an additional 2,352,941 units, based on a price of $0.17 per unit, of the Company were issued to Frankly, Inc. as consideration for the assumption of a $400,000 liability of the Company due to a third-party vendor.
F-49 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
Preferred Units
The Preferred Units have a stated capital value of $1.00 per unit and a dividend rate of 6% per year. The dividends are not cumulative. The dividend rate is applied to the unreturned capital value of the Preferred Units, which is the stated capital value of $1.00 per unit reduced by the aggregate amount of distributions made by the Company in respect of the Preferred Units. The Preferred Units are convertible, at the option of the holder, into Common Units at the ratio of the unreturned capital value to $1.00. The conversion ratio may be adjusted in the event of stock splits or stock dividends and to reflect distributions of cash or other assets. The Preferred Class B units have preference over the Preferred Class A units in the event of liquidation and for purposes of dividend distributions. There was no preferred unit activity in 2015 and 2014. A summary of preferred units authorized, issued and outstanding as of August 25, 2015 and December 31, 2014 is as follows:
Preferred Class A | Preferred Class B | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Units | value | Units | value | |||||||||||||
11,188,316 | $ | 11,188,316 | 12,984,743 | $ | 11,173,843 | |||||||||||
Unreturned capital value | $ | 11,188,316 | $ | 12,984,743 |
(10) | Credit Facility |
In September 2013, the Company entered into an amended agreement with its lender. The amended agreement provided for a $2,000,000 term loan, a $3,000,000 revolving line of credit, and a $500,000 letter of credit (collectively, the Credit Facility). The term loan was scheduled to mature in August 2016 and required monthly principal payments of $67,000 beginning in March 2014. Interest on the term loan was payable monthly and accrued at the greater of 3.25% or the lender’s prime rate, plus 1.0%. As of December 31, 2014, approximately $1,300,000 was outstanding under the term loan and the applicable interest rate was 4.25%. The term loan was repaid in full during the period ended August 25, 2015.
Borrowings on the revolving line of credit are limited to the lesser of $3,000,000 or a percentage of eligible accounts receivable (the advance rate). The advance rate is 85% of eligible accounts receivable, unless the dilution rate from items such as credits and billing adjustments is 3.5% but less than 5%, in which case it will be reduced to 80%. The lender may reduce the advance rate below 80% in the event the lender determines that dilution as to the Company’s receivables exceeds 5.0%. Eligible accounts receivable exclude, among other things, past-due invoices, and customer balances where more than 35% of the amounts owed by the customer are past due. The revolving credit facility was renewed in April 2015 for two years. It expires in April 2017 and requires monthly interest payments. The interest rate applicable to the revolving credit facility is the greater of 3.25% or the lender’s prime rate, plus 2.50%. As of August 25, 2015 and December 31, 2014, $2,900,000 and $3,000,000, respectively, was outstanding under the revolving line of credit and the applicable interest rate was 5.75%.
F-50 |
GANNAWAY
WEB HOLDINGS, LLC
(dba WORLDNOW)
Notes to Financial Statements
Period Ended August 25, 2015 and the Year Ended December 31, 2014
The Credit Facility contains financial covenants for which compliance must be measured monthly and before each advance. These covenants include an asset coverage ratio of not less than 1.05 to 1.0 and a debt service coverage ratio, measured on a rolling 3-month basis, of not less than 1.75 to 1.0. The asset coverage ratio is defined as unrestricted cash maintained at lender plus eligible receivables less contra-accounts, counterclaims, and offsets, which include liabilities the Company has to its customers for their share of advertising revenue, divided by the Credit Facility balance, including the letter of credit but excluding the term loan balance. The debt service coverage ratio was modified in April 2015 and is defined as the most recent three months’ net income plus interest, depreciation, amortization, and nonrecurring noncash expenses divided by the current portion of long-term debt plus interest expense, severance payments and capital lease payments for the three months tested. The Company’s ability to comply with these covenants is subject to risk and uncertainty. Borrowings under the Credit Facility are secured by all property of the Company, including but not limited to cash, accounts receivable, property and equipment, and other long-lived assets.
In the event there is an event of default under the Credit Facility, the interest rates on the term loan and revolving credit facility will be subject to an additional 5% (500 basis points).
The $2,000,000 term loan was secured by a guaranty executed by Raycom Media Inc., a related party. On August 5, 2015, the term loan, including accrued interest, was paid in full and, consequently, the guaranty by Raycom Media Inc. was terminated.
(11) | Subsequent Events |
The Company has evaluated subsequent events from the balance sheet date through September 19, 2016, the date on which the financial statements were available to be issued.
Sale of Company
On August 25, 2015, all of the outstanding common units and preferred units of the Company were acquired by Frankly, Inc. (the Acquirer, a company traded on the TSX Venture Exchange) for aggregate consideration of $45,000,000 comprised primarily of $10,000,000 of cash, $15,000,000 in promissory notes and $20,000,000 in restricted common shares of the Acquirer. In connection with the sale, the Company incurred transaction costs of approximately $1,459,000 in cash and stock during the period ended August 25, 2015.
F-51 |
Common Shares
PROSPECTUS
, 2017
Sole Book-Running Manager
Roth Capital Partners
Co-Manager
Noble Capital Markets
Until , all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table provides information regarding the various actual and anticipated expenses (other than underwriters’ discounts) payable by us in connection with the issuance and distribution of the securities being registered hereby. All amounts shown are estimates except the SEC registration fee.
Item | Amount | |||
SEC registration fee | $ | 1,159 | ||
FINRA filing fee | 2,000 | |||
Nasdaq filing fee | 5,000 | |||
Printing and engraving expenses | 1,665 | |||
Legal fees and expenses | 125,000 | |||
Consulting fees | 27,500 | |||
Accounting fees and expenses | 675,000 | |||
Transfer agent fees and expenses | 6,000 | |||
Miscellaneous costs | 6,676 | |||
Total | $ | 850,000 |
Item 14. Indemnification of Directors and Officers
Our Articles contain provisions to indemnify the directors, officers, employees or other agents to the fullest extent permitted by the Business Corporation Act. Subject to the BCBCA, we must indemnify and advance expenses of a director or former director of the Company and his or her heirs and legal personal representatives against all eligible penalties to which such person is or may be liable, and we must, after the final disposition of an eligible proceeding, pay the expenses actually and reasonably incurred by such person in respect of that proceeding. The failure of a director or former director of the Company to comply with the BCBCA or these Articles does not invalidate any indemnity to which he or she is entitled under our Articles. Subject to the BCBCA, no director or officer will be liable for (a) the acts, receipts, neglects or defaults of any person; (b) joining in any receipt or act of conformity; (c) any loss, damage or expense to the Company arising from the insufficiency or deficiency of title to any property acquired by or on behalf of the Company; (d) the insufficiency or deficiency of any security in or upon which any moneys of the Company are invested; (e) any loss, damage or expense arising from the bankruptcy, insolvency, act or omission of any person with whom any monies, securities or other property of the Company are lodged or deposited; (f) any loss, damage or expense occasioned by any error of judgment or oversight; or (g) any other loss, damage or expense related to the performance or non-performance of the duties that individual’s office.
We are also a party to director agreements with two of our new directors, Messrs. Zenz and Rogers that contain indemnification provisions. Under the director agreements, we have that in addition to any indemnification we are required to provide to our directors under our Articles, and subject to the provisions of the BCBCA and applicable law, we agreed to indemnify the directors for all costs, charges and expenses, including any amount paid to settle an action or satisfy a judgment which a director reasonably incurs in respect of any civil, criminal or administrative, investigative or other proceeding to which a director is made a party by reason of having been a director of Frankly, provided (i) the director acted honestly and in good faith with a view to the best interests of Frankly, (ii) in the case of a criminal or administrative proceeding that is enforced by a monetary penalty, the director had reasonable grounds for believing the conduct in respect of which the proceeding was brought was lawful, and (iii) in all events, the director gives Frankly prompt notice of any such civil, criminal or administrative matter.
We may purchase and maintain insurance on behalf of any person who is or was a director, officer or employee of ours, or is or was serving at our request as a director, officer, employee or agent of another company, partnership, joint venture, trust or other enterprise against liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not we would have the power to indemnify him against liability under the provisions of this section. We currently maintain such insurance.
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Item 15. Recent Sales of Unregistered Securities
In connection with the acquisition of Gannaway Web Holdings, LLC, now Frankly Media, in August 2015, we issued $20 million in Restricted Shares to GEI and Raycom in exchange for their LLC interests in Gannaway Web Holdings, LLC. The number of Restricted Shares was 9,772,204 shares, determined with reference to the volume-weighted average price of the common shares on the TSX-V for the five days prior to the date of the purchase agreement which was CDN$2.6471 ($2.0466 based on the exchange rate at July 28, 2015). All of such Restricted Shares were subject to a lock-up agreement. The lock-up period with respect to securities representing 50% of the value of the Share Consideration expired in August 2016. The lock-up period with respect to the remainder of the Share Consideration will expire upon the second anniversary of Closing Date of the transaction in August 2017. Further, upon expiry of the lock-up period, the Restricted Shares will be converted into common shares on a 1:1 basis. In August 2016, all of the Raycom Share Consideration Shares were converted into 6,751,132 common shares, upon waiver by us of the lock-up restriction for the Raycom Restricted Shares and half of the GEI Shares were converted into 1,510,536 common shares for a total of 8,261,668 common shares. The remaining 1,510,536 GEI Shares are subject to lock-up until August 2017. For purposes of the purchase price allocation, such Restricted Shares were reflected at fair value as of the Closing Date which amounted to $15,523,058. As a result of the lock-up agreement, a discount for lack of marketability in the amount of $2,444,882 was applied to arrive at the fair value of the Restricted Shares as of the Closing Date of $13,078,176. The issuance and conversion of the shares were made in reliance on the exemptions from registration set forth in Section 4(a)(2) of the Securities Act.
Further, in connection with the acquisition of Gannaway Web Holdings, LLC, we assumed a $400,000 liability of Gannaway Web Holdings, LLC with Schwartz & Associates, which we satisfied by granting 195,446 common shares to Schwartz & Associates. The common shares were issued at a price of CDN$2.6471 ($2.0466 based on the exchange rate at July 28, 2015) per Common Share, being the volume-weighted average price of the common shares on the TSX-V for the five days prior to the date of the purchase agreement. For purposes of the purchase price allocation, this additional investment was reflected at fair value as of the Closing Date which amounted to $310,464. The issuance and conversion of the shares were made in reliance on the exemptions from registration set forth in Section 4(a)(2) of the Securities Act.
Pursuant to a Management Services Agreement dated April 1, 2015, as amended on August 1, 2015 (the “Management Services Agreement”) between Gannaway Web Holdings, LLC (d/b/a Worldnow and now Frankly Media) and Schwartz & Associates for which Mr. Schwartz is managing partner, Schwartz & Associates was due the amount of $1,125,000 in connection with, and upon the closing of, the Worldnow acquisition as an incentive fee. $310,464 of the incentive fee was paid in 195,446 common shares. The issuance of the shares was made in reliance on the exemptions from registration set forth in Section 4(a)(2) of the Securities Act.
During the years ended December 31, 2014 and 2015, we issued 91,338 options and 1,850,979 options, respectively, to our directors, officers and employees. The weighted average exercise prices for these options for the years ended December 31, 2014 and 2015 are $1.61 and $2.20, respectively. The issuance of the shares were made in reliance on the exemptions from registration set forth in Section 4(a)(2) of the Securities Act.
In the year ended December 31, 2015, we granted an aggregate of 247,676 RSUs to our CEO and 30,000 RSUs which vested upon the one-year anniversary of their election to the Board to two independent directors. The 247,676 RSUs issued to our CEO were cancelled during the six months ended June 30, 2016. The issuance of the RSUs was made in reliance on the exemptions from registration set forth in Section 4(a)(2) of the Securities Act.
In July 2016, we issued 80,425 common shares upon conversion of 80,425 Restricted Shares held by an individual Korean investor. The issuance and conversion of the shares were made in reliance on the exemptions from prospectus requirements set forth in 2.42 (1)(a) of National Instrument 45-106 – Prospectus Exemptions.
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In August 2016, we issued 1,510,535 common shares upon conversion of 1,510,535 Restricted Shares held by an individual investor. The issuance of the shares upon conversion was made in reliance on the exemptions from registration set forth in Section 3(a)(9) of the Securities Act.
In August 2016, pursuant to the Raycom SPA, 2,553,400 common shares were issued for a purchase price of CDN$1,276,700 (or $1 million based on the exchange rate at August 18, 2016) in settlement of $1 million of the Original Raycom Loan. Pursuant to the Credit Agreement, we issued 14,809,720 warrants to purchase one Common Share per warrant at a price per Common Share equal to CDN$0.50 ($0.39 based on the exchange rate at August 18, 2016). We have also converted Raycom’s 6,751,132 Restricted Shares into our common shares on a one-for-one basis. The issuance of the shares and warrants were made in reliance on the exemptions from registration set forth in Section 4(a)(2) of the Securities Act. The conversion of the Restricted Shares of Raycom were made in reliance on the exemptions from registration set forth in Section 3(a)(9) of the Securities Act.
In September 2016, we issued 1,510,535 common shares upon conversion of 1,510,535 Restricted Shares held by Raycom. The conversion price was $0.38. The issuance and conversion of the shares were made in reliance on the exemptions from registration set forth in Section 3(a)(9) of the Securities Act.
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 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. 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. 1,195,000 Units were issued for an aggregate purchase price of CDN$537,750 to non-U.S. purchasers in reliance on the exemption from registration set forth in Section 904 of Regulation S under the Securities Act and 252,222 Units were issued for an aggregate purchase price of CDN$113,499 to U.S. purchasers in reliance on the exemption from registration set forth in Section 4(a)(2) of the Securities Act. In connection with sale of Units outside of the U.S., we paid finder’s fees of 6% cash totaling CDN$31,590 to the Private Placement Brokers. We also issued 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. The net proceeds from the 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.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits. The list of exhibits following the signature page of this registration statement is incorporated herein by reference.
(b) Financial Statements. See page F-1 for an index to the financial statements included in the registration statement.
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Item 17. Undertakings.
The undersigned registrant hereby undertakes:
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of California, on January 11, 2017.
FRANKLY INC. | ||
By: | /s/ Steve Chung | |
Name: | Steve Chung | |
Title: | Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Steve Chung | Chief Executive Officer and Director | January 11, 2017 | ||
Steve Chung | (Principal Executive Officer) | |||
/s/ Louis Schwartz | Chief Financial Officer and Chief Operating Officer | January 11, 2017 | ||
Louis Schwartz | (Principal Financial and Accounting Officer) | |||
* | Director | January 11, 2017 | ||
Choong Sik Hyun | ||||
* | Director | January 11, 2017 | ||
Joseph Gardner Fiveash III | ||||
* | Director | January 11, 2017 | ||
Steven Zenz | ||||
* | Director | January 11, 2017 | ||
Tom Rogers | ||||
/s/ Steve Chung | Attorney-In-Fact | January 11, 2017 | ||
Steve Chung |
* Attorney-in-fact
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EXHIBIT INDEX
Exhibit No. | ||
1.1* | Form of Underwriting Agreement | |
3.1 | Articles of Frankly Inc. | |
3.2** | Amended and Restated Certificate of Incorporation of Frankly Co. dated December 12, 2014 | |
3.3** | Certificate of Merger of Frankly Co. dated December 23, 2014 | |
3.4 | Certificate of Formation of Frankly Media LLC, dated May 11, 1998 as amended on October 15, 2015 | |
3.5** | Sixth Amended and Restated Limited Liability Company Agreement of Frankly Media LLC, dated August 25, 2015 | |
3.6** | Bylaws of Frankly Co. | |
4.1** | Warrant dated August 31, 2016 issued to Raycom Media, Inc. | |
4.2 | Form of Share Certificate | |
4.3 | Form of Class A Restricted Share Certificate | |
4.4** | Promissory Note, dated August 31, 2016 by and between Frankly Inc., as borrower, and Raycom Media, Inc., as creditor | |
4.5 | Form of Warrant dated December 19, 2016 | |
5.1* | Opinion of Ellenoff Grossman & Schole LLP | |
10.1** | Amended and Restated Employment Agreement, dated March 23, 2015, between Frankly Co. and Steve Chung | |
10.2** | Amendment of Employment Agreement, dated August 15, 2016 between Frankly Co. and Steve Chung | |
10.3** | Management Services Agreement between Schwartz & Associates, PC and Frankly Media, LLC | |
10.4** | Amendment to the Management Services Agreement, dated August 15, 2016, between Louis Schwartz and Frankly Media, LLC | |
10.5 | Amendment to the Credit Agreement and SPA, dated December 20, 2016 by and between Raycom Media, Inc. and Frankly Inc. | |
10.6 | Loan and Security Agreement between Silicon Valley Bank and Frankly Inc. dated December 28, 2016 | |
10.7 | [Reserved] | |
10.8** | Director Agreement dated August 11, 2016 between Frankly Inc. and Tom Rogers | |
10.9** | Director Agreement dated August 5, 2016 between Frankly Inc. and Steven Zenz | |
10.10 | Credit Agreement, dated August 31, 2016 by and between Frankly Inc. and Raycom Media, Inc. | |
10.11** | Share Purchase Agreement, dated August 31, 2016 by and between Frankly Inc. and Raycom Media, Inc. | |
10.12** | Amended and Restated Equity Incentive Plan dated January 22, 2016 | |
10.13** | Form of Restricted Stock Units Agreement | |
16.1** | Letter on Change in Certifying Accountant of Collins Barrow Toronto LLP | |
16.2** | Letter on Change in Certifying Accountant of KPMG Canada | |
21.1** | List of Subsidiaries | |
23.1 | Consent of Baker Tilly Virchow Krause, LLP relating to the consolidated financial statements of Frankly Inc. | |
23.2 | Consent of Baker Tilly Virchow Krause, LLP relating to the financial statements of Gannaway Web Holdings, LLC | |
23.3 | Consent of Collins Barrow Toronto, LLP. | |
23.4 | Consent of KPMG LLP | |
23.5* | Consent of Ellenoff Grossman & Schole LLP (included in Exhibit 5.1) | |
24.1** | Power of Attorney |
* To be filed by amendment.
** Previously filed.
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Continuation Number C1082451
Translation of Name (if any) _______________________
PROVINCE OF BRITISH COLUMBIA
BUSINESS CORPORATIONS ACT
ARTICLES
OF
FRANKLY INC.
Fasken Martineau DuMoulin LLP
Barristers & Solicitors
Canada
PROVINCE OF BRITISH COLUMBIA
BUSINESS CORPORATIONS ACT
ARTICLES
of
FRANKLY INC.
(the “Company”)
Continuation Number C1082451
Translation of Name (if any) _________________________________
Part
1
INTERPRETATION
1.1 Definitions. Without limiting Article 1.2, in these articles, unless the context requires otherwise:
“adjourned meeting” means the meeting to which a meeting is adjourned under Article 11.8 or 11.12;
“board”, “board of directors” and “directors” mean the directors or sole director of the Company for the time being and include a committee or other delegate, direct or indirect, of the directors or director;
“Business Corporations Act” means the Business Corporations Act, S.B.C. 2002, c.57 as amended, restated or replaced from time to time, and includes its regulations;
“Interpretation Act” means the Interpretation Act, R.S.B.C. 1996, c. 238;
“legal personal representative” means the personal or other legal representative of the shareholder; and
“seal” means the seal of the Company, if any.
1.2 Business Corporations Act Definitions Apply. The definitions in the Business Corporations Act apply to these articles.
1.3 Interpretation Act Applies. The Interpretation Act applies to the interpretation of these articles as if these articles were an enactment.
1.4 Conflict in Definitions. If there is a conflict between a definition in the Business Corporations Act and a definition or rule in the Interpretation Act relating to a term used in these articles, the definition in the Business Corporations Act will prevail in relation to the use of the term in these articles.
1.5 Conflict Between Articles and Legislation. If there is a conflict between these articles and the Business Corporations Act, the Business Corporations Act will prevail.
Part
2
SHARES AND SHARE CERTIFICATES
2.1 Authorized Share Structure. The authorized share structure of the Company consists of shares of the class or classes and series, if any, described in the Notice of Articles of the Company.
2.2 Form of Share Certificate. Each share certificate issued by the Company must comply with, and be signed as required by, the Business Corporations Act.
2.3 Right to Share Certificate or Acknowledgement. Each shareholder is entitled, without charge, to:
(a) | one certificate representing the share or shares of each class or series of shares registered in the shareholder’s name; or |
FASKEN MARTINEAU DUMOULIN LLP |
(b) | a non-transferable written acknowledgment of the shareholder’s right to obtain such a share certificate, |
provided that in respect of a share held jointly by several persons, the Company is not bound to issue more than one share certificate or acknowledgement and delivery of a share certificate or acknowledgment for a share to one of several joint shareholders or to one of the shareholder’s duly authorized agents will be sufficient delivery to all. The Company may refuse to register more than three persons as joint holders of a share.
2.4 Sending of Share Certificate. Any share certificate or non-transferable written acknowledgment of the shareholder’s right to obtain such a share certificate to which a shareholder is entitled may be sent to the shareholder by mail at the shareholder’s registered address, and neither the Company nor any agent is liable for any loss to the shareholder because the share certificate or acknowledgment sent is lost in the mail or stolen.
2.5 Replacement of Worn Out or Defaced Certificate. If the board of directors, or any officer or agent designated by the directors, is satisfied that a share certificate is worn out or defaced, they must, on production to them of the certificate and on such other terms, if any, as they think fit:
(a) | order the certificate to be cancelled; and |
(b) | issue a replacement share certificate. |
2.6 Replacement of Lost, Stolen or Destroyed Certificate. If a share certificate is lost, stolen or destroyed, a replacement share certificate must be issued to the person entitled to that certificate if the board of directors, or any officer or agent designated by the directors, receives:
(a) | proof satisfactory to them that the certificate is lost, stolen or destroyed; and |
(b) | any indemnity the board of directors, or any officer or agent designated by the directors, considers adequate. |
2.7 Splitting Share Certificates. If a shareholder surrenders a share certificate to the Company with a written request that the Company issue in the shareholder’s name two or more certificates, each representing a specified number of shares and in the aggregate representing the same number of shares as the certificate so surrendered, the Company must cancel the surrendered certificate and issue replacement share certificates in accordance with that request. The Company may refuse to issue a certificate with respect to a fraction of a share.
2.8 Certificate Fee. There must be paid to the Company, in relation to the issue of any share certificate under Articles 2.5, 2.6 or 2.7, the amount, if any and which must not exceed the amount prescribed under the Business Corporations Act, determined by the directors.
2.9 Recognition of Trusts. Except as required by law or statute or these Articles, no person will be recognized by the Company as holding any share upon any trust, and the Company is not bound by or compelled in any way to recognize (even when having notice thereof) any equitable, contingent, future or partial interest in any share or fraction of a share or (except as by law or statute or these Articles provided or as ordered by a court of competent jurisdiction) any other rights in respect of any share except an absolute right to the entirety thereof in the shareholder.
Part
3
ISSUE OF SHARES
3.1 Directors Authorized to Issue Shares. Subject to the Business Corporations Act and the rights of the holders of issued shares of the Company, the directors may issue, allot, sell or otherwise dispose of the unissued shares, and previously issued shares that are subject to reissuance or held by the Company, whether with par value or without par value, at the times, to the persons, including directors, in the manner, on the terms and conditions and for the issue prices (including any premium at which shares may be issued) that the directors, in their absolute discretion, may determine. The issue price for a share with par value must be equal to or greater than the par value of the share.
3.2 Commissions and Discounts. The directors may, at any time, authorize the Company to pay a reasonable commission or allow a reasonable discount to any person in consideration of that person purchasing or agreeing to purchase shares of the Company from the Company or any other person or procuring or agreeing to procure purchasers for shares of the Company.
3.3 Brokerage. The directors may authorize the Company to pay such brokerage fee or other consideration as may be lawful for or in connection with the sale or placement of its securities.
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3.4 Conditions of Issue. Except as provided for by the Business Corporations Act, no share may be issued until it is fully paid. A share is fully paid when:
(a) | consideration is provided to the Company for the issue of the share by one or more of the following: |
(i) | past services performed for the Company; |
(ii) | property; or |
(iii) | money; and |
(b) | the value of the consideration received by the Company equals or exceeds the issue price set for the share under Article 3.1. |
3.5 Warrants, Options and Rights. Subject to the Business Corporations Act, the Company may issue warrants, options and rights upon such terms and conditions as the directors determine, which warrants, options and rights may be issued alone or in conjunction with debentures, debenture stock, bonds, shares or any other securities issued or created by the Company from time to time.
3.6 Fractional Shares. A person holding a fractional share does not have, in relation to the fractional share, the rights of a shareholder in proportion to the fraction of the share held.
Part
4
SHARE REGISTERS
4.1 Central Securities Register. As required by and subject to the Business Corporations Act, the Company must maintain in British Columbia a central securities register.
4.2 Branch Registers. In addition to the central securities register, the Company may maintain branch securities registers.
4.3 Appointment of Agents. The directors may, subject to the Business Corporations Act, appoint an agent to maintain the central securities register and any branch securities registers. The directors may also appoint one or more agents, including the agent which keeps the central securities register, as transfer agent for its shares or any class or series of its shares, as the case may be, and the same or another agent as registrar for its shares or such class or series of its shares, as the case may be. The directors may terminate such appointment of any agent at any time and may appoint another agent in its place.
4.4 Closing Register. The Company must not at any time close its central securities register.
Part
5
SHARE TRANSFERS
5.1 Recording or Registering Transfer. Except to the extent that the Business Corporations Act otherwise provides, a transfer of a share of the Company must not be recorded or registered unless:
(a) | a duly signed instrument of transfer in respect of the share has been received by the Company; |
(b) | if a share certificate has been issued by the Company in respect of the share to be transferred, that share certificate has been surrendered to the Company; and |
(c) | if a non-transferable written acknowledgment of the shareholder’s right to obtain a share certificate has been issued by the Company in respect of the share to be transferred, that acknowledgment has been surrendered to the Company. |
5.2 Form of Instrument of Transfer. The instrument of transfer in respect of any share of the Company must be either in the form, if any, on the back of the Company’s share certificates or in any other form that may be approved by the directors from time to time.
5.3 Transferor Remains Shareholder. Except to the extent that the Business Corporations Act otherwise provides, the transferor of shares is deemed to remain the holder of the shares until the name of the transferee is entered in a securities register of the Company in respect of the transfer.
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5.4 Signing of Instrument of Transfer. If a shareholder, or his or her duly authorized attorney, signs an instrument of transfer in respect of shares registered in the name of the shareholder, the signed instrument of transfer constitutes a complete and sufficient authority to the Company and its directors, officers and agents to register the number of shares specified in the instrument of transfer, or, if no number is specified, all the shares represented by share certificates deposited with the instrument of transfer:
(a) | in the name of the person named as transferee in that instrument of transfer; or |
(b) | if no person is named as transferee in that instrument of transfer, in the name of the person on whose behalf the share certificate is deposited for the purpose of having the transfer registered. |
5.5 Enquiry as to Title Not Required. Neither the Company nor any director, officer or agent of the Company is bound to inquire into the title of the person named in the instrument of transfer as transferee or, if no person is named as transferee in the instrument of transfer, of the person on whose behalf the instrument is deposited for the purpose of having the transfer registered or is liable for any claim related to registering the transfer by the shareholder or by any intermediate owner or holder of the shares, of any interest in the shares, of any share certificate representing such shares or of any written acknowledgment of a right to obtain a share certificate for such shares.
5.6 Transfer Fee. There must be paid to the Company, in relation to the registration of any transfer, the amount determined by the directors.
Part
6
TRANSMISSION OF SHARES
6.1 Legal Personal Representative Recognized on Death. In the case of the death of a shareholder, the legal personal representative, or if the shareholder was a joint holder, the surviving joint holder, will be the only person recognized by the Company as having any title to the shareholder’s interest in the shares. Before recognizing a person as a legal personal representative, the directors may require proof of appointment by a court of competent jurisdiction, a grant of letters probate, letters of administration or such other evidence or documents as the directors consider appropriate.
6.2 Rights of Legal Personal Representative. The legal personal representative has the same rights, privileges and obligations that attach to the shares held by the shareholder, including the right to transfer the shares in accordance with these Articles, provided the documents required by the Business Corporations Act and the directors have been deposited with the Company.
Part
7
PURCHASE OF SHARES
7.1 Company Authorized to Purchase Shares. Subject to the special rights and restrictions attached to any class or series of shares and the Business Corporations Act, the Company may, if authorized by the directors, purchase or otherwise acquire any of its shares at the price and on the terms specified in such resolution.
7.2 Purchase When Insolvent. The Company must not make a payment or provide any other consideration to purchase or otherwise acquire any of its shares if there are reasonable grounds for believing that:
(a) | the Company is insolvent; or |
(b) | making the payment or providing the consideration would render the Company insolvent. |
7.3 Sale and Voting of Purchased Shares. If the Company retains a share redeemed, purchased or otherwise acquired by it, the Company may sell, gift or otherwise dispose of the share, but, while such share is held by the Company, it:
(a) | is not entitled to vote the share at a meeting of its shareholders; |
(b) | must not pay a dividend in respect of the share; and |
(c) | must not make any other distribution in respect of the share. |
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Part
8
BORROWING POWERS
8.1 Powers of Directors. The Company, if authorized by the directors, may from time to time:
(a) | borrow money in the manner and amount, on the security, from the sources and on the terms and conditions that the directors consider appropriate; |
(b) | issue bonds, debentures and other debt obligations either outright or as security for any liability or obligation of the Company or any other person; |
(c) | guarantee the repayment of money by any other person or the performance of any obligation of any other person; and |
(d) | mortgage or charge, whether by way of specific or floating charge, or give other security on the whole or any part of the present and future undertaking of the Company. |
8.2 Terms of Debt Instruments. Any bonds, debentures or other debt obligations of the Company may be issued at a discount, premium or otherwise, and with any special privileges on the redemption, surrender, drawing, allotment of or conversion into or exchange for shares or other securities, attending and voting at general meetings of the Company, appointment of directors or otherwise, and may by their terms be assignable free from any equities between the Company and the person to whom they were issued or any subsequent holder, all as the directors may determine.
8.3 Delegation by Directors. For greater certainty, the powers of the directors under this Part 8 may be exercised by a committee or other delegate, direct or indirect, of the board authorized to exercise such powers.
Part
9
ALTERATIONS
9.1 Alteration of Authorized Share Structure. Subject to Article 9.2 and the Business Corporations Act, the Company may by directors’ resolution:
(a) | create one or more classes or series of shares or, if none of the shares of a class or series of shares is allotted or issued, eliminate that class or series of shares; |
(b) | increase, reduce or eliminate the maximum number of shares that the Company is authorized to issue out of any class or series of shares or establish a maximum number of shares that the Company is authorized to issue out of any class or series of shares for which no maximum is established; |
(c) | subdivide or consolidate all or any of its unissued, or fully paid issued, shares; |
(d) | if the Company is authorized to issue shares of a class of shares with par value: |
(i) | decrease the par value of those shares; or |
(ii) | if none of the shares of that class of shares is allotted or issued, increase the par value of those shares; |
(e) | change all or any of its unissued, or fully paid issued, shares with par value into shares without par value or any of its unissued shares without par value into shares with par value; |
(f) | alter the identifying name of any of its shares; or |
(g) | otherwise alter its shares or authorized share structure when required or permitted to do so by the Business Corporations Act. |
9.2 Special Rights and Restrictions. Subject to the Business Corporations Act, the Company may by ordinary resolution:
(a) | create special rights or restrictions for, and attach those special rights or restrictions to, the shares of any class or series of shares, whether or not any or all of those shares have been issued; or |
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(b) | vary or delete any special rights or restrictions attached to the shares of any class or series of shares, whether or not any or all of those shares have been issued. |
9.3 Change of Name. The Company may by directors’ resolution authorize an alteration of its Notice of Articles in order to change its name.
9.4 Alterations to Articles. If the Business Corporations Act does not specify the type of resolution and these Articles do not specify another type of resolution, the Company may by directors’ resolution alter these Articles.
9.5 Alterations to Notice of Articles. If the Business Corporations Act does not specify the type of resolution and these Articles do not specify another type of resolution, the Company may by directors’ resolution alter its Notice of Articles.
Part
10
MEETINGS OF SHAREHOLDERS
10.1 Annual General Meetings. Unless an annual general meeting is deferred or waived in accordance with the Business Corporations Act, the Company must hold an annual general meeting, for the first time, not more than 18 months after the date on which it was recognized, and after its first annual reference date, at least once in each calendar year and not more than 15 months after the annual reference date for the preceding calendar year at such date, time and location as may be determined by the directors.
10.2 Resolution Instead of Annual General Meeting. If all of the shareholders who are entitled to vote at an annual general meeting consent by a unanimous resolution under the Business Corporations Act to all of the business that is required to be transacted at that annual general meeting, the annual general meeting is deemed to have been held on the date of the unanimous resolution. The shareholders must, in any unanimous resolution passed under this Article 10.2, select as the Company’s annual reference date a date that would be appropriate for the holding of the applicable annual general meeting.
10.3 Calling of Shareholder Meetings. The directors may, whenever they think fit, call a meeting of shareholders.
10.4 Location of Shareholder Meetings. The directors may by directors’ resolution, approve a location outside of British Columbia for the holding of a meeting of shareholders.
10.5 Notice for Meetings of Shareholders. The Company must send notice of the date, time and location of any meeting of shareholders, in the manner provided in these Articles, or in such other manner, if any, as may be prescribed by ordinary resolution (whether previous notice of the resolution has been given or not), to each shareholder entitled to attend the meeting, to each director and to the auditor of the Company, unless these Articles otherwise provide, at least the following number of days before the meeting:
(a) | if and for so long as the Company is a public company, 21 days; and |
(b) | otherwise, 10 days. |
10.6 Record Date for Notice. The directors may set a date as the record date for the purpose of determining shareholders entitled to notice of any meeting of shareholders. The record date must not precede the date on which the meeting is to be held by more than two months or, in the case of a general meeting requisitioned by shareholders under the Business Corporations Act, by more than four months. The record date must not precede the date on which the meeting is held by fewer than:
(a) | if and for so long as the Company is a public company, 21 days; and |
(b) | otherwise, 10 days. |
If no record date is set, the record date is 5 p.m. on the day immediately preceding the first date on which the notice is sent or, if no notice is sent, the beginning of the meeting.
10.7 Record Date for Voting. The directors may set a date as the record date for the purpose of determining shareholders entitled to vote at any meeting of shareholders. The record date must not precede the date on which the meeting is to be held by more than two months or, in the case of a general meeting requisitioned by shareholders under the Business Corporations Act, by more than four months. If no record date is set, the record date is 5 p.m. on the day immediately preceding the first date on which the notice is sent or, if no notice is sent, the beginning of the meeting.
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10.8 Failure to Give Notice and Waiver of Notice. The accidental omission to send notice of any meeting to, or the non-receipt of any notice by, any of the persons entitled to receive notice does not invalidate any proceedings at that meeting. Any person entitled to receive notice of a meeting of shareholders may, in writing or otherwise, waive or reduce the period of notice of such meeting.
10.9 Notice of Special Business at Meetings of Shareholders. If a meeting of shareholders is to consider special business within the meaning of Article 11.1, the notice of meeting must:
(a) | state the general nature of the special business; and |
(b) | if the special business includes considering, approving, ratifying, adopting or authorizing any document or the signing of or giving of effect to any document, have attached to it a copy of the document or state that a copy of the document will be available for inspection by the shareholders: |
(i) | at the Company’s records office, or at such other reasonably accessible location in British Columbia as is specified in the notice; and |
(ii) | during statutory business hours on any one or more specified days before the day set for the holding of the meeting. |
Part
11
PROCEEDINGS AT MEETINGS OF SHAREHOLDERS
11.1 Special Business. At a meeting of shareholders, the following business is special business:
(a) | at a meeting of shareholders that is not an annual general meeting, all business is special business except business relating to the conduct of or voting at the meeting; |
(b) | at an annual general meeting, all business is special business except for the following: |
(i) | business relating to the conduct of, or voting at, the meeting; |
(ii) | consideration of any financial statements of the Company presented to the meeting; |
(iii) | consideration of any reports of the directors or auditor; |
(iv) | the setting or changing of the number of directors; |
(v) | the election or appointment of directors; |
(vi) | the appointment of an auditor; |
(vii) | business arising out of a report of the directors not requiring the passing of a special resolution or an exceptional resolution; and |
(viii) | any other business which, under these Articles or the Business Corporations Act, may be transacted at a meeting of shareholders without prior notice of the business being given to the shareholders. |
11.2 Special Majority. The majority of votes required for the Company to pass a special resolution at a meeting of shareholders is two-thirds of the votes cast on the resolution.
11.3 Quorum. Subject to the special rights and restrictions attached to the shares of any class or series of shares, the quorum for the transaction of business at a meeting of shareholders is two persons who are, or who represent by proxy, shareholders who, in the aggregate, hold at least 10% of the issued shares entitled to be voted at the meeting. If there is only one shareholder the quorum is one person present and being, or representing by proxy, such shareholder.
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11.4 One Shareholder May Constitute Quorum. If there is only one shareholder entitled to vote at a meeting of shareholders:
(a) | the quorum is one person who is, or who represents by proxy, that shareholder; and |
(b) | that shareholder, present in person or by proxy, may constitute the meeting. |
11.5 Meetings by Telephone or Other Communications Medium. A shareholder or proxy holder who is entitled to participate in, including vote at, a meeting of shareholders may participate in person or by telephone or other communications medium if all shareholders and proxy holders participating in the meeting, whether in person or by telephone or other communications medium, are able to communicate with each other. A shareholder who participates in a meeting in a manner contemplated by this Article 11.5 is deemed for all purposes of the Business Corporations Act and these Articles to be present at the meeting and to have agreed to participate in that manner. Nothing in this Article 11.5 obligates the Company to take any action or provide any facility to permit or facilitate the use of any communications mediums at a meeting of shareholders.
11.6 Other Persons May Attend. The directors, the president (if any), the secretary (if any), the assistant secretary (if any), any lawyer for the Company, the auditor of the Company and any other persons invited by the directors are entitled to attend any meeting of shareholders, but if any of those persons does attend a meeting of shareholders, that person is not to be counted in the quorum, and is not entitled to vote at the meeting, unless that person is a shareholder or proxy holder entitled to vote at the meeting.
11.7 Requirement of Quorum. No business, other than the election of a chair of the meeting and the adjournment of the meeting, may be transacted at any meeting of shareholders unless a quorum of shareholders entitled to vote is present at the commencement of the meeting.
11.8 Lack of Quorum. If, within one-half hour from the time set for the holding of a meeting of shareholders, a quorum is not present:
(a) | in the case of a general meeting convened by requisition of shareholders, the meeting is dissolved; and |
(b) | in the case of any other meeting of shareholders, the meeting stands adjourned to the same day in the next week at the same time and place, or at such other date, time or location as the chair specifies on the adjournment. |
11.9 Lack of Quorum at Succeeding Meeting. If, at the meeting to which the first meeting referred to in Article 11.8(b) was adjourned, a quorum is not present within one-half hour from the time set for the holding of the meeting the person or persons present and being, or representing by proxy, one or more shareholders entitled to attend and vote at the meeting constitute a quorum.
11.10 Chair. The following individual is entitled to preside as chair at a meeting of shareholders:
(a) | the chair of the board, if any; and |
(b) | if the chair of the board is absent or unwilling to act as chair of the meeting, the president, if any. |
11.11 Selection of Alternate Chair. If, at any meeting of shareholders, there is no chair of the board or president present within 15 minutes after the time set for holding the meeting, or if the chair of the board and the president are unwilling to act as chair of the meeting, or if the chair of the board and the president have advised the secretary, if any, or any director present at the meeting, that they will not be present at the meeting, the directors present must choose one of their number to be chair of the meeting or if all of the directors present decline to take the chair or fail to so choose or if no director is present, the shareholders entitled to vote at the meeting who are present in person or by proxy may choose any person present at the meeting to chair the meeting.
11.12 Adjournments. The chair of a meeting of shareholders may, and if so directed by the meeting must, adjourn the meeting from time to time and from place to place, but no business may be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place.
11.13 Notice of Adjourned Meeting. It is not necessary to give any notice of an adjourned meeting or of the business to be transacted at an adjourned meeting of shareholders except that, when a meeting is adjourned for 30 days or more, notice of the adjourned meeting must be given as in the case of the original meeting.
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11.14 Decisions by Show of Hands or Poll. Subject to the Business Corporations Act, every motion put to a vote at a meeting of shareholders will be decided on a show of hands unless a poll, before or on the declaration of the result of the vote by show of hands, is directed by the chair or demanded by at least one shareholder entitled to vote who is present in person or by proxy.
11.15 Declaration of Result. The chair of a meeting of shareholders must declare to the meeting the decision on every question in accordance with the result of the show of hands or the poll, as the case may be, and that decision must be entered in the minutes of the meeting. A declaration of the chair that a resolution is carried by the necessary majority or is defeated is, unless a poll is directed by the chair or demanded under Article 11.14, conclusive evidence without proof of the number or proportion of the votes recorded in favour of or against the resolution.
11.16 Motion Need Not Be Seconded. No motion proposed at a meeting of shareholders need be seconded unless the chair of the meeting rules otherwise, and the chair of any meeting of shareholders is entitled to propose or second a motion.
11.17 Casting Vote. In case of an equality of votes, the chair of a meeting of shareholders shall not, either on a show of hands or on a poll, have a second or casting vote in addition to the vote or votes to which the chair may be entitled as a shareholder.
11.18 Manner of Taking a Poll. Subject to Article 11.19, if a poll is duly demanded at a meeting of shareholders:
(a) | the poll must be taken: |
(i) | at the meeting, or within seven days after the date of the meeting, as the chair of the meeting directs; and |
(ii) | in the manner, at the time and at the place that the chair of the meeting directs; |
(b) | the result of the poll is deemed to be a resolution of and passed at the meeting at which the poll is demanded; and |
(c) | the demand for the poll may be withdrawn by the person who demanded it. |
11.19 Demand for a Poll on Adjournment. A poll demanded at a meeting of shareholders on a question of adjournment must be taken immediately at the meeting.
11.20 Chair Must Resolve Dispute. In the case of any dispute as to the admission or rejection of a vote given on a poll, the chair of the meeting must determine the dispute, and his or her determination made in good faith is final and conclusive.
11.21 Casting of Votes. On a poll, a shareholder entitled to more than one vote need not cast all the votes in the same way.
11.22 Demand for Poll. No poll may be demanded in respect of the vote by which a chair of a meeting of shareholders is elected.
11.23 Demand for a Poll Not to Prevent Continuation of Meeting. The demand for a poll at a meeting of shareholders does not, unless the chair of the meeting so rules, prevent the continuation of a meeting for the transaction of any business other than the question on which a poll has been demanded.
11.24 Retention of Ballots and Proxies. The Company must, for at least three months after a meeting of shareholders, keep each ballot cast on a poll and each proxy voted at the meeting, and, during that period, make them available for inspection during statutory business hours by any shareholder or proxy holder entitled to vote at the meeting. At the end of such three month period, the Company may destroy such ballots and proxies.
Part
12
VOTES OF SHAREHOLDERS
12.1 Number of Votes by Shareholder or by Shares. Subject to any special rights or restrictions attached to any shares and to the restrictions imposed on joint registered holders of shares under Article 12.3:
(a) | on a vote by show of hands, every person present who is a shareholder or proxy holder and entitled to vote at the meeting has one vote, and |
(b) | on a poll, every shareholder entitled to vote has one vote in respect of each share entitled to be voted on the matter and held by that shareholder and may exercise that vote either in person or by proxy. |
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12.2 Votes of Persons in Representative Capacity. A person who is not a shareholder may vote at a meeting of shareholders, whether on a show of hands or on a poll, and may appoint a proxy holder to act at the meeting, if, before doing so, the person satisfies the chair of the meeting, or the directors, that the person is the legal personal representative or a trustee in bankruptcy for a shareholder who is entitled to vote at the meeting.
12.3 Votes by Joint Shareholders. If there are joint shareholders registered in respect of any share:
(a) | any one of the joint shareholders may vote at any meeting, either personally or by proxy, in respect of the share as if that joint shareholder were solely entitled to it; or |
(b) | if more than one of the joint shareholders is present at any meeting, personally or by proxy, and more than one of them votes in respect of that share, then only the vote of the joint shareholder present whose name stands first on the central securities register in respect of the share will be counted. |
12.4 Legal Personal Representatives as Joint Shareholders. Two or more legal personal representatives of a shareholder in whose sole name any share is registered are, for the purposes of Article 12.3, deemed to be joint shareholders.
12.5 Representative of a Corporate Shareholder. If a corporation that is not a subsidiary of the Company is a shareholder, that corporation may appoint a person to act as its representative at any meeting of shareholders of the Company, and:
(a) | for that purpose, the instrument appointing a representative must: |
(i) | be received at the registered office of the Company or at any other place specified, in the notice calling the meeting, for the receipt of proxies, at least the number of business days specified in the notice for the receipt of proxies or, if no number is specified, two days before the day set for the holding of the meeting; or |
(ii) | be provided, at the meeting, to the chair of the meeting or to a person designated by the chair of the meeting; and |
(b) | if a representative is appointed under this Article 12.5: |
(i) | the representative is entitled to exercise in respect of and at that meeting the same rights on behalf of the corporation that the representative represents as that corporation could exercise if it were a shareholder who is an individual, including, without limitation, the right to appoint a proxy holder; and |
(ii) | the representative, if present at the meeting, is to be counted for the purpose of forming a quorum and is deemed to be a shareholder present in person at the meeting. |
Evidence of the appointment of any such representative may be sent to the Company by written instrument, fax or any other method of transmitting legibly recorded messages.
12.6 Proxy Provisions Do Not Apply to All Companies. Articles 12.7 to 12.15 do not apply to the Company if and for so long as it is a public company or a pre-existing reporting company which has the Statutory Reporting Company Provisions as part of its Articles or to which the Statutory Reporting Company Provisions apply.
12.7 Appointment of Proxy Holder. Every shareholder of the Company, including a corporation that is a shareholder but not a subsidiary of the Company, entitled to vote at a meeting of shareholders of the Company may, by proxy, appoint one or more (but not more than five) proxy holders to attend and act at the meeting in the manner, to the extent and with the powers conferred by the proxy.
12.8 Alternate Proxy Holders. A shareholder may appoint one or more alternate proxy holders to act in the place of an absent proxy holder.
12.9 When Proxy Holder Need Not Be Shareholder. A person must not be appointed as a proxy holder unless the person is a shareholder, although a person who is not a shareholder may be appointed as a proxy holder if:
(a) | the person appointing the proxy holder is a corporation or a representative of a corporation appointed under Article 12.5; |
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(b) | the Company has at the time of the meeting for which the proxy holder is to be appointed only one shareholder entitled to vote at the meeting; or |
(c) | the shareholders present in person or by proxy at and entitled to vote at the meeting for which the proxy holder is to be appointed, by a resolution on which the proxy holder is not entitled to vote but in respect of which the proxy holder is to be counted in the quorum, permit the proxy holder to attend and vote at the meeting. |
12.10 Deposit of Proxy. A proxy for a meeting of shareholders must:
(a) | be received at the registered office of the Company or at any other place specified, in the notice calling the meeting, for the receipt of proxies, at least the number of business days specified in the notice, or if no number of days is specified, two business days before the day set for the holding of the meeting; or |
(b) | unless the notice provides otherwise, be provided, at the meeting, to the chair of the meeting or to a person designated by the chair of the meeting. |
A proxy may be sent to the Company by written instrument, fax or any other method of transmitting legibly recorded messages.
12.11 Validity of Proxy Vote. A vote given in accordance with the terms of a proxy is valid notwithstanding the death or incapacity of the shareholder giving the proxy and despite the revocation of the proxy or the revocation of the authority under which the proxy is given, unless notice in writing of that death, incapacity or revocation is received:
(a) | at the registered office of the Company, at any time up to and including the last business day before the day set for the holding of the meeting at which the proxy is to be used; or |
(b) | by the chair of the meeting, before the vote is taken. |
12.12 Form of Proxy. A proxy, whether for a specified meeting or otherwise, must be either in the following form or in any other form approved by the directors or the chair of the meeting:
[Name of Company]
(the “Company”)
The undersigned, being a shareholder of the Company, hereby appoints [name] or, failing that person, [name], as proxy holder for the undersigned to attend, act and vote for and on behalf of the undersigned at the meeting of shareholders to be held on [month, day, year] and at any adjournment of that meeting.
Number of shares in respect of which this proxy is given (if no number is specified, then this proxy is given in respect of all shares registered in the name of the shareholder): _______________________
Signed this _____ day of _________, ________.
________________________
Signature of shareholder
________________________
Name of shareholder—printed
12.13 Revocation of Proxy. Subject to Article 12.14, every proxy may be revoked by an instrument in writing that is:
(a) | received at the registered office of the Company at any time up to and including the last business day before the day set for the holding of the meeting at which the proxy is to be used; or |
(b) | provided, at the meeting, to the chair of the meeting. |
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12.14 Revocation of Proxy Must Be Signed. An instrument referred to in Article 12.13 must be signed as follows:
(a) | if the shareholder for whom the proxy holder is appointed is an individual, the instrument must be signed by the shareholder or his or her legal personal representative or trustee in bankruptcy; or |
(b) | if the shareholder for whom the proxy holder is appointed is a corporation, the instrument must be signed by the corporation or by a representative appointed for the corporation under Article 12.5. |
12.15 Production of Evidence of Authority to Vote. The chair of any meeting of shareholders may, but need not, inquire into the authority of any person to vote at the meeting and may, but need not, demand from that person production of evidence as to the existence of the authority to vote.
Part
13
DIRECTORS
13.1 Number of Directors. The number of directors, excluding additional directors appointed under Article 14.8, is set at:
(a) | if the Company is a public company, the greater of three and the most recently set of: |
(i) | the number of directors set by ordinary resolution to a maximum of 11 (whether or not previous notice of the resolution was given); and |
(ii) | the number of directors set under Article 14.4; |
(b) | if the Company is not a public company, the most recently set of: |
(i) | the number of directors set by ordinary resolution (whether or not previous notice of the resolution was given); and |
(ii) | the number of directors set under Article 14.4. |
13.2 Change in Number of Directors. If the number of directors is set under Articles 13.1(a)(i) or 13.1(b)(i):
(a) | the shareholders may elect or appoint the directors needed to fill any vacancies in the board of directors up to that number; |
(b) | if the shareholders do not elect or appoint the directors needed to fill any vacancies in the board of directors up to that number contemporaneously with the setting of that number, then the directors may appoint, or the shareholders may elect or appoint, directors to fill those vacancies. |
13.3 Directors’ Acts Valid Despite Vacancy. An act or proceeding of the directors is not invalid merely because fewer than the number of directors set or otherwise required under these Articles is in office.
13.4 Qualifications of Directors. A director is not required to hold a share in the capital of the Company as qualification for his or her office but must be qualified as required by the Business Corporations Act to become, act or continue to act as a director.
13.5 Remuneration of Directors. The directors are entitled to the remuneration for acting as directors, if any, as the directors may from time to time determine. If the directors so decide, the remuneration of the directors, if any, will be determined by the shareholders. That remuneration may be in addition to any salary or other remuneration paid to any officer or employee of the Company as such, who is also a director.
13.6 Reimbursement of Expenses of Directors. The Company must reimburse each director for the reasonable expenses that he or she may incur in his or her capacity as director in and about the business of the Company.
13.7 Special Remuneration for Directors. If any director performs any professional or other services for the Company that in the opinion of the directors are outside the ordinary duties of a director, or if any director is otherwise specially occupied in or about the Company’s business, he or she may be paid remuneration fixed by the directors, or, at the option of that director, fixed by ordinary resolution, and such remuneration may be either in addition to, or in substitution for, any other remuneration that he or she may be entitled to receive.
13.8 Gratuity, Pension or Allowance on Retirement of Director. Unless otherwise determined by ordinary resolution, the directors may authorize the Company to pay a gratuity or pension or allowance on retirement to any director who has held any salaried office or place of profit with the Company or to his or her spouse or dependants and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance.
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Part
14
ELECTION AND REMOVAL OF DIRECTORS
14.1 Election at Annual General Meeting. At every annual general meeting and in every unanimous resolution contemplated by Article 10.2:
(a) | the shareholders entitled to vote at the annual general meeting for the election of directors must elect, or in the unanimous resolution appoint, a board of directors consisting of the number of directors for the time being set under these Articles; and |
(b) | all the directors cease to hold office immediately before the election or appointment of directors under paragraph (a), but are eligible for re-election or re-appointment. |
14.2 Consent to be a Director. No election, appointment or designation of an individual as a director is valid unless:
(a) | that individual consents to be a director in the manner provided for in the Business Corporations Act; or |
(b) | that individual is elected or appointed at a meeting at which the individual is present and the individual does not refuse, at the meeting, to be a director. |
14.3 Failure to Elect or Appoint Directors. If:
(a) | the Company fails to hold an annual general meeting, and all the shareholders who are entitled to vote at an annual general meeting fail to pass the unanimous resolution contemplated by Article 10.2, on or before the date by which the annual general meeting is required to be held under the Business Corporations Act; or |
(b) | the shareholders fail, at the annual general meeting or in the unanimous resolution contemplated by Article 10.2, to elect or appoint any directors; |
then each director then in office continues to hold office until the earlier of:
(c) | the date on which his or her successor is elected or appointed; and |
(d) | the date on which he or she otherwise ceases to hold office under the Business Corporations Act or these Articles. |
14.4 Places of Retiring Directors Not Filled. If, at any meeting of shareholders at which there should be an election of directors, the places of any of the retiring directors are not filled by that election, those retiring directors who are not re-elected and who are asked by the newly elected directors to continue in office will, if willing to do so, continue in office to complete the number of directors for the time being set pursuant to these Articles until further new directors are elected at a meeting of shareholders convened for that purpose. If any such election or continuance of directors does not result in the election or continuance of the number of directors for the time being set pursuant to these Articles, the number of directors of the Company is deemed to be set at the number of directors actually elected or continued in office.
14.5 Directors May Fill Casual Vacancies. Any casual vacancy occurring in the board of directors may be filled by the directors.
14.6 Remaining Directors Power to Act. The directors may act notwithstanding any vacancy in the board of directors, but if the Company has fewer directors in office than the number set pursuant to these Articles as the quorum of directors, the directors may only act for the purpose of appointing directors up to that number or of summoning a meeting of shareholders for the purpose of filling any vacancies on the board of directors or, subject to the Business Corporations Act, for any other purpose.
14.7 Shareholders May Fill Vacancies. If the Company has no directors or fewer directors in office than the number set pursuant to these Articles as the quorum of directors, the shareholders may elect or appoint directors to fill any vacancies on the board of directors.
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14.8 Additional Directors. Notwithstanding Articles 13.1 and 13.2, between annual general meetings or unanimous resolutions contemplated by Article 10.2, the directors may appoint one or more additional directors, but the number of additional directors appointed under this Article 14.8 must not at any time exceed:
(a) | one-third of the number of first directors, if, at the time of the appointments, one or more of the first directors have not yet completed their first term of office; or |
(b) | in any other case, one-third of the number of the current directors who were elected or appointed as directors other than under this Article 14.8. |
Any director so appointed ceases to hold office immediately before the next election or appointment of directors under Article 14.1(a), but is eligible for re-election or re-appointment.
14.9 Ceasing to be a Director. A director ceases to be a director when:
(a) | the term of office of the director expires; |
(b) | the director dies; |
(c) | the director resigns as a director by notice in writing provided to the Company or a lawyer for the Company; or |
(d) | the director is removed from office pursuant to Articles 14.10 or 14.11. |
14.10 Removal of Director by Shareholders. The Company may remove any director before the expiration of his or her term of office by ordinary resolution. In that event, the shareholders may elect, or appoint by ordinary resolution, a director to fill the resulting vacancy. If the shareholders do not elect or appoint a director to fill the resulting vacancy contemporaneously with the removal, then the directors may appoint or the shareholders may elect, or appoint by ordinary resolution, a director to fill that vacancy.
14.11 Removal of Director by Directors. The directors may remove any director before the expiration of his or her term of office by directors’ resolution, and the directors may appoint a director to fill the resulting vacancy.
Part
15
POWERS AND DUTIES OF DIRECTORS
15.1 Powers of Management. The directors must, subject to the Business Corporations Act and these Articles, manage or supervise the management of the business and affairs of the Company and have the authority to exercise all such powers of the Company as are not, by the Business Corporations Act or by these Articles, required to be exercised by the shareholders of the Company.
15.2 Appointment of Attorney of Company. The directors exclusively may from time to time, by power of attorney or other instrument, under seal if so required by law, appoint any person to be the attorney of the Company for such purposes, and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the directors under these Articles and excepting the power to fill vacancies in the board of directors, to remove a director, to change the membership of, or fill vacancies in, any committee of the directors, to appoint or remove officers appointed by the directors and to declare dividends) and for such period, and with such remuneration and subject to such conditions as the directors may think fit. Any such power of attorney may contain such provisions for the protection or convenience of persons dealing with such attorney as the directors think fit. Any such attorney may be authorized by the directors to sub-delegate all or any of the powers, authorities and discretions for the time being vested in him or her.
Part
16
DISCLOSURE OF INTEREST OF DIRECTORS
16.1 Obligation to Account for Profits. A director or senior officer who holds a disclosable interest (as that term is used in the Business Corporations Act) in a contract or transaction into which the Company has entered or proposes to enter is liable to account to the Company for any profit that accrues to the director or senior officer under or as a result of the contract or transaction only if and to the extent provided in the Business Corporations Act.
16.2 Restrictions on Voting by Reason of Interest. A director who holds a disclosable interest in a contract or transaction into which the Company has entered or proposes to enter is not entitled to vote on any directors’ resolution to approve that contract or transaction, unless all the directors have a disclosable interest in that contract or transaction, in which case any or all of those directors may vote on such resolution.
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16.3 Interested Director Counted in Quorum. A director who holds a disclosable interest in a contract or transaction into which the Company has entered or proposes to enter and who is present at the meeting of directors at which the contract or transaction is considered for approval may be counted in the quorum at the meeting whether or not the director votes on any or all of the resolutions considered at the meeting.
16.4 Disclosure of Conflict of Interest or Property. A director or senior officer who holds any office or possesses any property, right or interest that could result, directly or indirectly, in the creation of a duty or interest that materially conflicts with that individual’s duty or interest as a director or senior officer, must disclose the nature and extent of the conflict as required by the Business Corporations Act.
16.5 Director Holding Other Office in the Company. A director may hold any office or place of profit with the Company, other than the office of auditor of the Company, in addition to his or her office of director for the period and on the terms (as to remuneration or otherwise) that the directors may determine.
16.6 No Disqualification. No director or intended director is disqualified by his or her office from contracting with the Company either with regard to the holding of any office or place of profit the director holds with the Company or as vendor, purchaser or otherwise, and no contract or transaction entered into by or on behalf of the Company in which a director is in any way interested is liable to be voided for that reason.
16.7 Professional Services by Director or Officer. Subject to the Business Corporations Act, a director or officer, or any person in which a director or officer has an interest, may act in a professional capacity for the Company, except as auditor of the Company, and the director or officer or such person is entitled to remuneration for professional services as if that director or officer were not a director or officer.
16.8 Director or Officer in Other Corporations. A director or officer may be or become a director, officer or employee of, or otherwise interested in, any person in which the Company may be interested as a shareholder or otherwise, and, subject to the Business Corporations Act, the director or officer is not accountable to the Company for any remuneration or other benefits received by him or her as director, officer or employee of, or from his or her interest in, such other person.
Part
17
PROCEEDINGS OF DIRECTORS
17.1 Meetings of Directors. The directors may meet together for the conduct of business, adjourn and otherwise regulate their meetings as they think fit, and meetings of the board held at regular intervals may be held at the place, at the time and on the notice, if any, that the board may by resolution from time to time determine.
17.2 Voting at Meetings. Questions arising at any meeting of directors are to be decided by a majority of votes and, in the case of an equality of votes, the chair of the meeting shall not have a second or casting vote.
17.3 Chair of Meetings. Meetings of directors are to be chaired by:
(a) | the chair of the board, if any; |
(b) | in the absence of the chair of the board, the president, if any, if the president is a director; or |
(c) | any other director chosen by the directors if: |
(i) | neither the chair of the board nor the president, if a director, is present at the meeting within 15 minutes after the time set for holding the meeting; |
(ii) | neither the chair of the board nor the president, if a director, is willing to chair the meeting; or |
(iii) | the chair of the board and the president, if a director, have advised the secretary, if any, or any other director, that they will not be present at the meeting. |
17.4 Meetings by Telephone or Other Communications Medium. A director may participate in a meeting of the directors or of any committee of the directors in person or by telephone or other communications medium if all directors participating in the meeting, whether in person or by telephone or other communications medium, are able to communicate with each other. A director who participates in a meeting in a manner contemplated by this Article 17.4 is deemed for all purposes of the Business Corporations Act and these Articles to be present at the meeting and to have agreed to participate in that manner.
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17.5 Calling of Meetings. A director may, and the secretary or an assistant secretary, if any, on the request of a director must, call a meeting of the directors at any time.
17.6 Notice of Meetings. Other than for meetings held at regular intervals as determined by the directors pursuant to Article 17.1, reasonable notice of each meeting of the directors, specifying the place, day and time of that meeting must be given to each of the directors by any method set out in Article 23.1 or orally or by telephone.
17.7 When Notice Not Required. It is not necessary to give notice of a meeting of the directors to a director if:
(a) | the meeting is to be held immediately following a meeting of shareholders at which that director was elected or appointed or is the meeting of the directors at which that director is appointed; or |
(b) | the director has waived notice of the meeting. |
17.8 Meeting Valid Despite Failure to Give Notice. The accidental omission to give notice of any meeting of directors to any director, or the non-receipt of any notice by any director, does not invalidate any proceedings at that meeting.
17.9 Waiver of Notice of Meetings. Any director may file with the Company a document signed by the director waiving notice of any past, present or future meeting of the directors and may at any time withdraw that waiver with respect to meetings of the directors held after that withdrawal. After sending a waiver with respect to all future meetings of the directors, and until that waiver is withdrawn, no notice of any meeting of the directors need be given to that director and all meetings of the directors so held are deemed not to be improperly called or constituted by reason of notice not having been given to such director.
17.10 Quorum. The quorum necessary for the transaction of the business of the directors may be set by the directors and, if not so set, is deemed to be set at a majority of the directors or, if the number of directors is set at one, is deemed to be set at one director, and that director may constitute a meeting.
17.11 Validity of Acts Where Appointment Defective. Subject to the Business Corporations Act, an act of a director or officer is not invalid merely because of an irregularity in the election or appointment or a defect in the qualification of that director or officer.
17.12 Consent Resolutions in Writing. A resolution of the directors or of any committee of the directors consented to in writing by all of the directors entitled to vote on it, whether by signed document, fax, email or any other method of transmitting legibly recorded messages, is as valid and effective as if it had been passed at a meeting of the directors or of the committee of the directors duly called and held. Such resolution may be in two or more counterparts which together are deemed to constitute one resolution in writing. A resolution passed in that manner is effective on the date stated in the resolution or, if no date is stated in the resolution, on the latest date stated on any counterpart. A resolution of the directors or of any committee of the directors passed in accordance with this Article 17.12 is deemed to be a proceeding at a meeting of directors or of the committee of the directors and to be as valid and effective as if it had been passed at a meeting of the directors or of the committee of the directors that satisfies all the requirements of the Business Corporations Act and all the requirements of these Articles relating to meetings of the directors or of a committee of the directors.
Part
18
EXECUTIVE AND OTHER COMMITTEES
18.1 Appointment and Powers of Executive Committee. The directors may, by resolution, appoint an executive committee consisting of the director or directors that they consider appropriate, and this committee has, during the intervals between meetings of the board of directors, all of the directors’ powers, except:
(a) | the power to fill vacancies in the board of directors; |
(b) | the power to remove a director; |
(c) | the power to change the membership of, or fill vacancies in, any committee of the directors; and |
(d) | such other powers, if any, as may be set out in the resolution or any subsequent directors’ resolution. |
18.2 Appointment and Powers of Other Committees. The directors may, by resolution,
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(a) | appoint one or more committees (other than the executive committee) consisting of the director or directors that they consider appropriate; |
(b) | delegate to a committee appointed under paragraph (a) any of the directors’ powers, except: |
(i) | the power to fill vacancies in the board of directors; |
(ii) | the power to remove a director; |
(iii) | the power to change the membership of, or fill vacancies in, any committee of the board, and |
(iv) | the power to appoint or remove officers appointed by the board; and |
(c) | make any delegation referred to in paragraph (b) subject to the conditions set out in the resolution. |
18.3 Obligations of Committee. Any committee appointed under Articles 18.1 or 18.2, in the exercise of the powers delegated to it, must
(a) | conform to any rules that may from time to time be imposed on it by the directors; and |
(b) | report every act or thing done in exercise of those powers as the directors may require. |
18.4 Powers of Board. The directors may, at any time, with respect to a committee appointed under Articles 18.1 or 18.2:
(a) | revoke or alter the authority given to a committee, or override a decision made by a committee, except as to acts done before such revocation, alteration or overriding; |
(b) | terminate the appointment of, or change the membership of, a committee; and |
(c) | fill vacancies on a committee. |
18.5 Committee Meetings. Subject to Article 18.3(a) and unless the directors otherwise provide in the resolution appointing the committee or in any subsequent resolution, with respect to a committee appointed under Articles 18.1 or 18.2:
(a) | the committee may meet and adjourn as it thinks proper; |
(b) | the committee may elect a chair of its meetings but, if no chair of the meeting is elected, or if at any meeting the chair of the meeting is not present within 15 minutes after the time set for holding the meeting, the directors present who are members of the committee may choose one of their number to chair the meeting; |
(c) | a majority of the members of a directors’ committee constitutes a quorum of the committee; and |
(d) | questions arising at any meeting of the committee are determined by a majority of votes of the members present, and in case of an equality of votes, the chair of the meeting has no second or casting vote. |
Part
19
OFFICERS
19.1 Appointment of Officers. The directors may, from time to time, appoint such officers, if any, as the directors determine, and the directors may, at any time, terminate any such appointment.
19.2 Functions, Duties and Powers of Officers. The directors may, for each officer:
(a) | determine the functions and duties of the officer; |
(b) | entrust to and confer on the officer any of the powers exercisable by the directors on such terms and conditions and with such restrictions as the directors think fit; and |
(c) | revoke, withdraw, alter or vary all or any of the functions, duties and powers of the officer. |
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19.3 Qualifications. No officer may be appointed unless that officer is qualified in accordance with the Business Corporations Act. One person may hold more than one position as an officer of the Company. Any officer need not be a director.
19.4 Remuneration. All appointments of officers are to be made on the terms and conditions and at the remuneration (whether by way of salary, fee, commission, participation in profits or otherwise) that the directors think fit and are subject to termination at the pleasure of the directors, and an officer may in addition to such remuneration be entitled to receive, after he or she ceases to hold such office or leaves the employment of the Company, a pension or gratuity.
Part
20
INDEMNIFICATION
20.1 Definitions. In this Part 20:
(a) | “eligible penalty” means a judgment, penalty or fine awarded or imposed in, or an amount paid in settlement of, an eligible proceeding; |
(b) | “eligible proceeding” means a legal proceeding or investigative action, whether current, threatened, pending or completed, in which a director, former director of the Company or an affiliate of the Company (an “eligible party”) or any of the heirs and legal personal representatives of the eligible party, by reason of the eligible party being or having been a director of the Company or an affiliate of the Company: |
(i) | is or may be joined as a party; or |
(ii) | is or may be liable for or in respect of a judgment, penalty or fine in, or expenses related to, the proceeding; |
(c) | “expenses” has the meaning set out in the Business Corporations Act. |
20.2 Mandatory Indemnification of Directors and Former Directors. Subject to the Business Corporations Act, the Company must indemnify and advance expenses of a director or former director of the Company and his or her heirs and legal personal representatives against all eligible penalties to which such person is or may be liable, and the Company must, after the final disposition of an eligible proceeding, pay the expenses actually and reasonably incurred by such person in respect of that proceeding. Each director is deemed to have contracted with the Company on the terms of the indemnity contained in this Article 20.2.
20.3 Indemnification of Other Persons. Subject to any restrictions in the Business Corporations Act, the Company may indemnify any person.
20.4 Non-Compliance with Business Corporations Act. The failure of a director or former director of the Company to comply with the Business Corporations Act or these Articles does not invalidate any indemnity to which he or she is entitled under this Part.
20.5 Company May Purchase Insurance. The Company may purchase and maintain insurance for the benefit of any person (or his or her heirs or legal personal representatives) who:
(a) | is or was a director, officer, employee or agent of the Company; |
(b) | is or was a director, officer, employee or agent of a corporation at a time when the corporation is or was an affiliate of the Company; |
(c) | at the request of the Company, is or was a director, officer, employee or agent of a corporation or of a partnership, trust, joint venture or other unincorporated entity; |
(d) | at the request of the Company, holds or held a position equivalent to that of a director or officer of a partnership, trust, joint venture or other unincorporated entity; |
against any liability incurred by him or her as such director, officer, employee or agent or person who holds or held such equivalent position.
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20.6 Limitation of Liability. Subject to the Business Corporations Act, no director or officer shall be liable for:
(a) | the acts, receipts, neglects or defaults of any person; |
(b) | joining in any receipt or act of conformity; |
(c) | any loss, damage or expense to the Company arising from the insufficiency or deficiency of title to any property acquired by or on behalf of the Company; |
(d) | the insufficiency or deficiency of any security in or upon which any moneys of the Company are invested; |
(e) | any loss, damage or expense arising from the bankruptcy, insolvency, act or omission of any person with whom any monies, securities or other property of the Company are lodged or deposited; |
(f) | any loss, damage or expense occasioned by any error of judgment or oversight; or |
(g) | any other loss, damage or expense related to the performance or non-performance of the duties that individual’s office. |
Part
21
DIVIDENDS
21.1 Payment of Dividends Subject to Special Rights. The provisions of this Part 21 are subject to the rights, if any, of shareholders holding shares with special rights as to dividends.
21.2 Declaration of Dividends. Subject to the Business Corporations Act, the directors may from time to time declare and authorize payment of such dividends as they may deem advisable.
21.3 No Notice Required. The directors need not give notice to any shareholder of any declaration under Article 21.2.
21.4 Record Date. The directors may set a date as the record date for the purpose of determining shareholders entitled to receive payment of a dividend. The record date must not precede the date on which the dividend is to be paid by more than two months. If no record date is set, the record date is 5 p.m. on the date on which the directors pass the resolution declaring the dividend.
21.5 Manner of Paying Dividend. A resolution declaring a dividend may direct payment of the dividend wholly or partly by the distribution of specific assets or of paid up shares or of bonds, debentures or other securities of the Company, or in any one or more of those ways.
21.6 Settlement of Difficulties. If any difficulty arises in regard to a distribution under Article 21.5, the directors may settle the difficulty as they deem advisable, and, in particular, may:
(a) | set the value for distribution of specific assets; |
(b) | determine that cash payments in substitution for all or any part of the specific assets to which any shareholders are entitled may be made to any shareholders on the basis of the value so fixed in order to adjust the rights of all parties; and |
(c) | vest any such specific assets in trustees for the persons entitled to the dividend. |
21.7 When Dividend Payable. Any dividend may be made payable on such date as is fixed by the directors.
21.8 Dividends to be Paid in Accordance with Number of Shares. All dividends on shares of any class or series of shares must be declared and paid according to the number of such shares held.
21.9 Receipt by Joint Shareholders. If several persons are joint shareholders of any share, any one of them may give an effective receipt for any dividend, bonus or other money payable in respect of the share.
21.10 Dividend Bears No Interest. No dividend bears interest against the Company.
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21.11 Fractional Dividends. If a dividend to which a shareholder is entitled includes a fraction of the smallest monetary unit of the currency of the dividend, that fraction may be disregarded in making payment of the dividend and that payment represents full payment of the dividend.
21.12 Payment of Dividends. Any dividend or other distribution payable in cash in respect of shares may be paid by cheque, made payable to the order of the person to whom it is sent, and mailed to the address of the shareholder, or in the case of joint shareholders, to the address of the joint shareholder who is first named on the central securities register, or to the person and to the address the shareholder or joint shareholders may direct in writing. The mailing of such cheque will, to the extent of the sum represented by the cheque (plus the amount of the tax required by law to be deducted), discharge all liability for the dividend unless such cheque is not paid on presentation or the amount of tax so deducted is not paid to the appropriate taxing authority.
21.13 Capitalization of Surplus. Notwithstanding anything contained in these Articles, the directors may from time to time capitalize any surplus of the Company and may from time to time issue, as fully paid, shares or any bonds, debentures or other securities of the Company as a dividend representing the surplus or any part of the surplus.
Part
22
DOCUMENTS, RECORDS AND REPORTS
22.1 Recording of Financial Affairs. The directors must cause adequate accounting records to be kept to record properly the financial affairs and condition of the Company and to comply with the provisions of the Business Corporations Act.
22.2 Inspection of Accounting Records. Unless the directors determine otherwise, or unless otherwise determined by ordinary resolution, no shareholder of the Company is entitled to inspect or obtain a copy of any accounting records of the Company.
22.3 Remuneration of Auditors. The remuneration of the auditors, if any, shall be set by the directors regardless of whether the auditor is appointed by the shareholders, by the directors or otherwise. For greater certainty, the directors may delegate to the audit committee or other committee the power to set the remuneration of the auditors.
Part
23
NOTICES
23.1 Method of Giving Notice. Unless the Business Corporations Act or these Articles provides otherwise, a notice, statement, report or other record required or permitted by the Business Corporations Act or these Articles to be sent by or to a person may be sent by any one of the following methods:
(a) | mail addressed to the person at the applicable address for that person as follows: |
(i) | for a record mailed to a shareholder, the shareholder’s registered address; |
(ii) | for a record mailed to a director or officer, the prescribed address for mailing shown for the director or officer in the records kept by the Company or the mailing address provided by the recipient for the sending of that record or records of that class; |
(iii) | in any other case, the mailing address of the intended recipient; |
(b) | delivery at the applicable address for that person as follows, addressed to the person: |
(i) | for a record delivered to a shareholder, the shareholder’s registered address; |
(ii) | for a record delivered to a director or officer, the prescribed address for delivery shown for the director or officer in the records kept by the Company or the delivery address provided by the recipient for the sending of that record or records of that class; |
(iii) | in any other case, the delivery address of the intended recipient; |
(c) | sending the record by fax to the fax number provided by the intended recipient for the sending of that record or records of that class; |
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(d) | sending the record, or a reference providing the intended recipient with immediate access to the record, by electronic communication to an address provided by the intended recipient for the sending of that record or records of that class; |
(e) | sending the record by any method of transmitting legibly recorded messages, including without limitation by digital medium, magnetic medium, optical medium, mechanical reproduction or graphic imaging, to an address provided by the intended recipient for the sending of that record or records of that class; or |
(f) | physical delivery to the intended recipient. |
23.2 Deemed Receipt. A record that is mailed to a person by ordinary mail to the applicable address for that person referred to in Article 23.1 is deemed to be received by the person to whom it was mailed on the day, Saturdays, Sundays and holidays excepted, following the date of mailing. Any demand, notice or other communication given by personal delivery will be conclusively deemed to have been given on the day of actual delivery thereof and, if given by electronic communication, on the day of transmittal thereof if given during statutory business hours on the day which statutory business hours next occur if not given during such hours on any day.
23.3 Certificate of Sending. A certificate signed by the secretary, if any, or other officer of the Company or of any other corporation acting in that behalf for the Company stating that a notice, statement, report or other record was addressed as required by Article 23.1, prepaid and mailed or otherwise sent as permitted by Article 23.1 is conclusive evidence of that fact.
23.4 Notice to Joint Shareholders. A notice, statement, report or other record may be provided by the Company to the joint shareholders of a share by providing the notice to the joint shareholder first named in the central securities register in respect of the share.
23.5 Notice to Trustees. A notice, statement, report or other record may be provided by the Company to the persons entitled to a share in consequence of the death, bankruptcy or incapacity of a shareholder by:
(a) | mailing the record, addressed to them: |
(i) | by name, by the title of the legal personal representative of the deceased or incapacitated shareholder, by the title of trustee of the bankrupt shareholder or by any similar description; and |
(ii) | at the address, if any, supplied to the Company for that purpose by the persons claiming to be so entitled; or |
(b) | if an address referred to in paragraph (a)(ii) has not been supplied to the Company, by giving the notice in a manner in which it might have been given if the death, bankruptcy or incapacity had not occurred. |
Part
24
SEAL
24.1 Who May Attest Seal. Except as provided in Articles 24.2 and 24.3, the Company’s seal, if any, must not be impressed on any record except when that impression is attested by the signature or signatures of:
(a) | any two directors; |
(b) | any officer, together with any director; |
(c) | if the Company only has one director, that director; or |
(d) | any one or more directors or officers or persons as may be determined by resolution of the directors. |
24.2 Sealing Copies. For the purpose of certifying under seal a certificate of incumbency of the directors or officers of the Company or a true copy of any resolution or other document, despite Article 24.1, the impression of the seal may be attested by the signature of any director or officer.
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24.3 Mechanical Reproduction of Seal. The directors may authorize the seal to be impressed by third parties on share certificates or bonds, debentures or other securities of the Company as they may determine appropriate from time to time. To enable the seal to be impressed on any share certificates or bonds, debentures or other securities of the Company, whether in definitive or interim form, on which facsimiles of any of the signatures of the directors or officers of the Company are, in accordance with the Business Corporations Act or these Articles, printed or otherwise mechanically reproduced, there may be delivered to the person employed to engrave, lithograph or print such definitive or interim share certificates or bonds, debentures or other securities one or more unmounted dies reproducing the seal and the chair of the board or any senior officer together with the secretary, treasurer, secretary-treasurer, an assistant secretary, an assistant treasurer or an assistant secretary-treasurer may in writing authorize such person to cause the seal to be impressed on such definitive or interim share certificates or bonds, debentures or other securities by the use of such dies. Share certificates or bonds, debentures or other securities to which the seal has been so impressed are for all purposes deemed to be under and to bear the seal impressed on them.
Part
25
PROHIBITIONS
25.1 Definitions. In this Part 25:
(a) | “designated security” means: |
(i) | a voting security of the Company; |
(ii) | a security of the Company that is not a debt security and that carries a residual right to participate in the earnings of the Company or, on the liquidation or winding up of the Company, in its assets; or |
(iii) | a security of the Company convertible, directly or indirectly, into a security described in paragraph (a) or (b); |
(b) | “security” has the meaning assigned in the Securities Act (British Columbia); |
(c) | “voting security” means a security of the Company that: |
(i) | is not a debt security, and |
(ii) | carries a voting right either under all circumstances or under some circumstances that have occurred and are continuing. |
25.2 Application. Article 25.3 does not apply to the Company if and for so long as it is a public company or a pre-existing reporting company which has the Statutory Reporting Company Provisions as part of its Articles or to which the Statutory Reporting Company Provisions apply.
25.3 Consent Required for Transfer of Shares or Designated Securities. No share or designated security may be sold, transferred or otherwise disposed of without the consent of the directors and the directors are not required to give any reason for refusing to consent to any such sale, transfer or other disposition.
Part
26
SPECIAL RIGHTS AND RESTRICTIONS
26.1 Special Rights and Restrictions.
The shares shall have attached to them the special rights and restrictions set for in Part 26, Part 27 and Part 28.
26.2 Interpretations
In Parts 26, 27, 28.
(a) | “1933 Act” means the United States Securities Act of 1933, as amended from time to time. |
(b) | “1934 Act” means the United States Securities Exchange Act of 1934, as amended from time to time. |
(c) | “Act” means the Business Corporations Act (British Columbia) and the Regulations enacted thereunder as amended from time to time. |
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(d) | “Articles” means the articles of the Company. |
(e) | “Board” means the board of directors of the Company from time to time. |
(f) | “Business Day” means a day on which securities may be traded on the TSX Venture Exchange, the Toronto Stock Exchange or any other stock exchange on which the Common Shares are then listed. |
(g) | “Conversion Notice” means a written notice to the transfer agent of the Restricted Voting Shares, in form and substance satisfactory to the Company and the transfer agent, executed by a person registered in the records of the Company or the transfer agent, as the case may be, as a holder of the Restricted Voting Shares, or by his or her attorney duly authorized in writing and specifying the number of Restricted Voting Shares which the holder thereof desires to have converted into Common Shares, and accompanied by: (a) if share certificates were issued to such holder, the share certificate or certificates representing the Restricted Voting Shares which such holder desires to convert; (b) a letter of transmittal, direction, transfer, power of attorney and/or such other documentation as is specified by the Company or the transfer agent for the Restricted Voting Shares, acting reasonably, as being required to give full effect to the conversion duly completed and executed by the person registered in the records of the Company or the transfer agent, as the case may be, as the holder of the Restricted Voting Shares to be converted or by his or her attorney duly authorized in writing; and (c) a duly completed and executed Residency Declaration or an opinion or memorandum of counsel (which may be the Company’s counsel), in form and substance satisfactory to the Company and the transfer agent, to the effect that the conversion of such Restricted Voting Shares into Common Shares would not cause the Company to become a Domestic Issuer. |
(h) | “Domestic Issuer” has the meaning ascribed thereto in Rule 902(e) of Regulation S under the 1933 Act. |
(i) | “Exclusionary Offer” means an offer to purchase Restricted Voting Shares which must be made, by reason of applicable securities legislation or by the rules or policies of a stock exchange on which any shares of the Company are listed, to all or substantially all of the holders of Restricted Voting Shares. |
(j) | “Foreign Issuer” has the meaning ascribed thereto in Rule 902(e) of Regulation S under the 1933 Act. |
(k) | “Fundamental Transaction” means a reorganization, recapitalization, reclassification, merger or amalgamation or any similar transaction involving the Company. |
(l) | “Liquidation Event” means a distribution of assets of the Company to its shareholders arising on the winding-up, liquidation or dissolution of the Company, whether voluntary or involuntary, or any other distribution of its assets for the purpose of winding up its affairs or otherwise. |
(m) | “Offer” means an offer to purchase Common Shares which must be made, by reason of applicable securities legislation or by the rules or policies of a stock exchange on which any shares of the Company are listed, to all or substantially all of the holders of Common Shares any of whom are in or whose last address as shown on the books of the Company is in a province or territory of Canada to which the relevant requirement applies. |
(n) | “Offer Date” means the date on which the Offer is made. |
(o) | “Residency Declaration” means (i) a declaration by a person attesting that such person is not a resident of the United States and (ii) any indemnity required by the Company or the transfer agent in respect of such declaration in favour of the Company from the person providing the declaration, in each case in form approved by the Company from time to time. |
(p) | “Restricted Period” means any time at which the Board reasonably believes that the Company is a Domestic Issuer or would become a Domestic Issuer as a result of the issuance of Common Shares pursuant to Section 28.9 hereof. |
(q) | “Restricted Voting Shares” means the Class A convertible restricted voting shares in the capital of the Company. |
(r) | “United States” means the United States of America, its territories and possessions, any State of the United States and the District of Columbia. |
(s) | “U.S. Holder Event” means any time at which the Company is subject to the reporting requirements under Section 13(a) of the 1934 Act. |
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Part
27
SPECIAL RIGHTS AND RESTRICTIONS ATTACHING TO COMMON SHARES
27.1 Common Shares.
Subject to the Articles, the Common Shares shall have attached thereto the rights, privileges, restrictions set forth in this Part 27.
27.2 Voting.
Each Common Share entitles the holder to receive notice of and to attend any meeting of shareholders and to exercise one vote for each Common Share held at all meetings of shareholders of the Company, other than meetings at which only the holders of another class or series of shares are entitled to vote separately as a class or series. Except as provided otherwise herein or as required by law, holders of Common Shares and Restricted Voting Shares shall vote as one class at all meetings of shareholders of the Company.
27.3 Dividends.
Subject to the Act, and subject to the rights of the shares of any other class ranking senior to the Common Shares with respect to priority in the payment of dividends, the holders of Common Shares shall be entitled to receive dividends, and the Company shall pay dividends thereon, as and when declared by the Board out of moneys properly applicable to the payment of dividends, pari passu with the holders of the Restricted Voting Shares on a per share basis, in such amount and in such form as the Board may from time to time determine; provided however that no dividend on the Common Shares shall be declared unless contemporaneously therewith the Board shall declare a dividend, payable at the same time as such dividend on the Common Shares, on each Restricted Voting Share. All dividends declared on the Common Shares and on the Restricted Voting Shares shall be declared and paid in equal amounts per share on all Common Shares and Restricted Voting Shares at the time outstanding on the applicable record data for such dividend. For purposes hereof, the payment of dividends by way of a stock dividend in Common Shares on the Common Shares and in Restricted Voting Shares on the Restricted Voting Shares in the same number per share shall be considered to be a pari passu payment of dividends.
27.4 Liquidation Event.
Subject to the rights of the shares of any other class ranking senior to the Common Shares with respect to priority upon a Liquidation Event, in the event of a Liquidation Event, the holders of Common Shares and the holders of Restricted Voting Shares shall participate rateably in equal amounts per share, without preference or distinction, in the remaining assets of the Company.
27.5 Changes to Common Shares.
The Common Shares shall not be subdivided, consolidated, reclassified or otherwise changed unless, contemporaneously therewith, the Restricted Voting Shares are subdivided, consolidated, reclassified or otherwise changed in the same proportion and in the same manner as the Common Shares.
Part
28
special rights and restrictions attaching to Class A restricted voting shares
28.1 Restricted Voting Shares.
Subject to the Articles, the Restricted Voting Shares shall have attached thereto the rights, privileges, restrictions set forth in this Part 28.
28.2 Voting.
Subject to Section 28.3, each Restricted Voting Share entitles the holder to receive notice of and to attend any meeting of shareholders of the Company and to exercise one vote for each Restricted Voting Share held at all meetings of shareholders of the Company, other than meetings at which only the holders of another class or series of shares are entitled to vote separately as a class or series. Except as provided otherwise herein or as required by law, holders of Common Shares and Restricted Voting Shares shall vote as one class at all meetings of shareholders of the Company.
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28.3 Limitation on Voting Rights.
The Restricted Voting Shares carry no entitlement for the holder thereof to vote for the election or removal of directors of the Company
28.4 Dividends.
Subject to the Act, and subject to the rights of the shares of any other class ranking senior to the Common Shares with respect to priority in the payment of dividends, the holders of Restricted Voting Shares shall be entitled to receive dividends, and the Company shall pay dividends thereon, as and when declared by the Board out of moneys properly applicable to the payment of dividends, pari passu with the holders of the Common Shares on a per share basis, in such amount and in such form as the Board may from time to time determine; provided however that no dividend on the Restricted Voting Shares shall be declared unless contemporaneously therewith the Board shall declare a dividend, payable at the same time as such dividend on the Restricted Voting Shares, on each Common Share. All dividends declared on the Common Shares and on the Restricted Voting Shares shall be declared and paid in equal amounts per share on all Common Shares and Restricted Voting Shares at the time outstanding on the applicable record date for such dividend. For purposes hereof, the payment of dividends by way of a stock dividend in Common Shares on the Common Shares and in Restricted Voting Shares on the Restricted Voting Shares in the same number per share shall be considered to be a pari passu payment of dividends.
28.5 Liquidation Event.
Subject to the rights of the shares of any other class ranking senior to the Restricted Voting Shares with respect to priority upon a Liquidation Event, in the event of a Liquidation Event, the holders of Restricted Voting Shares and the holders of Common Shares shall participate rateably in equal amounts per share, without preference or distinction, in the remaining assets of the Company.
28.6 Restrictions on Transfer.
No Restricted Voting Share shall be transferred by any holder thereof pursuant to an Exclusionary Offer unless, concurrently with the Exclusionary Offer, an offer to acquire Common Shares is made that is identical to the Exclusionary Offer in terms of price per share, percentage of outstanding shares to be taken up (exclusive of shares owned immediately before the Exclusionary Offer by the offeror) and in all other material respects.
28.7 Conversion at the Option of the Holder.
Each Restricted Voting Share may be converted into one Common Share, without payment of additional consideration, at the option of the holder thereof as follows:
(a) | each Restricted Voting Share may be so converted at any time that is not a Restricted Period or with the consent of the Board in accordance with the procedures set forth in Section 28.8; |
(b) | if the Company determines that the Company has ceased to be a Foreign Issuer, the Company shall notify the holders of Restricted Voting Shares in respect of such determination and, thereafter, each Restricted Voting Share may be so converted at any time and from time to time in accordance with the procedures set forth in Section 28.8; and |
(c) | if there is an Offer, the Company shall notify the holders of the Restricted Voting Shares and commencing on the Offer Date until completion or termination of such Offer, each Restricted Voting Share shall be so convertible in accordance with the procedures set forth in Section 28.8. |
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28.8 Conversion Procedure.
A holder of Restricted Voting Shares may convert all or any number of Restricted Voting Shares held by such holder into Common Shares in accordance with Section 28.7 upon delivery by the holder of such Restricted Voting Shares of a duly completed and executed Conversion Notice and upon receipt by the transfer agent of the Company of such notice and upon compliance with any requirements the transfer agent or the Company may reasonably request, the Company shall issue or cause to be issued the relevant number of fully paid Common Shares. The effective time of conversion shall be the close of business on the date of receipt of a valid Conversion Notice by the transfer agent of the Company and the Common Shares issuable upon conversion of such Restricted Voting Shares shall be deemed to be issued and outstanding of record as of such time.
28.9 Conversation at the Option of the Company.
Each Restricted Voting Share may be converted into one Common Share, at any time and from time to time, at the option of the Company by delivery to a holder of the Restricted Voting Share of a notice indicating same and the holder of Restricted Voting Shares shall only have the right to receive the relevant number of Common Shares resulting from such conversion and any accrued and unpaid dividends on the Restricted Voting Shares so converted upon compliance with the terms of the notice. The effective time of conversion shall be the close of business on the date specified in the notice of the Company and the Common Shares issuable upon conversion of such Restricted Voting Shares shall be deemed to be issued and outstanding of record as of such time and the applicable Restricted Voting Shares shall be cancelled at that time.
28.10 Withdrawal of Conversion Notice.
Despite any other provision hereof, a holder of a Restricted Voting Share that has duly presented a Conversion Notice may, at any time before such Restricted Voting Shares are converted and Common Shares are issued, by irrevocable written notice to the Company, advise the Company that the holder no longer desires that such Restricted Voting Shares be converted into Common Shares and, upon receipt of such written notice, the Company shall return to the holder the certificate(s) representing such Restricted Voting Shares, if any, and thereupon the Company shall cease to have any obligation to convert such Restricted Voting Shares hereunder unless such Restricted Voting Shares are again tendered for conversion by the holder in accordance with the provisions hereof.
28.11 Fractional Common Shares.
The Company shall not issue fractional Common Shares in satisfaction of the conversion rights herein provided for. Where the exercise of conversion rights pursuant to this Part 28 would otherwise result in fractional Common Shares being issued, the number of Common Shares to be issued by the Company shall be rounded down to the nearest whole number of Common Shares. A determination of whether or not any fractional share would be issuable upon a conversion of Restricted Voting Shares shall be made on the basis of the total number of Restricted Voting Shares the holder is at the time converting into Common Shares and the appropriate number of Common Shares issuable upon conversion.
28.12 Dividend Entitlement.
A holder of Restricted Voting Shares on the record date for the determination of holders of Restricted Voting Shares entitled to receive a dividend declared payable on the Restricted Voting Shares will be entitled to such dividend notwithstanding that such share is converted after such record date and before the payment date of such dividend, and the holders of any Common Shares resulting from any conversion shall be entitled to rank equally with the holders of all other Common Shares in respect of all dividends declared payable to holders of Common Shares of record on any date on or after the date of conversion.
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28.13 Adjustments.
(a) | If there shall occur any Fundamental Transaction involving the Company in which the Common Shares (but not the Restricted Voting Shares) are converted into or exchanged for securities, cash or other property (other than a transaction otherwise covered by this Section 28.13) then, following such Fundamental Transaction each Restricted Voting Share shall thereafter be convertible, in lieu of the Common Share into which it was convertible before such event, into the kind and amount of securities, cash or other property which a holder of the number of Common Shares issuable upon conversion of one Restricted Voting Share immediately before such Fundamental Transaction would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined by the Board) shall be made in the application of the provisions of this subsection 28.13(a) with respect to the rights and interests thereafter of the holders of the Restricted Voting Shares, to the end that the provisions set forth in this subsection 28.13(a) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of the Restricted Voting Shares. |
(b) | The Restricted Voting Shares shall not be subdivided, consolidated, reclassified or otherwise changed unless, contemporaneously therewith, the Common Shares are subdivided, consolidated, reclassified or otherwise changed in the same proportion and in the same manner as the Restricted Voting Shares. |
Part
29
Miscellaneous
29.1 Miscellaneous.
Subject to the Act, the Board may establish, amend or repeal any procedures required to administer provisions set out in these Articles and to require any affidavit, declaration or other statement in connection with an issuance of Common Shares pursuant to a conversion permitted by Part 28.
Dated July 11, 2016.
Full Name and Signature of director or officer | ||
FRANKLY INC | ||
Per: | /s/ “John Wilk” | |
Authorized Signatory |
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TABLE OF CONTENTS
Page | ||
Part 1 INTERPRETATION | 1 | |
1.1 | Definitions. | 1 |
1.2 | Business Corporations Act Definitions Apply. | 1 |
1.3 | Interpretation Act Applies. | 1 |
1.4 | Conflict in Definitions. | 1 |
1.5 | Conflict Between Articles and Legislation. | 1 |
Part 2 SHARES AND SHARE CERTIFICATES | 1 | |
2.1 | Authorized Share Structure. | 1 |
2.2 | Form of Share Certificate. | 1 |
2.3 | Right to Share Certificate or Acknowledgement. | 1 |
2.4 | Sending of Share Certificate. | 2 |
2.5 | Replacement of Worn Out or Defaced Certificate. | 2 |
2.6 | Replacement of Lost, Stolen or Destroyed Certificate. | 2 |
2.7 | Splitting Share Certificates. | 2 |
2.8 | Certificate Fee. | 2 |
2.9 | Recognition of Trusts. | 2 |
Part 3 ISSUE OF SHARES | 2 | |
3.1 | Directors Authorized to Issue Shares. | 2 |
3.2 | Commissions and Discounts. | 2 |
3.3 | Brokerage. | 2 |
3.4 | Conditions of Issue. | 3 |
3.5 | Warrants, Options and Rights. | 3 |
3.6 | Fractional Shares. | 3 |
Part 4 SHARE REGISTERS | 3 | |
4.1 | Central Securities Register. | 3 |
4.2 | Branch Registers. | 3 |
4.3 | Appointment of Agents. | 3 |
4.4 | Closing Register. | 3 |
Part 5 SHARE TRANSFERS | 3 | |
5.1 | Recording or Registering Transfer. | 3 |
5.2 | Form of Instrument of Transfer. | 3 |
5.3 | Transferor Remains Shareholder. | 3 |
5.4 | Signing of Instrument of Transfer. | 4 |
5.5 | Enquiry as to Title Not Required. | 4 |
5.6 | Transfer Fee. | 4 |
Part 6 TRANSMISSION OF SHARES | 4 | |
6.1 | Legal Personal Representative Recognized on Death. | 4 |
6.2 | Rights of Legal Personal Representative. | 4 |
Part 7 PURCHASE OF SHARES | 4 | |
7.1 | Company Authorized to Purchase Shares. | 4 |
7.2 | Purchase When Insolvent. | 4 |
7.3 | Sale and Voting of Purchased Shares. | 4 |
Part 8 BORROWING POWERS | 5 | |
8.1 | Powers of Directors. | 5 |
8.2 | Terms of Debt Instruments. | 5 |
8.3 | Delegation by Directors. | 5 |
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Part 9 ALTERATIONS | 5 | |
9.1 | Alteration of Authorized Share Structure. | 5 |
9.2 | Special Rights and Restrictions. | 5 |
9.3 | Change of Name. | 6 |
9.4 | Alterations to Articles. | 6 |
9.5 | Alterations to Notice of Articles. | 6 |
Part 10 MEETINGS OF SHAREHOLDERS | 6 | |
10.1 | Annual General Meetings. | 6 |
10.2 | Resolution Instead of Annual General Meeting. | 6 |
10.3 | Calling of Shareholder Meetings. | 6 |
10.4 | Location of Shareholder Meetings. | 6 |
10.5 | Notice for Meetings of Shareholders. | 6 |
10.6 | Record Date for Notice. | 6 |
10.7 | Record Date for Voting. | 6 |
10.8 | Failure to Give Notice and Waiver of Notice. | 7 |
10.9 | Notice of Special Business at Meetings of Shareholders. | 7 |
Part 11 PROCEEDINGS AT MEETINGS OF SHAREHOLDERS | 7 | |
11.1 | Special Business. | 7 |
11.2 | Special Majority. | 7 |
11.3 | Quorum. | 7 |
11.4 | One Shareholder May Constitute Quorum. | 8 |
11.5 | Meetings by Telephone or Other Communications Medium. | 8 |
11.6 | Other Persons May Attend. | 8 |
11.7 | Requirement of Quorum. | 8 |
11.8 | Lack of Quorum. | 8 |
11.9 | Lack of Quorum at Succeeding Meeting. | 8 |
11.10 | Chair. | 8 |
11.11 | Selection of Alternate Chair. | 8 |
11.12 | Adjournments. | 8 |
11.13 | Notice of Adjourned Meeting. | 8 |
11.14 | Decisions by Show of Hands or Poll. | 9 |
11.15 | Declaration of Result. | 9 |
11.16 | Motion Need Not Be Seconded. | 9 |
11.17 | Casting Vote. | 9 |
11.18 | Manner of Taking a Poll. | 9 |
11.19 | Demand for a Poll on Adjournment. | 9 |
11.20 | Chair Must Resolve Dispute. | 9 |
11.21 | Casting of Votes. | 9 |
11.22 | Demand for Poll. | 9 |
11.23 | Demand for a Poll Not to Prevent Continuation of Meeting. | 9 |
11.24 | Retention of Ballots and Proxies. | 9 |
Part 12 VOTES OF SHAREHOLDERS | 9 | |
12.1 | Number of Votes by Shareholder or by Shares. | 9 |
12.2 | Votes of Persons in Representative Capacity. | 10 |
12.3 | Votes by Joint Shareholders. | 10 |
12.4 | Legal Personal Representatives as Joint Shareholders. | 10 |
12.5 | Representative of a Corporate Shareholder. | 10 |
12.6 | Proxy Provisions Do Not Apply to All Companies. | 10 |
12.7 | Appointment of Proxy Holder. | 10 |
12.8 | Alternate Proxy Holders. | 10 |
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12.9 | When Proxy Holder Need Not Be Shareholder. | 10 |
12.10 | Deposit of Proxy. | 11 |
12.11 | Validity of Proxy Vote. | 11 |
12.12 | Form of Proxy. | 11 |
12.13 | Revocation of Proxy. | 11 |
12.14 | Revocation of Proxy Must Be Signed. | 11 |
12.15 | Production of Evidence of Authority to Vote. | 12 |
Part 13 DIRECTORS | 12 | |
13.1 | Number of Directors. | 12 |
13.2 | Change in Number of Directors. | 12 |
13.3 | Directors’ Acts Valid Despite Vacancy. | 12 |
13.4 | Qualifications of Directors. | 12 |
13.5 | Remuneration of Directors. | 12 |
13.6 | Reimbursement of Expenses of Directors. | 12 |
13.7 | Special Remuneration for Directors. | 12 |
13.8 | Gratuity, Pension or Allowance on Retirement of Director. | 12 |
Part 14 ELECTION AND REMOVAL OF DIRECTORS | 13 | |
14.1 | Election at Annual General Meeting. | 13 |
14.2 | Consent to be a Director. | 13 |
14.3 | Failure to Elect or Appoint Directors. | 13 |
14.4 | Places of Retiring Directors Not Filled. | 13 |
14.5 | Directors May Fill Casual Vacancies. | 13 |
14.6 | Remaining Directors Power to Act. | 13 |
14.7 | Shareholders May Fill Vacancies. | 13 |
14.8 | Additional Directors. | 13 |
14.9 | Ceasing to be a Director. | 14 |
14.10 | Removal of Director by Shareholders. | 14 |
14.11 | Removal of Director by Directors. | 14 |
Part 15 POWERS AND DUTIES OF DIRECTORS | 14 | |
15.1 | Powers of Management. | 14 |
15.2 | Appointment of Attorney of Company. | 14 |
Part 16 DISCLOSURE OF INTEREST OF DIRECTORS | 14 | |
16.1 | Obligation to Account for Profits. | 14 |
16.2 | Restrictions on Voting by Reason of Interest. | 14 |
16.3 | Interested Director Counted in Quorum. | 15 |
16.4 | Disclosure of Conflict of Interest or Property. | 15 |
16.5 | Director Holding Other Office in the Company. | 15 |
16.6 | No Disqualification. | 15 |
16.7 | Professional Services by Director or Officer. | 15 |
16.8 | Director or Officer in Other Corporations. | 15 |
Part 17 PROCEEDINGS OF DIRECTORS | 15 | |
17.1 | Meetings of Directors. | 15 |
17.2 | Voting at Meetings. | 15 |
17.3 | Chair of Meetings. | 15 |
17.4 | Meetings by Telephone or Other Communications Medium. | 15 |
17.5 | Calling of Meetings. | 16 |
17.6 | Notice of Meetings. | 16 |
17.7 | When Notice Not Required. | 16 |
17.8 | Meeting Valid Despite Failure to Give Notice. | 16 |
17.9 | Waiver of Notice of Meetings. | 16 |
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17.10 | Quorum. | 16 |
17.11 | Validity of Acts Where Appointment Defective. | 16 |
17.12 | Consent Resolutions in Writing. | 16 |
Part 18 EXECUTIVE AND OTHER COMMITTEES | 16 | |
18.1 | Appointment and Powers of Executive Committee. | 16 |
18.2 | Appointment and Powers of Other Committees. | 16 |
18.3 | Obligations of Committee. | 17 |
18.4 | Powers of Board. | 17 |
18.5 | Committee Meetings. | 17 |
Part 19 OFFICERS | 17 | |
19.1 | Appointment of Officers. | 17 |
19.2 | Functions, Duties and Powers of Officers. | 17 |
19.3 | Qualifications. | 18 |
19.4 | Remuneration. | 18 |
Part 20 INDEMNIFICATION | 18 | |
20.1 | Definitions. | 18 |
20.2 | Mandatory Indemnification of Directors and Former Directors. | 18 |
20.3 | Indemnification of Other Persons. | 18 |
20.4 | Non-Compliance with Business Corporations Act. | 18 |
20.5 | Company May Purchase Insurance. | 18 |
20.6 | Limitation of Liability. | 18 |
Part 21 DIVIDENDS | 19 | |
21.1 | Payment of Dividends Subject to Special Rights. | 19 |
21.2 | Declaration of Dividends. | 19 |
21.3 | No Notice Required. | 19 |
21.4 | Record Date. | 19 |
21.5 | Manner of Paying Dividend. | 19 |
21.6 | Settlement of Difficulties. | 19 |
21.7 | When Dividend Payable. | 19 |
21.8 | Dividends to be Paid in Accordance with Number of Shares. | 19 |
21.9 | Receipt by Joint Shareholders. | 19 |
21.10 | Dividend Bears No Interest. | 19 |
21.11 | Fractional Dividends. | 20 |
21.12 | Payment of Dividends. | 20 |
21.13 | Capitalization of Surplus. | 20 |
Part 22 DOCUMENTS, RECORDS AND REPORTS | 20 | |
22.1 | Recording of Financial Affairs. | 20 |
22.2 | Inspection of Accounting Records. | 20 |
22.3 | Remuneration of Auditors. | 20 |
Part 23 NOTICES | 20 | |
23.1 | Method of Giving Notice. | 20 |
23.2 | Deemed Receipt. | 21 |
23.3 | Certificate of Sending. | 21 |
23.4 | Notice to Joint Shareholders. | 21 |
23.5 | Notice to Trustees. | 21 |
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Part 24 SEAL | 21 | |
24.1 | Who May Attest Seal. | 21 |
24.2 | Sealing Copies. | 21 |
24.3 | Mechanical Reproduction of Seal. | 21 |
Part 25 PROHIBITIONS | 22 | |
25.1 | Definitions. | 22 |
25.2 | Application. | 22 |
25.3 | Consent Required for Transfer of Shares or Designated Securities. | 22 |
Part 26 SPECIAL RIGHTS AND RESTRICTIONS | 22 | |
26.1 | Special Rights and Restrictions. | 22 |
26.2 | Interpretations. | 22 |
Part 27 SPECIAL RIGHTS AND RESTRICTIONS ATTACHING TO COMMON SHARES | 24 | |
27.1 | Common Shares. | 24 |
27.2 | Voting. | 24 |
27.3 | Dividends. | 24 |
27.4 | Liquidation Event. | 24 |
27.5 | Changes to Common Shares. | 24 |
Part 28 special rights and restrictions attaching to Class A restricted voting shares | 24 | |
28.1 | Restricted Voting Shares. | 24 |
28.2 | Voting. | 24 |
28.3 | Limitation on Voting Rights. | 25 |
28.4 | Dividends. | 25 |
28.5 | Liquidation Event. | 25 |
28.6 | Restrictions on Transfer. | 25 |
28.7 | Conversion at the Option of the Holder. | 25 |
28.8 | Conversion Procedure. | 26 |
28.9 | Conversation at the Option of the Company. | 26 |
28.10 | Withdrawal of Conversion Notice. | 26 |
28.11 | Fractional Common Shares. | 26 |
28.12 | Dividend Entitlement. | 26 |
28.13 | Adjustments. | 27 |
Part 29 Miscellaneous | 27 | |
29.1 | Miscellaneous. | 27 |
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CERTIFICATE OF FORMATION
OF
GANNAWAY WEB HOLDINGS, LLC
Under Section 18-201 of the Delaware Limited Liability Company Act
FIRST: The name of the limited liability company is Gannaway Web Holdings, LLC.
SECOND: The address of its registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company.
IN WITNESS WHEREOF, the undersigned authorized person has executed this Certificate of Formation this 11th day of May, 1998.
/s/ Jung-Wong Hyun | |
Jung-Wong Hyun | |
Authorized Person |
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF FORMATION OF
GANNAWAY WEB HOLDINGS, LLC
1. Name of Limited Liability Company: Gannaway Web Holdings, LLC
2. The Certificate of Formation of the limited liability company is hereby amended as follows:
“The name of the limited liability company is Frankly Media LLC.”
IN WITNESS WHEREOF, the undersigned has executed this Certificate of Amendment to the Certificate of Formation of Gannaway Web Holdings, LLC this 14th day of October, 2015.
/s/ John Wilk | |
John Wilk | |
Authorized Person |
FRANKLY INC.
(INCORPORATED (BY CONTINUANCE) UNDER THE BUSINESS CORPORATIONS ACT (BRITISH COLOMBIA))
THIS CERTIFIES THAT
CUSIP: | ||
ISIN: |
is the registered owner of
FULLY PAID AND NON-ASSESSABLE COMMON SHARES IN THE CAPITAL OF
FRANKLY INC.
transferable only on the books of the Company by the registered holder in person or by duly authorized Attorney on surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar of the Company.
IN WITNESS WHEREOF the Company has caused this Certificate to be signed by its duly authorized officers.
DATED: | |
COUNTERSIGNED AND REGISTERED by | |
TSX Trust Company | |
Toronto, Ontario, Canada. | |
Transfer Agent and Registrar |
Steven Chung | Jungsoo Park | ||||
Chief Executive Officer | Vice President, Operations | By | |||
AUTHORIZED OFFICER |
The Shares represented by this Certificate are transferable at the offices of TSX Trust Company, Toronto, Ontario, Canada
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL INSURANCE NUMBER OF TRANSFEREE
|
|
|
_ |
_ |
(PLEASE PRINT OR TYPEWRITE NAME AND ADRESS OF ASSIGNEE)
Shares of the Capital Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
Attorney to transfer the said Stock on the Books of the within named Company, with full power of substitution in the premises
Dated |
Signature: |
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A SCHEDULE 1 CANADIAN CHARTERED BANK OR AN ELIGIBILE GUARANTOR INSTITUTION WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM.
Guaranteed by: |
RESTRICTIONS
FRANKLY INC.
(INCORPORATED (BY CONTINUANCE) UNDER THE BUSINESS CORPORATIONS ACT (BRITISH COLOMBIA))
THIS CERTIFIES THAT
CUSIP: | ||
ISIN: |
is the registered owner of
FULLY PAID AND NON-ASSESSABLE CLASS A RESTRICTED VOTING COMMON SHARES IN THE CAPITAL OF
FRANKLY INC.
transferable only on the books of the Company by the registered holder in person or by duly authorized Attorney on surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned and registered by the Transfer Agent and Registrar of the Company.
IN WITNESS WHEREOF the Company has caused this Certificate to be signed by its duly authorized officers.
DATED: | |
COUNTERSIGNED AND REGISTERED by | |
TSX Trust Company | |
Toronto, Ontario, Canada. | |
Transfer Agent and Registrar |
Steven Chung | Jungsoo Park | ||||
Chief Executive Officer | Vice President, Operations | By | |||
AUTHORIZED OFFICER |
The Shares represented by this Certificate are transferable at the offices of TSX Trust Company, Toronto, Ontario, Canada
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL INSURANCE NUMBER OF TRANSFEREE
|
|
|
_ |
_ |
(PLEASE PRINT OR TYPEWRITE NAME AND ADRESS OF ASSIGNEE)
Shares of the Capital Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
Attorney to transfer the said Stock on the Books of the within named Company, with full power of substitution in the premises
Dated |
Signature: |
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE. IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A SCHEDULE 1 CANADIAN CHARTERED BANK OR AN ELIGIBILE GUARANTOR INSTITUTION WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM.
Guaranteed by: |
RESTRICTIONS
THIS WARRANT CERTIFICATE, AND THE SECURITIES EVIDENCED HEREBY, WILL BE VOID AND OF NO VALUE UNLESS EXERCISED ON OR BEFORE 5:00 P.M. (EASTERN STANDARD TIME) ON ______________, 20__.
UNLESS PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THIS SECURITY MUST NOT TRADE THE SECURITY BEFORE _________, 20__.
WITHOUT PRIOR WRITTEN APPROVAL OF tsx vENTURE EXCHANGE AND COMPLIANCE WITH ALL APPLICABLE SECURITIES LEGISLATION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE TRADED ON OR THROUGH THE FACILITIES OF TSX VENTURE EXCHANGE OR OTHERWISE IN CANADA OR TO OR FOR THE BENEFIT OF A CANADIAN RESIDENT UNTIL __________, 20__.
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND SUCH LAWS WHICH, IN THE OPINION OF COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
frankly inc.
a
corporation continued under the laws of the Province of British Columbia
and having its registered office at
2900-550 Burrard Street, Vancouver, BC V6C 0A3
NO. C-2016-<@> | <@> WARRANTS |
Each whole warrant entitling the holder to acquire one (1) common share of Frankly Inc., subject to adjustment as set forth herein, in accordance with the terms and conditions set forth herein. |
WARRANTS TO PURCHASE COMMON SHARES
THIS IS TO CERTIFY THAT for value received <@> (the “Holder”) is the registered holder of the number of non-transferable share purchase warrants stated above (each a “Warrant” and collectively, the “Warrants”) and is entitled for each whole Warrant represented hereby to purchase one (1) fully paid and non-assessable common share, subject to adjustment as hereinafter provided (each a “Share” and collectively the “Shares”), in the capital of the Frankly Inc. (the “Corporation”) at any time and from time to time from the date of issue hereof up to and including 5:00 p.m. (Eastern Standard Time) on ___________, 20__ (the “Expiry Time”), at a price per Share equal to $0.56, subject to adjustment as hereinafter provided (the “Exercise Price”), upon and subject to the following terms and conditions.
For purposes of this Warrant Certificate:
“$” means Canadian dollars.
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TERMS AND CONDITIONS
1. | At any time and from time to time at or prior to the Expiry Time (the “Exercise Period”), the Holder may exercise all or any number of whole Warrants represented hereby, upon delivering to the Corporation at its principal office noted above, this Warrant Certificate, together with a duly completed and executed subscription notice in the form attached hereto (the “Subscription Notice”) evidencing the election of the Holder to exercise the number of Warrants set forth in the Subscription Notice (which shall not be greater than the number of Warrants represented by this Warrant Certificate) and a certified cheque, money order or bank draft payable to the Corporation for the aggregate Exercise Price of the Warrants being exercised. If the Holder is not exercising all Warrants represented by this Warrant Certificate, the Holder shall be entitled to receive, without charge, a new Warrant Certificate representing the number of Warrants which is the difference between the number of Warrants represented by the then original Warrant Certificate and the number of Warrants being so exercised. |
2. | The Holder shall be deemed to have become the holder of record of Shares on the date (the “Exercise Date”) on which the Corporation has received a duly completed Subscription Notice, delivery of the Warrant Certificate and payment of the full aggregate Exercise Price in respect of the Warrants being exercised pursuant to such Subscription Notice; provided, however, that if such date is not a business day in the City of Vancouver, British Columbia, (a “Business Day”) then the Shares shall be deemed to have been issued and the Holder shall be deemed to have become the holder of record of the Shares on the next following Business Day. Within five (5) Business Days of the Exercise Date, the Corporation shall issue and deliver (or cause to be delivered) to the Holder, by registered mail or pre-paid courier to its address specified in the register of the Corporation, one or more certificates for the appropriate number of issued and outstanding Shares to which the Holder is entitled pursuant to the exercise of Warrants. All costs, expenses, transfer taxes and other charges payable in connection with the issue and delivery of the Shares shall be at the sole expense of the Corporation (other than withholding tax, if any). |
3. | The Corporation covenants and agrees that, until the Expiry Time, while any of the Warrants represented by this Warrant Certificate shall be outstanding, it shall reserve and there shall remain unissued out of its authorized capital a sufficient number of Shares to satisfy the right of purchase herein provided, as such right of purchase may be adjusted pursuant to Sections 4 and 5 of this Warrant Certificate. The Corporation represents and warrants that all Shares which shall be issued upon the exercise of the right to purchase herein provided for, upon payment of the aggregate Exercise Price at which Shares may at that time be purchased pursuant to the provisions hereof, shall be issued as fully paid and non-assessable shares and the holders thereof shall not be liable to the Corporation or its creditors in respect thereof. The Corporation further represents and warrants that this Warrant Certificate is a legal, valid and binding obligation of the Corporation, enforceable against the Corporation in accordance with its terms, provided that enforcement thereof may be limited by laws effecting creditors’ rights generally and that specific performance and other equitable remedies may only be granted in the discretion of a court of competent jurisdiction. |
4. | The Exercise Price (and the number of Shares purchasable upon exercise) shall be subject to adjustment from time to time in the events and in the manner provided as follows: |
(a) | Share Reorganization. If during the Exercise Period the Corporation shall: |
(i) | issue Shares or securities exchangeable for or convertible into Shares to holders of all or substantially all of its then outstanding Shares by way of stock dividend or other distribution, or | |
(ii) | subdivide, redivide or change its outstanding Shares into a greater number of Shares, or | |
(iii) | consolidate, reduce or combine its outstanding Shares into a lesser number of Shares, (any of such events in these paragraphs (i), (ii) and (iii) being a “Share Reorganization”), then the Exercise Price shall be adjusted as of the effective date or record date, as the case may be, at which the holders of Shares are determined for the purpose of the Share Reorganization by multiplying the Exercise Price in effect immediately prior to such effective date or record date by a fraction, the numerator of which shall be the number of Shares outstanding on such effective date or record date before giving effect to such Share Reorganization and the denominator of which shall be the number of Shares outstanding as of the effective date or record date after giving effect to such Share Reorganization (including, in the case where securities exchangeable for or convertible into Shares are distributed, the number of Shares that would have been outstanding had such securities been fully exchanged for or converted into Shares on such record date or effective date). From and after any adjustment of the Exercise Price pursuant to this Section 4(a), the number of Shares purchasable pursuant to this Warrant Certificate shall be adjusted contemporaneously with the adjustment of the Exercise Price by multiplying the number of Shares then otherwise purchasable on the exercise thereof by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment and the denominator of which shall be the Exercise Price resulting from such adjustment. |
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(b) | Rights Offering. If and whenever during the Exercise Period the Corporation shall fix a record date for the issue or distribution of rights, options or warrants to all or substantially all of the holders of Shares under which such holders are entitled, during a period expiring not more than 45 days after the record date for such issue to subscribe for or purchase Shares or securities exchangeable for or convertible into Shares at a price per share to the holder (or having a conversion price or exchange price per Share) of less than 95% of the Current Market Price (as defined in Section 5 hereof) for the Shares on such record date (any of such events being called a “Rights Offering”), then the Exercise Price shall be adjusted effective immediately after the record date for the Rights Offering to a price determined by multiplying the Exercise Price in effect on such record date by a fraction: |
(i) | the numerator of which shall be the aggregate of: |
(A) | the number of Shares outstanding as of the record date for the Rights Offering, and | |
(B) | a number determined by dividing either |
I. | the product of the number of Shares offered under the Rights Offering and the price at which such Shares are offered, |
or, as the case may be,
II. | the product of the exchange or conversion price per share of such securities offered and the maximum number of Shares for or into which the securities so offered pursuant to the Rights Offering may be exchanged or converted, |
by the Current Market Price of the Shares as of the record date for the Rights Offering; and
(ii) | the denominator of which shall be the aggregate of the number of Shares outstanding on such record date after giving effect to the Rights Offering and including the number of Shares offered pursuant to the Rights Offering (including shares issuable upon exercise of the rights, warrants or options under the Rights Offering or upon the exercise of the exchange or conversion rights contained in such exchangeable or convertible securities under the Rights Offering). |
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Any Shares owned by or held for the account of the Corporation shall be deemed not to be outstanding for the purpose of any such calculation. To the extent that such Rights Offering is not so made or any such rights, options or warrants are not exercised prior to the expiration thereof, the Exercise Price shall then be readjusted to the Exercise Price which would then be in effect if such record date had not been fixed or if such expired rights, options or warrants had not been issued. From and after any adjustment of the Exercise Price pursuant to this Section 4(b), the number of Shares purchasable pursuant to this Warrant Certificate shall be adjusted contemporaneously with the adjustment of the Exercise Price by multiplying the number of Shares then otherwise purchasable on the exercise thereof by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment and the denominator of which shall be the Exercise Price resulting from such adjustment.
(c) | Special Distribution. If and whenever during the Exercise Period the Corporation shall issue or distribute to all or to substantially all the holders of the Shares: |
(i) | securities of the Corporation including shares, rights, options or warrants to acquire shares of any class or securities exchangeable for or convertible into or exchangeable into any such shares, or | |
(ii) | any cash (other than cash dividends made in the ordinary course), property or other assets or evidences of its indebtedness, |
and if such issuance or distribution does not constitute a Share Reorganization or a Rights Offering (any of such non-excluded events being herein called a “Special Distribution”), the Exercise Price shall be adjusted immediately after the record date for the Special Distribution so that it shall equal the price determined by multiplying the Exercise Price in effect on such record date by a fraction:
(i) | the numerator of which shall be the difference between: |
(A) | the amount obtained by multiplying the number of Shares outstanding on such record date by the Current Market Price of the Shares on such record date, and | |
(B) | the fair value (as determined by the directors of the Corporation) to the holders of such Shares of such Special Distribution; and |
(ii) | the denominator of which shall be the total number of Shares outstanding on such record date multiplied by such Current Market Price of the Shares on such record date. |
Any Shares owned by or held for the account of the Corporation shall be deemed not to be outstanding for the purpose of any such computation. To the extent that such Special Distribution is not so made or any such rights, options or warrants are not exercised prior to the expiration thereof, the Exercise Price shall then be readjusted to the Exercise Price which would then be in effect if such record date had not been fixed or if such expired rights, options or warrants had not been issued. From and after any adjustment of the Exercise Price pursuant to this Section 4(c), the number of Shares purchasable pursuant to this Warrant Certificate shall be adjusted contemporaneously with the adjustment of the Exercise Price by multiplying the number of Shares then otherwise purchasable on the exercise thereof by a fraction, the numerator of which shall be the Exercise Price in effect immediately prior to the adjustment and the denominator of which shall be the Exercise Price resulting from such adjustment.
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(d) | Capital Reorganization. If and whenever during the Exercise Period there shall be a reclassification or redesignation of Shares at any time outstanding or a change of the Shares into other shares or into other securities or any other capital reorganization (other than a Share Reorganization), or a consolidation, amalgamation, arrangement or merger of the Corporation with or into any other corporation or other entity (other than a consolidation, amalgamation, arrangement or merger which does not result in any reclassification or redesignation of the outstanding Shares or a change of the Shares into other securities), or a transfer of the undertaking or assets of the Corporation as an entirety or substantially as an entirety to another corporation or other entity (any of such events being herein called a “Capital Reorganization”), the Holder, where he, she or it has not exercised the right of subscription and purchase under this Warrant Certificate prior to the effective date or record date, as the case may be, of such Capital Reorganization, shall be entitled to receive, and shall accept upon the exercise of such right for the same aggregate consideration, in lieu of the number of Shares to which such Holder was theretofore entitled upon such exercise, the kind and aggregate number of shares, other securities or other property which such holder would have been entitled to receive as a result of such Capital Reorganization if, on the effective date thereof, he had been the registered holder of the number of Shares to which such holder was theretofore entitled to subscribe for and purchase; provided however, that no such Capital Reorganization shall be carried into effect unless all necessary steps shall have been taken by the Corporation to so entitle the Holder. If determined appropriate by the board of directors of the Corporation, acting reasonably and in good faith, and subject to the prior written approval of the principal Canadian stock exchange or over-the-counter market on which the Shares are then listed or quoted for trading if required by such stock exchange or over-the-counter market, appropriate adjustments shall be made as a result of any such Capital Reorganization in the application of the provisions set forth in this Section 4 with respect to the rights and interests thereafter of the Holder to the end that the provisions set forth in this Section 4 shall thereafter correspondingly be made applicable as nearly as may reasonably be possible in relation to any shares, other securities or other property thereafter deliverable upon the exercise of any Warrant. Any such adjustments shall be made by and set forth in terms and conditions supplemental hereto approved by the board of directors of the Corporation, acting reasonably and in good faith. | |
(e) | Subject to the approval of the TSX Venture Exchange, if and whenever at any time after the date hereof and prior to the Expiry Time, the Corporation takes any action affecting its Shares to which the foregoing provisions of this Section 4, in the opinion of the board of directors of the Corporation, acting reasonably and in good faith, are not strictly applicable, or if strictly applicable would not fairly adjust the rights of the Holder against dilution in accordance with the intent and purposes thereof, or would otherwise materially affect the rights of the Holder hereunder, then the Corporation shall execute and deliver to the Holder an amendment hereto providing for an adjustment in the application of such provisions so as to adjust such rights as aforesaid in such a manner as the board of directors of the Corporation may determine to be equitable in the circumstances, acting reasonably and in good faith. The failure of the taking of action by the board of directors of the Corporation to so provide for any adjustment on or prior to the effective date of any action or occurrence giving rise to such state of facts will be conclusive evidence, absent manifest error, that the board of directors has determined that it is equitable to make no adjustment in the circumstances. |
5. | The following rules and procedures shall be applicable to the adjustments made pursuant to Section 4: |
(a) | The adjustments provided for in Section 4 are cumulative and shall be made successively whenever an event referred to therein shall occur, and shall, in the case of adjustments to the Exercise Price be computed to the nearest one-tenth of one cent subject to the following paragraphs of this Section 5. |
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(b) | No adjustment in the Exercise Price shall be required unless such adjustment would result in a change of at least 1% in the prevailing Exercise Price and no adjustment shall be made in the number of Shares purchasable upon exercise of this Warrant Certificate unless it would result in a change of at least one one-hundredth of a Share; provided, however, that any adjustments which, except for the provisions of this Section 5(b) would otherwise have been required to be made, shall be carried forward and taken into account in any subsequent adjustment. Notwithstanding Section 4 or 5 hereof, no adjustment shall be made which would result in an increase in the Exercise Price or a decrease in the number of Shares issuable upon the exercise of this Warrant Certificate (except in respect of a consolidation of the outstanding Shares). | |
(c) | No adjustment in the Exercise Price or in the number of Shares purchasable upon exercise of Warrants shall be made in respect of any event described in Section 4, other than the events referred to in Sections 4(a)(ii) and (iii), if the Holder is entitled to participate in such event on the same terms, mutatis mutandis, as if it had exercised its Warrants prior to or on the effective date or record date, as the case may be, of such event. The terms of the participation of the Holder in such event shall be subject to the prior written approval, if applicable, of the principal Canadian stock exchange or over-the-counter market on which the Shares are then listed or quoted for trading. | |
(d) | No adjustment in the Exercise Price shall be made pursuant to Section 4 in respect of the issue from time to time: |
(i) | of Shares purchasable on exercise of the Warrants represented by this Warrant Certificate; | |
(ii) | of Shares to holders of Shares who exercise an option or election to receive substantially equivalent dividends in Shares in lieu of receiving a cash dividend pursuant to a dividend reinvestment plan or similar plan adopted by the Corporation in accordance with the requirements of the principal Canadian stock exchange or over-the-counter market on which the Shares are then listed or quoted for trading and applicable securities laws; or | |
(iii) | of Shares pursuant to any stock option, stock option plan, stock purchase plan or benefit plan in force at the date hereof for directors, officers, employees or consultants of the Corporation, as such option or plan is amended or superseded from time to time in accordance with the requirements of the principal Canadian stock exchange or over-the-counter market on which the Shares are then listed or quoted for trading and applicable securities laws, and such other stock option, stock option plan or stock purchase plan as may be adopted by the Corporation in accordance with the requirements of the principal Canadian stock exchange or over-the-counter market on which the Shares are then listed or quoted for trading and applicable securities laws; |
and any such issue shall be deemed not to be a Share Reorganization or Capital Reorganization.
(e) | If the Corporation shall set a record date to determine the holders of the Shares for the purpose of entitling them to receive any dividend or distribution or any subscription or purchase rights and shall, thereafter and before the distribution to such shareholders of any such dividend, distribution or subscription or purchase rights, legally abandon its plan to pay or deliver such dividend, distribution or subscription or purchase rights, then no adjustment in the Exercise Price or the number of Shares purchasable upon exercise of any Warrant shall be required by reason of the setting of such record date. | |
(f) | As a condition precedent to the taking of any action which would require any adjustment in any of the subscription rights pursuant to this Warrant Certificate, including the Exercise Price and the number or class of shares or other securities which are to be received upon the exercise thereof, the Corporation shall take any corporate action which may, in the opinion of counsel, be necessary in order that the Corporation have unissued and reserved Shares in its authorized capital, and may validly and legally issue as fully paid and non-assessable all the shares or other securities which the Holder of such Warrant Certificate is entitled to receive on the full exercise thereof in accordance with the provisions hereof. |
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(g) | For the purposes of this Warrant Certificate, “Current Market Price” of a Share at any date shall be calculated as the price per share equal to the weighted average price at which the Shares have traded in the principal Canadian stock exchange or, if the Shares are not listed, the over-the-counter market, on which the Shares are then listed or posted for trading during the 20 consecutive trading days ending not more than five trading days immediately prior to such date as reported by such exchange or market in which the Shares are then trading or quoted. If the Shares are not then traded in the over-the-counter market or on a recognized Canadian stock exchange, the Current Market Price of the Shares shall be the fair market value of the Shares as determined in good faith by a nationally or internationally recognized and independent investment dealer, investment banker or firm of chartered accountants. | |
(h) | In the absence of a resolution of the board of directors of the Corporation fixing a record date for any dividend or distribution referred to in Section 4(a)(i) or any Rights Offering or Special Distribution, the Corporation shall be deemed to have fixed as the record date therefor the date on which such dividend or distribution, Rights Offering or Special Distribution is effected. | |
(i) | Any question that at any time or from time to time arises with respect to the amount of any adjustment to the Exercise Price or other adjustments pursuant to Section 4 shall be conclusively determined by a firm of independent chartered accountants and shall be binding upon the Corporation and the Holder, absent manifest error. Notwithstanding the foregoing, such determination shall be subject to the prior written approval of the principal Canadian stock exchange or over-the-counter market on which the Shares are then listed or quoted for trading if required by such stock exchange or over-the-counter market. In the event that any such determination is made, the Corporation shall notify the Holder in the manner contemplated in Section 16 describing such determination. |
6. | On the happening of each and every such event set out in Section 4, the applicable provisions of this Warrant Certificate, including the Exercise Price, shall, ipso facto, be deemed to be amended accordingly and the Corporation shall take all necessary action so as to comply with such provisions as so amended. |
7. | In any case in which Section 4 shall require that an adjustment shall be effective immediately after a record date for an event referred to herein, the Corporation may defer, until the occurrence of such an event: |
(a) | issuing to the holder of any Warrant exercised after such record date and before the occurrence of such event, the additional Shares issuable upon such exercise by reason of the adjustment required by such event, and | |
(b) | delivering to such holder any distributions declared with respect to such additional Shares after such Exercise Date and before such event; |
provided, however, that the Corporation shall deliver or cause to be delivered to such holder, an appropriate instrument evidencing such holder’s right, upon the occurrence of the event requiring the adjustment, to an adjustment in the Exercise Price and/or the number of Shares purchasable on the exercise of any Warrant and to such distributions declared with respect to any additional Shares issuable on the exercise of any Warrant.
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8. | At least five days after the effective date or record date, as the case may be, of any event which requires or might require adjustment in any of the subscription rights pursuant to this Warrant Certificate, including the Exercise Price and the number of Shares which are purchasable upon the exercise thereof, the Corporation shall notify the Holder of the particulars of such event and, if determinable, the required adjustment and the computation of such adjustment. In case any adjustment for which such notice has been given is not then determinable, the Corporation shall promptly after such adjustment is determinable notify the Holder of the adjustment and the computation of such adjustment. |
9. | Where the Holder is entitled to receive on the exercise or partial exercise of its Warrants a fraction of a Share, such right may only be exercised in respect of such fraction in combination with another Warrant or Warrants which in the aggregate entitle the Holder to receive a whole number of Shares. If a Holder is not able to, or elects not to, combine Warrants so as to be entitled to acquire a whole number of Shares, the Holder may not exercise the right to acquire a fractional Share, and, does not have the right to receive a cash equivalent in lieu thereof equal to such fraction of a Share multiplied by the Current Market Price. |
10. | The registered Holder of this Warrant Certificate may at any time up to and including the Expiry Time, upon the surrender hereof to the Corporation at its principal office, exchange this Warrant Certificate for one or more Warrant Certificates entitling the Holder to subscribe in the aggregate for the same number of Shares as is expressed in this Warrant Certificate. Any Warrant Certificate tendered for exchange shall be surrendered to the Corporation and cancelled. |
11. | If this Warrant Certificate becomes stolen, lost, mutilated or destroyed, the Corporation shall, on such terms as it may in its discretion acting reasonably impose, issue and deliver to the Holder a new Warrant Certificate of like denomination, tenor and date as the Warrant Certificate so stolen, lost, mutilated or destroyed. |
12. | Nothing contained herein shall confer any right upon the Holder hereof or any other person to subscribe for or purchase any Shares of the Corporation at any time subsequent to the Expiry Time. After the Expiry Time this Warrant Certificate and all rights hereunder shall be void and of no value. |
13. | Except as expressly set out herein, the holding of this Warrant Certificate shall not constitute a Holder hereof a holder of Shares nor entitle it to any right or interest in respect thereof. |
14. | Unless herein otherwise expressly provided, any notice to be given hereunder to the Holder shall be deemed to be validly given if such notice is given by personal delivery or registered mail to the attention of the Holder at its registered address recorded in the registers maintained by the Corporation. Any notice so given shall be deemed to be validly given, if delivered personally, on the day of delivery and if sent by post or other means, on the third Business Day next following the sending thereof. In determining under any provision hereof the date when notice of any event must be given, the date of giving notice shall be included and the date of the event shall be excluded. |
15. | This Warrant Certificate and the Warrants represented hereby are not transferable and are not assignable. |
16. | Time is of the essence hereof. |
17. | This Warrant Certificate is binding upon the Corporation and its successors and assigns, provided that it shall not be assigned by the Corporation without the prior written consent of the Holder. |
18. | This Warrant Certificate and the Warrants represented hereby shall be governed by the laws of the Province of British Columbia and the federal laws of Canada applicable therein. |
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IN WITNESS WHEREOF this Warrant Certificate has been executed on behalf of Frankly Inc. as of the __ day of December, 2016.
FRANKLY INC. | ||
By: | ||
Authorized Signing Officer |
subscription notice
TO: | Frankly Inc. |
27-01 Queens Plaza North, Suite 502, Long Island City, NY, 11101 |
Terms used herein but not otherwise defined have the meanings ascribed thereto in the attached Warrant Certificate.
The undersigned registered Holder of the attached Warrant Certificate, hereby:
(a) | subscribes for ___________________________ Shares at a price per of $0.56 per Share (or such adjusted price which may be in effect under the provisions of the Warrant Certificate) and in payment of the exercise price encloses a certified cheque, bank draft or money order in lawful money of Canada payable to the order of Frankly Inc. or its successor corporation; and | |
(b) | delivers herewith the above-mentioned Warrant Certificate entitling the undersigned to subscribe for the above-mentioned number of Shares; |
in each case in accordance with the terms and conditions set out in the attached Warrant Certificate.
The undersigned hereby directs that the said Shares be registered as follows:
Name(s) in full |
Address(es) (including Postal Code) |
Number of Shares | ||
Total:________ |
(Please print full name in which Share certificates are to be issued.)
DATED this day of , 20 .
(Signature of Subscriber) | |
(Print Name of Subscriber) | |
(Address of Subscriber in full) | |
The certificates will be mailed by registered mail to the address appearing in this Subscription Notice.
Frankly Inc.
333 Bryant Street, Suite 240
San Francisco, CA 94107
December 20, 2016
Mr. Pat LaPlatney
Raycom Media, Inc.
RSA Tower
201 Monroe Street, 20th Floor
Montgomery, AL 36104
Re: Frankly Credit Agreement
Dear Pat,
Reference is made to the Credit Agreement between Raycom Media, Inc. (“Raycom”) and Frankly Inc. (“Frankly”) dated August 31, 2016 (the “Credit Agreement”). Section 4.3.2.3 of the Credit Agreement requires mandatory payment to Raycom of the net proceeds received by Frankly from any “issuances of debt or equity.” Sections 4.3.2.4 and 4.3.2.5 of the Credit Agreement provide for mandatory repayment to Raycom of specific amounts, based upon the amount of capital raised in connection with a NASDAQ listing. Frankly anticipates (a) closing a private placement of equity in December of 2016, (b) closing a revolving credit facility with Silicon Valley Bank in December of 2016, and (c) making a US public offering of equity on or about the date that its pending S-1 Registration Statement and NASDAQ listing application become effective. Raycom and Frankly agree that the proceeds received by Frankly from the financings listed in (a) and (b) above (and (c) above to the extent that the amount raised is less than US$8 million) will not be subject to Section 4.3.2.3 of the Credit Agreement, provided that nothing herein will modify the operation of Sections 4.3.2.4 and 4.3.2.5 of the Credit Agreement.
Reference is also made to the Share Purchase Agreement between Raycom and Frankly dated August 31, 2017 (“the Share Purchase Agreement”). At the time the Share Purchase Agreement was entered, Frankly’s Board of Directors (the “Board”) consisted of four members. Section 4.2.1 of the Share Purchase Agreement required Frankly to enlarge the Board to seven members within 90 days following the Closing Date of the Share Purchase Agreement, subject to shareholder approval. On October 3, 2016, the Board was enlarged to five members. The parties agree that the 90 day period set forth in Section 4.2.1 of the Share Purchase Agreement for enlargement of the Board to seven members is hereby deleted and the Frankly will, subject to shareholder approval, cause the Board to be enlarged to seven members by the earlier of (a) 45 days following the effective date of Frankly’s pending S-1 Registration Statement, or (b) April 15, 2017.
If the foregoing is acceptable, please return a signed copy to us at your earliest convenience.
Sincerely, | ||
Frankly Inc. | ||
By: | /s/ Steve Chung | |
Name: | Steve Chung | |
Title: | Chief Financial Officer |
Accepted and Agreed:
Raycom Media, Inc.
By: | /s/ Pat LaPlatney | |
Name: | Pat LaPlatney | |
Title: | Chief Executive Officer |
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (this “Agreement”) dated as of December 28, 2016 (the “Effective Date”) among (a) SILICON VALLEY BANK, a California corporation (“Bank”), and (b) FRANKLY INC., a corporation continued under the laws of British Columbia, Canada (“Canadian Borrower”), FRANKLY CO., a Delaware corporation (“Frankly Co.”) and FRANKLY MEDIA LLC, a Delaware limited liability company (“Frankly LLC” and, together with Canadian Borrower and Frankly Co., individually and collectively, jointly and severally, “Borrower”), provides the terms on which Bank shall lend to Borrower and Borrower shall repay Bank. The parties agree as follows:
1 ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement shall be construed following GAAP. Calculations and determinations must be made following GAAP. Notwithstanding the foregoing, all financial covenant and other financial calculations shall be calculated with respect to Borrower on a consolidated basis for every Borrower together as a group (but for clarity, such consolidated group shall not include any entity other than a Borrower, including without limitation, any Subsidiary). Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13. All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein. All references to “Dollars” or “$” are United States Dollars, unless otherwise noted.
2 LOAN AND TERMS OF PAYMENT
2.1 Promise to Pay. Borrower hereby unconditionally promises to pay Bank the outstanding principal amount of all Credit Extensions and accrued and unpaid interest thereon as and when due in accordance with this Agreement.
2.2 Revolving Line.
(a) Availability. Subject to the terms and conditions of this Agreement and to deduction of Reserves, upon Frankly LLC’s request, Bank shall make Advances to Frankly LLC in amounts up to the Availability Amount. Amounts borrowed under the Revolving Line may be repaid and, prior to the Revolving Line Maturity Date, reborrowed, subject to the applicable terms and conditions precedent herein. Notwithstanding the foregoing, until the completion of the Initial Audit, the aggregate amount of Advances outstanding at any time will not exceed One Million Five Hundred Thousand Dollars ($1,500,000.00).
(b) Termination; Repayment. The Revolving Line terminates on the Revolving Line Maturity Date, when the principal amount of all Advances, the unpaid interest thereon, and all other Obligations relating to the Revolving Line shall be immediately due and payable.
2.3 Overadvances. If, at any time, the outstanding principal amount of any Advances exceeds the lesser of either the Revolving Line or the Borrowing Base, Borrower shall immediately pay to Bank in cash the amount of such excess (such excess, the “Overadvance”). Without limiting Borrower’s obligation to repay Bank any Overadvance, Borrower agrees to pay Bank interest on the outstanding amount of any Overadvance, on demand, at a per annum rate equal to the rate that is otherwise applicable to Advances plus five percent (5.0%).
2.4 Payment of Interest on the Credit Extensions.
(a) Interest Rate. Subject to Section 2.4(b), the principal amount outstanding under the Revolving Line shall accrue interest at a floating per annum rate equal to two and one-quarter of one percent (2.25%) above the Prime Rate, which interest shall be payable monthly in accordance with Section 2.4(d) below.
(b) Default Rate. Immediately upon the occurrence and during the continuance of an Event of Default, Obligations shall bear interest at a rate per annum which is five percent (5.0%) above the rate that is otherwise applicable thereto (the “Default Rate”). Fees and expenses which are required to be paid by Borrower pursuant to the Loan Documents (including, without limitation, Bank Expenses) but are not paid when due shall bear interest until paid at a rate equal to the highest rate applicable to the Obligations. Payment or acceptance of the increased interest rate provided in this Section 2.4(b) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Bank.
(c) Adjustment to Interest Rate. Changes to the interest rate of any Credit Extension based on changes to the Prime Rate shall be effective on the effective date of any change to the Prime Rate and to the extent of any such change.
(d) Payment; Interest Computation. Interest is payable monthly on the Payment Date of each month and shall be computed on the basis of a 360-day year for the actual number of days elapsed. In computing interest, (i) all payments received after 12:00 p.m. Pacific time on any day shall be deemed received at the opening of business on the next Business Day, and (ii) the date of the making of any Credit Extension shall be included and the date of payment shall be excluded; provided, however, that if any Credit Extension is repaid on the same day on which it is made, such day shall be included in computing interest on such Credit Extension.
2.5 Fees. Borrower shall pay to Bank:
(a) Revolving Line Commitment Fee. A fully earned, non refundable commitment fee of Fifteen Thousand Dollars ($15,000.00), on the Effective Date;
(b) Termination Fee. Upon termination of this Agreement or the termination of the Revolving Line for any reason 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 one percent (1.0%) of the Revolving Line (the “Termination Fee”); and
(c) Bank Expenses. All Bank Expenses (including reasonable attorneys’ fees and expenses for documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due (or, if no stated due date, upon demand by Bank).
(d) Fees Fully Earned. Unless otherwise provided in this Agreement or in a separate writing by Bank, Borrower shall not be entitled to any credit, rebate, or repayment of any fees earned by Bank pursuant to this Agreement notwithstanding any termination of this Agreement or the suspension or termination of Bank’s obligation to make loans and advances hereunder. Bank may deduct amounts owing by Borrower under the clauses of this Section 2.5 pursuant to the terms of Section 2.6(c). Bank shall provide Borrower written notice of deductions made from the Designated Deposit Account pursuant to the terms of the clauses of this Section 2.5.
2.6 Payments; Application of Payments; Debit of Accounts.
(a) All payments to be made by Borrower under any Loan Document shall be made in immediately available funds in Dollars, without setoff or counterclaim, before 12:00 p.m. Pacific time on the date when due. Payments of principal and/or interest received after 12:00 p.m. Pacific time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment shall be due the next Business Day, and additional fees or interest, as applicable, shall continue to accrue until paid.
(b) Bank has the exclusive right to determine the order and manner in which all payments with respect to the Obligations may be applied. Borrower shall have no right to specify the order or the accounts to which Bank shall allocate or apply any payments required to be made by Borrower to Bank or otherwise received by Bank under this Agreement when any such allocation or application is not specified elsewhere in this Agreement.
(c) Bank may debit any of Borrower’s deposit accounts, including the Designated Deposit Account, for principal and interest payments or any other amounts Borrower owes Bank when due. These debits shall not constitute a set-off.
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2.7 Withholding. Payments received by Bank from Borrower under this Agreement will be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Authority (including any interest, additions to tax or penalties applicable thereto). Specifically, however, if at any time any Governmental Authority, applicable law, regulation or international agreement requires Borrower to make any withholding or deduction from any such payment or other sum payable hereunder to Bank, Borrower hereby covenants and agrees that the amount due from Borrower with respect to such payment or other sum payable hereunder will be increased to the extent necessary to ensure that, after the making of such required withholding or deduction, Bank receives a net sum equal to the sum which it would have received had no withholding or deduction been required, and Borrower shall pay the full amount withheld or deducted to the relevant Governmental Authority. Borrower will, upon request, furnish Bank with proof reasonably satisfactory to Bank indicating that Borrower has made such withholding payment; provided, however, that Borrower need not make any withholding payment if the amount or validity of such withholding payment is contested in good faith by appropriate and timely proceedings and as to which payment in full is bonded or reserved against by Borrower. The agreements and obligations of Borrower contained in this Section 2.7 shall survive the termination of this Agreement.
3 CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Credit Extension. Bank’s obligation to make the initial Credit Extension is subject to the condition precedent that Bank shall have received, in form and substance satisfactory to Bank, such documents, and completion of such other matters, as Bank may reasonably deem necessary or appropriate, including, without limitation:
(a) duly executed original signatures to the Loan Documents;
(b) duly executed original signatures to the Control Agreements;
(c) the Operating Documents and long-form good standing certificates of Frankly Co. certified by the Secretary of State (or equivalent agency) of Delaware, each as of a date no earlier than thirty (30) days prior to the Effective Date;
(d) the Operating Documents and long-form good standing certificates of Frankly LLC certified by the Secretary of State (or equivalent agency) of Delaware and New York, each as of a date no earlier than thirty (30) days prior to the Effective Date;
(e) a secretary’s corporate borrowing certificate of Frankly Co. with respect to such Frankly Co.’s Operating Documents, incumbency, specimen signatures and resolutions authorizing the execution and delivery of this Agreement and the other Loan Documents to which it is a party;
(f) a limited liability company borrowing certificate of Frankly LLC with respect to such Frankly LLC’s Operating Documents, incumbency, specimen signatures and resolutions authorizing the execution and delivery of this Agreement and the other Loan Documents to which it is a party;
(g) an officer’s certificate of Canadian Borrower with respect to its notice of articles, articles, shareholder agreement (or equivalent), incumbency and resolutions authorizing the execution and delivery of this Agreement and the other Loan Documents;
(h) a Certificate of Good Standing for Canadian Borrower;
(i) duly executed original signatures to the completed Borrowing Resolutions for each Borrower;
(j) duly executed original signatures to the Intercreditor Agreement, together with copies of the underlying documents evidencing Borrower’s Indebtedness with Raycom;
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(k) certified copies, dated as of a recent date, of financing statement searches (including, without limitation, UCC searches, PPSA searches and Bank Act searches), as Bank may request, accompanied by written evidence (including any PPSA/UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the initial Credit Extension, will be terminated or released;
(l) the Perfection Certificate(s) of Borrower, together with the duly executed original signature thereto;
(m) Intellectual Property search results with the United States Patent and Trademark Office, the United States Copyright Office and the Canadian Intellectual Property Office and completed exhibits to the IP Agreement;
(n) legal opinions of each Borrower’s counsel (authority/enforceability) dated as of the Effective Date, together with the duly executed original signature thereto, in form and substance acceptable to Bank;
(o) evidence satisfactory to Bank that the insurance policies and endorsements required by Section 6.7 hereof are in full force and effect, together with appropriate evidence showing lender loss payable and/or additional insured clauses or endorsements in favor of Bank; and
(p)\ payment of the fees and Bank Expenses then due as specified in Section 2.5 hereof.
3.2 Conditions Precedent to all Credit Extensions. Bank’s obligations to make each Credit Extension, including the initial Credit Extension, is subject to the following conditions precedent:
(a) timely receipt of the Credit Extension request and any materials and documents required by Section 3.4;
(b) the representations and warranties in this Agreement shall be true, accurate, and complete in all material respects on the date of the proposed Credit Extension and on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Event of Default shall have occurred and be continuing or result from the Credit Extension. Each Credit Extension is Borrower’s representation and warranty on that date that the representations and warranties in this Agreement remain true, accurate, and complete in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date; and
(c) Bank determines to its satisfaction that there has not been any material impairment in the general affairs, management, results of operation, financial condition or the prospect of repayment of the Obligations, nor any material adverse deviation by Borrower from the most recent business plan of Borrower presented to and accepted by Bank.
3.3 Covenant to Deliver. Borrower agrees to deliver to Bank each item required to be delivered to Bank under this Agreement as a condition precedent to any Credit Extension. Borrower expressly agrees that a Credit Extension made prior to the receipt by Bank of any such item shall not constitute a waiver by Bank of Borrower’s obligation to deliver such item, and the making of any Credit Extension in the absence of a required item shall be in Bank’s sole discretion.
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3.4 Procedures for Borrowing. Subject to the prior satisfaction of all other applicable conditions to the making of an Advance set forth in this Agreement, to obtain an Advance, Borrower shall notify Bank (which notice shall be irrevocable) by electronic mail by 12:00 p.m. Pacific time on the Funding Date of the Advance. Such notice shall be made by Borrower through Bank’s online banking program, provided, however, if Borrower is not utilizing Bank’s online banking program, then such notice shall be in a written format acceptable to Bank that is executed by an Authorized Signer. Bank shall have received satisfactory evidence that the provision of such notices and the requests for Advances have been approved by the Board. In connection with any such notification, Borrower must promptly deliver to Bank by electronic mail or through Bank’s online banking program such reports and information, including without limitation, sales journals, cash receipts journals, accounts receivable aging reports, as Bank may request in its sole discretion. Bank shall credit proceeds of an Advance to the Designated Deposit Account. Bank may make Advances under this Agreement based on instructions from an Authorized Signer or without instructions if the Advances are necessary to meet Obligations which have become due.
4 CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower hereby grants Bank, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Bank, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof.
Borrower acknowledges that it previously has entered, and/or may in the future enter, into Bank Services Agreements with Bank. Regardless of the terms of any Bank Services Agreement, Borrower agrees that any amounts Borrower owes Bank thereunder shall be deemed to be Obligations hereunder and that it is the intent of Borrower and Bank to have all such Obligations secured by the first priority perfected security interest in the Collateral granted herein (subject only to Permitted Liens that are permitted pursuant to the terms of this Agreement to have superior priority to Bank’s Lien in this Agreement and except that the first priority aspect may be subject to the security interest of Raycom in certain property, but only to the extent contemplated by the Intercreditor Agreement).
If this Agreement is terminated, Bank’s Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations) are repaid in full in cash. Upon payment in full in cash of the Obligations (other than inchoate indemnity obligations) and at such time as Bank’s obligation to make Credit Extensions has terminated, Bank shall, at the sole cost and expense of Borrower, release its Liens in the Collateral and all rights therein shall revert to Borrower. In the event (x) all Obligations (other than inchoate indemnity obligations), except for Bank Services, are satisfied in full, and (y) this Agreement is terminated, Bank shall terminate the security interest granted herein upon Borrower providing cash collateral acceptable to Bank in its good faith business judgment for Bank Services, if any. In the event such Bank Services consist of outstanding Letters of Credit, Borrower shall provide to Bank cash collateral in an amount equal to (x) if such Letters of Credit are denominated in Dollars, then at least one hundred five percent (105.0%); and (y) if such Letters of Credit are denominated in a Foreign Currency, then at least one hundred ten percent (110.0%), of the Dollar Equivalent of the face amount of all such Letters of Credit plus all interest, fees, and costs due or to become due in connection therewith (as estimated by Bank in its business judgment), to secure all of the Obligations relating to such Letters of Credit.
4.2 Priority of Security Interest. Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral (subject only to Permitted Liens that are permitted pursuant to the terms of this Agreement to have superior priority to Bank’s Lien in this Agreement and except that the first priority aspect may be subject to the security interest of Raycom in certain property, but only to the extent contemplated by the Intercreditor Agreement). If Borrower shall acquire a commercial tort claim, Borrower shall promptly notify Bank in a writing signed by Borrower of the general details thereof and grant to Bank in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Bank.
4.3 Authorization to File Financing Statements. Borrower hereby authorizes Bank to file financing statements, without notice to Borrower, with all appropriate jurisdictions to perfect or protect Bank’s interest or rights hereunder, including a notice that any disposition of the Collateral, by either Borrower or any other Person, shall be deemed to violate the rights of Bank under the Code. Such financing statements may indicate the Collateral as “all assets of the Debtor” or words of similar effect, or as being of an equal or lesser scope, or with greater detail, all in Bank’s discretion.
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5 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization, Authorization; Power and Authority. Borrower is duly existing and in good standing as a Registered Organization in its jurisdiction of formation and is qualified and licensed to do business and is in good standing in any jurisdiction in which the conduct of its business or its ownership of property requires that it be qualified except where the failure to do so could not reasonably be expected to have a material adverse effect on Borrower’s business. In connection with this Agreement, each Borrower has delivered to Bank a completed certificate signed by Borrower, entitled “Perfection Certificate” (collectively, the “Perfection Certificate”). Borrower represents and warrants to Bank that (a) Borrower’s exact legal name is that indicated on the Perfection Certificate and on the signature page hereof; (b) Borrower is an organization of the type and is organized in the jurisdiction set forth in the Perfection Certificate; (c) the Perfection Certificate accurately sets forth Borrower’s organizational identification/corporation number or accurately states that Borrower has none; (d) the Perfection Certificate accurately sets forth Borrower’s place of business, or, if more than one, its chief executive office as well as Borrower’s mailing address (if different than its chief executive office); (e) except as set forth on the Perfection Certificate, Borrower (and each of its predecessors) has not, in the past five (5) years, changed its jurisdiction of formation, organizational structure or type, or any organizational/corporation number assigned by its jurisdiction; and (f) all other information set forth on the Perfection Certificate pertaining to Borrower and each of its Subsidiaries is accurate and complete in all material respects (it being understood and agreed that Borrower may from time to time update certain information in the Perfection Certificate after the Effective Date to the extent permitted by one or more specific provisions in this Agreement). If Borrower is not now a Registered Organization but later becomes one, Borrower shall promptly notify Bank of such occurrence and provide Bank with Borrower’s organizational identification number.
The execution, delivery and performance by Borrower of the Loan Documents to which it is a party have been duly authorized, and do not (i) conflict with any of Borrower’s organizational documents, (ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which Borrower or any of its Subsidiaries or any of their property or assets may be bound or affected, (iv) require any action by, filing, registration, or qualification with, or Governmental Approval from, any Governmental Authority (except such Governmental Approvals which have already been obtained and are in full force and effect), or (v) conflict with, contravene, constitute a default or breach under, or result in or permit the termination or acceleration of, any material agreement by which Borrower is bound. Borrower is not in default under any agreement to which it is a party or by which it is bound in which the default could reasonably be expected to have a material adverse effect on Borrower’s business.
5.2 Collateral. Borrower has good title to, rights in, and the power to transfer each item of the Collateral upon which it purports to grant a Lien hereunder, free and clear of any and all Liens except Permitted Liens. Borrower has no Collateral Accounts at or with any bank or financial institution other than Bank or Bank’s Affiliates except for the Collateral Accounts described in the Perfection Certificate delivered to Bank in connection herewith and which Borrower has taken such actions as are necessary to give Bank a perfected security interest therein, pursuant to the terms of Section 6.8(b) but subject to the Intercreditor Agreement. The Accounts are bona fide, existing obligations of the Account Debtors.
The Collateral is not in the possession of any third party bailee (such as a warehouse) except as otherwise provided in the Perfection Certificate. None of the components of the Collateral shall be maintained at locations other than as provided in the Perfection Certificate or as permitted pursuant to Section 7.2.
All Inventory is in all material respects of good and marketable quality, free from material defects.
Borrower is the sole owner of the Intellectual Property which it owns or purports to own except for (a) non-exclusive licenses granted to its customers in the ordinary course of business, (b) over-the-counter software that is commercially available to the public, and (c) material Intellectual Property licensed to Borrower and noted on the Perfection Certificate. Each Patent which it owns or purports to own and which is material to Borrower’s business is valid and enforceable, and no part of the Intellectual Property which Borrower owns or purports to own and which is material to Borrower’s business has been judged invalid or unenforceable, in whole or in part. To the best of Borrower’s knowledge, no claim has been made that any part of the Intellectual Property violates the rights of any third party except to the extent such claim would not reasonably be expected to have a material adverse effect on Borrower’s business.
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Except as noted on the Perfection Certificate, Borrower is not a party to, nor is it bound by, any Restricted License.
5.3 Accounts Receivable.
(a) For each Account with respect to which Advances are requested, on the date each Advance is requested and made, such Account shall be an Eligible Account.
(b) All account statements given and all unpaid balances appearing in all invoices, instruments and other documents evidencing the Eligible Accounts are and shall be true and correct and all such invoices, instruments and other documents, and all of Borrower’s Books are genuine and in all respects what they purport to be. All sales and other transactions underlying or giving rise to each Eligible Account shall comply in all material respects with all applicable laws and governmental rules and regulations. Borrower has no knowledge of any actual or imminent Insolvency Proceeding of any Account Debtor whose accounts are Eligible Accounts in any Borrowing Base Report. To the best of Borrower’s knowledge, all signatures and endorsements on all documents, instruments, and agreements relating to all Eligible Accounts are genuine, and all such documents, instruments and agreements are legally enforceable in accordance with their terms.
5.4 Litigation. Except as set forth on the Perfection Certificate, there are no actions or proceedings pending or, to the knowledge of any Responsible Officer, threatened in writing by or against Borrower or any of its Subsidiaries involving more than, individually or in the aggregate, Fifty Thousand Dollars ($50,000.00).
5.5 Financial Statements; Financial Condition. All consolidated financial statements for Borrower and any of its Subsidiaries delivered to Bank fairly present in all material respects Borrower’s consolidated financial condition and Borrower’s consolidated results of operations. There has not been any material deterioration in Borrower’s consolidated financial condition since the date of the most recent financial statements submitted to Bank.
5.6 Solvency. The fair salable value of Borrower’s consolidated assets (including goodwill minus disposition costs) exceeds the fair value of Borrower’s liabilities; Borrower is not left with unreasonably small capital after the transactions in this Agreement; and Borrower is able to pay its debts (including trade debts) as they mature.
5.7 Regulatory Compliance. Borrower is not an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act of 1940, as amended. Borrower is not engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors). Borrower (a) has complied in all material respects with all Requirements of Law, and (b) has not violated any Requirements of Law the violation of which could reasonably be expected to have a material adverse effect on its business. None of Borrower’s or any of its Subsidiaries’ properties or assets has been used by Borrower or any Subsidiary or, to the best of Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than legally. Borrower and each of its Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Governmental Authorities that are necessary to continue their respective businesses as currently conducted.
5.8 Subsidiaries; Investments. Borrower does not own any stock, partnership, or other ownership interest or other equity securities except for Permitted Investments.
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5.9 Tax Returns and Payments; Pension Contributions. Borrower has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state, provincial and local taxes, assessments, deposits and contributions owed by Borrower except (a) to the extent such taxes are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, so long as such reserve or other appropriate provision, if any, as shall be required in conformity with GAAP shall have been made therefor, or (b) if such taxes, assessments, deposits and contributions do not, individually or in the aggregate, exceed Five Thousand Dollars ($5,000.00).
To the extent Borrower defers payment of any contested taxes, Borrower shall (i) notify Bank in writing of the commencement of, and any material development in, the proceedings, and (ii) post bonds or take any other steps required to prevent the Governmental Authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien.” Borrower is unaware of any claims or adjustments proposed for any of Borrower’s prior tax years which could result in additional taxes becoming due and payable by Borrower in excess of Five Thousand Dollars ($5,000.00). Borrower has paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and Borrower has not withdrawn from participation in, and has not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.
5.10 Use of Proceeds. Borrower shall use the proceeds of the Credit Extensions solely as working capital and to fund its general business requirements and not for personal, family, household or agricultural purposes.
5.11 Full Disclosure. No written representation, warranty or other statement of Borrower in any certificate or written statement given to Bank, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to Bank, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized by Bank that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).
5.12 Definition of “Knowledge.” For purposes of the Loan Documents, whenever a representation or warranty is made to Borrower’s knowledge or awareness, to the “best of” Borrower’s knowledge, or with a similar qualification, knowledge or awareness means the actual knowledge, after reasonable investigation, of any Responsible Officer.
6 AFFIRMATIVE COVENANTS
Borrower shall do all of the following:
6.1 Government Compliance.
(a) Maintain its and all its Subsidiaries’ legal existence and good standing in their respective jurisdictions of formation and maintain qualification in each jurisdiction in which the failure to so qualify would reasonably be expected to have a material adverse effect on Borrower’s business or operations, provided that upon prior written notice to Bank, Borrower may dissolve Frankly Co. (so long as all assets of Frankly Co. are transferred to another Borrower) or merge Frankly Co. into another Borrower. Borrower shall comply, and have each Subsidiary comply, in all material respects, with all laws, ordinances and regulations to which it is subject.
(b) Obtain all of the Governmental Approvals necessary for the performance by Borrower of its obligations under the Loan Documents to which it is a party and the grant of a security interest to Bank in all of its property. Borrower shall promptly provide copies of any such obtained Governmental Approvals to Bank.
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6.2 Financial Statements, Reports, Certificates. Provide Bank with the following:
(a) (i) a Borrowing Base Report (and any schedules related thereto and including any other information requested by Bank with respect to Borrower’s Accounts), (ii) monthly accounts receivable agings, aged by invoice date, (iii) monthly accounts payable agings, aged by invoice date, and outstanding or held check registers, if any, and (iv) monthly reconciliations of accounts receivable agings (aged by invoice date), transaction reports and general ledger, in each case (A) no later than Friday of each week when a Streamline Period is not in effect and (B) within thirty (30) days after the end of each month when a Streamline Period is in effect;
(b) as soon as available, but no later than thirty (30) days after the last day of each month, a company prepared consolidated balance sheet and income statement covering Borrower’s consolidated operations for such month certified by a Responsible Officer and in a form acceptable to Bank (the “Monthly Financial Statements”);
(c) within thirty (30) days after the last day of each month and together with the Monthly Financial Statements, a duly completed Compliance Certificate signed by a Responsible Officer, certifying that as of the end of such month, Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth in this Agreement and such other information as Bank may reasonably request, including, without limitation, a statement that at the end of such month there were no held checks;
(d) annually, on the earlier to occur of (i) seven (7) Business Days following approval by the Board and (ii) March 31st of each year, and contemporaneously with any updates or amendments thereto, (A) an annual consolidated operating budget for Canadian Borrower (including income statements, balance sheets and cash flow statements, by month), and (B) annual consolidated financial projections for Canadian Borrower (on a quarterly basis) as approved by the Board, together with any related business forecasts used in the preparation of such annual financial projections;
(e) as soon as available, and in any event within one hundred twenty (120) days following the end of Borrower’s fiscal year, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements from an independent certified public accounting firm reasonably acceptable to Bank;
(f) in the event that Borrower becomes subject to the reporting requirements under the Exchange Act within five (5) days of filing, copies of all periodic and other reports, proxy statements and other materials filed by Borrower and/or any Guarantor with the SEC, any Governmental Authority succeeding to any or all of the functions of the SEC or with any national securities exchange, or distributed to its shareholders, as the case may be. Documents required to be delivered pursuant to the terms hereof (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which Borrower posts such documents, or provides a link thereto, on Borrower’s website on the internet at Borrower’s website address; provided, however, Borrower shall promptly notify Bank in writing (which may be by electronic mail) of the posting of any such documents;
(g) within five (5) days of delivery, copies of all statements, reports and notices made available to Borrower’s security holders or to any holders of Subordinated Debt;
(h) prompt report of any legal actions pending or threatened in writing against Borrower or any of its Subsidiaries that could result in damages or costs to Borrower or any of its Subsidiaries of, individually or in the aggregate, Fifty Thousand Dollars ($50,000.00) or more;
(i) prompt written notice of (i) any material change in the composition of the Intellectual Property, (ii) the registration of any Copyright, including any subsequent ownership right of Borrower in or to any Copyright, Patent or Trademark not shown in the IP Agreement, and (iii) Borrower’s knowledge of an event that could reasonably be expected to materially and adversely affect the value of the Intellectual Property; and
(j) promptly, from time to time, such other information regarding Borrower or compliance with the terms of any Loan Documents as reasonably requested by Bank.
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6.3 Accounts Receivable.
(a) Schedules and Documents Relating to Accounts. Borrower shall deliver to Bank transaction reports and schedules of collections, as provided in Section 6.2, on Bank’s standard forms; provided, however, that Borrower’s failure to execute and deliver the same shall not affect or limit Bank’s Lien and other rights in all of Borrower’s Accounts, nor shall Bank’s failure to advance or lend against a specific Account affect or limit Bank’s Lien and other rights therein. If reasonably requested by Bank, Borrower shall furnish Bank with copies (or, at Bank’s request, originals) of all contracts, orders, invoices, and other similar documents, and all shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the sale or disposition of which gave rise to such Accounts. In addition, Borrower shall deliver to Bank, on its request, the originals of all instruments, chattel paper, security agreements, guarantees and other documents and property evidencing or securing any Accounts, in the same form as received, with all necessary indorsements, and copies of all credit memos.
(b) Disputes. Borrower shall promptly notify Bank of all disputes or claims relating to Accounts. Borrower may forgive (completely or partially), compromise, or settle any Account for less than payment in full, or agree to do any of the foregoing so long as (i) Borrower does so in good faith, in a commercially reasonable manner, in the ordinary course of business, in arm’s-length transactions, and reports the same to Bank in the regular reports provided to Bank; (ii) no Event of Default has occurred and is continuing; and (iii) after taking into account all such discounts, settlements and forgiveness, the total outstanding Advances will not exceed the lesser of the Revolving Line or the Borrowing Base.
(c)\ Collection of Accounts. Borrower shall direct Account Debtors to deliver or transmit all proceeds of Accounts into a lockbox account, or such other “blocked account” as specified by Bank (either such account, the “Cash Collateral Account”). Whether or not an Event of Default has occurred and is continuing, Borrower shall immediately deliver all payments on and proceeds of Accounts to the Cash Collateral Account. Subject to Bank’s right to maintain a reserve pursuant to Section 6.3(d), all amounts received in the Cash Collateral Account shall be (i) applied to immediately reduce the Obligations when a Streamline Period is not in effect (unless Bank, in its sole discretion, at times when an Event of Default exists, elects not to so apply such amounts), or (ii) transferred on a daily basis to Borrower’s operating account with Bank when a Streamline Period is in effect. Borrower hereby authorizes Bank to transfer to the Cash Collateral Account any amounts that Bank reasonably determines are proceeds of the Accounts (provided that Bank is under no obligation to do so and this allowance shall in no event relieve Borrower of its obligations hereunder).
(d)\ Reserves. Notwithstanding any terms in this Agreement to the contrary, at times when an Event of Default exists, Bank may hold any proceeds of the Accounts and any amounts in the Cash Collateral Account that are not applied to the Obligations pursuant to Section 6.3(c) above (including amounts otherwise required to be transferred to Borrower’s operating account with Bank when a Streamline Period is in effect) as a reserve to be applied to any Obligations regardless of whether such Obligations are then due and payable.
(e) Returns. Provided no Event of Default has occurred and is continuing, if any Account Debtor returns any Inventory to Borrower, Borrower shall promptly (i) determine the reason for such return, (ii) issue a credit memorandum to the Account Debtor in the appropriate amount, and (iii) if a credit is due, provide a copy of such credit memorandum to Bank, upon request from Bank. In the event any attempted return occurs after the occurrence and during the continuance of any Event of Default, Borrower shall hold the returned Inventory in trust for Bank, and immediately notify Bank of the return of the Inventory.
(f) Verifications; Confirmations; Credit Quality; Notifications. Bank may, from time to time, (i) verify and confirm directly with the respective Account Debtors the validity, amount and other matters relating to the Accounts, either in the name of Borrower or Bank or such other name as Bank may choose, and notify any Account Debtor of Bank’s security interest in such Account and/or (ii) conduct a credit check of any Account Debtor to approve any such Account Debtor’s credit. In addition, Bank may notify Account Debtors to make payments in respect of Accounts directly to Bank. So long as no Event of Default exists, Bank will notify Borrower prior to making any direct contact with an Account Debtor.
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(g) No Liability. Bank shall not be responsible or liable for any shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good faith for less than the full amount thereof, nor shall Bank be deemed to be responsible for any of Borrower’s obligations under any contract or agreement giving rise to an Account. Nothing herein shall, however, relieve Bank from liability for its own gross negligence or willful misconduct.
6.4 Remittance of Proceeds. Except as otherwise provided in Section 6.3(c), deliver, in kind, all proceeds arising from the disposition of any Collateral to Bank in the original form in which received by Borrower not later than the following Business Day after receipt by Borrower, to be applied to the Obligations (a) prior to an Event of Default, pursuant to the terms of Section 6.3(c) hereof, and (b) after the occurrence and during the continuance of an Event of Default, pursuant to the terms of Section 9.4 hereof; provided that, if no Event of Default has occurred and is continuing, Borrower shall not be obligated to remit to Bank the proceeds of the sale of worn out or obsolete Equipment disposed of by Borrower in good faith in an arm’s length transaction for an aggregate purchase price of Fifty Thousand Dollars ($50,000.00) or less (for all such transactions in any fiscal year). Borrower agrees that it will not commingle proceeds of Collateral with any of Borrower’s other funds or property, but will hold such proceeds separate and apart from such other funds and property and in an express trust for Bank. Nothing in this Section 6.4 limits the restrictions on disposition of Collateral set forth elsewhere in this Agreement.
6.5 Taxes; Pensions. Timely file, and require each of its Subsidiaries to timely file, all required tax returns and reports and timely pay, and require each of its Subsidiaries to timely pay, all foreign, federal, state, provincial and local taxes, assessments, deposits and contributions owed by Borrower and each of its Subsidiaries, except for deferred payment of any taxes contested pursuant to the terms of Section 5.9 hereof, and shall deliver to Bank, on demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms.
6.6 Access to Collateral; Books and Records. At reasonable times, on one (1) Business Day’s notice (provided no notice is required if an Event of Default has occurred and is continuing), Bank, or its agents, shall have the right to inspect the Collateral and the right to audit and copy Borrower’s Books. Such inspections and audits shall be conducted as frequently as Bank determines in its sole discretion that conditions warrant (provided that Bank will not complete more than one (1) such audit and inspection per calendar quarter at times when no Event of Default exists). The foregoing inspections and audits shall be conducted at Borrower’s expense. The charge therefor shall be One Thousand Dollars ($1,000.00) per person per day (or such higher amount as shall represent Bank’s then-current standard charge for the same), plus reasonable out-of-pocket expenses. In the event Borrower and Bank schedule an audit more than ten (10) days in advance, and Borrower cancels or seeks to or reschedules the audit with less than ten (10) days written notice to Bank, then (without limiting any of Bank’s rights or remedies) Borrower shall pay Bank a fee of One Thousand Dollars ($1,000.00) plus any out-of-pocket expenses incurred by Bank to compensate Bank for the anticipated costs and expenses of the cancellation or rescheduling. Borrower acknowledges that the first such audit will occur within sixty (60) days of the Effective Date.
6.7 Insurance.
(a) Keep its business and the Collateral insured for risks and in amounts standard for companies in Borrower’s industry and location and as Bank may reasonably request. Insurance policies shall be in a form, with financially sound and reputable insurance companies that are not Affiliates of Borrower, and in amounts that are satisfactory to Bank. All property policies shall have a lender’s loss payable endorsement showing Bank as a lender loss payee. All liability policies shall show, or have endorsements showing, Bank as an additional insured. Bank shall be named as lender loss payee and/or additional insured with respect to any such insurance providing coverage in respect of any Collateral.
(b) Ensure that proceeds payable under any property policy are, at Bank’s option, payable to Bank on account of the Obligations.
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(c) At Bank’s request, Borrower shall deliver certified copies of insurance policies and evidence of all premium payments. Each provider of any such insurance required under this Section 6.7 shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to Bank, that it will give Bank thirty (30) days prior written notice before any such policy or policies shall be materially altered or canceled. If Borrower fails to obtain insurance as required under this Section 6.7 or to pay any amount or furnish any required proof of payment to third persons and Bank, Bank may make all or part of such payment or obtain such insurance policies required in this Section 6.7, and take any action under the policies Bank deems prudent.
6.8 Accounts.
(a) Maintain all of its and all of its Subsidiaries operating, depository and securities/investment accounts with Bank and Bank’s Affiliates; provided, however, (i) Borrower may maintain its existing account with Bank of America as disclosed on the Perfection Certificate (account number ending E+11) and its existing accounts with Western Alliance Bank as disclosed on the Perfection Certificate (account numbers ending 182, 166, 190, 174, 967, 771, 489, 638 and 315) (collectively, the “Transition Accounts”) so long as (A) the Transition Accounts are only permitted to be maintained until the date that is sixty (60) days following the Effective Date (at which point such accounts must be closed and all funds therein must be transferred to an account or accounts of Borrower maintained with Bank), (B) all funds in the Transition Accounts are transferred to an account of Borrower maintained with Bank on the Effective Date and (C) all funds maintained in the Transition Accounts on or after the Effective Date are transferred to an account of Borrower maintained with Bank within one (1) Business Day and (ii) Canadian Borrower may maintain its existing accounts with Royal Bank of Canada in Canada as disclosed on the Perfection Certificate (account numbers ending 289-4 and 727-0) so long as (A) such accounts, at all times, are located in Canada and are depository/operating accounts and (B) the aggregate amount of funds maintained therein does not exceed at any time an amount necessary for the ordinary and necessary current monthly operating expenses in Canada of Canadian Borrower. Any Guarantor shall maintain all of its operating, depository and securities/investment accounts with Bank and Bank’s Affiliates.
(b) In addition to and without limiting the restrictions in (a), Borrower shall provide Bank five (5) days prior written notice before establishing any Collateral Account at or with any bank or financial institution other than Bank or Bank’s Affiliates. For each Collateral Account that Borrower at any time maintains, Borrower shall cause the applicable bank or financial institution (other than Bank) at or with which any Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Bank’s Lien in such Collateral Account in accordance with the terms hereunder which Control Agreement may not be terminated without the prior written consent of Bank. The provisions of the previous sentence shall not apply to (i) the Transition Accounts for a period of sixty (60) days following the Effective Date or (ii) deposit accounts exclusively used for payroll, payroll taxes, and other employee wage and benefit payments to or for the benefit of Borrower’s employees and identified to Bank by Borrower as such.
6.9 Financial Covenants.
(a) Cash at Bank. Maintain at all times, to be tested as of each day, unrestricted and unencumbered cash at Bank in an aggregate amount of at least One Million Dollars ($1,000,000.00).
(b) Adjusted Quick Ratio. Maintain at all times, to be tested as of the last day of each month, an Adjusted Quick Ratio of at least (i) 1.10 to 1.0 until the earlier to occur of (A) March 31, 2017 and (B) such date as when any Borrower’s securities are first listed or approved for trading or quotation on a United States national stock exchange or market such as NYSE or NASDAQ and (ii) 1.30 to 1.0 at such time and at all times thereafter.
6.10 Protection and Registration of Intellectual Property Rights.
(a) (i) Protect, defend and maintain the validity and enforceability of its Intellectual Property that is material to its business (it being acknowledged that the Intellectual Property owned by Frankly Co. as of the Effective Date shall not be deemed material to Borrower’s business); (ii) promptly advise Bank in writing of material infringements or any other event that could reasonably be expected to materially and adversely affect the value of its Intellectual Property; and (iii) not allow any Intellectual Property material to Borrower’s business to be abandoned, forfeited or dedicated to the public without Bank’s written consent.
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(b) If Borrower (i) obtains any Patent, registered Trademark, registered Copyright, registered mask work, or any pending application for any of the foregoing, whether as owner, licensee or otherwise, or (ii) applies for any Patent or the registration of any Trademark, then Borrower shall immediately provide written notice thereof to Bank and shall execute such intellectual property security agreements and other documents and take such other actions as Bank may request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Bank in such property (except that the first priority aspect may be subject to the security interest of Raycom in certain property, but only to the extent contemplated by the Intercreditor Agreement). If Borrower decides to register any Copyrights or mask works in the United States Copyright Office or the Canadian Intellectual Property Office, Borrower shall: (x) provide Bank with at least fifteen (15) days prior written notice of Borrower’s intent to register such Copyrights or mask works together with a copy of the application it intends to file with the United States Copyright Office or the Canadian Intellectual Property Office (excluding exhibits thereto); (y) execute an intellectual property security agreement and such other documents and take such other actions as Bank may request in its good faith business judgment to perfect and maintain a first priority perfected security interest in favor of Bank in the Copyrights or mask works intended to be registered with the United States Copyright Office or the Canadian Intellectual Property Office (except that the first priority aspect may be subject to the security interest of Raycom in certain property, but only to the extent contemplated by the Intercreditor Agreement); and (z) record such intellectual property security agreement with the United States Copyright Office or the Canadian Intellectual Property Office contemporaneously with filing the Copyright or mask work application(s) with the United States Copyright Office or the Canadian Intellectual Property Office. Borrower shall promptly provide to Bank copies of all applications that it files for Patents or for the registration of Trademarks, Copyrights or mask works, together with evidence of the recording of the intellectual property security agreement required for Bank to perfect and maintain a first priority perfected security interest in such property (except that the first priority aspect may be subject to the security interest of Raycom in certain property, but only to the extent contemplated by the Intercreditor Agreement).
(c) Provide written notice to Bank within ten (10) days of entering or becoming bound by any Restricted License (other than over-the-counter software that is commercially available to the public). Borrower shall take such steps as Bank reasonably requests to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (i) any Restricted License to be deemed “Collateral” and for Bank to have a security interest in it that might otherwise be restricted or prohibited by law or by the terms of any such Restricted License, whether now existing or entered into in the future, and (ii) Bank to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Bank’s rights and remedies under this Agreement and the other Loan Documents.
6.11 Litigation Cooperation. From the date hereof and continuing through the termination of this Agreement, make available to Bank, without expense to Bank, Borrower and its officers, employees and agents and Borrower’s books and records, to the extent that Bank may deem them reasonably necessary to prosecute or defend any third-party suit or proceeding instituted by or against Bank with respect to any Collateral or relating to Borrower.
6.12 Online Banking. Utilize Bank’s online banking platform for all matters requested by Bank which shall include, without limitation (and without request by Bank for the following matters), uploading information pertaining to Accounts and Account Debtors, requesting approval for exceptions making certain Accounts Eligible Accounts, requesting Credit Extensions, and uploading financial statements and other reports required to be delivered by this Agreement (including, without limitation, those described in Section 6.2 of this Agreement).
6.13 Further Assurances. Execute any further instruments and take further action as Bank reasonably requests to perfect or continue Bank’s Lien in the Collateral or to effect the purposes of this Agreement. Deliver to Bank, within five (5) days after the same are sent or received, copies of all correspondence, reports, documents and other filings with any Governmental Authority regarding compliance with or maintenance of Governmental Approvals or Requirements of Law or that could reasonably be expected to have a material effect on any of the Governmental Approvals or otherwise on the operations of Borrower or any of its Subsidiaries.
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7 NEGATIVE COVENANTS
Borrower shall not do any of the following without Bank’s prior written consent:
7.1 Dispositions. Convey, sell, lease, transfer, assign, or otherwise dispose of (collectively, “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (a) of Inventory in the ordinary course of business; (b) of worn-out or obsolete Equipment that is, in the reasonable judgment of Borrower, no longer economically practicable to maintain or useful in the ordinary course of business of Borrower; (c) consisting of Permitted Liens and Permitted Investments; (d) consisting of non-exclusive licenses for the use of the property of Borrower or its Subsidiaries in the ordinary course of business; (e) of other property with an aggregate value not to exceed Fifty Thousand Dollars ($50,000.00) per year; and (f) transfers from Frankly Co. to Frankly LLC.
7.2 Changes in Business, Management, Control, or Business Locations. (a) Engage in or permit any of its Subsidiaries to engage in any business other than the businesses currently engaged in by Borrower and such Subsidiary, as applicable, or reasonably related thereto; (b) liquidate or dissolve (provided that upon prior written notice to Bank, Frankly Co. may dissolve so long as all assets of Frankly Co. are transferred to another Borrower); (c) fail to provide notice to Bank of any Key Person departing from or ceasing to be employed by Borrower within five (5) days after such Key Person’s departure from Borrower; or (d) permit or suffer any Change in Control.
Borrower shall not, without at least fifteen (15) days prior written notice to Bank: (1) add any new offices or business locations, including warehouses (unless such new offices or business locations contain less than Ten Thousand Dollars ($10,000.00) in Borrower’s assets or property) or deliver any portion of the Collateral valued, individually or in the aggregate, in excess of One Hundred Thousand Dollars ($100,000.00) to a bailee at a location other than to a bailee and at a location already disclosed in the Perfection Certificate, (2) change its jurisdiction of organization, (3) change its organizational structure or type, (4) change its legal name, (5) change its registered office or its chief executive office, or (6) change any organizational number (if any) assigned by its jurisdiction of organization. If Borrower intends to deliver any portion of the Collateral valued, individually or in the aggregate, in excess of Ten One Hundred Dollars ($100,000.00) to a bailee, and Bank and such bailee are not already parties to a bailee agreement governing both the Collateral and the location to which Borrower intends to deliver the Collateral, then Borrower will first receive the written consent of Bank, and such bailee shall execute and deliver a bailee agreement in form and substance reasonably satisfactory to Bank.
7.3 Mergers, Amalgamations or Acquisitions. Merge, amalgamate or consolidate, or permit any of its Subsidiaries to merge, amalgamate or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock, membership interests, or property of another Person (including, without limitation, by the formation of any Subsidiary). A Subsidiary (other than a Borrower) may merge, amalgamate or consolidate into another Subsidiary or into Borrower, provided that upon prior written notice to Bank, Frankly Co. may merge into another Borrower.
7.4 Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness.
7.5 Encumbrance. Create, incur, allow, or suffer any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, permit any Collateral not to be subject to the first priority security interest granted herein (subject only to Permitted Liens that are permitted pursuant to the terms of this Agreement to have superior priority to Bank’s Lien in this Agreement and except that the first priority aspect may be subject to the security interest of Raycom in certain property, but only to the extent contemplated by the Intercreditor Agreement), or enter into any agreement, document, instrument or other arrangement (except with or in favor of Bank) with any Person which directly or indirectly prohibits or has the effect of prohibiting Borrower or any Subsidiary from assigning, mortgaging, pledging, granting a security interest in or upon, or encumbering any of Borrower’s or any Subsidiary’s Intellectual Property, except as is otherwise permitted in Section 7.1 hereof and the definition of “Permitted Liens” herein.
7.6 Maintenance of Collateral Accounts. Maintain any Collateral Account except pursuant to the terms of Section 6.8(b) hereof.
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7.7 Distributions; Investments. (a) Pay any dividends or make any distribution or payment to equityholders or redeem, retire or purchase any capital stock or membership interests (provided that the foregoing will not apply to the Canadian Borrower’s conversion of shareholders’ Class A restricted voting common shares into common shares); or (b) directly or indirectly make any Investment (including, without limitation, by the formation of any Subsidiary) other than Permitted Investments, or permit any of its Subsidiaries to do so.
7.8 Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower (excluding a merger of Frankly Co. with, or transfer of assets of Frankly Co. to, another Borrower), except for transactions that are in the ordinary course of Borrower’s business, upon fair and reasonable terms that are no less favorable to Borrower than would be obtained in an arm’s length transaction with a non-affiliated Person.
7.9 Subordinated Debt. (a) Make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof, provide for earlier or greater principal, interest, or other payments thereon, or adversely affect the subordination thereof to Obligations owed to Bank.
7.10 Compliance. Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940, as amended, or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a material adverse effect on Borrower’s business, or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability of Borrower, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other governmental agency.
8 EVENTS OF DEFAULT
Any one of the following shall constitute an event of default (an “Event of Default”) under this Agreement:
8.1 Payment Default. Borrower fails to (a) make any payment of principal or interest on any Credit Extension when due, or (b) pay any other Obligations within three (3) Business Days after such Obligations are due and payable (which three (3) Business Day cure period shall not apply to payments due on the Revolving Line Maturity Date). During the cure period, the failure to make or pay any payment specified under clause (b) hereunder is not an Event of Default (but no Credit Extension will be made during the cure period);
8.2 Covenant Default.
(a) Borrower fails or neglects to perform any obligation in Sections 6.2, 6.3, 6.4, 6.5, 6.6, 6.8, 6.9, 6.10, or 6.12 of this Agreement or violates any covenant in Section 7 of this Agreement; or
(b) Borrower fails or neglects to perform, keep, or observe any other term, provision, condition, covenant or agreement contained in this Agreement or any Loan Documents, and as to any default (other than those specified in this Section 8) under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within ten (10) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default (but no Credit Extensions shall be made during such cure period). Grace and cure periods provided under this Section 8.2 shall not apply, among other things, to financial covenants or any covenants set forth in clause (a) above;
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8.3 Material Adverse Change. A Material Adverse Change occurs;
8.4 Attachment; Levy; Restraint on Business.
(a) (i) The service of process seeking to attach, by trustee or similar process, any funds of Borrower or of any entity under the control of Borrower (including a Subsidiary), or (ii) a notice of lien or levy is filed against any of Borrower’s assets by any Governmental Authority, and the same under subclauses (i) and (ii) hereof are not, within ten (10) days after the occurrence thereof, discharged or stayed (whether through the posting of a bond or otherwise); provided, however, no Credit Extensions shall be made during any ten (10) day cure period; or
(b) (i) any material portion of Borrower’s assets is attached, seized, levied on, or comes into possession of a trustee or receiver, or (ii) any court order enjoins, restrains, or prevents Borrower from conducting all or any material part of its business;
8.5 Insolvency. (a) Borrower or any of its Subsidiaries is unable to pay its debts (including trade debts) as they become due or otherwise becomes insolvent; (b) Borrower or any of its Subsidiaries begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower or any of its Subsidiaries and is not dismissed or stayed within thirty (30) days (but no Credit Extensions shall be made while any of the conditions described in clause (a) exist and/or until any Insolvency Proceeding is dismissed);
8.6 Other Agreements. There is, under any agreement to which Borrower or any Guarantor is a party with a third party or parties, (a) any default resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount individually or in the aggregate in excess of Fifty Thousand Dollars ($50,000.00); or (b) any breach or default by Borrower or Guarantor, the result of which could have a material adverse effect on Borrower’s or any Guarantor’s business;
8.7 Judgments; Penalties. One or more fines, penalties or final judgments, orders or decrees for the payment of money in an amount, individually or in the aggregate, of at least Fifty Thousand Dollars ($50,000.00) (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) shall be rendered against Borrower by any Governmental Authority, and the same are not, within ten (10) days after the entry, assessment or issuance thereof, discharged, satisfied, or paid, or after execution thereof, stayed or bonded pending appeal, or such judgments are not discharged prior to the expiration of any such stay (provided that no Credit Extensions will be made prior to the satisfaction, payment, discharge, stay, or bonding of such fine, penalty, judgment, order or decree);
8.8 Misrepresentations. Borrower or any Person acting for Borrower makes any representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to Bank or to induce Bank to enter this Agreement or any Loan Document, and such representation, warranty, or other statement is incorrect in any material respect when made;
8.9 Subordinated Debt. Any document, instrument, or agreement evidencing any Subordinated Debt shall, for reason of Borrower’s breach, be revoked or invalidated or otherwise cease to be in full force and effect, or the Obligations shall for any reason be subordinated or shall not have the priority contemplated by this Agreement any applicable subordination or intercreditor agreement or the Intercreditor Agreement;
8.10 Guaranty. (a) Any guaranty of any Obligations terminates or ceases for any reason to be in full force and effect; (b) any Guarantor does not perform any obligation or covenant under any guaranty of the Obligations; (c) any circumstance described in Sections 8.3, 8.4, 8.5, 8.6, 8.7, or 8.8 of this Agreement occurs with respect to any Guarantor, (d) the death, liquidation, winding up, or termination of existence of any Guarantor; or (e) (i) a material impairment in the perfection or priority of Bank’s Lien in the collateral provided by Guarantor or in the value of such collateral or (ii) a material adverse change in the general affairs, management, results of operation, condition (financial or otherwise) or the prospect of repayment of the Obligations occurs with respect to any Guarantor;
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8.11 Governmental Approvals. Any Governmental Approval shall have been (a) revoked, rescinded, suspended, modified in an adverse manner or not renewed in the ordinary course for a full term or (b) subject to any decision by a Governmental Authority that designates a hearing with respect to any applications for renewal of any of such Governmental Approval or that could result in the Governmental Authority taking any of the actions described in clause (a) above, and such decision or such revocation, rescission, suspension, modification or non-renewal (i) causes, or could reasonably be expected to cause, a Material Adverse Change, or (ii) adversely affects the legal qualifications of Borrower or any of its Subsidiaries to hold such Governmental Approval in any applicable jurisdiction and such revocation, rescission, suspension, modification or non-renewal could reasonably be expected to affect the status of or legal qualifications of Borrower or any of its Subsidiaries to hold any Governmental Approval in any other jurisdiction; or
8.12 Raycom. The occurrence of any default or event of default (howsoever defined) under any document evidencing or in connection with Borrower’s Indebtedness and obligations with Raycom.
9 BANK’S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the continuance of an Event of Default, Bank may, without notice or demand, do any or all of the following:
(a) declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations are immediately due and payable without any action by Bank);
(b) stop advancing money or extending credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower and Bank;
(c) demand that Borrower (i) deposit cash with Bank in an amount equal to at least (A) one hundred five percent (105.0%) of the Dollar Equivalent of the aggregate face amount of all Letters of Credit denominated in Dollars remaining undrawn, and (B) one hundred ten percent (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 Bank 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 Borrower shall forthwith deposit and pay such amounts, and (ii) pay in advance all letter of credit fees scheduled to be paid or payable over the remaining term of any Letters of Credit;
(d) terminate any FX Contracts;
(e) verify the amount of, demand payment of and performance under, and 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 Bank considers advisable, and notify any Person owing Borrower money of Bank’s security interest in such funds. Borrower shall collect all payments in trust for Bank and, if requested by Bank, immediately deliver the payments to Bank in the form received from the Account Debtor, with proper endorsements for deposit;
(f) make any payments and do any acts it considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral. Borrower shall assemble the Collateral if Bank requests and make it available as Bank designates. Bank may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Bank a license to enter and occupy any of its premises, without charge, to exercise any of Bank’s rights or remedies;
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(g) apply to the Obligations any (i) balances and deposits of Borrower it holds, or (ii) amount held by Bank owing to or for the credit or the account of Borrower;
(h) ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell the Collateral. Subject to the rights of third parties, to the extent such third parties’ rights are senior to Bank’s rights, Bank is hereby granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower’s labels, Patents, Copyrights, mask works, rights of use of any name, trade secrets, trade names, Trademarks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Bank’s exercise of its rights under this Section 9.1, Borrower’s rights under all licenses and all franchise agreements inure to Bank’s benefit;
(i) place a “hold” on any account maintained with Bank and/or deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any Control Agreement or similar agreements providing control of any Collateral;
(j) demand and receive possession of Borrower’s Books;
(k) obtain from any court of competent jurisdiction an order for the sale or foreclosure of any or all of the Collateral;
(l) appoint in writing a receiver or receiver and manager (a “Receiver”) for all or any part of the Collateral who shall be vested with all of Bank’s rights and remedies under this Agreement, at law or in equity. Any such Receiver, with respect to responsibility for its acts, shall, to the extent permitted by applicable law, be deemed to the agent of Borrower and not Bank;
(m) obtain from any court of competent jurisdiction an order for the appointment of a Receiver of Borrower or of any or all of the Collateral;
(n) realize on any or all of the Collateral and sell, lease, assign, give options to purchase, or otherwise dispose of and deliver any or all of the Collateral (or contract to do any of the above), in one or more parcels at any public or private sale, on such terms and conditions as Bank may deem advisable and at such prices as it may deem best; and
(o) exercise all rights and remedies available to Bank under the Loan Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof).
Without limiting the foregoing, Bank acknowledges that, solely as between Bank and Raycom, Bank’s ability to take certain of the foregoing actions may be subject to the terms of the Intercreditor Agreement.
9.2 Power of Attorney. Borrower hereby irrevocably appoints Bank as its lawful attorney-in-fact to: (a) exercisable following the occurrence of an Event of Default, (i) sign Borrower’s name on any invoice or bill of lading for any Account or drafts against Account Debtors; (ii) demand, collect, sue, and give releases to any Account Debtor for monies due, settle and adjust disputes and claims about the Accounts directly with Account Debtors, and compromise, prosecute, or defend any action, claim, case, or proceeding about any Collateral (including filing a claim or voting a claim in any bankruptcy case in Bank’s or Borrower’s name, as Bank chooses); (iii) make, settle, and adjust all claims under Borrower’s insurance policies; (iv) pay, contest or settle any Lien, charge, encumbrance, security interest, or other claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; (v) transfer the Collateral into the name of Bank or a third party as the Code permits; (vi) receive, open and dispose of mail addressed to Borrower; (vii) endorse Borrower’s name on any checks, payment instruments, or other forms of payment or security; and (b) regardless of whether an Event of Default has occurred, notify all Account Debtors to pay Bank directly. Borrower hereby appoints Bank as its lawful attorney-in-fact to sign Borrower’s name on any documents necessary to perfect or continue the perfection of Bank’s security interest in the Collateral regardless of whether an Event of Default has occurred until all Obligations have been satisfied in full and the Loan Documents have been terminated. Bank’s foregoing appointment as Borrower’s attorney in fact, and all of Bank’s rights and powers, coupled with an interest, are irrevocable until all Obligations have been fully repaid and performed and the Loan Documents have been terminated
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9.3 Protective Payments. If Borrower fails to obtain the insurance called for by Section 6.7 or fails to pay any premium thereon or fails to pay any other amount which Borrower is obligated to pay under this Agreement or any other Loan Document or which may be required to preserve the Collateral, Bank may obtain such insurance or make such payment, and all amounts so paid by Bank are Bank Expenses and immediately due and payable, bearing interest at the then highest rate applicable to the Obligations, and secured by the Collateral. Bank will make reasonable efforts to provide Borrower with notice of Bank obtaining such insurance at the time it is obtained or within a reasonable time thereafter. No payments by Bank are deemed an agreement to make similar payments in the future or Bank’s waiver of any Event of Default.
9.4 Application of Payments and Proceeds. Bank shall have the right to apply in any order any funds in its possession, whether from Borrower account balances, payments, proceeds realized as the result of any collection of Accounts or other disposition of the Collateral, or otherwise, to the Obligations. Bank shall pay any surplus to Borrower by credit to the Designated Deposit Account or to other Persons legally entitled thereto; Borrower shall remain liable to Bank for any deficiency. If Bank, directly or indirectly, enters into a deferred payment or other credit transaction with any purchaser at any sale of Collateral, Bank shall have the option, exercisable at any time, of either reducing the Obligations by the principal amount of the purchase price or deferring the reduction of the Obligations until the actual receipt by Bank of cash therefor.
9.5 Bank’s Liability for Collateral. In the absence of gross negligence or willful misconduct by Bank, so long as Bank complies with reasonable banking practices regarding the safekeeping of the Collateral in the possession or under the control of Bank, Bank shall not be liable or responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss, damage or destruction of the Collateral.
9.6 No Waiver; Remedies Cumulative. Bank’s failure, at any time or times, to require strict performance by Borrower of any provision of this Agreement or any other Loan Document shall not waive, affect, or diminish any right of Bank thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by the party granting the waiver and then is only effective for the specific instance and purpose for which it is given. Bank’s rights and remedies under this Agreement and the other Loan Documents are cumulative. Bank has all rights and remedies provided under the Code, by law, or in equity. Bank’s exercise of one right or remedy is not an election and shall not preclude Bank from exercising any other remedy under this Agreement or other remedy available at law or in equity, and Bank’s waiver of any Event of Default is not a continuing waiver. Bank’s delay in exercising any remedy is not a waiver, election, or acquiescence.
9.7 Demand Waiver. Borrower waives demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Bank on which Borrower is liable.
9.8 Borrower Liability. Subject to Section 2.2(a), each Borrower may, acting singly, request Credit Extensions hereunder. Each Borrower hereby appoints the others as agent for itself for all purposes hereunder, including with respect to requesting Credit Extensions hereunder. Each Borrower hereunder shall be jointly and severally obligated to repay all Credit Extensions made hereunder, regardless of which Borrower actually receives said Credit Extensions, as if each Borrower hereunder directly received all Credit Extensions. Each Borrower waives (a) any suretyship defenses available to it under the Code or any other applicable law, and (b) any right to require Bank to: (i) proceed against any Borrower or any other person; (ii) proceed against or exhaust any security; or (iii) pursue any other remedy. Bank may exercise or not exercise any right or remedy it has against any Borrower or any security it holds (including the right to foreclose by judicial or non-judicial sale) without affecting any Borrower’s liability. Notwithstanding any other provision of this Agreement or other related document, each Borrower irrevocably waives all rights that it may have at law or in equity (including, without limitation, any law subrogating Borrower to the rights of Bank under this Agreement) to seek contribution, indemnification or any other form of reimbursement from any other Borrower, or any other Person now or hereafter primarily or secondarily liable for any of the Obligations, for any payment made by Borrower with respect to the Obligations in connection with this Agreement or otherwise and all rights that it might have to benefit from, or to participate in, any security for the Obligations as a result of any payment made by Borrower with respect to the Obligations in connection with this Agreement or otherwise. Any agreement providing for indemnification, reimbursement or any other arrangement prohibited under this Section 9.8 shall be null and void. If any payment is made to a Borrower in contravention of this Section 9.8, such Borrower shall hold such payment in trust for Bank and such payment shall be promptly delivered to Bank for application to the Obligations, whether matured or unmatured.
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10 NOTICES
All notices, consents, requests, approvals, demands, or other communication by any party to this Agreement or any other Loan Document must be in writing and shall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actual receipt and three (3) Business Days after deposit in the U.S. mail, first class, registered or certified mail return receipt requested, with proper postage prepaid; (b) upon transmission, when sent by electronic mail; (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address, or email address indicated below. Bank or Borrower may change its mailing or electronic mail address by giving the other party written notice thereof in accordance with the terms of this Section 10.
If to Borrower: | Frankly Inc. | |
Frankly Co. | ||
Frankly Media LLC | ||
27-01 Queens Plaza North, Suite 502 | ||
Long Island City, New York 11101 | ||
Attn: Lou Schwartz | ||
Email: lou@franklyinc.com | ||
If to Bank: | Silicon Valley Bank | |
555 Mission Street | ||
San Francisco, California 94105 | ||
Attn: Trefor Bacon | ||
Email: TBacon@svb.com | ||
with a copy to: | Riemer & Braunstein LLP | |
Three Center Plaza | ||
Boston, Massachusetts 02108 | ||
Attn: David A. Ephraim, Esquire | ||
Email: DEphraim@riemerlaw.com |
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
Except as otherwise expressly provided in any of the Loan Documents, New York law governs the Loan Documents without regard to principles of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of the State and Federal courts in New York; provided, however, that nothing in this Agreement shall be deemed to operate to preclude Bank from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in favor of Bank. Borrower expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and Borrower hereby waives any objection that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court. Borrower hereby waives personal service of the summons, complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be made by registered or certified mail addressed to Borrower at the address set forth in, or subsequently provided by Borrower in accordance with, Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of Borrower’s actual receipt thereof or three (3) Business Days after deposit in the U.S. mails, proper postage prepaid.
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BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
NO DOCUMENT SHALL BE DEEMED DELIVERED TO BANK UNTIL RECEIVED AND ACCEPTED BY BANK AT ITS OFFICES IN THE STATE OF CALIFORNIA. UNDER NO CIRCUMSTANCES SHALL THIS AGREEMENT TAKE EFFECT UNTIL EXECUTED AND ACCEPTED BY BANK AT SAID OFFICES.
This Section 11 shall survive the termination of this Agreement.
12 GENERAL PROVISIONS
12.1 Termination Prior to Maturity Date; Survival. All covenants, representations and warranties made in this Agreement shall continue in full force until this Agreement has terminated pursuant to its terms and all Obligations have been satisfied. So long as Borrower has satisfied the Obligations (other than inchoate indemnity obligations, and any other obligations which, by their terms, are to survive the termination of this Agreement, and any Obligations under Bank Services Agreements that are cash collateralized in accordance with Section 4.1 of this Agreement), this Agreement may be terminated prior to the Revolving Line Maturity Date by Borrower, effective three (3) Business Days after written notice of termination is given to Bank. Those obligations that are expressly specified in this Agreement as surviving this Agreement’s termination shall continue to survive notwithstanding this Agreement’s termination.
12.2 Successors and Assigns. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not assign this Agreement or any rights or obligations under it without Bank’s prior written consent (which may be granted or withheld in Bank’s discretion). Bank has the right, without the consent of or notice to Borrower, to sell, transfer, assign, negotiate, or grant participation in all or any part of, or any interest in, Bank’s obligations, rights, and benefits under this Agreement and the other Loan Documents.
12.3 Indemnification. Borrower agrees to indemnify, defend and hold Bank and its directors, officers, employees, agents, attorneys, or any other Person affiliated with or representing Bank (each, an “Indemnified Person”) harmless against: (i) all obligations, demands, claims, and liabilities (collectively, “Claims”) claimed or asserted by any other party in connection with the transactions contemplated by the Loan Documents; and (ii) all losses or expenses (including Bank Expenses) in any way suffered, incurred, or paid by such Indemnified Person as a result of, following from, consequential to, or arising from transactions between Bank and Borrower contemplated by the Loan Documents (including reasonable attorneys’ fees and expenses), except for Claims and/or losses directly caused by such Indemnified Person’s gross negligence or willful misconduct.
This Section 12.3 shall survive until all statutes of limitation with respect to the Claims, losses, and expenses for which indemnity is given shall have run.
12.4 Time of Essence. Time is of the essence for the performance of all Obligations in this Agreement.
12.5 Severability of Provisions. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.
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12.6 Correction of Loan Documents. Bank may correct patent errors and fill in any blanks in the Loan Documents consistent with the agreement of the parties.
12.7 Amendments in Writing; Waiver; Integration. No purported amendment or modification of any Loan Document, or waiver, discharge or termination of any obligation under any Loan Document, shall be enforceable or admissible unless, and only to the extent, expressly set forth in a writing signed by the party against which enforcement or admission is sought. Without limiting the generality of the foregoing, no oral promise or statement, nor any action, inaction, delay, failure to require performance or course of conduct shall operate as, or evidence, an amendment, supplement or waiver or have any other effect on any Loan Document. Any waiver granted shall be limited to the specific circumstance expressly described in it, and shall not apply to any subsequent or other circumstance, whether similar or dissimilar, or give rise to, or evidence, any obligation or commitment to grant any further waiver. The Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of the Loan Documents merge into the Loan Documents.
12.8 Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one Agreement.
12.9 Confidentiality. In handling any confidential information, Bank shall exercise the same degree of care that it exercises for its own proprietary information, but disclosure of information may be made: (a) to Bank’s Subsidiaries or Affiliates (such Subsidiaries and Affiliates, together with Bank, collectively, “Bank Entities”); (b) to prospective transferees or purchasers of any interest in the Credit Extensions (provided, however, Bank shall use its best efforts to obtain any prospective transferee’s or purchaser’s agreement to the terms of this provision); (c) as required by law, regulation, subpoena, or other order; (d) to Bank’s regulators or as otherwise required in connection with Bank’s examination or audit; (e) as Bank considers appropriate in exercising remedies under the Loan Documents; and (f) to third-party service providers of Bank so long as such service providers have executed a confidentiality agreement with Bank with terms no less restrictive than those contained herein. Confidential information does not include information that is either: (i) in the public domain or in Bank’s possession when disclosed to Bank, or becomes part of the public domain (other than as a result of its disclosure by Bank in violation of this Agreement) after disclosure to Bank; or (ii) disclosed to Bank by a third party, if Bank does not know that the third party is prohibited from disclosing the information.
Bank Entities may use confidential information for the development of databases, reporting purposes, and market analysis so long as such confidential information is aggregated and anonymized prior to distribution unless otherwise expressly permitted by Borrower. The provisions of the immediately preceding sentence shall survive the termination of this Agreement.
12.10 Electronic Execution of Documents. The words “execution,” “signed,” “signature” and words of like import in any Loan Document shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity and enforceability as a manually executed signature or the use of a paper-based recordkeeping systems, as the case may be, to the extent and as provided for in any applicable law, including, without limitation, any state law based on the Uniform Electronic Transactions Act.
12.11 Right of Setoff. Borrower hereby grants to Bank a Lien and a right of setoff as security for all Obligations to Bank, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Bank or any entity under the control of Bank (including a subsidiary of Bank) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Bank may set off the same or any part thereof and apply the same to any liability or Obligation of Borrower even though unmatured and regardless of the adequacy of any other collateral securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER, ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.
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12.12 Captions. The headings used in this Agreement are for convenience only and shall not affect the interpretation of this Agreement.
12.13 Construction of Agreement. The parties mutually acknowledge that they and their attorneys have participated in the preparation and negotiation of this Agreement. In cases of uncertainty this Agreement shall be construed without regard to which of the parties caused the uncertainty to exist.
12.14 Relationship. The relationship of the parties to this Agreement is determined solely by the provisions of this Agreement. The parties do not intend to create any agency, partnership, joint venture, trust, fiduciary or other relationship with duties or incidents different from those of parties to an arm’s-length contract.
12.15 Third Parties. Nothing in this Agreement, whether express or implied, is intended to: (a) confer any benefits, rights or remedies under or by reason of this Agreement on any persons other than the express parties to it and their respective permitted successors and assigns; (b) relieve or discharge the obligation or liability of any person not an express party to this Agreement; or (c) give any person not an express party to this Agreement any right of subrogation or action against any party to this Agreement.
13 DEFINITIONS
13.1 Definitions. As used in the Loan Documents, the word “shall” is mandatory, the word “may” is permissive, the word “or” is not exclusive, the words “includes” and “including” are not limiting, the singular includes the plural, and numbers denoting amounts that are set off in brackets are negative. As used in this Agreement, the following capitalized terms have the following meanings:
“Account” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to Borrower.
“Account Debtor” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.
“Adjusted Quick Ratio” is the ratio of (a) Quick Assets to (b) Current Liabilities minus the current portion of non-refundable Deferred Revenue.
“Advance” or “Advances” means a revolving credit loan (or revolving credit loans) under the Revolving Line.
“Affiliate” is, with respect to any Person, each other Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.
“Agreement” is defined in the preamble hereof.
“Applicable Borrowing Base Percentage” is (a) eighty-five percent (85.0%) at times when the dilution rate with respect to Accounts (as determined by Bank) is less than three and one-half of one percent (3.50%) and (b) eighty percent (80.0%) at times when the dilution rate with respect to Accounts (as determined by Bank) is three and one-half of one percent (3.50%) or higher. Notwithstanding the foregoing, Bank has the right to decrease the Applicable Borrowing Base Percentage (i) in its good faith business judgment to mitigate the impact of events, conditions, contingencies, or risks which may adversely affect the Collateral or its value and (ii) in its sole discretion at times when the dilution rate with respect to Accounts (as determined by Bank) is five percent (5.0%) or higher.
“Authorized Signer” is any individual listed in Borrower’s Borrowing Resolution who is authorized to execute the Loan Documents, including making (and executing if applicable) any Credit Extension request, on behalf of Borrower.
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“Availability Amount” is (a) the lesser of (i) the Revolving Line or (ii) the amount available under the Borrowing Base minus (b) the outstanding principal balance of any Advances.
“Bank” is defined in the preamble hereof.
“Bank Entities” is defined in Section 12.9.
“Bank Expenses” are all audit fees and expenses, costs, and expenses (including reasonable attorneys’ fees and expenses) for preparing, amending, negotiating, administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred with respect to Borrower or any Guarantor.
“Bank Services” are any products, credit services, and/or financial accommodations previously, now, or hereafter provided to Borrower or any of its Subsidiaries by Bank or any Bank Affiliate, including, without limitation, any letters of credit, cash management services (including, without limitation, merchant services, direct deposit of payroll, business credit cards, and check cashing services), interest rate swap arrangements, and foreign exchange services as any such products or services may be identified in Bank’s various agreements related thereto (each, a “Bank Services Agreement”).
“Bank Services Agreement” is defined in the definition of Bank Services.
“Board” is Borrower’s board of directors.
“Borrower” is defined in the preamble hereof.
“Borrower’s Books” are all Borrower’s books and records including ledgers, federal, state and provincial tax returns, records regarding Borrower’s assets or liabilities, the Collateral, business operations or financial condition, and all computer programs or storage or any equipment containing such information.
“Borrowing Base” is the Applicable Borrowing Base Percentage of Eligible Accounts, as determined by Bank from Borrower’s most recent Borrowing Base Report (and as may subsequently be updated by Bank in Bank’s sole discretion based upon information received by Bank including, without limitation, Accounts that are paid and/or billed following the date of the Borrowing Base Report).
“Borrowing Base Report” is that certain report of the value of certain Collateral in the form attached hereto as Exhibit C.
“Borrowing Resolutions” are, with respect to any Person, those resolutions adopted by such Person’s board of directors (and, if required under the terms of such Person’s Operating Documents, stockholders, members and/or managers) and delivered by such Person to Bank approving the Loan Documents to which such Person is a party and the transactions contemplated thereby, together with a certificate executed by its secretary or other senior officer on behalf of such Person certifying (a) such Person has the authority to execute, deliver, and perform its obligations under each of the Loan Documents to which it is a party, (b) that set forth as a part of or attached as an exhibit to such certificate is a true, correct, and complete copy of the resolutions then in full force and effect authorizing and ratifying the execution, delivery, and performance by such Person of the Loan Documents to which it is a party, (c) the name(s) of the Person(s) authorized to execute the Loan Documents, including making (and executing if applicable) any Credit Extension request, on behalf of such Person, together with a sample of the true signature(s) of such Person(s), and (d) that Bank may conclusively rely on such certificate unless and until such Person shall have delivered to Bank a further certificate canceling or amending such prior certificate.
“Business Day” is any day that is not a Saturday, Sunday or a day on which Bank is closed.
“Canadian Borrower” is defined in the preamble hereof.
“Cash Collateral Account” is defined in Section 6.3(c).
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“Cash Equivalents” means (a) marketable direct obligations issued or unconditionally guaranteed by(i) the United States or any agency or any State thereof, or (ii) Canada or any agency or Province thereof, having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc.; (c) Bank’s certificates of deposit issued maturing no more than one (1) year after issue; and (d) money market funds at least ninety-five percent (95%) of the assets of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) of this definition.
“Change in Control” means (a) at any time, any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act, shall become, or obtain rights (whether by means of warrants, options or otherwise) to become, the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of forty percent (40.0%) or more of the ordinary voting power for the election of directors of Borrower (determined on a fully diluted basis) other than by the sale of Borrower’s equity securities in a public offering or to venture capital or private equity investors so long as Borrower identifies to Bank the venture capital or private equity investors at least seven (7) Business Days prior to the closing of the transaction and provides to Bank a description of the material terms of the transaction; (b) during any period of twelve (12) consecutive months following the Effective Date, a majority of the members of the board of directors or other equivalent governing body of Borrower cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body; or (c) at any time, Borrower shall cease to own and control, of record and beneficially, directly or indirectly, one hundred percent (100.0%) of each class of outstanding capital stock or membership interests of each subsidiary of Borrower free and clear of all Liens (except Permitted Liens).
“Claims” is defined in Section 12.3.
“Code” is (a) with respect to any assets located in the United States, the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of New York; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Bank’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of New York, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions and (b) with respect to any assets located in Canada, the PPSA; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Bank’s Lien on any Collateral is governed by the PPSA or equivalent legislation in effect in a provincial jurisdiction other than British Columbia, the term “Code” shall mean the PPSA or equivalent legislation as enacted and in effect in such other province solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.
“Collateral” is any and all properties, rights and assets of Borrower described on Exhibit A.
“Collateral Account” is any Deposit Account, Securities Account, or Commodity Account.
“Commodity Account” is any “commodity account” as defined in the Code with such additions to such term as may hereafter be made.
“Compliance Certificate” is that certain certificate in the form attached hereto as Exhibit B.
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“Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation, in each case, directly or indirectly guaranteed, endorsed, co made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.
“Control Agreement” is any control agreement entered into among the depository institution at which Borrower maintains a Deposit Account or the securities intermediary or commodity intermediary at which Borrower maintains a Securities Account or a Commodity Account, Borrower, and Bank pursuant to which Bank obtains control (within the meaning of the Code) over such Deposit Account, Securities Account, or Commodity Account.
“Copyrights” are any and all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret.
“Credit Extension” is any Advance, any Overadvance, or any other extension of credit by Bank for Borrower’s benefit.
“Currency” is coined money and such other banknotes or other paper money as are authorized by law and circulate as a medium of exchange.
“Current Liabilities” are (a) all obligations and liabilities of Borrower to Bank, plus (b) without duplication, the aggregate amount of Borrower’s Total Liabilities that mature within one (1) year.
“Default Rate” is defined in Section 2.4(b).
“Deferred Revenue” is all amounts received or invoiced in advance of performance under contracts and not yet recognized as revenue.
“Deposit Account” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.
“Designated Deposit Account” is the account number ending 342 maintained by Borrower with Bank (provided, however, if no such account number is included, then the Designated Deposit Account shall be any deposit account of Borrower maintained with Bank as chosen by Bank).
“Dollars,” “dollars” or use of the sign “$” means only lawful money of the United States and not any other currency, regardless of whether that currency uses the “$” sign to denote its currency or may be readily converted into lawful money of the United States.
“Dollar Equivalent” is, at any time, (a) with respect to any amount denominated in Dollars, such amount, and (b) with respect to any amount denominated in a Foreign Currency, the equivalent amount therefor in Dollars as determined by Bank at such time on the basis of the then-prevailing rate of exchange in San Francisco, California, for sales of the Foreign Currency for transfer to the country issuing such Foreign Currency.
“Effective Date” is defined in the preamble hereof.
“Eligible Accounts” means Accounts of Frankly LLC which arise in the ordinary course of Frankly LLC’s business that meet all Borrower’s representations and warranties in Section 5.3, that have been, at the option of Bank, confirmed in accordance with Section 6.3(f) of this Agreement, and are due and owing from Account Debtors deemed creditworthy by Bank in its good faith business judgment. Bank reserves the right, at any time after the Effective Date, in its good faith business judgment in each instance, to either (i) adjust any of the criteria set forth below and to establish new criteria or (ii) deem any Accounts owing from a particular Account Debtor or Account Debtors to not meet the criteria to be Eligible Accounts. Unless Bank otherwise agrees in writing, Eligible Accounts shall not include:
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(a) Accounts for which the Account Debtor is Borrower’s Affiliate, officer, employee, or agent, and Accounts that are intercompany Accounts;
(b) Accounts that the Account Debtor has not paid within ninety (90) days of invoice date regardless of invoice payment period terms;
(c) Accounts with credit balances over ninety (90) days from invoice date;
(d) Accounts owing from an Account Debtor if fifty percent (50%) or more of the Accounts owing from such Account Debtor have not been paid within ninety (90) days of invoice date;
(e) Accounts owing from an Account Debtor which does not have its principal place of business in the United States or Canada, unless otherwise approved by Bank in writing on a case-by-case basis in its sole discretion;
(f) Accounts billed from and/or payable to Borrower outside of the United States (sometimes called foreign invoiced accounts);
(g) Accounts owing from an Account Debtor to the extent that Borrower is indebted or obligated in any manner to the Account Debtor (as creditor, lessor, supplier or otherwise - sometimes called “contra” accounts, accounts payable, customer deposits or credit accounts);
(h) Accounts owing from an Account Debtor which is a United States or Canadian government entity or any department, agency, or instrumentality thereof unless Borrower has assigned its payment rights to Bank and the assignment has been acknowledged under the Federal Assignment of Claims Act of 1940, as amended, the Financial Administration Act (Canada) or any like provincial statute, as applicable;
(i) Accounts for demonstration or promotional equipment, or in which goods are consigned, or sold on a “sale guaranteed”, “sale or return”, “sale on approval”, or other terms if Account Debtor’s payment may be conditional;
(j) Accounts owing from an Account Debtor where goods or services have not yet been rendered to the Account Debtor (sometimes called memo billings or pre-billings), except for pre-billings with respect to non-cancellable contracts;
(k) Accounts subject to contractual arrangements between Borrower and an Account Debtor where payments shall be scheduled or due according to completion or fulfillment requirements (sometimes called contracts accounts receivable, progress billings, milestone billings, or fulfillment contracts);
(l) Accounts owing from an Account Debtor the amount of which may be subject to withholding based on the Account Debtor’s satisfaction of Borrower’s complete performance (but only to the extent of the amount withheld; sometimes called retainage billings);
(m) Accounts subject to trust provisions, subrogation rights of a bonding company, or a statutory trust;
(n) Accounts owing from an Account Debtor that has been invoiced for goods that have not been shipped to the Account Debtor unless Bank, Borrower, and the Account Debtor have entered into an agreement acceptable to Bank wherein the Account Debtor acknowledges that (i) it has title to and has ownership of the goods wherever located, (ii) a bona fide sale of the goods has occurred, and (iii) it owes payment for such goods in accordance with invoices from Borrower (sometimes called “bill and hold” accounts);
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(o) Accounts for which the Account Debtor has not been invoiced;
(p) Accounts that represent non-trade receivables or that are derived by means other than in the ordinary course of Borrower’s business;
(q) Accounts for which Borrower has permitted Account Debtor’s payment to extend beyond ninety (90) days (including Accounts with a due date that is more than ninety (90) days from invoice date);
(r) Accounts arising from chargebacks, debit memos or other payment deductions taken by an Account Debtor;
(s) Accounts arising from product returns and/or exchanges (sometimes called “warranty” or “RMA” accounts);
(t) Accounts in which the Account Debtor disputes liability or makes any claim (but only up to the disputed or claimed amount), or if the Account Debtor is subject to an Insolvency Proceeding, or becomes insolvent, or goes out of business;
(u) Accounts owing from an Account Debtor with respect to which Borrower has received Deferred Revenue (but only to the extent of such Deferred Revenue), except for Deferred Revenue arising solely from pre-billings with respect to non-cancellable contracts;
(v) Accounts owing from an Account Debtor, whose total obligations to Borrower exceed thirty-five percent (35.0%) of all Accounts, for the amounts that exceed that percentage, unless Bank approves in writing;
(w) Accounts for which Bank in its good faith business judgment determines collection to be doubtful, including, without limitation, accounts represented by “refreshed” or “recycled” invoices; and
(x) Accounts of Canadian Borrower or Frankly Co.
“Equipment” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.
“ERISA” is the Employee Retirement Income Security Act of 1974, and its regulations.
“Event of Default” is defined in Section 8.
“Exchange Act” is the Securities Exchange Act of 1934, as amended.
“Foreign Currency” means lawful money of a country other than the United States.
“Frankly Co.” is defined in the preamble hereof.
“Frankly LLC” is defined in the preamble hereof.
“Funding Date” is any date on which a Credit Extension is made to or for the account of Borrower which shall be a Business Day.
“FX Contract” is any foreign exchange contract by and between Borrower and Bank under which Borrower commits to purchase from or sell to Bank a specific amount of Foreign Currency on a specified date.
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“GAAP” is generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the date of determination.
“General Intangibles” is all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all Intellectual Property, claims, income and other tax refunds, security and other deposits, payment intangibles, contract rights, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.
“Governmental Approval” is any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.
“Governmental Authority” is any nation or government, any state, province, or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.
“Guarantor” is any Person providing a Guaranty in favor of Bank.
“Guaranty” is any guarantee of all or any part of the Obligations, as the same may from time to time be amended, restated, modified or otherwise supplemented.
“Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease and real property lease obligations, and (d) Contingent Obligations.
“Indemnified Person” is defined in Section 12.3.
“Initial Audit” is Bank’s inspection of Borrower’s Accounts, the Collateral, and Borrower’s Books, with results satisfactory to Bank in its reasonable discretion.
“Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, the Bankruptcy and Insolvency Act (Canada), the Companies’ Creditors Arrangement Act (Canada) or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.
“Intellectual Property” means, with respect to any Person, all of such Person’s right, title, and interest in and to the following:
(a) its Copyrights, Trademarks and Patents;
(b) any and all trade secrets and trade secret rights, including, without limitation, any rights to unpatented inventions, know-how and operating manuals;
(c) any and all source code;
(d) any and all design rights which may be available to such Person;
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(e) any and all claims for damages by way of past, present and future infringement of any of the foregoing, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the Intellectual Property rights identified above; and
(f) all amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents.
“Intercreditor Agreement” is that certain Intercreditor Agreement dated as of the Effective Date by and between Bank and Raycom and acknowledged by Borrower, as the same may from time to time be amended, modified, supplemented, and/or restated from time to time.
“Inventory” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of Borrower’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.
“Investment” is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to any Person.
“IP Agreement” is, collectively, (a) that certain Intellectual Property Security Agreement between Canadian Borrower and Bank dated as of the Effective Date, (b) that certain Intellectual Property Security Agreement between Frankly Co. and Bank dated as of the Effective Date and (c) that certain Intellectual Property Security Agreement between Frankly LLC and Bank dated as of the Effective Date, in each case as may be amended, modified, supplemented and/or restated from time to time.
“Key Person” is each of Borrower’s Chief Executive Officer and Chief Financial Officer.
“Letter of Credit” is a standby or commercial letter of credit issued by Bank upon request of Borrower based upon an application, guarantee, indemnity, or similar agreement.
“Lien” is a claim, mortgage, deed of trust, levy, charge, pledge, security interest or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.
“Liquidity” is (a) the aggregate amount of Borrower’s unrestricted and unencumbered cash and Cash Equivalents, in each only to the extent maintained with Bank plus (b) the Availability Amount.
“Loan Documents” are, collectively, this Agreement and any schedules, exhibits, certificates, notices, and any other documents related to this Agreement, the IP Agreement, any Bank Services Agreement, the Perfection Certificate, the Intercreditor Agreement, any subordination agreement, any note, or notes or guaranties executed by Borrower or any Guarantor, and any other present or future agreement by Borrower and/or any Guarantor with or for the benefit of Bank, all as amended, restated, or otherwise modified.
“Material Adverse Change” is (a) a material impairment in the perfection or priority of Bank’s Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations, or condition (financial or otherwise) of Borrower; (c) a material impairment of the prospect of repayment of any portion of the Obligations; or (d) Bank determines, based upon information available to it and in its reasonable judgment, that there is a reasonable likelihood that Borrower shall fail to comply with one or more of the financial covenants in Section 6 during the next succeeding financial reporting period.
“Monthly Financial Statements” is defined in Section 6.2(b).
“Obligations” are Borrower’s obligations to pay when due any debts, principal, interest, fees, Bank Expenses, the Termination Fee, and other amounts Borrower owes Bank now or later, whether under this Agreement, the other Loan Documents, or otherwise, including, without limitation, all obligations relating to Bank Services and interest accruing after Insolvency Proceedings begin and debts, liabilities, or obligations of Borrower assigned to Bank, and to perform Borrower’s duties under the Loan Documents.
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“Operating Documents” are, for any Person, such Person’s formation documents, as certified by the Secretary of State (or equivalent agency) of such Person’s jurisdiction of organization on a date that is no earlier than thirty (30) days prior to the Effective Date, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current amendments or modifications thereto.
“Overadvance” is defined in Section 2.3.
“Patents” means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.
“Payment Date” is the last calendar day of each month.
“Perfection Certificate” is defined in Section 5.1.
“Permitted Indebtedness” is:
(a) Borrower’s Indebtedness to Bank under this Agreement and the other Loan Documents;
(b) Indebtedness existing on the Effective Date which is shown on the Perfection Certificate;
(c) Subordinated Debt;
(d) unsecured Indebtedness to trade creditors incurred in the ordinary course of business;
(e) Indebtedness to Raycom pursuant to the Raycom Loan Agreement in an aggregate original principal amount of up to Sixteen Million Dollars ($16,000,000.00), which amount shall be reduced on a dollar for dollar basis as such Indebtedness is repaid or otherwise satisfied; provided that such Indebtedness shall at all times be subject to the Intercreditor Agreement;
(f) extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (d) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose more burdensome terms upon Borrower or its Subsidiary, as the case may be; and
(g) Indebtedness secured by Liens permitted under clause (c) of the definition of “Permitted Liens” hereunder.
“Permitted Investments” are:
(a) Investments (including, without limitation, Subsidiaries) existing on the Effective Date which are shown on the Perfection Certificate; and
(b) Investments consisting of Cash Equivalents.
“Permitted Liens” are:
(a) Liens existing on the Effective Date which are shown on the Perfection Certificate or arising under this Agreement or the other Loan Documents;
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(b) Liens for taxes, fees, assessments or other government charges or levies, either (i) not due and payable or (ii) being contested in good faith and for which Borrower maintains adequate reserves on Borrower’s Books, provided that no notice of any such Lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;
(c) purchase money Liens (including capital leases) (i) on Equipment acquired or held by Borrower incurred for financing the acquisition of the Equipment securing no more than Fifty Thousand Dollars ($50,000.00) in the aggregate amount outstanding, or (ii) existing on Equipment when acquired, if the Lien is confined to the property and improvements and the proceeds of the Equipment;
(d) Liens incurred in the extension, renewal or refinancing of the Indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase;
(e) Liens in favor of Raycom securing the Indebtedness to Raycom described in subsection (e) of the definition of Permitted Indebtedness, but only to the extent that such Liens are subject to the Intercreditor Agreement; and
(h) non-exclusive licenses of Intellectual Property granted to third parties in the ordinary course of business.
“Person” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.
“PPSA” means the Personal Property Security Act (British Columbia) as amended and as may be further amended and in effect from time to time.
“Prime Rate” is the rate of interest per annum from time to time published in the money rates section of The Wall Street Journal or any successor publication thereto as the “prime rate” then in effect; provided that, in the event such rate of interest is less than zero, such rate shall be deemed to be zero for purposes of this Agreement; and provided further that if such rate of interest, as set forth from time to time in the money rates section of The Wall Street Journal, becomes unavailable for any reason as determined by Bank, the “Prime Rate” shall mean the rate of interest per annum announced by Bank as its prime rate in effect at its principal office in the State of California (such Bank announced Prime Rate not being intended to be the lowest rate of interest charged by Bank in connection with extensions of credit to debtors).
“Quick Assets” is, on the last day of a calendar month, Borrower’s unrestricted and unencumbered cash maintained with Bank (or maintained in the Transition Accounts during the first sixty (60) days following the Effective Date) plus net billed accounts receivable determined according to GAAP.
“Raycom” is, individually and collectively, (a) Raycom Media, Inc., a Delaware corporation and (b) The Teachers’ Retirement System of Alabama.
“Raycom Loan Agreement” is a certain Credit Agreement among Borrower and Raycom Media, Inc. dated as of August 31, 2016 in existence on the Effective Date or as modified with Bank’s prior written consent.
“Receiver” is defined in 9.1(l).
“Registered Organization” is any “registered organization” as defined in the Code, as applicable, with such additions to such term as may hereafter be made.
“Requirement of Law” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
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“Reserves” means, as of any date of determination, such amounts as Bank may from time to time establish and revise in its good faith business judgment, reducing the amount of Advances and other financial accommodations which would otherwise be available to Borrower (a) to reflect events, conditions, contingencies or risks which, as determined by Bank in its good faith business judgment, do or may adversely affect (i) the Collateral or any other property which is security for the Obligations or its value (including without limitation any increase in delinquencies of Accounts), (ii) the assets, business or prospects of Borrower or any Guarantor, or (iii) the security interests and other rights of Bank in the Collateral (including the enforceability, perfection and priority thereof); or (b) to reflect Bank’s reasonable belief that any collateral report or financial information furnished by or on behalf of Borrower or any Guarantor to Bank is or may have been incomplete, inaccurate or misleading in any material respect; or (c) in respect of any state of facts which Bank determines constitutes an Event of Default or may, with notice or passage of time or both, constitute an Event of Default.
“Responsible Officer” is any of the Chief Executive Officer, President, Chief Financial Officer and Controller of Borrower.
“Restricted License” is any material license or other agreement with respect to which Borrower is the licensee (a) that prohibits or otherwise restricts Borrower from granting a security interest in Borrower’s interest in such license or agreement or any other property, or (b) for which a default under or termination of could interfere with Bank’s right to sell any Collateral.
“Revolving Line” is an aggregate principal amount equal to Three Million Dollars ($3,000,000.00).
“Revolving Line Maturity Date” is one (1) year from the Effective Date.
“SEC” shall mean the Securities and Exchange Commission, any successor thereto, and any analogous Governmental Authority.
“Securities Account” is any “securities account” as defined in the Code with such additions to such term as may hereafter be made.
“Streamline Balance” is defined in the definition of Streamline Period.
“Streamline Period” is, on and after the Effective Date, provided no Event of Default has occurred and is continuing, the period (a) commencing on the first day of the month following the day that Borrower provides to Bank a written report that Borrower has maintained, for each consecutive day in the immediately preceding month, as determined by Bank in its discretion, Liquidity of at least Three Million Dollars ($3,000,000.00) (the “Streamline Balance”); and (b) terminating on the earlier to occur of (i) the occurrence of an Event of Default, and (ii) the first day thereafter in which Borrower fails to maintain the Streamline Balance, as determined by Bank in its discretion. Upon the termination of a Streamline Period, Borrower must maintain the Streamline Balance each consecutive day for two (2) months as determined by Bank in its discretion, prior to entering into a subsequent Streamline Period. Borrower shall give Bank prior written notice of Borrower’s election to enter into any such Streamline Period, and each such Streamline Period shall commence on the first day of the monthly period following the date Bank determines, in its reasonable discretion, that the Streamline Balance has been achieved.
“Subordinated Debt” is indebtedness incurred by Borrower subordinated to all of Borrower’s now or hereafter indebtedness to Bank (pursuant to a subordination, intercreditor, or other similar agreement in form and substance satisfactory to Bank entered into between Bank and the other creditor), on terms acceptable to Bank.
“Subsidiary” is, as to any Person, a corporation, partnership, limited liability company or other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation, partnership or other entity are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless the context otherwise requires, each reference to a Subsidiary herein shall be a reference to a Subsidiary of Borrower or Guarantor.
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“Total Liabilities” is on any day, obligations that should, under GAAP, be classified as liabilities on Borrower’s consolidated balance sheet, including all Indebtedness.
“Trademarks” means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.
“Transfer” is defined in Section 7.1.
“Transition Accounts” is defined in Section 6.8(a).
[Signature page follows.]
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IN WITNESS WHEREOF, this Agreement, and all documents executed in connection therewith, or relating thereto, have been negotiated, prepared and deemed to be executed by Borrower in the United States of America. In addition, this Agreement is being executed as of the Effective Date.
BORROWER:
FRANKLY INC.
By | /s/ Steve Chung | |
Name: | Steve Chung | |
Title: | Chief Executive Officer |
FRANKLY MEDIA LLC
By | /s/ Steve Chung | |
Name: | Steve Chung | |
Title: | Chief Executive Officer |
FRANKLY CO.
By | /s/ Steve Chung | |
Name: | Steve Chung | |
Title: | Chief Executive Officer |
BANK:
SILICON VALLEY BANK
By | /s/ Bailey Morrow | |
Name: | Bailey Morrow | |
Title: | Vice President |
EXHIBIT A - COLLATERAL DESCRIPTION
The Collateral consists of all of Borrower’s right, title and interest in and to the following personal property:
All goods, Accounts (including health-care receivables), Equipment, Inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, General Intangibles, Intellectual Property, commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts, certificates of deposit, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and
all Borrower’s Books relating to the foregoing, and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing.
EXHIBIT B
COMPLIANCE CERTIFICATE
TO: |
SILICON VALLEY BANK | Date: |
FROM: FRANKLY INC., FRANKLY MEDIA LLC and FRANKLY CO.
The undersigned authorized officer of FRANKLY INC., FRANKLY MEDIA LLC and FRANKLY CO. (individually and collectively, jointly and severally, “Borrower”) certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (the “Agreement”), (1) Borrower is in complete compliance for the period ending _______________ with all required covenants except as noted below, (2) there are no Events of Default, (3) all representations and warranties in the Agreement are true and correct in all material respects on this date except as noted below; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, (4) Borrower, and each of its Subsidiaries, has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state, provincial and local taxes, assessments, deposits and contributions owed by Borrower except as otherwise permitted pursuant to the terms of Section 5.9 of the Agreement, and (5) no Liens have been levied or claims made against Borrower or any of its Subsidiaries, if any, relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notification to Bank. Attached are the required documents supporting the certification. The undersigned certifies that these are prepared in accordance with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes. The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered. Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Agreement.
Please indicate compliance status by circling Yes/No under “Complies” column.
Reporting Covenants | Required | Complies | ||
Monthly financial statements and Compliance Certificate | Monthly within 30 days | Yes No | ||
Annual financial statements (CPA audited) | FYE within 120 days | Yes No | ||
10-Q, 10-K and 8-K | Within 5 days after filing with SEC |
Yes No | ||
Borrowing Base Report, A/R Agings and A/P Agings | On Friday of each week when not in a Streamline Period
Monthly within 30 days in a Streamline Period |
Yes No | ||
Board-approved Projections | Earlier of 7 Business Days following Board approval, and March 31st of each year (and in each case as updated or amended) |
Yes No | ||
The following Intellectual Property was registered after the Effective Date (if no registrations, state “None”) ____________________________________________________________________________
|
Financial Covenants | Required | Actual | Complies | |||
Maintain as indicated: | ||||||
Cash at Bank | $1,000,000.00 | $______________ | Yes No | |||
Adjusted Quick Ratio | > ______ : 1.0 | _____ :1.0 | Yes No |
*As set forth in Section 6.9(b)
Streamline Eligible | Applies | |||
Required | Actual | |||
Liquidity of $3,000,000.00 | $______________ | Yes No |
The following financial covenant analyses and information set forth in Schedule 1 attached hereto are true and accurate as of the date of this Certificate.
The following are the exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions to note.”)
—————————————————————————————————————————————————————————————————————————
FRANKLY INC. | BANK USE ONLY | |||
FRANKLY MEDIA LLC | Received by: | |||
FRANKLY CO. |
authorized signer | |||
By: | Date: | |||
Name: | Verified | |||
Title: |
authorized signer | |||
Date: | ||||
Compliance Status | Yes No |
Schedule 1 to Compliance Certificate
Financial Covenants of Borrower
In the event of a conflict between this Schedule and the Agreement, the terms of the Agreement shall govern.
Dated: ____________________
I. Cash at Bank (Section 6.9(a))
Required: $1,000,000.00
Actual: $________________
Is Borrower’s unrestricted and unencumbered cash at Bank equal to or greater than the required amount set forth above?
___ No, not in compliance | ___ Yes, in compliance |
II. Adjusted Quick Ratio (Section 6.9(b))
Required: _____ : 1.0 (see Section 6.9(b))
Actual: _____ : 1.0
A. | Aggregate value of the unrestricted and unencumbered cash of Borrower at Bank (or maintained in the Transition Accounts during the first sixty (60) days following the Effective Date) | $ | ||||
B. | Aggregate value of the net billed accounts receivable of Borrower | $ | ||||
C. | Quick Assets (the sum of lines A and B) | $ | ||||
D. | All obligations and liabilities of Borrower to Bank | $ | ||||
E. | Obligations that mature within one year not otherwise reflected in Line D that should, under GAAP, be classified as liabilities on Borrower’s consolidated balance sheet, including all Indebtedness | $ | ||||
F. | Current Liabilities (the sum of lines D and E) | $ | ||||
G. | Current portion of non-refundable Deferred Revenue | $ | ||||
H. | Line F minus Line G | $ | ||||
I. | Adjusted Quick Ratio (Line C divided by Line H) | ____:1.0 |
Is line I equal to or greater than or equal to the amount set forth above?
__________No, not in compliance ____________Yes, in compliance
EXHIBIT C
Borrowing Base Report
Credit Agreement
BETWEEN
RAYCOM MEDIA, INC.
– and –
FRANKLY INC.
August 31, 2016
Table of Contents
Page | |
ARTICLE 1 INTERPRETATION | 1 |
1.1 Definitions | 1 |
1.2 Certain Rules of Interpretation | 19 |
1.3 Governing Law | 20 |
1.4 Entire Agreement | 20 |
1.5 Business Day | 20 |
1.6 Conflicts | 20 |
1.7 Guaranteed Amounts | 21 |
1.8 Accounting Changes | 21 |
1.9 Schedules and Exhibits | 21 |
ARTICLE 2 CREDIT FACILITY | 22 |
2.1 Facility | 22 |
2.2 Purpose | 22 |
2.3 Drawdowns—Notices and Limitations | 23 |
2.4 Lender’s Records | 23 |
ARTICLE 3 CALCULATION OF INTEREST, FEES AND EXPENSES | 23 |
3.1 Calculation and Payment of Interest | 23 |
3.2 Expenses | 24 |
3.3 General Provisions Regarding Interest | 24 |
3.4 Maximum Return | 24 |
ARTICLE 4 REDUCTION OF COMMITMENT AND REPAYMENT | 25 |
4.1 Optional Repayment of Loans under the Facility | 25 |
4.2 Repayment of Facility | 26 |
4.3 Other Mandatory Repayments | 26 |
4.4 Payments—General | 27 |
ARTICLE 5 INDEMNITIES | 27 |
5.1 General Indemnity | 27 |
5.2 Environmental Indemnity | 28 |
ARTICLE 6 CONDITIONS PRECEDENT | 28 |
6.1 Conditions Precedent to the Initial Drawdown | 28 |
6.2 Conditions Precedent to all Loans | 31 |
6.3 Waiver of a Condition Precedent | 32 |
ARTICLE 7 SECURITY DOCUMENTS | 32 |
7.1 Security Documents | 32 |
7.2 Registration of Security Documents | 34 |
7.3 Dealing With Security Documents | 34 |
7.4 Permitted Liens | 34 |
ARTICLE 8 REPRESENTATIONS AND WARRANTIES | 35 |
8.1 Representations and Warranties | 35 |
8.2 Repetition of Representations and Warranties | 41 |
8.3 Survival of Representations and Warranties | 41 |
-i- |
Table of Contents
(continued)
Page | |
ARTICLE 9 COVENANTS | 41 |
9.1 Positive Covenants | 41 |
9.2 Financial Covenants | 47 |
9.3 Negative Covenants | 48 |
ARTICLE 10 EVENTS OF DEFAULT | 50 |
10.1 Events of Default | 50 |
10.2 Acceleration and Remedies | 53 |
10.3 Application of Proceeds of Realization | 54 |
10.4 Waivers | 54 |
10.5 Non-Merger | 55 |
10.6 Lender May Perform Covenants | 55 |
10.7 Grant of Licence | 55 |
ARTICLE 11 GENERAL | 55 |
11.1 Time of Essence | 55 |
11.2 Notices | 55 |
11.3 Severability | 56 |
11.4 Submission to Jurisdiction | 57 |
11.5 Amendment and Waiver | 57 |
11.6 Further Assurances | 57 |
11.7 Assignment | 58 |
11.8 Enurement | 58 |
11.9 Counterparts and Electronic Delivery | 58 |
11.10 Conduct of Parties | 58 |
11.11 Remedies Cumulative | 58 |
11.12 Survival | 58 |
11.13 Telephone Instructions | 59 |
11.14 Judgment Currency | 59 |
11.15 No Contra Proferentem | 59 |
11.16 Consent to Disclosure of Information | 60 |
-ii- |
Credit Agreement
THIS AGREEMENT is dated as of August 31, 2016
BETWEEN:
RAYCOM MEDIA, INC., as Lender
- and -
FRANKLY INC., as Borrower
CONTEXT
A. | The Lender has agreed to provide the Facility to the Borrower on the terms set out in this Agreement. |
B. | The Borrower and the Guarantors have agreed to execute and deliver to the Lender the Loan Documents to which they are a party, and to comply with the other terms set out in this Agreement. |
THEREFORE, the Parties agree as follows:
Article
1
INTERPRETATION
1.1 | Definitions |
In this Agreement, in addition to terms defined elsewhere in this Agreement, the following terms have the following meanings:
1.1.1 | “Accounting Changes” means (i) changes in accounting principles of IFRS as issued by the International Accounting Standards Board (or successor thereto or any agency with similar functions); or (ii) (x) changes in the application of such accounting principles adopted; or (y) the adoption of different accounting principles and standards by the Borrower and in each case concurred in by the Borrower’s independent chartered accountants and the Lender. |
1.1.2 | “Acquisition” means any transaction, or any series of related transactions, by which any Person, directly or indirectly, by means of a takeover bid, tender offer, amalgamation, merger, purchase of Property or otherwise: |
1.1.2.1 | acquires any business, line of business or business unit of any other Person; | |
1.1.2.2 | acquires all or substantially all of the Property of any other Person; | |
1.1.2.3 | acquires, or acquires Control of, Equity Securities of any other Person representing more than 50% of the ordinary voting power for the election of directors or other governing position, if the business affairs of that Person are managed by a board of directors or other governing body; |
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1.1.2.4 | acquires, or acquires Control of, more than 50% of the ownership or economic interest in any other Person; or | |
1.1.2.5 | acquires Control of any other Person. |
1.1.3 | “Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. |
1.1.4 | “Agreement” means this credit agreement between the Borrower and the Lender, including all Schedules and Exhibits, as it may be confirmed, amended, extended, supplemented or restated by written agreement between the Parties. |
1.1.5 | “Anti-Money Laundering Legislation” means the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada) and other Applicable Laws relating to anti-money laundering, anti-terrorist financing, government sanctions and “know your client” matters, whether in Canada or elsewhere, together with any guidelines or orders under those laws. |
1.1.6 | “Applicable Law” means, at any time, and whether or not having the force of law: |
1.1.6.1 | any domestic or foreign statute, law (including common and civil law), treaty, code, ordinance, rule, regulation, restriction or by-law; | |
1.1.6.2 | any judgment, order, writ, injunction, decision, ruling, decree or award issued or made by any Governmental Authority; | |
1.1.6.3 | any regulatory policy, practice, guideline or directive of any Governmental Authority; or | |
1.1.6.4 | any other Authorization, |
in each case binding on or affecting the Person referred to in the context in which the term is used or binding on or affecting the Property of that Person.
1.1.7 | “Applicable Period” is defined in Section 1.1.26. |
1.1.8 | “Arm’s Length” means arm’s length as that term is interpreted in connection with its use in the Income Tax Act. |
1.1.9 | “Asset Disposition” means, at any time, the direct or indirect sale, transfer, assignment, conveyance, lease or other disposition of any Property by any Person. |
1.1.10 | “Authorization” means any authorization, order, permit, approval, grant, licence, qualification, consent, exemption, waiver, right, franchise, privilege, certificate, judgment, writ, injunction, award, determination, direction, decree, by-law, rule or regulation of any Governmental Authority having jurisdiction over any Person, whether or not having the force of law. |
1.1.11 | “Borrower” means Frankly Inc., a continued incorporated under the laws of British Columbia, and its successors and permitted assigns. |
1.1.12 | “Borrower’s Obligations” means, at any time, all of the indebtedness, liabilities and obligations, absolute or contingent, direct or indirect, matured or not matured, liquidated or unliquidated, of the Borrower to the Lender arising under the Facility or created by reason of or relating to this Agreement or any other Loan Document, including all Loans and any unpaid interest on them, all fees due under this Agreement and all reasonable costs and expenses of the Lender, and any other sums payable by the Borrower to the Lender, under the Loan Documents. |
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1.1.13 | “Business Day” means any day excluding a Saturday, Sunday or other day on which commercial banking institutions are generally closed in Toronto, Ontario or New York, New York. |
1.1.14 | “Capital Expenditure” means any expense classified and accounted for as a capital expenditure pursuant to IFRS. |
1.1.15 | “Capital Lease” means any lease of Property by a Person as lessee that is required by IFRS to be classified and accounted for as a capital lease on the balance sheet of that Person. |
1.1.16 | “Capital Lease Obligations” means, for any Person, as of the date of determination, the obligations of that Person to pay rent and other amounts under a Capital Lease. |
1.1.17 | “Closing Date” means August 31, 2016 or any other date agreed to in writing by the Lender and the Borrower. |
1.1.18 | “Commitment” means, at any time, the commitment of the Lender to make a Loan available under the Facility in the amount of $14,500,000, as that amount may be reduced, adjusted or amended at any time under the terms of this Agreement, including without limitation Section 2.1.3. |
1.1.19 | “Communication” means any notice, demand, request, consent, approval or other communication which is required or permitted by this Agreement to be given or made by a Party. |
1.1.20 | “Compliance Certificate” means a compliance certificate substantially in the form attached to this Agreement as Exhibit 9.1.1.4, to be executed by a Responsible Officer of the Borrower and delivered to the Lender as set out in Section 9.1.1.4. |
1.1.21 | “Consolidated Basis” means, in relation to any Financial Statements or financial results of the Borrower (or any determination derived from them), the Financial Statements and financial results of the Borrower and the other Obligors, prepared and calculated on a consolidated basis all in accordance with IFRS. |
1.1.22 | “Constating Documents” means: |
1.1.22.1 | for a corporation, unlimited liability company, limited liability company or other body corporate, its articles of incorporation, amalgamation, arrangement or continuance or similar organizational documents, by-laws and any unanimous shareholder agreement or other shareholder agreement; | |
1.1.22.2 | for a partnership, limited liability partnership or limited partnership, its partnership declaration, partnership agreement or similar related organizational documents; |
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1.1.22.3 | for a trust, the declaration, indenture or agreement under which it is created and its affairs are governed, or similar related organizational documents; or | |
1.1.22.4 | for any other entity or relationship of entities, the documents and agreements by which they are created and organized. |
1.1.23 | “Control” means the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise, and “Controlled” has a corresponding meaning. |
1.1.24 | “Criminal Code” means the Criminal Code, R.S.C. 1985, c. C-46. |
1.1.25 | “Current Liens” is defined in Section 6.1.1.13. |
1.1.26 | “Current Year Excess Cash Flow Amount” means, with respect to any Fiscal Year, commencing the Fiscal Year ending December 31, 2017, and as of any date of determination during the period (the “Applicable Period”) commencing with the date of receipt by the Lender of the consolidated financial statements required by Section 9.1.1.1 for the Fiscal Year ending December 31, 2017, the amount of Excess Cash Flow (which shall not be less than zero) for such Fiscal Year as determined by the Borrower in good faith and supported by calculations of such Excess Cash Flow amount in form and substance satisfactory to the Lender. For avoidance of doubt, the Current Year Excess Cash Flow Amount shall be zero on any date that is not part of the Applicable Period and all references to the definition of Excess Cash Flow to “Fiscal Year” shall be deemed to refer to the Applicable Period. |
1.1.27 | “Debt” means, at any time, without duplication, and on a Consolidated Basis, the obligations of any Person that are considered as debt in accordance with IFRS, including: |
1.1.27.1 | all indebtedness of that Person for money borrowed by or otherwise advanced to it for which the principal bears interest, including bankers’ acceptances, letters of credit or letters of guarantee and all indemnity and reimbursement obligations under them; | |
1.1.27.2 | all indebtedness of that Person for the deferred purchase price of Property or services; | |
1.1.27.3 | all indebtedness of that Person created or arising under any conditional sale or other title retention agreement with respect to Property acquired by that Person, including indebtedness under agreements that limit the rights and remedies of the seller or lender if default occurs to repossession or sale of that Property; | |
1.1.27.4 | all interest or other obligations of that Person that are capitalized; | |
1.1.27.5 | all Capital Lease Obligations of that Person; | |
1.1.27.6 | the aggregate amount at which any Equity Securities of that Person that are redeemable or retractable at the option of the holder may be redeemed or retracted for cash or other payment, provided that all conditions precedent for the redemption or retraction have been satisfied; |
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1.1.27.7 | all other obligations of that Person upon which interest charges are customarily paid by that Person; | |
1.1.27.8 | all obligations arising from any right of recourse against that Person relating to any sale of accounts receivable to a Person that is not a Related Party, including in any securitization transaction; | |
1.1.27.9 | all obligations of that Person under any Guarantee; and | |
1.1.27.10 | all Debt of any other Person secured by (or for which a holder of that Debt has an existing right, contingent or otherwise, to be secured by) any Lien on Property, including accounts and contract rights, owned by the first Person, whether or not that Person has assumed or become liable for the payment of the obligation, provided that the amount of that Debt will be deemed to be the lesser of the unpaid amount of that Debt or the fair market value of that Property. |
1.1.28 | “Default” means any event or condition that with the passage of any time specified, the giving of any notice or the satisfaction of any condition subsequent would constitute an Event of Default. |
1.1.29 | “Depreciation Expense” means, for any period, depreciation, amortization, depletion and other similar reductions to income of a Person for that period not involving any outlay of cash, all determined in accordance with IFRS. |
1.1.30 | “Distribution” means any payment by a Person: |
1.1.30.1 | of any dividends or other distributions in cash on any of its Equity Securities; | |
1.1.30.2 | on account of, or for the purpose of setting apart any Property for, the purchase, redemption, retirement or other acquisition of any of the Equity Securities of that Person or any of its Subsidiaries or any warrants, options or rights to acquire any of those Equity Securities, or the making by that Person of any other distribution in cash relating to any of those Equity Securities; | |
1.1.30.3 | of any principal of, or interest or premium on or of, any Debt of that Person to a shareholder of that Person or to any other Person not at Arm’s Length to that Person or shareholder; | |
1.1.30.4 | of any: |
1.1.30.4.1 | management, consulting or similar fee or any bonus payment or comparable payment; | |
1.1.30.4.2 | gift or other gratuity; or | |
1.1.30.4.3 | amounts for services rendered, Property leased or acquired, or for any other reason, |
in each case, to any Related Party or to any Person not at Arm’s Length to that Person; or
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1.1.30.5 | the setting aside of any cash or other Property to make any of the payments referred to above. |
1.1.31 | “Drawdown Date” means the Business Day specified as the date on which the Borrower is requesting that a Loan occur or on which it will occur pursuant to this Agreement. |
1.1.32 | “Adjusted EBITDA” means, for any period, the Net Income of a Person on a consolidated basis for that period, plus: |
1.1.32.1 | without duplication, but only to the extent any of those amounts were deducted in determining the Net Income for that period: |
1.1.32.1.1 | the Interest Expense of that Person for that period; | |
1.1.32.1.2 | the Income Tax Expense of that Person for that period; | |
1.1.32.1.3 | the Depreciation Expense of that Person for that period; | |
1.1.32.1.4 | the actual amortization expenses of that Person for that period; and | |
1.1.32.1.5 | extraordinary and non-recurring losses of that Person for that period; and | |
1.1.32.1.6 | any non-cash equity based compensation; less |
1.1.32.2 | without duplication, but only to the extent any of those amounts were added in determining Net Income for that period, extraordinary and non-recurring gains of that Person for that period. |
1.1.33 | “Environmental Activity” means any past, present or future activity, event or circumstance in respect of any Hazardous Materials, including their storage, use, holding, collection, purchase, accumulation, assessment, generation, manufacture, construction, processing, treatment, stabilization, disposition, handling or transportation, or their Release, escape, leaching, dispersal or migration into or movement through the Natural Environment. |
1.1.34 | “Environmental Laws” means, at any time, all Applicable Laws relating to Hazardous Materials, Environmental Activity and to the protection and regulation of the Natural Environment, or to human health and safety as it relates to Environmental Activity or the Natural Environment. |
1.1.35 | “Environmental Liabilities” means all Losses of any kind suffered by or against any Person or its business or Property, including or as a result of any order, investigation or action by any Governmental Authority, arising from or with respect to any one or more of the following: |
1.1.35.1 | the Release, threat of Release or presence of any Hazardous Materials, affecting any Property, whether or not originating or emanating from a Person’s Property or any contiguous Real Property or immovable Property, including any loss of value of any Property as a result of that Release, threat of Release or presence of any Hazardous Materials; |
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1.1.35.2 | the Release of any Hazardous Materials owned by, or under the charge, management or Control of, that Person, or any assignor of that Person; | |
1.1.35.3 | liability incurred under any Environmental Laws for any costs incurred by any Governmental Authority or any other Person, or for damages from injury to, destruction of, or loss of natural resources in relation to, a Person’s Property or related Property, including the reasonable costs of assessing that injury, destruction or loss; and | |
1.1.35.4 | liability for personal injury or Property damage arising in connection with breach of any Environmental Laws, including by reason of any civil law offences or quasi-criminal offences or under any statutory or common law tort or similar theory, including damages assessed for the maintenance of a public or private nuisance or for the carrying on of a dangerous activity at, near, or with respect to a Person’s Property or elsewhere. |
1.1.36 | “Equity Incentive Plan” means the Borrower’s Stock Option and RSU Plan, as it exists as of the date hereof. |
1.1.37 | “Equity Securities” means, at any time, all shares or stock of, units of interest in, or participations or rights in, any Person’s capital (or other equivalents), whether voting or non-voting, including any interest in a partnership, limited partnership or other similar Person and any beneficial interest in a trust, and all rights, warrants, debt securities, options or other rights exchangeable for or convertible into any of the equity securities and related interests listed above. |
1.1.38 | “Event of Default” is defined in Section 10.1. |
1.1.39 | “Excess Cash Flow” means EBITDA less Interest Expense paid in cash for any Fiscal Year, aggregate tax expenses of the Borrower to the extent paid in cash during such Fiscal Year, Capital Expenditures to the extent paid in cash during such Fiscal Year, the aggregate of all scheduled payments of principal on Debt (other than mandatory prepayments of Loans) made in cash by the Borrower during such Fiscal Year, but only to the extent that such payments or repayments by their terms cannot be reborrowed or redrawn. |
1.1.40 | “Facility” means the non-revolving credit facility in the initial maximum principal amount of US$14,500,000, made available by the Lender to the Borrower under this Agreement and described in Section 2.1. |
1.1.41 | “Financial Statements” means a balance sheet, statement of income and retained earnings, statement of cash flow and any other statements required by IFRS, together with all schedules and notes to them. |
1.1.42 | “Fiscal Quarter” means, relating to any Person, the fiscal quarter of that Person. |
1.1.43 | “Fiscal Year” means, relating to any Person, the fiscal year of that Person. |
1.1.44 | “Governmental Authority” means: |
1.1.44.1 | any federal, provincial, state, local, municipal, regional, territorial, aboriginal, or other government, governmental or public department, branch, ministry, or court, domestic or foreign, including any district, agency, commission, board, arbitration panel or authority and any subdivision of any of them exercising or entitled to exercise any administrative, executive, judicial, ministerial, prerogative, legislative, regulatory, or taxing authority or power of any nature; and |
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1.1.44.2 | any quasi-governmental or private body exercising any regulatory, expropriation or taxing authority under or for the account of any of them, and any subdivision of any of them. |
1.1.45 | “Guarantee” means any absolute or contingent liability of any Person under any guarantee, agreement, endorsement (other than for collection or deposit in the ordinary course of business), discount with recourse or other obligation to pay, purchase, repurchase or otherwise be or become liable or obligated upon any Debt of any other Person, and including any absolute or contingent obligations to: |
1.1.45.1 | advance or supply funds for the payment or purchase of any Debt of any other Person; | |
1.1.45.2 | purchase, sell or lease (as lessee or lessor) any Property, services, materials or supplies primarily for the purpose of enabling any other Person to pay its Debt or to assure the holder of it against loss relating to payment of that Debt; or | |
1.1.45.3 | indemnify or hold harmless any other Person from or against any losses, liabilities or damages, in circumstances intended to enable that other Person to incur or pay any of its Debt or to comply with any agreement relating to it or otherwise to assure or protect creditors against loss relating to that Debt. |
1.1.46 | “Guaranteed Obligations” means all indebtedness, liabilities and obligations, absolute or contingent, direct or indirect, matured or not matured, liquidated or unliquidated, of the Guarantors and each of them to the Lender under the Guarantee granted by each Guarantor to the Lender at any time. |
1.1.47 | “Guarantors” means, collectively: |
1.1.47.1 | Frankly Co. and Frankly Media LLC; | |
1.1.47.2 | each present or future Subsidiary of the Borrower; and | |
1.1.47.3 | each other Person who at any time grants a Guarantee of the Borrower’s Obligations to the Lender, in form and substance satisfactory to the Lender, |
and “Guarantor” means any one of them.
1.1.48 | “Hazardous Materials” means any substance that when Released into the Natural Environment creates a material risk of causing material harm or degradation, immediately or at some future time, to the Natural Environment, or any ascertainable risk to human health or safety, including any pollutant, contaminant, waste, hazardous waste, dangerous goods (as defined by applicable Environmental Laws), asbestos and polychlorinated biphenyls. |
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1.1.49 | “IFRS” means the International Financial Reporting Standards as issued by the International Accounting Standards Board. |
1.1.50 | “Income Tax Act” means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.). |
1.1.51 | “Income Tax Expense” means, with respect to any period, the aggregate of all Taxes on the income or capital of a Person, determined in accordance with IFRS, for that period. |
1.1.52 | “Indemnified Party” is defined in Section 5.1. |
1.1.53 | “Insolvency Law” means the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, the Winding-up and Restructuring Act, R.S.C. 1985, c. W-11, and any other laws relating to bankruptcy, insolvency, reorganization, compromise of debts or similar laws of any jurisdiction affecting creditors’ rights generally. |
1.1.54 | “Insurance” is defined in Section 9.1.14.1. |
1.1.55 | “Intellectual Property” means trade-marks and trade-mark applications, trade names, certification marks, patents and patent applications, copyrights, domain names, industrial designs, trade secrets, know-how, formulae, processes, inventions, technical expertise, research data and other similar property, all associated registrations and applications for registration, and all associated rights, including moral rights. |
1.1.56 | “Intellectual Property Rights” is defined in Section 8.1.17. |
1.1.57 | “Interest Coverage Ratio” means, as of any date of determination, the ratio of (a) Adjusted EBITDA for the then applicable Reference Period to (b) Interest Expense for the then applicable Reference Period. |
1.1.58 | “Interest Expense” means, with respect to any Reference Period and on a consolidated basis, the aggregate amount of interest and other financing charges incurred by a Person, determined in accordance with, and characterized under, IFRS as interest, during that period with respect to Debt (including, without duplication, interest, capitalized interest, discount and financing fees, unused commitment fees, commissions, discounts, costs related to factoring or securitizing accounts receivable and other fees and charges payable with respect to letters of credit and bankers’ acceptances, standby fees and the interest component of Capital Lease Obligations and PMSI Obligations). |
1.1.59 | “Interest Payment Date” means, the first Business Day of each month. |
1.1.60 | “Investment” means: |
1.1.60.1 | any direct or indirect purchase or other acquisition by any Investor of Equity Securities, or a beneficial interest in them, of any other Person that does not otherwise constitute an Acquisition, including any exchange of Equity Securities for indebtedness; | |
1.1.60.2 | any direct or indirect loan, advance (other than Loans to employees for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution (by way of cash or Property) by any Investor to any other Person, including all indebtedness and accounts receivable owing to the Investor from that other Person that did not arise from sales or services rendered to that other Person in the ordinary course of the Investor’s business; or |
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1.1.60.3 | any direct or indirect purchase or other acquisition by any Investor of bonds, notes, debentures or other debt securities of any other Person. |
1.1.61 | “Investor” means any Person who makes an Investment. |
1.1.62 | “Judgment Conversion Date” is defined in Section 11.14.1.2. |
1.1.63 | “Judgment Currency” is defined in Section 11.14.1. |
1.1.64 | “Knowledge of the Obligors” means the knowledge that the Obligors or any of them either have, or would have obtained, after having made or caused to be made all reasonable inquiries necessary to obtain informed knowledge, including inquiries of the records of any Obligor and the management employees of any Obligor who are reasonably likely to have knowledge of the relevant matter. |
1.1.65 | “Lender” means Raycom Media, Inc., and its successors and assigns. |
1.1.66 | “Lien” means any Security Interest, lien (statutory, common law, equitable or otherwise), privilege, charge, trust deemed to exist under any Applicable Law or other encumbrance of any kind, or any other agreement or arrangement creating in favour of any claimant or creditor a right relating to any particular Property that is in priority to the right of any ordinary creditors relating to that Property, and including the right of a lessor under a Capital Lease or Operating Lease. |
1.1.67 | “Loan Documents” means this Agreement, the Security Documents and any other instruments and agreements entered into between the Lender and any Obligor relating to the Facility. |
1.1.68 | “Loans” means loans made under the Facility by the Lender to the Borrower. |
1.1.69 | “Losses” means all claims, suits, actions, debts, damages, costs, losses, liabilities, penalties, obligations, judgments, charges, expenses and disbursements, including all reasonable legal fees and disbursements on a solicitor and its own client basis. |
1.1.70 | “Material Adverse Change” means any event, development or circumstance that has had, or could reasonably be expected to have, a Material Adverse Effect. |
1.1.71 | “Material Adverse Effect” means any fact, circumstance or event that could result in a material adverse effect on: |
1.1.71.1 | the business, financial condition, operations or Property of the Obligors on a Consolidated Basis; | |
1.1.71.2 | the validity or enforceability of any Loan Document; | |
1.1.71.3 | the ability of any Obligor to perform its material obligations under the Loan Documents; or |
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1.1.71.4 | the filing, registration, perfection or priority of any Security Interests created by the Security Documents, other than as a result of Permitted Liens that have priority under Applicable Law, against any Property of any Obligor or the rights and remedies of the Lender against that Property. |
1.1.72 | “Material Permits” means those Authorizations the breach, non-performance or cancellation of which, or the failure of which to renew, could reasonably be expected to result in a Material Adverse Effect. |
1.1.73 | “Maturity Date” means the fifth anniversary of the Closing Date, being August 31, 2021, subject to any earlier date that may result from any acceleration of the requirement to pay the Outstanding Obligations under this Agreement. |
1.1.74 | “Maximum Amount” is defined in Section 2.1.1. |
1.1.75 | “Natural Environment” means the air, land, subsoil and water (including surface water and ground water), or any combination or part of them. |
1.1.76 | “Net Income” means, relating to any period, the net income or loss, as applicable, of a Person for that period determined in accordance with IFRS and after Income Tax Expenses but excluding extraordinary items, as shown on that Person’s statement of operations for that period. |
1.1.77 | “Obligation Currency” is defined in Section 11.13. |
1.1.78 | “Obligor Location” means, for each Obligor, its sole place of business or chief executive office and, if different, its location as determined under the location of debtor rules in section 7(3) of the Personal Property Security Act (Ontario). |
1.1.79 | “Obligors” means, collectively, the Borrower and the Guarantors, and “Obligor” means any one of them. |
1.1.80 | “Operating Lease” means any lease of Property by a Person as lessee that is required by IFRS to be classified and accounted for as an operating lease. |
1.1.81 | “Operating Lease Obligations” means, under any Operating Lease entered into by any Obligor as lessee, the aggregate amount of the lease payments of the lessee, including all rent and payments to be made by the lessee in connection with the return of the leased Property, during the remaining term of the Operating Lease, including any period for which the Operating Lease has been extended. |
1.1.82 | “Optional Repayment Date” is defined in Section 4.1.1. |
1.1.83 | “Outstanding Obligations” means, collectively, the Borrower’s Obligations, the Guaranteed Obligations and all reasonable expenses and charges, whether for legal expenses or otherwise, incurred by the Lender in collecting or enforcing any of the Borrower’s Obligations or the Guaranteed Obligations, or in realizing on or protecting or preserving any security held for those obligations, including the Security Documents. |
1.1.84 | “Parties” means, collectively, the Borrower, the Guarantors and the Lender, and their respective successors and permitted assigns, and “Party” means any one of them. |
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1.1.85 | “Pension Plan” means any pension plan, fund or other similar program, other than a government sponsored plan, that covers employees of an Obligor who are employed in Canada and either: |
1.1.85.1 | is subject to any statutory funding requirement that, if not satisfied, results in a Lien or other statutory requirement permitting any Governmental Authority to accelerate the obligation of that Obligor to fund all or a substantial portion of the unfunded, accrued benefit liabilities of that plan; or | |
1.1.85.2 | is, or is intended to be, a “registered pension plan”, as that term is defined in the Income Tax Act. |
1.1.86 | “Permitted Acquisition” means an Acquisition by an Obligor under which the aggregate consideration is less than $2,500,000 and the aggregate consideration for Acquisitions by all of the Obligors in the Fiscal Year of the Borrower in which the Acquisition takes place is less than $2,500,000, provided that at the time of and immediately after completing the Acquisition no Default or Event of Default will have occurred and be continuing or could reasonably be expected to result from it. |
1.1.87 | “Permitted Debt” means any of the following types of Debt: |
1.1.87.1 | the Outstanding Obligations; | |
1.1.87.2 | any Debt listed on Schedule 1.1.87.2 and any renewals, extensions and modifications that do not increase the principal amount of that Debt or otherwise make the terms of it more burdensome; | |
1.1.87.3 | any PMSI Obligations, provided that the aggregate amount of all PMSI Obligations outstanding at any time does not exceed $2,000,000; | |
1.1.87.4 | any other unsecured Debt of the Obligors or any of them not exceeding at any time $200,000 in aggregate principal amount outstanding; | |
1.1.87.5 | secured credit facilities from an arm’s length financial institution in a principal amount of not more than $5,000,000 on terms and conditions satisfactory to the Lender, acting reasonably; and | |
1.1.87.6 | Secured Debt that is subordinated to the Outstanding Obligations on terms satisfactory to the Lender, it its discretion. |
1.1.88 | “Permitted Disposition” means: |
1.1.88.1 | the sale of Inventory by any Obligor in the ordinary course of business; | |
1.1.88.2 | the sale or other disposition of any Property other than Inventory by any Obligor in the ordinary course of business, provided that the aggregate value of Property so sold or disposed of by all of the Obligors in any Fiscal Year of the Borrower, valued in each case at its purchase price or exchange value (in the case of Property exchanges) does not exceed $350,000; |
provided that at the time of and immediately after making a sale or other disposition referred to in Section 1.1.88.1, no Default or Event of Default will have occurred and be continuing or could reasonably be expected to result from it.
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1.1.89 | “Permitted Distribution” means: |
1.1.89.1 | any dividends declared by any Obligor under its Equity Securities that are payable solely in additional Equity Securities, other than any Equity Securities constituting Debt; | |
1.1.89.2 | Distributions by any Obligor to its shareholders, provided that the aggregate amount of those Distributions made by all of the Obligors in any Fiscal Year of the Borrower does not exceed (i) $0 if the Borrower’s Total Leverage Ratio is equal to or more than 3.00:1.00; or (ii) $250,000, annually, if the Borrower’s Total Leverage Ratio is less than 3.00:1.00 and | |
1.1.89.3 | Distributions under any one or more stock option plans, profit sharing plans, employment agreements and other compensation plans for directors, officers or employees of any Obligor, provided that the aggregate amount of the payments made by all of the Obligors in any Fiscal Year of the Borrower under all of those plans and agreements will not exceed amounts that are customary for the Borrower’s past practice and in the ordinary course of business. |
provided that at the time of and immediately after paying or making a dividend or Distribution referred to in Sections 1.1.89, no Default or Event of Default will have occurred and be continuing or could reasonably be expected to result from it.
1.1.90 | “Permitted Fundamental Change” means: |
1.1.90.1 | any amalgamation of a Wholly-Owned Subsidiary with the Obligor that owns it, if that Obligor is the continuing or surviving corporation, or with or into one or more other Wholly-Owned Subsidiaries of an Obligor if one of the Wholly-Owned Subsidiaries will be the continuing or surviving corporation, provided that: |
1.1.90.1.1 | the amalgamated corporation confirms to the Lender in writing, in form and substance satisfactory to the Lender, that the amalgamated corporation is an Obligor under this Agreement and is liable for the Outstanding Obligations; | |
1.1.90.1.2 | the amalgamated corporation immediately delivers to the Lender a certificate of a senior officer attaching the new Constating Documents and incumbency information for that corporation; and | |
1.1.90.1.3 | the Lender receives all Security Documents, legal opinions and other acknowledgements or agreements from all applicable Persons as the Lender may reasonably require; or |
1.1.90.2 | any sale, lease, transfer or other disposition by a Wholly-Owned Subsidiary of any or all of its Property, upon voluntary liquidation or otherwise, to the Obligor that owns it or any other Wholly-Owned Subsidiary of an Obligor; |
provided that at the time of and immediately after a change referred to in Sections 1.1.90.1 or 1.1.90.2 no Default or Event of Default will have occurred and be continuing or could reasonably be expected to result from it.
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1.1.91 | “Permitted Investment” means: |
1.1.91.1 | certificates of deposit, time deposits or overnight bank deposits that mature in six months or less from the date of acquisition of them, with or issued by the Lender or any bank listed on Schedule I to the Bank Act (Canada); | |
1.1.91.2 | Investments by one Obligor in or to another Obligor, provided that if the Investments are in the Equity Securities of an Obligor, the Lender has a Security Interest in those Equity Securities under a Security Document; | |
1.1.91.3 | at any time that no Default or Event of Default has occurred and is continuing, Investments by an Obligor in any Obligor’s Wholly-Owned Subsidiary which is not itself an Obligor, provided that the aggregate amount of those Investments made by all of the Obligors in any Fiscal Year of the Borrower does not exceed $500,000; | |
1.1.91.4 | Investments existing on the Closing Date in Equity Securities listed on Schedule 1.1.91.4 or any Replacement Schedule; | |
1.1.91.5 | loans to officers of an Obligor, provided that the aggregate principal amount of all of those loans outstanding at any time does not exceed $150,000; and | |
1.1.91.6 | Investments approved by the Borrower’s shareholders for securities into other companies for an Obligor under which at the time of and immediately after completing the Acquisition, no Default or Event of Default will have occurred and be continuing or could reasonably be expected to result from it; such Investments not to exceed $5,000,000. |
1.1.92 | “Permitted Liens” means, at any time, any of the following: |
1.1.92.1 | any Lien for Taxes levied or imposed by a Governmental Authority against an Obligor: |
1.1.92.1.1 | that are not due or delinquent at that time; or | |
1.1.92.1.2 | the validity of which the Obligor is contesting in good faith at that time and relating to which the Obligor has set aside a reserve sufficient to pay those Taxes, or which at that time is not a material risk to the Property of the Obligor, whether because no steps or proceedings to enforce that Lien have been initiated at that time or because the value of the Property affected by the Lien is not material to the Property of the Obligors collectively; |
1.1.92.2 | any Lien for any judgment rendered, or order filed, against Property of an Obligor which the Obligor is contesting in good faith at that time: |
1.1.92.2.1 | relating to which the Obligor has set aside a reserve sufficient to pay that judgment or order in accordance with IFRS; or | |
1.1.92.2.2 | that is not material, because the value of the Property affected by the Lien is not material to the Property of the Obligors collectively; |
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1.1.92.3 | any Lien against an Obligor or Property of an Obligor imposed or permitted by Applicable Law which: |
1.1.92.3.1 | is inchoate and relates to obligations of an Obligor not yet due or delinquent; | |
1.1.92.3.2 | in the case of any repairer’s or storer’s Lien that has been filed, the aggregate amount of the obligations to which the Lien relates does not exceed $250,000, and that Lien is not a material risk to the Property subject to it, whether because no steps or proceedings to enforce the Lien have been initiated at that time or because the value of the Property affected by the Lien is not material to the Property of the Obligors collectively; or | |
1.1.92.3.3 | is not a material risk to the Property of the Obligor, whether because no steps or proceedings to enforce the Lien have been initiated at that time or because the value of the Property affected by the Lien is not material to the Property of the Obligors collectively; |
1.1.92.4 | any undetermined or inchoate Lien against an Obligor or Property of an Obligor arising in the ordinary course of and incidental to construction by or current operations of that Obligor: |
1.1.92.4.1 | that relates to obligations that are not yet due or delinquent; | |
1.1.92.4.2 | that has not been filed under Applicable Law against an Obligor or its Property, or if filed, the Obligor has obtained an order of a court of competent jurisdiction discharging that Lien within 15 days of the filing of it; | |
1.1.92.4.3 | relating to which no steps or proceedings to enforce that Lien have been initiated; or | |
1.1.92.4.4 | that is not a material risk to Property of the Obligors, because the value of the Property affected by the Lien is not material to the Property of the Obligors collectively; |
1.1.92.5 | easements, rights-of-way, servitudes or other similar rights or restrictions relating to land in which any Obligor has an interest (including rights-of-way and servitudes for railways, sewers, drains, pipe lines, gas and water mains, and electric light, power, telephone internet and cable television conduits, poles, wires, cables and optic fibre cables), granted to or reserved or taken by other Persons, which either alone or in the aggregate do not materially detract from the value of the Property of the Obligors collectively or materially impair the use or operation of that Property; |
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1.1.92.6 | any Lien given by an Obligor to a public utility or any Governmental Authority when and to the extent required by that public utility or Governmental Authority that relates to obligations that are not yet due or delinquent and which Lien does not, either alone or in the aggregate, materially detract from the value of the Property of the Obligors subject to that Lien or materially impair the use or operation of that Property; | |
1.1.92.7 | the reservation in any original grant from the Crown of any Real Property of an Obligor or interests in it, and statutory exceptions to title; | |
1.1.92.8 | any Lien attaching to or against any Property of an Obligor which is in favour of another Obligor and is subordinated in favour of the Lender; | |
1.1.92.9 | cash, marketable securities or bonds deposited by an Obligor in connection with bids or tenders, deposited with a court as security for costs in any litigation, deposited to secure workers’ compensation or unemployment insurance liabilities, or deposited to secure the performance of statutory obligations of an Obligor; | |
1.1.92.10 | Liens securing the performance of statutory obligations, surety or performance bonds and other obligations of similar nature incurred in the ordinary course of business of an Obligor, provided that those Liens are subordinate to the Security Interests created by the Security Documents; | |
1.1.92.11 | Purchase Money Security securing PMSI Obligations that constitute Permitted Debt; | |
1.1.92.12 | any Operating Leases of an Obligor under which the aggregate Operating Lease Obligations outstanding at any time under leases of personal Property do not exceed $2,000,000, and the aggregate Operating Lease Obligations outstanding at any time under any Real Property Leases of an Obligor constituting Operating Leases do not exceed $10,000,000; | |
1.1.92.13 | Security Interests securing Debt permitted pursuant section 1.1.87.5, which may permit the lender providing such Debt to have a first priority security interest on cash and accounts receivable of the Obligors, subject to an interecreditor arrangement satisfactory to the Lender, acting reasonably; | |
1.1.92.14 | other than as set out in Section 1.1.92.13, any Lien securing Permitted Debt; and | |
1.1.92.15 | the Liens set forth in Schedule 8.1.19 | |
1.1.92.16 | the Security Interests created by the Security Documents. |
1.1.93 | “Person” will be broadly interpreted and includes: |
1.1.93.1 | a natural person, whether acting in his or her own capacity, or in his or her capacity as executor, administrator, estate trustee, trustee or personal or legal representative, and the heirs, executors, administrators, estate trustees, trustees or other personal or legal representatives of a natural person; |
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1.1.93.2 | a corporation or a company of any kind, a partnership of any kind, a sole proprietorship, a trust, a joint venture, an association, an unincorporated association, an unincorporated syndicate, an unincorporated organization or any other association, organization or entity of any kind; and | |
1.1.93.3 | a Governmental Authority. |
1.1.94 | “PMSI Obligation” means: |
1.1.94.1 | the unpaid purchase price of any tangible Property purchased or acquired by an Obligor; | |
1.1.94.2 | any indebtedness incurred or assumed by an Obligor to enable it to acquire rights in any tangible Property, to the extent that the indebtedness is applied to acquire those rights; and | |
1.1.94.3 | any Capital Lease Obligations of an Obligor, |
provided that before entering into the agreement creating the obligations described in Sections 1.1.94.1, 1.1.94.2 and 1.1.94.3, no Obligor or any Related Party to an Obligor owned or had any interest in that Property or any portion of it; and
1.1.94.4 | any extensions, renewals, refinancings or replacements, whether from the same or another lender or lessor, in whole or in part, of any indebtedness or lease obligations described in Sections 1.1.94.1, 1.1.94.2 and 1.1.94.3, provided that the principal amount of indebtedness of an Obligor secured by, or of the Capital Lease Obligations of an Obligor after, any extension, renewal, refinancing or replacement does not exceed the principal amount outstanding immediately before the extension, renewal, refinancing or replacement, and the Liens granted in respect of that indebtedness or those Capital Lease Obligations will be limited to all or a part of the Property or assets which secured that indebtedness or those Capital Lease Obligations immediately prior to that extension, renewal, refinancing or replacement. |
1.1.95 | “Priority Claims” means, at the time of any determination of them, the aggregate amount due and payable at that time which is subject to or secured by one or more statutory Liens created or arising, without any necessity for the consent or agreement of any Obligor, by operation of Applicable Law that rank or are capable of ranking in priority to or pari passu with the Security Interests created by the Security Documents, including all claims that are due and payable or past due relating to employee salaries and wages, vacation pay, employee withholdings, pension plan contributions, workers’ compensation assessment, Taxes (including municipal Taxes) and claims by public utilities. |
1.1.96 | “Property” means present and after-acquired property, assets, undertakings and privileges, whether real or personal, tangible or intangible, moveable or immoveable, and all interests in them. |
1.1.97 | “Purchase Money Security” means any Security Interest created or assumed by an Obligor to secure PMSI Obligations that extends only to the Property that the Obligor acquired or leased in incurring or assuming those PMSI Obligations, and the identifiable or traceable proceeds of that Security Interest. |
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1.1.98 | “Real Property” means all present and future real property and all interests in it, whether held in fee simple or any lesser estate, including all Real Property Leases, mortgages, easements, rights-of-way, licences, privileges, benefits, and rights related to or connected with that real property. |
1.1.99 | “Real Property Leases” means all leases, agreements to lease or sub-leases relating to any Real Property, including all easements, rights-of-way, licences, privileges, benefits, and rights related to or connected with that Real Property, and all present and future licences under which the licencee is given the right to use or occupy any Real Property, all as amended, extended or renewed. |
1.1.100 | “Receivable” means a trade account receivable of or owned by an Obligor, and all related instruments and documents. |
1.1.101 | “Reference Period” means, with respect to any date of determination, the most recent four (4) consecutive Fiscal Quarter period then ended or most recently ended for which financial statements have been made available to the Lender; |
1.1.102 | “Related Parties” means, with respect to any Person, that Person’s Affiliates and the directors, officers, employees, agents and advisors of that Person and of that Person’s Affiliates, and “Related Party” means any one of them. |
1.1.103 | “Release” includes deposit, leak, emit, add, spray, inject, inoculate, abandon, spill, seep, pour, empty, throw, dump, place and exhaust, and when used as a noun has a corresponding meaning. |
1.1.104 | “Risk Management Transaction” means any foreign exchange or interest rate risk management transaction, commodity swap, option, cap, collar, floor or similar arrangement or other risk management arrangement to which any Person is a party. |
1.1.105 | “Security Documents” is defined in Section 7.1.1. |
1.1.106 | “Security Interest” means any mortgage, charge, pledge, assignment, hypothecation, title retention, finance lease or security interest, including any trust obligations, creating in favour of any creditor a right in respect of any Property. |
1.1.107 | “Seller Debt” is defined in Section 2.2.1. |
1.1.108 | “Software Escrow Agreement” is defined in Section 7.1.1.4. |
1.1.109 | “Subsidiary” means, with respect to any Person (in this Section 1.1.109 the “Parent”), at any time, any corporation, limited liability company, trust, partnership, limited partnership, association or other entity the accounts of which would be consolidated with those of the Parent in the Parent’s consolidated Financial Statements if those Financial Statements were prepared in accordance with IFRS as of that date, as well as any other corporation, limited liability company, trust, partnership, limited partnership, association or other entity: |
1.1.109.1 | of which Equity Securities representing more than 50% of the equity or economic interest in them or more than 50% of the ordinary voting power, or, in the case of a partnership, more than 50% of the general or limited partnership interests or the economic interest in them are, as at that time, owned, Controlled or held by any combination of the Parent and one or more Subsidiaries of the Parent; or | |
1.1.109.2 | that is, as at that time, otherwise Controlled by any combination of the Parent and one or more Subsidiaries of the Parent. |
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1.1.110 | “Taxes” means all present and future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable to them. |
1.1.111 | “Three Party Escrow Agreement” is defined in Section 7.1.1.5; |
1.1.112 | “Total Leverage Ratio” means, at any time, without duplication and on a Consolidated Basis, the ratio of: |
1.1.112.1 | the aggregate amount of Debt of the Borrower; to | |
1.1.112.2 | Adjusted EBITDA of the Borrower, |
in each c]ase, for the applicable Reference Period of the Borrower.
1.1.113 | “U.S. Dollars” or “U.S.$” each means currency of the United States of America which, as at the time of payment or determination, is legal tender in the United States of America for the payment or determination of public or private debts. |
1.1.114 | “Wholly-Owned Subsidiary” means any Subsidiary of a Person in which that Person owns, directly or indirectly, 100% of the issued and outstanding Equity Securities. |
1.2 | Certain Rules of Interpretation |
1.2.1 | In this Agreement, words signifying the singular number include the plural and vice versa, and words signifying gender include all genders. Every use of the words “including” or “includes” in this Agreement is to be construed as meaning “including, without limitation” or “includes, without limitation”, respectively. |
1.2.2 | The division of this Agreement into Articles and Sections, the insertion of headings and the inclusion of a table of contents are for convenience of reference only and do not affect the construction or interpretation of this Agreement. |
1.2.3 | References in this Agreement to an Article, Section, Schedule or Exhibit are to be construed as references to an Article, Section, Schedule or Exhibit of or to this Agreement unless otherwise specified. |
1.2.4 | Unless otherwise specified in this Agreement: |
1.2.4.1 | time periods within which or following which any calculation or payment is to be made, or action is to be taken, will be calculated by excluding the day on which the period begins and including the day on which the period ends; and | |
1.2.4.2 | if the last day of a time period is not a Business Day, the time period will end on the next Business Day. |
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1.2.5 | Unless otherwise specified, any reference in this Agreement to any statute includes all regulations and subordinate legislation made under or in connection with that statute at any time, and is to be construed as a reference to that statute as amended, modified, restated, supplemented, extended, re-enacted, replaced or superseded at any time. |
1.2.6 | References to an amount of money in this Agreement will, unless otherwise expressly stated, be to that amount in United States Dollars. |
1.3 | Governing Law |
This Agreement is governed by, and is to be construed and interpreted in accordance with, the laws of the Province of Ontario and the laws of Canada applicable therein.
1.4 | Entire Agreement |
This Agreement, together with, any other agreement or agreements and other documents (including other Loan Documents) to be delivered under this Agreement, constitutes the entire agreement between the Parties pertaining to the subject matter of this Agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties, and there are no representations, warranties or other agreements between the Parties in connection with the subject matter of this Agreement except as specifically set out in this Agreement or in any of the other agreements and documents (including other Loan Documents) delivered under this Agreement. No Party has been induced to enter into this Agreement in reliance on, and there will be no liability assessed, either in tort or contract, with respect to, any warranty, representation, opinion, advice or assertion of fact, except to the extent it has been reduced to writing and included as a term in this Agreement or in any of the other agreements and documents (including other Loan Documents) delivered under this Agreement.
1.5 | Business Day |
Whenever any calculation or payment to be made or action to be taken under this Agreement is required to be made or taken on a day other than a Business Day, then unless otherwise specified in this Agreement, the calculation or payment is to be made, or action is to be taken, on the next Business Day.
1.6 | Conflicts |
In the event of a conflict in or between the provisions of this Agreement and the provisions of any other Loan Document, then, despite anything contained in that other Loan Document, the provisions of this Agreement will prevail and those provisions of that other Loan Document will be deemed to be amended to the extent necessary to eliminate the conflict. If any act or omission is expressly prohibited under a Loan Document, other than this Agreement, but this Agreement does not expressly permit that act or omission, or if any act is expressly required to be performed under a Loan Document, other than this Agreement, but this Agreement does not expressly relieve the applicable Obligor from that performance, that circumstance will not constitute a conflict in or between the provisions of this Agreement and the provisions of that other Loan Document.
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1.7 | Guaranteed Amounts |
In this Agreement, a Guarantee will be deemed to be in an amount equal to the amount of the Debt relating to which the Guarantee is given, unless the Guarantee is limited to a determinable amount, in which case the amount of the Guarantee will be deemed to be the lesser of the amount of the Debt relating to which the Guarantee is given and that determinable amount.
1.8 | Accounting Changes |
If any Accounting Changes occur and such changes result in a material change in the calculation of the financial covenants, standards or terms used in this Agreement or any other Loan Document, the Borrower and the Lender agree to enter into negotiations in order to amend such provisions of this Agreement or such Loan Document, as applicable, so as to equitably reflect such Accounting Changes with the desired result that the criteria for evaluating the Borrower’s financial condition shall be the same after such accounting changes as if such accounting changes had not been made.
If the borrower and the Lender agree upon the required amendments, then after appropriate amendments have been executed and the underlying Accounting Changes with respect thereto has been implemented, any reference to IFRS contained in this Agreement or in any other Loan Document shall, only to the extent of such Accounting Changes, refer to IFRS, consistently applied after giving effect to the implementation of such Accounting Changes.
If the Borrower and the Lender cannot agree upon the required amendments within thirty (30) days following the date of implementation of any Accounting Change, then all calculations of financial covenants and other standards and terms in this Agreement and the other Loan Documents shall continue to be prepared, delivered and made without regard to the underlying Accounting Change. In such case, Borrower shall, in connection with the delivery of any financial statements under this agreement, provide a management prepared reconciliation of the financial covenants to such financial statements in light of such Accounting Changes.
1.9 | Schedules and Exhibits |
The following is a list of Schedules and Exhibits:
Schedules | Subject Matter | |
1.1.87.2 | Permitted Debt | |
1.1.91.4 | Investments on Closing Date | |
8.1.6 | Litigation | |
8.1.8 | Organizational Structure | |
8.1.9 | Equity Securities | |
8.1.10.2 | Taxes | |
8.1.11.1 | Owned and Leased Real Property | |
8.1.11.2 | Operating Leases and Capital Leases | |
8.1.15 | Environmental Disclosure | |
8.1.17 | Intellectual Property Rights | |
8.1.18 | Software | |
8.1.19 | Permitted Liens |
Exhibits | Subject Matter | |
7.1.1.4 | Code Escrow Agreement | |
7.1.1.5 | Three-Party Escrow Service Agreement | |
9.1.1.4 | Compliance Certificate |
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Article
2
CREDIT FACILITy
2.1 | Facility |
2.1.1 | Subject to the terms and conditions of this Agreement, the Lender establishes in favour of the Borrower a non-revolving credit facility as described in this Section 2.1 (the “Facility”) for the period from and after the Closing Date until the Maturity Date, and agrees to make Loans available to the Borrower under the Facility, provided that the sum of all Loans outstanding under the Facility will not at any time exceed US$14,500,000 (subject to Section 2.1.3, the “Maximum Amount”); |
2.1.2 | Within the limits and restrictions set out in Section 2.1.1, the principal amount outstanding to the Lender under the Facility may not revolve but the Borrower may repay Loans in full or in accordance with the terms hereof without penalty. |
2.1.3 | Subject to the consent of the Lender, at its sole discretion, if the Borrower requires further loans for working capital or general operating requirements, it may request from time to time on not less than thirty (30) Business Days written notice, that the Maximum Amount be increased by minimum increments of US$500,000 up to an aggregate amount of US$1,500,000. Such requests once delivered shall be irrevocable. No such request may be delivered later than ninety (90) days prior the Maturity Date. If the Lender agrees, in its sole discretion, to an increase in the Maximum Amount, it shall so advise the Borrower in writing and the Borrower and the Lender shall agree on the date or dates on which further Loans shall be made (which shall be in the full amount of the agreed upon increase to the Maximum Amount). If the Lender does not advise the Borrower in writing within fifteen (15) Business Days that it has agreed to an increase in the Maximum Amount, the Lender shall be deemed to have refused such increase and the Maximum Amount shall remain unchanged. If any Event of Default or Default shall have occurred, no increase to the Maximum Amount shall be available. For certainty, no amounts repaid may be reborrowed pursuant to this Section. |
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2.2 | Purpose |
The Borrower will use the Loans obtained by it under the Facility as follows:
2.2.1 | the initial Loan will be used to repay in full the indebtedness, liabilities and obligations of the Borrower to the sellers in connection with the Borrower’s purchase of Frankly Media LLC (other than $1,000,000 in principal Debt owing to the Lender in respect thereof) (“Seller Debt”) on the Closing Date; and |
2.2.2 | each subsequent Loan will be used by the Borrower solely to finance the working capital and other general operating requirements of the Obligors. |
2.3 | Drawdowns—Notices and Limitations |
2.3.1 | The first Loan hereunder shall be in the Maximum Amount as of the Closing Date and shall be made on the day after the Closing Date; |
2.3.2 | No Loan may occur if a Default or Event of Default is subsisting, or all of the conditions precedent in Article 6 have not been satisfied and all other terms and conditions of this Agreement have been met. |
2.4 | Lender’s Records |
The Lender will maintain records of:
2.4.1 | the Borrower’s Obligations for outstanding Loans and accrued interest on them, fees relating to them, and other amounts payable under this Agreement; |
2.4.2 | the amounts paid at any time by the Borrower to the Lender under this Agreement for Loans, interest, fees and other amounts. |
The Borrower agrees that all records kept by the Lender will constitute prima facie evidence of the matters referred to in this Section, but the failure of the Lender to make any entry in its records will not limit or otherwise affect the obligations of the Borrower under this Agreement or with respect to any Loans, Loans, interest, fees or other amounts owed by it to the Lender.
Article
3
CALCULATION OF INTEREST, FEES AND EXPENSES
3.1 | Calculation and Payment of Interest |
3.1.1 | The Borrower 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 in a year of 365 or 366 days, as applicable, and will be compounded and payable monthly in arrears on each Interest Payment Date. |
To the maximum extent permitted by Applicable Law, the Borrower will pay interest on all overdue amounts owing by the Borrower under this Agreement, 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 the Lender at a rate per annum of 12%.
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3.2 | Expenses |
The Borrower will pay to the Lender on the Closing Date, or reimburse the Lender for, the following reasonable out-of-pocket expenses, including reasonable legal fees and disbursements (on a solicitor and its own client basis):
3.2.1 | the expenses of the Lender incurred in negotiating, preparing, registering and executing the Loan Documents; and |
3.2.2 | the expenses of the Lender incurred in enforcing the Loan Documents, including the costs of legal counsel acting on behalf of the Lender. |
3.3 | General Provisions Regarding Interest |
3.3.1 | Each determination by the Lender of the amount of interest, fees or other amounts payable by the Borrower to the Lender under this Agreement will be prima facie evidence of the accuracy of the determination. |
3.3.2 | Except as otherwise provided in this Agreement, all interest, fees and other amounts payable by the Borrower under this Agreement will accrue daily, be calculated as described in this Agreement, and be payable both before and after demand, maturity, default and judgment. |
3.3.3 | To the full extent permitted by Applicable Law, the covenant of the Borrower to pay interest at the rates provided in this Agreement will not merge in any judgment relating to any obligation of the Borrower to the Lender. |
3.3.4 | For the purposes of the Interest Act, R.S.C. 1985, c. I-15: |
3.3.4.1 | the principle of deemed reinvestment of interest will not apply to any calculation or determination of interest under this Agreement; | |
3.3.4.2 | the rates of interest specified in this Agreement are intended to be nominal rates and not effective rates; and | |
3.3.4.3 | unless otherwise stated, each rate of interest specified in this Agreement as an interest rate “per annum” or a similar expression, is to be calculated on the basis of a calendar year of 365 or 366 days, as applicable, and the annual rate of interest which is equivalent to that interest rate will be that rate multiplied by a fraction, the numerator of which is the total number of days in each year and the denominator of which is 365 or 366 days, as applicable. If the amount of any interest is determined or expressed on the basis of a period of less than a year of 365 or 366 days, as applicable, the equivalent annual rate is equal to the rate so determined or expressed, divided by the number of days in the period, and multiplied by the actual number of days in that calendar year. |
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3.4 | Maximum Return |
3.4.1 | In no event will any interest, fees or other amounts payable under this Agreement exceed the maximum rate permitted by Applicable Law. If any provisions of this Agreement would require the Borrower to pay any interest or make any other payment that is construed by a court of competent jurisdiction to be interest in an amount or calculated at a rate that would be prohibited by Applicable Law or would result in receipt by the Lender of interest at a criminal rate (as those terms are construed under the Criminal Code), then despite those provisions, that amount or rate will be deemed to have been reduced to the maximum amount or rate recoverable under Applicable Law, as if the Parties had agreed to that amount or rate by contract. That reduction will be effected, to the extent necessary: |
3.4.1.1 | firstly, by reducing the amount or rate of interest otherwise required to be paid under Article 3 of this Agreement; and | |
3.4.1.2 | secondly, by reducing any fees, commissions, premiums and other amounts that would constitute interest for the purposes of Section 347 of the Criminal Code. |
3.4.2 | If, despite the provisions of this Section 3.4 and after giving effect to all reductions under it, the Lender has received an amount or rate in excess of the maximum permitted by the Criminal Code, then that excess will be applied by the Lender to reduce the principal balance of the Borrower’s Obligations outstanding and not to the payment of interest, with any remaining portion being paid to subsequent secured creditors or to the applicable Obligors, as determined by Applicable Law. |
3.4.3 | Any amount or rate of interest referred to in this Section 3.4 will be determined in accordance with generally accepted actuarial practices and principles at an effective annual rate of interest over the term of this Agreement on the assumption that any charges, fees, expenses or other amounts that fall within the meaning of “interest” (as defined in the Criminal Code) will, if they relate to a specific period of time, be prorated over that period of time and otherwise be prorated over the term of this Agreement and, in the event of dispute, a certificate of a Fellow of the Canadian Institute of Actuaries appointed by the Lender will be conclusive for the purposes of that determination. |
Article
4
REDUCTION OF COMMITMENT AND REPAYMENT
4.1 | Optional Repayment of Loans under the Facility |
4.1.1 | The Borrower will have the right at any time on any Business Day (an “Optional Repayment Date”) to repay all, or a portion of, Loans outstanding under the Facility without premium, penalty or bonus on the following terms and conditions: |
4.1.1.1 | the Lender will have received an irrevocable written notice by 12:00 (noon) (Toronto time) not fewer than three Business Days before the Optional Repayment Date specifying the Loans will be repaid in full; | |
4.1.1.2 | on the applicable Optional Repayment Date, the Borrower will repay the outstanding Loans in accordance with the notice given under Section 4.1.1.1 together with all interest, fees and other amounts accrued and unpaid under this Agreement, and any amounts payable under Section 5.1. |
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4.2 | Repayment of Facility |
Subject to the terms and conditions of this Agreement, all Loans outstanding under the Facility, together with all accrued interest, fees and other amounts unpaid relating to those Loans, will be due and payable in full on the Maturity Date, and the Facility will be automatically terminated at that time. | |
4.3 | Other Mandatory Repayments |
4.3.1 | Subject to the other subsections of this Section 4.3, if at any time the sum of all Loans outstanding under the Facility exceeds the Maximum Amount the Borrower will immediately repay to the Lender an amount of the applicable Loans outstanding at least equal to that excess. |
4.3.2 | The Borrower shall make all of the following mandatory repayments: |
4.3.2.1 | a mandatory repayment of US $2,000,000 prior to August 31, 2019; | |
4.3.2.2 | commencing on November 30, 2019 and on the last day of the month of each three month period thereafter, an amount of US$687,500 per three month period; | |
4.3.2.3 | proceeds (less actual costs paid and income taxes) on any asset sales or issuances of debt or equity (subject to certain priority of payment in favour of Silicon Valley Bank or Bridge Bank only in respect of accounts receivable of the Obligors); | |
4.3.2.4 | upon a successful listing of Borrower’s shares on the NASDAQ with a capital raise of between US$8,000,000 to $US11,000,000 mandatory repayment in the amount of US$2,000,000, which will be applied toward fulfilling the repayment obligation required by Section 4.3.2.1 by August 31, 2019 if completed by March 31, 2017; | |
4.3.2.5 | upon a successful listing of Borrower’s shares on the NASDAQ with a capital raise of more than US$12,000,000, a mandatory repayment in the amount of US$3,000,000 which will be applied toward fulfilling the $2,000,000 repayment obligation required by Section 4.3.2.1 by August 31, 2019 if completed by March 31, 2017 and any amounts raised in excess of US$2,000,000 will be applied pro rata to repayment obligations required by Section 4.3.2.2 commencing November 30, 2019; and | |
4.3.2.6 | commencing on the financial year ending December 31, 2017, and each financial year ending after December 31, 2017, 100% of the Current Year Excess Cash Flow Amount in excess of $2,000,000 shall be paid to the Lender as a mandatory repayment amount no later than May 1 of the following year until a Total Leverage Ratio of not more than 3.00:1.00 has been met for such Fiscal Year, at which point 50% of the Current Year Excess Cash Amount in excess of $2,000,000 shall be paid to the Lender as mandatory repayment amounts. Such Excess Cash Flow payments shall be applied pro rata to reduce other mandatory payments due hereunder. |
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4.3.3 | Prepayments under this Section 4.3 of Loans outstanding will be applied by the Lender: |
4.3.3.1 | firstly, to repay principal of Loans outstanding under the Facility; and | |
4.3.3.2 | secondly, to repay any other Outstanding Obligations. |
4.3.4 | The payments set out in this Section 4.3 are in addition to all other payments of principal, interest, fees, expenses or other amounts required under this Agreement. |
4.4 | Payments—General |
4.4.1 | Except as otherwise provided in this Agreement, all payments of principal, interest, fees, expenses and other amounts payable under the Borrower’s Obligations and owing at any time by the Borrower to the Lender under this Agreement will be made in immediately available, freely transferable same day funds in the currency in which the Loans are outstanding, at the Lender’s address for notice provided herein. All payments received after 12:00 (noon) (Toronto time) will be deemed to be received on the next Business Day. |
4.4.2 | The Borrower will make all payments required under this Agreement, whether of principal, interest, fees, expenses or other amounts payable under the Borrower’s Obligations or otherwise owing by the Borrower to the Lender: |
4.4.2.1 | in accordance with the terms of this Agreement; and | |
4.4.2.2 | without regard to any defence, counterclaim, deduction or right of set off available to the Borrower. |
4.4.3 | Except as otherwise provided in this Agreement, if any payment required under this Agreement becomes due and payable on a day that is not a Business Day, that payment will be made on the next following Business Day, and any extension of time in those circumstances will be included in computing interest and any other amounts payable under this Agreement relating to that payment. |
Article
5
INDEMNITIES
5.1 | General Indemnity |
The Borrower will indemnify and save harmless the Lender and its Affiliates, officers, directors, employees, agents and attorneys (in this Article 5, each an “Indemnified Party”), immediately on demand by the Lender, from and against all Losses that any Indemnified Party may sustain or incur as a result of or in connection with the Facility or the Loan Documents, including as a result of or in connection with:
5.1.1 | any cost or expense incurred by reason of the liquidation or redeployment in whole or in part of deposits or other funds required to fund or maintain any Loan as a result of the Borrower’s failure to complete a Loan or to make any payment, prepayment or repayment on the date required under this Agreement or specified by the Lender in any notice given under this Agreement; |
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5.1.2 | the Borrower’s failure to pay principal, interest, fees, expenses or other amounts due under this Agreement on the due date after the expiration of any applicable grace periods; |
5.1.3 | the acceleration under Article 10 of this Agreement of any of the Facility or of the Loans or any other amounts owing under this Agreement or any other Loan Documents; |
5.1.4 | the Borrower’s failure to give any notice required to be given by it to the Lender under this Agreement; |
5.1.5 | any inaccuracy in the representations and warranties in Article 8 of this Agreement or any other representation, warranty or statement of any Obligor in any other Loan Documents; |
5.1.6 | any failure of any Obligor to observe or comply with the covenants, negative covenants or other agreements applicable to it under the Loan Documents; or |
5.1.7 | the occurrence of any Default or Event of Default. |
5.2 | Environmental Indemnity |
Without limiting the indemnity in Section 5.1 above, the Borrower will indemnify and save harmless each Indemnified Party, immediately on demand by the Lender on the terms set out in this Section 5.2, from and against all Environmental Liabilities that any Indemnified Party may sustain or incur as a result of or in connection with the Facility or the Loan Documents, including as a result of or in connection with:
5.2.1 | realization on the Security Documents; |
5.2.2 | an Indemnified Party being a lender to the Borrower or a successor to or assignee of any right or interest of any Obligor; |
5.2.3 | any order, investigation or action by any Governmental Authority relating to any Obligor or its Business or the Property; |
5.2.4 | an Indemnified Party being or being deemed to be a mortgagee in possession of the Property of any Obligor or a successor or successor-in-interest to any Obligor as a result of taking possession of all or any of the Property of an Obligor, whether by foreclosure, foreclosure deed, deed in lieu of foreclosure or by any other means; or |
5.2.5 | the past, present or future operations of any Obligor or any predecessor in interest to any Obligor, or the past, present or future condition of any part of any Property owned, operated, leased or occupied by any Obligor or any predecessor in interest to any Obligor. |
Article
6
CONDITIONS PRECEDENT
6.1 | Conditions Precedent to the Initial Drawdown |
The obligation of the Lender to make available the initial Loans is subject to the Borrower satisfying each of the conditions precedent set out in this Section 6.1 on or before the Closing Date, to the satisfaction of the Lender and its counsel.
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6.1.1 | Documents. The Lender will have received, in form and substance satisfactory to it, duly executed and delivered originals of the following: |
6.1.1.1 | this Agreement; | |
6.1.1.2 | the Security Documents; | |
6.1.1.3 | a certificate dated as of the Closing Date from a Responsible Officer of each Obligor: |
6.1.1.3.1 | attaching true copies of its Constating Documents; | |
6.1.1.3.2 | attaching true copies of resolutions dated as of the Closing Date of its directors or other managing body authorizing the entering into, execution, delivery and performance of the Loan Documents to which it is a party and setting out the manner in which those Loan Documents are to be executed and delivered; | |
6.1.1.3.3 | setting out specimen signatures of one or more Responsible Officers or other authorized signatories who will sign on its behalf the Loan Documents to which it is a party; | |
6.1.1.3.4 | certifying any other matters as required by the Lender, acting reasonably, including the matters referred to in Sections 6.2.1, 6.2.2, and 6.2.3; |
6.1.1.4 | a Compliance Certificate as at the Closing Date; | |
6.1.1.5 | certificates of status relating to each Obligor that is a corporation, and partnership searches relating to each Obligor that is a partnership; | |
6.1.1.6 | an opinion of counsel for the Obligors in each jurisdiction specified by the Lender, acting reasonably, addressed to the Lender and its counsel and dated the Closing Date, with respect to the existence, powers and capacity of each Obligor, the authorization, execution and delivery of the Loan Documents, the legality, validity and enforceability of the Loan Documents, regulatory compliance, the validity of the Security Interests created by the Security Documents, the registration of the Security Documents and perfection of the Security Interests created by them, the absence of conflict and any other matters as the Lender requires, in form and substance satisfactory to the Lender, acting reasonably; | |
6.1.1.7 | all other documents and instruments that are customary for transactions of this type or as may be reasonably requested by the Lender; | |
6.1.1.8 | simultaneous with the initial Loan, all other creditors to the Obligors (other than ordinary course of business trade creditors) have been repaid in full and their security terminated and their security interests discharged (or an undertaking to discharge satisfactory to the Lender has been received by the Lender); |
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6.1.1.9 | Lender’s shall have received a warrant certificate and other warrant documentation entitling the Lender to acquire 14,809,720 common shares of the Borrower at any time within 5 years following the Closing Date with an exercise price of 0.50CAD; all on terms and conditions satisfactory to the Lender and confirmation of listing approval from the TSXV in respect of the common shares issuable upon exercise of such warrants from time to time; | |
6.1.1.10 | the Borrower’s financial projections which, for certainty, shall include a balance sheet, income statement and statement of cash flows, along with all pertinent underlying assumptions, prepared on a monthly pro-forma basis, for the fiscal years ended 2016 and 2017, with demonstrated liquidity to fund ongoing business requirements of the Obligors satisfactory to the Lender; | |
6.1.1.11 | the Obligors’ operational plan; | |
6.1.1.12 | the execution and delivery of appropriate and duly authorized legal documentation as required by the Lender (including, without limitation, the Loan Agreement and all applicable security documents, legal opinions (including supporting resolutions and certificates), compliance certificates, original share certificates and powers of attorney, landlord, source code escrow agreements, PPSA and UCC estoppel letters, inter-creditor agreements with third party debt holders and subordination agreements, if applicable), which must be satisfactory in form and substance to Borrower and Lender and their respective counsels; | |
6.1.1.13 | simultaneous with the closing, the Lender’s satisfaction that the assets of the Obligors are free and clear of all liens and security interests (other than the Permitted Liens and as may be permitted by the Lender) and that the security interests granted to the Lender have been perfected and all security filings in favour of the Lender have been properly registered and completed; | |
6.1.1.14 | the corporate structure, ownership structure, financial condition and capital structure of the Obligors and their respective subsidiaries; | |
6.1.1.15 | all material agreements of the Borrower and the Guarantors (as determined by the Lender); | |
6.1.1.16 | Lender’s satisfaction that there has occurred no Material Adverse Change; | |
6.1.1.17 | the Obligors shall not have incurred or assumed any Debt on or prior to the Closing Date (other than to the Lender, as contemplated by this Loan Agreement and as otherwise agreed in writing by the Lender); | |
6.1.1.18 | simultaneous with the closing, US$1,000,000 of the existing US$4,000,000 principal amount of the loans owing by the Borrower to the Lender shall be repaid by the issuance of US$1,000,000 of common stock in the Borrower, based on the Market Price of such stock and subject to documentation satisfactory to the Lender; and | |
6.1.1.19 | irrevocable direction to the Lender, in form and content satisfactory to the Lender, that the proceeds of the initial Loan is to repay in full on the Closing Date the Seller Debt. |
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6.1.2 | Further Conditions. The Borrower will have satisfied as at the Closing Date the conditions precedent set out in Sections 6.2.1 to 6.2.5 inclusive. |
6.1.3 | Registration of Security. The Security Documents or notices of them will have been duly registered, recorded or filed in all places and jurisdictions that the Lender and its counsel deem appropriate, all steps will have been taken to validly create, perfect, protect and preserve the Security Interests created by the Security Documents and to provide the Facility, the Outstanding Obligations and those Security Interests with the priority contemplated by this Agreement, and the Lender will have received evidence satisfactory to the Lender and its counsel of the completion of those registrations, recordings and filings and the full payment of all necessary registration, recording and filing fees for them. |
6.1.4 | Fees. The Borrower will have paid to the Lender all fees and expenses that are due and payable by the Borrower on or before the Closing Date under the Loan Documents. |
6.1.5 | Insurance. The Lender will have received a certificate from each insurance broker of the Obligors with respect to the Insurance, in scope and substance satisfactory to the Lender, dated not more than 30 days before the Closing Date, confirming that the Obligors have the Insurance required by Section 9.1.16. |
6.1.6 | Due Diligence. The Lender will have been satisfied with the results of its financial, business and legal due diligence with respect to the Obligors, and will have received and be satisfied with the results of all Property, litigation, judgment, bankruptcy, execution and other searches conducted or caused to be conducted by the Lender and its counsel with respect to the Obligors in all jurisdictions that the Lender and its counsel deem appropriate. |
6.1.7 | Regulatory Approval, Consents and Waivers. The Lender will be satisfied, acting reasonably, that all material Authorizations required in connection with the Loan Documents have been obtained and are in full force and effect, and that all consents and waivers from other Persons required to authorize, execute, deliver and perform the Loan Documents have been obtained, to the extent that completion of the transactions contemplated by the Loan Documents would otherwise be restricted or prohibited under the terms of any Material Contract to which any Obligor is a party, or by which it is bound, including any consents to the Security Interests created by the Security Documents from landlords under any Real Property Leases of any Obligor, and any other consents and waivers as may be required by the Lender. |
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6.2 | Conditions Precedent to all Loans |
The obligation of the Lender to make available or permit any Loans is subject to the Borrower satisfying each of the conditions precedent set out in this Section 6.2 as at each date of advance of such Loan to the satisfaction of the Lender and its counsel:
6.2.1 | the representations and warranties contained in Section 8.1 will be true and correct on each date of such Loan with the same effect as if made as of that date; |
6.2.2 | no Material Adverse Change will have occurred and be continuing, and no Material Adverse Change will result from any Loan; |
6.2.3 | no Default or Event of Default will have occurred and be continuing, and no Default or Event of Default will result from the making or permitting of an Loan; |
6.2.4 | the Lender will not have received a notice from any Person of any Priority Claims or of any other claims the effect of which under Applicable Law would be to make the Lender liable to that Person for the amount to be advanced, if that amount was advanced, including third party demands made by Canada Revenue Agency or the Internal Revenue Service and any notice of seizure of bank accounts or the credit balance in them from any Governmental Authority; and |
6.2.5 | if any Obligor or Subsidiary of an Obligor is required to provide Security Documents to the Lender under Sections 7.1 or 9.1.17, those Security Documents will have been executed and delivered to the Lender, and those Security Documents or notices of them will have been duly registered, recorded or filed in all places and jurisdictions that the Lender or its counsel deem appropriate, all steps will have been taken to validly create, perfect, protect and preserve the Security Interests created by those Security Documents and to provide the Facility, the Outstanding Obligations and those Security Interests with the priority contemplated by this Agreement, and the Lender will have received evidence satisfactory to the Lender or its counsel of the completion of those registrations, recordings and filings and the full payment of all necessary registration, recording and filing fees for them. |
6.3 | Waiver of a Condition Precedent |
The conditions precedent set out in Sections 6.1 and 6.2 are for the sole benefit of the Lender and may be waived by the Lender, in whole or in part and with or without terms or conditions, relating to all or any portion of any Loan, without affecting the right of the Lender to require that those terms and conditions be satisfied in whole or in part relating to any other Loan.
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Article
7
SECURITY DOCUMENTS
7.1 Security Documents
7.1.1 | As general and continuing collateral security for the Outstanding Obligations for which they are liable, the Obligors will execute and deliver to and in favour of the Lender the following security documents and agreements to which they are a party, together with any relevant powers of attorney, registrations, filings and other supporting documents deemed necessary by the Lender and its counsel to perfect them or otherwise in respect of them (which, as confirmed, amended, extended, supplemented, restated or replaced at any time, together with any similar security documents and agreements provided under Sections 7.1 or 9.1.17, are collectively, the “Security Documents”), all in form and substance satisfactory to the Lender, acting reasonably: |
7.1.1.1 | a general security agreement granted by each Obligor creating a first-ranking Security Interest over all of its present and after-acquired personal Property other than cash and present and future accounts receivable, which shall be subject to a prior ranking change in favour of Silicon Valley Bank or Bridge Bank only; | |
7.1.1.2 | an investment property pledge agreement granted by each Obligor creating a first-ranking Security Interest in all present and after-acquired Equity Securities owned by that Obligor in its Subsidiaries; | |
7.1.1.3 | an Intellectual Property security agreement granted by each Obligor creating a first-ranking Security Interest in all of its present and after-acquired Intellectual Property Rights; | |
7.1.1.4 | a code escrow agreement between Lender and Borrower in the form attached as Exhibit 7.1.1.4 (the “Software Escrow Agreement”); | |
7.1.1.5 | a three party escrow service agreement between Lender, Frankly Media LLC and Iron Mountain Intellectual Property Management, Inc. in the form attached as Exhibit 7.1.1.5 (the “Three Party Escrow Agreement”). | |
7.1.1.6 | an unlimited Guarantee by each Guarantor guaranteeing the payment and performance of the Borrower’s Obligations and including any additional representations, warranties and covenants required by the Lender; and | |
7.1.1.7 | an insurance transfer and consent, assigning the Insurance to the Lender as mortgagee, first loss payee and additional named insured as required by this Agreement; | |
7.1.1.8 | undertaking to provide landlord waivers in form and substance satisfactory to the Lender from each Obligor’s landlords, on a best efforts basis; | |
7.1.1.9 | If at any time after the Closing Date an Obligor creates or acquires a Subsidiary, or an Obligor becomes the holder of any Equity Securities of a Subsidiary of it, the applicable Obligor will: |
7.1.1.9.1 | immediately provide the Lender with written notice of those circumstances, including all relevant details; | ||
7.1.1.9.2 | promptly execute and deliver to the Lender, as general and continuing collateral security for the Outstanding Obligations for which it is liable, a Security Document substantially in the form described in Section 7.1.1.2 that creates a Security Interest in all of the Equity Securities in the Subsidiary owned by that Obligor; and | ||
7.1.1.9.3 | cause that Subsidiary to promptly execute and deliver to the Lender, as general and continuing collateral security for the Outstanding Obligations for which it is liable, the Security Documents substantially in the form contemplated in Sections 7.1.1.1, 7.1.1.3, 7.1.1.6 and 7.1.1.7, | ||
and the Security Documents contemplated by Sections 7.1.1.9.2 and 7.1.1.9.3 will be accompanied by any relevant powers of attorney, registrations, filings and other supporting documents deemed necessary by the Lender and its counsel to perfect them or otherwise in respect of them, and by any resolutions, certificates, legal opinions and other related documents that are reasonably requested by the Lender and consistent with the relevant forms and types of them delivered on the Closing Date. |
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7.2 | Registration of Security Documents |
Each Obligor will cooperate, and cause each other Obligor to cooperate, fully with the Lender and its counsel to register, record or file the Security Documents or notice of them in all places where, in the opinion of counsel for the Lender, acting reasonably, registration, recording or filing is necessary or desirable in order to perfect, protect or preserve the Security Interests created by the Security Documents, and each Obligor will also cooperate, and cause each other Obligor to cooperate, with any amendments to or renewals of those registrations, recordings and filings, and will do, or cause to be done, all other things as, in the opinion of counsel for the Lender, acting reasonably, are necessary or desirable to maintain for the Lender the rights, benefits and priority of the Security Documents and related Security Interests.
7.3 | Dealing With Security Documents |
The Lender may grant extensions, take and give up any Security Documents or other security, accept compositions of, and grant releases and discharges of, any Security Documents or other security in whole or in part, and otherwise deal with any Obligor or any Loan Documents as the Lender may see fit, all without prejudice to the Outstanding Obligations or the rights, remedies, powers and recourses of the Lender under the Loan Documents. The taking of any Security Documents under this Agreement will not operate by way of merger of any of the Outstanding Obligations or any previously taken Security Documents.
7.4 | Permitted Liens |
The fact that:
7.4.1 | an Obligor is permitted to create, or allow to exist, any Permitted Lien; |
7.4.2 | any representation, warranty or covenant in this Agreement may make an exception for the existence of Permitted Liens; or |
7.4.3 | the Security Interests created by the Security Documents are stated to be subject to, or are not required to rank in priority to, Permitted Liens, |
will not in any manner, nor in any cause or proceeding, directly or indirectly, be taken to constitute a subordination of any Security Interests created by the Security Documents to any Permitted Lien or to any other Lien or other obligation of any kind, it being the intention of the Obligors and the Lender that all Security Interests created by the Security Documents will at all times, to the maximum extent permitted by Applicable Law (except as otherwise expressed herein), rank as first priority Security Interests in priority to Permitted Liens and all other Liens or obligations, except security interests granted to Silicon Valley Bank in Borrower’s cash and accounts receivable.
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Article
8
REPRESENTATIONS AND WARRANTIES
8.1 | Representations and Warranties |
Each Obligor, for itself and for each other Obligor, makes the representations and warranties set out in this Section 8.1 to the Lender.
8.1.1 | Status and Powers, Authorization, Execution and Delivery, Enforceability and No Conflict. |
8.1.1.1 | Each Obligor is duly organized or formed, validly existing and in good standing under the laws of the jurisdiction of its organization. | |
8.1.1.2 | Each Obligor has the necessary power, authority and legal right to make, execute, deliver and perform its obligations under each Loan Document to which it is a party, and to borrow or guarantee, as applicable, under this Agreement, and each Obligor has the necessary power and authority to own and lease its Property and carry on its Business as now conducted, and is qualified to do business and is in good standing in every jurisdiction in which its ownership, lease or operation of Property or the conduct of its Business requires it to be qualified. | |
8.1.1.3 | The execution, delivery and performance by each Obligor of each Loan Document to which it is a party has been duly authorized by all necessary corporate or other organizational and, if required, shareholder, action, and each Loan Document to which each Obligor is a party will, when delivered, have been duly executed and unconditionally delivered by it. | |
8.1.1.4 | Each Loan Document delivered on the Closing Date, and each other Loan Document to which each Obligor is a party, when executed and delivered by it, constitutes and will constitute a legal, valid and binding obligation of each Obligor, enforceable against it by the Lender in accordance with its terms, except as may be limited by general principles of equity or by Insolvency Law. | |
8.1.1.5 | The execution, delivery and performance of each Loan Document to which each Obligor is a party does not and will not: |
8.1.1.5.1 | violate any Applicable Law or any of its Constating Documents; | ||
8.1.1.5.2 | be in conflict with, result in a breach of or constitute, alone or with notice or lapse of time or both, a default under, or give rise to any right to require prepayment, repurchase or redemption under, any material contract or any other indenture, agreement or instrument binding upon any Obligor or its Property; or | ||
8.1.1.5.3 | result in the creation or imposition of any Lien on the Property of any Obligor, other than the Security Interests created by the Security Documents. |
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8.1.2 | Approvals. |
8.1.2.1 | No Authorization by, and no registration, filing or recording with, any Governmental Authority is or will be required in connection with the Loans under this Agreement or the making, execution, delivery or performance of the Loan Documents, except for: |
8.1.2.1.1 | registrations, filings or recordings necessary to perfect the Security Interests in the Property granted by the Obligors in favour of the Lender; and | ||
8.1.2.1.2 | those that have been made or obtained and are in full force and effect. |
8.1.2.2 | Each Obligor has obtained or made all material consents, approvals, authorizations, declarations, registrations, filings, recordings, notices and other actions with Persons other than Governmental Authorities required in connection with the creation, execution, delivery and performance by it of the Loan Documents to which it is a party. |
8.1.3 | Security Documents. Subject to Section 6.1.1.13, from and after the Closing Date and subject to any expressed exceptions in this Agreement, each Security Document granted by each Obligor will create in favour of the Lender valid, enforceable and perfected Security Interests in the Property of each Obligor ranking first in priority, subject only to any Permitted Liens having priority under Applicable Law and which have not been subordinated, provided that those Permitted Liens will not in any manner, or in any cause or proceeding, be taken to directly or indirectly constitute a subordination of any Security Interests created by the Security Documents to any Permitted Lien, it being the intention of the Parties that all Security Interests created by the Security Documents will at all times, to the maximum extent permitted by Applicable Law, rank as first priority Security Interests in priority to Permitted Liens and all other Liens or obligations. |
8.1.4 | Financial Statements. |
8.1.4.1 | The Financial Statements of the Borrower on a Consolidated Basis, audited and accompanied by the report of Collins Barrow, for the 2014 and 2015 Fiscal Years of the Borrower, copies of which have been provided to the Lender, are complete and correct and present fairly the consolidated financial position and results of the Borrower and the financial position and results of each Obligor, in all material respects as of that date and for that Fiscal Year. | |
8.1.4.2 | The Financial Statements referred to in Section 8.1.4.1 have been prepared in accordance with IFRS applied consistently throughout the periods involved, except as disclosed in them. |
8.1.5 | No Material Adverse Changes. Since December 31, 2015, no Material Adverse Change has occurred. |
8.1.6 | Litigation. Except as set out in Schedule 8.1.6, there are no actions, suits or proceedings, including any Tax-related matter, by or before any arbitrator or Governmental Authority pending against or threatened against or affecting any Obligor that, if adversely determined, could reasonably be expected to result in, either individually or in the aggregate, damages or other monetary claims that are uninsured and exceed. |
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8.1.7 | Compliance with Applicable Laws. Each Obligor has complied in all material respects with all Applicable Laws binding on it or its Business or Property. No Obligor has violated or failed to obtain any Authorization necessary for the ownership of any of its Property or the conduct of its Business. |
8.1.8 | Organizational Structure. Schedule 8.1.8 correctly sets out: |
8.1.8.1 | the corporate organizational structure of the Borrower, including its shareholders and Subsidiaries; and | |
8.1.8.2 | with respect to each Obligor: (i) its legal names (including any French and English name combinations); (ii) its form of legal entity; (iii) the Equity Securities it has authorized or issued and which are outstanding, including the names of (and number of shares or other Equity Securities held by) the registered and beneficial owners of those Equity Securities, and including any Debt convertible into any Equity Securities; (iv) the Equity Securities owned by it; (v) the jurisdictions of its organization and head office, and the location of its corporate records or minute books and of its share or unit registers; (vi) its Obligor Location; and (vii) the jurisdictions in which it carries on business or has assets (including receivables) having an aggregate value in excess of $30,000,000 (not including goodwill). | |
The Obligors do not have any Subsidiaries and any Subsidiaries created or acquired by any Obligor after the Closing Date will be identified to the Lender under Section 7.1.1.9.1. |
8.1.9 | Equity Securities. Except as set out in Schedule 8.1.9: |
8.1.9.1 | no Obligor owns any Equity Securities or any Debt which is convertible into, or exchangeable for, Equity Securities of any Person; | |
8.1.9.2 | all of the outstanding Equity Securities of each Obligor and any other Subsidiary owned by an Obligor are owned of record and beneficially by an Obligor, and all Equity Securities so owned are duly authorized, validly issued, fully paid and non-assessable, and are free and clear of all Liens; and | |
8.1.9.3 | there are no contractual restrictions on the ability of any Obligor or the Lender to sell, transfer or assign any of the Equity Securities owned by any Obligor. |
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8.1.10 | Taxes. Each Obligor has filed or caused to be filed when due all required Tax returns, and has paid or caused to be paid all Taxes required to have been paid under those Tax returns or under any assessments made against each Obligor or any of its Property, including all instalments with respect to the current period, and has made adequate provision for Taxes payable in the current period, except: |
8.1.10.1 | for Taxes that are payable or have been assessed: |
8.1.10.1.1 | that are being contested in good faith by appropriate proceedings; | ||
8.1.10.1.2 | for which an Obligor has set aside on its books adequate reserves in compliance with IFRS; | ||
8.1.10.1.3 | relating to which no Tax Lien has been filed; and | ||
8.1.10.1.4 | relating to which no Tax claim individually or collectively with all other similar claims in excess of $200,000 (and which could reasonably be expected to result in a Tax Lien arising or being filed) is being asserted against an Obligor; or |
8.1.10.2 | as set out in Schedule 8.1.10.2. |
8.1.11 | Title to and Location of Property. |
8.1.11.1 | Each Obligor has good and marketable title in fee simple to, or valid leasehold title under valid and enforceable Real Property Leases to, all of its Real Property, which title is free and clear of all Liens except for Permitted Liens, and each Obligor owns or leases all Real Property used in connection with its Business. Schedule 8.1.11.1, together with any Replacement Schedule, sets out a complete and accurate list of all leased, subleased or owned Real Property of the Obligors, including correct legal descriptions and a list of all Real Property Leases to which any Obligor is a party. | |
8.1.11.2 | Each Obligor owns, or leases under valid and enforceable Operating Leases or Capital Leases, its personal Property free and clear of all Liens except for Permitted Liens, and owns or leases all personal Property used or acquired in connection with its Business. Schedule 8.1.11.2, together with any Replacement Schedule, sets out a complete and accurate list of all Operating Leases and Capital Leases with respect to each Obligor’s personal Property and sets out the locations of each Obligor’s personal Property. | |
8.1.11.3 | All of the tangible personal Property of the Obligors having an individual book value in excess of $200,000 is located in Weehawken, New Jersey. |
8.1.12 | Leases. All rental and other payments required to be paid by any Obligor under any Real Property Leases, Operating Leases and Capital Leases have been paid when due, and all of those Real Property Leases, Operating Leases and Capital Leases are in full force and effect. No Obligor is in default under or breach of any Real Property Lease, Operating Lease or Capital Lease, or is aware of any default under or breach of any other party to them. |
8.1.13 | Debt Defaults. No Obligor is in default of, and no event or circumstance has occurred which, but for the passage of time or the giving of notice, or both, would constitute a default under, any loan or loan agreement, indenture, mortgage, deed of trust, security agreement or other instrument or agreement evidencing or pertaining to any Debt of any Obligor, except for any defaults that individually or in the aggregate do not exceed $250,000 at any time. |
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8.1.14 | Insurance. All policies relating to Insurance: |
8.1.14.1 | comply with all requirements of the Loan Documents, Applicable Law and all material contracts to which any Obligor is a party; | |
8.1.14.2 | are valid, in full force and effect, and enforceable; and | |
8.1.14.3 | provide adequate insurance coverage for the Property, Business and operations of the Obligors in at least those amounts and against at least those risks required under Section 9.1.16. All premiums with respect to all material policies of Insurance have been paid in accordance with their respective terms, and no notice of cancellation or termination has been received with respect to any of those policies. |
8.1.15 | Environmental Matters. Except as set out in Schedule 8.1.15 or any Replacement Schedule: |
8.1.15.1 | the Obligors are in compliance in all material respects with all applicable Environmental Laws; | |
8.1.15.2 | any Authorizations or notices required to be obtained or filed by each Obligor under Environmental Laws in connection with its Business, Property or operations have been obtained or filed; | |
8.1.15.3 | all Hazardous Materials generated at the Property of any Obligor have been treated, transported, stored and disposed of in accordance with all material requirements of Environmental Laws and Authorizations applicable to them; | |
8.1.15.4 | the Obligors have taken all reasonable steps necessary to determine, and have determined, that there has been no Release of Hazardous Materials and there has been no threatened Release of Hazardous Materials on or to any Property of any Obligor, other than in compliance in all material respects with Environmental Laws; | |
8.1.15.5 | there are no claims, notices of violation, notices of potential liability, requests for information, complaints, proceedings, investigations or actions by any Governmental Authority or any other Person pending or threatened against any Obligor under any Environmental Laws; | |
8.1.15.6 | no Obligor has agreed to assume, or accept responsibility by contract for, any liability of any Person under any Environmental Laws; and | |
8.1.15.7 | there are no facts, circumstances or conditions, including the Release of any Hazardous Materials, relating to the past or present Business, Property or operations of the Obligors or any of their predecessors in interest, that could reasonably be expected to result in any Obligor having or incurring any material claim or liability under any Environmental Laws. |
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8.1.16 | Employee Matters. |
8.1.16.1 | No Obligor, and no employee of any Obligor, is subject to any collective bargaining agreement. There are no strikes, slowdowns, work stoppages or other labour disputes pending or threatened in writing against any Obligor that could reasonably be expected to result in, either individually or in the aggregate, a Material Adverse Effect. | |
8.1.16.2 | Each Pension Plan, and each employee benefit, fringe benefit, supplemental unemployment benefit, bonus, incentive, profit sharing, termination, change of control, compensation, retirement, salary continuation, stock option, stock purchase, stock appreciation, health, welfare, medical, dental, accident, disability, life insurance or other plan, arrangement, agreement, program, policy, practice or undertaking that is sponsored or maintained by any Obligor for the benefit of its employees and former employees who are or were employed in Canada, and their respective beneficiaries, is in compliance with Applicable Law, including the Income Tax Act and any federal or provincial pension benefits standards legislation, and is being administered in compliance with its terms. | |
8.1.16.3 | Each Obligor has withheld from all payments to each of its officers, directors and employees the amount of all Taxes, Pension Plan contributions, employment insurance premiums and other payments and deductions that it is required to withhold under Applicable Law, and has paid or remitted those amounts to the appropriate Governmental Authority in accordance with Applicable Law. No Obligor is subject to any Priority Claim arising from those withholdings that does not constitute a Permitted Lien. |
8.1.17 | Intellectual Property Rights. All Intellectual Property owned or licensed by any Obligor, and all rights of any Obligor to the use of any Intellectual Property owned by and licensed from others, in each case that is material to the present and planned future conduct of the Business of that Obligor, are set out in Schedule 8.1.17 (collectively, the “Intellectual Property Rights”). Except as set out in Schedule 8.1.17 or any Replacement Schedule, no material claim has been asserted and is pending by any Person with respect to the use by any Obligor of any Intellectual Property Rights or challenging the validity, enforceability or effectiveness of any Intellectual Property Rights necessary for the conduct of the Business of the Obligors taken as a whole. Except as set out in Schedule 8.1.17: |
8.1.17.1 | each Obligor owns, licenses or possesses the right to use all Intellectual Property that is necessary for the operation of its Business as currently conducted and as proposed to be conducted, free and clear of all Liens, except for Permitted Liens, and restrictions; | |
8.1.17.2 | all necessary applications and registrations for Intellectual Property Rights of each Obligor are current; and | |
8.1.17.3 | the conduct of each Obligor’s Business does not infringe the Intellectual Property of any other Person. |
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Except for the filing with a register maintained under the legislative or regulatory authority of a Governmental Authority, or with a register maintained by an authority established by a treaty (such as the European Patent Convention) where the purpose of the register is to maintain records of documents received by the legislative or regulatory authority and relating to Intellectual Property registrations or applications for Intellectual Property registration, and except as has been already made or obtained, in relation to the Intellectual Property Rights no authorization, approval or other action by, and no notice to or filing with, any register is required for the grant by any Obligor of the Liens under the Security Documents, the execution, delivery or performance of the Security Documents to which each Obligor is a party, or the perfection or the exercise by the Lender of its rights and remedies under the Security Documents.
8.1.18 | Software. Each Obligor is the sole legal and beneficial owner of, and has good and marketable title to, or is a licensee of, all of the computer software, other than operating systems software, running on its computer systems. Each Obligor has the right to use all software used by it and has not granted any licence or other rights to any other Person in respect of that software which could interfere with its rights. Except as set out in Schedule 8.1.18, each Obligor possesses the object code and user manuals for all software used by it, and the source code and all documentation required for effective use of it. |
8.1.19 | Other Representations. Each representation and warranty made by an Obligor in any Loan Document to which it is a party is true and correct in all material respects. |
8.1.20 | No Event of Default. No Default or Event of Default has occurred and is continuing. |
8.2 | Repetition of Representations and Warranties |
Without limiting Section 8.3, the representations and warranties set out in Section 8.1 will be deemed to be made by each Obligor, for itself and for each other Obligor, on each date of advance of such Loan based on the facts and circumstances then existing, and in the case of representations and warranties relating to a Subsidiary that becomes an Obligor after the date of this Agreement, on the date it becomes an Obligor, except that any representation or warranty expressly relating to a specific date shall only be true and correct as of such date.
8.3 | Survival of Representations and Warranties |
The representations and warranties set out in Section 8.1 will survive the execution and delivery of this Agreement until all Outstanding Obligations have been fulfilled and the Lender has no further obligations under any Loan Documents, and the Lender will be entitled to rely, and will be deemed to have relied, upon the representations and warranties set out in Section 8.1 in making any advance available under this Agreement, regardless of any investigation or examination made by the Lender or its counsel.
Article
9
COVENANTS
9.1 | Positive Covenants |
So long as this Agreement is in force, any Outstanding Obligations remain outstanding or the Lender has any obligations under any Loan Documents, each Obligor covenants and agrees with the Lender that, unless the Lender otherwise expressly agrees in writing, it will, and it will cause each other Obligor to, comply with the covenants and agreements set out in this Section 9.1.
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9.1.1 | Financial Reporting. The Obligors will prepare and deliver to the Lender, in a form satisfactory to the Lender, acting reasonably: |
9.1.1.1 | as soon as available and in any event within 120 days after the end of each Fiscal Year of the relevant Obligor: |
9.1.1.1.1 | annual audited Financial Statements of the Borrower on a Consolidated Basis, together with a management discussion and analysis relating to the Financial Statements and an auditor’s report prepared by an internationally recognized independent firm of chartered accountants selected by the board of directors of the Borrower, containing the auditor’s confirmation that its examinations of those Financial Statements were made in accordance with generally accepted auditing standards and the auditor’s opinion that those Financial Statements present fairly in all material respects, as applicable, the consolidated and unconsolidated financial position of the Borrower as of the close of each Fiscal Year, and the results of its operations and changes in financial position for the Fiscal Year then ended, in accordance with IFRS; | ||
each certified to be true and in accordance with IFRS by a Responsible Officer of the relevant Obligor; |
9.1.1.2 | as soon as available and in any event within 60 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of the Obligors, quarterly unaudited Financial Statements of the Borrower on a Consolidated Basis as at the end of each of those Fiscal Quarters, each prepared in accordance with IFRS and certified to be true and in accordance with IFRS by a Responsible Officer of the relevant Obligor; | |
9.1.1.3 | as soon as available and in any event within 30 days of the end of each month other than a month which is the last month in a Fiscal Quarter, monthly unaudited balance sheet, statement of income, statement of retained earnings and statement of cash flow of the Borrower on a Consolidated Basis prepared in accordance with IFRS and certified to be true and in accordance with IFRS by a Responsible Officer of the relevant Obligor; | |
9.1.1.4 | concurrently with the Financial Statements and other information referred to in Sections 9.1.1.1 and 9.1.1.2, a duly executed and completed Compliance Certificate relating to the Fiscal Year or Fiscal Quarter, as applicable, of each Obligor being reported upon, certified by a Responsible Officer of the Borrower; | |
9.1.1.5 | within 30 days of the start of each Fiscal Year, an annual budget in reasonable detail including monthly income and expenses; and | |
9.1.1.6 | promptly upon any reasonable request by the Lender, any other information regarding the Property, operations, Business, legal or corporate affairs and financial position of any Obligor, or compliance with the terms of this Agreement or any other Loan Document. |
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9.1.2 | Prompt Payment. The Borrower will pay to the Lender when due all principal, interest, fees, expenses and other amounts owing by the Borrower to the Lender under this Agreement, on the dates and in the manner provided by this Agreement and the other Loan Documents, without set off or deduction of any kind. |
9.1.3 | Existence and Good Standing. Each Obligor will do or cause to be done all things reasonably necessary to preserve, renew and keep in full force and effect and in good standing its legal existence in its jurisdiction of formation or organization, and do or cause to be done all things reasonably necessary to preserve, renew and keep in full force and effect and in good standing its registration in every other jurisdiction in which the nature of its Business or activities, or the character of any of its material Property, make that registration necessary. |
9.1.4 | Conduct of Business. Each Obligor will manage and operate its Business: |
9.1.4.1 | in all material respects in accordance with prudent industry practice and in compliance with the terms and provisions of all Material Permits; and | |
9.1.4.2 | in compliance with all Applicable Laws of the jurisdictions in which its Business is carried on. |
9.1.5 | Applicable Laws. Each Obligor will comply in a timely manner with all Applicable Laws and will obtain, preserve and keep in force all Material Permits required by it to properly conduct its Business and to own, operate, lease or license its Property. |
9.1.6 | Anti-Money Laundering Legislation. Each Obligor will promptly upon request: |
9.1.6.1 | provide to the Lender all information, including supporting documentation and other evidence, as reasonably requested by it or any prospective assignee of it, that may be required by the Lender or prospective assignee to obtain, verify and record information regarding an Obligor, an Obligor’s directors, authorized signing officers, direct or indirect shareholders or unitholders or other Persons in control of the Obligor, and the transactions contemplated by this Agreement, or to otherwise comply with any applicable Anti-Money Laundering Legislation; and | |
9.1.6.2 | notify the recipient of that information of any changes to it. |
9.1.7 | Use of Loans. The proceeds of the Loans provided under the Facility will be used solely for the purposes set out in Section 2.2. |
9.1.8 | Payment Obligations. Each Obligor will pay its obligations before they are delinquent or in default, except if: |
9.1.8.1 | the validity or amount of those obligations is being contested in good faith by appropriate proceedings; and | |
9.1.8.2 | it has, if required, set aside on its books adequate reserves with respect to those obligations in accordance with IFRS. |
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9.1.9 | Maintenance of Property and Intellectual Property Rights. Each Obligor will: |
9.1.9.1 | operate, maintain and preserve in good working order and condition, ordinary wear and tear excepted, all Property necessary for the proper conduct of its Business, and make or cause to be made all repairs, additions and improvements to, and renewals and replacements of, that Property necessary or desirable for the conduct of its Business; | |
9.1.9.2 | do or cause to be done all things necessary to obtain, preserve, renew, extend and keep in full force and effect and in good standing all Authorizations and all rights, licences, privileges, franchises and Intellectual Property Rights material to the conduct of its Business; and | |
9.1.9.3 | protect, defend and maintain the validity and enforceability of its Intellectual Property Rights, and not allow any Intellectual Property owned, licensed or used in its Business to be abandoned, forfeited or dedicated to the public. |
9.1.10 | Notice Provisions. Each Obligor will promptly and, unless otherwise provided, in any event within five days after any Obligor becomes aware of any event set out in this Section 9.1.10, provide the Lender with notice of: |
9.1.10.1 | the occurrence of a Default or Event of Default, together with a statement of a Responsible Officer of the relevant Obligor setting out the details of that Default or Event of Default and the action that the Obligors propose to take or have taken with respect to it; | |
9.1.10.2 | the receipt by any Obligor of any official notice of violation or non-compliance from, or claim made by, any Governmental Authority relating to any Obligor or any of its Property; | |
9.1.10.3 | any breach or default by any Obligor under, termination of, or material amendment to, any Material Contract; | |
9.1.10.4 | the receipt of any notice of material breach or default by any Obligor from, or the taking of any other material action by: |
9.1.10.4.1 | any Person to whom any Obligor owes Debt in an amount in excess of $250,000; or | ||
9.1.10.4.2 | any landlord under a Real Property Lease, | ||
in each case together with a statement of a Responsible Officer of the relevant Obligor setting out the details of that breach or default and the action that the Obligors propose to take or have taken with respect to it; |
9.1.10.5 | the institution of, or any material adverse development in, any action, suit, proceeding, investigation or arbitration before any arbitrator or Governmental Authority by any Person against any Obligor or any of its Property claiming in excess of $500,000; | |
9.1.10.6 | any Material Adverse Change. |
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9.1.11 | Change in Jurisdiction or Name. Each Obligor will, not less than 30 days before the change occurs, provide the Lender with written notice of any change by any Obligor of its Obligor Location, or of the location of its “registered office”, “chief place of business”, “principal place of business”, or any change by any Obligor of its corporate, partnership or trust name, as applicable. |
9.1.12 | Environmental Reporting. Each Obligor will promptly, and in any event within 15 days of each occurrence, notify the Lender of any civil, criminal or regulatory proceeding before, or investigation or order of, any Governmental Authority or other Person requiring any Obligor to comply with or take action under any Environmental Laws, and of any state of affairs that contravene Environmental Laws on any Real Property owned or leased by, or relating to any Business of, any Obligor, and of any Release from any Real Property owned or leased by any Obligor into the Natural Environment, and any similar environmental occurrence. |
9.1.13 | Environmental Compliance. Each Obligor will: |
9.1.13.1 | immediately rectify as and to the extent required by Environmental Laws any breach or failure of it to comply with any Environmental Laws or any Material Permits issued under Environmental Laws, or any Release of any Hazardous Materials from its Property or caused by any Obligor, and will immediately comply with all applicable orders and Material Permits issued by any Governmental Authority with respect to the Natural Environment; and | |
9.1.13.2 | comply with all Environmental Laws. |
9.1.14 | Taxes and Priority Claims. Each Obligor will: |
9.1.14.1 | in a timely manner and in compliance with Applicable Laws, file all Tax returns required to be filed by it with applicable Governmental Authorities, on or before their respective due dates, and withhold, collect and remit all Taxes that it is required to collect, withhold or remit; and | |
9.1.14.2 | pay and discharge promptly when due all Taxes and Priority Claims imposed upon it or upon its Property or any part of it, as well as all claims of any kind (including claims for labour, materials and supplies) that, if unpaid, would by law become a Lien, other than a Permitted Lien, upon any of its Property. |
9.1.15 | Books and Records and Inspection. Each Obligor will: |
9.1.15.1 | keep proper books of record and account containing full and accurate entries of all dealings and transactions relating to its Property, Business and operations in a manner sufficient to enable the preparation of Financial Statements as required by this Agreement; and | |
9.1.15.2 | permit representatives designated by the Lender, upon reasonable prior notice and during normal business hours, to visit and inspect its Property, examine and make extracts from its books and records, and discuss its affairs, finances and condition with its officers and independent accountants. |
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9.1.16 | Insurance. Each Obligor will: |
9.1.16.1 | maintain or cause to be maintained insurance with respect to its Property, Business and operations against all liabilities, casualties, risks and contingencies, of the types, including business interruption, “all risks” property damage, boiler and machinery, third party liability, professional liability and flood insurance, and in the amounts customary for Persons engaged in the same or similar businesses and similarly situated, without co-insurance and in accordance with any requirements of any Governmental Authority (collectively, the “Insurance”). All policies of Insurance will be in form and substance acceptable to the Lender, acting reasonably, and will be underwritten by financially sound and reputable insurance companies that are acceptable to the Lender; | |
9.1.16.2 | in the case of any fire, accident or other casualty causing material damage or loss to any of its Property, or if otherwise required by Applicable Law, apply all proceeds of Insurance to repairing or replacing the damaged or destroyed Property, provided that if an Event of Default has occurred and is continuing or the uninsured or insured loss is greater than $500,000, all proceeds of that Insurance will only be used as directed by the Lender in its sole discretion; | |
9.1.16.3 | maintain Insurance with respect to its Property in an amount no less than the replacement value of the Property insured, endorsed in favour of the Lender as a first loss payee and first mortgagee. The Lender will be named as first mortgagee in accordance with the Insurance Bureau of Canada’s standard mortgage clause (or an alternative form of mortgage clause satisfactory to the Lender, acting reasonably) with respect to all Real Property owned by the Obligors, as first loss payee with respect to all other Property of the Obligors, and as an additional insured with respect to all liability policies maintained by the Obligors. The Insurance will provide that the insurer make commercially reasonable efforts to provide at least 30 days’ notice to the Lender of any changes to the Insurance and that the Insurance will not be cancelled or terminated without at least 30 days’ notice being given by the insurer to the Lender. Evidence of the giving of that notice will be the responsibility of the insurer in each case; | |
9.1.16.4 | as soon as practicable following the happening of any damage or loss to its Property subject to any Insurance, at its expense, furnish or cause to be furnished all proof of damage or loss and do all acts required to enable the Person entitled to receipt of the proceeds of that Insurance under this Section 9.1.16 to obtain payment of those proceeds; | |
9.1.16.5 | ensure that all policies of Insurance, where applicable, contain a release of any subrogation rights that its insurers may have against the Lender or those for whom it is in law responsible; | |
9.1.16.6 | deliver in writing to the Lender, at any time, upon reasonable request by the Lender, evidence of all Insurance required to be maintained by the Obligors under this Section 9.1.16 together with a summary of the coverage provided by that Insurance, and all other information relating to the Insurance and all monies payable to each Obligor under it. The Lender will be entitled, at any time, to inspect and to make copies of any books, papers, documents or records evidencing or relating to the Insurance; and |
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9.1.16.7 | immediately provide the Lender with a certified copy of each policy of Insurance within 90 days of the Closing Date, together with a certified copy of each renewal policy of Insurance and of each policy of Insurance issued in replacement of or in substitution for any policy of Insurance within 30 days of the renewal, replacement or substitution. |
9.1.17 | Further Assurances. At its own expense and promptly at the reasonable request of the Lender, each Obligor will: |
9.1.17.1 | cure or cause to be cured all defects in the content, execution, delivery, validity or enforceability of any Loan Document to which it is a party or any other document contemplated by or created under any Loan Document; | |
9.1.17.2 | execute and deliver or cause to be executed and delivered to the Lender all other documents, agreements and instruments, and do or cause to be done all other acts as may be necessary or desirable in the reasonable opinion of the Lender to better carry out the provisions and purposes of the Loan Documents, including filing financing statements or other documents and effecting registrations under any Applicable Law with respect to the Security Interests created by the Security Documents; and | |
9.1.17.3 | obtain any consents or acknowledgements reasonably required by the Lender. |
9.2 | Financial Covenants |
So long as this Agreement is in force, any Outstanding Obligations remain outstanding or the Lender has any obligations under any Loan Documents, each Obligor covenants and agrees with the Lender that, unless the Lender otherwise expressly agrees in writing, it will, and it will cause each other Obligor to, comply with the financial covenants set out in this Section 9.2.
9.2.1 | Total Leverage Ratio. Beginning with the Fiscal Quarter ending December 31, 2017, the Borrower will not permit the Total Leverage Ratio as of the last day of the Fiscal Quarter to be greater than the following: |
Fiscal Quarter ending | Total Leverage Ratio | |
12/31/2017 | 4.00:1.00 | |
3/31/2018 | 3.50:1.00 | |
6/30/2018 | 3.50:1.00 | |
9/30/2018 | 3.50:1.00 | |
12/31/2018 | 3.00:1.00 | |
3/31/2019 | 3.00:1.00 | |
6/30/2019 | 3.00:1.00 | |
9/30/2019 | 3.00:1.00 | |
12/31/2019 | 3.00:1.00 | |
Thereafter | 2.50:1.00 |
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9.2.2 | Interest Coverage Ratio. Beginning with the Fiscal Quarter ending December 31, 2017, the Borrower will not permit the Interest Coverage Ratio as of the last day of the Fiscal Quarter to be less than the following: |
Fiscal Quarter ending | Interest Coverage Ratio | |
12/31/2017 | 2.00:1.00 | |
3/31/2018 | 2.00:1.00 | |
6/30/2018 | 2.00:1.00 | |
9/30/2018 | 2.00:1.00 | |
12/31/2018 | 2.00:1.00 | |
3/31/2019 | 3.00:1.00 | |
6/30/2019 | 3.00:1.00 | |
9/30/2019 | 3.00:1.00 | |
12/31/2019 | 3.00:1.00 | |
Thereafter | 3.50:1.00 |
9.3 | Negative Covenants |
So long as this Agreement is in force, any Outstanding Obligations remain outstanding or the Lender has any obligations under any Loan Documents, each Obligor covenants and agrees with the Lender that, unless the Lender otherwise expressly agrees in writing, it will, and it will cause each other Obligor to, comply with the negative covenants and agreements set out in this Section 9.2.
9.3.1 | Nature of Business. No Obligor will enter into any business either directly or through any Subsidiary except for the business in which it is engaged on the date of this Agreement, provided that the foregoing will not prohibit an Obligor from entering or otherwise engaging in any business or activities that relate to the creation, sale, licensing or other distribution of content, content management systems, computer programs, mobile and OTT applications, advertising, advertising sales, data collection, data analysis and any services related to the foregoing. |
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9.3.2 | Limitation on Liens. No Obligor will create, incur, assume or allow any Lien on or relating to all or any part of its Property, whether now owned or later acquired, except for Permitted Liens. |
9.3.3 | Fundamental Changes. No Obligor will enter into any amalgamation, merger or consolidation with any other Person, liquidate, wind-up or dissolve itself or any other Obligor, allow the liquidation or dissolution of itself or any other Obligor, convey, sell, lease, transfer, assign or otherwise dispose of all or substantially all of its Property or Business, sell, transfer, assign or otherwise dispose of any Equity Securities in any of its Subsidiaries, permit the issuance of any Equity Securities in any of its Subsidiaries to any Person, enter into any partnership with any Person that is not an Obligor, or make any material change in its present method of conducting business, except for any Permitted Fundamental Change. |
9.3.4 | Restrictions on Dispositions. No Obligor will convey, sell, lease, transfer, assign or otherwise dispose of all or any part of its Property or Business, whether now owned or later acquired, or issue or sell any Equity Securities of any of its Subsidiaries not subject to the Security Interests created by the Security Documents, except for any Permitted Disposition. |
9.3.5 | Debt. No Obligor will create, incur, assume or permit to exist any Debt other than Permitted Debt. |
9.3.6 | Limitation on Optional Payments and Modifications of Debt Instruments. No Obligor will make any optional payment or prepayment on, or redemption, defeasance or purchase of, any Debt (other than any Outstanding Obligations), or amend, or consent to any amendment of, any of the terms relating to the payment or prepayment of principal, interest or fees relating to, any of that Debt. |
9.3.7 | Distributions. No Obligor will declare, pay or make, or agree to pay or make, any Distributions except for Permitted Distributions. |
9.3.8 | Transactions with Related Parties. No Obligor will enter into any transaction, purchase, sale, lease, or exchange of Property with, or render any service to, any Related Party, other than in connection with a Permitted Fundamental Change, a Permitted Investment, a Permitted Acquisition or any transaction, purchase, sale, lease, exchange or service that is in the ordinary course of the Obligor’s Business and upon fair and reasonable terms no less favourable to it than it would apply to a comparable Arm’s Length transaction with a Person that is not a Related Party. |
9.3.9 | Corporate Structure. No Obligor will change, or participate in a change in, the ownership and organizational structure of the Obligors from that set out in Schedule 8.1.8, except for a Permitted Fundamental Change. |
9.3.10 | Equity Securities. No Obligor will issue any Equity Securities other than to another Obligor or in connection with such Obligor’s Equity Incentive Plan, or create any other Subsidiary, unless it has provided not less than 30 days’ prior written notice to the Lender. |
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9.3.11 | Business Outside Certain Jurisdictions. No Obligor will have any place of business or keep or store any tangible personal Property having a value in excess of $250,000 in the aggregate in, or change its Obligor Location to, any jurisdiction in which the Lender does not have a perfected Security Interest, unless it has: |
9.3.11.1 | given 30 days’ prior written notice of the new jurisdiction to the Lender; and | |
9.3.11.2 | done or caused to be done all acts and things and executed and delivered or caused to be executed and delivered all agreements, deeds, transfers, assignments and instruments as the Lender may reasonably require for perfecting, protecting and registering the Security Interests in favour of the Lender in the new jurisdiction. |
9.3.12 | Acquisitions. No Obligor will make any Acquisition other than a Permitted Acquisition or a Permitted Investment. |
9.3.13 | Limitation on Investments. No Obligor will make or permit to exist any Investment, except for a Permitted Investment. |
9.3.14 | Fiscal Year. No Obligor will permit the Fiscal Year end of any Obligor to end on any day other than December 31. |
9.3.15 | Amendments. No Obligor will allow any amendments to its Constating Documents that are adverse to the Lender’s interests or the Security Interests under the Security Documents, or allow any amendments to, or grant any waivers relating to, material contracts or any Guarantee or security in respect of them that could reasonably be expected to be adverse to the Lender’s interests. |
9.3.16 | Limitation on Risk Management Transactions. No Obligor will enter into any Risk Management Transaction without the prior written consent of the Lender. |
9.3.17 | Limitation on Sale and Leaseback Transactions. No Obligor will enter into any arrangement, directly or indirectly, with any Person under which it will sell, assign or otherwise transfer any Property having an aggregate fair market value in excess of $250,000 in any Fiscal Year of the Borrower, whether now owned or later acquired, and under which it will, at or after that time, lease or rent as lessee that Property or any part of it or other Property that it intends to use for substantially the same purpose as the Property sold, assigned or otherwise transferred. |
Article
10
EVENTS OF DEFAULT
10.1 | Events of Default |
The occurrence of any one or more of the following events or conditions will be an event of default under this Agreement (“Event of Default”):
10.1.1 | the Borrower defaults in the due and punctual payment of the principal amount, or any part of the principal amount, of any Loan under the Loan Documents when that amount becomes due and payable, whether on the Maturity Date or otherwise; |
10.1.2 | the Borrower defaults in the due and punctual payment of any interest owing under the Loan Documents as and when they become due and payable and that default continues for a period of 5 Business Days; |
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10.1.3 | 5 Business Days an Obligor defaults in payment when due of any of the Outstanding Obligations that require the payment of money by it to the Lender, other than amounts referred to in Sections 10.1.1 and 10.1.2; |
10.1.4 | an Obligor fails to observe or perform any agreement, covenant, condition or obligation applicable to it under this Agreement or any other Loan Document (including, for certainty the Software Escrow Agreement and the Three Party Escrow Agreement), other than an agreement or a covenant, condition or obligation the breach or default in performance of which is specifically dealt with elsewhere in this Article 10, and the Obligor fails to remedy that Default within 30 days from the earlier of the date that: |
10.1.4.1 | it becomes aware of the Default; and | |
10.1.4.2 | the Lender delivers written notice of the Default to that Obligor, specifying the Default and requiring that it be remedied; |
10.1.5 | except as permitted by this Agreement or with the prior written consent of the Lender, there is any change in the ownership of the Equity Securities of an Obligor (excluding the publicly held shares of Borrower, or an Obligor amalgamates, merges or consolidates with any other Person, or an Obligor sells or otherwise disposes of all or substantially all of its assets out of the ordinary course of business; |
10.1.6 | any representation or warranty made by an Obligor in any Loan Document, or in any officer’s certificate or other document delivered to the Lender under any Loan Document, or any statement certified in any certificate provided by or on behalf of an Obligor, is found to be false or incorrect in any way which makes it materially misleading when made or deemed to have been made; |
10.1.7 | an Obligor defaults in the observance or performance of any covenant, condition or obligation contained in any agreement between the Obligor and any Person, if that default gives rise to a right to enforce security against the Obligor; |
10.1.8 | an Obligor fails to: |
10.1.8.1 | make any payment when it is due and payable to any Person in relation to any Debt that in the aggregate principal amount then outstanding is in excess of $250,000; or | |
10.1.8.2 | observe or perform any other agreement or condition relating to any Debt that in the aggregate principal amount then outstanding is in excess of $250,000, or contained in any instrument or agreement evidencing, securing or relating to that Debt, or any other event occurs or condition exists that causes or permits the holder of that Debt to cause it to become due before its stated maturity date; |
10.1.9 | an Obligor admits its inability to pay its Debts generally as they become due or otherwise acknowledges its insolvency; |
10.1.10 | an Obligor ceases or threatens to cease to carry on its Business; |
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10.1.11 | an Obligor institutes any proceeding or takes any action or executes any agreement to authorize its participation in or the commencement of any proceeding: |
10.1.11.1 | seeking to adjudicate it a bankrupt or insolvent; or | |
10.1.11.2 | seeking liquidation, dissolution, winding-up, reorganization, arrangement, protection, relief or composition of it or any of its Property or Debt or making a proposal for it under any Applicable Law, including any Insolvency Law, and also including any application for reorganization, arrangement or compromise of Debt under the laws of its jurisdiction of incorporation, organization, formation or otherwise; |
10.1.12 | any proceeding is commenced against or otherwise affects an Obligor: |
10.1.12.1 | seeking to adjudicate it a bankrupt or insolvent; | |
10.1.12.2 | seeking liquidation, dissolution, winding-up, reorganization, arrangement, protection, relief or composition of it or any of its Property or Debt or making a proposal for it under any Applicable Law, including any Insolvency Law, and also including any application for reorganization, arrangement or compromise of Debt under the laws of its jurisdiction of incorporation, organization, formation or otherwise; or | |
10.1.12.3 | seeking the appointment of a receiver, trustee, agent, custodian or other similar official for it or for any of its Property; |
10.1.13 | any judgment or order for the payment of money in excess of $250,000 is rendered against an Obligor and either enforcement proceedings have been commenced by any Person upon that judgment or order, or there is any period during which a stay of enforcement of that judgment or order, by reason of a pending appeal or otherwise, will not be in effect; |
10.1.14 | any execution, distress or other enforcement process, whether by court order or otherwise, becomes enforceable against any Property of an Obligor; |
10.1.15 | any proceeding is commenced or action is taken with respect to an Obligor or any part of its Property in any jurisdiction outside Canada that has an effect equivalent or similar to any of the events or proceedings described in Sections 10.1.11 to 10.1.14 inclusive; |
10.1.16 | any adverse change occurs in the financial condition or prospects of an Obligor that, in the sole opinion of the Lender, is likely to impair to a material extent the ability of the Borrower or any other Obligor to pay the Outstanding Obligations payable by it or, in the sole opinion of the Lender, is likely to put any of the Security Documents in jeopardy or otherwise have a Material Adverse Effect; |
10.1.17 | after execution and delivery of it, any Loan Document ceases to be in full force and effect (unless within 5 Business Days of notice of those circumstances being delivered by the Lender to the relevant Obligor that Loan Document is again in full force and effect as if it had always had full force and effect), or any Loan Document is declared by a court or tribunal of competent jurisdiction to be invalid, or the validity or enforceability of it is contested by an Obligor, or an Obligor denies in writing that it has any further liability or obligations under a Loan Document; |
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10.1.18 | any action, event or situation, other than as set out in Section 10.1.16, occurs that has a Material Adverse Effect; |
10.1.19 | any material Insurance coverage of any Obligor lapses and that coverage is not reinstated within 48 hours of that lapse; |
10.1.20 | the occurrence of any of the following events with respect to a Pension Plan: |
10.1.20.1 | any steps are taken by an Obligor or any Governmental Authority to terminate a Pension Plan, in whole or in part, if as a result of that termination an Obligor may be required to make an additional contribution to that Pension Plan, or to incur an additional liability or obligation to that Pension Plan, equal to or in excess of $250,000 of the equivalent of that amount in another currency; or | |
10.1.20.2 | a contribution failure with respect to a Pension Plan sufficient to give rise to a Lien under any Applicable Law; or |
10.1.21 | change in the ownership of any Obligor (other than the Borrower) or a change in the ownership of the common shares of the Borrower resulting in any person or group of persons acting together holding, directly or indirectly, individually or collectively, a majority of the votes attached to the outstanding voting shares of the Borrower, except for any circumstance where such person is the Lender or such person acts in concert with the Lender, and the Borrower remains a reporting issuer. |
10.2 | Acceleration and Remedies |
10.2.1 | Upon the occurrence and during the continuance of any Event of Default, the Lender may do any one or more of the following, all of which are authorized by each Obligor: |
10.2.1.1 | by written notice to the Borrower, declare the Facility to be terminated, at which time they will terminate immediately and the Lender will have no further obligation to make any Loan available to the Borrower under the Facility; | |
10.2.1.2 | by written notice to the Borrower, declare all of the Borrower’s Obligations (whether matured or not matured), to be immediately due and payable without further demand, presentation, protest or other notice of any kind, all of which are expressly waived by the Borrower, and the Borrower will immediately deliver any cash collateral security required by the Lender under this Agreement; | |
10.2.1.3 | by written notice to the Guarantors, declare all Guaranteed Obligations and all costs and expenses of the Lender under this Agreement for which the Guarantors are liable, along with any other sums payable by the Guarantors to the Lender under the Loan Documents, to be immediately due and payable without further demand or other notice of any kind, all of which are expressly waived by the Guarantors, and demand payment of all amounts owing by them under the Loan Documents to which they are a party; | |
10.2.1.4 | without notice, set off and consolidate, and apply, any or all deposits and any other Debt at any time held by or owing to any Obligor by the Lender against and on account of the Outstanding Obligations, whether or not due and payable and whether or not the Lender has made demand for them; |
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10.2.1.5 | as and by way of collateral security, deposit and retain in an account maintained by the Lender, bearing interest at the rates of the Lender applicable to other deposits of similar amounts for similar terms, amounts received by the Lender from any Obligor, or as proceeds of realization of any Security Documents or Security Interest, to the extent those amounts may be required to satisfy any Outstanding Obligations; | |
10.2.1.6 | realize upon the Security Documents and any other security that secures any Outstanding Obligations; and | |
10.2.1.7 | exercise any other action, suit, remedy or proceeding authorized or permitted by the Loan Documents or by Applicable Law, including specifically performing any covenant or agreement contained in the Loan Documents, enjoining any violation of any of the terms of the Loan Documents, exercising any power granted by the Loan Documents or by Applicable Law, or obtaining judgment for and recovering all amounts due and owing relating to the Outstanding Obligations. |
10.3 | Application of Proceeds of Realization |
Despite any other provision of this Agreement, the proceeds realized from the exercise by the Lender of its powers, rights and remedies under the Loan Documents will be distributed in the following order:
10.3.1 | first, in payment of all costs and expenses, including legal, accounting, receivers’ and other similar fees and disbursements, incurred by the Lender in connection with that realization; |
10.3.2 | second, in payment of all Liens or claims ranking in priority to the Security Interests created by the Security Documents; |
10.3.3 | third, against payment of the Outstanding Obligations; and |
10.3.4 | fourth, if all Outstanding Obligations have been paid in full, any surplus proceeds will be paid in accordance with Applicable Law. |
10.4 | Waivers |
No delay on the part of the Lender in exercising any power, right or remedy under any Loan Document will operate as a waiver of that power, right or remedy, no waiver of any Default or Event of Default will operate as a waiver of that Default or Event of Default unless made in writing and signed by an authorized officer of the Lender, and any single or partial exercise by the Lender of any power, right or remedy for a Default or Event of Default will not be deemed to be a waiver of or to alter, affect or prejudice any other power, right or remedy to which the Lender may be lawfully entitled relating to that Default or Event of Default. No written waiver will preclude the exercise by the Lender of any power, right or remedy under any Loan Document other than relating to the specific action or inaction covered by that waiver and strictly in accordance with the terms of that waiver, or extend to or apply to any other Default or Event of Default. The Lender will not be deemed to have waived, by reason of making available any Loan under this Agreement, any Default or Event of Default, including any Default or Event of Default arising from any representation or warranty made or deemed to have been made in any Loan Document proving to be false or incorrect.
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10.5 | Non-Merger |
Any judgment obtained, or any action or proceeding taken, by the Lender under any Loan Document will not operate as a merger of any Outstanding Obligations of any Obligor to the Lender, or in any way suspend payment or affect or prejudice the powers, rights and remedies, legal or equitable, that the Lender may have in connection with the Outstanding Obligations. The surrender or cancellation of, or any other dealings with, any Security Documents will not release or affect the Outstanding Obligations of the Obligors under any of the Loan Documents.
10.6 | Lender May Perform Covenants |
If an Obligor fails to perform any covenant or agreement on its part in this Agreement, the Lender may, but is not required to, on 10 days’ notice to that Obligor, perform that covenant or agreement if it is capable of being performed by the Lender, and if that covenant or agreement requires the payment of money the Lender may, but is not required to, make that payment with its own funds. All amounts paid by the Lender under this Section 10.6 will be repaid by the Borrower on demand for payment, and will bear interest at 12% per annum commencing on the day of payment of those amounts by the Lender, calculated daily and payable on demand.
10.7 | Grant of Licence |
To enable the Lender to exercise its powers, rights and remedies under this Article 10 when the Lender is entitled to do so, and for no other purpose, each Obligor grants to the Lender an irrevocable licence, exercisable without payment of royalty or other compensation to it, to use, assign or sublicense any or all of its Intellectual Property Rights, and that licence will include reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout of them.
Article
11
General
11.1 | Time of Essence |
Time is of the essence in all respects of this Agreement.
11.2 | Notices |
Except as otherwise expressly provided for in this Agreement, any Communication must be in writing and either:
11.2.1 | delivered personally or by courier; |
11.2.2 | sent by prepaid registered mail; or |
11.2.3 | transmitted by facsimile, e-mail or functionally equivalent electronic means of transmission, charges (if any) prepaid. |
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Any Communication must be sent to the intended recipient at its address as follows:
to Raycom Media, Inc. at:
Pat LaPlatney
President and CEO
201 Monroe Street
20th Floor
Montgomery, AL 36104
(334) 206-1400
With a copy to:
Legal Department
201 Monroe Street
20th Floor
Montgomery, AL 36104
(334) 206-1400
to Frankly Inc. at:
CEO
333 Bryant Street #240
San Francisco, CA 94107
or at any other address as any Party may at any time advise the others by Communication given or made in accordance with this Section 11.2. Any Communication delivered to the Party to whom it is addressed will be deemed to have been given or made and received on the day it is delivered at that Party’s address, provided that if that day is not a Business Day then the Communication will be deemed to have been given or made and received on the next Business Day. Any Communication sent by prepaid registered mail will be deemed to have been given or made and received on the fifth Business Day after which it is mailed. If a strike or lockout of postal employees is then in effect, or generally known to be impending, every Communication must be delivered personally or by courier or transmitted by facsimile, e-mail or functionally equivalent electronic means of transmission. Any Communication transmitted by facsimile, e-mail or other functionally equivalent electronic means of transmission will be deemed to have been given or made and received on the day on which it is transmitted; but if the Communication is transmitted on a day which is not a Business Day or after 3:00 p.m. (local time of the recipient), the Communication will be deemed to have been given or made and received on the next Business Day.
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11.3 | Severability |
Each Section of this Agreement is distinct and severable. If any Section of this Agreement, in whole or in part, is or becomes illegal, invalid, void, voidable or unenforceable in any jurisdiction by any court of competent jurisdiction, the illegality, invalidity or unenforceability of that Section, in whole or in part, will not affect:
11.3.1 | the legality, validity or enforceability of the remaining Sections of this Agreement, in whole or in part; or |
11.3.2 | the legality, validity or enforceability of that Section, in whole or in part, in any other jurisdiction. |
11.4 | Submission to Jurisdiction |
Each of the Parties irrevocably and unconditionally submits and attorns to the non-exclusive jurisdiction of the courts sitting in Toronto, Ontario to determine all issues, whether at law or in equity, arising from this Agreement. To the extent permitted by Applicable Law, each of the Parties:
11.4.1 | irrevocably waives any objection, including any claim of inconvenient forum, that it may now or in the future have to the venue of any legal proceeding arising out of or relating to this Agreement in the courts sitting in Toronto, Ontario, or that the subject matter of this Agreement may not be enforced in those courts; |
11.4.2 | irrevocably agrees not to seek, and waives any right to, judicial review by any court which may be called upon to enforce the judgment of the courts referred to in this Section 11.4, of the substantive merits of any suit, action or proceeding; and |
11.4.3 | to the extent a Party has or may acquire any immunity from the jurisdiction of any court or from any legal process, whether through service or notice, attachment before judgment, attachment in aid of execution, execution or otherwise, with respect to itself or its Property, that Party irrevocably waives that immunity in respect of its obligations under this Agreement. |
11.5 | Amendment and Waiver |
Except as otherwise provided in this Agreement, no amendment, discharge, modification, restatement, supplement, termination or waiver of this Agreement or any Section of this Agreement is binding unless it is in writing and executed by the Party to be bound. No waiver of, failure to exercise, or delay in exercising, any Section of this Agreement constitutes a waiver of any other Section, whether or not similar, nor does any waiver constitute a continuing waiver unless otherwise expressly provided.
11.6 | Further Assurances |
Except as otherwise provided in any Loan Document, each Obligor will, upon request of the Lender and at the Obligor’s own cost and expense, execute and deliver any further agreements and documents and provide any further assurances, undertakings and information as may be reasonably required by the Lender to give effect to the Loan Documents, and without limiting the generality of this Section 11.6 will do or cause to be done all acts and things, execute and deliver or cause to be executed and delivered all agreements and documents and provide any assurances, undertakings and information as may be required at any time by all Governmental Authorities having jurisdiction over the affairs of an Obligor or as may be required at any time under Applicable Law.
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11.7 | Assignment |
11.7.1 | The Lender may, without notice to or consent of the Obligors, at any time assign, transfer, syndicate, grant a participation interest in, or grant a Security Interest in, all or any part of its rights, remedies and obligations under this Agreement, the other Loan Documents and the Security Interests created by the Security Documents. Each Obligor expressly agrees that the assignee, transferee, syndicated or participating lender or secured party, as the case may be, will have all of the Lender’s rights, remedies and obligations under this Agreement and the other Loan Documents, and the Obligors will not assert any defence, cross-claim, counterclaim, right of set off or any other claim that any Obligor now has or in the future acquires against the Lender in any action commenced by any assignee, transferee, syndicated or participating lender or secured party, as applicable, and will pay the Outstanding Obligations payable by it to the assignee, transferee, syndicated or participating lender or secured party, as the case may be, as they become due. |
11.7.2 | None of this Agreement, the other Loan Documents or any rights, remedies or obligations under them may be assigned by any Obligor without the prior written consent of the Lender. |
11.8 | Enurement |
This Agreement enures to the benefit of and is binding upon the Parties and their respective successors and permitted assigns.
11.9 | Counterparts and Electronic Delivery |
This Agreement may be executed and delivered by the Parties in one or more counterparts, each of which will be an original, and each of which may be delivered by facsimile, e-mail or other functionally equivalent electronic means of transmission, and those counterparts will together constitute one and the same instrument.
11.10 | Conduct of Parties |
Whenever a Section of this Agreement or a Schedule or an Exhibit requires a consent or approval by a Party and notification of the consent or approval is not delivered within the applicable time limit, then, unless otherwise specified, the Party whose consent or approval is required will be conclusively deemed to have withheld its consent or approval.
11.11 | Remedies Cumulative |
The rights, powers and remedies under the Loan Documents are cumulative and are in addition to and not in substitution for any other rights, powers and remedies available at law or in equity or otherwise. No single or partial exercise by a Party of any right, power or remedy precludes or otherwise affects the exercise of any other right, power or remedy to which that Party may be entitled.
11.12 | Survival |
All indemnities set out in this Agreement will survive the repayment of all Loans and other Outstanding Obligations and the termination of this Agreement.
- 59 - |
11.13 | Telephone Instructions |
Any telephone instructions given by the Borrower in relation to this Agreement will be at the risk of the Borrower, and the Lender will not be liable for any errors or omissions in those telephone instructions or the interpretation or execution of them by the Lender, provided that the Lender acted without gross negligence in the circumstances. The Lender will notify the Borrower of any conflict or inconsistency between any telephone instructions and any written confirmation of them received from the Borrower as soon as practicable after the conflict or inconsistency becomes apparent to the Lender.
11.14 | Judgment Currency |
11.14.1 | If, for the purpose of obtaining or enforcing judgment against a Party in any court in any jurisdiction, it becomes necessary to convert into any other currency (the other currency is referred to in Section 11.14 as the “Judgment Currency”) an amount due under this Agreement in any currency other than the Judgment Currency (the “Obligation Currency”), the conversion will be made at the exchange rate prevailing on the Business Day immediately preceding: |
11.14.1.1 | the date of actual payment of the amount due, in the case of any proceeding in the courts of any jurisdiction that will give effect to the conversion being made on that date; or | |
11.14.1.2 | the date on which the judgment is given, in the case of any proceeding in the courts of any other jurisdiction, | |
(the applicable date on which the conversion is made under Section 11.14.1 is referred to in Section 11.14 as the “Judgment Conversion Date”). |
11.14.2 | If, in the case of any proceeding in the court of any jurisdiction referred to in Section 11.14.1, there is a change in the exchange rate prevailing between the Judgment Conversion Date and the date of actual receipt of the amount due in immediately available funds, the applicable Party will pay the additional or lesser amounts as may be necessary to ensure that the amount actually received in the Judgment Currency, when converted at the Exchange Rate prevailing on the date of payment, produces the amount of the Obligation Currency which could have been purchased with the amount of the Judgment Currency stipulated in the judgment or judicial order at the Exchange Rate prevailing on the Judgment Conversion Date. |
11.14.3 | Any amount due from the applicable Party under this Section 11.14 is to be due as a separate Debt, independent of its obligations under this Agreement, and will not be affected by judgment being obtained for any other amounts due under or relating to this Agreement. |
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11.15 | No Contra Proferentem |
This Agreement has been reviewed by each Party’s professional advisors, and revised during the course of negotiations between the Parties. Each Party acknowledges that this Agreement is the product of their joint efforts, that it expresses their agreement and, that if there is any ambiguity in any of its provisions, that provision should not be interpreted in favour of either one of them.
11.16 | Consent to Disclosure of Information |
Each Obligor consents to the Lender obtaining from any credit bureau, credit reporting agency, creditor of the Obligor or other Person any information, including personal information, relating directly or indirectly to its credit, finances or Business that may be required by the Lender at any time for the purposes of this Agreement or any other Loan Documents, including to establish, maintain and manage the relationship of each Obligor with the Lender, and authorizes and directs any credit bureau, credit reporting agency, creditor or other Person to provide that information to the Lender.
- remainder of page intentionally left blank -
Each of the Parties has executed and delivered this Agreement, as of the date noted at the beginning of the Agreement.
RAYCOM MEDIA, INC. | ||
Per: | /s/ Warren Spector | |
Name: | Warren Spector | |
Title: | Chief Financial Officer | |
FRANKLY INC. | ||
Per: | /s/ Steve Chung | |
Name: | Steve Chung | |
Title: | Chief Executive Officer |
Schedule
1.1.87.2
Permitted Debt
1.1.26.1
1. | Frankly Media LLC - $499,157.52 letter of credit between Frankly Media LLC (Borrower) and Western Alliance Bank (Lender). |
2. | Frankly Media LLC – Finance agreement between Frankly Media LLC (Borrower) and Leaf Capital Funding, LLC (Lender). As of the closing date, $23,690.73 is due under this finance agreement. |
1.1.26.2
N/A
1.1.26.3
N/A
1.1.26.4
N/A
1.1.26.5
1. | Frankly Media LLC – Capital lease agreement between Frankly Media LLC (Lessee) and Dell Financial Services LLC (Lessor). As of the closing date, $23,464.52 is due under this lease agreement. |
2. | Frankly Media LLC – Capital lease agreement between Frankly Media LLC (Lessee) and EMC Corporation (Lessor). As of the closing date, $248,920.80 is due under this lease agreement. |
1.1.26.6
N/A
1.1.26.7
N/A
1.1.26.8
N/A
1.1.26.9
N/A
1.1.26.10
N/A
Schedule
1.1.91.4
Investments on Closing Date
1. | Frankly Inc. – Sole member of Frankly Media LLC. See below for capitalization table of Frankly Media LLC as of the closing date. |
Member Name and Address | Com mon Units |
Preferred Class A Units |
Preferred Class B Units |
Percentage Units |
||||||||||||
Frankly Inc. | 99,352,941 | 11,188,316 | 12.984,743 | 100 | % | |||||||||||
5 Hazelton Avenue Suite 300 Phone: (416) 972-9993 Email: steve@franklyinc.com |
2. | Frankly Inc. – 100% shareholder of Frankly Co. See below for capitalization table of Frankly Co. as of the closing date. |
Name of Shareholder | Cert. # | Date Issued | Shares Issued | Shares Cancelled | Shares Outstanding | Percentage of Common Owned |
Amount Paid for or Value of Shares | Notes | ||||||||||||||||||||||||
Frankly Inc. | C-1 | 24/12/2014 | 100 | 100 | 100.00 | % | $ | 0.01 | Original Issuance | |||||||||||||||||||||||
Total: | 100 | 100 | 100.00 | % | $ | 0.01 |
SCHEDULE
8.1.6
LITIGATION
None.
SCHEDULE
8.1.8
ORGANIZATIONAL STRUCTURE
8.1.8.1
\
8.1.8.2 – Frankly Inc.
(i) | Legal Name: Frankly Inc. |
(ii) | Form of Legal Entity: British Columbia corporation since July 2016 (prior to July 2016, Frankly Inc. was an Ontario corporation) |
(iii) | Equity Securities: Refer to capitalization table as of the closing date below. |
Shareholder | Common | Restricted Voting | Employee Options | RSUs | Fully Diluted %* | |||||||||||||||
SKP America, LLC | 9,269,917 | 24.52 | % | |||||||||||||||||
Raycom Media Inc. | 6,751,132 | 17.86 | % | |||||||||||||||||
Gannway Entertainment, Inc. | 3,021,072 | 7.99 | % | |||||||||||||||||
FORMER JJR Frankly Holdco Limited Partnership | 2,092,050 | 5.53 | % | |||||||||||||||||
Stanford-StartX Fund, LLC | 528,451 | 1.40 | % | |||||||||||||||||
Changha Kim | 454,404 | 1.20 | % | |||||||||||||||||
Schwartz & Associates (Lou Schwartz) | 195,446 | 0.52 | % | |||||||||||||||||
Hyungseok Lee | 92,490 | 0.24 | % | |||||||||||||||||
Hyunseok Yoon | 80,425 | 0.21 | % | |||||||||||||||||
Hyungchul Kim | 80,425 | 0.00 | % | |||||||||||||||||
Jungsoo Park | 32,170 | 0.09 | % | |||||||||||||||||
Juyoung Yang | 16,084 | 0.04 | % | |||||||||||||||||
FORMER Patrick Bradley, sold w/ restriction legend off | 39,578 | 0.10 | % | |||||||||||||||||
Gary + Robin Jacobs Family Trust | 37,313 | 0.10 | % | |||||||||||||||||
Brad Park | 14,844 | 0.04 | % | |||||||||||||||||
Director RSUs Exercised (Ron, Tony) | 30,000 | 0.08 | % | |||||||||||||||||
GMP Securities L.P. | 23,115 | 0.06 | % | |||||||||||||||||
Private Placement (Canada) | 8,436,700 | 22.31 | % | |||||||||||||||||
Private Placement (USA) | 160,000 | 0.42 | % | |||||||||||||||||
WB III Existing Shares | 737,715 | 1.95 | % | |||||||||||||||||
WB III Existing Options to WB III D&O | 24,590 | 0.07 | % | |||||||||||||||||
Frankly employee stock options | 4,340,041 | 11.48 | % | |||||||||||||||||
Option Reserve | 990,114 | 2.62 | % | |||||||||||||||||
RSU - directors & officers | 360,360 | 0.95 | % | |||||||||||||||||
RSU - reserve | 0.00 | % | ||||||||||||||||||
Sum | 22,078,729 | 10,014,602 | 5,354,745 | 360,360 | 100.00 | % | ||||||||||||||
Grand Total | 37,808,436 |
(iv) | Equity Securities owned by it: Owns 100% of Frankly Media LLC and Frankly Co. outstanding securities. See information below for capitalization tables of both Frankly Media LLC and Frankly Co. |
(v) | Jurisdictions of its organization: British Columbia corporation since July 2016 (prior to July 2016, Frankly Inc. was an Ontario corporation) |
Head office: 333 Bryant Street, Suite 240, San Francisco, CA 94107 | |
Location of its corporate records or minute books and of its share or unit registers: | |
333 Bryant Street, Suite 240, San Francisco, CA 94107 | |
5 Hazelton Avenue, Suite 300, Toronto, ON M5R2E1 | |
2900 - 550 Burrard Street, Vancouver BC V6C 0A3 | |
(vi) | Obligor Location: 333 Bryant Street, Suite 240, San Francisco, CA 94107 |
(vii) | Jurisdictions in which it carries on business or has assets (including receivables) having an aggregate value in excess of $XX: |
333 Bryant Street, Suite 240, San Francisco, CA 94107
5 Hazelton Avenue, Suite 300, Toronto, ON M5R2E1
2900 - 550 Burrard Street, Vancouver BC V6C 0A3
- 2 - |
8.1.8.2 – Frankly Media LLC
(i) | Legal Name: Frankly Media LLC |
(ii) | Form of Legal Entity: Delaware limited liability company |
(iii) | Equity Securities: Refer to capitalization table as of the closing date below. All securities are 100% owned by Frankly Inc. |
Member Name and Address | Common Units | Preferred Class A Units | Preferred Class B Units | Percentage Units | ||||||||||||
Frankly Inc. | 99,352,941 | 11,188,316 | 12,984,743 | 100 | % | |||||||||||
5 Hazelton Avenue Suite 300 Phone: (416) 972-9993 Email: steve@franklyinc.corn |
(iv) | Equity Securities owned by it: N/A |
(v) | Jurisdictions of its organization: Delaware limited liability company |
Head office: 27-01 Queens Plaza North, Suite 502, Long Island City, NY 11101
Location of its corporate records or minute books and of its share or unit registers:
27-01 Queens Plaza North, Suite 502, Long Island City, NY 11101
(vi) | Obligor Location: 27-01 Queens Plaza North, Suite 502, Long Island City, NY 11101 |
(vii) | Jurisdictions in which it carries on business or has assets (including receivables) having an aggregate value in excess of $XX: |
27-01 Queens Plaza North, Suite 502, Long Island City, NY 11101 (main office)
CenturyLink (Savvis) - 300 Boulevard East, Weehawken, NJ 07086 (server farm)
- 3 - |
8.1.8.2 – Frankly Co.
(i) | Legal Name: Frankly Co. |
(ii) | Form of Legal Entity: Delaware corporation |
(iii) | Equity Securities: Refer to capitalization table as of the closing date below. All securities are 100% owned by Frankly Inc. |
Name of Shareholder | Cert. # | Date Issued | Shares Issued | Shares Cancelled | Shares Outstanding | Percentage of Common Owned | Amount Paid for or Value of Shares | Notes | ||||||||||||||||||||||||
Frankly Inc. | C-1 | 24/12/2014 | 100 | 100 | 100.00 | % | $ | 0.01 | Original Issuance | |||||||||||||||||||||||
Total: | 100 | 100 | 100.00 | % | $ | 0.01 |
(iv) | Equity Securities owned by it: N/A |
(v) | Jurisdictions of its organization: Delaware corporation |
Head office: 333 Bryant Street, Suite 240, San Francisco, CA 94107
Location of its corporate records or minute books and of its share or unit registers:
333 Bryant Street, Suite 240, San Francisco, CA 94107
(vi) | Obligor Location: 333 Bryant Street, Suite 240, San Francisco, CA 94107 |
(vii) | Jurisdictions in which it carries on business or has assets (including receivables) having an aggregate value in excess of $XX: |
333 Bryant Street, Suite 240, San Francisco, CA 94107
SCHEDULE
8.1.9
Equity Securities
8.1.9.1
Frankly Inc. – Sole member of Frankly Media LLC. See below for capitalization table of Frankly Media LLC as of the closing date.
Member Name and Address | Common Units | Preferred Class A Units | Preferred Class B Units | Percentage Units | ||||||||||||
Frankly Inc. | 99,352,941 | 11,188,316 | 12,984,743 | 100 | % | |||||||||||
5 Hazelton Avenue Suite 300 Phone: (416) 972-9993 Email: steve@franklyinc.com |
Frankly Inc. – 100% shareholder of Frankly Co. See below for capitalization table of Frankly Co. as of the closing date.
Name of Shareholder | Cert. # | Date Issued | Shares Issued | Shares Cancelled | Shares Outstanding | Percentage of Common Owned | Amount Paid for or Value of Shares | Notes | ||||||||||||||||||||||||
Frankly Inc. | C-1 | 24/12/2014 | 100 | 100 | 100.00 | % | $ | 0.01 | Original Issuance | |||||||||||||||||||||||
Total: | 100 | 100 | 100.00 | % | $ | 0.01 |
8.1.9.2
N/A
8.1.9.3
N/A
SCHEDULE
8.1.10.2
TAXES
Frankly Media LLC is currently undergoing a New York state and local sales and use tax audit examination with audit period of March 1, 2012 to February 28, 2015. Assessment has not yet been made by New York. Frankly Media LLC has set aside on its books adequate reserves in compliance with IFRS.
SCHEDULE
8.1.11.1
OWNED AND LEASED REAL PROPERTY
Leased Property:
Frankly Co.
1. | 333 Bryant Street, Suite 240, San Francisco, CA 94107 |
2. | 333 Bryant Street, Suite 230, San Francisco, CA 94107 |
3. | 333 Bryant Street, Suite 310, San Francisco, CA 94107 |
Frankly Media LLC
1. | 27-01 Queens Plaza North, Suite 502, Long Island City, NY 11101 |
Schedule
8.1.11.2
Operating Leases and Capital Leases
Frankly Media LLC
1. | Frankly Media LLC – Capital lease agreement between Frankly Media LLC (Lessee) and Dell Financial Services LLC (Lessor). As of the closing date, $23,464.52 is due under this lease agreement. |
Location of personal property under lease agreement – 27-01 Queens Plaza North, Suite 502, Long Island City, NY 11101. | |
2. | Frankly Media LLC – Capital lease agreement between Frankly Media LLC (Lessee) and EMC Corporation (Lessor). As of the closing date, $248,920.80 is due under this lease agreement. |
Location of personal property under lease agreement – CenturyLink (Savvis) - 300 Boulevard East, Weehawken, NJ 07086 (server farm).
|
SCHEDULE
8.1.15
ENVIRONMENTAL DISCLOSURE
N/A
SCHEDULE
8.1.17
INTELLECTUAL PROPERTY RIGHTS
Frankly Media LLC
Patents:
REAL-TIME VIDEO EDITING – U.S. Patent Reg. No. 8,515,241 B2, issued October 20, 2013
Trademarks:
WORLDNOW – U.S. Trademark Reg. No. 2,109,296, Reg. Date October 28, 1997
Copyrights:
Producer 4.5, U.S. Copyright Reg. No. TX0005914743
Schedule
8.1.18
Software
Schedule
8.1.19
CURRENT LIENS
DEBTOR | UCC-11 (THROUGH) |
FILING JURISDICTION |
FILING NO. AND DATE |
SECURED PARTY | COLLATERAL | COMMENTS/ ACTION | ||||||
GANNAWAY WEB HOLDINGS, LLC | Delaware Secretary of State | 20064289849 filed 12/8/06 |
Key Equipment Finance Inc. 600 Travis Street 14th Floor Houston, TX 77002 |
NOTICE FILING: The ‘Collateral’ defined below is covered by this financing statement only to the extent such Collateral is provide to or obtained by Debtor in connection with present or future: (i) leases, loans, conditional sale agreements or other agreements with Secured Party, or (ii) obligations funded by Secured Party on behalf of or at the direction of Debtor. Copies of applicable agreements with specific Collateral listings can be obtained from Secured Party. To the extent listed in applicable agreements, Collateral consists of all Debtor’s right, title and interest in the listed licenses, equipment, inventory and goods (including, without limitation, attachments, accessories, accessions, and replacements), wherever located and whether now or hereafter acquired or existing, together with all related: (a) contracts, documents of title, investment property, chattel paper, notes and instruments; (b) accounts, contract rights and general intangibles; (c) records, data, information and documentation; (d) proceeds, whether cash or non-cash, and products of the foregoing in any form; and (e) all rights, claims and remedies of Debtor arising in connection with any of the foregoing. Debtor has no independent or separate power, right or authority to encumber, transfer or dispose of such Collateral or of any interest therein except as expressly directed by Secured Party. | Continuation filed 9/10/11
Expires on 12/8/16 |
- 2 - |
DEBTOR | UCC-11 (THROUGH) |
FILING JURISDICTION |
FILING NO. AND DATE |
SECURED PARTY | COLLATERAL | COMMENTS/ ACTION | ||||||
GANNAWAY WEB HOLDINGS, LLC | 8/17/2016 | Delaware Secretary of State | 20074076724 filed 10/26/07
|
Dell Financial Services, LP 12234 N. IH-35 Bldg B Austin, TX 78753
Added 1/11/13: Dell Financial Services, LLC Mail Stop-PS2DF-23 One Dell Way Round Rock, TX 78682
|
All computer equipment and peripherals (collectively “Equipment”) wherever located, financed under and described in the Master Lease Agreement (“MLA”) entered into between Lessee and Lessor and all o Lessee’s rights, title and interest in and to use any software and services (collectively “Software”) financed under and described in the MLA, along with any modifications or supplements to the MLA which are incorporated or evidenced in writing and all substitutions, additions, assessions and replacements to the Equipment or Software now or hereafter installed in, affixed to, or used in conjunction with the Equipment or Software and the proceeds thereof together with all payments, insurance proceeds, credits or refunds obtained by Lessee from a manufacturer, licensor or service provider, or other proceeds and payments due and to become due and arising from or relating to such Equipment, Software or the MLA. | Continuation filed 9/14/12
Dell Financial Services, LP removed and Dell Financial Services L.L.C. added 1/11/13
Expires on 10/26/17 |
- 3 - |
DEBTOR | UCC-11 (THROUGH) |
FILING JURISDICTION |
FILING NO. AND DATE |
SECURED PARTY | COLLATERAL | COMMENTS/ ACTION | ||||||
GANNAWAY WEB HOLDINGS, LLC | 8/17/2016 | Delaware Secretary of State | 20114819408 Filed 12/15/11 |
IBM Credit LLC 1 North Castle Drive Armonk, KY 10504 |
All of the following equipment together with all related software, whether now owned or hereafter acquired and wherever located (all as more fully described on IBM Credit LLC Supplement(s) # H07413) including one or more of the following: 9994-001 (IBM), CISS-OLN (CISCO-2X XEON QUAD CORE 2.13GHZ 24) all additions, attachments, accessories, accessions and upgrades thereto and any and all substitutions, replacements or exchanges for any such item of equipment or software and any and all proceeds of any of the foregoing, including, without limitation, payments under insurance or any indemnity or warranty relating to loss or damage to such equipment and software. IMB Credit LLC files this notice as a precautionary filing. See UCC9-905. (12/15/11) UCC Log Number: CPVP0H07413 3685153 | Expires on 12/15/16 | ||||||
GANNAWAY WEB HOLDINGS, LLC | 8/17/2016 | Delaware Secretary of State | 20120493983 Filed 2/7/12 |
Merchant Lending PO Box 15270 Irvine, CA 92623-527
Fully Assigned on 2/8/12 to: Susquehanna Commercial Finance, Inc. 2 Country View Road, Suite 300 Malvern, PA 19355 |
All equipment and other personal property, including but not limited to, furniture, fixtures and equipment subject to that certain Agreement Number LA# 102927-008 dated 2/7/2012, between Secured Party as Lessor/Creditor and Debtor as Lessee/Debtor, and subject to any and all existing and future schedules entered into pursuant to and incorporating said Agreement, together with all accessories, parts, attachments and appurtenances appertaining or attached to any of the Equipment, and all substitutions, trade-ins, proceeds, renewals and replacements of, and improvements and accessions to the Equipment. LA# 102927-008 | Expires on 2/7/17 |
- 4 - |
DEBTOR | UCC-11 (THROUGH) |
FILING JURISDICTION |
FILING NO. AND DATE |
SECURED PARTY | COLLATERAL | COMMENTS/ ACTION | ||||||
GANNAWAY WEB HOLDINGS, LLC & WORLDNOW |
8/17/2016 | Delaware Secretary of State | 20144763884 Filed on 11/25/14 |
Bank of the West 475 Sansome Street 19th Floor San Francisco, CA 94111 |
Isilon 3 X200-SATA-S23 6 851-0154 8 800-0012 3 851-0099 2 851-0167 1 201-0300 1 PS-BAS-IBMSP 1 PS-BAS-INIS2U 1 CE-VPISILONAM 1 M-PREHWI-001 1 M-PRESWI-001 3 611-0005 3 612-0019 5 800-0012 3 613-0002 3 800-0012 1 TRK-ENTERP DESC 3 201-0300 1 PS-BAS-MIBISI
XtremIO 1 X02-D25-800F 2 X02-UPS-220FP
1 CE-SUBCUS01 1 PS-BAS-XTINBS 1 PS-BAS-XTIMBS 1 PREHWX-001 Including but not limited to all replacements, parts, repairs and attachments incorporated therein or affixed thereto, now owned or hereafter acquired and all proceeds thereof. |
Amended to add Collateral
Expires on 11/25/2019 | ||||||
FRANKLY MEDIA LLC | Western Alliance Bank | The certain deposit account (“Account”) maintained by Applicant with Bank and referred to as account no. 102107489 in an amount equal to USD524,115.40 , 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 | Pursuant to Standby Letter of Credit dated August 30, 2016 by and between Frankly Media LLC and Western Alliance Bank |
- 5 - |
***Exhibit 7.1.1.4
CODE ESCROW AGREEMENT
See attached.
- 6 - |
CODE ESCROW AGREEMENT
THIS AGREEMENT dated August 31, 2016,
B E T W E E N :
FRANKLY INC., a corporation existing under the laws of the Province of British Columbia
(“Frankly”)
- and -
RAYCOM MEDIA, INC., a corporation existing under the laws of Delaware
(“Raycom”)
CONTEXT:
A. | Frankly Media LLC (formerly Gannaway Web Holdings LLC) (“Frankly LLC) and Raycom entered into a Website Software and Services Agreement dated October 1, 2011, as amended (the “License Agreement”). |
B. | Frankly and Raycom entered into a share purchase agreement dated the date hereof (the “Share Purchase Agreement”) pursuant to which Frankly agreed to issue common shares in the capital stock of Frankly to Raycom in satisfaction of certain indebtedness owing by Frankly to Raycom. |
C. | Frankly and Raycom also entered into a credit agreement dated the date hereof (the “Loan Agreement; pursuant to which Raycom, as lender, agreed to make certain loans to Frankly, as borrower. |
D. | It is a condition of the Closing (as defined in the Share Purchase Agreement) that Frankly execute and deliver this Agreement, and agree to deposit the Source Code with the Escrow Agent within the timeframe set forth in the Iron Mountain Escrow Agreement |
THEREFORE, the Parties agree as follows:
- 2 - |
ARTICLE 1
DEFINITIONS
1.1 | Defined Terms |
In this Agreement, the following terms have the following meanings:
1.1.1 | “Agreement” means this agreement, including all Schedules, as it may be confirmed, amended, modified, supplemented or restated by written agreement between the Parties. |
1.1.2 | “Back-Up Services” means the services and activities to be performed by or on behalf of Frankly for the benefit of Raycom pursuant to Article 4. |
1.1.3 | “Deposit Materials” has the meaning ascribed to that term in the Iron Mountain Escrow Agreement |
1.1.4 | “Escrow Agent” means Iron Mountain Intellectual Property Management, Inc. |
1.1.5 | “Frankly LLC” is defined in the recitals. |
1.1.6 | “Iron Mountain Escrow Agreement” means the Three-Party Master Depositor Escrow Service Agreement dated [the date hereof] between Raycom, Frankly LLC and the Escrow Agent |
1.1.7 | “License Agreement” is defined in the recitals. |
1.1.8 | “Loan Agreement” is defined in the recitals. |
1.1.9 | “Parties” means Raycom and Frankly. |
1.1.10 | “Release Condition” means a condition, the occurrence of which will entitle Raycom to cause the Software to be released from escrow under the Iron Mountain Escrow Agreement or the SaaS Escrow Agreement. |
1.1.11 | “SaaS Escrow Agreement” has the meaning ascribed to that term in Section 3.5.1. |
1.1.12 | “Services” means the services to be performed by Frankly LLC pursuant to the |
License Agreement. |
- 3 - |
1.1.13 | “Share Purchase Agreement” is defined in the recitals. |
1.1.14 | “Sites” has the meaning ascribed to that term in the License Agreement |
1.1.15 | “Software” bas the meaning ascribed to that term in the License Agreement |
1.1.16 | “Source Code” means the uncompiled version of the Software written in a generally recognized programming language, including all comments and procedural code, in a form intelligible to trained programmers and capable of being translated into executable code for operation on computer equipment through assembly or compiling the software in a programming language, together with all notes, schematics and other documentation, if any, related thereto or necessary for the support or maintenance thereof |
- 4 - |
1.2 | Certain Rules of Interpretation |
1.2.1 | In this Agreement, words signifying the singular number include the pl and vice versa, and words signifying gender include all genders. Every use of the word ’‘including” in this Agreement is to be construed as meaning “including, without limitation”. |
1.2.2 | The division of this Agreement into Articles and Sections, the insertion of headings and the provision of a table of contents are for convenience of reference only and do not affect the construction or interpretation of this Agreement |
1.2.3 | References in this Agreement to an Article or Section are to be construed as references to an Article or Section of this Agreement unless the context requires otherwise. |
1.3 | Governing Law |
This Agreement is governed by, and is to be construed and interpreted in accordance with, the laws of the Province of Ontario and the laws of Canada applicable in that Province.
1.4 | Entire Agreement |
This Agreement constitutes the entire agreement between the Parties pertaining to the subject matter of this agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties, and there are no representations, warranties or other agreements between the Parties, express or implied, in connection with the subject matter of this agreement except as specifically set out in this Agreement. No Party has been induced to enter into this agreement in reliance on, and there will be no liability assessed, either in tort or contract, with respect to, any warranty, representation, opinion, advice or assertion of fact, except to the extent it has been reduced to writing and included as a term in this Agreement
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ARTICLE 2
TERM AND TERMINATION
2.1 | Term |
The term of this Agreement will commence on the date hereof and end upon the expiration or termination of the License Agreement, subject to earlier termination pursuant to Section 2.2.
2.2 | Termination |
Raycom may terminate this Agreement at any time upon written notice to Frankly.
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ARTICLE 3
ESCROW ARRANGEMENTS
3.1 | Initial Deposit |
Frankly represents and warrants that: (i) the Deposit Materials contain all of the Source Code and all other instructions and materials necessary to enable Raycom to perform the Services itself and (ii) such Deposit Materials will be deposited with the Escrow Agent in accordance with the terms of the Iron Mountain Escrow Agreement
3.2 | Deposit Material Updates |
Frankly warrants that it will ensure that the then-current version of the Source Code and all other instructions and materials forming part of the Deposit Materials is deposited with the Escrow Agent as an update to the Deposit Materials no less frequently than once per calendar quarter and following the completion of each major update to or release of the Software.
3.3 | Verification of Deposit Materials |
Frankly acknowledges that, from time to time, Raycom may request that the Escrow Agent verify that the Deposit Materials are complete and capable of being 1ranslated into executable code that operates in accordance with the requirements of the License Agreement. Raycom will bear all such verification costs, provided that Frankly will promptly reimburse Raycom for such costs if the Escrow Agent determines that the Deposit Materials are not complete and Frankly does not cure such deficiency within 30 days following written notice thereof from Raycom.
3.4 | Release of Deposit Materials |
If the Deposit Materials are released by the Escrow Agent due to the occurrence of a Release Condition consisting of a default under the Loan Agreement, Frankly may contest with Raycom whether the Release Condition was met, and if it is subsequently determined by a court of competent jurisdiction that the Release Condition was not met, Frankly and Raycom will renew their agreement with the Escrow Agent and Raycom will return the Deposit Materials to the Escrow Agent Raycom acknowledges that any release of the Deposit Materials or breach of the Loan Agreement will not, by themselves, relieve Raycom’s obligation to make payments under the License Agreement
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3.5 | SaaS Escrow |
3.5.1 | Frankly represents and warrants that Frankly LLC has completed and submitted to the Escrow Agent the Escrow Agent>s standard form of SaaS Protect Environment Questionnaire. Frankly will promptly provide to Raycom copies of all information, including information relating to pricing, provided by the Escrow Agent to Frankly or Frankly LLC in relation to the possible provision of escrow services pursuant the SaaS Escrow Agreement. Frankly will provide Raycom with all such assistance that Raycom may reasonably request in order to determine the benefits that Raycom might receive in the event that Frankly was to enter into the SaaS Escrow Agreement. |
3.5.2 | If: at any time and for any reason, Raycom is not satisfied with Frankly’s performance of the Back-Up Services, Raycom may require Frankly, upon written notice to Frankly, to enter into a SaaS escrow agreement with the Escrow Agent on the Escrow Agent’s standard terms or such other terms as Raycom may, acting reasonably, require (the “SaaS Escrow Agreement”). Upon receipt of such notice, Frankly will as promptly as reasonably possible, but in any event no later than October 1, 2017, provide the Escrow Agent with an instance of the Software configured for the Escrow Agent’ s deployment of the Software < > sufficient for the Escrow Agent or Raycom to operate the Sites covered by the License Agreement If Frankly bas not complied with its obligations in the preceding sentence and has not cured such deficiency within 30 days following written notice thereof from Raycom such failure will constitute a material breach of this Agreement. |
3.5.3 | Upon the occurrence of a Release Condition, Raycom will have the option to switch the active operation of the Sites to the instance of the Software administered by the Escrow Agent Raycom will be responsible for < > under the SaaS Escrow Agreement |
3.5.4 | To facilitate Raycom’s use of the Software upon the occurrence of a Release Condition, Frankly will at any time upon not less than ten day’s notice from Raycom, make senior members of Frankly’s technical staff available to provide sufficient training to Raycom and the Escrow Agent to enable Raycom or the Escrow Agent to |
(i) | launch, configure and operate the escrow versions of Software for Raycom for the uses permitted in the License Agreement and (ii)perform such other activities as may be necessary to enable Raycom or the Escrow Agent to perform the Services. Raycom will pay for such training at the rate of < >. |
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ARTICLE 4
BACK-UP SERVICES
4.1 | Development of < > Proof of Concept |
Frankly will implement a non-production, proof of concept instance of Frankly’s < >, in a manner acceptable to Raycom acting reasonably, by January 1, 2017. Frankly will ensure that Frankly is capable of accelerating its proof of concept < > upon thirty days’ notice from Raycom A one-time cost of $200,000 will be charged by Frankly to make up for the cost of overtime and additional resources for this acceleration, which amount will be payable by Raycom upon acceptance by Raycom of such full product ready instance.
4.2 | Full Backup Services < > |
Frankly will implement < >, by October 1, 2017. < >
4.3 | Establishment of < > |
Frankly will create < > no later than October 1, 2017.
4.4 | Verification Assistance |
Frankly will, without charge, provide Raycom with such assistance as Raycom may reasonably require to verify that Frankly has satisfied its obligations under this Article 4.
45 | Contractual Transition |
As promptly as practically possible, Frankly will -use its best efforts to ensure that, if a Release Condition were to occur, Raycom will have the right to use all of the services of third-parties that Frankly currently relies upon to make the Software and Services available to Raycom under the License Agreement, including assisting Raycom with entering into contracts directly with such service providers in a manner that entitles Raycom to receive the same services at the same service levels as Raycom is receiving through the establishment of separate accounts with such service providers or otherwise. Frankly will use its best efforts to ensure that (i) Raycom is able to exercise such rights without any liability to pay for any past services performed for Frankly by such third-parties and (ii) the costs to be incurred by Raycom prior to exercising such rights are minimized. Frankly will permit Raycom and its legal counsel to participate in any discussions or negotiations with such third-party service providers upon request by Raycom and provide Raycom with all reasonable assistance that Raycom may require in such regard, including providing Raycom with such information as it may reasonably require to configure any accounts that it may set up with such service providers to be consistent with the configurations used by Frankly.
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4.6 | Proposed Timeline |
The Parties agree that the proposed timeline for the completion of the major project milestones associated with the Back-Up Services are set out in Schedule A Each Party will use its best efforts to ensure that all Back-Up Services are completed in accordance with such proposed timelines unless the Parties otherwise agree in writing. Nothing in this Section 4.6 will relieve Frankly of its obligation to complete those activities identified in Sections 4.1, 4.2 and 4.3 by the dates set out in those Sections. Frankly acknowledges that Raycom has entered into each of the Share Purchase Agreement and the Loan Agreement based in part on the representations by Frankly that (i) the timelines set out in Schedule A are realistic and achievable in light of the information available to Frankly as of the date hereof and (ii) the activities identified in Sections
4.1, 4.2 and 4.3 will be completed by the dates set out in those Sections. H Frankly has not complied with its obligation to complete an activity set out in any of Section 4.1, 4.2 or 4.3 by the date set out in the applicable Section and has not cured such deficiency within 30 days following written notice thereof from Raycom, such failure will constitute a material breach of this Agreement
ARTICLE 5
GENERAL
5.1 | Notices |
Any notice provided in connection with this Agreement will be provided in accordance with Section [11.2] of the Loan Agreement
5.2 | Severability |
F.ach provision of this Agreement is distinct and severable. If any provision of this Agreement, in whole or in part, is or becomes illegal, invalid or unenforceable in any jurisdiction, the illegality, invalidity or unenforceability of that provision will not affect
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5.2.1 | the legality, validity or enforceability of the remaining provisions of this Agreement; or |
5.2.2 | the legality, validity or enforceability of that provision in any other jurisdiction. |
5.3 | Submission to Jurisdiction |
Without prejudice to the ability of any Party or the Escrow Agent to enforce this Agreement in any other proper jurisdiction, each of the Parties and the Escrow Agent irrevocably submits and attorns to the non-exclusive jurisdiction of the courts of the Province of Ontario to determine all issues, whether at law or in equity, arising from this Agreement To the extent permitted by applicable law, each of the Parties and the Escrow Agent:
5.3.1 | irrevocably waives any objection (including any claim of inconvenient forum) that it may now or hereafter have to the venue of any legal proceeding arising out of or relating to this Agreement in the courts of the Province of Ontario, or that the subject matter of this Agreement may not be enforced in those courts; |
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5.3.2 | irrevocably agrees not to seek, and waives any right to, judicial review by any court which may be called upon to enforce the judgment of the courts of the Province of Ontario, of the substantive merits of any such suit, action or proceeding; and |
5.3.3 | to the extent a Party or the Escrow Agent has or hereafter may acquire any immunity from the jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, that Party or the Escrow Agent, as the case may be, irrevocably waives such immunity in respect of its obligations under this Agreement. |
5.4 | Remedies Cumulative |
The rights and remedies of the Parties and the Escrow Agent under this Agreement are cumulative and not alternative.
5.5 | Further Assurances |
Each of the Parties, upon the request of the other Party will do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered all further acts, deeds, documents, assignments, transfers, conveyances, powers of attorney and assurances as may be reasonably necessary or desirable to complete and give full effect to the transactions contemplated by this Agreement.
5.6 | Amendment and Waiver |
No supplement, modification, amendment, waiver, discharge or termination of this Agreement is binding unless it is executed in writing by each of the Parties and the Escrow Agent No waiver of, failure to exercise or delay in exercising, any provision of this Agreement constitutes a waiver of any other provision (whether or not similar) nor does any waiver constitute a continuing waiver unless otherwise expressly provided
5.7 | Assignment and Enurement |
None of the Parties and the Escrow Agent may assign this Agreement, or any of its rights or obligations under this Agreement, without the prior written consent of the Parties, or the Escrow Agent and the other Party, as the case may be. This Agreement enures to the benefit of and is binding upon the Parties and the Escrow Agent and their respective successors and permitted assigns.
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5.8 | Counterparts |
This Agreement may be executed and delivered by the Parties in one or more counterparts, each of which when so executed and delivered will be an original, and each of which may be delivered by facsimile or functionally equivalent electronic means, and such counterparts will together constitute one and the same instrument
THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFI’ BLANK.
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Each of die Parties has executed and delivered this Agreement as of the Effective Date.
FRANKLY INC. | ||
Per. | ||
Name: | ||
Title: | ||
RAYCOM MEDIA, INC. | ||
Per. | ||
Name: | ||
Title: |
Schedule •A”
Key Target Milestone Timeline -High Level Deliverables
< >
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Reference Logical Diagram (Frankly Services)
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***** Exhibit 7.1.1.5
THREE-PARTY ESCROW SERVICE AGREEMENT
See attached.
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IRON MOUNTAIN ·
Effective Date |
Deposit Account Number |
•Effective Date and Deposit Account Number to be supplied by Iron Mountain only. |
Three-Party Escrow Service Agreement
1. | I introduction |
This Three Party Escrow Service Agreement (the “Agreement”) is entered into by and between Frankly Media LLC (the “Depositor”), and by Raycom Media, Inc. (the “Beneficiary”) and by Iron Mountain Intellectual Property Management, Inc. (“Iron Mountain”). Depositor, Beneficiary, and Iron Mountain may be referred to individually as a “Party” or collectively as the “Parties” throughout this Agreement. |
a | The use of the term services in this Agreement shall refer to Iron Mountain services that facilitate the creation, management, and enforcement of software or other technology escrow accounts as described in Exhibit A attached to this Agreement (“Services”). A Party shall request Services under this Agreement by selecting such Service on Exhibit A upon execution of the Agreement or by submitting a work request for certain Iron Mountain Services (“Work Request”) via written instruction or the online portal maintained at the website located at www.ironmountainconnect.com or other websites owned or controlled by Iron Mountain that are linked to that website (collectively the “Iron Mountain Website”). | |
b | The Beneficiary and Depositor have, or will have, entered into a license agreement or other agreement (“License Agreement”) conveying intellectual property rights to the Beneficiary, and the Parties intend this Agreement to be considered as supplementary to such agreement, pursuant to Title 11United States [Bankruptcy] Code, Section 365(n). |
2. | Depositor Responsibilities and Representations |
(a) | It shall be solely the Depositor’s responsibility to: (i) make an initial deposit of all proprietary technology and other materials covered under this Agreement ((“Deposit Material’) to Iron Mountain within thirty (30) days of the Effective Date; (ii) make any required updates to the Deposit Material during the Term (as defined below) of this Agreement; and | |
(iii) ensure that a minimum of one (1) copy of Deposit Material is deposited with Iron Mountain at all times. At the time of each deposit or update, Depositor will provide an accurate and complete description of all Deposit Material sent 1D Iron Mountain using the form attached to this Agreement as Exhibit B. | ||
(b) | Depositor represents that it lawfully possesses all Deposit Material provided to Iron Mountain under this Agreement and that any current or future Deposit Material liens or encumbrances will not prohibit, limit, or alter the rights and obligations of Iron Mountain under this Agreement. Depositor warrants that with respect to the Deposit Material, Iron Mountain’s proper administration of this Agreement will not violate the rights of any third parties. | |
(c) | Depositor represents that all Deposit Material is readable and useable in its then current form; if any portion of such Deposit Material is encrypted, the necessary decryption tools and keys to read such material are deposited contemporaneously. |
3. | Beneficiary Responsibilities and Representations |
(a) | Beneficiary acknowledges that, as between Iron Mountain and Beneficiary, Iron Mountain’s obligation is to maintain the Deposit Material as delivered by the Depositor and that, other than Iron Mountain’s inspection of the Deposit Material (as described in Section 4) and the performance of any of the optional verification Services listed in Exhibit A, Iron Mountain has no other obligation regarding the completeness, accuracy, or functionality of the Deposit Material. | |
(b) | It shall be solely the Beneficiary’s responsibility to monitor whether a deposit or deposit update has been accepted by Iron Mountain. |
4. | Iron Mountain Responsibilities and Representations |
(a) | Iron Mountain agrees to use commercially reasonable efforts to provide the Services requested by Authorized Person(s) (as identified in the “Authorized Person(s)/Notices Table” below) representing the Depositor or Beneficiary in a Work Request. Iron Mountain may reject a Work Request (in whole or in part) that does not contain all required information at any time upon notification to the Party originating the Work Request. | |
(b) | Iron Mountain will conduct a visual inspection upon receipt of any Deposit Material and associated Exhibit B. If Iron Mountain determines that the Deposit Material does not match the description provided by Depositor represented in Exhibit B, Iron Mountain will notify Depositor of such discrepancy. | |
(c) | Iron Mountain will provide notice to the Beneficiary of all Deposit Material that is accepted and deposited into the escrow account under this Agreement. Unless Depositor or Beneficiary submits a Work Request for “Deposit Tracking Notification• as described in Exhibit Iron Mountain shall not have any obligation to prompt the Depositor to make a deposit. nor shall it have an obligation to notify the Beneficiary of the Depositor’s failure to make a deposit or deposit update. Notwithstanding the forgoing, either Depositor or Beneficiary may obtain information regarding deposits or deposit updates upon request or through the Iron Mountain Website. |
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(d) | Iron Mountain will follow the provisions of Exhibit C attached to this Agreement in administering the release of Deposit Material. | |
(e) | Iron Mountain will hold and protect Deposit Material in physical or electronic vaults that are either owned or under the control of Iron Mountain, unless otherwise agreed to by the Parties. | |
(f) | Upon receipt of written instructions by both Depositor and Beneficiary, Iron Mountain will permit the replacement or removal of previously submitted Deposit Material. The Party making such request shall be responsible for getting the other Party to approve the joint instructions. Any Deposit Material that is removed from the deposit account will be either returned to Depositor or destroyed in accordance with Depositor’s written instructions. | |
(g) | Should transport of Deposit Material be necessary for Iron Mountain to perform Services requested by Depositor or Beneficiary under this Agreement or following the termination of this Agreement, Iron Mountain will use a commercially recognized overnight carrier such as Federal Express or United Parcel Service. Iron Mountain will not be responsible for any loss or destruction of, or damage to, such Deposit Material while in the custody of the common carrier. |
5. | Deposit Material Verification |
(a) | Beneficiary may submit a verification Work Request to Iron Mountain for one or more of the Services defined in Exhibit A attached to this Agreement and Depositor consents to Iron Mountain’s performance of any level(s) of such Services. Upon request by Iron Mountain and in support of Beneficiary’s request for verification Services, Depositor shall promptly complete and return an escrow deposit questionnaire and reasonably cooperate with Iron Mountain by providing reasonable access to its technical personnel whenever reasonably necessary. | |
(b) | The Parties consent to Iron Mountain’s use of a subcontractor to perform verification Services. Such subcontractor shall be bound by the same confidentiality obligations as Iron Mountain and shall not be a direct competitor to either Depositor or Beneficiary. Iron Mountain shall be responsible for the delivery of Services of any such subcontractor as if Iron Mountain had performed the Services. Depositor warrants and Beneficiary warrants that any material it supplies for verification Services is lawful, does not violate the rights of any third parties and is provided with all rights necessary for Iron Mountain to perform verification of the Deposit Material. | |
(c) | Iron Mountain will work with a Party who submits any verification Work Request for Deposit Material covered under this Agreement to either fulfill any standard verification Services Work Request or develop a custom Statement of Work (“SOW”). Iron Mountain and the requesting Party will mutually agree in writing to an SOW on terms and conditions that include but are not limited to: description of Deposit Material to be tested; description of verification testing requesting Party responsibilities; Iron Mountain responsibilities; Service Fees; invoice payment instructions; designation of the paying Party; designation of authorized SOW representatives for both the requesting Party and Iron Mountain with name and contact information; and description of any final deliverables prior to the start of any fulfillment activity. Provided that the requesting Party has identified in the verification Work Request or SOW that the Deposit Material is subject to the regulations of the International Traffic in Arms Regulations (22 CFR 120)(hereinafter “ITAR”), Iron Mountain shall ensure that any subcontractor who is granted access to the Deposit Material for the performance of verification Services shall be a U.S. Person as defined in 8 US.C. 1101(a)(20) or who is a protected person as defined in 8 US.C.1324b(a)(3). After the start of fulfillment activity, each SOW may only be amended or modified in writing with the mutual agreement of both Parties, in accordance with the change control procedures set forth in the SOW. If the verification Services extend beyond those described in Exhibit A, the Depositor shall be a necessary Party to the SOW governing the Services. |
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6. | Payment |
The Party responsible for payment designated in the Paying Party Billing Contact Table (“Paying Party”) shall pay to Iron Mountain all fees as set forth in the Work Request (“Service Fees”). All Service Fees are due within thirty (30) calendar days from the date of invoice in U.S. currency and are non-refundable. Iron Mountain may update Service Fees with a ninety (90) calendar day written notice to the Paying Party during the Term of this Agreement (as defined below). The Paying Party is liable for any taxes (other than Iron Mountain income taxes) related to Services purchased under this Agreement or shall present to Iron Mountain an exemption certificate acceptable to the taxing authorities. Applicable taxes shall be billed as a separate item on the invoice. Any Service Fees not collected by Iron Mountain when due shall bear interest until paid at a rate of one percent (1%) per month ((12% per annum) or the maximum rate permitted by law, whichever is less. Notwithstanding the non-performance of any obligations of Depositor to deliver Deposit Material under the license Agreement or this Agreement. Iron Mountain is entitled to be paid all Service Fees that accrue during the Term of this Agreement.
1. | Term and Termination |
(a) | The term of this Agreement is for a period of one (1) year from the Effective Date (“Initial Term”) and will automatically renew for additional one (1) year terms (“Renewal Term”) (collectively the “Term”). This Agreement shall continue in full force and effect until one of the following events occur: (i) Depositor and Beneficiary provide Iron Mountain with sixty (60) days’ prior written joint notice of their intent to terminate this Agreement; (ii) Beneficiary provides Iron Mountain and Deposit with sixty (60) days’ prior written notice of its intent to terminate this Agreement; (ii) the Agreement terminates under another provision of this Agreement; or (iv) any time after the Initial Term, Iron Mountain provides sixty (60) days’ prior written notice to the Depositor and Beneficiary of Iron Mountain’s intent to terminate this Agreement. The Effective Date and the Deposit Account Number shall be supplied by Iron Mountain only. The Effective Date supplied by Iron Mountain and specified above shall be the date Iron Mountain sets up the escrow account. |
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(b) | Unless the express terms of this Agreement provide otherwise, upon termination of this Agreement, Iron Mountain shallreturn physical Deposit Material to the Depositor and erase electronically submitted Deposit Material. If reasonable attempts to return the physical Deposit Material to Depositor are unsuccessful, Iron Mountain shall destroy the Deposit Material. | |
(c) | In the event of the nonpayment of undisputed Service Fees owed to Iron Mountain, Iron Mountain shall provide all Parties to this Agreement with written notice of Iron Mountain’s intent to terminate this Agreement. Any Party to this Agreement shall have the right to make the payment to Iron Mountain to cure the default. If the past due payment is not received in full by Iron Mountain within thirty (30) calendar days of the date of such written notice, then Iron Mountain shall have the right to terminate this Agreement at any time thereafter by sending written notice to all Parties. Iron Mountain shall have no obligation to perform the Services under this Agreement (except those obligations that survive termination of this Agreement, which includes the confidentiality obligations in Section 10) so long as any undisputed Service Fees due Iron Mountain under this Agreement remain unpaid. |
8. | Infringement Indemnification |
Anything in this Agreement to the contrary notwithstanding, Depositor at its own expense shall defend, indemnify and hold Iron Mountain fully harmless against any claim or action asserted against Iron Mountain(specifically including costs and reasonable attorneys’ fees associated with any such claim or action) to the extent such claim or action is based on an assertion that Iron Mountain’s administration of this Agreement infringes any patent. copyright, license or other proprietary right of any third party. When Iron Mountain has notice of a claim or action, it shall promptly notify Depositor in writing. Depositor may elect to control the defense of such claim or action or enter into a settlement Agreement, provided that no such settlement or defense shall include any admission or implication of wrong doing on the part of Iron Mountain without Iron Mountain’s prior written consent, which consent shall not be unreasonably delayed or withheld. Iron Mountain shall have the right to employ separate counsel and participate in the defense of any claim at its own expense.
9. | Warranties |
IRON MOUNTAIN WARRANTS ANY AND ALL SERVICES PROVIDED HEREUNDER SHALL BE PERFORMED IN ACOMMERCALLY REASONABLE MANNER CONSISTENT WITH INDUSTRY STANDARDS. EXCEPT AS SPEOAED INTHIS SECTION.ALL CONDITIONS, REPRESENTATIONS, AND WARRANTIES INCLUDING, WITHOUT LIMITATION,ANY IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABILITY. ATNESS FOR A PARTICULAR PURPOSE, SATISFACTORY QUALITY, OR ARISING FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE, ARE HEREBY EXQ.UDED TO THE EXTENT ALLOWED BY APPLICABLE LAW. AN AGGRIEVED PARTY MUST NOTIFY IRON MOUNTAIN PROMPTLY UPON LEARNING OF ANY CLAIMED BREACH OF ANY WARRANTY AND.TO THE EXTENT ALLOWED BY APPLICABLE LAW, SUCH PARTY’S REMEDY FOR BREACH OF THIS WARRANTY SHALL BE SUBJECT TO THE LIMITATION OF LIABILITY AND CONSEQUENTIAL DAMAGES WAIVER INTHIS AGREEMENT. THIS OISOAIMER ANO EXCLUSION SHALL APPLY EVEN IF THE EXPRESS WARRANTY AND LIMITED REMEDY SET FORTH ABOVE FAILS OF ITS ESSENTIAL PURPOSE.
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10. | ConfidentialInformation |
Iron Mountain shall have the obligation to implement and maintain safeguards designed to protect the confidentiality of the Deposit Material and use at least the same degree of care to safeguard the confidentiality of the Deposit Material as it uses to protect its own confidential information but in no event less than a reasonable degree of care. Except as provided in this Agreement Iron Mountain shall not use or disclose the Deposit Material. Iron Mountain shall not disclose the terms of this Agreement to any third party other than its financial, technical, or legal advisors, or its administrative support service providers. Any such third party shall be bound by the same confidentiality obligations as Iron Mountain. If Iron Mountain receives a subpoena or any other order from a court or other judicial tribunal pertaining to the disclosure or release of the Deposit Material. Iron Mountain will promptly notify the Parties to this Agreement unless prohibited by law. After notifying the Parties, Iron Mountain may comply in good faith with such order or subpoena. It shall be the responsibility of Depositor or Beneficiary to challenge any such order or subpoena; provided, however, that Iron Mountain does not waive its rights to present its position with respect to any such order or subpoena. Iron Mountain will cooperate with the Depositor or Beneficiary, as applicable, to support efforts to quash or limit any order or subpoena, at such Party’s expense.
11. | Limitation of Liability |
EXCEPT FOR: (I) LIABILITY FOR DEATH OR BODILY INJURY; (II) PROVEN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT; OR (111) THE INFRINGEMENT INDEMNIFICATION OBLIGATIONS OF SECTION 8,ALL OTHER LIABILITY RELATED TO THIS AGREEMENT, IF ANY,WHETHER ARISING IN CONTRACT, TORT (INCLUDING NEGLIGENCE) OR OTHERWISE, OF ANY PARTY TO THIS AGREEMENT SHALL BE LIMITED TO THE AMOUNT EQUALTO ONE YEAR OF FEES PAIDTO IRON MOUNTAIN UNDER THIS AGREEMENT. IF CLAIM OR LOSS IS MADE IN RELATION TO A SPECIFIC DEPOSIT OR DEPOSITS, SUCH LIABILITY SHALL BE LIMITED TO THE FEES RELATED SPECIFICALLY TO SUCH DEPOSITS.
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12. | Consequential Damages Waiver |
IN NO EVENT SHALL ANY PARTY TO THIS AGREEMENT BE LIABLE FOR ANY INCDENT SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, LOST PROFITS, ANY COSTS OR EXPENSES FOR THE PROCUREMENT OF SUBSTITUTE SERVICES (EXCLUDING SUBSTITUTE ESCROW SERVICES), OR ANY OTHER INDIRECT DAMAGES,WHETHER ARISING IN CONTRACT,TORT 0NCLUDING NEGLIGENCE) OR OTHERWISE EVEN IF THE POSSIBILITY THEREOF MAY BE KNOWN INADVANCE TO ONE OR MORE PARTIES.
13. | General |
(a) | Purchase Orders. In the event that the Paying Party issues a purchase order or other instrument used to pay Service Fees to Iron Mountain, any terms and conditions set forth in the purchase order which constitute terms and conditions which are in addition to those set forth in this Agreement or which establish conflicting terms and conditions to those set forth in this Agreement are expressly rejected by Iron Mountain. | |
(b) | Right to Make Copies. Iron Mountain shall have the right to make copies of all Deposit Material as reasonably necessary to perform the Services. Iron Mountain shall copy all copyright. nondisclosure, and other proprietary notices and titles contained on Deposit Material onto any copies made by Iron Mountain. Any copying expenses incurred by Iron Mountain as a result of a Work Request to copy will be borne by the requesting Party. Iron Mountain may request Depositor’s reasonable cooperation in promptly copying Deposit Material in order for Iron Mountain to perform this Agreement. | |
(c) | Choice of Law. The validity, interpretation, and performance of this Agreement shall be construed under the laws of the Commonwealth of Massachusetts, USA, without giving effect to the principles of conflicts of laws. | |
(d) | Authorized Person(s). Depositor and Beneficiary must each authorize and designate one person whose actions will legally bind such Party (“Authorized Person who shall be identified in the Authorized Person(s) Notices Table of this Agreement or such Party’s legal representative) and who may manage the Iron Mountain escrow account through the Iron Mountain website or written instruction. Depositor and Beneficiary warrant that they shall maintain the accuracy of the name and contact information of their respective designated Authorized Person during the Term of this Agreement by providing Iron Mountain with a written request to update its records for the Party’s respective Authorized Person which includes the updated information and applicable deposit account number(s). | |
(e) | Right to Rely on Instructions. With respect to release of Deposit Material or the destruction of Deposit Material, Iron Mountain shall rely on instructions from a Party’s Authorized Person. In all other cases, Iron Mountain may act in reliance upon any instruction, instrument. or signature reasonably believed by Iron Mountain to be genuine and from an Authorized Person, officer, or other employee of a Party. Iron Mountain may assume that such representative of a Party to this Agreement who gives any written notice, request, or instruction has the authority to do so. Iron Mountain will not be required to inquire into the truth of, or evaluate the merit of, any statement or representation contained in any notice or document reasonably believed to be from such representative. |
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(f) | Force Majeure. No Party shall be liable for any delay or failure in performance due to events outside the defaulting Party’s reasonable control, including without limitation acts of God, strikes, riots, war, acts of terrorism, fire, epidemics, or delays of common carriers or other circumstances beyond its reasonable control. The obligations and rights of the excused Party shall be extended on a day-to-day basis for the time period equal to the period of the excusable delay. | |
(g) | Notices. Iron Mountain shall have the right to rely on the last known address provided by each the Depositor and Beneficiary for its respective Authorized Person and Billing Contact as set forth in this Agreement or as subsequently provided as an update! to such address. All notices regarding Exhibit C (Release of Deposit Material) shall be sent by commercial express mail or other commercially appropriate means that provide prompt delivery and require proof of delivery. All other correspondence, including but not limited to invoices and payments, may be sent electronically or by regular mail. The Parties shall have the right to rely on the last known address of the other Parties. Any correctly addressed notice to the last known address of the other Parties, that is refused, unclaimed, or undeliverable shall be deemed effective as of the first date that said notice was refused, unclaimed, or deemed undeliverable by electronic mail, the postal authorities, or commercial express mail. | |
(h) | No Waiver. No waiver of any right under this Agreement by any Party shall constitute a subsequent waiver of that or any other right under this Agreement. | |
(i) | Assignment. No assignment of this Agreement by Depositor or Beneficiary or any rights or obligations of Depositor or Beneficiary under this Agreement is permitted without the written consent of Iron Mountain, which shall not be unreasonably withheld or delayed. Iron Mountain shall have no obligation in performing this Agreement to recognize any successor or assign of Depositor or Beneficiary unless Iron Mountain receives clear, authoritative and conclusive written evidence of the change of Parties. | |
U) | Severability. In the event any of the terms of this Agreement become or are declared to be illegal or otherwise unenforceable by any court of competent jurisdiction, such term(s) shall be null and void and shall be deemed deleted from this Agreement. All remaining terms of this Agreement shall remain in full force and effect. | |
(k) | Independent Contractor Relationship. Depositor and Beneficiary understand, acknowledge, and agree that Iron Mountain’s relationship with Depositor and Beneficiary will be that of an independent contractor and that nothing in this Agreement is intended to or should be construed to cream a partnership, joint venture, or employment relationship. |
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P) | Attorneys’ Fees. Any costs and fees incurred by Iron Mountain in the performance of obligations imposed upon Iron Mountain solely by virtue of its role as escrow service provider including, without limitation, compliance with subpoenas. court orders, discovery requests, and disputes arising solely between Depositor and Beneficiary, including, but not limited to, disputes concerning a release of the Deposit Material shall, unless adjudged otherwise, be divided equally and paid by Depositor and Beneficiary. | |
(m) | No Agency. No Party has the right or authority to, and shall not, assume or create any obligation of any nature whatsoever on behalf of the other Parties or bind the other Parties in any respect whatsoever. | |
(n) | Disputes. Any dispute, difference or question arising among any of the Parties concerning the construction, meaning, effect or implementation of this Agreement or the rights or obligations of any Party will be submitted to, and settled by arbitration by a single arbitrator chosen by the corresponding Regional Office of the American Arbitration Association in accordance with the Commercial Rules of the American Arbitration Association. The Parties shall submit briefs of no more than 10 pages and the arbitration hearing shall be limited to two (2) days maximum. Arbitration will take place in Boston, Massachusetts, USA. Any court having jurisdiction over the matter may enter judgment on the award of the arbitrator. Service of a petition to confirm the arbitration award may be made by regular mail or by commercial express mail, to the attorney for the Party or, if unrepresented, to the Party at the last known business address. | |
(o) | lnterpleader. Anything to the contrary notwithstanding, in the event of any dispute regarding the interpretation of this Agreement, or the rights and obligations with respect to the Deposit Material in escrow or the propriety of any action contemplated by Iron Mountain hereunder, then Iron Mountain may, in its sole discretion, file an interpleader or similar action in any court of competent jurisdiction to resolve any such dispute. | |
(p) | Regulations. Depositor and Beneficiary are responsible for and warrant, to the extent of their individual actions or omissions, compliance with all applicable laws. rules and regulations, including but not limited to: customs laws; import; export and re-export laws; and government regulations of any country from or to which the Deposit Material may be delivered in accordance with the provisions of this Agreement. Depositor represents and warrants that the establishment of a deposit account containing ITAR regulated Deposit Material for the Beneficiary, and Iron Mountain’s subsequent release of such Deposit Material under the terms of this Agreement will be lawful under any applicable U.S. export control regulations and laws, including ITAR. Conversely, Depositor shall refrain from establishing a deposit account containing ITAR regulated Deposit Material for the Beneficiary if the release of such Deposit Material to the Beneficiary, under the terms of this Agreement, would be in violation of any applicable U.S export control regulations and laws, including ITAR. With respect to Deposit Material containing personal information and data, Depositor agrees to (i) procure all necessary consents in relation to personal information and data; and (ii) otherwise comply with all applicable privacy and data protection laws as they relate to the subject matter of this Agreement. Iron Mountain is responsible for and warrants, to the extent of their individual actions or omissions, compliance with all applicable laws, rules and regulations to the extent that it is directly regulated by the law, rule or regulation and to the extent that it knows or has been advised that, as a result of this Agreement, its activities are subject to the law, rule or regulation. Notwithstanding anything in this Agreement to the contrary, if an applicable law or regulation exists or should be enacted which is contrary to the obligations imposed upon Iron Mountain hereunder, and results in the activities contemplated hereunder unlawful, Depositor and/or Beneficiary will notify Iron Mountain and Iron Mountain will be relieved of its obligations hereunder unless and until such time as such activity is permitted . | |
(q) | No Third Party Rights. This Agreement is made solely for the benefit of the Parties to this Agreement and their respective permitted successors and assigns, and no other person or entity shall have or acquire any right by virtue of this Agreement unless otherwise agreed to by all of the Parties. |
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(r) | Entire Agreement. The Parties agree that this Agreement, which includes all attached Exhibits and all valid Work Requests and SOWs submitted by the Parties, is the complete agreement between the Parties concerning the subject matter of this Agreement and replaces any prior or contemporaneous oral or written communications between the Parties. There are no conditions, understandings, agreements, representations, or warranties, expressed or implied, which are not specified in this Agreement. Each of the Parties warrant that the execution, delivery, and performance of this Agreement has been duly authorized and signed by a person who meets statutory or other binding approval to sign on behalf of its organization as named in this Agreement. This Agreement may be modified only by mutual written agreement of all the Parties. | |
(s) | Counterparts. This Agreement may be executed electronically in accordance with applicable law or in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. | |
(t) | Survival. Sections 7 (Term and Termination), 8 (Infringement Indemnification), 9 (Warranties), 10 (Confidential Information), 11(Limitation of Liability), 12 (Consequential Damages Waiver), and 13(General) of this Agreement shall survive termination of this Agreement or any Exhibit attached to this Agreement. |
Page 10 of 18 |
IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the Effective Date! by their authorized representatives:
DEPOSITOR | BENEFICIARY | |||
Signature | Signature | |||
Print Name | Omar Karim | Print Name | Warren Spector | |
Title | Head of Engineering | Title | Chief Financial Officer | |
Date | Date |
IIRON MOUNTAIN IINTELLECTUAL PROPERTY MANAGEMENT,INC. |
Approved as to Form and Legal Content: Iron Mountain Legal Department | |
Signature | Shilpa Daiya. Corporate Counsel & Contracts Specialist | |
Print Name | Date: August 31, 2016 | |
Title | ||
Date |
Approved as to IPM Operational Content: Iron Mountain Operations |
||
Name: .John Stysllngier, Contracts Specialist August 31, 2016 |
Page 11 of 18 |
Authorized Person Notices Table |
Please provide the names and contact information of the Authorized Persons under this Agreement. Please complete all information as applicable. Incomplete information may result in a delay of processing. |
DEPOSITOR (Required information) | BENEFICIARY (Required information) | |||
Print Name | Omar Karim | Print Name | Warren Spector | |
Title | Head of Engineering | Title | Chief Financial Officer | |
Email Address | omar@franklyinc. com | Email Address | WS(wspector@raycommedia.com | |
Street Address | Frankly 27-01Queens Plaza North, Suite 502 |
Street Address | 201 Monroe Street, 20th Floor | |
City | Long Island City | City | Montgomery | |
State/Province | NY | State/Province | Al | |
Postal/Zip Code | 11101 | Postal Zip Code | 36104 | |
Country | USA | Country | USA | |
Phone Number | 212-931-1200 | Phone Number | 334-206-1485 | |
Fax Number | 212-931-1299 | Fax Number |
Paying Party Billing Contact Information Table (Required information) |
||
Please provide the name and contact information of the Billing Contact for the Paying Party under this Agreement. All Invoices will be sent to this individual at the address set forth below. Incomplete information may result in a delay of processing. | ||
Company Name | Raycom Media, Inc. | |
Print Name | Warren Spector | |
Title | Chief Financial Officer | |
Email Address | wspector@raycommedia.com | |
Street Address | 201Monroe Street,, 20th Floor | |
City | Montgomery | |
State/Province | AL | |
Postal/Zip Code | 36104 | |
Country | USA | |
Phone Number | 334-206-1486 | |
Fax Number | ||
Purchase Order # |
IRON MOUNTAIN INTELLECTUAL. PROPERTY MANAGEMENT, INC.
All notices should be sent to ipmclientservices@ironmountain.com OR Iron Mountain Intellectual Property Management. Inc., Attn: Client Services, 2100 Norcross Parkway, Suite 150, Norcross, Georgia, 30071, USA. Telephone: 800-875-5669. Facsimile: 770- 239-9201
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Exhibit A
Escrow Services Fee Schedule -Work Request
Deposit Account Number
Service | Service Description - Three-Party Escrow Service Agreement AD services are listed below. Check the requested service and submit a Work Request to Iron Mountain for services requested after agreement signature. |
One- T1me/Per Service Fees | Annual Fees | |||
[X] Setup Fee (Required at Setup) | One-time Setup Fee for Iron Mountain to setup a standard Three-Party Escrow Service Agreement. | $2,575 | ||||
[X] Deposit Account Fee (Required at Setup) | Iron Mountain will set up one deposit account to manage and administrate access to Deposit Material to be secured in a controlled storage environment. Iron Mountain will provide account services that include unlimited deposits, electronic vaulting access to Iron Mountain Connect”’ Escrow Management Center for secure online account management, submission of electronic Work Requests, and communication of status. Release of deposit material is also included in the annual fee. An oversize fee of $200 USD per 12 cubic foot will be charged for deposits that exceed 2.4cubic feet. | Sl.150 | ||||
[X] Beneficiary Fee (Required at Setup) |
Iron Mountain will fulfill a Work Request to add a Beneficiary to an escrow deposit account and manage account access rights. Beneficiary will have access to Iron Mountain Connect. Escrow Management Center for secure online account management, submission of electronic Work Requests, and communication of status. | $850 | ||||
[ ] File List Test | Iron Mountain will perform one (1) File list Test, which includes a Deposit Material media readability analysis, a file listing. a file classification table, virus scan outputs, and confirmation of the presence or absence of a completed escrow deposit questionnaire. A final report will be sent to the requesting Party regarding the Deposit Material Deposit must be provided on CD, OVD-R, or deposited electronically. | $2,750 | N/A | |||
[ ] Level 1 Inventory and Analysis Test | Iron Mountain will perform one (1) Inventory and Analysis Test on the specified deposit. which includes the outputs of the File List Test, identifying the presence/absence of build, setup and design documentation (including the presence or absence of a completed escrow deposit questionnaire), and identifying materials required to recreate the Depositor’s application development and production environments. Output includes a report that includes compile and setup documentation, file classification tables and file listings. The report will list required software development materials, including, without limitation, required source code languages and compilers, third-party software, libraries, operating systems, and hardware, and Iron Mountain’s analysis of the deposit A final report will be sent to the requesting Party regarding the Deposit Material. | $5,250 or based on SOW if custom work required |
N/A | |||
[ ] Deposit Tracking |
At least semi-annually, Iron Mountain will send a reminder to Depositor to update Deposit Material. Thereafter, Beneficiary will be notified of last deposit. | N/A | $450 | |||
[ ] Deposit Vaulting |
Iron Mountain will store and manage a redundant copy of the Deposit Material in one (1) additional location. All Deposit Material (original and copy) must be provided by the Depositor. | N/A | $450 | |||
[ ] Remote Vaulting |
Iron Mountain will store and manage the Deposit Material in a remote location, designated by the client, outside of Iron Mountain’s primary escrow vaulting location . All Deposit Material (original and copy) must be provided by the Depositor. | N/A | $750 | |||
[X] Custom Contract Fee | Custom contracts are subject to the Custom Contract Fee, which covers the review and processing of custom or modified contracts. | $750 | N/A |
Additional Verification Services (Fees based on Statement of Work) | ||
Level 2 Deposit Compile Test | Iron Mountain will fulfill a Statement of Work (SOW) to perform a Deposit Compile Test, which includes the outputs of the Level 1- Inventory and Analysis Test. plus recreating the Depositor’s software development environment, compiling source files and modules, linking libraries and recreating executable code, providing a pass/fail determination, and creation of comprehensive compilation documentation with a final report sent to the Paying Party regarding the Deposit Material. The requesting Party and Iron Mountain will agree on a custom SOW prior to the start of fulfillment. A completed escrow deposit questionnaire is required for execution of this test. | |
Level 3 Binary Comparison Test | Iron Mountain will fulfill a Statement of Work (SOW} to perform one Binary Comparison Test - Binary Comparison, which includes the outputs of the Level 2 test, a comparison of the executable files built from the Deposit Compile Test to the actual executable files in use by the Beneficiary to ensure a full binary- level match, with a final report sent to the Requesting Party regarding the Deposit Material. The Paying Party and Iron Mountain will agree on a custom SOW prior to the start of fulfillment. A completed escrow deposit questionnaire is required for execution of this test. | |
Level 4 Full Usability Test | Iron Mountain will fulfill a Statement of Work (SOW) to perform one Deposit Usability Test - Full Usability, which includes which includes the outputs of the Level 1 and Level 2 tests (if applicable). Iron Mountain will confirm that the deposited application can be setup, installed and configured and, when installed, will execute functional tests, based on pre-determined test scripts provided by the Parties, and create comprehensive setup and installation documentation. A final report will be sent to the Paying Party regarding the Deposit Material. The Paying Party and Iron Mountain will agree on a custom SOW prior to the start of fulfillment. A completed escrow deposit questionnaire is required for execution of this test. |
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Pursuant to the Agreement, the undersigned hereby issues this work Request for performance of the Service(s) selected above.
Paying Party- For Future Work Request Use Only | ||
Paying Party Name | ||
Signature |
||
Print Name | ||
Tide | ||
Date |
IRON MOUNTAIN INTELLECTUAL PROPERTY MANAGEMENT,INC.
All Work Requests should be sent to ipmdientservices@imnmountain.com OR Iron Mountain Intellectual Property Management. Inc., Attn: Client Services, 2100 Norcross Parkway, me 1.50, Norcross, Georgia, 30071, USA .Telephone:800-875-5669. Facsimile:770-239-9201
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Exhibit B
Deposit Material Description
(This document must accompany each submission of Deposit Material)
Company Name | Deposit Account Number |
Deposit Name | Deposit Version |
(Deposit Name will appear in account history reports)
Deposit Media
(Please Label All Media with the Deposit Name Provided Above)
Media Type | Quantity | Media Type | Quantity | |||
l J CD-ROM / DVD | l J use Drive | |||||
0 DLT Tape | DDocumentation | |||||
lJ DAT Tape(4mm/8mm) | LJ Hard Drive / CPU | |||||
l ILTO Tape | lJ Circuit Board | |||||
D Other (please describe): |
Total Size of Transmissions (specify in bytes) |
#of Files | #of Folders | ||||
I lElectronic Deposit |
Deposit Encryption
(Please check either “Yes’ or “No” below and complete as appropriate)
Is the media or are any of the files encrypted? []Yes or DNo
If yes, please include any passwords and decryption tools description below. Please also deposit all necessary encryption software with this deposit. Depositor at its option may submit passwords on a separate Exhibit B.
Encryption tool name | I Version I | |
Hardware required | ||
Software required | ||
Other required information |
Deposit Certification (Please check the box below to certify and provide your contact information)
D I certify for Depositor that the above described Deposit Material has been transmitted electronically or sent via commercial express mail carrier to Iron Mountain at the address below. |
LI Iron Mountain has inspected and accepted the above described Deposit Material either electronically or physically. Iron Mountain will notify Depositor of any discrepancies. | |||
Print Name | Name | |||
Date | Date | |||
Email Address | ||||
Telephone Number |
Page 15 of 18 |
Note: If Depositor is physically sending Deposit Material to Iron Mountain please label all media and mail all Deposit Material
with the appropriate Exhibit B via commercial express carrier to the following address;
Iron Mountain Intellectual Property Management,, Inc. Attn: Vault Administration
2100 Norcross Parkway, Suite 150
Norcross, GA 30071
Telephone: 800-875-5669
Facsimile: 770-239-9201
Page 16 of 18 |
Exhibit C
Release of Deposit Material
Deposit Account Number !
Iron Mountain will use the following procedures to process any Beneficiary Work Request to release Deposit Material. All notices under this Exhibit C shall be sent pursuant to the terms of Section 13(g) Notices.
A. | Standard Release Process. |
1. | Standard Release Conditions. | |
Depositor and Beneficiary agree that a Work f(request for the release of the Deposit Material shall be based solely on one or more of the following conditions (defined as “Standard Release Conditions”): |
(i) | Depositor’s breach of the License Agreement or other agreement between the Depositor and Beneficiary regulating the use of the Deposit Material covered under this Agreement; or | |
(ii) | Failure of the Depositor to function as a going concern or operate in the ordinary course; or | |
(iii) | Depositor’s subject to voluntary or involuntary bankruptcy. |
2. | Standard Release Work Request |
A Beneficiary may submit a Work Request to Iron Mountain to release the Deposit Material covered under this Agreement (“Standard Release Work Request”); provided that it indicates specifically which type of Release Process is applicable. Iron Mountain shall not exercise any discretion nor make any determination regarding the validity of a Standard Release Condition nor the Beneficiary’s eligibility to submit such Standard Work Request for the release of the Deposit Material To the extent that the Deposit Material is subject to applicable U.S. export control regulations and laws, including ITAR, the Beneficiary Work Request to release the Deposit Material must include Beneficiary’s certification that such release would be compliant with the applicable U.S. export control regulations and laws, including ITAR. Iron Mountain will send a written notice of this Beneficiary Work Request within five (5) business days to the Depositor’s Authorized Person.
3. | Contrary Instructions. |
From the date Iron Mountain mails written notice of the Beneficiary’s Standard Release Work Request to release Deposit Material covered under this Agreement. Depositor’s Authorized Person shall have ten (10) business days to deliver to Iron Mountain contrary instructions. Contrary instructions shall mean the written representation by Depositor that a Standard
Release Condition has not occurred or has been cured (“Contrary Instructions”’). Contrary Instructions shall be on company letterhead and signed by a Depositor Authorized Person. Upon receipt of Contrary Instructions., Iron Mountain shall promptly send a copy to Beneficiary’s Authorized Person. Additionally, Iron Mountain shall notify both Depositor and Beneficiary Authorized Persons that there is a dispute to be resolved pursuant to the Disputes provisions of this Agreement. Iron Mountain will continue to store Deposit Material without release pending (i) instructions from Depositor to release the Deposit Material to Beneficiary; or (ii) dispute resolution pursuant to the Disputes provisions of this Agreement; or (iii) withdrawal of Contrary Instructions from Depositor’s Authorized Person or legal representative; or (iv) receipt of an order from a court of competent jurisdiction. The existence of a Release Condition dispute shall not relieve the Paying Party from payment of applicable Service Fees.
Page 17 of 18 |
4. | Release of Deposit Material. |
If Iron Mountain does not receive timely Contrary Instructions from a Depositor Authorized Person or receives written instructions directly from Depositor’s Authorized Person to release a copy of the Deposit Material to the Beneficiary, then Iron Mountain is authorized to release Deposit Material to the Beneficiary. Iron Mountain is entitled to receive any undisputed, unpaid Service Fees due Iron Mountain from the Parties before fulfilling the Work Request to release Deposit Material covered under this Agreement. Any Party may cure a default of payment of Service Fees.
B. | Demand Release Process |
1. | Demand Release Conditions. |
Depositor and Beneficiary agree that a Work Request for the release of the Deposit Material shall be based solely on one or more of the following conditions (defined as “Demand Release Conditions”):
0) Beneficiary notifies Depositor in writing that Depositor is in default under any agreement pursuant to which
Beneficiary loans funds to Depositor or any corporation or other entity affiliated with Depositor (the “Loan Agreements”).
Page 18 of 18 |
2. | Demand Release Work Request. |
Beneficiary may submit a Work Request to Iron Mountain to release the Deposit Material covered under this Agreement (“Demand Release Work Request”), provided that it indicates specifically which type of Release Process is applicable. Iron Mountain shall not exercise any discretion nor make any determination regarding the validity of a Demand Release Condition nor the Beneficiary’s eligibility to submit such Demand Release Work Request for the release of the Deposit Material. To the extent that the Deposit Material is subject to applicable U.S. export control regulations and laws, including ITAR, the Beneficiary Work Request to release the Deposit Material must include Beneficiary’s certification that such release would be compliant with the applicable U.S. export control regulations and laws, including ITAR. Iron Mountain will send a written notice, as well as a copy of this Beneficiary Demand Work Request, within five (5) business days to the Depositor’s Authorized Person.
3. | Contrary Instructions. (Intentionally Omitted) | |
4. | Demand Release of Deposit Material. |
Iron Mountain is authorized to release the Deposit Material to the Beneficiary ten (10) business days after Iron Mountain sends notice of Beneficiary’s Demand Release Work Request to Depositor. DEPOSITOR ACKNOWLEDGES AND AGREES THAT IT SHALL NOT BE ENTITLED TO PROVIDE CONTRARY INSTRUCTIONS TO IRON MOUNTAIN TO OBJECT TO THE BENEFICIARY’S REQUEST FOR A RELEASE OF THE DEPOSIT MATERIAL UNLESS IRON MOUNTAIN RECEIVES AN ORDER FROM A COURT OF COMPETENT JURISDICTION OR JOINT WRITTEN INSTRUCTIONS FROM DEPOSITOR AND BENEFICIARY WITHDRAWING THE RELEASE REQUEST, IRON MOUNTAIN SHALL PROCESS THE REI.EASE OF THE DEPOSIT MATERIAL TO
THE BENEFICIARY IN ACCORDANCE WITH THE TERMS OF THIS EXHIBIT C. Not withstanding anything set forth in this Agreement. including without limitation Section 11and 12 of the Agreement, Beneficiary agrees to indemnify Iron Mountain for any and all claims and costs, including reasonable attorneys’ fees, incurred by Iron Mountain related to any improper request for release of the Deposit Material by Beneficiary. Iron Mountain is entitled to receive any undisputed, unpaid Service Fees due Iron Mountain from the Parties before fulfilling the Work Request to release Deposit Material covered under this Agreement. Any Party may cure a default of payment of Service Fees..
C. | Post Release Process |
1. | Termination of Agreement Upon Release. |
This Agreement will terminate upon the release of Deposit Material held by Iron Mountain.
2. | Right to Use Following Release. |
Beneficiary has the right under this Agreement to use the Deposit Material for the sole purpose of obtaining the benefits afforded to> Beneficiary by the License Agreement. Notwithstanding& the Beneficiary shall not have access to the Deposit Material unless there is a release of the Deposit Material in accordance with this Agreement. Beneficiary shall be obligated to maintain the confidentiality of the released Deposit Material.
- 2 - |
Exhibit
9.1.1.4
COMPLIANCE CERTIFICATE
TO: | ●, as Lender |
FROM: | ● |
RE: | Credit Agreement dated[ as of] ●, 20● between ●, as Borrower, ●[and ●], as Guarantor[s], and● as Lender (as confirmed, amended, supplemented or restated at any time, the “Credit Agreement”) |
Capitalized terms not otherwise defined in this Compliance Certificate have the meanings given to them in the Credit Agreement.
I, ___________________, the _____________________ of the Borrower, certify on behalf of the Borrower and without personal liability as follows:
1. | This Compliance Certificate is furnished under Section 9.1.1.4 of the Credit Agreement. |
2. | I have read and I am familiar with the Credit Agreement including, in particular, the definitions of various terms used in the Credit Agreement. A review of the Financial Statements accompanying this Compliance Certificate and the activities of the Obligors during the period covered by this Compliance Certificate has been made under my supervision to determine whether the Obligors have fulfilled all of their obligations under the Credit Agreement and the other Loan Documents. |
3. | All of the representations and warranties of the Obligors in Article 8 of the Credit Agreement, as of the date of this Compliance Certificate and except as expressed as of a specified date, are true and correct in all material respects, except _____________________________. |
4. | As of the date of this Compliance Certificate, no Default or Event of Default has occurred or is continuing, except ____________________________. |
5. | Attached hereto is a schedule that sets forth computations in reasonable detail demonstrating compliance with the financial covenants set forth in Section 9.2 on and as of the date of this Compliance Certificate. |
DATED __________________, 20____. |
Per: | ||
Name: | ||
Title: |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Registration Statements on Form S-1/A of Frankly Inc. and Subsidiaries of our report dated November 10, 2016, relating to the consolidated financial statements as of December 31, 2014 and for the year then ended, and to the reference to our Firm under the caption “Experts”.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP |
Minneapolis, Minnesota
January 11, 2017
Exhibit 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Registration Statements on Form S-1/A of Frankly, Inc. and Subsidiaries of our report dated September 19, 2016, relating to the financial statements of Gannaway Web Holdings, LLC (dba WorldNow) as of August 25, 2015 and for the period from January 1, 2015 to August 25, 2015, and to the reference to our Firm under the caption “Experts”.
/s/ BAKER TILLY VIRCHOW KRAUSE, LLP |
Minneapolis, Minnesota
January 11, 2017
Exhibit 23.3
January 11, 2017
Re: Consent of Independent Registered Public Accounting Firm
We consent to the use in this Registration Statement on Form S-1 of Frankly Inc. and Subsidiaries of our report dated November 10, 2016, relating to the consolidated financial statements as of December 31, 2015 and for the year then ended, and to the reference to our Firm under the caption “Experts”.
/s/ Collins Barrow Torronto, LLP
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Ontario
Exhibit 23.4
Consent of Independent Registered Public Accounting Firm
We consent to the use of our report dated May 22, 2015, with respect to the balance sheet of Gannaway Web Holdings, LLC (dba Worldnow) as of December 31, 2014, and the related statements of income, preferred units and members’ deficit, and cash flows for the year then ended, included herein and to the reference to our firm under the heading “Experts” in the prospectus of Frankly Inc.
/s/ KPMG LLP | |
New York, New York | |
January 11, 2017 |
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