.
As filed with the Securities and Exchange
Commission on February 13, 2017
No. 333-______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MONSTER DIGITAL, INC.
(Exact name of registrant as specified in
its charter)
Delaware
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3572
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27-3948465
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(State of Incorporation)
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(Primary Standard Industrial
Classification Code Number)
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(IRS Employer
Identification No.)
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2655 Park Center Drive, Unit C
Simi Valley, California 93065
(Address, including zip code, and telephone
number, including area code, of registrant’s principal executive offices)
David Clarke
2655 Park Center Drive, Unit C
Simi Valley, California 93065
(805) 955-4190
(Name, address, including zip code, and telephone
number, including, area code, of agent for service)
With copies to:
Thomas J. Poletti, Esq.
Manatt, Phelps & Phillips, LLP
695 Town Center Drive, 14
th
Floor
Costa Mesa, California 92626
(714) 371-2500
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.
x
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering.
¨
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
¨
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, 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
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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x
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CALCULATION OF REGISTRATION
FEE
Title of Each Class of
Securities to be Registered
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Amount
to be
Registered
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Proposed
Maximum
Offering Price
Per Share
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Proposed
Maximum
Aggregate
Offering Price
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Amount of
Registration Fee
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Shares of common stock, par value $0.0001 per share
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333,333
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(1)
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$
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1.50
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(2)
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$
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500,000
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$
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57.95
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(1)
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Pursuant to Rule 416 under
the Securities Act of 1933, as amended, there is also being registered hereby such indeterminate number of additional shares of
common stock of the registrant as may be issued or issuable because of stock splits, stock dividends, stock distributions, and
similar transactions.
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(2)
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Estimated solely for the
purpose of calculating the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended,
based upon the original sale price of the shares of common stock registered hereunder.
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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 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 prospectus is not complete and may be
changed. The selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange
Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 13,
2017
PROSPECTUS
MONSTER DIGITAL, INC.
333,333 Shares of Common Stock
This prospectus relates to the offering and resale by the selling
stockholder identified herein of up to 333,333 shares of common stock, par value $0.0001 per share, of Monster Digital, Inc. These
shares include represent shares of common stock issued and sold to accredited investors in a private placement offering which closed
on November 10, 2016 at a purchase price of $1.50 per share.
The selling stockholder may sell the shares of common stock on any
national securities exchange or quotation service on which the securities may be listed or quoted at the time of sale, in the over-the-counter
market, in one or more transactions otherwise than on these exchanges or systems, such as privately negotiated transactions, or
using a combination of these methods, and at fixed prices, at prevailing market prices at the time of the sale, at varying prices
determined at the time of sale, or at negotiated prices. See the disclosure under the heading “Plan of Distribution”
elsewhere in this prospectus for more information about how the selling stockholder may sell or otherwise dispose of its shares
of common stock hereunder.
The selling stockholder may sell any, all or none of the securities
offered by this prospectus, and we do not know when or in what amount the selling stockholder may sell its shares of common stock
hereunder following the effective date of this registration statement.
We will not receive any proceeds from the sale of our common stock
by the selling stockholder in the offering described in this prospectus.
Our common stock is quoted for trading on the Nasdaq Capital Market
under the symbol “MDSI”. As of February 7, 2017, the closing sales price for our common stock as reported on the
Nasdaq Capital Market was $1.67 per share.
Investing in our common stock involves a high degree of risk.
Before making any investment in our common stock, you should read and carefully consider the risks described in this prospectus
under “
Risk Factors
” beginning on page 5 of this prospectus.
You should rely only on the information contained in this prospectus
or any prospectus supplement or amendment hereto. We have not authorized anyone to provide you with different information.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
This prospectus is dated ,
2017
TABLE OF CONTENTS
About This Prospectus
You should rely only on the information that we have provided or
included in this prospectus, any applicable prospectus supplement and any related free writing prospectus that we may authorize
to be provided to you. We have not authorized anyone to provide you with different information. No dealer, salesperson or other
person is authorized to give any information or to represent anything not contained in this prospectus, any applicable prospectus
supplement or any related free writing prospectus that we may authorize to be provided to you. You must not rely on any unauthorized
information or representation. This prospectus is an offer to sell only the securities offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. You should assume that the information in this prospectus, any applicable prospectus
supplement or any related free writing prospectus is accurate only as of the date on the front of the document and that any information
we have incorporated by reference is accurate only as of the date of the document incorporated by reference, regardless of the
time of delivery of this prospectus, any applicable prospectus supplement or any related free writing prospectus, or any sale of
a security registered under the registration statement of which this prospectus is a part.
This prospectus contains summaries of certain provisions contained
in some of the documents described herein, but reference is made to the actual documents for complete information. All of the summaries
are qualified in their entirety by the actual documents. Copies of some of the documents referred to herein have been filed, will
be filed or will be incorporated by reference as exhibits to the registration statement of which this prospectus is a part, and
you may obtain copies of those documents as described below under the heading “Where You Can Find Additional Information.”
As used in this prospectus, unless the context indicates or otherwise
requires, “our company”, “we”, “us”, and “our” refer to Monster Digital, Inc.,
a Nevada corporation, and its wholly-owned subsidiary, SDJ Technologies, Inc., a Delaware corporation.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing
in our common stock, you should read the entire prospectus carefully, including the sections titled “Risk Factors”
and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” consolidated financial
statements and related notes included elsewhere in this prospectus. Unless the context suggests otherwise, references in this prospectus
to “Monster Digital,” “we,” “us” and “our” refer to Monster Digital, Inc. and,
where appropriate, its wholly-owned subsidiary SDJ Technologies, Inc., a Delaware corporation (“SDJ”).
Unless we specifically state otherwise, all information in this
prospectus (i) gives effect to (a) a one-for-11.138103 reverse stock split of our common stock effected on January 7, 2016, (b)
a one-for-1.2578616 reverse stock split of our common stock effected on June 6, 2016, and (c) a one-for-1.06 reverse stock split
of our common stock effected on June 23, 2016 and (ii) assumes no exercise of 2,458,279 shares of common stock issuable upon exercise
of outstanding options and warrants.
Our Business
General
Our primary business focus is the design, development
and marketing of premium products under the “Monster Digital” brand for use in high-performance consumer electronics,
mobile products and computing applications. Our license with Monster, Inc. allows us to manufacture and sell certain high-end products
utilizing the “Monster Digital” brand name; Monster, Inc. is highly recognized by consumers for its high quality audio-video
products. We work with our subcontract manufacturers and suppliers to offer new and enhanced products that use existing technology
and adopt new technologies to satisfy existing and emerging consumer demands and preferences. On the marketing side, we partner
with Monster, Inc. to support the sales and marketing of these products on a global basis.
Currently, our primary product offerings are
as follows:
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A line of action sports
cameras used in adventure sport, adventure photography and extreme-action videography.
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A line of ultra-small
mobile external memory drive products for Apple iOS devices.
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On-The-Go Cloud devices
on an exclusive basis which create a wi-fi hot spot for multiple users while simultaneously allowing data to be viewed, played
or transferred among the connected storage.
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A broad selection of
high-value memory storage products consisting of high-end, ruggedized Solid
State Drives (“SSDs”),
removable flash memory CompactFlash cards (“CF cards”), secured digital cards (“SD cards”) and USB flash
drives.
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Monster License Agreement
We entered into a trademark license agreement
with Monster, Inc. effective July 7, 2010 (the “Monster License Agreement”). The Monster License Agreement, as amended,
gives us exclusive rights to utilize the tradenames “Monster Memory,” “Monster Digital” and the M (stylized)
mark on (i) action sports cameras and accessories (including virtual reality goggles), (ii) cable memory, (iii) flash based cards,
(iv) flash based SSD drive products, (v) DRAM modules, (vi) USB flash drives and (vii) internal power supplies for personal computers.
The 25 year Agreement provides for the payment of royalties to Monster, Inc. on all sales of the referenced products, excluding
sales to Monster, Inc., as follows:
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Years 1 (2012) and 2: Royalties
on all sales excluding sales to Monster, Inc. at a rate of four (4) percent, with no minimum.
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Years 3 through 6: Minimum
royalty payments of $50,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
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Years 7 through 10: Minimum
royalty payments of $125,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
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Years 11 through 15: Minimum
royalty payments of $187,500 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
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Years 16 through 25: Minimum
royalty payments of $250,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc..
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Effective July 1, 2014, the royalty rate on
certain products was reduced to 2% for a 12 month period.
At any time during the term of the Monster
License Agreement, a permanent license may be negotiated subject to the parties reaching a mutually acceptable agreement.
Under the Monster License Agreement, Monster,
Inc. itself may use (but not sublicense) the Monster mark and its M (stylized) mark (but not the Monster Digital mark) in connection
with memory and data storage products. Although Monster, Inc. must offer us the first right to supply such products on commercially
reasonable terms under an arrangement similar to the Monster License Agreement, nothing limits the ability of Monster, Inc. to
act as a competitor to us.
In August 2015, we executed an amendment to
the Monster License Agreement with Monster Inc. whereby Monster granted us the additional right further to the Monster License
Agreement to use the name “Monster Digital, Inc.” as our corporate name. Further to the amendment, in addition to royalties
mentioned above, we issued Monster, Inc. 382,575 shares of our common stock and paid it a cash fee of $500,000 payable in four
quarterly installments of $125,000.
We are required to remit royalty payments to
Monster, Inc. on or before the 30
th
day following the end of each calendar quarter. This license agreement contains
various termination clauses that include (i) change in control, (ii) breach of contract and (iii) insolvency, among others. Either
party to the license agreement has the right to terminate the agreement if the other is in material breach of any of the terms
and conditions of the agreement and such party fails to cure such breach within 30 days after the date of receipt of written notice
from the other party.
In addition, in August 2015, and in connection
with the aforementioned amendment to the trademark license agreement, we entered into a two-year advisory board agreement with
Noel Lee, the Chief Executive Officer and sole shareholder of Monster, Inc. Further to the advisory board agreement, we issued
Mr. Lee a warrant to purchase up to 191,289 shares of our common stock at a per share exercise price of $14.85. See “Management — Advisory
Board.”
The Private Placement
On November 10, 2016, we entered into a securities purchase agreement
with the selling stockholder providing for the issuance and sale to such investor of 333,333 shares of our common stock. The Private
Placement closed on November 10, 2016. The shares issued in the Private Placement were sold at a purchase price per share
of $1.50, for aggregate gross proceeds to us of approximately $500,000 and aggregate net proceeds to us, after deducting for placement
agent fees and expenses, of approximately $446,000. Axiom Capital Management, Inc. served as the placement agent in the Private
Placement.
On November 10, 2016, we entered into a registration rights
agreement (the Registration Rights Agreement) with the investor that participated in the Private Placement. Pursuant to the terms
of the Registration Rights Agreement, we agreed to file with the Securities and Exchange Commission (the SEC) the registration
statement of which this prospectus forms a part, to register for resale all of the 333,333 shares of our common stock issued in
the Private Placement.
Under the Registration Rights Agreement, subject to exception in
certain circumstances, we have agreed to keep this registration statement effective such time as all of the securities to be registered
hereunder have been sold under this registration statement or pursuant to Rule 144 or may be sold without restriction pursuant
to Rule 144. If there is not an effective registration statement covering the resale of the securities to be registered hereunder
at any time during the period required by the Registration Rights Agreement, then the selling stockholder will have “piggyback”
registration rights with respect to any such securities that are not eligible for resale pursuant to Rule 144 in connection with
any other registration statement we determine to file that would permit the inclusion of those shares.
The foregoing description of the Registration Rights Agreement does
not purport to be complete, and is qualified in their entirety by the complete text of this agreement, which is attached as an
exhibit to this prospectus and are incorporated herein by reference.
Corporate Information
SDJ, our operating subsidiary, was incorporated in 2007 and became
our wholly owned subsidiary in 2012. We were incorporated under the name WRASP 35, Inc., changed our name to AOTS 35, Inc. in September
2011, changed our name to Tandon Digital, Inc. in May 2012 and changed our name to Monster Digital, Inc. in August 2015. Our principal
executive offices are located at 2655 Park Center Drive, Unit C, Simi Valley, California and our telephone number is (805) 381-5544.
Our website address is
www.monsterdigital.com
.
Information contained on or accessible through our website is not
a part of this prospectus and should not be relied upon in determining whether to make an investment decision.
Monster Digital, Tandon Digital, Memory Cable, iX32 and other trade
names, trademarks or service marks appearing in this prospectus are the property of, or exclusively licensed by, Monster Digital.
Trade names, trademarks and service marks of other companies appearing in this prospectus, including but not limited to “Monster”,
are the property of their respective holders.
We are an “emerging growth company” as defined in the
Jumpstart Our Business Startups Act, or the JOBS Act, and therefore we may take advantage of certain exemptions from various public
company reporting requirements, including not being required to have our internal control over financial reporting audited by our
independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley
Act, 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 any golden parachute payments. We may
take advantage of these exemptions until we are no longer an “emerging growth company”. We will remain an “emerging
growth company” for up to five years. We will cease to be an “emerging growth company” upon the earliest of:
(1) December 31, 2021, (2) the last day of the first fiscal year in which our annual gross revenues are $1 billion or more, (3)
the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities,
and (4) the date on which we are deemed to be a “large accelerated filer” as defined in the Securities Exchange Act
of 1934, as amended, or the Exchange Act. We are choosing to irrevocably opt out of the extended transition periods available under
the JOBS Act for complying with new or revised accounting standards.
The Offering
This prospectus relates to the resale from time to time by the selling
stockholder identified herein of up to 333,333 shares of our common stock. All of the common stock to be registered for resale
hereunder was purchased by the selling stockholder in the Private Placements. We are not offering any shares for sale under the
registration statement of which this prospectus is a part.
Common stock outstanding:
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8,537,511 shares (1)
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Common stock offered by the selling stockholder hereunder:
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333,333 shares (2)
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Use of Proceeds:
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We will not receive any proceeds from the sale of our common stock offered by the selling stockholder under this prospectus.
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Risk Factors:
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Investing in our securities involves a high degree of risk and
purchasers may lose their entire investment. See the disclosure under the heading “Risk Factors” beginning on
page 5 of this prospectus.
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Nasdaq Capital Market Symbol:
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MSDI
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(1)
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Represents shares outstanding at February 7, 2017. Such information excludes 2,459,279 shares of common stock issuable upon the exercise of outstanding options and warrants at an exercise price between $0.052 and $29.71 per share.
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RISK FACTORS
Investing in our
offered securities involves a high degree of risk. You should carefully consider the following risks and all of the other information
contained in this prospectus, including our combined and consolidated financial statements and related notes, before investing
in our common stock. While we believe that the risks and uncertainties described below are the material risks currently facing
us, additional risks that we do not yet know of or that we currently think are immaterial may also arise and materially affect
our business. If any of the following risks materialize, our business, financial condition and results of operations could be materially
and adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or all of your
investment.
Risks Related To Our Business
Our independent auditors have expressed
substantial doubt about our ability to continue as a going concern.
We incurred net losses of $5.0 million, $8.7
million and $11.1 million for the nine months ended September 30, 2016 and the years ended December 31, 2015 and 2014, respectively.
As of September 30, 2016, we had an accumulated deficit of $30.8 million. In their report on our financial statements for the year
ended December 31, 2015, our independent registered public accounting firm included an explanatory paragraph regarding the substantial
doubt about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing
the circumstances regarding our ability to continue as a going concern. Failure to generate sufficient cash flows from operations
raise additional capital or reduce discretionary spending will have a material adverse effect on our ability to achieve our intended
business objectives. While management has a plan to fund ongoing operations, there is no assurance that its plan will be successfully
implemented. As a result, you may lose the entire value of your investment in our company.
Our operating results, gross margins,
cash flow and ability to sustain profitability may fluctuate significantly in the future and are difficult to predict.
Our operating results, gross margins, operating
cash flow and ability to sustain profitability are based on a number of factors related to our industry and the markets for our
memory storage products. We will have little or no control over many of these factors and any of these factors could cause our
operating results, gross margins and ability to sustain profitability to fluctuate significantly. These factors include, among
others:
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competitive pricing
pressures for the products we sell, including the timing and amount of any reductions in the average selling prices of our products
and our ability to charge a premium for our higher performance products;
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the growth of the markets
for host devices that use data storage products;
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our ability to control
our operating expenses;
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the timing and amount
of expenses related to obsolescence and disposal of excess inventory and the difficulty of forecasting and managing our inventory
levels;
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the amount of price
protection, volume incentive rebates, discounts, market development funds, cooperative advertising payments and other concessions
and discounts that we may need to provide to some of our customers due to competitive pricing pressures;
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changes in our product
and revenue mix;
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the extent to which
our products, particularly our higher margin products, are accepted by the markets;
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the timing of the collection
of our accounts receivable;
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the decision of our
customers to return products or rotate their inventory;
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the inability of suppliers to fully indemnify us should
we be subjected to litigation;
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the difficulty of forecasting sell-through rates of
our products and their impact on inventory levels at our resellers if sell-through data is not timely reported to us, which may
result in additional orders being delayed or reduced and inventory being returned;
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increases in costs charged
by our product suppliers or the failure of our suppliers to decrease the prices they charge to us when industry prices decline;
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competing data memory
standards, which displace the standards used in our products and our customers’ products;
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the announcement or
introduction of products and technologies by competitors; and
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potential product quality
problems which could raise returns or rework costs.
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In addition, we may be unable to accurately
forecast our revenues and gross margins. We incur expenses based predominantly on operating plans and estimates of future revenues.
Our expenses are to a large extent fixed in the short term and we may not be able to adjust them quickly to meet a shortfall in
revenues during any particular quarter. We also plan inventory levels based on anticipated demand for our products and on anticipated
product mix. As we anticipate increased demand for certain products we increase our level of inventory, which results in increased
risk if we inaccurately estimate anticipated demand. Any significant shortfall in revenues in relation to our expenses and planned
inventories would decrease our net income or increase our operating losses and harm our financial condition. If we are unsuccessful
in increasing revenues from our higher margin products and controlling our operating expenses, we may not be able to achieve profitability.
Also, we have generated significant negative
operating cash flows since our inception and expect to continue to do so for the foreseeable future. We are required to expend
significant dollars on inventory and marketing efforts prior to the receipt of cash from the collection of our accounts receivable.
We expect that our negative operating cash flows will continue for the foreseeable future as we increase our product offerings
and expand our customer base. While we have a factoring arrangement in place that assists in part, we require substantial additional
funds to bridge the gap between the expenditure and receipt of funds. If we are unable to raise additional capital, we will continue
to be limited in our business and expansion efforts.
Because we have a limited operating history,
we may not be able to successfully manage our business or achieve profitability.
We have a limited operating history upon which
to base an evaluation of our prospects and the potential value of our offered securities. We are confronted with the risks inherent
in an early stage company, including difficulties and delays in connection with the acquisition and marketing of products, operational
difficulties, and difficulty in estimating future development, regulatory, and administrative costs. If we cannot successfully
manage our business, we may not be able to acquire and offer commercially viable products, generate future profits and may not
be able to support our operations. It is possible that we will incur additional expenses and may incur losses in the further implementation
of our business plan.
In addition, we have not had limited experience
in sourcing and selling action sports cameras. We are uncertain as to whether our action sports cameras will ultimately achieve
the level of market acceptance that we expect or at all. Given our lack of experience in the action sports camera market, we cannot
assure you that we will be able to identify the needs and preferences of customers and to adjust inventory mixes or marketing efforts
that correspond to such needs and preferences; and we also cannot assure you that our action sports cameras will ultimately become
commercially successful. In such circumstances, our business, growth prospects, financial condition and results will be adversely
affected.
Our strategic partnership with Monster,
Inc. poses significant challenges for us, and if we are unable to manage this relationship, our business and operating results
will be adversely affected.
We have entered into a multi-year license agreement
with Monster, Inc. (the “Monster License Agreement”) under which we have the right to exclusively market certain products
under the “Monster Digital” brand name. As of September 30, 2016, this list of permitted products consists of the following:
action cameras and accessories (including virtual reality goggles), DRAM modules; USB flash drives; flash based SD, M2,MicroSD,
CF, ProDuo, card products; SSD drive products; internal power supplies for PCs, cable memory and hybrid drives. The management
of this business will adversely affect our revenues and gross margins if we are, among other things, unable to:
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properly manage the
use of Monster Digital brand;
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control the sales and
marketing expenses associated with launching the brand in new channels;
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plan for anticipated
changes in demand; and
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effectively leverage
the Monster Digital brand to achieve premium pricing and grow market share.
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We have a number of obligations that we must
fulfill under our agreement with Monster, Inc. to keep it in effect. These obligations include compliance with Monster, Inc. guidelines
and trademark usage, customer satisfaction and the requirement that we meet target minimum royalty payments. As a result, Monster,
Inc. may in the future have the right to terminate our license in its entirety. We were not in compliance with the royalty remittance
policy for the fiscal periods referenced in the agreement nor with the installment payment terms of the $500,000 payment required
for the continued use of the name “Monster Digital, Inc.” as a corporate, business and operating and as described below.
If we were to lose the rights to sell products under the “Monster Digital” brand, our financial results would be significantly
negatively impacted.
While we will continue to seek to offer additional
products bearing the “Monster Digital” brand, the consent of Monster, Inc. will be required in order to sell any additional
products bearing the “Monster Digital” brand. While to date Monster, Inc. has granted its consent to all our additional
products to be sold bearing the “Monster Digital” brand, there can be no assurance that it would similarly consent
in the future. If we are unable to secure the consent of Monster, Inc. for the sale of future products bearing the “Monster
Digital” brand our product offering will be limited which would substantially and adversely affect our future prospects.
Our strategic partnership with Monster,
Inc. does not restrict Monster, Inc. from offering its own line of action sports cameras or memory products.
Under the Monster License Agreement, Monster,
Inc. itself may use (but not sublicense) the Monster mark and its M (stylized) mark (but not the Monster Digital mark) in connection
with action sports cameras or memory and data storage products. Although Monster, Inc. must offer us the first right to supply
such products on commercially reasonable terms under an arrangement similar to the Monster License Agreement, nothing limits the
ability of Monster, Inc. to act as a competitor to us. Monster, Inc. has substantially more resources to exploit these markets
than we do and their entry into our markets would substantially and adversely affect our future prospects.
We estimate that a significant percentage
of our net revenues for the nine months ended September 30, 2016 and the years ended December 31, 2015 and 2014 were derived from
Monster, Inc.’s introductions to buyers and retailers.
We believe that approximately 17% of our gross
revenues for the nine months ended September 30, 2016 and approximately 33% for the years ended December 31, 2015 and 2014 were
derived from Monster, Inc.’s introductions to buyers and retailers. Monster, Inc. is under no contractual obligation to continue
making such introductions. There can be no assurance that Monster, Inc. will continue to introduce us to significant buyers and
retailers or that any buyers and retailers previously introduced to us by Monster, Inc. will continue to order products at previous
levels or at all.
Our failure to successfully promote our
brand and achieve strong brand recognition in our markets will limit and reduce the demand for our products.
We believe that brand recognition is critical
to our success. We plan to increase our marketing expenditures to create and maintain prominent brand awareness. If we fail to
promote our Monster Digital brand successfully, or if the expenses with doing so are disproportionate to any increased net sales
we achieve, it would have a material adverse effect on our business and results of operations. Other companies, who may have significantly
more resources to promote their own brands then we do, may not be aggressively promoting their brands. If they begin to more aggressively
promote their brand or if our products exhibit poor performance or other defects, our brand may be adversely affected, which would
inhibit our ability to attract or retain customers.
We need additional capital to adequately
fund our future business objectives and we may not be able to obtain the amount of capital required, particularly when the credit
and capital markets are unstable. Future sales and issuances of our common stock or rights to purchase common stock, including
pursuant to our equity incentive plans, could result in additional dilution of the percentage ownership of our stockholder and
could cause the price of our offered securities to fall.
We currently have minimal cash on hand and
an accounts receivable factoring facility limited to $4.0 million. We will need substantial additional funding to achieve our goal
of increasing sales of higher margin specialty products as a percentage of revenues. Our estimation of necessary future funding
is based on our operating plan, which in turn is based on assumptions that may prove to be incorrect. Should these assumptions
prove incorrect, our financial resources may not be sufficient to satisfy our future minimum capital requirements and will be insufficient
to adequately address our goal of increasing sales of higher margin specialty products as referred above.
Any of the following factors could result in
insufficient capital to fund our operations:
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if our capital requirements
or cash flow vary materially from our current projections;
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if we are unable to
timely collect our accounts receivable;
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the loss of a key customer
or a material reduction by a key customer in the range of inventory level of our products;
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if we are unable to
sell-through inventory currently in our sales channels as anticipated;
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if we are unable to
timely bring new successful products to market; or
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if other unforeseen
circumstances occur.
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We do not know whether additional financing
will be available when needed, or, if available, whether the terms of any financing will be favorable to us. The current worldwide
financing environment is challenging, which could make it more difficult for us to raise funds on reasonable terms, or at all.
To the extent we raise additional capital by issuing equity securities, our stockholder may experience substantial dilution and
the new equity securities may have rights, preferences or privileges senior to those of our common stock. If we cannot raise needed
funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future strategic opportunities
or respond to competitive pressures or unanticipated events, or meet our aforementioned goal of increasing sales of higher margin
specialty products, all of which would harm our business and results of operations. Furthermore, if we are unable to raise additional
capital, or cannot raise capital on acceptable terms, we may not have sufficient capital to operate our business as planned and
would have to modify our business plan or curtail some or all of our operations.
In addition, pursuant to our equity incentive
plan, our compensation committee is authorized to grant equity-based incentive awards to our directors, executive officers and
other employees and service providers, including officers, employees and service providers of our subsidiary. Future grants of,
options and other equity awards and issuances of common stock under our equity incentive plans may have an adverse effect on the
market price of our offered securities.
If we are unable to develop or maintain
the strategic relationships necessary to develop, sell and market products that are commercially viable and widely accepted, the
growth and success of our business will be limited.
We may not be able to acquire and sell products
that are commercially viable and widely accepted if we are unable to anticipate market trends and the price, performance and functionality
requirements of data memory manufacturers, suppliers and customers. We must continue to collaborate closely with our customers,
manufacturers, and other suppliers to ensure that critical development, marketing and distribution projects proceed in a coordinated
manner. These collaborations are also important because our ability to anticipate trends and plan our future product offerings
depends to a significant degree upon our continued access to strategic relationships we currently have with our manufacturers and
suppliers. If any of our current relationships terminate or otherwise deteriorate, or if we are unable to enter into future relationships
that provide us with comparable insight into market trends or access to new and enhanced products, offerings and technologies,
we will be substantially hindered in our future business endeavors.
We depend exclusively on third parties
to manufacture and supply all of our products. If third party manufacturers and suppliers are unable to timely deliver required
quantities of our products at acceptable qualities and prices, we will not be able to meet customer demand for our products, which
would adversely impact success of our business.
We do not own or operate a manufacturing facility
and rely on third parties to manufacture, produce and supply all of our products. We cannot be certain that we will not experience
operational difficulties with our manufacturers and suppliers. Our reliance on third party manufacturers and suppliers involves
a number of significant risks, including:
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reduced control over
delivery schedules, quality assurance, manufacturing yields and production costs;
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unavailability of, or
delayed access to, next-generation or key products, processes or technologies; and
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the failure of a key
manufacturer or supplier to remain in business and adjust to market conditions.
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These risks could result in product shortages
or increase our costs of manufacturing, sourcing, assembling or testing our products which could result in failure to meet customers’
expectations and damage our brand, which could result in lost sales. In addition, if third party manufacturers are unable or unwilling
to continue to manufacture and deliver products of acceptable quality, at acceptable costs and in a timely manner, we would have
to identify and qualify other third party manufacturers. This could be time-consuming and difficult and result in unforeseen operational
problems and/or lost sales which would have a material adverse effect on our operating results.
We do not have long-term agreements with any
of our third party suppliers or manufacturers for our primary memory products or our iX32 flashdrive. Our current offerings of
action sports cameras and our iX32 flash drive are currently sourced from sole source suppliers and while we believe there is an
alternative supplier available for our iX32 flash drive, we do not currently have an alternative supplier for our action sports
cameras. We have a formal arrangement with Shuoying Digital Science & Technology (China) Co., Ltd. to manufacture and source
our current offerings of action sports cameras. If these suppliers stopped supplying these products on acceptable terms, or at
all, or we experienced delays in receipt of such products from these suppliers, we would experience a significant disruption in
our business until such time as we are able to find alternative sources. In such event our business and financial results would
be materially adversely affected.
We depend exclusively on third parties
for the research and development of products.
The products we market are subject to rapid
technological change and evolving industry standards. The future revenue growth of our business depends in large part on the development,
market acceptance and performance of any new products we introduce in the marketplace. We do not have an internal research and
development department. Instead, we rely on third parties for the research and development of new and enhanced products.
Although we depend on various third parties
for the introduction and acceptance of new products, we do not have long-term relationships with any of them. There can be no assurance
that we will maintain existing relationships or forge new relationships, that we will continue to have access to significant proprietary
products, processes and technologies, or that we will continue to have access to new competitive products, processes and technologies
that may be required to introduce new products. If we are not successful in maintaining and developing new relationships or obtaining
rights to market products with competitive technologies, we will become less competitive and our operations will suffer.
A material change in customer relationships
or in customer demand for products could have a significant impact on our business.
Our success is dependent on our ability to
successfully offer trade terms that are acceptable to our customers and that are aligned with our pricing and profitability targets.
Our business could suffer if we cannot maintain relationships with key customers based on our trade terms and conditions. In addition,
our business would be negatively impacted if key customers were to significantly reduce or eliminate the range of inventory level
of our products.
In our memory storage industry, products
are typically characterized by average selling prices that historically decline over relatively short time periods. If we are unable
to effectively manage our inventories, reduce our costs, introduce new products with higher average selling prices or increase
our sales volumes, our revenues and gross margins will be negatively impacted.
Data memory products often experience price
erosion over their life cycle due in large part to competitive pressures, customer demand and technological changes. In order to
maintain gross profits for products that have a declining average selling price, we must continuously reduce costs, increase sales
volume or introduce new products with higher gross margins. We must also successfully manage our inventory to reduce our overall
exposure to price erosion. In our industry, prices have often fallen faster than costs which has resulted in margin pressure. Our
customers may exert pressure on us to make price concessions or to match pricing of our competitors. Any reduction in prices by
us in response to pricing pressure will hurt our gross margins unless we can reduce our costs and manage our inventory levels to
minimize the impact of such price declines. For example, gross profit as a percentage of net sales was 5.2% for the year ended
December 31, 2015, compared to 2.1% for the year ended December 31, 2014. Gross profit in 2015 was significantly adversely impacted
by the resale of approximately $1.3 million of returned products at substantially reduced prices which resulted in a loss of approximately
$900,000, as well as an overall reduction in average selling price for certain products during the year ended December 31, 2015
as compared to 2014. There can be no assurance that the introduction of new products will assist in protecting gross margin.
As it relates to our SSD, CF and SD card and
USB flash drive products, demand depends in large part on the demand for additional storage and storage upgrades in existing computer
systems. The demand for computer systems has been volatile in the past and often has had an exaggerated effect on the demand for
drives and flash memory in any given period. As a result, these markets have experienced periods of excess capacity, which can
lead to liquidation of excess inventories and more intense price competition. If more intense price competition occurs, we may
be forced to lower prices sooner and more than expected, which could result in lower average selling prices, revenue and gross
margins. We expect that average selling prices and gross margins will also tend to decline when there is a shift in the mix of
products and sales of lower priced products increase relative to those of higher priced products. In addition, rapid technological
changes often reduce the volume and profitability of sales of existing products and increase the risk of inventory obsolescence.
If we are unable to reduce our costs to offset
declines in average selling prices or increase the sales volume of our existing products, particularly higher capacity or premium
products, or introduce new products with higher gross margins, our revenues and gross margins will be adversely affected. This
may negatively impact our anticipated growth in product revenues as well as our gross margins, particularly if the decline in our
average selling prices is not matched by price declines in our supply costs.
Our failure to accurately forecast market
and customer demand for our products, or to quickly adjust to forecast changes, would adversely affect our business and financial
results or operating efficiencies.
The data storage industry faces difficulties
in accurately forecasting market and customer demand for its products. The variety and volume of products we offer is based in
large part on these forecasts. Accurately forecasting demand has become increasingly difficult in light of the volatility in global
economic conditions. In addition, because many of our products are designed to be largely substitutable, our demand forecasts may
be impacted significantly by the strategic actions of our competitors. As forecasting demand becomes more difficult, the risk that
our forecasts are not in line with demand increases. If our forecasts exceed actual market demand, then we could experience periods
of product oversupply and price decreases, which would impact our financial performance. If market demand increases significantly
beyond our forecasts, then we may not be able to satisfy customer product needs, which could result in a loss of market share if
our competitors are able to meet customer demands.
If we do not effectively manage our inventory
and product mix, we may incur costs associated with excess inventory or lose sales from not having enough inventory.
We operate in markets that are characterized
by intense competition, supply shortages or oversupply, rapid technological change, evolving industry standards, declining average
selling prices and rapid product obsolescence, all of which make it more challenging to effectively manage our inventory. If we
are unable to properly monitor, control and manage our inventory and maintain an appropriate level and mix of products with our
customers, we may incur increased and unexpected costs associated with this inventory. For example, if our customers are unable
to sell their inventory in a timely manner, we may choose or be required to lower the price of our products or allow our customers
to exchange the slow-moving products for newer products. Similarly, if we improperly forecast demand for our products, we could
end up with excess inventory that we may be unable to sell in a timely manner, if at all. As a result, we could incur increased
expenses associated with writing off excess or obsolete inventory. Alternatively, we could end up with too little inventory and
we may not be able to satisfy demand, which could have a material adverse effect on our customer relationships. Our risks related
to inventory management are exacerbated by our strategy of closely matching inventory levels with product demand, leaving limited
margin for error.
We are subject to the cyclical nature
of the consumer electronics industry and any future downturn could adversely affect our business.
The consumer electronics industry is highly
cyclical and characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards,
short product life cycles and wide fluctuations in product supply and demand. The flash memory markets have in the past experienced
significant downturns often connected with, or in anticipation of, maturing product cycles and declines in general economic conditions.
These downturns have been characterized by diminished product demand, production overcapacity, high inventory levels and accelerated
erosion of average sales prices. It is impossible to predict whether demand for our products will diminish or costs for any of
our products will increase. Also our customers’ demand for storage capacity may not continue to grow at current industry
estimates. For example, there has been a recent rapid growth in devices that do not contain a hard drive such as tablet computers
and smartphones; this could affect demand for our SSD products. Any future downturns could have a material adverse effect on our
business and results of operations.
To remain competitive and stimulate customer
demand, we must successfully manage product introductions and transitions.
We believe that we must continually source
and introduce new products, enhance our existing products and effectively stimulate customer demand for new and upgraded products.
Our success depends on our ability to identify and originate product trends as well as to anticipate and react to changing consumer
demands in a timely manner. The success of new product introductions depends on a number of factors including market and customer
acceptance, the effective forecasting and management of product demand, purchase commitments and inventory levels, the management
of manufacturing and supply costs, and the risk that new products may have quality or other defects in the early stages of introduction.
In addition, the introduction of new products or product enhancements may shorten the life cycle of our existing products, or replace
sales of some of our current products, thereby offsetting the benefit of even a successful product introduction, and may cause
customers to defer purchasing our existing products in anticipation of the new products and potentially lead to challenges in managing
inventory of existing products. If we are unable to introduce new products or novel technologies in a timely manner or our new
products or technologies are not accepted by consumers, our competitors may introduce more attractive products, which could hurt
our competitive position. Our new products might not receive consumer acceptance if consumer preferences shift to other products,
and our future success depends in part on our ability to anticipate and respond to these changes. Failure to anticipate and respond
in a timely manner to changing consumer preferences could lead to, among other things, lower revenue and excess inventory levels.
As we seek to enhance our products, we may incur additional costs to incorporate new or revised features. We might not be able
to, or determine that it is not in our interests to, raise prices to compensate for these additional costs. If we do not successfully
manage product transitions, our revenue and business may be harmed.
Our markets are extremely competitive
and subject to rapid technological change. Many of our significant competitors have greater financial and other resources than
we do, and one or more of these competitors could use their greater resources to gain market share at our expense.
Competition is based on a multitude of factors,
including product design, brand strength, distribution presence and capability, channel knowledge and expertise, geographic availability,
breadth of product line, product cost, media capacity, access speed and performance, durability, reliability, scalability and compatibility.
Specifically, the performance, functionality, reliability and price of our products are critical elements of our ability to compete.
We believe that we offer, and that our target consumers seek, products that combine higher levels of performance, functionality
and reliability at prices competitive with other leading brand-name products. Also, market penetration, brand recognition and inventory
management are also critical elements of our ability to compete. Most consumers purchase products similar to ours from off-the-shelf
retailers such as a large computer, consumer electronics and office supply superstores. Market penetration in the industries in
which we compete is typically based on the number of retailers who offer a company’s products and the amount of shelf-space
allocated to those products.
Our existing competitors include many large
domestic and international companies that have longer operating histories and have greater brand name recognition, substantially
greater financial, technical, marketing and other resources, broader product lines and longer standing relationships with retailers,
distributors, OEMs and end users. As a result, these competitors may be able to better absorb price declines, ensure more stable
supply, adapt more quickly to new or emerging technologies or devote greater resources to the promotion and sale of their products
than we may. Ultimately, this may lead to a decrease in our sales and market share and have a material adverse effect on our business,
financial condition and results of operations.
We face competition from existing competitors
and expect to face competition from future competitors that design and market similar or alternative data storage solutions that
may be less costly or provide additional features. If a manufacturer of consumer electronic devices designs one of these alternative
competing standards into its products, the digital media we manufacture, as currently configured, will not be compatible with that
product and/or may cause our revenues to decline, which would result in a material adverse effect on our business.
We substantially rely on distributors
and retailers to sell our data storage products and our inability to control the activities of such retailers could cause our operating
results and gross margins to fluctuate significantly.
We sell substantially all of our data storage
products through distributors and retailers. Sales to distributors and retailers subject us to many special risks, including the
following:
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continued downward pricing
pressure may necessitate price protection of the inventories of our products that many of our customers carry;
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distributors and retailers
may emphasize our competitors’ products over our products or decline to carry our products;
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loss of market share
if the retailers that carry our products do not grow as quickly and sell as many digital media products as the retailers that
carry the digital media products of our competitors;
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loss of business or
monetary penalties if we are unable to satisfy the product needs of these customers or fulfill their orders on a timely basis;
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increased sales and
marketing expenses if we are unable to accurately forecast our customer’s orders, including, among other items, increased
freight and fulfillment costs if faster shipping methods are required to meet customer demand;
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reduced ability to forecast
sales; and
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reduced gross margins,
delays in collecting receivables and increased inventory levels due to the increasing tendency for some retailers to require products
be supplied on a consignment basis.
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Availability of reliable sell-through data
varies throughout the retail channel, which will make it difficult for us to determine actual retail product revenues until after
the end of each of our fiscal quarters. Unreliable sell-through data may result in either an overstatement or understatement of
our reported revenues and results of operations. Our arrangements with our customers also provide them price protection against
declines in our recommended selling prices. We do not have exclusive relationships with our retailers or distributors and therefore
must rely on them to effectively sell our products over those of our competitors. Our reliance on the activities of distributors
and retailers over which we have little or no control could cause our operating results and gross margin, to fluctuate significantly.
We obtain many products from a limited
number of suppliers, and if these suppliers fail to meet our supply requirement or cease production of our products, we may lose
sales and experience increased costs.
Our products inventory strategy is to maintain
as little inventory as is necessary for the efficient operation of our business, which creates the risk that any shortage or delay
in the supply of our products could harm our ability to meet demand. We obtain many of our products from a limited number of suppliers
on a purchase order basis.
Furthermore, none of our suppliers have a contractual
commitment to supply us with products. These products include our SSDs, flash memory cards and USB flash drives. If demand for
a specific product increases, we may not be able to obtain an adequate supply of that product in a timely manner, since our suppliers
may fill other orders before ours. It could be difficult, costly and time-consuming to obtain alternative sources for these products,
or to change products, or to change designs to make use of alternative products. In addition, difficulties in transitioning from
an existing supplier to a new supplier could create delays in product availability that would have a significant impact on our
ability to fulfill orders for our products. This would adversely impact on our ability to meet demand and damage our brand and
reputation in the market, which would have a material adverse effect on our business and results of operations.
Because we protect some of our retail
customers and distributors against the effects of price decreases on their inventories of our products, we may incur price protection
charges if we reduce our prices when there are large quantities of our products in our distribution channel.
We provide price protection to certain of our
major resellers. In the past we have incurred price protection charges ranging from 2% to 5% of gross sales before giving effect
to such changes for the fiscal periods presented in this prospectus. Price protection allows customers to receive a price adjustment
on existing inventory when its published price is reduced. In an environment of slower demand and abundant supply of products,
price declines and channel promotions expenses are more likely to occur and, should they occur, are more likely to have a significant
impact on our operating results. Further, in this environment, high channel inventory may result in substantial price protection
charges. These price protection charges have the effect of reducing gross sales and gross margins. We anticipate that we may continue
to incur price protection charges due to competitive pricing pressures and, as a result, our revenues and gross margins may be
adversely affected.
A significant product defect or product
recall could materially and adversely affect our brand image, causing a decline in our sales and profitability, and could reduce
or deplete our financial resources.
A significant product defect could materially
harm our brand image and could force us to conduct a product recall. This could damage our relationships with our customers and
reduce end-user loyalty
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A product recall would be particularly harmful to us because we have limited financial and
administrative resources to effectively manage a product recall and it would detract management’s attention from implementing
our core business strategies. As a result, a significant product defect or product recall could cause a decline in our sales and
profitability, and could reduce or deplete our financial resources.
A substantial portion of our sales have
been made to customers accounting for over 10% of sales. We expect that this may continue in the foreseeable future. If any of
these customers fails to timely pay us amounts owed, we could suffer a significant decline in cash flow and liquidity.
For the nine months ended September 30 2016,
one customer accounted for over 10% of our gross sales. For the year ended December 31, 2015, three customers accounted for over
10% of our gross sales. For the year ended December 31, 2014, two customers accounted for over 10% of our gross sales. We expect
that we may continue to depend upon a limited number of major customers for a significant portion of our sales for the foreseeable
future. We expect the composition of our major customer base to change over time, as our markets and strategies evolve, which could
make our revenue less predictable from period-to-period.
Our agreements with our customers do not require
them to purchase any specified number of products or dollar amount of purchases or to make any purchases whatsoever. Therefore,
we cannot assure you that, in any future period, our sales generated from these customers, individually or in the aggregate, will
equal or exceed historical levels. We also cannot assure you that, if sales to any of these customers cease or decline, we will
be able to replace these sales with sales to either existing or new customers in a timely manner, or at all. A cessation or reduction
of sales, or a decrease in the prices of products sold to one or more of these customers could cause a significant decline in our
net sales and profitability.
Our financial performance depends significantly
on worldwide economic conditions and the related impact on levels of consumer spending, which have deteriorated in many countries
and regions, including the U.S., and may not recover in the foreseeable future.
Demand for our products is adversely affected
by negative macroeconomic factors affecting consumer spending. The tightening of consumer credit, low level of consumer liquidity,
and volatility in credit and equity markets have weakened consumer confidence and decreased consumer spending primarily in the
U.S. and European retail markets. A continuation or further deterioration of depressed economic conditions could have an even greater
adverse effect on our business. Adverse economic conditions affect demand for devices that incorporate our products, such as personal
computers and other computing and networking products, mobile devices, and flash memory cards. Reduced demand for our products
could result in continued market oversupply and significant decreases in our average selling prices. A continuation of current
negative conditions in worldwide credit markets would limit our ability to obtain external financing to fund our operations and
capital expenditures. Difficult economic conditions may also result in a higher rate of losses on our accounts receivables due
to credit defaults. As a result, our business, results of operations or financial condition could be materially adversely affected.
Negative or uncertain global economic conditions
could also cause many of our direct and indirect customers to delay or reduce their purchases of our products. Further, many of
our customers in our distribution and retail channels rely on credit financing in order to purchase our products. If negative conditions
in the global credit markets prevent our customers’ access to credit, product orders in these channels may decrease, which
could result in lower revenue. Likewise, our suppliers may face challenges in obtaining credit, in selling their products or otherwise
in operating their businesses. These actions could result in reductions in our revenue, increased price competition and increased
operating costs, which could adversely affect our business, results of operations and financial condition.
We are currently, and may be in the future,
party to intellectual property rights claims that are expensive and time consuming to defend, and, if resolved adversely, could
have a significant impact on our business, financial condition or operating results.
Our industry is characterized by vigorous protection
and pursuit of intellectual property rights. Companies in the technology and consumer products 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 claims in order to extract value from technology
and consumer products companies. We do not currently manufacture any products and currently purchase all our products from third
parties for resale. From time to time we may receive claims from third parties which allege that we have infringed upon their intellectual
property rights or we may be called upon to indemnify our customers for any intellectual property right infringements by us. If
such products infringe the intellectual property rights of a third party or if we are found to owe license fees or royalties relating
to these products, our margins and operating results would be severely negatively impacted.
In this regard, we received a letter from GoPro,
Inc., or GoPro, alleging that we infringe on at least five U.S. patents held by GoPro, and requesting that we confirm in writing
that we will permanently cease the sale and distribution of our 1080p action sports camera, along with any camera accessories,
including the waterproof camera case and standard housing. The five patents specifically identified by GoPro in the letter were
U.S. Patent No. D710,921: camera housing design, U.S. Patent No. D702,747: camera housing design, U.S. Patent No. D740,875: camera
housing design, U.S. Patent No. D737,879: camera design, and U.S. Patent No. 721,395: camera design. Based upon our preliminary
review of these patents, we believe we have some defenses to GoPro’s allegations. Our outside counsel has been in discussions
with GoPro’s outside counsel and has forwarded them material which we believe supports defenses to these allegations, all
in an effort to move the matter to resolution. But as of yet, there is no final resolution to this matter. There can be no assurance
that we will be successful in defending against these allegations or reaching a business resolution that is satisfactory to us.
Further, from time to time we may introduce
new products and services, including in areas where we currently do not have an offering, which could increase our exposure to
patent and other intellectual property claims from competitors and non-practicing entities. Litigation could result in significant
expense to us and divert the efforts of our technical and management personnel. In the event of an adverse result in litigation,
we could be required to pay substantial damages, cease the manufacture, use and sale of some products, and expend significant resources
to develop non-infringing technology, discontinue the use of some processes or obtain licenses to use the infringed technology.
Any of these results could have a material adverse effect on our business and results of operations.
Our indemnification obligations to our
customers for product defects could require us to pay substantial damages.
A number of our product sales agreements provide
that we will defend, indemnify and hold harmless our customers from damages and costs that arise from product warranty claims or
claims for injury or damage resulting from defects in our products. Our insurance coverage may not be adequate to cover all or
any part of the claims asserted against us. A successful claim brought against us that is in excess of, or excluded from, our insurance
coverage could have a material adverse effect on our business and results of operations.
Substantially all of our executive officers
were only recently appointed to their current roles and have a limited history of working together as a management group.
In December 2015, Jawahar Tandon stepped down as our Chief Executive
Officer and David Clarke assumed that role; Mr. Tandon was appointed Executive Chairman of the Board. Mr. Clarke has no previous
experience in the management or operation of a company that engages in the business currently conducted and proposed to be conducted
by the Company. In addition, in December 2015 Vivek Tandon stepped down as our President and Mr. Clarke assumed that position as
well; Mr. Tandon was appointed Vice President, Operations. In October 2016 Jonathan Clark was appointed Interim President; Mr.
Clark has no previous experience in the management or operation of a company that engages in the business currently conducted and
proposed to be conducted by our company. Also, in January 2016, the Company appointed its Executive Vice President, Sales and Marketing
and an additional Vice President, Operations. And in May 2016, Jawahar Tandon stepped down as our Executive Chairman of the Board
but remained as a director. In August 2016 each of Vivek Tandon, Jawahar Tandon and Jonathan Orban stepped down as directors of
the Company. As a result, our current management team has very limited experience working together as a management group which
could cause short-term difficulties in implementing and overseeing significant corporate and operational functions.
To date, we have engaged in significant
related party transactions.
We have adopted a policy that our executive
officers, directors, nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and
any members of the immediate family of any of the foregoing persons are not permitted to enter into a related person transaction
with us without the proper consent of our audit committee. Further to such policy, any request for us to enter into a transaction
with an executive officer, director, nominee for election as a director, beneficial owner of more than 5% of any class of our voting
securities or any member of the immediate family of any of the foregoing persons in which the amount involved exceeds $120,000
and such person would have a direct or indirect interest, must first be presented to our audit committee for review consideration
and approval. However to date, we have engaged in a substantial number of related party transactions prior to the adoption of such
policy and all of which were approved by a board with no independent members. While the board believed the terms and conditions
of such transactions was fair and in the best interests of our company, there can be no assurance that the transactions were on
terms no less favorable than terms generally available to an unaffiliated third party under the same or similar circumstances.
See “Certain Relationships and Related Party Transactions.”
We have limited human resources; we need
to attract and retain highly skilled personnel; and we may be unable to manage our growth with our limited resources effectively.
The expansion of our business has placed a
significant strain on our limited managerial, operational, and financial resources. We have been and will continue to be required
to expand our operational and financial systems significantly and to expand, train and manage our work force in order to manage
the expansion of our operations. Our future success will depend in large part on our ability to attract, train, and retain additional
highly skilled executive level management with experience in the memory and data storage industry. Competition is intense for these
types of personnel from more established organizations, many of which have significantly larger operations and greater financial,
marketing, human, and other resources than we have. We may not be successful in attracting and retaining qualified personnel on
a timely basis, on competitive terms or at all. To date we have had to limit the engagement of critical management and other key
personnel due in part to limited financial resources. If we are not successful in attracting and retaining these personnel, our
business, prospects, financial condition and operating results would be materially adversely affected. Further, our ability to
manage our growth effectively will require us to continue to improve our operational, financial and management controls, reporting
systems and procedures, to install new management information and control systems and to train, motivate and manage employees.
If we are unable to manage growth effectively and new employees are unable to achieve adequate performance levels, our business,
prospects, financial condition and operating results will be materially adversely affected.
Our international operations subject
us to risks, which could adversely affect our operating results.
Our international operations are exposed to
the following risks, several of which are out of our control:
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political and economic
instability, international terrorism and anti-American sentiment, particularly in emerging markets;
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preference for locally-branded
products, and laws and business practices favoring local competition;
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unusual or burdensome
foreign laws or regulations, and unexpected changes to those laws or regulations;
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import and export license
requirements, tariffs, taxes and other barriers;
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costs of customizing
products for foreign countries;
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increased difficulty
in managing inventory;
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less effective protection
of intellectual property; and
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difficulties and costs
of staffing and managing foreign operations.
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Any or all of these factors could adversely
affect our ability to execute any geographic expansion strategies or have a material adverse effect on our business and results
of operations.
Terrorist attacks, war, threats of war
and government responses thereto may negatively impact our operations, revenues, costs and the market price of our securities.
Terrorist attacks, U.S. military responses
to these attacks, war, threats of war and any corresponding decline in consumer confidence could have a negative impact on consumer
demand. Any of these events may disrupt our operations or those of our customers and suppliers and may affect the availability
of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished
products to customers. Any of these events could also increase volatility in the U.S. and world financial markets, which could
limit the capital resources available to us and our customers or suppliers, or adversely affect consumer confidence. Turmoil and
unrest in regions from which we source our products could cause delays in the development or production of our products. This could
harm our business and results of operation.
Our operations are vulnerable because
we have limited redundancy and backup systems.
Our internal order, inventory and product data
management system is an electronic system through which our customers place orders for our products and through which we manage
product pricing, shipments, returns and other matters. This system’s continued and uninterrupted performance is critical
to our day-to-day business operations. Despite our precautions, unanticipated interruptions in our computer and telecommunications
systems could occur in the future. We have extremely limited ability and personnel to process purchase orders and manage product
pricing and other matters in any manner other than through this electronic system. Any interruption or delay in the operation of
this electronic system could cause a significant decline in our sales and profitability.
We may make acquisitions that are dilutive
to existing stockholders. In addition, our limited experience in acquiring other businesses, product lines and technologies may
make it difficult for us to overcome problems encountered in connection with any acquisitions we may undertake.
We intend to evaluate and explore strategic
opportunities as they arise, including business combinations, strategic partnerships, and the purchase, licensing or sale of assets.
In connection with any such future transaction, we could issue dilutive equity securities, incur substantial debt, reduce our cash
reserves or assume contingent liabilities.
Our experience in acquiring other businesses,
product lines and technologies is limited. Our inability to overcome problems encountered in connection with any acquisitions could
divert the attention of management, utilize scarce corporate resources and otherwise harm our business. Any potential future acquisitions
also involve numerous risks, including:
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problems assimilating
the purchased operations, technologies or products;
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costs associated with
the acquisition;
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adverse effects on existing
business relationships with suppliers and customers;
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risks associated with
entering markets in which we have no or limited prior experience;
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potential loss of key
employees of purchased organizations; and
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potential litigation
arising from the acquired company’s operations before the acquisition.
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Furthermore, acquisitions may require material
charges and could result in adverse tax consequences, substantial depreciation, deferred compensation charges, in-process research
and development charges, the amortization of amounts related to deferred compensation and identifiable purchased intangible assets
or impairment of goodwill, any of which could negatively affect our results of operations.
Sudden disruptions to the availability
of freight lanes could have an impact on our operations.
We generally ship our products to our customers,
and receive shipments from our suppliers, via air or ocean freight. The sudden unavailability or disruption of cargo operations
or freight lanes, such as due to labor difficulties or disputes, severe weather patterns or other natural disasters, or political
instability, terrorism or civil unrest, could impact our operating results by impairing our ability to timely and efficiently deliver
our products.
If currency exchange rates fluctuate
substantially in the future, our financial results, which are reported in U.S. dollars, could be adversely affected.
As we continue to expand our international
operations, we become more exposed to the effects of fluctuations in currency exchange rates. Our sales contracts are denominated
in U.S. dollars, and therefore substantially all of our revenues are not subject to foreign currency risk. However, a strengthening
of the U.S. dollar could increase the real cost of our products to our customers outside of the United States, adversely affecting
our business operations and financial results. To date, we have not engaged in any hedging strategies, and any such strategies,
such as forward contracts, options and foreign exchange swaps related to transaction exposures that we may implement to mitigate
this risk may not eliminate our exposure to foreign exchange fluctuations.
Risks Related to the Ownership of our Common
Stock
Our share price is volatile and may be influenced by numerous
factors, some of which are beyond our control.
The trading price of the shares of our common stock currently is, and is likely to continue to be, highly volatile and could be
subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed
in this “Risk Factors” section and elsewhere in this prospectus, these factors include:
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the success of competitive
products or technologies;
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actual or anticipated
changes in our growth rate relative to our competitors;
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announcements by us
or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
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regulatory or legal
developments in the United States and other countries;
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the recruitment or departure
of key personnel;
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actual or anticipated
changes in estimates as to financial results, development timelines or recommendations by securities analysts;
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variations in our financial
results or those of companies that are perceived to be similar to us;
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fluctuations in the
valuation of companies perceived by investors to be comparable to us;
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inconsistent trading
volume levels of our shares;
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announcement or expectation
of additional financing efforts;
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sales of our common
stock by us, our insiders or our other stockholder;
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market conditions in
the technology sectors; and
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general economic, industry
and market conditions.
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In addition, the stock market in general, and
technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our
common stock, regardless of our actual operating performance. The realization of any of these risks or any of a broad range of
other risks, including those described in these “Risk Factors,” could have a dramatic and material adverse impact on
the market price of the shares of our common stock.
We may be subject to securities litigation,
which is expensive and could divert management attention.
In the past companies that have experienced
volatility in the market price of their securities have been subject to securities class action litigation. We may be the target
of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s
attention from other business concerns, which could seriously harm our business.
Pursuant to our decision to cancel our proposed
acquisition of Syrma Technologies Pvt. Ltd., in September 2015 Jawahar Tandon, our former Executive Chairman of the Board and former
Chief Executive Officer, and Devinder Tandon, one of our significant stockholder and a former director, offered in the aggregate
to each stockholder who purchased shares of our company for cash the opportunity to receive .07 additional shares from Mssrs. Tandon’s
beneficial holdings for each .41 shares held by such stockholder (together the “Additional Shares”). As a condition
to such grant, the executing stockholder agreed to release our company and Westpark Capital from any claim or cause of action that
arise out of or are related in any way to the purchase or acquisition of our common stock (the “Release”). Stockholders
holding an aggregate of 1,279,056 of such shares agreed to receive Additional Shares and sign the Release; an aggregate of 216,971
Additional Shares were afforded these stockholder from each of Jawahar Tandon's and Devinder Tandon’s beneficial holdings.
Stockholders holding an aggregate of 199,248 of such shares did not agree to receive any Additional Shares and did not sign the
Release. As such, these stockholder have reserved rights to file claims against our company in connection with the issuance of
securities to them, which claims may include claims that securities were sold to them in violation of Section 10(b) of the Securities
Exchange Act of 1934, as amended. While we have not received any notice that such a claim has been or is intended to be filed,
no assurance can be given that any such claim will not be made against us or any of our officers or directors,. To the extent that
any such claims or suits are brought and successfully concluded, we could be materially adversely affected, jeopardizing our ability
to operate successfully. Furthermore, our human and capital resources of could be adversely affected by the need to defend any
such actions, even if we are ultimately successful in our defense.
We are an “emerging growth company”
and we intend to take advantage of reduced disclosure and governance requirements applicable to emerging growth companies, which
could result in our shares of common stock or warrants being less attractive to investors.
We are an “emerging growth company,”
as defined in the JOBS Act, and we intend to take advantage of certain exemptions from various reporting requirements that are
applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to
comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, 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 stockholder approval of any golden parachute payments not previously approved. We cannot
predict if investors will find our shares of common stock or warrants less attractive because we will rely on these exemptions.
If some investors find our common stock less attractive as a result, there may be a less active trading market for our shares of
common stock or warrants and the market price of such securities may be more volatile. We may take advantage of these reporting
exemptions until we are no longer an emerging growth company, which in certain circumstances could be for up to five years. We
will cease to be an “emerging growth company” upon the earliest of: (1) December 31, 2021, (2) the last day of the
first fiscal year in which our annual gross revenues are $1 billion or more, (3) the date on which we have, during the previous
rolling three-year period, issued more than $1 billion in non-convertible debt securities, and (4) the date on which we are deemed
to be a “large accelerated filer” as defined in the Exchange Act.
Our status as an “emerging growth
company” under the JOBS Act may make it more difficult to raise capital as and when we need it.
Because of the exemptions from various reporting
requirements provided to us as an “emerging growth company” we may be less attractive to investors and it may be difficult
for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies
in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are
unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially
and adversely affected.
We have identified a material weakness
in our internal control over financial reporting and may identify additional material weaknesses in the future that may cause us
to fail to meet our reporting obligations or result in material misstatements of our financial statements. If we fail to remediate
any material weaknesses or if we fail to establish and maintain effective control over financial reporting, our ability to accurately
and timely report our financial results could be adversely affected.
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in
accordance with US generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies,
in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual
or interim financial statements will not be prevented or detected on a timely basis.
We have determined that we had a material weakness
in our internal control over financial reporting as of September 30, 2016 and December 31, 2015 and 2014 relating to the design
and operation of our closing and financial reporting processes.
For a discussion of our remediation plan and
the actions that we have executed during 2014 and 2015, in addition to the estimated costs incurred in connection with such remediation
efforts, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal
Control over Financial Reporting.” The actions we have taken are subject to continued review, supported by confirmation and
testing by management. While we have implemented a plan to remediate this weakness, we cannot assure you that we will be able to
remediate this weakness, which could impair our ability to accurately and timely report our financial position, results of operations
or cash flows. If we are unable to successfully remediate this material weakness, and if we are unable to produce accurate and
timely financial statements, our stock price may be adversely affected and we may be unable to maintain compliance with applicable
Nasdaq listing requirements.
Our failure to remediate the material weakness
identified above or the identification of additional material weaknesses in the future, could adversely affect our ability to report
financial information, including our filing of quarterly or annual reports with the SEC on a timely and accurate basis. Moreover,
our failure to remediate the material weakness identified above or the identification of additional material weaknesses could prohibit
us from producing timely and accurate financial statements, which may adversely affect our the market price of shares of our common
stock and we may be unable to maintain compliance with Nasdaq listing requirements.
Because we do not anticipate paying any
cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will be your sole source of potential
gain.
We have never declared or paid cash dividends
on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of
our business. In addition, the terms of any future debt agreements may preclude us from paying dividends. As a result, capital
appreciation, if any, of our shares of common stock and warrants will be your sole source of gain for the foreseeable future.
Sales of a substantial number of shares
of our common stock in the public market could cause the market price of shares of our common stock or warrants to fall.
Sales of a substantial number of shares of
our common stock in the public market could occur at any time. These sales, or the perception in the market that the holders of
a large number of shares intend to sell shares, could reduce the market price of our shares of our common stock. Commencing on
January 7, 2017, approximately 5,000,000 shares of our common stock may be resold in the public market, most without restriction
on volume, unless held by our affiliates. We have also agreed to register all 382,575 shares of common stock held by Monster, Inc.
(upon demand) and all shares underlying warrants issued in connection with our initial public offering. All of the shares involved
in an effective registration statement may be freely sold and transferred. We have also registered all shares of common stock that
we may issue under our equity compensation plan. Once we register these shares, they can be freely sold in the public market upon
issuance, subject to volume limitations applicable to affiliates.
Some provisions of our charter documents
and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would
be beneficial to our stockholder and may prevent attempts by our stockholder to replace or remove our current management.
Provisions in our Certificate of Incorporation
and Bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us or increase the
cost of acquiring us, even if doing so would benefit our stockholder, or remove our current management. These include provisions
that:
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permit our board of
directors to issue up to 10,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;
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provide that all vacancies
on our board of directors, including as a result of newly created directorships, may, except as otherwise required by law, be
filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;
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require that any action
to be taken by our stockholder must be effected at a duly called annual or special meeting of stockholder and not be taken by
written consent;
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provide that stockholder
seeking to present proposals before a meeting of stockholder or to nominate candidates for election as directors at a meeting
of stockholder must provide advance notice in writing, and also satisfy requirements as to the form and content of a stockholder’s
notice;
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not provide for cumulative
voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors
to elect all of the directors standing for election; and
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provide that special
meetings of our stockholder may be called only by the board of directors or by such person or persons requested by a majority
of the board of directors to call such meetings.
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These provisions may frustrate or prevent any
attempts by our stockholder to replace or remove our current management by making it more difficult for stockholder to replace
members of our board of directors, who are responsible for appointing the members of our management. Because we are incorporated
in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay
or prevent someone from acquiring us or merging with us whether or not it is desired by or beneficial to our stockholder. Under
Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital
stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction.
Any provision of our Certificate of Incorporation or Bylaws or Delaware law that has the effect of delaying or deterring a change
in control could limit the opportunity for our stockholder to receive a premium for their shares of common stock, and could also
affect the price that some investors are willing to pay for our shares of common stock.
If securities or industry analysts do
not publish research or publish inaccurate or unfavorable research about our business, the trading price of our common stock or
warrants and trading volume could decline.
The trading market for our shares of our common
stock and warrants will depend in part on the research and reports that securities or industry analysts publish about us or our
business. Securities and industry analysts do not currently, and may never, publish research on our shares of common stock or warrants.
If no securities or industry analysts commence coverage of our company, the trading price for our shares of our stock and warrants
would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts
who cover us downgrade our securities or publish inaccurate or unfavorable research about our business, the price of our shares
of common stock or warrants would likely decline. If one or more of these analysts cease coverage of our company or fail to publish
reports on us regularly, demand for our securities could decrease, which might cause the trading price of our shares of common
stock and trading volume to decline.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections
titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and “Business,” contains forward-looking statements. In some cases you can
identify these statements by forward-looking words such as “believe,” “may,” “will,” “estimate,”
“continue,” “anticipate,” “intend,” “could,” “would,” “project,”
“plan,” “expect” or the negative or plural of these words or similar expressions. These forward-looking
statements include, but are not limited to, statements concerning the following:
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our ability to continue
as a going concern;
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our ability to successfully
manage our business or achieve profitability;
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our operating results,
including our margins and negative cash flow;
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our strategic relationship
with Monster, Inc., including their introductions to buyers and retailers;
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our ability to successfully
promote our brand and achieve strong brand recognition;
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our ability to develop
or maintain necessary strategic relationships;
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our reliance on third
party manufacturers;
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customer relationships
or customer demand for our products;
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our ability to effectively
manage our inventories, reduce our costs, introduce new products with higher average selling prices or increase our sales volume;
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our ability to accurately
forecast market and customer demand or to quickly adjust to forecast changes;
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the cyclical nature
of the consumer electronics industry;
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the competitive nature
of our markets and our ability to compete;
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our reliance on distributors
and retailers;
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our reliance on a limited
number of and certain sole source suppliers;
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our exposure to price
protection charges;
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our financial performance;
and
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developments and projections
relating to our competitors and our industry.
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These statements are only current predictions
and are subject to known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results,
levels of activity, performance or achievements to be materially different from those anticipated by the forward-looking statements.
We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors” and elsewhere
in this prospectus. You should not rely upon forward-looking statements as predictions of future events. New risk factors and uncertainties
may emerge from time to time, and it is not possible for management to predict all risks and uncertainties.
Although we believe that the expectations reflected
in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.
Except as required by law, after the date of this prospectus, we are under no duty to update or revise any of the forward-looking
statements, whether as a result of new information, future events or otherwise.
SELLING STOCKHOLDER
This prospectus covers the resale from time to time by the selling
stockholder identified in the table below of up to an aggregate of 333,333 issued and outstanding shares of our common stock issued
and sold to such investor in the Private Placement.
Pursuant to the Registration Rights Agreement, we have filed with
the SEC the registration statement of which this prospectus forms a part in order to register such resale of our common stock under
the Securities Act. We have also agreed to cause this registration statement to become effective and to keep such registration
statement effective within and for the time periods set forth in the Registration Rights Agreement.
The selling stockholder identified in the table below may from time
to time offer and sell under this prospectus any or all of the shares of common stock described under the column “Shares
of Common Stock Being Offered in this Offering” in the table below. The table below has been prepared based upon information
furnished to us by the selling stockholder as of the date represented in the footnotes accompanying the table. The selling stockholder
identified below may have sold, transferred or otherwise disposed of some or all of its shares since the date on which the information
in the following table is presented in transactions exempt from or not subject to the registration requirements of the Securities
Act. Information concerning the selling stockholder may change from time to time and, if necessary, we will amend or supplement
this prospectus accordingly and as required.
We have been advised that the selling stockholder is not a broker-dealer.
The selling stockholder has informed us that it bought our securities in the ordinary course of business, and that the selling
stockholder has, at the time of its purchase of our securities, no agreements or understandings, directly or indirectly, with any
person to distribute such securities.
The following table and footnote disclosure following the table
sets forth the name of the selling stockholder, the nature of any position, office or other material relationship, if any, that
the selling stockholder has had within the past three years with us or with any of our predecessors or affiliates, and the number
of shares of our common stock beneficially owned by the selling stockholder before this offering. The number of shares reflected
are those beneficially owned, as determined under applicable rules of the SEC, and the information is not necessarily indicative
of beneficial ownership for any other purpose. Under applicable SEC rules, beneficial ownership includes any shares of common stock
as to which a person has sole or shared voting power or investment power and any shares of common stock which the person has the
right to acquire within 60 days after February 7, 2017 through the exercise of any option, warrant or right or through the conversion
of any convertible security. Unless otherwise indicated in the footnotes to the table below and subject to community property laws
where applicable, we believe, based on information furnished to us, that the selling stockholder named in this table has sole voting
and investment power with respect to the shares indicated as beneficially owned.
We have assumed that all shares of common stock reflected in the
table as being offered in the offering covered by this prospectus will be sold from time to time in this offering. We cannot provide
an estimate as to the number of shares of common stock that will be held by the selling stockholder upon termination of the offering
covered by this prospectus because the selling stockholder may offer some, or none of its shares of common stock being offered
in the offering.
Selling Stockholder
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Shares of
Common
Stock
Beneficially
Owned
Before this
Offering
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Percentage
of
Outstanding
Common
Stock
Beneficially
Owned
Before this
Offering (1)
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Shares
of
Common
Stock
Being
Offered
in this
Offering
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Shares of
Common
Stock
Beneficially
Owned
Upon
Completion
of this
Offering
(2)
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Percentage
of
Outstanding
Common
Stock
Beneficially
Owned
Upon
Completion
of this
Offering
(1)(2)
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Gibralt Capital Corporation (3)
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333,333
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3.9
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%
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333,333
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—
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Stanley Belzberg (3)(4)
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333,333
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3.9
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%
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333,333
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—
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—
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(1)
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Percentage ownership is based on 8,537,511 shares of our common stock outstanding as of February 7, 2017.
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(2)
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Assumes that all shares of common stock being registered under the registration statement of which this prospectus forms a part are sold in this offering, and that the selling stockholder does not acquire additional shares of our common stock after the date of this prospectus and prior to completion of this offering.
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(3)
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All information regarding the selling stockholder is provided as of November 10, 2016. The address is 1075 West Georgia Street, #2600, Vancouver, BC V6E3C9.
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(4)
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Stanley Belzberg, the owner and Chief Executive Officer of the selling stockholder, has the power to vote or dispose of the securities held of record by the selling stockholder and may be deemed to beneficially own those securities.
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PLAN OF DISTRIBUTION
We are registering the shares of common stock issued to the selling
stockholder to permit the resale of these shares of common stock by the holder of the shares of common stock from time to time
after the date of this prospectus. We will not receive any of the proceeds from the sale by the selling stockholder of the shares
of common stock. We will bear all fees and expenses incident to our obligation to register the shares of common stock.
The selling stockholder may sell all or a portion of the shares
of common stock beneficially owned by it and offered hereby from time to time directly or through one or more underwriters, broker-dealers
or agents. If the shares of common stock are sold through underwriters or broker-dealers, the selling stockholder will be responsible
for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold in one or more transactions,
which may involve crosses or block transactions, and may be sold on any national securities exchange or quotation service on which
our common stock may be listed or quoted at the time of sale, in the over-the-counter market, or in transactions otherwise than
on these exchanges or systems. As of the date of this prospectus, our common stock is quoted for trading on the Nasdaq Capital
Market. As of February 7, 2017, the last reported sales price for our common stock on the Nasdaq Capital Market was $1.67 per
share, and as such represented the market price for our common stock as of that date. However, as described under the heading “Risk
Factors” in this prospectus, the market price of our common stock is subject to a high degree of volatility. Further, sales
of the common stock to be registered hereunder could be made at prevailing market prices at the time of the sale, at fixed prices,
at negotiated prices, or at varying prices determined at the time of sale. As a result, we cannot know the price at which any of
our common stock to be registered hereunder may ultimately be sold by the holder thereof.
The selling stockholder may use any one or more of the following
methods when selling shares:
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ordinary brokerage transactions
and transactions in which the broker-dealer solicits purchasers;
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block trades in which
the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to
facilitate the transaction;
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purchases by a broker-dealer
as principal and resale by the broker-dealer for its account;
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an exchange distribution
in accordance with the rules of the applicable exchange;
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privately negotiated
transactions;
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settlement of short sales
entered into after the effective date of the registration statement of which this prospectus is a part;
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broker-dealers may agree
with the selling stockholder to sell a specified number of such shares at a stipulated price per share;
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through the writing or
settlement of options or other hedging transactions, whether such options are listed on an options exchange or otherwise;
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a combination of any
such methods of sale; and
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any other method permitted
pursuant to applicable law.
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The selling stockholder also may resell all or a portion of the
shares in open market transactions in reliance upon Rule 144 under the Securities Act, as permitted by that rule, or Section 4(a)(1)
under the Securities Act, if available, rather than under this prospectus, provided that they meet the criteria and conform to
the requirements of those provisions.
Broker-dealers engaged by the selling stockholder may arrange for
other broker-dealers to participate in sales. If the selling stockholder effects such transactions by selling shares of common
stock to or through underwriters, broker-dealers or agents, such underwriters, broker-dealers or agents may receive commissions
in the form of discounts, concessions or commissions from the selling stockholder or commissions from purchasers of the shares
of common stock for whom they may act as agent or to whom they may sell as principal. Such commissions will be in amounts to be
negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction will not be in excess
of a customary brokerage commission in compliance with FINRA Rule 5110.
In connection with sales of the shares of common stock or otherwise,
the selling stockholder may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn
engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling stockholder
may also sell shares of common stock short and if such short sale shall take place after the date that this registration statement
is declared effective by the SEC, the selling stockholder may deliver shares of common stock covered by this prospectus to close
out short positions and to return borrowed shares in connection with such short sales. The selling stockholder may also loan or
pledge shares of common stock to broker-dealers that in turn may sell such shares, to the extent permitted by applicable law. The
selling stockholder may also enter into option or other transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of
shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus
(as supplemented or amended to reflect such transaction). Notwithstanding the foregoing, the selling stockholder has been advised
that it may not use shares registered pursuant to this registration statement to cover short sales of our common stock made prior
to the date the registration statement of which this prospectus forms a part is declared effective by the SEC.
The selling stockholder may, from time to time, pledge or grant
a security interest in some or all of the shares of common stock owned by it and, if it defaults in the performance of its secured
obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus
or any amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act, amending, if necessary,
the list of selling stockholder to include the pledgee, transferee or other successors in interest as selling stockholder under
this prospectus. The selling stockholder also may transfer and donate the shares of common stock in other circumstances in which
case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this
prospectus.
The selling stockholder and any broker-dealer or agents participating
in the distribution of the shares of common stock offered hereby may be deemed to be “underwriters” within the meaning
of Section 2(11) of the Securities Act in connection with such sales. In such event, any commissions paid, or any discounts
or concessions allowed to, any such broker-dealer or agent and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act. If the selling stockholder is deemed an “underwriter”
within the meaning of Section 2(11) of the Securities Act, it will be subject to the prospectus delivery requirements of the
Securities Act and may be subject to certain statutory liabilities of, including but not limited to, Sections 11, 12 and 17 of
the Securities Act and Rule 10b-5 under the Exchange Act.
The selling stockholder has informed us that it is not a registered
broker-dealer and does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute
the common stock. Upon us being notified in writing by a selling stockholder that any material arrangement has been entered into
with a broker-dealer for the sale of common stock through a block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker-dealer, a supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the participating broker-dealer(s), (ii) the number of shares involved, (iii) the
price at which such the shares of common stock were sold, (iv) the commissions paid or discounts or concessions allowed to
such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not conduct any investigation to verify the information
set out or incorporated by reference in this prospectus, and (vi) other facts material to the transaction.
Under the securities laws of some states, the shares of common stock
may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common
stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with in all respects.
The selling stockholder may sell some, all or none of the shares
of common stock to be registered pursuant to the registration statement of which this prospectus forms a part.
The selling stockholder and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including,
without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of
common stock by the selling stockholder and any other participating person. Regulation M may also restrict the ability of any person
engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common
stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity
to engage in market-making activities with respect to the shares of common stock.
We will pay all expenses of the registration of the shares of common
stock pursuant to the Registration Rights Agreement, including, without limitation, SEC filing fees and expenses of compliance
with state securities or “blue sky” laws;
provided
,
however
, that the selling stockholder will pay all
underwriting discounts and selling commissions, if any, and any legal expenses incurred by it. We will indemnify the selling stockholder
against certain liabilities, including some liabilities under the Securities Act, in accordance with the Registration Rights Agreement,
or the selling stockholder will be entitled to contribution. We may be indemnified by the selling stockholder against civil liabilities,
including liabilities under the Securities Act, that may arise from any written information furnished to us by the selling stockholder
specifically for use in this prospectus, in accordance with the Registration Rights Agreement, or we may be entitled to contribution.
DETERMINATION OF OFFERING PRICE
The selling stockholder will determine at what price it may sell
the shares of common stock offered by this prospectus, and such sales may be made at fixed prices, at prevailing market prices
at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. As of February 7, 2017,
the sale price for our common stock as reported on the Nasdaq Capital Market was $1.67 per share.
USE OF PROCEEDS
We will not receive any proceeds from the sale of our common stock
offered by this prospectus. We have agreed to bear the expenses (other than any underwriting discounts or selling commissions or
any legal expenses incurred by the selling stockholder) in connection with the registration of the shares of our common stock being
offered for resale hereunder by the selling stockholder.
DESCRIPTION OF SECURITIES
General
The following description of our capital stock
summarizes the most important terms of our capital stock. The descriptions of our capital stock and certain provisions of our Certificate
of Incorporation and Bylaws are summaries and are qualified by reference to the Certificate of Incorporation and Bylaws filed with
the SEC as exhibits to this registration statement, of which this prospectus forms a part, and by the applicable provisions of
Delaware law.
Our Certificate of Incorporation provides for
common stock and undesignated preferred stock, the rights, preferences and privileges of which may be designated from time to time
by our board of directors.
Our authorized capital stock consists of 110,000,000
shares, all with a par value of $0.0001 per share, of which 100,000,000 shares are designated as common stock and 10,000,000 shares
designated as preferred stock.
As of February 7, 2017, we had outstanding
8,537,511 shares of common stock held by approximately 350 stockholders of record.
Common Stock
The holders of our common stock are entitled
to one vote per share on all matters submitted to a vote of our stockholders. Subject to preferences that may be applicable to
any preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to receive ratably
any dividends declared by our board of directors out of assets legally available therefor. In the event that we liquidate, dissolve
or wind up, holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities and
the liquidation preference of any then outstanding shares of preferred stock. Holders of common stock have no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock.
Preferred Stock
Our board of directors may, without further
action by our stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of 10,000,000 shares
of preferred stock in one or more series and authorize their issuance. These rights, preferences and privileges could include dividend
rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares
constituting any series or the designation of such series, any or all of which may be greater than the rights of our common stock.
The issuance of our preferred stock could adversely affect the voting power of holders of our common stock and the likelihood that
such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have
the effect of delaying, deferring or preventing a change of control or other corporate action.
Warrants
The 2,025,000 warrants issued in connection
with our initial public offering entitle the registered holder to purchase one share of our common stock at a price equal to $5.625,
subject to adjustment as discussed below, immediately following the issuance of such warrant and terminating at 5:00 p.m., New
York City time, on July 12, 2021. Each warrant is listed on the Nasdaq Capital Market under the symbol “MSDIW”.
From and after one year following their issuance,
we may redeem the outstanding warrants without the consent of any third party or the underwriter:
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in whole and not in
part;
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at a price of $0.001
per warrant, so long as a registration statement relating to the common stock issuable upon the exercise of the warrants has been
effective and current during the 30 consecutive trading day period described below;
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upon not less than 30
days’ prior written notice of redemption; and
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if, and only if, the
last closing trade price of a share of our common stock equals or exceeds 160% of the warrant exercise price (subject to adjustment
for splits, dividends, recapitalization and other similar events) for any 20 trading days within a 30 consecutive trading day
period ending three business days before we send the notice of redemption to the holders of warrants.
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If the foregoing conditions are satisfied and
we call the warrants for redemption, each holder of warrants will then be entitled to exercise his, her or its warrants prior to
the date scheduled for redemption. However, there can be no assurance that the price of the common stock will exceed the warrants
exercise price after the redemption call is made.
The exercise price and number of shares of
common stock issuable upon exercise of the warrants may be adjusted in certain circumstances, including in the event of a stock
dividend or recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances
of common stock at prices below its exercise price.
The warrants may be exercised upon surrender
of the warrant certificate on or prior to the expiration date at the offices of the Warrant Agent, with the exercise form on the
reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price,
by certified or official bank check payable to us, for the number of warrants being exercised. Under the terms of the Warrant Agreement,
we must use our best efforts to maintain the effectiveness of the registration statement and current prospectus relating to common
stock issuable upon exercise of the warrants until the expiration of the warrants. If we fail to maintain the effectiveness of
the registration statement and current prospectus relating to the common stock issuable upon exercise of the warrants, the holders
of the warrants shall have the right to exercise the warrants solely via a cashless exercise feature provided for in the warrants,
until such time as there is an effective registration statement and current prospectus. The warrant holders do not have the rights
or privileges of holders of common stock or any voting rights until they exercise their warrants and receive shares of common stock.
After the issuance of shares of common stock upon exercise of the warrants, each holder will be entitled to one vote for each share
held of record on all matters to be voted on by stockholders.
A holder may not exercise any portion of a
warrant to the extent that the holder, together with its affiliates and any other person or entity acting as a group, would own
more than 4.99% of the outstanding common stock after exercise, as such percentage ownership is determined in accordance with the
terms of the warrant, except that upon at least 61 days’ prior notice from the holder to us, the holder may waive such limitation
up to a percentage not in excess of 9.99%.
No fractional shares of common stock will be
issued upon exercise of the warrants. If, upon exercise of the warrant, a holder would be entitled to receive a fractional interest
in a share, we will, upon exercise, pay a cash adjustment in respect of such fraction in an amount equal to such fraction multiplied
by the exercise price. If multiple warrants are exercised by the holder at the same time, we shall pay a cash adjustment in respect
of such final fraction in an amount equal to such fraction multiplied by the exercise price.
Options and Stock Grants under 2012 Omnibus
Incentive Plan
As of February 7, 2017, there were outstanding
stock options under our 2012 Omnibus Incentive Plan to purchase up to 10,000 shares of common stock all of which have an exercise
price of $29.71 per share, vesting in four annual installments and 52,834 shares at an exercise price of $4.50 all vesting over
four annual installments.
Other Warrants
The owner and Chief Executive Officer of Monster,
Inc. holds warrants to purchase an aggregate of 208,122 shares of common stock. Warrants representing the right to purchase 16,833
shares have a per share exercise price of $29.71, and expire in 2017 and the balance have a per share exercise price of $14.85
per share and expire in 2025.
In connection with a private placement of convertible
promissory notes and warrants effected by us in between April 2014 and March 2015, we issued investors in the private placement
warrants to purchase an aggregate of 2,303 shares of our common stock at exercise price of $22.14, all of which remain outstanding.
We issued WestPark Capital Financial Services,
LLC warrants to purchase an aggregate of 116,651 shares of common stock issued in connection with the reorganization of our company
in 2012 and further to its role as placement agent in connection with private placements of common stock and convertible note and
warrants e at exercise prices ranging from $.0052 to $22.28 and expiring between 2017 and 2020. In October 2015, WestPark Capital
transferred 84,845 shares of the common stock held by it and warrants to purchase 40,590 shares of common stock to third parties
further to prior contractual commitments; each of the transferees represented that he/she/it was an accredited investor.
Registration Rights
We have agreed to register all 382,575 shares
of common stock held by Monster, Inc. upon demand. We have also agreed (i) to register all shares underlying the warrants and (ii)
to register all shares of our common stock underlying the warrants to sold to the underwriter upon the closing of our initial public
at such time as we become eligible to file a resale registration statement on Form S-3
.
On November 10, 2016, we entered into
the Registration Rights Agreement with the selling stockholder. Under the Registration Rights Agreement, subject to exception in
certain circumstances, we have agreed to keep this registration statement effective until such time as all of the securities to
be registered hereunder have been sold under this registration statement or pursuant to Rule 144 or may be sold without restriction
pursuant to Rule 144. If there is not an effective registration statement covering the resale of the securities to be registered
hereunder at any time during the period required by the Registration Rights Agreement, then the selling stockholder will have “piggyback”
registration rights with respect to any such securities that are not eligible for resale pursuant to Rule 144 in connection with
any other registration statement we determine to file that would permit the inclusion of those shares.
The foregoing description of the Registration Rights Agreement does
not purport to be complete, and is qualified in its entirety by the complete text of that agreement, which is attached as an exhibit
to this prospectus and is incorporated herein by reference.
Anti-Takeover Provisions
Certificate of Incorporation and Bylaws
Because our stockholders do not have cumulative
voting rights, our stockholders holding a majority of the outstanding shares of common stock outstanding will be able to elect
all of our directors. Our Certificate of Incorporation and Bylaws provide that all stockholder actions must be effected at a duly
called meeting of stockholders and not by written consent. A special meeting of stockholders may be called by holders of a majority
of our common stock, voting together as a single class, or by the majority of our whole board of directors, or our chief executive
officer.
The foregoing provisions will make it more
difficult for our existing stockholders to replace our board of directors as well as for another party to obtain control of us
by replacing our board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions
could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the
authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting
or other rights or preferences that could impede the success of any attempt to change our control.
These provisions are intended to enhance the
likelihood of continued stability in the composition of our board of directors and its policies and to discourage certain types
of transactions that may involve an actual or threatened acquisition of us. These provisions are also designed to reduce our vulnerability
to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. However, such provisions
could have the effect of discouraging others from making tender offers for our shares and may have the effect of deterring hostile
takeovers or delaying changes in our control or management. As a consequence, these provisions also may inhibit fluctuations in
the market price of our stock that could result from actual or rumored takeover attempts.
Section 203 of the Delaware General Corporation
Law
We are subject to Section 203 of the Delaware
General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder
for a period of three years after the date that such stockholder became an interested stockholder, with the following exceptions:
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before such date, the
board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
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upon closing of the
transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85%
of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining the
voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned by (i)
persons who are directors and also officers and (ii) employee stock plans in which employee participants do not have the right
to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
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on or after such date, the business combination is
approved by the board of directors and authorized at an annual or special meeting of the stockholders, and not by written consent,
by the affirmative vote of at least 66
2
/
3
% of the outstanding voting stock that is not owned by the
interested stockholder.
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In general, Section 203 defines business combination
to include the following:
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any merger or consolidation
involving the corporation and the interested stockholder;
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any sale, transfer,
pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
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subject to certain exceptions,
any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested
stockholder;
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any transaction involving
the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the corporation
beneficially owned by the interested stockholder; or
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the receipt by the interested
stockholder of the benefit of any loss, advances, guarantees, pledges or other financial benefits by or through the corporation.
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In general, Section 203 defines an “interested
stockholder” as an entity or person who, together with the person’s affiliates and associates, beneficially owns, or
within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding
voting stock of the corporation.
Limitations of Liability and Indemnification
See “Executive Compensation — Limitation
on Liability and Indemnification Matters.
”
Listing
The shares of our common stock and warrants
are listed on The Nasdaq Capital Market under the symbols “MSDI” and “MSDIW”, respectively.
Transfer Agent and Registrar
The transfer agent and registrar for our common
stock and our Warrant Agent is Corporate Stock Transfer, Denver, Colorado.
MARKET PRICE OF AND DIVIDENDS ON OUR COMMON
STOCK
AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock is quoted on the symbol “MSD1”. As
of February 7, 2017, the closing sales price for our common stock as reported on the Nasdaq Capital Market was $1.67 per share.
The table below sets forth reported high and low closing bid quotations
for our common stock for the fiscal quarters indicated as reported on the Nasdaq Capital Market. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
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High
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Low
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Quarter ended September 30, 2016*
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$4.01
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$1.62
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Quarter ended December 31, 2016
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$2.15
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$1.04
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Fiscal Year Ending December 31, 2017
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Quarter ending March 31, 2017 (through February 7, 2017)
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$2.16
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$1.32
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* We effected our initial public offering on July 7, 2016
Holders
A
s of February 7, 2017, there were approximately 350 holders
of record of our common stock.
Dividends
We have never declared nor paid any cash dividends to stockholder.
We do not intend to pay cash dividends on our common stock for the foreseeable future, and currently intend to retain any future
earnings to fund our operations and the development and growth of our business. The declaration of any future cash dividend, if
any, would be at the discretion of our Board of Directors and would depend upon our earnings, if any, our capital requirements
and financial position, our general economic conditions, and other pertinent conditions.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of our common stock in the public
market, or the availability of such shares for sale in the public market, could adversely affect market prices of our shares of
common stock or warrants prevailing from time to time. Sales of our common stock in the public market after such restrictions lapse,
or the perception that those sales may occur, could adversely affect the prevailing market price of our shares of common stock
or warrants at such time and our ability to raise equity capital in the future.
As of February 7, 2017, 8,537,511 shares of
common stock were outstanding . Of the outstanding shares, all of the shares sold in our initial public offering are freely tradable,
except that any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act, may only be sold in
compliance with the limitations described below. The remaining shares of our common stock are restricted securities as such term
is defined in Rule 144 under the Securities Act and are subject to lock-up agreements with us as described below. Following the
expiration of the lock-up period, restricted securities may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rule 144 or 701 promulgated under the Securities Act, described in greater detail below.
Rule 144
In general, a person who has beneficially owned
restricted shares of our common stock 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 90 days preceding, a sale and
(ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Persons who have
beneficially owned restricted shares of our common stock for at least six months but who are our affiliates at the time of, or
any time during the 90 days 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 either of the following:
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1% of the number of
shares of our common stock outstanding ; or
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the average weekly trading
volume of our common stock on The Nasdaq Capital Market during the four calendar weeks preceding the filing of a notice on Form
144 with respect to the sale;
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provided, in each case, that we are subject
to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Such sales both by affiliates and by
non-affiliates must also comply with the manner non-affiliates of sale, current public information and notice provisions of non-affiliates
Rule 144.
Rule 701
Rule 701 under the Securities Act, as in effect
on the date of this prospectus, permits re-sales of shares in reliance upon Rule 144 but without compliance with certain restrictions
of Rule 144, including the holding period requirement. Most of our employees, executive officers, directors or consultants who
purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701.
Registration
We have agreed to register all 382,575 shares
of common stock held by Monster, Inc. upon demand. We have also agreed (i) to register all shares underlying the warrants offered
hereby and (ii) to register all shares of our common stock underlying warrants to be sold to the underwriter in connection with
our initial public offering at such time as we become eligible to file a resale registration statement on Form S-3. All of the
shares included in an effective registration statement may be freely sold and transferred, subject to any applicable lock-up agreement.
Equity Incentive Plan
We have filed a Form S-8 registration statement
under the Securities Act registering shares of our common stock issued or reserved for issuance under our 2012 Omnibus Incentive
Plan. This registration statement became effective immediately upon filing, and shares covered by this registration statement are
eligible for sale in the public markets, subject to vesting restrictions, the lock-up agreements described above and Rule 144 limitations
applicable to affiliates.
Registration Rights Agreement
On November 10, 2016, we entered into the Registration Rights
Agreement with the investor in the Initial Private Placement. Pursuant to the terms of the Registration Rights Agreement, we are
filing the registration statement of which this prospectus is a part with the SEC to register for resale the 333,333 shares of
our common stock issued in the Private Placement. See the description of the Registration Rights Agreement under the heading “Description
of Securities—Registration Rights Agreement” elsewhere in this prospectus.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results
of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements
appearing elsewhere in this Report.
Certain statements in this Report constitute forward-looking
statements. These forward-looking statements include statements, which involve risks and uncertainties, regarding, among other
things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) anticipated trends in our industry,
(d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable
by use of the words “may,” “will,” “should,” “anticipate,” “estimate,”
“plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,”
“management believes,” “we believe,” “we intend,” or the negative of these words or other variations
on these words or comparable terminology. In light of these risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.
The forward-looking statements speak only as of the date on which
they are made and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking
statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated
events.
The “Company”, “we,” “us,”
and “our,” refer to Monster Digital, Inc. and its wholly-owned subsidiary SDJ Technologies, Inc.
General
Our primary business focus is the design, development and marketing
of premium products under the “Monster Digital” brand for use in high-performance computing and consumer and mobile
product applications. We have invested significantly in building a broad distribution channel for the sale of products bearing
the “Monster Digital” brand. ). Our current focus is to leverage our distribution network through cooperating with
Monster, Inc. to identify and market additional specialty and consumer electronics products.
Currently, our primary product offerings are as follows:
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A line of action sports cameras
used in adventure sport, adventure photography and extreme-action videography.
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A line of ultra-small mobile
external memory drive products for Apple iOS devices.
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On-The-Go Cloud devices on
an exclusive basis which create a wi-fi hot spot for multiple users while simultaneously allowing data to be viewed, played or
transferred among the connected storage.
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A broad selection of high-value
memory storage products consisting of high-end, ruggedized Solid State Drives (“SSDs”), removable flash memory CompactFlash
cards (“CF cards”), secured digital cards (“SD cards”) and USB flash drives.
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Our license with Monster, Inc. allows us to manufacture and sell
certain high-end products, utilizing the Monster premium brand name which is highly recognized by consumers for its high quality
audio-video products. We work with our world-class subcontract manufacturers and suppliers to offer new and enhanced products that
use existing technology and adopt new technologies to satisfy existing and emerging consumer demands and preferences. On the marketing
side, we partner with Monster, Inc. to support the sales and marketing of these products on a global basis
Historically, memory has been the most significant part of our business
and it is a commodity that tends to be subject to price erosion. Using the Monster branding to quickly introduce new technologies
to the market is designed to bring about the introduction of products that are not subject to the same level of downward pressure
on pricing as is common with memory products. In addition, we intend to expand and continue to invest in our international operations,
which we believe will be an important factor in our continued growth.
As a result of our strategy to increase our investments in sales,
marketing, support, and international expansion, we expect to continue to incur operating losses and negative cash flows from operations
at least in the near future and may require additional capital resources to execute strategic initiatives to grow our business.
Net sales
The principal factors that have affected or could affect our net
sales from period to period are:
|
•
|
The condition of the economy
in general and of the memory storage products industry in particular,
|
|
•
|
Our customers’ adjustments
in their order levels,
|
|
•
|
Changes in our pricing policies
or the pricing policies of our competitors or suppliers,
|
|
•
|
The addition or termination
of key supplier relationships,
|
|
•
|
The rate of introduction
and acceptance by our customers of new products,
|
|
•
|
Our ability to compete effectively
with our current and future competitors,
|
|
•
|
Our ability to enter into
and renew key corporate and strategic relationships with our customers, vendors and strategic alliances,
|
|
•
|
Changes in foreign currency
exchange rates,
|
|
•
|
A major disruption of our
information technology infrastructure,
|
|
•
|
Unforeseen catastrophic events,
such as armed conflict, terrorism, fires, typhoons and earthquakes, and
|
|
•
|
Any other disruptions, such
as labor shortages, unplanned maintenance or other manufacturing problems.
|
Cost of goods sold
Cost of goods sold primarily includes the cost of products that
we purchase from third party manufacturers and sell to our customers. Additional packaging and assembly (labor) costs for certain
product orders is also a component of costs of goods sold. Cost of goods sold is also affected by inventory obsolescence if our
inventory management is not effective or efficient. We mitigate the risk of inventory obsolescence by stocking relatively small
amounts of inventory at any given time, and relying instead on a strategy of manufacturing or acquiring products based on orders
placed by our customers.
General and administrative expenses
General and administrative expenses relate primarily to compensation
and associated expenses for personnel in general management, information technology, human resources, procurement, planning and
finance, as well as outside legal, investor relations, accounting, consulting and other operating expenses.
Selling and marketing expenses
Selling and marketing expenses relate primarily to salary and other
compensation and associated expenses for internal sales and customer relations personnel, advertising, outbound shipping and freight
costs, tradeshows, royalties under a brand license, and selling commissions.
Research and development expenses
Research and development expenses consist of compensation and associated
costs of employees engaged in research and development projects, as well as materials and equipment used for these projects, and
third party compensation for research and development services. We do not engage in any long-term research and development contracts,
and all research and development costs are expensed as incurred.
Other expenses
Interest and finance expense includes interest paid or payable to
a finance company for outstanding borrowings, bank fees, purchase order finance fees, interest accrued on convertible debt, amortization
of a debt discount that arose as a result of the issuance of warrants with convertible debt, and amortization of debt issuance
costs. Debt conversion expense is a non-cash charge for the effect of an induced conversion of debt to equity
Nine Months ended September 30, 2016 Compared
to Nine Months ended September 30, 2015
Results of Operations
The following discussion explains in greater detail our consolidated
operating results and financial condition. This discussion should be read in conjunction with the consolidated financial statements
and notes herein.
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Net sales
|
|
$
|
2,999
|
|
|
$
|
6,827
|
|
Net sales for the nine months ended September 30, 2016 decreased
approximately 56% to $3.0 million from $6.8 million for the nine months ended September 30, 2015. This decrease occurred primary
during the third quarter of 2016 and is related to the reduction in sales for top customers who had placed significant orders for
memory product in the third quarter of 2015 but who either did not order, or ordered in reduced amounts, in the third quarter of
2016. A strategy to transition quickly from lower margin digital memory products to higher margin products contributed to the decrease
in sales with the action sports camera line staged for sales in the fourth quarter of the year. In addition, cash constraints prior
to our public offering limited our ability to aggressively build and fill a pipeline for our products.
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Cost of goods sold
|
|
$
|
2,430
|
|
|
$
|
6,034
|
|
Gross profit
|
|
$
|
569
|
|
|
$
|
793
|
|
Gross profit margin
|
|
|
19.0
|
%
|
|
|
11.6
|
%
|
Cost of goods sold decreased approximately $3.6 million for the
nine months ended September 30, 2016 to $2.4 million compared to $6.0 million for the nine months ended September 30, 2015. As
a percent of net sales, cost of goods sold decreased to 81.0% in the nine months ended September 30, 2016 from 88.4% for the nine
months ended September 30, 2015. The decrease in cost of sales as a percentage of net sales is attributable to higher margin products
in our sales mix as well as improving control over sales adjustments in the nine months ended September 30, 2016 as compared to
the nine months ended September 30, 2015. Gross profit in the nine months ended September 30, 2016 decreased to $569,000 from $793,000
in the nine months ended September 30, 2015. Gross profit as a percentage of net sales was 19.0% in the nine months ended September
30, 2016, compared to 11.6% in the nine months ended September 30, 2015.
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Selling and marketing
|
|
$
|
1,777
|
|
|
$
|
1,563
|
|
General and administrative
|
|
$
|
3,322
|
|
|
$
|
3,083
|
|
Selling and marketing for the nine months ended September 30, 2016
increased approximately 14%, to $1.8 million, compared to $1.6 million for the nine months ended September 30, 2015. The increase
in selling and marketing expense was significantly attributable to the increase in royalty expense as the Monster, Inc. royalty
payment rate increased during the third quarter of 2016.
General and administrative expenses for the nine months ended September
30, 2016 increased by approximately 8% to $3.3 million compared to $3.1 million in the nine months ended September 30, 2015. The
increase was significantly attributable to an increase in stock-based compensation in the nine months ended September 30, 2016
as compared to the nine months ended September 30, 2015.
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Research and development (“R&D”)
|
|
$
|
168
|
|
|
$
|
288
|
|
R&D for the nine months ended September 30, 2016 decreased approximately
42% to $168,000, compared to $288,000 for the nine months ended September 30, 2015. The decrease is most significantly related
to having one less employee in the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2016
as well as a reduction in consulting expenses.
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Interest and finance expense
|
|
$
|
812
|
|
|
$
|
705
|
|
Gain on debt conversion
|
|
|
(557
|
)
|
|
|
—
|
|
Debt conversion expense
|
|
$
|
—
|
|
|
$
|
898
|
|
For the nine months ended September 30, 2016, we incurred approximately
$740,000 in amortization of debt discount and deferred financing costs related to bridge loan financing and $55,000 of interest
expense related to accounts receivable financing. For the nine months ended September 30, 2015 we incurred approximately $483,000
in amortization of debt discount and deferred financing costs related to bridge loan financing and $221,000 of interest expense
related to accounts receivable financing. For the nine months ended September 30, 2016, a $557,000 gain on debt conversion resulted
from bridge loan accrued interest and deferred financing costs converting to common stock as part of our public offering. For the
nine months ended September 30, 2015, debt conversion expense of $898,000 was a non-cash expense incurred as an inducement for
the exchange of our convertible notes and warrants further to our exchange offer, with a corresponding credit to additional paid-in
capital.
|
|
Nine months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Income tax provision
|
|
$
|
2
|
|
|
$
|
1
|
|
Income tax expense generally consists of state income taxes due
or paid in the states in which we operate. We have not recognized a deferred tax benefit for the operating losses generated during
the periods due to the uncertainty that we will generate taxable income in the future that will allow us to utilize the benefit.
Financial Condition
Liquidity and Capital Resources
Our primary sources of liquidity throughout the nine months ended
September 30, 2016 and 2015 have been our initial public offering, cash raised in private placements of preferred stock, common
stock and notes payable and an accounts receivable factoring credit facility. In addition, from time to time, we have obtained
short-term, non-interest bearing loans from a related party to complement our working capital needs.
In September 2015, we secured an accounts receivable financing facility
with Bay View Funding. The contract provides for maximum funding of $4.0 million and a factoring fee of 1.35% for the first 30
days and .45% for each 10-day period thereafter that the financed receivable remains outstanding. As of September 30, 2016, there
was no balance owed on this facility.
From October 2015 to March 7, 2016, we issued $4.1 million of promissory
notes. The notes were due and payable on the earlier of one year from the date of issuance or the closing date of our initial public
offering and consisted of $3.36 million loaned to the company and a 22.5% loan origination fee payable on maturity. Amounts lent
bore interest at a fixed amount of 15% of principal loaned, regardless of the time that the loan was outstanding. All principal,
interest and fees were payable on the due date. Upon the close of our public offering in July 2016, 90% of the outstanding promissory
notes totaling $3,024,000 were converted to common stock and the accrued interest and origination fee were waived as part of the
conversion. The remaining, unconverted $336,000 of promissory notes were paid along with the accrued interest and origination fee
attributable to those notes.
From March 2016 through June 2016, we issued 2,802,430 shares of
Series A Preferred Stock for net proceeds of $2.4 million. The use of the net proceeds of the notes and preferred stock was the
funding of inventory purchases and working capital and corporate expenses, including personnel expenses and professional fees and
expenses associated with our initial public offering. Upon the close of our public offering in July 2016, the preferred shares
were converted to common stock.
On July 13, 2016, we closed an initial public offering and received
net proceeds of $8,151,000.
Discussion of Cash Flows
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
|
(in thousands)
|
|
Net cash used in operating activities
|
|
$
|
(6,237
|
)
|
|
$
|
(42
|
)
|
|
$
|
(6,195
|
)
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
|
9,088
|
|
|
|
(1
|
)
|
|
|
9,089
|
|
Net increase (decrease) in cash
|
|
$
|
2,851
|
|
|
$
|
(43
|
)
|
|
$
|
2,894
|
|
Operating Activities
Net cash used in operating activities in the nine months ended September
30, 2016 was approximately $6.2 million, due primarily to the net loss of $5.0 million. An increase in accounts receivable of $437,000
and inventory of $1.2 million as uses of cash were attributable to one large customer account and the purchase of action cameras
for the holiday season. A $633,000 decrease in accounts payable as a use of cash was attributable to bringing our accounts payable
aging more current. Certain non-cash items that partially offset these uses of cash include $740,000 amortization of deferred debt
issuance costs and debt discount and non-cash stock-based compensation of $943,000. In the nine months ended September 30, 2015,
the $5.7 million net loss was offset by both $1.9 million in collections on accounts receivable and a $1.4 million decrease in
inventory levels. There were also non-cash charges of $898,000 for debt conversion expense, $283,000 of stock-based compensation
and $483,000 for the amortization of debt issuance costs.
Investing Activities
Our current operating structure does not depend upon a significant
investment in capital equipment or operating facilities. Substantially all of our manufacturing is conducted offshore by third
party manufacturers. Our office and warehouse facilities are leased under a nine-year operating lease. For the nine months ended
September 30, 2016 and 2015, we used no cash in investing activities.
Financing Activities
Net cash provided by financing activities for the nine months ended
September 30, 2016 was approximately $9.1 million and was primarily attributable to our initial public offering proceeds as well
as the bridge loan financing and preferred stock issuances during the first nine months of 2016. Net cash used in financing activities
in the nine months ended September 30, 2015 was $43,000. Proceeds from a private placement offering and issuance of convertible
debt were offset by the net repayment of approximately $3.8 million of our accounts receivable credit facility.
Debt Instruments
As of September 30, 2016, debt instruments include two convertible
notes payable with a total principal amount of $38,000 due in 2015 that remain unpaid.
Operating and Capital Expenditure Requirements
We have not achieved profitability since our inception and we expect
to continue to incur net losses for the foreseeable future. We expect our cash expenditures to increase in the near term as we
fund our future growth. As a publicly traded company we will incur significant legal, accounting and other expenses that we were
not required to incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules adopted by the Securities and
Exchange Commission, or SEC, and the Nasdaq Stock Market, requires public companies to implement specified corporate governance
practices that are currently inapplicable to us as a private company. We expect these rules and regulations will increase our legal
and financial compliance costs and will make some activities more time-consuming and costly.
Our future capital requirements will depend on many factors, including:
the costs and timing of future product and marketing activities, including product manufacturing, marketing, sales and distribution
for any of our products; and the expenses needed to attract and retain skilled personnel. Until such time, if ever, as we can generate
more substantial product revenues, we expect to finance our cash needs through a combination of equity or debt financings.
We may need to raise substantial additional financing in the future
to fund our operations. In order to meet these additional cash requirements, we may seek to sell additional equity or convertible
securities that may result in dilution to our stockholders. If we raise additional funds through the issuance of convertible securities,
these securities could have rights senior to those of our common stock and could contain covenants that restrict our operations.
There can be no assurance that we will be able to obtain additional equity or debt financing on terms acceptable to us, if at all.
If we raise additional funds through collaboration and licensing agreements with third parties, it may be necessary to relinquish
valuable rights to our product candidates, technologies or future revenue streams or to grant licenses on terms that may not be
favorable to us.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by
applicable SEC rules and regulations.
Year 2015 Compared to Year 2014
Results of Operations
Summary of the Year Ended December 31,
2015
|
•
|
Net sales for 2015 decreased
to $8.3 million compared to $11.3 million in 2014;
|
|
•
|
Gross profit for 2015
was $426,000, or 5.2% of net sales, from $234,000, or 2.1% of net sales, in 2014;
|
|
•
|
Operating expenses,
as a percentage of net sales, increased to 83.3% for 2015 compared to 60.9% for 2014;
|
|
•
|
Net loss attributable
to common stockholders for 2015 was $8.7 million, or $2.65 per diluted share, as compared to $11.1 million, or $3.95 per diluted
share, in 2014; and
|
|
•
|
Cash used in operations
for 2015 was $1.8 million, a decrease from $7.5 million used in 2014.
|
The following table sets forth, for the periods
indicated, the percentage that certain items in the statements of operations bear to net sales and the percentage dollar increase
(decrease) of such items from year to year.
|
|
Percent of net sales
year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Net sales
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost of goods sold
|
|
|
(94.8
|
)
|
|
|
(97.9
|
)
|
Gross profit
|
|
|
5.2
|
|
|
|
2.1
|
|
Operating expenses
|
|
|
(83.3
|
)
|
|
|
(60.9
|
)
|
Income (loss) from operations
|
|
|
(78.1
|
)
|
|
|
(58.8
|
)
|
Interest and finance expense
|
|
|
16.7
|
|
|
|
14.7
|
|
Debt conversion expenses
|
|
|
10.9
|
|
|
|
23.9
|
|
Income (loss) before income taxes
|
|
|
(105.7
|
)
|
|
|
(97.4
|
)
|
Income tax provision
|
|
|
(.0
|
)
|
|
|
(.1
|
)
|
Net income (loss)
|
|
|
(105.7
|
)
|
|
|
(97.5
|
)
|
The following discussion explains in greater
detail our consolidated operating results and financial condition. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this prospectus.
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Net sales
|
|
$
|
8,266
|
|
|
$
|
11,343
|
|
Net sales in 2015 decreased approximately 27%
to $8.3 million from $11.3 million in 2014. The decrease in net sales was primarily attributable to a reduction in sales to our
top three customers in the year ended December 31, 2015. Strategies for the sale of new product lines were in their infancy in
2015 and such sales had an immaterial impact on total sales for the year.
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Cost of goods sold
|
|
$
|
7,840
|
|
|
$
|
11,109
|
|
Gross profit
|
|
$
|
426
|
|
|
$
|
234
|
|
Gross profit margin
|
|
|
5.2
|
%
|
|
|
2.1
|
%
|
Cost of goods sold decreased approximately
29% in 2015 to $7.8 million, as compared to $11.1 million in 2014. As a percent of net sales, cost of goods sold decreased from
97.9% in 2014 to 94.8% in 2015. Gross profit increased approximately 82% in 2015 to $426,000 as compared to $234,000 in 2014. As
a percentage of net sales, gross profit increased to 5.2% in 2015 as compared to 2.1% in 2014. These low gross profit margins were
caused by a combination of factors including product mix, customer mix and specific pricing decisions. These factors can affect
a significant change in gross profit as a percentage of net sales from one period to the next, particularly when sales are relatively
low. In 2015, for instance, we resold approximately $1.3 million of returned products at substantially reduced prices which resulted
in a loss of approximately $900,000. There was also an overall reduction in average selling price for certain products during the
year ended December 31, 2015. In the year ended December 31, 2014, we began selling to several large national retailers in the
third and fourth quarters of the year. In order to establish these new relationships, we offered abnormally large discounts in
the form of market development credits (MDF credits) and other liberal allowances during the year. These allowances, along with
price protection and return allowance, which effectively reduced the selling prices to these customers, totaled $3.4 million, or
21% of gross sales before these allowances, during 2014.
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Selling and marketing
|
|
$
|
2,928
|
|
|
$
|
3,722
|
|
General and administrative
|
|
|
3,625
|
|
|
|
2,646
|
|
Sales and marketing expense in 2015 decreased
approximately $794,000, or 21%, to $2.9 million, as compared to $3.7 million for 2014. Sales and marketing, as a percentage of
net sales was 35.4% and 32.8% for the years ended December 31, 2015 and 2014, respectively. The decrease in sales and marketing
expense was significantly attributable to the decrease in expenses such as commissions and royalties that vary directly with sales.
General and administrative expense in 2015
increased by approximately $979,000, or 37%, to $3.6 million as compared to $2.7 million in 2014. The most significant expenses
contributing to the increase in general and administrative expense were the employee related expenses such as compensation, payroll
taxes and medical insurance as we have employed more personnel in our purchasing, finance and administrative functions to build
our infrastructure in support of the growth of our business. We will continue to assess our infrastructure requirements and expect
that our general and administrative spending will increase at a modest rate as revenues increase, but will decline as a percentage
of sales. In addition, in the year ended December 31, 2015, we recognized $356,000 of non-cash, stock-based compensation and recorded
a $300,000 contingent legal expense. There was no stock-based compensation in 2014.
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Research and development
|
|
$
|
333
|
|
|
$
|
542
|
|
Research and development expense for 2015 decreased
approximately $209,000, or 39%, to $333,000, as compared to $542,000 for 2014, primarily due to the completion of certain development
projects in 2014. Our research and development function is managed by one employee, and we use the services of third party software
engineers to complement our needs on a product-by-product basis if and when needed. With respect to our products, the basic functional
technology we use changes very little over time, therefore, our R&D spending is primarily related to enhancing existing functionality,
introducing new functions within existing products, and designing and engineering new products largely with existing proven technology.
We do not expect that R&D costs as a percentage of sales will be significant for the foreseeable future.
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Interest and finance expense
|
|
$
|
1,381
|
|
|
$
|
1,661
|
|
Debt conversion expense
|
|
|
898
|
|
|
|
2,707
|
|
For the year ended December 31, 2015, we
incurred approximately $333,000 of interest expense related to our accounts receivable financing credit facility and
approximately $503,000 of interest expense related to debt conversions that occurred in early 2015. In addition, we incurred
approximately $545,000 of interest expense related to bridge loan financing in the fourth quarter of 2015, $101,000 of which
was the amortization of debt discount related to a bridge loan origination fee. In 2014, we incurred approximately $382,000
in interest expense related to our financing credit facilities. In connection with raising $3.5 million of convertible debt
with detachable warrants, we incurred interest expense on the debt of approximated $100,000 and amortization of debt discount
related to the warrants of approximately $1.1 million. (see Note 3 to the Consolidated Financial Statements).
In December 2014, approximately $3.4 million
of our convertible notes were converted to common stock pursuant to an exchange offer. In connection with the conversion, we recognized
debt conversion expense of $2.7 million in 2014. The debt conversion expense recognized in 2015 related to the exchange offer was
approximately $898,000 in connection with conversion of $1.6 million convertible notes into common stock.
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(in thousands)
|
|
Income tax provision
|
|
$
|
2
|
|
|
$
|
13
|
|
Income tax expense in 2015 and 2014 consists
of minimum state income taxes due in the states in which we operate. We have not recognized a deferred tax benefit for the operating
losses generated in 2015 or prior due to the uncertainty that we will generate taxable income in the future that will allow us
to utilize the benefit.
Financial Condition
Liquidity and Capital Resources
Our primary sources of liquidity throughout
the years ended December 31, 2015 and 2014 have been cash raised in private placements of common stock and notes payable, an accounts
receivable factoring credit facility, and a purchase order finance facility. In addition, from time to time, we have obtained short-term,
non-interest bearing loans from a related party to complement our working capital needs.
In June 2015, we secured an accounts receivable
financing facility with Bay View Funding. The new contract provides for maximum funding of $4.0 million and a factoring fee of
1.35% for the first 30 days and .45% for each 10-day period thereafter that the financed receivable remains outstanding. As of
December 31, 2015, the balance owed on this facility was $215,000.
During the year ended December 31, 2015, we
had one purchase order finance facility in place with Brookridge Funding. When we would receive a firm purchase order from our
customer, we would prepare a purchase order to one of our offshore suppliers. We then submitted all documentation to our purchase
order financer who in turn would establish a standby letter of credit on our behalf for the benefit of that offshore supplier.
Once the standby letter of credit was in place, our supplier would initiate production of our order. Upon completion of our purchase
order, our purchase order financer would remit payment to the offshore supplier, at which time we would ship the product to our
customer and present our invoice to them. At the same time, we could submit the invoice to our credit provider, as described in
the previous paragraph, and the credit provider will remit to the purchase order financer the amount owed for the purchase transaction.
As of September 30, 2015, the balance owed on this facility was $940,000. This facility was terminated in October 2015 as Brookridge
Funding declined to renew it. We were informed that the primary reason for such non-renewal was due to certain concerns regarding
our company’s financial performance. All amounts due to Brookridge Funding were settled at that time.
In 2015 and 2014, the net amount of cash we
received from our credit facilities, the private placement of common stock and issuance of convertible debt totaled $1.8 million
and $7.5 million, respectively. We currently rely on third-party suppliers to manufacture our products to our specifications. As
such, historically our capital expenditures on plant and equipment have been nominal and are expected to continue as such for the
foreseeable future.
Between October 2015 and March 2016, we issued
an aggregate of $4,116,000 principal amount of promissory notes, or Bridge Notes. The Bridge Notes were due and payable on the
earlier of one year from the date of issuance or the closing date of our initial public offering, and consist of $3,360,000 loaned
to our company and a 22.5% loan origination fee payable on maturity. Amounts actually loaned bear interest at a fixed amount of
15% of principal loaned, regardless of the time that the loan is outstanding. Bridge Note holders which loaned our company $3,024,000
agreed that the unpaid actual loan amount of the Bridge Notes would automatically convert immediately prior to the consummation
of our initial public offering into a number of shares of common stock and warrants equal to the quotient obtained by dividing
the unpaid principal amount of the Bridge Notes by the initial public offering price of our shares of common stock; the interest
and the loan origination fee were waived. Based upon the initial public offering price of $4.50 per share, the Bridge Notes converted
into approximately 672,000 shares of common stock and 672,000 warrants.
In March 2016, we authorized the issuance of
an aggregate of $3.0 million worth of our Series A Preferred Stock. Further to the terms of such Series A Preferred Stock, said
securities automatically converted immediately prior to the consummation of our initial public offering into an equivalent dollar
amount of shares of common stock and warrants at the initial offering price of the shares of our common stock. An aggregate of
2,802,430 shares of Series A Preferred Stock were outstanding as of June 23, 2016. Based upon the initial public offering price
of $4.50 per share, said outstanding shares of preferred stock automatically converted into approximately 622,762 shares of common
stock and 622,762 warrants.
The use of the net proceeds of the Bridge Notes
and Series A Preferred Stock was the funding of inventory purchases and working capital and corporate expenses, including personnel
expenses and professional fees and expenses associated with our initial public offering.
Discussion of Cash Flows
|
|
Year ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
Change
|
|
|
|
(in thousands)
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(1,730
|
)
|
|
$
|
(7,452
|
)
|
|
$
|
5,722
|
|
Net cash used by investing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net cash provided by (used in) financing activities
|
|
|
1,752
|
|
|
|
7,548
|
|
|
|
(5,796
|
)
|
Net increase (decrease) in cash
|
|
$
|
22
|
|
|
$
|
96
|
|
|
$
|
(74
|
)
|
Operating Activities
Net cash used in operating activities in the
year ended December 31, 2015 was approximately $1.7 million due primarily to a net loss of $8.7 million, partially offset by a
$2.7 million decrease in accounts receivable and a $1.9 million decrease in inventory. Both of these decreases are reflective of
the decrease in sales as well as a more conservative approach to inventory levels maintained. In the addition, the net loss included
non-cash charges totaling $583,000 for the amortization of debt discount, a debt to equity conversion expense of $898,000 and stock-based
compensation expense of $356,000. The reduction in accounts receivable is reflective of 28 days of sales outstanding at December
31, 2015 as compared to 115 days of sales outstanding at December 31, 2014. Net cash used in operating activities in 2014 was approximately
$7.5 million, due primarily to a net loss of $11.1 million, partially offset by non-cash finance and other charges of approximately
$3.9 million pertaining to convertible debt issued in 2014. We used approximately $3.1 million of cash with the increase in customer
accounts receivable, while we were leveraged our trade payables by $2.9 million. In addition, accrued expenses increased by approximately
$1.3 million. The increase in accounts receivable corresponded to the increase in sales and was also reflective of 115 days sales
outstanding in 2014 as compared to 92 days sales outstanding in 2013.
Investing Activities
Our current operating structure does not depend
upon a significant investment in capital equipment or operating facilities. Substantially all of our manufacturing is conducted
offshore by third party manufacturers. Our office and warehouse facilities are leased under a three-year operating lease. For 2015
and 2014, we used no cash in investing activities.
Financing Activities
Net cash provided by financing activities in
the year ended December 31, 2015 was approximately $1.8 million. There was a net repayment of approximately $4.8 million of our
accounts receivable credit facility as a result of the collection of accounts receivable, as indicated above. In 2015, we continue
to receive funding through the issuance of convertible debt under the private placement offering that began in 2014. In 2015, an
additional gross total of $1.6 million was raised under this offering, and the offering has been closed. In March 2015, we initiated
a common stock purchase rights offering for the issuance of up to $4.8 million of equity and raised a net total of $3.0 million
under this offering. From October to December 2015, we raised a net total of issued $2.5 million, issuing $3.5 million of promissory
notes. The use of the net proceeds of such indebtedness was the funding of inventory purchases and working capital and corporate
expenses, including personnel expenses and professional fees and expenses associated with our initial public offering. Net cash
provided by financing activities in 2014 was approximately $7.6 million, due primarily to net proceeds from the issuance of convertible
debt of $2.8 million, net of issuance costs of $.6 million, and net borrowings under an accounts receivable factoring credit facility
of approximately $4.3 million.
Debt Instruments
As of December 31, 2015, debt instruments include
$3.5 million of promissory notes, a $450,000 note payable related to trademark licensing and two convertible notes payable with
a total principal amount of $38,000, due in 2015 that remain unpaid.
Operating and Capital Expenditure Requirements
We have not achieved profitability since our
inception and we expect to continue to incur net losses for the foreseeable future. We expect our cash expenditures to increase
in the near term as we fund our future growth. As a publicly traded company, we are required to incur significant legal, accounting
and other expenses that we were not required to incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules
adopted by the Securities and Exchange Commission, or SEC, and the Nasdaq Stock Market, requires public companies to implement
specified corporate governance practices that are currently inapplicable to us as a private company. We expect these rules and
regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.
We will need to raise substantial additional
financing in the future to fund our operations. In order to meet these additional cash requirements, we may seek to sell additional
equity or convertible securities that may result in dilution to our stockholders. If we raise additional funds through the issuance
of convertible securities, these securities could have rights senior to those of our common stock and could contain covenants that
restrict our operations. There can be no assurance that we will be able to obtain additional equity or debt financing on terms
acceptable to us, if at all. If we raise additional funds through collaboration and licensing agreements with third parties, it
may be necessary to relinquish valuable rights to our product candidates, technologies or future revenue streams or to grant licenses
on terms that may not be favorable to us. Please see “Risk Factors” for additional risks associated with our substantial
capital requirements.
Contractual Obligations and Commitments
The following is a summary of our long-term
contractual cash obligations as of December 31, 2015 (in thousands):
Contractual Obligations
|
|
Total
|
|
|
less than
One year
|
|
|
1 – 3
Years
|
|
|
3 – 5
years
|
|
|
More than
5 years
|
|
Inventory-related commitments
(1)
|
|
$
|
768
|
|
|
$
|
768
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Royalty obligations
(2)
|
|
|
2,400
|
|
|
|
200
|
|
|
|
700
|
|
|
|
1,500
|
|
|
|
—
|
|
Long-term debt obligations
(3)
|
|
|
38
|
|
|
|
38
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Operating lease obligations
(4)
|
|
|
498
|
|
|
|
166
|
|
|
|
332
|
|
|
|
—
|
|
|
|
—
|
|
Total contractual obligations
|
|
$
|
3,704
|
|
|
$
|
1,172
|
|
|
$
|
1,032
|
|
|
$
|
1,500
|
|
|
$
|
—
|
|
|
(1)
|
Represents outstanding purchase orders for inventory that
we have placed with our suppliers as of December 31, 2015.
|
|
(2)
|
This table does not include
any other royalty payments that may become payable to Monster, Inc. under our license agreement above and beyond the minimum amounts
owed and more than five years because the timing and likelihood of such payments are not known.
|
|
(3)
|
Amount represents principal
and interest cash payments over the life of the debt obligations, including anticipated interest payments that are not recorded
on our balance sheet. Excluding $4.6 million in promissory notes and interest payments converted into shares of common stock and
warrants immediately prior to the consummation of our initial public offering.
|
|
(4)
|
Operating lease obligations reflect our obligations pursuant
to the terms of a lease agreement entered into in October 2014 for our office space located in Simi Valley, California.
|
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements,
as defined by applicable SEC rules and regulations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in
conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of net sales and expenses during the reporting period. On an on-going basis, we evaluate our estimates, which are based upon historical
experiences, market trends and financial forecasts and projections, and upon various other assumptions that management believes
to be reasonable under the circumstances at that certain point in time. Actual results may differ, significantly at times, from
these estimates under different assumptions or conditions.
We believe the following critical accounting
policies and estimates affect the significant estimates and judgments we use in the preparation of our consolidated financial statements,
and may involve a higher degree of judgment and complexity than others.
Revenue recognition
Net sales (revenue) are recognized when there
is persuasive evidence that an arrangement exists, when delivery has occurred, when the price to the buyer is fixed or determinable
and when collectability of the receivable is reasonably assured. These elements are met when title to the products is passed to
the buyers, which is generally when product is delivered to the customer and the customer has accepted delivery.
Certain customers have limited rights of return
and/or are entitled to price adjustments on products held in their inventory. We reduce net sales in the period of sale for estimates
of product returns, price adjustments and other allowances. Our reserve estimates are based upon historical data as well as projections
of sales, customer inventories, price adjustments, average selling prices and market conditions. Price protection is calculated
on a product by product basis. The objective of price protection is to mitigate returns by providing retailers with credits to
ensure maximum consumer sales. Price protection is granted to retailers after they have presented our company an affidavit of existing
inventory. Actual returns and adjustments could be significantly different from our estimates and provisions, resulting in an adjustment
to net sales.
Inventories
Inventory is stated at the lower of cost or
market, with cost being determined on the weighted average cost method of accounting. We purchase finished goods and materials
to assemble kits in quantities that we anticipate will be fully used in the near term. Changes in operating strategy, customer
demand, and fluctuations in market values can limit our ability to effectively utilize all products purchased and can result in
finished goods with above-market carrying costs which may cause losses on sales to customers. Our policy is to closely monitor
inventory levels, obsolescence and lower market values compared to costs and, when necessary, reduce the carrying amount of inventory
to market value. As of December 31, 2015 and 2014, inventory on hand was comprised primarily of finished goods ready for sale and
packaging materials.
Share-based compensation/Warrants valuation
We use the Black-Scholes model to determine
the fair value of stock options and stock purchase warrants on the date of grant. The amount of compensation or other expense recognized
using the Black-Scholes model requires us to exercise judgment and make assumptions relating to the factors that determine the
fair value of our share-based grants. The fair value calculated by this model is a function of several factors, including the grant
price, the expected future volatility, the expected term of the option or warrant and the risk-free interest rate correlating to
the term of the option or warrant. The expected term is derived using the simplified method provided in Securities and Exchange
Commission release Staff Accounting Bulletin No. 110 which averages an awards weighted average vesting period and contractual term
for “plain vanilla” share options. The expected volatility is estimated by analyzing the historic volatility of similar
public companies. The risk-free rate of return reflects the weighted average interest rate offered for US treasury rates over the
expected life of options or warrants. The expected term and expected future volatility requires our judgment. In addition, we are
required to estimate the expected forfeiture rate and only recognize a cost or expense for those stock options or warrants expected
to vest.
Estimated Litigation Losses
We are subject to certain legal proceedings
and claims arising in connection with the normal course of business and have established a reserve for contingent legal liabilities
in connection with three pending cases. Based on the range of possible loss as provided by outside legal counsel, we have reserved
$400,000 for possible loss related to the three cases at December 31, 2015. The reserve represents what we believe to be an estimate
of possible loss only for those three matters and does not represent the maximum loss exposure. The assessment as to whether a
loss is probable or a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of
complex judgments about future events and there is, therefore, considerable uncertainty regarding the timing or ultimate resolution
of such matters, including a possible eventual loss, fine, penalty or business impact, if any. We will continue to evaluate, on
a quarterly basis, the adequacy of the loss reserve, and update our disclosure if necessary, based on available information and
in accordance with ASC 450-20-50, evaluating developments in legal proceedings, investigation or claims that could affect the amount
of any accrual, as well as any developments that would make a loss contingency both probably and reasonably estimable.
Fair value measurements
Fair value is an exit price, representing the
amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. As such, fair value is a market-based measurement that should be determined based on the assumptions that
market participants would use in pricing an asset or liability. Fair value is based on a hierarchy of valuation techniques, which
is determined on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market
data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create
a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
Level 1:
|
Quoted prices for identical instruments in active markets.
|
|
Level 2:
|
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
|
|
|
Level 3:
|
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
All stock options and stock purchase warrants
are valued under methods of fair value under the Level 3 tier, as described above.
Factors included in the valuation of common
stock underlying stock options and warrants include the present value of future cash flows, capital structure, valuation of comparable
companies, existing licensing agreements and the growth prospects for our product line. These factors were incorporated into an
income approach and a market approach in order to derive an overall valuation of our common stock of $5.49. Such a valuation is
dependent upon estimates that are highly complex and subjective and will not be necessary once the shares underlying stock options
and warrants begin trading.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 of Notes to Consolidated Financial
Statements beginning on page F-10 contained elsewhere in this prospectus.
Quantitative and Qualitative Disclosures
About Market Risk.
Foreign Currency Risk
We face potential exposure to adverse movements
in foreign currency exchange rates, primarily in Asia, due to the fact that we source substantially all of our products in Taiwan,
Hong Kong, and China. Although we currently transact all purchases in U.S. dollars and therefore do not engage in any currency
hedging activities, an adverse change in the currency exchange rate in those countries could adversely affect the price at which
our suppliers would be willing to sell to us. Our foreign currency risk may change over time as the level of activity in foreign
markets grows and could have a material adverse impact upon our financial results.
Interest Rate Risk
We have a credit facility with a U.S. based
financing company. Borrowings under the facility are subject to a variable rate of interest, and subject to a minimum of interest
rate 6.75%. Throughout 2015, the minimum interest rate of 6.75% was in effect. A rise in interest rates could have an adverse impact
upon our cost of working capital and our interest expense. As a matter of policy, we do not enter into derivative transactions
for hedging variable rate interest or for speculative purposes. As of December 31, 2015, our outstanding principal debt included
$215,000 outstanding under our accounts receivable financing facility. Based on our average borrowing under the facility in 2015,
an increase in the variable interest rate by 1.0% would have caused an increase of our interest expense by approximately $26,000.
A decrease in the variable rate would have no impact on interest expense because of the minimum interest rate provision.
Inflation Risk
Inflation did not have a material effect on
net sales or net loss in 2015. A significant increase in inflation could have a significant detrimental impact on our future performance
since our products are ultimately purchased by individual consumers whose discretionary spending is influenced by the effects of
inflation. We are unable to quantify the potential effects that various rates of inflation could have on our operating performance.
Credit Risk
The success of our business depends, among
other factors, on the strength of the North American and global economies and the stability of the financial markets, which in
turn affects end users’ demand for our products and therefore our customers’ demand for our products. We provide credit
to customers in the ordinary course of business and perform initial and ongoing credit evaluations, while at times providing extended
terms. We believe that our exposure to concentrations of credit risk with respect to trade receivables is largely mitigated by
dispersion of our customers over various geographic areas. We believe our allowance for doubtful accounts is sufficient to cover
customer credit risks.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP. Internal control over financial reporting includes: maintaining records that in reasonable detail
accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for
preparation of our financial statements; providing reasonable assurance that receipts and expenditures of our assets are made in
accordance with management’s authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because
of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement
of our financial statements would be prevented or detected. Furthermore, our controls and procedures can be circumvented by the
individual acts of some persons, by collusion of two or more people or by management override of the controls or procedures, and
misstatements due to error or fraud may occur and not be detected on a timely basis.
Our management has determined that we had a
material weakness in our internal control over financial reporting as of September 30, 2016 and December 31, 2015 and 2014 relating
to the design and operation of our closing and financial reporting processes. We have concluded that this material weakness in
our internal control over financial reporting is due to the fact that we do not yet have the appropriate resources with the appropriate
level of experience and technical expertise to oversee our closing and financial reporting processes.
In order to remediate this material weakness,
we have taken the following actions:
|
•
|
we have begun to use a third party, independent consultant
to review our quarterly close;
|
|
•
|
we have hired and are continuing to actively seek additional
accounting and finance staff members to augment our current staff and to improve the effectiveness of our closing and financial
reporting processes; and
|
|
•
|
we are formalizing our accounting policies and internal
controls documentation and strengthening supervisory reviews by our management.
|
Notwithstanding the material weakness that
existed as of September 30, 2016 and December 31, 2015 and 2014, our management has concluded that the consolidated financial
statements included elsewhere in this prospectus present fairly, in all material respects, our financial position, results of
operations and cash flows in conformity with GAAP.
We
expect to continue to implement measures to remedy our internal control deficiencies in order to meet the reporting requirement
of Section 404 of the Sarbanes-Oxley Act of 2002. However, we cannot be certain that the measures we have taken or might take
in the future will ensure that we will maintain adequate controls over our financial processes and reporting in the future. If
we fail to fully remediate this material weakness or fail to maintain effective internal controls in the future, it could result
in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, which could
cause investors to lose confidence in our financial information or cause our stock price to decline. Our independent registered
public accounting firm has not assessed the effectiveness of our internal control over financial reporting and, under the JOBS
Act, will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting
so long as we qualify as an “emerging growth company,” which may increase the risk that weaknesses or deficiencies
in our internal control over financial reporting go undetected.
Changes in Internal Control Over Financial Reporting
During the three months ended September 30, 2016, we engaged
an independent outside consulting firm to review our quarterly close. Other than that additional control, there were no material
changes in our internal control over financial reporting during the three months ended September 30, 2016 that materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
EMERGING GROWTH COMPANY
STATUS
We are an “emerging growth company”
as defined in the JOBS Act, and therefore we may take advantage of certain exemptions from various public company reporting requirements.
As an “emerging growth company:”
|
•
|
we will present no more
than two years of audited financial statements and no more than two years of related management’s discussion and analysis
of financial condition and results of operations;
|
|
•
|
we will avail ourselves
of the exemption from the requirement to obtain an attestation and report from our auditors on the assessment of our internal
control over financial reporting pursuant to the Sarbanes-Oxley Act;
|
|
•
|
we will provide less
extensive disclosure about our executive compensation arrangements; and
|
|
•
|
we will not require
stockholder non-binding advisory votes on executive compensation or golden parachute arrangements.
|
However, we are choosing to irrevocably opt
out of the extended transition periods available under the JOBS Act for complying with new or revised accounting standards. We
will remain an “emerging growth company” for up to five years, although we will cease to be an “emerging growth
company” upon the earliest of: (1) December 31, 2021, (2) the last day of the first fiscal year in which our annual gross
revenues are $1 billion or more, (3) the date on which we have, during the previous rolling three-year period, issued more than
$1 billion in non-convertible debt securities, and (4) the date on which we are deemed to be a “large accelerated filer”
as defined in the Exchange Act.
BUSINESS
Our primary business focus is the design, development and marketing
of premium products under the “Monster Digital” brand for use in high-performance consumer electronics, mobile products
and computing applications. Our license with Monster, Inc. allows us to manufacture and sell certain high-end products utilizing
the “Monster Digital” brand name; Monster, Inc. is highly recognized by consumers for its high quality audio-video
products. We work with our subcontract manufacturers and suppliers to offer new and enhanced products that use existing technology
and adopt new technologies to satisfy existing and emerging consumer demands and preferences. On the marketing side, we partner
with Monster, Inc. to support the sales and marketing of these products on a global basis.
We have invested significantly in building a broad distribution
channel for the sale of products bearing the “Monster Digital” brand. . Our current focus is to leverage our distribution
network through cooperating with Monster, Inc. to identify and market additional specialty and consumer electronics products.
Currently, our primary product offerings are as follows:
|
•
|
A line of action sports
cameras used in adventure sport, adventure photography and extreme-action videography.
|
|
•
|
A line of ultra-small
mobile external memory drive products for Apple iOS devices.
|
|
•
|
On-The-Go Cloud devices
on an exclusive basis which create a wi-fi hot spot for multiple users while simultaneously allowing data to be viewed, played
or transferred among the connected storage.
|
|
•
|
A broad selection of
high-value memory storage products consisting of high-end, ruggedized Solid State Drives (“SSDs”), removable flash
memory CompactFlash cards (“CF cards”), secured digital cards (“SD cards”) and USB flash drives.
|
We intend to focus our efforts on increasing sales of higher margin
specialty products over lower margin memory items. While sales of memory products helped to build our Monster Digital brand, we
believe our future success depends in large part on our ability to substantially increase sales of specialty products bearing the
Monster Digital brand as a percentage of revenues.
Products
Action Sports Cameras
Our Action Sports Cameras
We believe that to succeed in the competitive action camera marketplace,
it is imperative that we to distinguish our product offerings through clear and unique value propositions. For this reason, we
have positioned our current action sports camera offerings as “ready-to-go” cameras. We believe our approach is unique
to this category as we intend to provide a completely “all included” solution for the consumer. The strategy is to
provide the end user with everything necessary to start enjoying the product straight out of the box.
The “all included” package contains numerous universal
mounts designed to enable users to capture content when engaged in a wide variety of activities. These include helmet, handlebar
grip and tripod mounts. Also included are helmet straps, a tripod and a removable replaceable battery. We also intend to sell cables
that connect our action sports cameras to television monitors, as well as other accessories to further expand the features, versatility
and convenience of our camera.
1080p Action Sports Camera
. We introduced
our initial entry into the action sports camera market in November 2015. Our 1080p action camera is easy handling with sharing
options that ensure high-quality images, long battery life and expandable memory storage. The camera comes in a small, easy-to-use
form factor housing with dimensions of 2 5/16” W by 1¾” H, weighing 2.5 pounds with the battery installed
and featuring a 2” LCD display and a 32GB Sport Series SDXC Card. The 1080p camera is a fixed-lens camera with a 5 mega pixel
sensor, a 140 degree viewing angle, and provides video recording at 1080 pixels at 30 frames per second and 12 mega pixel photos.
This camera can be used in time lapse mode and is wi-fi enabled. The camera is contained in a removable polycarbonate floating
water proof housing with a glass lens that is rated shockproof and waterproof to 100 feet. Our 1080p camera features a quick-release
buckle and threads at the bottom to attach to all our offered mounts. In addition, we have priced our 1080p camera on an “all
included basis” at $149, which we believe makes it extremely price competitive with other entries in the action camera market.
This camera is currently offered under the name “Villain” but will be renamed as Monster Vision 1080p when our current
packaged inventory sells through. For information concerning certain patent infringement claims surrounding our 1080p action sports
camera, see “— Litigation.”
Monster Vision 360 Action Sports Camera
. We
introduced our Monster Vision 360 action sports camera in March 2016. The Monster 360 Vision is a shockproof and waterproof 360-degree
action camera designed for action enthusiasts. The Vision features a 190 degree wide angle lens and can record, playback and share
360 degree videos up to 30 frames per second. A user can control the camera via Bluetooth with his or her smartphone or tablet
and can connect to a user’s WiFi router or function as a standalone WiFi access point to stream and control the camera. The
included USB 3.0 cable allows a user the ability to transfer videos and photos with the high speed USB 3.0 protocol. The Micro
SD memory slot and included 32GB Micro SD card enables a user to add and upgrade memory as needed. The Vision 360 features electronic
vibration reduction, enabled through applications during playback, that reduces the effect of camera shake to help produce sharp
and crisp picture quality. Also, the Vision is designed to be used with existing virtual reality headsets currently provided by
others. We have priced the Monster 360 Vision on an “all included basis” at $329, which we believe makes the Vision
extremely price competitive with other 360-degree entries in the 360-degree action camera market.
Monster Vision HD Action Sports Camera
. We
introduced our Monster Vision HD action sports camera in May 2016. This 720p action sports camera is meant as an entry level action
camera built for simplicity and fun and designed for use in outdoor sports as well as for tourism, action shooting and daily life
recording. Featuring a 1.7” color display and a 120 degree viewing angle, users can see what they are shooting, digitally
zoom to up to 8x and use over 20 on-board visual effects to get creative. In addition to video recording it is a 5 megapixel digital
camera with the ability to take individual still shots or take a burst of 3 shots in rapid succession. Like our 1080p action sports
camera, the camera is a fixed-lens camera that comes in a small, easy-to-use form factor housing with the battery installed. This
camera can be used in time lapse mode, is wi-fi enabled and is offered with a 16GB Sport Series SDXC card. And like our 1080p action
sports camera, the camera is contained in a removable polycarbonate floating water proof housing with a glass lens that is rated
shockproof and waterproof to 100 feet. We have priced our Monster Vision HD on an “all included basis” at $79, which
we believe makes it extremely price competitive with other entry level action sports camera offerings.
Dual lens 360 VR action sports
camera.
We offer a dual lens 360 degree action sports camera which can be used with virtual reality
headsets. This action sports camera substantially enhances the 360 degree experience for our consumers. During
playback, viewers can choose where they look, being able to see up, and down and all the way around for a truly immersive
experience. This camera connects both camera images with simple drag-and-drop software. It features fixed focus lenses, a 2 x
220-degree wide angle and resolution of 1920 x 960. Like our other cameras, it is offered on an “all included
basis”, at an attractive price point $250.
Virtual reality
headset.
We offer a virtual reality headset that can be used to view videos created by our existing Monster Vision
360 and Dual lens 360 VR action sports camera.
The headset offers integrated high performance with on-ear headphones.
The headset features pupil distance adjustment, precision polished gloss lenses for a better picture and call answer, pause/play
and multifunction control. We offer our headset at $40.
Data Storage Devices
Our primary end markets for our memory storage
products are as follows:
Consumer
. We provide flash memory storage
products to multiple consumer markets, including imaging, gaming, audio/video and mobile applications. Flash storage cards are
used as the film for all major brands of digital cameras. In addition, many portable game devices include advanced features that
require high capacity memory storage. Also, multimedia features and download applications in mobile phones drive demand for additional
flash memory storage.
Computing
. We provide data storage solutions
for the computing market. CF and SD card and USB flash drive flash memory allows consumers to store pictures and music on cards
and then quickly and easily transfer these files to and between laptops, notebooks, desktops, and other devices. In addition, we
sell SSDs for the computing market. We plan to continue to develop new releases of our SSDs for the notebook and desktop computer
markets as we believe that SSDs are increasingly likely to replace HDDs in a variety of computing solutions.
Monster Apple iPhone/iPad External Memory Drive
We offer a family of ultra-small mobile external memory drive products
for Apple iOS devices (iPhone/iPad/iPod) under the iX32 and Memory Cable trade names.
We offer an iX32 flash drive which contains a memory module (16GB
up to 128GB) with a Lightning connector and a USB connector. Lightning is a proprietary computer bus and power connector created
by Apple Inc. and is used to connect Apple mobile devices like iPhones, iPads and iPods to host computers, external monitors, cameras,
USB battery chargers and other peripherals. Through the USB port, the user can plug his/her Apple device to any computer to store
data/media and take it for future use. Through the Lightning connector, the user can download data from selected Apple iOS devices
onto the drive and then transfer the data to another iOS device or to a device with a USB port ( such as a TV or a computer). As
a result, the user creates“freed” up space on his/her Apple device by directly copying content off the device instead
of having to move the content by sending it to iCloud or other remote cloud storage destinations. It is also helpful if a user
wants to consume large megabyte data, such as a movie, and does not want to store that content on his/her iOS device which would
further diminish the available memory. In such an instance the“movie” can be loaded onto the drive and then watched
from the drive when it is plugged into the iOS device.
The device also allows backup of photos, contacts, documents and
videos, access to Dropbox, internal App storage and is security protected with optional password/fingerprint protection. In the
case of the Memory Cable, it also serves as a charging cable if needed for the iOS device.
On-The-Go Cloud
Our On-The-Go Cloud device, which we market on an exclusive basis,
is an innovative multi-function wireless media access hub. This device allows a user to create a wi-fi hot spot for multiple users,
share photos and videos with friends and stream movies while on the road or in the air to any wi-fi enabled device. This lightweight,
smartphone-sized device is equipped with dedicated ports for SD and microSD cards up to 64GB, as well as standard-size USB flash
drives or external hard drives up to 2TB. A Micro USB cable is used for connectivity and charging the onboard battery which can
last five hours on a single charge while streaming videos. When a PC or Mac is connected via the micro USB cable, it acts as a
reader and hub, simultaneously giving access to memory cards and/or a storage device plugged into the USB port. Not only can data
be viewed or played, it can be transferred among the connected storage. For example, an HD movie file from an SD card can be copied
to an external hard drive.
The same functionality above can also be done wirelessly. The device
has 2.4GHz (b/g/n) encrypted Wi-Fi capability, which gives cable-free connectivity to PCs, Macs, tablets and smartphones. Files
can be accessed via any web browser and by wireless enumeration, in which it operates as a network drive. With a streaming capacity
of up to five devices at 720p (three devices at 1080p) and unlimited direct access, it’s ideal for sharing media. The device
also has an Ethernet port allowing it to act as a wi-fi hotspot. The device comes with a travel bag and micro USB cable and is
priced under $100.
SSDs
SSDs are data storage devices that utilize solid-state memory to
store persistent data. SSDs contain no moving parts and use microchips that retain data in non-volatile memory chips, meaning they
retain their memory when the power is turned off. SSDs have the same interface as hard disk drives (“HDDs”) and easily
replace them in most applications. SSDs are used in consumer electronic products which are primarily designed for small form factor,
battery powered consumer hand held devices, such as laptop computers and tablets.
Our drives are used for laptop, notebook, desktop and enterprise
server applications. These drives feature enhanced reliability, higher performance and reduced power consumption compared to typical
HHDs and are more than twice as fast as many other SSD drives.
Overdrive 3.0 SSD and Overdrive 3.0 Mini
. Our
Overdrive 3.0 Series of SSDs is designed for consumer applications that require high-performance and endurance with easy plug and
play compatibility. The drives are USB powered making them energy efficient with no external power switch required. Our Overdrive
3.0 and Overdrive 3.0 Minis are USB 2.0 compatible as well. Its robust construction is designed to survive impact up to 500g and
resistant to magnetic interference and extreme temperatures. The drives have a laser extended stainless steel enclosure with a
small form factor that travels easily.
This family of SSDs is available in densities of 128GB, 256GB and
512GB, and 1 Terra Byte (“TB”) with 250/150 Megabytes (“MB”) sequential read/write speeds. Prices for our
Overdrive 3.0 SSDs range from $99 to $700.
Overdrive Thunderbolt SSD.
Our Overdrive Thunderbolt SSD series incorporates Intel’s
Thunderbolt technology that simultaneously supports high resolution displays and high performance data devices through a single
compact port. With read/write speeds of 500/450 MB/s, our Overdrive Thunderbolt is substantially faster than many other commercially
offered Thunderbolt connected drives. Our drive features an integrated 250mm Thunderbolt Cable with a press-to-release catch. With
the same robust construction durability and stainless steel enclosure as our Overdrive 3.0 series, this family of drives offers
high performance in demanding data applications.
This family of SSDs is available in densities of 240GB, 480GB and
1TB and prices range from $99 to $799.
Overdrive Advanced SSD
. This device is
an entry level SSD for less demanding data applications. The external SSD has a density of 128GB and a speed of 140 MB/s, making
it substantially faster than many other commercially available USB 3.0 drives. The SSD includes a USB 3.0 cable and has a price
point of $100.
Monster “Superfast” SSD
. Our
Monster “Superfast” SSD allows a user the ability to upgrade an PC from the internal traditional rotating HDD to our
MD-550 2.5” SSD. The upgrade increases the speed, battery life and reliability of the PC. The MD-550 SSD has no rotating
parts thus offering substantially more reliability and durability than standard rotating HDDs.
Our Monster “Superfast” SSD comes in 240GB, 480GB and
1TB configurations and range in price from $150 to $450.
CompactFlash Cards
CF cards are flash memory mass storage devices used mainly in portable
electronic devices. Flash memory products are electronically re-writable, non-volatile semiconductor memory devices that retain
content when power is turned off. CF cards make data easy to add to a wide variety of computer devices, including digital cameras
and music players, desktop computers, personal digital assistants, digital audio recorders and photo printers.
Our line of CF cards consists of the following:
800x CF.
These cards are designed for discerning photo
and video users. Built with a robust structure, our CF Cards feature 120 MB/s read read/write speeds and superior memory card performance.
The cards are offered in 320GB and 64GB configurations, are waterproof and impact resistant to 1500g. These cards are ideal for
fast action photography and video capture.
Our CF cards are offered at prices of $140 and $280.
Secure Digital Cards
SD cards are removable flash memory products. SD cards are used
in many consumer electronic devices and have become a widespread means of storing several gigabytes (“GB”) of data
in a smaller site. Devices where the user may remove and replace cards often, such as laptop or notebook computers, digital cameras,
camcorders and video game consoles tend to use full-sized cards. Devices where small size is paramount, such as action sports cameras
and mobile phones, tend to use microSD cards.
We offer a variety of SD cards with a range of speeds, capacities
and value-added features in all major media formats.
Sport Series SDXC
. Our line of Secure Digital
eXtreme Capacity, or SDXC, cards is tailored for those users seeking the highest standards in memory card technology. These products
have the highest speed rating in our SD product line and are targeted at users of action sports cameras, professional photographers
and high-end gamers. Speed, capacity and protection are maximized for consumers’ important data; our SDXC cards have 90/45
MBs read/write speeds and are waterproof, magnetic, impact and temperature resistant. Storage densities include 64GB and 128GB
offered at $120 and $200 respectively.
Legacy Series SDHC Card
. Our line of Secure
Digital High Capacity, or SDHC, cards are specially designed for personal electronics applications. Our SDHC cards include 8GB,
16GB and 32GB storage densities; they also support the UHS104 (ultra-high speed) SD interface and are compliant with the industry
standard SD Memory Card Standard Version 3.0 (SD 3.0) which supports SD interface speeds up to 104MB per second. Prices range from
$19 to $40.
USB Flash Drives
USB flash drives are small portable data storage devices that include
flash memory. The integrated universal serial bus (“USB”) interface plug into a computer’s USB port and function
as portable hard drives. USB flash drives have less storage capacity than an external hard drive, but they are smaller and more
durable because they do not contain any internal moving parts. They are often used for storage, back-up and transfer of computer
files, thus facilitating data transfers between different devices.
We offer a wide selection of customized USB flash drives in different
memory capacities and with a wide variety of features.
COPPA 3.0 and 2.0
. Our Coppa 3.0 and 2.0
USB flash drives are lightweight, compact and have high quality memory. The COPPA 3.0 USB has speed up to 160/45 MB/s read/write
and the COPPA 3.0 USB has 32/28 MB/s read/write, each allowing users to quickly and easily transfer large documents, HD movies,
high resolution photographs and other large memory use data. The COPPA 3.0 is backwards compatible with the USB 2.0 allowing use
with devices that are not 3.0 enabled.
The drives come with an integrated twist cover, a lanyard key chain
loop and are offered in configurations of 8GB, 16GB, 32GB and 64GB at prices ranging from $9 to $100.
Advanced 3.0 OTG
. Our advanced 3.0 OTG
USB flash drives allow users the ability to easily backup and transfer files from a place without a computer, cable or wifi. Files
can be transferred directly without sending information through the drive or on an unsecured wireless network. The drive has similar
features to our COPPA 3.0 USB drives and can be used with our proprietary On-The-Go Cloud Storage device. The Advanced 3.0 OTG
is offered in 16GB, 32GB and 64GB configurations at prices ranging from $24 to $75.
Legacy 2.0 UFD
. We also offer an entry
level series of drives for businesses, schools, and home applications at speeds of up to 14 MB/S. These drives are offered in configurations
of 2GB, 4GB, 8Gb, 16GB and 32GB at prices ranging from $7 to $30.
Manufacturing and Product Development
Manufacturing
We do not directly manufacture any of the products we sell. Instead,
we depend exclusively on third parties for the manufacture and sourcing of our products. Reliance on third party manufacturers
and suppliers exposes us to material risks, especially as our action sports cameras and iX32 flash drive are currently sourced
from sole source suppliers. See “Risk Factors — We depend exclusively on third parties to manufacture and
supply our products. If third party manufacturers are unable to timely deliver required quantities of our products at acceptable
qualities and prices, we will not be able to meet customer demand for our products, which would adversely impact the success of
our business.” However, we believe that by outsourcing the manufacture and sourcing of these products, we benefit from lower
manufacturing and engineering costs. For this reason, for the foreseeable future we expect to continue to rely on third party manufacturers
and suppliers to produce and supply the substantial majority of our products.
We do not have long-term agreements with any of our third party
suppliers or manufacturers for our primary memory products or our iX32 flash drive. We currently source our current action sports
camera offerings and iX32 flash drive from sole source suppliers and while we believe there is an alternative supplier available
for our iX32 flash drive we do not currently have an alternative supplier for our action sports cameras. We obtain our action sports
cameras further to a formal agreement with Shuoying Digital Science & Technology (China) Co., Ltd. that expires in January
2017 but automatically renews for successive 12 months periods unless sooner terminated by either party with six months prior written
notice. We believe it may be more difficult to find alternative sources for our action sports cameras if necessary. We intend to
endeavor to locate alternative sources for our action sports cameras to mitigate risks related to reliance on this sole source
supplier.
We seek to differentiate our products through product features offered,
product positioning, packaging, merchandising and branding. By continuing to subcontract manufacture and source our products from
third parties, we believe that we are able to sell products incorporating new technology without having to make the substantial
investment in, or having to incur the fixed costs associated with, product development and manufacturing.
Our in-house testing and production staff in Simi Valley, California
regularly inspects and tests product samples, assembles pilot production runs and repackages bulk quantities received from our
subcontract manufacturers and suppliers. We also develop user manuals, product packaging and marketing materials, as well as installation
guides, software and hardware designed to permit user friendly product installation. Our staff periodically tours our subcontract
manufacturers’ and suppliers’ facilities and monitors and tests to minimize defective products.
The majority of our products are shipped directly by our subcontractor
manufacturers and suppliers to our facility in Simi Valley, California. These products are then packaged and shipped by us directly
to our customers.
Product development
To date, we have not made material expenditures on product development.
However, we realize that to compete in this industry, we must continue to offer technologically advanced products. New products
are developed and offered by our subcontractors, manufacturers and suppliers and then offered by us. We believe our relationship
with our contract manufacturers and suppliers allows us to enhance and expand our product offerings with existing and new technologies
that such third parties develop internally and avoid the costs associated with an in-house research and development team. Our efforts
are directed at the evaluation of new products and enhancements to existing products. We monitor market and industry trends to
understand and identify new technologies and plan for new product offerings.
We intend to continue to devote efforts to introduce new products
that meet emerging demands and preferences, including new versions of our existing product lines. Specifically, we plan to continue
to penetrate the global action camera market, while identifying additional consumer electronic products to be introduced based
on leading technologies.
Sales and Marketing
Sales
We sell our products primarily through distributors and independent
sales representatives and distributors.
Distributors
. We use distributors to sell our
products to non-direct customers such as small computer manufacturers, dealers, systems integrators, online retailers and other
resellers. Distributors generally enter into non-exclusive agreements with us for the purchase and redistribution of our products
in specific territories.
Retailers
. We sell our branded devices directly
to a select group of major retailers such as computer superstores, warehouse clubs, online retailers, and computer electronics
stores, and authorize sales through distributors to smaller retailers. The retail channel complements our other sales channels
while helping to build brand awareness for our products. We also offer our branded products through our website.
Although we have established a substantial domestic distribution
channel for our memory products bearing the Monster brand, we believe it is necessary to substantially expand our distribution
channels with respect to sales of our higher margin specialty products. Our executive sales team has recently established domestic
distribution arrangements for our actions sports cameras with major entities such as Fry’s, Sam’s Club and Toys R’
Us. We also believe that international markets represent a significant growth opportunity for us. Our executive sales team seeks
to enhance our international presence by capitalizing on the strength of the Monster Digital brand. Examples of recently added
international retailers and strategic distribution arrangements include Synchro France, ADL, Selfridges and FNAC.
We protect some of our customers against the effects of price decreases
on their inventories. Accordingly, if we reduce our prices, we pay certain distributors and retailers the difference between the
price paid for the product still in their inventory and the reduced price. Additionally, some of our retail customers and distributors
have the right to return limited amounts of products still in their inventory for credit.
Marketing
We believe our marketing relationships with key industry leaders
distinguishes our company from others in our industry. Our Overdrive 3.0 SSD and Overdrive Thunderbolt SSD, each with a 1TB configuration,
are currently offered in all Apple stores throughout Europe. Our Advanced 3.0 OTG USB flash drive is the first Apple certified
external memory of iOS.
Also, our products are offered and supported by Monster, Inc.’s
large global and retail distribution network.
Further to the license with Monster, Inc., our company and Monster,
Inc. consult and cooperate with each other in the design process of products sold under the Monster Digital brand name. Also, the
license provides that our company and Monster, Inc. will cooperate to promote and effect the offer and marketing of products sold
under the Monster Digital brand name through Monster, Inc.’s existing and future sales and distribution channels.
To date, Monster, Inc. sales team has introduced our Monster Digital
memory products to many of their key distributors and retail chains and has indicated that it intends to continue to do so in the
future. We believe that approximately 17% of our gross revenues for the nine months ended September 30, 2016 and 33% for the years
ended December 31, 2015 and 2014 were derived from Monster, Inc.’s introductions to buyers and retailers. Monster, Inc. has
existing relationships with virtually all major retail chains and strategic distributors across North America, Latin America and
Europe.
In addition, Monster, Inc. has a global network of independent sales
representatives established which affords us the ability to access additional sales coverage and to take advantage of established
local market relationships. To ensure the quality of its sales forces, our products are incorporated into Monster, Inc.’s
internal sales metrics that measure sales performance for all sales people, independent sales representatives and customers.
We participate in co-sponsored events with our customers and industry
trade shows such as Consumer Electronics Show. We participate in these events and trade shows in order to develop new relationships
with potential customers and maintain relationships with our existing customers. We also intend to fund cooperative advertising
campaigns with our customers, develop custom product promotions and cooperate with our retailers to use point-of-sale and mail-in
rebate promotions to increase sales of our products. We also intend to utilize sales circulars to obtain regional and national
exposure for our products and our brands. We believe that these marketing efforts will help generate additional shelf-space for
our products with our major retailers, promote retail traffic and sales of our products, and enhance our goodwill with these retailers.
Monster License Agreement
We entered into a trademark license agreement with Monster, Inc.
effective July 7, 2010. The agreement gives us exclusive rights to utilize the tradenames “Monster Memory”, “Monster
Digital, Inc.” and the M (stylized) mark on (i) action sports cameras, (ii) cable memory, (iii) flash based cards, (iv)
flash based SSD drive products, (v) DRAM modules, (vi) USB flash drives and (vii) internal power supplies for personal computers.
The 25 year agreement provides for the payment of royalties to Monster, Inc. on all sales of the referenced products, excluding
sales to Monster, Inc., as follows:
Years 1 (2012) and 2: Royalties on all sales excluding sales to
Monster, Inc. at a rate of four (4) percent, with no minimum.
Years 3 through 6: Minimum royalty payments of $50,000 per quarter
up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 7 through 10: Minimum royalty payments of $125,000 per quarter
up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 11 through 15: Minimum royalty payments of $187,500 per quarter
up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
Years 16 through 25: Minimum royalty payments of $250,000 per quarter
up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
At any time during the term of the agreement, a permanent license
may be negotiated subject to the parties reaching a mutually acceptable agreement.
Effective July 1, 2014, the royalty rate on certain products was
reduced to 2% for a period of 12 months.
Monster, Inc. may purchase licensed products from us at a price
no greater than 20% above our standard costs. Monster, Inc. has agreed not to sell products sourced from us in a way that undermines
our position in the marketplace. We have agreed that all design, packaging and marketing materials for any licensed products would
be in accordance with and conform to design standards prescribed by Monster, Inc. Monster, Inc. and our company have agreed to
cooperate to promote and affect the offer and marketing of the licensed products through Monster Inc.’s existing and future
sales and distribution channels.
Monster, Inc. may use and grant others the right to use any trademarks,
logos, domain names and/or trademarks for use in connection any products except (i) the granting to others of the use of the Monster
mark in connection with the manufacture, design, distribution, sales or other similar exploitation of any licensed Monster mark
(but not the Monster Digital mark or the M (stylized) mark) if the primary purpose of such license is the settlement of a claim
of infringement of the Monster mark with that of the subject licensee and not the commercial exploitations of the Monster Mark
and (ii) Monster, Inc. itself may use (but not sublicense) the Monster mark and the M (stylized) mark (but not the Monster Digital
mark) in connection with any licensed products or other data memory products subject to the condition that Monster, Inc. provides
us with at least thirty (30) days prior written notice of its intention to so enter the market and offers us the first right to
supply such products pursuant to a commercially reasonable arrangement similar to the Monster License Agreement.
In August 2015, we executed an amendment to the license agreement
with Monster whereby Monster granted us the additional right further to the aforementioned License Agreement to use the name “Monster
Digital, Inc.” as our corporate name. Further to the amendment, in addition to the royalties mentioned above, we issued Monster,
Inc. 382,575 shares of our common stock and will pay Monster a cash fee of $500,000.
We are required to remit royalty
payments to Monster, Inc. on or before the 30
th
day following the end of each calendar quarter. For the years
ended December 31, 2015 and 2014, royalty expense amounted to $262,000 and $572,000, respectively. We were not in compliance
with the royalty remittance policy for each of the aforementioned fiscal periods nor with the installment payment terms of
the aforementioned $500,000 payment. As of September 30, 2016, all past due payments had been made and we were in full
compliance with the royalty remittance policy. This license agreement contains various termination clauses that include (i)
change in control, (ii) breach of contract and (iii) insolvency, among others. Either party to the license agreement has the
right to terminate the agreement if the other is in material breach of any of the terms and conditions of the agreement and
such party fails to cure such breach within 30 days after the date of receipt of written notice from the other party. We
presently owe Monster, Inc. a $125,000 royalty payment for the fourth quarter of 2016.
In addition, in August 2015, and in connection with the aforementioned
amendment to the trademark license agreement, we entered into a two-year advisory board agreement with Noel Lee, the Chief Executive
Officer and sole shareholder of Monster, Inc. Further to the advisory board agreement, we issued Mr. Lee a warrant to purchase
up to 191,289 shares of our common stock at a per share exercise price of $14.85.
Warranties
Because the design and manufacturing process for our products is
highly complex, it is possible that our products may contain defects or are otherwise not compatible with end uses. In accordance
with industry practice, we generally provide a limited warranty that our products are in compliance with our specifications existing
at the time of delivery. Under our general terms and conditions of sale, liability for certain failures of products during a stated
warranty period is usually limited to repair or replacement of defective items or return of, or a credit with respect to, amounts
paid for such items. Under certain circumstances, we may provide more extensive limited warranty coverage than that provided under
our general terms and conditions.
Backlog
Because of volatile conditions in our markets, customers are reluctant
to enter into long-term, fixed-price contracts. Accordingly, new order volumes for our products do and are expected to continue
to fluctuate significantly. We typically accept orders with acknowledgment that the terms may be adjusted to reflect market conditions
at the date of shipment. For these reasons, we do not believe that our order backlog as of any particular date is a reliable indicator
of actual sales for any succeeding period.
Competition
Our industry is characterized by intense competition, supply shortages
or oversupply, rapid technological change, evolving industry standards, declining average selling prices and rapid product obsolescence.
Competition is based on multitude of factors, including product
design, brand strength, distribution presence and capability, channel knowledge and expertise, geographic availability, breadth
of product line, product cost, media capacity, access speed and performance, durability, reliability, scalability and compatibility.
Specifically, the performance, functionality, reliability and price of our products are critical elements of our ability to compete.
We believe that we offer, and that our target consumers seek products that combine higher levels of performance, functionality
and reliability at prices competitive with other leading brand-name products. Also, market penetration, brand recognition and inventory
management are also critical elements of our ability to compete. Most consumers purchase products similar to ours from off-the-shelf
retailers such as large consumer electronics and office supply superstores. Market penetration in the industries in which we compete
is typically based on the number of retailers who offer a company’s products and the amount of shelf-space allocated to those
products.
Our existing competitors include many large domestic and international
companies that have longer operating histories and have greater brand name recognition, substantially greater financial, technical,
marketing and other resources, broader product lines and longer standing relationships with retailers, distributors, OEMs and end
users. As a result, these competitors may be able to better absorb price declines, ensure more stable supply, adapt more quickly
to new or emerging technologies or devote greater resources to the promotion and sale of their products than we may. Ultimately,
this may lead to a decrease in our sales and market share and have a material adverse effect on our business, financial condition
and results of operations.
We expect to face competition from existing or future competitors
that design and market similar or alternative data storage solutions that may be less costly or provide additional features. If
a manufacturer of consumer electronic devices designs one of these alternative competing standards into its products, the digital
media we sell, as currently configured, will not be compatible with that product and our revenues may decline, which would result
in a material adverse effect on or business.
Our competition includes:
Action sports cameras
. The market for action sports
cameras is highly competitive. Further, we expect competition to intensify in the future as existing competitors introduce new
and more competitive offerings alongside their existing products, and as new market entrants introduce new products into this market.
We compete against established, well-known action camera and traditional camera manufacturers such as GoPro, Inc., Canon Inc.,
Nikon Corporation, Olympus Corporation, Polaroid Holding Corporation and Vivitar Corporation, large, diversified electronics companies
such as JVC Kenwood Corporation, Panasonic Corporation, Samsung Electronics Co., Sony Corporation and Toshiba Corporation, and
specialty companies such as Garmin Ltd. Most of these competitors have substantial market share, diversified product lines, well-established
supply and distribution systems, strong worldwide brand recognition and greater financial, marketing, research and development
and other resources than we do. In addition, many of these existing and potential competitors enjoy substantial competitive advantages,
such as:
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longer operating histories;
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the capacity to leverage
their sales efforts and marketing expenditures across a broader portfolio of products;
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broader distribution
and established relationships with channel partners;
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access to larger established
customer bases;
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greater resources to
make acquisitions;
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larger intellectual
property portfolios; and
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the ability to bundle
competitive offerings with other products and services.
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Moreover, smartphones and tablets with photo and video functionality
have significantly displaced the market for traditional camera sales. It is possible that, in the future, the manufacturers of
these devices, such as Apple Inc. and Samsung, may design them for use in a range of conditions, including challenging physical
environments, or develop products similar to our action sport camera. In addition to competition or potential competition from
large, established companies, new companies may emerge and offer competitive products.
Solid-state drive and hard disk drive manufacturers
. Our
SSDs face competition from other manufacturers, including Intel, Micron and Samsung, Toshiba, and others. Our SSDs also face competition
from hard disks drives, which are offered by companies including, among others, Seagate, Samsung and Western Digital Corporation.
CF and SD card and USB flash drive manufacturers and resellers
. We
compete with semiconductor companies that manufacture and sell flash memory chips, flash memory cards and USB flash drives. These
include Hynix, Infineon, Micron, Samsung, SanDisk, and Toshiba. We also face significant competition from manufacturers or card
assemblers and resellers that either resell flash cards and USB flash drives purchased from others or assemble cards and USB flash
drives from controllers and flash memory chips purchased from companies such as Renesas, Samsung or Toshiba, into flash cards and
USB flash drives. These companies include Crucial, Dane-Elec, Delkin Devices, Feiya, Fuji, Hagiwara, Hama, Hewlett Packard, Data
I/O, Infineon, Kingston, Kodak, M-Systems, Matsushita, Memorex, Memory Plus, Micron, PNY, PQI, Pretec, Ritek, Samsung, SanDisk,
Silicon Storage Technology, SimpleTech, SMART Modular Technologies, Sony, TDK, Transcend and Viking InterWorks.
Employees
As of September 30, 2016 we had 16 full-time employees. In addition
to our full-time employees, we employ temporary and part-time employees. Our employees are not represented by any collective bargaining
agreements. We have never experienced a work stoppage at any of our facilities. We consider our relationship with our employees
to be good.
Facilities
We lease approximately 11,500 square feet for our executive offices
in Simi Valley, CA pursuant to a three year lease at a monthly rental rate of $10,500. We believe these facilities are sufficient
for our currently foreseeable needs.
Litigation
On February 16, 2016 we received a letter from GoPro, Inc., or GoPro,
alleging that we infringe on at least five U.S. patents held by GoPro, and requesting that confirm in writing that we will permanently
cease the sale and distribution of our 1080p action sports camera, along with any camera accessories, including the waterproof
camera case and standard housing. The five patents specifically identified by GoPro in the letter were U.S. Patent No. D710,921:
camera housing design, U.S. Patent No. D702,747: camera housing design, U.S. Patent No. D740,875: camera housing design, U.S. Patent
No. D737,879: camera design and U.S. Patent No. 721,935: camera design. Based upon our preliminary review of these patents, we
believe we have some defenses to GoPro’s allegations. Our outside counsel has been in discussions with GoPro’s outside
counsel and has forwarded them material which we believe supports defenses to these allegations, all in an effort to move the matter
to resolution. But as of yet, there is no final resolution to this matter. There can be no assurance that we will be successful
in defending against these allegations or reaching a business resolution that is satisfactory to us.
The supplier of our action sports cameras has contractually represented
and warranted that it owns or has paid royalties to any and all intellectual property, designs, software, hardware, packaging,
components, manuals and any other portion, part or element that is or may be subject to such products and the parts and accessories
thereof sourced by the supplier. This supplier has contractually agreed to pay any claims, damages, or costs that we suffer as
a result of the patent infringement or a violation of international, U.S. or state laws or regulations as detailed in the prior
sentence.
Other than the foregoing, we are not party to any material pending
or threatened litigation.
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, their respective positions
and their respective ages as of February 7, 2017 are as follows:
Name
|
|
Age
|
|
Position(s)
|
David H. Clarke
|
|
74
|
|
Chief Executive Officer and Director
|
Jonathan Clark
|
|
57
|
|
Interim President and Director
|
David Olert
|
|
63
|
|
Vice President, Finance and Chief Financial Officer
|
Marcus S. Matejka
|
|
52
|
|
Vice President, Operations
|
Stephen R. Brownsell
|
|
46
|
|
Executive Vice President
|
Robert B. Machinist
|
|
62
|
|
Director
|
Christopher M. Miner
|
|
63
|
|
Director
|
Steven Barre
|
|
57
|
|
Director
|
David H. Clarke — Chief Executive Officer
and Director
. Mr. Clarke has served as Chief Executive Officer and President since December 2015, has served
as a director since September 2015, served as our President from September 2015 through October 2016 and served as our Executive
Chairman of the Board from September 2015 through December 2015. Mr. Clarke is currently Chief Executive Officer of GSB Holdings,
Inc., a subsidiary of his family’s private business engaged in real estate development and investments. He also serves on
the board and Audit Committee of Fiduciary Trust Company International, a money manager, which is a subsidiary of Franklin Resources,
Inc. From June 2010 until October 2014, Mr. Clarke was chairman of Hong Kong-based United Pacific Industries, Limited, a conglomerate
listed on the Hong Kong Stock Exchange. He also served as a director of United Pacific Industries, Limited since 2004. Previously
he was Chairman and Chief Executive Officer of Jacuzzi Brands from June 1995 through October 2006.
Mr. Clarke spends a portions of his time managing the business and
affairs of GSB Holdings, Inc., a family-owned entity engaged only in investments and which is not involved in any industries in
which our company currently competes. He may face a conflict regarding the allocation of time between our business and the other
business interests of GSB Holdings, Inc. Mr. Clarke has agreed to devote as much time to the management of our business and affairs
as is necessary for the proper conduct of our business and affairs. We expect Mr. Clarke will devote at least 90% of his time to
our operations.
Jonathan Clark — Interim President and Director
. Mr.
Clark joined our board of directors in July 2016 and became our Interim President in October 2016. Since 2009, Mr. Clark has been
the Chief Executive Officer and President of Priority Posting and Publishing, Inc., a real estate services provider to trustees,
law firms and banking related organizations. From 1988 to 2009 he held a number of executive positions, including President and
Chief Executive Officer of Sundance Spas, Inc. Mr. Clark holds doctorate degrees in Psychology from the American Behavioral Studies
Institute and a Bachelor of Business Degree from California State University — Fullerton.
David Olert — Vice President, Finance
and Chief Financial Officer
. Mr. Olert has served as the Chief Financial Officer and Vice President,
Finance since September 2015. Prior to his appointment, he served as Chief Financial Officer for InterMetro Communications a
publicly traded long-distance provider, since July 2007. Mr. Olert is a certified public accountant and holds a Masters of
Business Administration from William Howard Taft University and a Bachelors in Computer Science Concentration from Barry
University.
Stephen
R. Brownsell — Executive Vice President
. Mr. Brownsell was recently promoted to
Executive Vice President and previously served as a Vice President since joining the Company in October 2016. Mr. Brownsell
is a management executive with over twenty years of international marketing experience. Previously, from August 2009, he was
Vice President, Marketing, Business Development and Business Strategy at Priority Posting and Publishing, Inc. Prior to that,
he held multiple marketing executive positions that included a position as a marketing executive at Hilton International
Hotels. Mr. Brownsell is a graduate of Oxford University in the UK and has a Master’s Degree from Wake Forest
University.
Marc S. Matejka — Vice President, Operations
. Mr.
Matejka has served as Vice President, Operations since July 2015. Mr. Matejka is an electrical engineer with over 25 years experience
in engineering, operations and quality. From June 2011 to March 2015 he was the Director of Operations at US Seismic Systems, Inc.
(USSI). USSI provided fiber optic solutions to energy markets in the oil and gas sector. USSI was a subsidiary of Arcorn Energy,
an energy technology holding company. At USSI he was responsible for procurement, production, logistics and quality assurance.
From April 2015 through June 2015 he was unemployed. From June 2006 to June 2011 Mr. Matejka was Sr. Manager of Global Engineering
Services at Belkin International, Inc., a worldwide supplier of consumer electornic products. Mr. Matejka received his Master’s
degree in Electrical Engineering from Swiss Federal Institute of Technology (ETH) in Zurich, Switzerland.
Robert B. Machinist — Director
. Mr.
Machinist joined our board of directors in July 2016. Mr. Machinist is the Chairman of CIFC Corp. and has been a member of that
board since December 2004. He is currently Chairman of the Board of Advisors of MESA, a merchant bank specializing in media and
entertainment industry transactions. Mr. Machinist also runs a private family investment company. In addition, he is a member of
the boards of directors of United Pacific Industries, a publicly listed Hong Kong company, and Maimonides Medical Center. He was
the Chairman of Atrinsic, a publicly-listed interactive media company, through 2008. From 1998 to December 2001, Mr. Machinist
was managing director and head of investment banking for the Bank of New York and its Capital Markets division. From January 1986
to November 1998, he was president and one of the principal founders of Patricof & Co. Capital Corp. (and its successor companies),
a multinational investment banking business, until its acquisition by the Bank of New York. Mr. Machinist received a B.A. from
Vassar College.
Christopher M. Miner — Director
Mr.
Miner joined our board of directors in July 2016. Since January 2014, Mr. Miner has been a member of the board of director of Interush
Holdings, Inc., a multi-level marketer, acting as its President since October 2015. Mr. Miner most recently served as a director
to Craig Wireless, Ltd. a publically traded telecommunications company. He joined Craig Wireless as a consultant in 2010, was elected
to the board in 2011 and served through February 2012, continuing as consultant until end of 2012. Mr. Miner was previously director
of Cali-West, a manufacturing, construction and service company in the car care industry until 2010 when he sold the business.
For nearly eight years Mr. Miner was active on the board of Herbalife International, a public reporting Health and Wellness Company.
Mr. Miner was part of the special committee that managed the sale of Herbalife in 2002 and also chaired or participated in audit,
compensation, and finance committees. Early technology engagements included serving as CFO of a NASDAQ reporting company, Technology
Marketing Inc., and integration of several acquisitions substantially increasing company performance and valuation. In 1989 he
founded Workstation Technologies, an international development company and marketer of compression and videoconferencing products
to major telecommunication and computer manufacturers. Mr. Miner earned a Masters in Business Administration from the California
State University in 1976 and Bachelors from the University of New York in 1973.
Steven
Barre — Director.
Mr. Barre joined our board of directors in December 2016. Mr. Barre is
currently the Founder and President of Verona Group Inc., a real estate investment company. From 2008 to 2012, he was a
member of the Board of Directors at Tigrent Inc., an educational program provider, and he served as its Chief Executive
Officer from 2010 to 2012. Prior to this, Mr. Barre was Senior Vice President, General Counsel and Secretary of Jacuzzi
Brands, Inc. Mr. Barre earned a B.S. from Cornell University and a JD from Columbia Law School.
Each of our officers serves at the discretion of our board of directors.
Each of our directors holds office until his or her successor is duly elected and qualified or until his or her earlier resignation
or removal.
Director Independence
The shares our common stock and warrants are listed on the Nasdaq
Capital Market. Generally, under the listing requirements and rules of Nasdaq, independent directors must comprise a majority of
a listed company’s board of directors. A majority of our directors are independent, as required under applicable Nasdaq rules.
In making this determination, our board of directors considered the current and prior relationships that each non-employee director
has with our company, if any, and all other facts and circumstances our board of directors deemed relevant in determining their
independence, including the beneficial ownership of our capital stock, if any, by each non-employee director.
Board Committees
Our board of directors has established an audit committee, compensation
committee and nominating and corporate governance committee. Our board of directors may establish other committees to facilitate
the management of our business. The composition and functions of each committee are described below. Members serve on these committees
until their resignation or until otherwise determined by our board of directors.
Audit Committee
Our audit committee consists of Steven Barre, Robert Machinist and
Christopher Miner, with Mr. Machinist acting as the chair. The audit committee consists solely of directors which satisfy the independence
requirements under Nasdaq listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chair of our audit committee is a person
who our board of directors has determined is an “audit committee financial expert” within the meaning of SEC regulations.
Each member of our audit committee is a person who our board of directors has determined has the requisite financial expertise
required under the applicable requirements of Nasdaq. In arriving at this determination, the board examines each audit committee
member’s scope of experience and the nature of their employment in the corporate finance sector. The primary functions of
this committee includes:
|
•
|
reviewing and approving
the engagement of our independent registered public accounting firm to perform audit services and any permissible non-audit services;
|
|
•
|
evaluating the performance
of our independent registered public accounting firm and deciding whether to retain their services;
|
|
•
|
monitoring the rotation
of partners on the engagement team of our independent registered public accounting firm;
|
|
•
|
reviewing our annual
and quarterly financial statements and reports and discussing the statements and reports with our independent registered public
accounting firm and management, including a review of disclosures under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations;”
|
|
•
|
considering and approving
or disapproving all related party transactions;
|
|
•
|
reviewing, with our
independent registered public accounting firm and management, significant issues that may arise regarding accounting principles
and financial statement presentation, as well as matters concerning the scope, adequacy and effectiveness of our financial controls;
|
|
•
|
conducting an annual
assessment of the performance of the audit committee and its members, and the adequacy of its charter; and
|
|
•
|
establishing procedures
for the receipt, retention and treatment of complaints received by us regarding financial controls, accounting or auditing matters.
|
Compensation Committee
Our compensation committee consists of Robert Machinist, Steven
Barre and Christopher Miner, with Mr. Miner acting as the chair. The compensation committee consists solely of directors whom our
board of directors has determined to be independent under Nasdaq listing standards, a “non-employee director” as defined
in Rule 16b-3 promulgated under the Exchange Act and an “outside director” as that term is defined in Section 162(m)
of the Internal Revenue Code of 1986, as amended, or the Code. The functions of this committee includes:
|
•
|
determining the compensation
and other terms of employment of our chief executive officer and our other executive officers and reviewing and approving corporate
performance goals and objectives relevant to such compensation;
|
|
•
|
reviewing and recommending
to the full board of directors the compensation of our directors;
|
|
•
|
evaluating and administering
the equity incentive plans, compensation plans and similar programs advisable for us, as well as reviewing and recommending to
our board of directors the adoption, modification or termination of our plans and programs;
|
|
•
|
establishing policies
with respect to equity compensation arrangements;
|
|
•
|
reviewing with management
our disclosures under the caption “Compensation Discussion and Analysis” and recommending to the full board its inclusion
in our periodic reports to be filed with the SEC; and
|
|
•
|
reviewing and evaluating, at least annually, the performance
of the compensation committee and the adequacy of its charter.
|
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Steven
Barre, Robert Machinist and Christopher Miner, with Mr. Barre acting as the chair. Our nominating and corporate governance committee
consists solely of directors whom our board of directors has determined to be independent under Nasdaq listing standards. The functions
of this committee includes:
|
•
|
reviewing periodically
and evaluating director performance on our board of directors and its applicable committees, and recommending to our board of
directors and management areas for improvement;
|
|
•
|
interviewing, evaluating,
nominating and recommending individuals for membership on our board of directors;
|
|
•
|
reviewing and recommending
to our board of directors any amendments to our corporate governance policies; and
|
|
•
|
reviewing and assessing,
at least annually, the performance of the nominating and corporate governance committee and the adequacy of its charter.
|
Code of Business Conduct and Ethics
Our board of directors has adopted a code of business conduct and
ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting.
Our code of business conduct and ethics will be available on our website at
www.monsterdigital.com
. We intend to disclose
any amendments to the code, or any waivers of its requirements, on our website to the extent required by the applicable rules and
exchange requirements. The inclusion of our website address in this prospectus does not include or incorporate by reference into
this prospectus the information on or accessible through our website.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves, or served during our fiscal
year ended December 31, 2016, as a member of the board of directors or compensation committee of any other entity that has or has
had one or more executive officers serving as a member of our board of directors.
Non-Employee Director Compensation
We issued David Clarke 84,170 shares of
our common stock in May 2015 further to a consulting contract. Further to David Clarke’s agreement to become Executive
Chairman of the Board, in October 2015 we issued Mr. Clarke an additional 67,337 shares of our common stock. In December 2015
Mr. Clarke became our Chief Executive Officer and President and we issued him an additional 13,467 shares of our common
stock. Finally, in January 2017, we
issued him an additional 175,000 shares of our common stock.
In May 2016, we entered into a ten week consulting agreement with
Jonathan Orban, a former director. Further to the agreement, we agreed to pay Mr. Orban $250 per hour but no more than $10,000
per week. We also agreed to pay all of Mr. Orban’s expenses incurred in connection with the performance of his consulting
duties in an amount not to exceed $20,000. The Agreement was mutually terminated in October 2016 and we paid Mr. Orban an aggregate
of $80,000 in connection therewith.
In June 2016, we entered into a one year consulting agreement with
Jawahar Tandon, our former Chief Executive Officer and a former director. Further to the agreement, issued Mr. Tandon 125,000 restricted
shares of our common stock. Mr. Tandon agreed with the underwriters pf our initial public offering not to directly or indirectly
sell, offer, contract or grant any option to sell, pledge, transfer (excluding intra-family transfers, transfers to a trust for
estate planning purposes or to his beneficiaries upon his death), or otherwise dispose of or enter into any transaction which may
result in the disposition of any such shares without the prior written consent of Axiom Capital Management, Inc., as representative
of the underwriters, for a period of twelve months after the date of this prospectus. We also agreed to pay all of Mr. Tandon’s
pre-approved reasonable expenses incurred in connection with the performance of his consulting duties.
Our board of directors has established a
compensation program for our non-employee, independent directors. Each such director receives an initial share or
stock options grant of up to 15,000 shares; subsequent equity grants will be subject to the review and approval of the full
board of directors. It is currently intended that cash fees may also be paid to our non-employee, independent directors at
such time as our financial status improves in such amounts as will be determined by those disinterested board members.
Advisory Board
We have created an advisory board to provide us with advice and
assistance on various matters regarding unmet industry needs and opportunities, customer feedback on existing products, proposed
product offerings and assessment of other strategic corporate matters. None of the members of all advisory board can be an officer
or employee of our company and we seek to have members which are opinion leaders in their respective fields.
Our sole current advisory board member is Noel Lee, the owner and
Chief Executive Officer of Monster, Inc. We have entered into an advisory board agreement with Mr. Lee whereby we are reimbursed
for certain of his out-of-pocket expenses incurred in connection with company-related business. The agreement contemplates a perpetual
term commencing August 2015 to continue until (i) either party elects to terminate the agreement at any time after August 2017
or (ii) we elect to terminate the agreement immediately upon Mr. Lee’s breach or suspected breach of certain of the confidentiality
provisions of the agreement. In addition, Mr. Lee was issued a warrant to purchase up to 191,289 shares of our common stock at
a per share exercise price of $14.85. We will seek to add other industry leaders to our advisory board in the future as opportunities
present themselves.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding the compensation
awarded to or earned by the executive officers listed below during the years ended December 31, 2015 and 2016. Throughout this
prospectus, these officers are referred to as our named executive officers.
Name and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
All Other Compensation
($)
|
|
|
Total
($)
|
|
Jawahar Tandon
|
|
|
2015
|
|
|
|
250,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,112
|
(2)
|
|
|
310,112
|
|
Chief Executive Officer
(1)
|
|
|
2016
|
|
|
|
9,615
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,021
|
(2)
|
|
|
25,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas Dulek
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
99,999
|
(4)
|
|
|
99,999
|
|
Chief Financial Officer
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vivek Tandon
|
|
|
2015
|
|
|
|
225,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,277
|
(6)
|
|
|
244,277
|
|
President and Chief Operating Officer
(5)
|
|
|
2016
|
|
|
|
190,844
|
|
|
|
|
|
|
|
|
|
|
|
14,495
|
(6)
|
|
|
205,339
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David H. Clarke
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
905,707
|
(8)
|
|
|
50,000
|
(9)
|
|
|
955,707
|
|
Chief Executive Officer and Chairman of the Board
(7)
|
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David Olert
|
|
|
2015
|
|
|
|
44,115
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,347
|
(10)
|
|
|
46,462
|
|
Chief Financial Officer
|
|
|
2016
|
|
|
|
198,596
|
|
|
|
46,250
|
|
|
|
—
|
|
|
|
13,574
|
(10)
|
|
|
258,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marc Matejka
|
|
|
2015
|
|
|
|
69,231
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,316
|
(10)
|
|
|
73,547
|
|
Vice President — Operations
|
|
|
2016
|
|
|
|
170,211
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,529
|
(10)
|
|
|
179,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen R. Brownsell (11)
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Executive Vice President
|
|
|
2016
|
|
|
|
40,808
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,400
|
(12)
|
|
|
43,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jonathan Clark (13)
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Interim President and Director
|
|
|
2016
|
|
|
|
55,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
(12)
|
|
|
58,000
|
|
|
(1)
|
Mr. Tandon resigned as Chief
Executive Officer in December 2015 and became our Chairman of the Board. Mr. Tandon’s employment agreement with our company
was terminated effective with his resignation as Chief Executive Officer. Mr. Tandon resigned as Executive Chairman of the Board
in June 2016. He is currently a consultant.
|
|
(2)
|
Consists of payments by us
for medical and dental premiums of $27,748, automobile expenses of $17,764 and country club membership of $14,600 in 2015 and
medical and dental insurance premiums of $16,021 in 2016. Mr. Tandon’s automobile expense and country club reimbursement
was discontinued for 2016.
|
|
(3)
|
Mr. Dulek’s status
as Chief Financial Officer was terminated in June 2015.
|
|
(4)
|
Although named Chief Financial
Officer of our company, Mr. Dulek rendered services as a consultant; all amounts are classified as consulting payments.
|
|
(5)
|
Vivek Tandon served as President
and Chief Operating Officer from October 2014 through December 2015 when he resigned from such positions and became our Executive
Vice President — Operations. His current annual salary is $180,000.
|
|
(6)
|
Includes automobile expenses
of $19,277 in 2015 and medical and dental insurance premiums of $14,49 in 2016. Mr. Tandon’s automobile expense reimbursement
was discontinued for calendar 2016.
|
|
(7)
|
Mr. Clarke resigned as our
Executive Chairman of the Board in December 2015 and currently serves as our Chief Executive Officer.
|
|
(8)
|
An aggregate of 164,974 shares
were issued to Mr. Clarke in 2015. As described further in “Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Critical Accounting Policies and Estimates — Fair Value Measurements”,
factors included in the valuation of common stock include the present value of future cash flows, capital structure, valuation
of comparable companies, exiting licensing agreements and the growth prospects for our product line. These factors were incorporated
into an income approach and a market approach in order to derive an overall valuation of our common stock of $5.49 with respect
to such issuances.
|
|
(9)
|
Represents unpaid expenses
incurred further to the consulting contract which were converted into shares of common stock and warrants further to the Conversion.
|
|
(10)
|
Represents medical premiums.
|
|
(11)
|
Mr. Brownsell joined the
Company in October, 2016
|
|
(12)
|
Represents automobile expense
allowance
|
|
(13)
|
Mr. Clark became the Interim President of the Company
in October, 2016
|
Outstanding Equity Awards at Fiscal Year-End
The table below summarizes the aggregate stock and option awards
held by our named executive officers as of December 31, 2016.
Name
|
|
Number of
securities
underlying
unexercised
options
exercisable
|
|
|
Number of
securities
underlying
unexercised
options
unexercisable
|
|
|
Option
exercise
price
|
|
|
Option
expiration
date
|
|
|
Number
of shares
of stock that
have
not
vested
|
|
|
Market
value of
shares of
stock that
have not
vested
|
|
David Olert
|
|
|
|
|
|
|
16,834
|
|
|
$
|
4.50
|
|
|
|
7/7/2026
|
|
|
|
16,834
|
|
|
|
—
|
|
Marc Matejka
|
|
|
|
|
|
|
18,000
|
|
|
$
|
4.50
|
|
|
|
7/7/2026
|
|
|
|
18,000
|
|
|
|
—
|
|
Employment Agreements
We have Executive Employment Agreements with
each of David Olert, our Chief Financial Officer and Marc Matejka, our Vice President – Operations. Further to these Agreements,
Mssrs. Olert, and Matejka are paid a base salary of $195,000 and $180,000, respectively. On July 2016, each of these Executives
were granted shares of restricted stock under our Plan as well as stock options under the Plan at a per share price of $4.50 in
the following amounts: Olert – 25,000 shares and 16,834 options; Matejka – 25,000 shares and 18,000 options; each
reserved an additional 15,000 shares in January 2017.
In addition, each of the Executive Employment Agreements contain
the following provisions.
* The agreements are for a one year term but renew automatically
on the anniversary date of each year unless terminated by either party with 30 days’ notice.
*The Agreements provide that the executive shall be eligible to
earn a bonus. It is currently anticipated that the Compensation Committee will set the bonus plan within 60 days of the beginning
of each fiscal year. Within 45 days following the end of the calendar year, the Board shall determine whether and in what amount
the executive has earned bonus for the prior calendar year. Notwithstanding the foregoing, determination of Executive’s entitlement
to Bonus and amounts shall be determined exclusively by the Board in its sole discretion. General factors the board may consider
in his bonus determination include our company’s financial performance, the level of responsibility, and contribution and
performance of the Executive. Evaluation of these and other factors is subjective and no fixed, relative weights are assigned to
the factors given.
*The Agreements provide that one-third (1/3) of the restricted stock
and stock options granted thereunder shall vest on each anniversary of the date thereof. Any unvested shares of restricted stock
and stock options in an amount proportional to the time held will vest upon any termination of the executive’s employment
other than termination of the Agreement by our company for “cause” or due to the voluntary resignation by the executive
in the absence of “good reason”. Executive may be able to receive additional stock options and/or restricted stock
from time to time at the sole discretion of the Compensation Committee and the Board.
* As long as executive remains a full-time employee of our company,
executive shall be entitled to apply to participate in such executive benefit plans and programs as we may from time to time offer
or provide to executives of our company at similar levels, including, but not limited to, any life insurance, health and accident,
medical and dental, disability and retirement plans and programs.
* In the event of the termination of the Agreements by us without
“cause” or due to the voluntary resignation by the executive for “good reason”, executive shall be entitled
to a severance payment equal to 1/3 of executive’s then Base Salary, payable in accordance with our customary payroll practices.
2012 Omnibus Incentive Plan
We have adopted a 2012 Omnibus Incentive Plan (the “Plan”).
An aggregate of 970,350 shares of our common stock is reserved for issuance and available for awards under the Plan, including
incentive stock options granted under the Plan. The Plan administrator may grant awards to any employee, director, consultant or
other person providing services to us or our affiliates. As of February 7, 2017 , options and restricted stock grants representing
810,901 shares have been made under the Plan.
The Plan shall be initially administered by the Board. The Plan
administrator has the authority to determine, within the limits of the express provisions of the Plan, the individuals to whom
awards will be granted, the nature, amount and terms of such awards and the objectives and conditions for earning such awards.
The Board may at any time amend or terminate the Plan, provided that no such action may be taken that adversely affects any rights
or obligations with respect to any awards previously made under the Plan without the consent of the recipient. No awards may be
made under the Plan after the tenth anniversary of its effective date.
Awards under the Plan may include incentive stock options, nonqualified
stock options, stock appreciation rights (“SARs”), restricted shares of common stock, restricted stock Units, performance
share or Unit awards, other stock-based awards and cash-based incentive awards.
Stock Options
. The Plan administrator may
grant to a participant options to purchase our common stock that qualify as incentive stock options for purposes of Section 422
of the Internal Revenue Code (“incentive stock options”), options that do not qualify as incentive stock options (“non-qualified
stock options”) or a combination thereof. The terms and conditions of stock option grants, including the quantity, price,
vesting periods, and other conditions on exercise will be determined by the Plan administrator. The exercise price for stock options
will be determined by the Plan administrator in its discretion, but non-qualified stock options and incentive stock options may
not be less than 100% of the fair market value of one share of our company’s common stock on the date when the stock option
is granted. Additionally, in the case of incentive stock options granted to a holder of more than 10% of the total combined voting
power of all classes of our stock on the date of grant, the exercise price may not be less than 110% of the fair market value of
one share of common stock on the date the stock option is granted. Stock options must be exercised within a period fixed by the
Plan administrator that may not exceed ten years from the date of grant, except that in the case of incentive stock options granted
to a holder of more than 10% of the total combined voting power of all classes of our stock on the date of grant, the exercise
period may not exceed five years. At the Plan administrator’s discretion, payment for shares of common stock on the exercise
of stock options may be made in cash, shares of our common stock held by the participant or in any other form of consideration
acceptable to the Plan administrator (including one or more forms of “cashless” or “net” exercise).
Stock Appreciation Rights
. The Plan administrator
may grant to a participant an award of SARs, which entitles the participant to receive, upon its exercise, a payment equal to (i)
the excess of the fair market value of a share of common stock on the exercise date over the SAR exercise price, times (ii) the
number of shares of common stock with respect to which the SAR is exercised. The exercise price for a SAR will be determined by
the Plan administrator in its discretion; provided, however, that in no event shall the exercise price be less than the fair market
value of our common stock on the date of grant.
Restricted Shares and Restricted Units
. The
Plan administrator may award to a participant shares of common stock subject to specified restrictions (“restricted shares”).
Restricted shares are subject to forfeiture if the participant does not meet certain conditions such as continued employment over
a specified forfeiture period and/or the attainment of specified performance targets over the forfeiture period. The Plan administrator
also may award to a participant Units representing the right to receive shares of common stock in the future subject to the achievement
of one or more goals relating to the completion of service by the participant and/or the achievement of performance or other objectives
(“restricted Units”). The terms and conditions of restricted share and restricted Unit awards are determined by the
Plan administrator.
Performance Awards
. The Plan administrator
may grant performance awards to participants under such terms and conditions as the Plan administrator deems appropriate. A performance
award entitles a participant to receive a payment from us, the amount of which is based upon the attainment of predetermined performance
targets over a specified award period. Performance awards may be paid in cash, shares of common stock or a combination thereof,
as determined by the Plan administrator.
Other Stock-Based Awards
. The Plan administrator
may grant equity-based or equity-related awards, referred to as “other stock-based awards,” other than options, SARs,
restricted shares, restricted Units, or performance awards. The terms and conditions of each other stock-based award will be determined
by the Plan administrator. Payment under any other stock-based awards will be made in common stock or cash, as determined by the
Plan administrator.
Cash-Based Awards
. The Plan administrator
may grant cash-based incentive compensation awards, which would include performance-based annual cash incentive compensation to
be paid to covered employees subject to Section 162(m) of the Code. The terms and conditions of each cash-based award will be determined
by the Plan administrator.
Dividend Equivalents
. The Plan administrator
may provide for the payment of dividends or dividend equivalents with respect to any shares of common stock subject to an award
under the Plan.
Limitation on Liability and Indemnification Matters
Our Certificate of Incorporation and Bylaws provide that we will
indemnify our directors and officers, and may indemnify our employees and other agents, to the fullest extent permitted by the
Delaware General Corporation Law. However, Delaware law prohibits our amended and restated certificate of incorporation from limiting
the liability of our directors for the following:
|
•
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any breach of a director’s
duty of loyalty to us or to our stockholders;
|
|
•
|
acts or omissions not
in good faith or that involve intentional misconduct or a knowing violation of law;
|
|
•
|
unlawful payment of
dividends or unlawful stock repurchases or redemptions; and
|
|
•
|
any transaction from
which a director derived an improper personal benefit.
|
If Delaware law is amended to authorize corporate action further
eliminating or limiting the personal liability of a director, then the liability of our directors will be eliminated or limited
to the fullest extent permitted by Delaware law, as so amended. Our Certificate of Incorporation does not eliminate a director’s
duty of care and, in appropriate circumstances, equitable remedies, such as injunctive or other forms of non-monetary relief, remain
available under Delaware law. It also does not affect a director’s responsibilities under any other laws, such as the federal
securities laws or other state or federal laws. Under our Bylaws, we are also empowered to enter into indemnification agreements
with our directors, officers, employees and other agents and to purchase insurance on behalf of any person whom we are required
or permitted to indemnify.
In addition to the indemnification required in our Certificate of
Incorporation and Bylaws, we have entered into indemnification agreements with each of our current directors and executive officers.
These agreements provide for the indemnification of such persons for all reasonable expenses and liabilities incurred in connection
with any action or proceeding brought against them by reason of the fact that they are or were serving in such capacity. We believe
that these Certificate of Incorporation and Bylaws provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors, officers and employees. Furthermore, we have obtained director and officer liability insurance
to cover liabilities our directors and officers may incur in connection with their services to us.
The limitation of liability and indemnification provisions in our
Certificate of Incorporation and Bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their
fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action,
if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs
of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable.
There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought,
nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
The following is a description of transactions since May 2012, to
which we have been a party, in which the amount involved exceeded or will exceed $120,000, and in which any of our executive officers,
directors, promoters or holders of more than 5% of any class of our voting securities, or an affiliate or immediate family member
thereof, had or will have a direct or indirect material interest, other than compensation, termination and change in control arrangements,
which are described under “Executive Compensation”. Jawahar Tandon, our founder, former Executive Chairman of the Board
and former Chief Executive Officer, may be deemed to be a promoter within the meaning of SEC rules under the Securities Act. We
believe the terms obtained or consideration that we paid or received, as applicable, in connection with the transactions described
below were comparable to terms available or the amounts that would be paid or received, as applicable, in arm’s-length transactions
with unrelated third parties.
Related Party Loans
From time to time since inception, we have obtained certain related
party loans from and advances Tandon Enterprises, Inc. a company controlled and owned by Jawahar Tandon, a director and our former
Executive Chairman of the Board and Chief Executive Officer, and Devinder Tandon, a former director. The proceeds of the loans
provided us with working capital. For the years ended December 31, 2015 and 2014, the net amount borrowed was $(151,000) and $460,000,
respectively. However, as of June 22, 2016, we were indebted to Tandon Enterprises, Inc. in the amount of $346,100. The loans and
advances were non-interest bearing and had no maturity date. Tandon Enterprises, Inc. converted all outstanding net amounts lent
and advanced to our company into shares of common stock and warrants immediately prior to consummation of our initial public offering
at the initial public offering price of the shares of common stock so offered.
David H. Clarke, our Chief Executive Officer and one of our principal
stockholders, agreed that a $100,000 promissory note owed to him by our company made in September 2015, which note bears interest
at 5% per annum, plus any interest accrued but unpaid thereon, as well as an aggregate of approximately $50,000 owed to Mr. Clarke
under his prior consulting arrangement with our company, the total amounts owing to Clarke known as the Clarke Obligation, automatically
converted immediately prior to the consummation of our initial public offering into a number of shares of common stock and warrants
equal to the principal amount of the Clarke Obligation divided by the initial public offering price of the shares so offered (33,333
shares of common stock and 33,333 warrants).
Arrangements with Tandon Enterprises, Inc.
Services Arrangement
From inception through the date of this prospectus, Tandon Enterprises,
Inc. has provided administrative, accounting, and operational support to our company. Such support includes providing warehouse
space as required. We reimburse Tandon Enterprises, Inc. for its actual costs of rendering the services. The fee was $0 and $172,000
for the years ended December 31, 2015 and 2014, respectively. Devinder Tandon and Jawahar Tandon are founders, directors, and officers
of Tandon Enterprises, Inc. and serve as its Chief Executive Officer and President, respectively.
License and Sublicense Agreement
Further to a License and Sublicense Agreement entered into in May
2012, Tandon Enterprises, Inc. agreed to grant us (i) a non-exclusive sublicense to the subject matter of certain patents and (ii)
a non-exclusive license or sublicense, as the case may be, to certain know-how, trade secrets, inventions, data, technology, and
other information now owned or licensed by Tandon Enterprises, Inc., or which Tandon Enterprises, Inc. has the right to use or
exploit relating to such patents, each to be used by us in connection with the development, manufacture, sale and distribution
of assembled memory modules and memory data storage products. In consideration of the rights granted to us under this Agreement,
we issued Tandon Enterprises, Inc. 67,337 shares of our common stock.
Non-Competition and Non-Solicitation Agreement
Further to a Non-Competition and Non-Solicitation Agreement entered
into in May 2012, Tandon Enterprises, Inc. agreed not to engage in (i) the development, manufacture, sale and distribution of assembled
memory modules and memory data storage products or (ii) the marketing, packaging, advertising and promotion of any of such products
and services (the “Restricted Activities”). Tandon Enterprises, Inc. agreed not to enter into any agreement to license
or otherwise exploit any mark using the word “Monster” or any derivation thereof for use in any of the Restricted Activities.
In addition, Tandon Enterprises, Inc., agreed that it would not (i) solicit, recruit or hire any employee of our company or (ii)
solicit or encourage any employee of our company to leave our employment.
Other arrangements
As of December 31, 2011, we entered an agreement whereby obligations
of our company to related parties were assumed by Tandon Enterprises, Inc.. Tandon Enterprises, Inc. then forgave the assumed debt
in totality. We recorded the debt forgiveness of $152,036 as a contribution to capital.
Until December 31, 2014, we sub-leased approximately 2,500 square
feet from Tandon Enterprises, Inc. for our executive offices and headquarters in Simi Valley, California at a monthly rate of $2,143,
which we believed was a fair rental rate for such a sub-lease.
For the year ended December 31, 2013, we purchased $110,301 of products
from SMLINQ, LLC, an entity controlled by Vivek Tandon, our Executive Vice President, Operations and our former Chief Operating
Officer and President.
As of August 7, 2015, Jawahar Tandon and Vivek Tandon were each
indebted to our company in the amount of approximately $184,000 and $115,000, respectively. In August 2015, pursuant to an arrangement
with Tandon Enterprises, Inc. we transferred these receivables to Tandon Enterprises, Inc. in consideration for an identical reduction
in amounts owed by our company to Tandon Enterprises, Inc.. This terminated these loan arrangements between our company and Jawahar
and Vivek Tandon. As a result, neither Jawahar nor Vivek Tandon has any outstanding amounts due to our company.
Pursuant to an arrangement with our company, 4PAC, LLC, an entity
owned by Tayel Tandon, the wife of Vivek Tandon, has provided marketing services to our company commencing February 2015 at the
rate of $5,000 per month, plus expenses. Further to this arrangement, we paid 4PAC, LLC an aggregate of $57,790 for the nine months
ended September 30, 2015.
Tandon Enterprises, Inc. agreed that $346,100 owed to it by our
company automatically converted immediately prior to the consummation of our initial public offering into a number of shares of
common stock and warrants equal to the principal amount of the obligation divided by the initial public offering price of the shares
so offered (76,911 shares of common stock and 76,911 warrants).
Assignment and Assumption Agreement
As referenced herein, prior to our reorganization described below
under the heading “Arrangements with WestPark Capital”, SDJ was owned solely by Devinder Tandon and Jawahar Tandon,
who also substantially own Tandon Enterprises, Inc. Syrma Technologies Private Ltd. (“Syrma”) is owned by Manohar Tandon,
the brother of Jawahar and Devinder Tandon. Prior to the execution of the Monster License Agreement, SDJ had primarily acted as
a pass-through entity for transactions between Tandon Enterprises, Inc. and Syrma. Tandon Enterprises, Inc. and Syrma sold to each
other memory chips and performed value-added services related to such chips, as well as transferring and selling equipment to manufacture
and test memory chips to each other using SDJ as a conduit; the primary purpose for using the conduit was to allow Syrma to comply
with applicable restrictions under its bank agreements. SDJ recorded substantial accounts payable to and accounts receivable from
each of Syrma and Tandon Enterprises, Inc. relating to such sales and services, as well as advances and loans between Syrma and
Tandon Enterprises, Inc. using SDJ as a conduit on an as-needed basis. In addition, each of Devinder Tandon and Jawahar Tandon
personally made advances and loans to SDJ on an as-needed basis for working capital purposes. Also, Tandon Enterprises, Inc. assumed
certain of the liabilities of a company owned by Vivek Tandon but recorded on SDJ’s books. No representation can be made
that any of such transactions by and among SDJ, Tandon Enterprises and Syrma were conducted as an “arms-length transaction.”
In May 2012, each of SDJ, Tandon Enterprises, Inc. and Syrma entered
into an Assumption of Liabilities and Assignment of Receivables Agreement (the “Assignment and Assumption Agreement”),
effective December 31, 2011. The primary purpose of the transaction was for Syrma and Tandon Enterprises, Inc. to take onto their
books those liabilities and receivables that primarily related to the transactions referenced above and have them substantially
removed from the books of SDJ. This would reflect the true nature of the transactions as opposed to having the transactions reflected
on the books of SDJ when it merely acted as a conduit for the referenced sales, services and advances referenced above. Accordingly,
these amounts are not reflected in our audited financial statements included in this prospectus.
As a result of the Assignment and Assumption Agreement, the net
effect was that the net amount of obligations and receivables by and among these related parties were assumed by Tandon Enterprises,
Inc. Upon the execution of such agreement, we had a net liability to Tandon Enterprises, Inc. in the amount of $153,798. Tandon
Enterprises, Inc. then forgave the debt and we recorded the debt forgiveness as a contribution to capital.
Consulting Agreements
In May 2015, we entered into a one-year consulting
agreement with David Clarke, our current Chief Executive Officer. Further to the agreement, we issued Mr. Clarke 84,170 shares
of our common stock. In September 2015, Mr. Clarke became our Executive Chairman of the Board. In connection with his appointment,
in October 2015 we issued him an additional 67,337 shares of our common stock. In December 2015, Mr. Clarke became our President
and Chief Executive Officer and we issued him an additional 13,467 shares of our common stock in connection with his appointment.
Mr. Clarke has agreed not to transfer or sell any of these shares until January 10, 2017. We also agreed to pay all of Mr. Clarke’s
expenses incurred in connection with the performance of his consulting duties. Mr. Clarke agreed to convert all unreimbursed expenses
owed into shares of common stock and warrants immediately prior to the consummation of our initial public offering at the initial
public offering price of the shares so offered.
During the years ended December 31, 2013 and 2014, we paid $10,000
a month to Vivek Tandon as consulting fees. An aggregate of $120,000 and $60,000 was paid to Mr. Tandon as a consultant for the
years ended December 31, 2013 and 2014.
In May 2016, we entered into a 10 week consulting agreement with
Jonathan Orban, a director, which becomes effective on the effective date of our initial public offering. The Agreement may be
extended . Further to the agreement, we agreed to pay Mr. Orban $250 per hour but no more than $10,000 per week. We also agreed
to pay all of Mr. Orban’s expenses incurred in connection with the performance of his consulting duties in an amount not
to exceed $20,000. This Agreement was terminated in October 2016 and in connection therewith we paid Mr. Orban the aggregate sum
of $80,000.
In June 2016, we entered into a one year consulting agreement with
Jawahar Tandon, our former Chief Executive Officer. Further to the agreement, we issued Mr. Tandon 125,000 restricted shares of
our common stock. We also agreed to pay all of Mr. Tandon’s pre-approved reasonable expenses incurred in connection with
the performance of his consulting duties.
Cancellation of Shares
May 2012 – June 2013
Further to a private placement of common stock effected by us between
May 2012 and June 2013, the J Tandon Irrevocable Family Trust agreed to transfer .07 shares beneficially held by it for each .37
shares purchased by investors further to the private placement if the data memory division of Tandon Enterprises, Inc. was not
transferred to us. Since said division was not transferred, the J Tandon Irrevocable Family Trust was obligated to transfer an
aggregate of 104,983 shares of common stock beneficially held by it to investors in the private placement. For the sake of expediency,
we agreed to issue all such shares to investors in the private placement and the J Tandon Irrevocable Family Trust cancelled an
identical number of shares, such shares issued in June 2015.
December 2014 – March 2015
Between December 2014 and March 2015, we effected an exchange offer
whereby all holders of convertible promissory note and warrants issued by us between April 2014 and March 2015 ($5.1 million principal
amount of 6% convertible promissory notes convertible at $22.28 and warrants to purchase up to an aggregate of 309,391 shares of
common stock at a per share exercise price of $22.28) were offered the ability to exchange such securities for shares of our common
stock as follows: (i) for the settlement of all outstanding balances (principal and accrued interest) under each note at the rate
of .07 shares of common stock of the registrant for each $14.85 in outstanding principal amount of the note and (ii) for the cancellation
of all warrants, .07 shares of common stock for each .13 shares of common stock issuable upon exercise of the warrants. Further
to the exchange offer, Jawahar Tandon agreed that for each .07 new share issued by us further to the exchange offer up to 336,682
shares, he would cancel .07 shares of our common stock beneficially held by him. An aggregate of 481,119 shares of common stock
were issued by us pursuant to the exchange offer and the J Tandon Partnership Trust cancelled 336,682 shares of our common stock.
April 2015 – August 2015
Between April and August 2015 we effected a rights offering to existing
shareholders and to new investors. Further to the rights offering, for every $44.55 invested, the investor would receive .20 newly
issued shares of our common stock and Jawahar Tandon would transfer .13 shares of common stock beneficially held by him to the
investor. For the sake of expediency, we agreed to issue all shares to investors in the rights offering and Mr. Tandon would cancel
those shares he would otherwise have had to transfer further to the rights offering. An aggregate of 394,008 shares of common stock
were issued by us, 157,603 shares of which represented shares which would have otherwise been transferred by Mr. Tandon and which
were simultaneously cancelled by the J Tandon Irrevocable Family Trust and J Tandon Irrevocable Partnership Trust.
September 2015
Pursuant to our decision to cancel our proposed acquisition of Syrma
Technologies Pvt. Ltd., in September 2015 Jawahar Tandon, our former Executive Chairman of the Board and former Chief Executive
Officer, and Devinder Tandon, one of our significant stockholders and a former director, offered in the aggregate to each stockholder
who purchased shares of our company for cash the opportunity to receive .07 additional shares from Mssrs. Tandon’s beneficial
holdings for each .41 shares purchased from our company by such stockholder (together the “Syrma Additional Shares”).
As a condition to such grant, the executing stockholders agreed to release our company and WestPark Capital from any claim or cause
of action that arise out of or are related in any way to the purchase or acquisition of our common stock (the “Release”).
Stockholders holding an aggregate of 1,279,054 shares agreed to receive Syrma Additional Shares; an aggregate of 216,971 Additional
Shares were afforded these stockholders; from each of Jawahar Tandon’s and Devinder Tandon’s beneficial holdings. Stockholders
holding an aggregate of 199,248 shares purchased for cash did not agree to receive such shares and did not execute the Release.
For the sake of expediency, we issued the Syrma Additional Shares directly to electing stockholders and Mssrs. Tandon cancelled
in the aggregate an equivalent number of shares beneficially held by them for each Syrma Additional Share referenced further to
the previous sentence.
Cancellation immediately prior to our initial public offering
Pursuant to the Conversion, Jawahar Tandon and Devinder Tandon offered
in the aggregate to each holder who agreed to convert Bridge Notes into shares of common stock and warrants or who purchased shares
of our Series A Preferred Stock, which automatically converts into shares of common stock and warrants, one share from Mssrs. Tandon’s
beneficial holdings for each share of common stock issued further to the aforementioned Conversion (but excluding shares issuable
upon exercise of the warrants issued further to the Conversion) (the “Conversion Additional Shares”). For the sake
of expediency, we will issue the Conversion Additional Shares directly to such holders and Mssrs. Tandon (and Tandon Enterprises,
Inc. as described below) will cancel in the aggregate an equivalent number of shares beneficially held by them for each Conversion
Additional Share referenced further to the previous sentence. The D Tandon Irrevocable Family Trust beneficially owned 479,065
shares of common stock prior to the Conversion; as a result of the Conversion, all shares held by the D Tandon Irrevocable Family
Trust were cancelled. Further to a Share Cancellation Agreement dated June 1, 2016 by and among our company, the D Tandon Irrevocable
Family Trust, the J Tandon Irrevocable Family Trust and Tandon Enterprises, Inc. (the “Share Cancellation Agreement”),
Tandon Enterprises, Inc. and the J Tandon Irrevocable Family Trust agreed to cancel any shortfall in the number of shares that
the D Tandon Irrevocable Family Trust would have been required to cancel further to the Conversion. As a result of the aforementioned
shortfall, Tandon Enterprises Inc. canceled all 67,337 shares held by it prior to the Conversion and all 72,863 shares to be issued
to it as described above further to the Conversion. Further to the Share Cancellation Agreement, the J Tandon Irrevocable Family
Trust agreed to cancel any shortfall in the number of shares that Tandon Enterprises agreed to cancel to cover any referenced shortfall
by the D Tandon Irrevocable Family Trust. The J Tandon Irrevocable Family Trust owned 647,651 shares of common stock prior to the
Conversion; as a result of the Conversion, all shares held by the J Tandon Irrevocable Family Trust were cancelled. Further to
the Share Cancellation Agreement, we agreed to issue any additional shares that the D Tandon Irrevocable Family Trust, the J Tandon
Irrevocable Family Trust and Tandon Enterprises, Inc. could not cancel to cover shares that were required to be cancelled further
to the Conversion. As all shares held by the D Tandon Irrevocable Family Trust, the J Tandon Irrevocable Family Trust and Tandon
Enterprises, Inc. were cancelled further to the Conversion, and based upon the public offering price of $4.50 per share, we issued
134,043 shares of common stock to investors in the Conversion.
Indemnification Agreements
We have entered into indemnification agreements with each of our
directors and executive officers. For more information regarding these agreements, see “Executive Compensation — Limitation
on Liability and Indemnification Matters.”
Arrangements with Monster, Inc. and affiliates
Monster License Agreement
We entered into a trademark license agreement with Monster, Inc.
effective July 7, 2010. The agreement, as amended, gives us exclusive rights to utilize the tradenames “Monster Memory,”
“Monster Digital” and the M (stylized mark on (i) action sport cameras, (ii) cable memory, (iii) flash based cards,
(iv) flash based SSD drive products, (v) DRAM modules, (vi) USB flash drives and (vii) internal power supplies for personal computers.
The 25 year agreement provides for the payment of royalties to Monster, Inc. on all sales of the referenced products, excluding
sales to Monster, Inc., as follows:
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Years 1 (2012) and 2:
Royalties on all sales excluding sales to Monster, Inc. at a rate of four (4) percent, with no minimum;
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Years 3 through 6: Minimum
royalty payments of $50,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
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Years 7 through 10:
Minimum royalty payments of $125,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster,
Inc.
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•
|
Years 11 through 15:
Minimum royalty payments of $187,500 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster,
Inc.
|
|
•
|
Years 16 through 25:
Minimum royalty payments of $250,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster,
Inc.
|
Effective July 1, 2014, the royalty rate on certain products was
reduced to 2% for a 12 month period.
At any time during the term of the agreement, a permanent license
may be negotiated subject to the parties reaching a mutually acceptable agreement.
In August 2015, we executed a amendment the trademark license agreement
with Monster whereby Monster granted us the additional right further to the aforementioned license agreement to use the name “Monster
Digital, Inc.” as our corporate name. Further to the amendment, in addition to the royalties mentioned above, we issued Monster,
Inc. 405,530 shares of our common stock and will pay it a cash fee of $500,000.
We are required to remit royalty payments to Monster, Inc. on or
before the 30
th
day following the end of each calendar quarter. For the nine months ended September 30, 2016 and
the years ended December 31, 2015 and 2014, royalty expense amounted to $246,000, $262,00 and $572,000, respectively. We were not
in compliance with the royalty remittance policy for each of the aforementioned fiscal periods nor with the installment payment
terms of the aforementioned $500,000 payment. This license agreement contains various termination clauses that include (i) change
in control, (ii) breach of contract and (iii) insolvency, among others. Either party to the license agreement has the right to
terminate the agreement if the other is in material breach of any of the terms and conditions of the agreement and such party fails
to cure such breach within 30 days after the date of receipt of written notice from the other party.
Noel Lee Advisory Board Agreement
In addition, in August 2015, and in connection with the aforementioned
amendment to the trademark license agreement, we entered into an advisory board agreement with Noel Lee, the Chief Executive Officer
and sole shareholder of Monster, Inc. Further to the advisory board agreement, we issued Mr. Lee a warrant to purchase up to 191,289
shares of our common stock at a per share exercise price of $14.85.
Arrangements with WestPark Capital
Reorganization
In August 2012, SDJ, the predecessor of Monster Digital, became
a wholly-owned subsidiary of Monster Digital (formerly known as WRASP 35, Inc. which changed its name to AOTS 35, Inc., a company
wholly owned by WP Financial, an affiliate of WestPark Capital) further to a share exchange agreement. In connection with this
reorganization, 100% of the issued and outstanding securities of SDJ were exchanged for securities of Monster Digital. An aggregate
of 1,169,068 shares of common stock was issued to the shareholders of SDJ. Prior to the closing of the reorganization, the then-controlling
stockholder of Monster Digital, WP Financial, agreed to the cancellation of an aggregate of 1,234,868 shares and warrants to purchase
an aggregate of 1,871,991 shares of common stock held by it such that there were 198,670 shares of common stock and warrants to
purchase an aggregate of 39,392 shares of common stock owned by it immediately after the reorganization.
WP Financial did not receive any consideration for the cancellation
of the shares and warrants. The cancellation of the shares and warrants was accounted for as a contribution to capital. The number
of shares and warrants cancelled was determined based on negotiations between WP Financial and SDJ. The parties to the transaction
acknowledged that a conflict of interest existed with respect to the negotiations for the terms of the reorganization due to, among
other factors, the fact that WestPark was advising SDJ in the transaction. The shareholders of SDJ negotiated an estimated value
of SDJ and its subsidiaries and an estimated value of Monster Digital (based on the mutually desired capitalization of the company
resulting from the reorganization) which therefore determined the capitalization of Monster Digital following the reorganization.
In addition, we paid a $155,000 success fee to WestPark for services
being provided in connection with the reorganization, including coordinating the reorganization process, interacting with the principals
of Monster Digital pre-reorganization and negotiating the definitive agreement for the reorganization of SDJ with Monster Digital,
conducting a financial analysis of SDJ, conducting due diligence on SDJ and managing the interrelationship of legal and accounting
activities. We also paid a $95,000 fee to WestPark for providing the use of Monster Digital for the reorganization.
Richard Rappaport, the former President of each of AOTS 35, Inc.
(renamed Monster Digital, Inc.) and its indirect controlling stockholder through his control of WP Financial prior to the reorganization,
indirectly holds a 100% interest in WestPark, an underwriter for our initial public offering, due to the fact that he is the sole
owner of the membership interests of the parent company of WestPark. Neither Mr. Rappaport nor WP Financial received any benefits
in their individual capacities related to the transactions described above, except for WP Financial’s retention of shares
in Monster Digital.
Private Placements
WestPark Capital acted as our placement agent in connection with
a private placement of 524,914 shares of our common stock between May 2012 and June 2013. In connection therewith, we paid WestPark
Capital commissions and expenses of $921,000 and issued them five year warrants to purchase an aggregate of up to 52,492 shares
of our common stock at a per share exercise price of $14.85, which was the private placement per share price.
WestPark Capital also acted as our placement agent in connection
with a private placement between April 2014 and March 2015 of $5.1 million worth of our convertible notes and warrants to purchase
shares of our common stock. In connection therewith, we paid WestPark Capital commissions and expenses of $662,000 and issued them
five year warrants to purchase an aggregate of up to 29,121 shares of our common stock at an exercise price of $22.28; the warrants
issued to WestPark Capital had identical terms and conditions to those issued to investors in that private placement.
In December 2014, we issued 57,236 shares of our common stock to
a non-executive employee of WestPark Capital for assistance in effecting an exchange offer of the aforementioned notes and warrants
for shares of our common stock which we effected between December 2014 and March 2015.
WestPark Capital also acted as our Subscription
Agent in connection with a rights offering between April and August 2015 of 394,008 shares of our common stock. In connection
therewith, we paid WestPark Capital commissions and expenses of $475,000.
WestPark Capital acted as our placement agent in connection with
a private placement from October 2015 to February 2016 of promissory notes consisting of $3.36 million loaned to our company a
22.5% loan organization fee payable on maturity, which is on the earlier of October 2016 or the closing date of our initial public
offering, and a flat fee interest rate of 15%. In connection therewith we paid WestPark Capital commission and expenses of $454,000.
Westpark Capital acted as our placement agent in connection with
a private placement of up to $3.0 million of our Series A Preferred Stock which we commenced in March 2016. In connection therewith
we paid Westpark Capital a 10% commission and a 3% non-accountable expense allowance, as well as certain legal and other expenses
of Westpark Capital.
Factoring Facility
In 2013, WestPark Capital acted as our agent in arranging a factoring
facility. In connection therewith, we paid WestPark Capital a fee of $60,000.
Other Arrangements
In December 2013 and January 2014, David H. Clarke, our Chief Executive
Officer, beneficially loaned Westpark Capital Financial Services LLC, the parent company of WestPark Capital, Inc., an aggregate
of $350,000 evidenced by promissory notes bearing interest at 5% per annum and due five years from the date of issuance. In connection
therewith Westpark Capital Financial Services LLC transferred to Mr. Clarke 7,659 shares of our common stock held by it and warrants
to purchase up to 7,659 shares of our common stock held by it. The exercise price of the warrants is $14.85 and the warrants expire
in 2017. All such loans and equity transfers were made by Westpark Capital Financial Services LLC prior to Mr. Clarke becoming
our Chief Executive Officer. All such notes remain outstanding.
Prior to our initial public offering Westpark Capital
beneficially held over 5% of our common stock. WestPark Capital transferred 111,257 shares of the
common stock held by it and warrants to purchase 35,537 shares of common stock to associated persons at WestPark Capital and
to third parties further to prior contractual commitments; each of the transferees represented that he/she/it was an
accredited investor.
Policies and Procedures for Transactions with Related Persons
We have adopted a policy that our executive officers, directors,
nominees for election as a director, beneficial owners of more than 5% of any class of our common stock and any members of the
immediate family of any of the foregoing persons are not permitted to enter into a related person transaction with us without the
prior consent of our audit committee. Any request for us to enter into a transaction with an executive officer, director, nominee
for election as a director, beneficial owner of more than 5% of any class of our voting securities or any member of the immediate
family of any of the foregoing persons, in which the amount involved exceeds $120,000 and such person would have a direct or indirect
interest, must first be presented to our audit committee for review, consideration and approval. In approving or rejecting any
such proposal, our audit committee is to consider the material facts of the transaction, including, but not limited to, whether
the transaction is on terms no less favorable than terms generally available to an unaffiliated third party under the same or similar
circumstances and the extent of the related person’s interest in the transaction. All of the transactions described above
were entered into prior to the adoption of such policy, but after presentation, consideration and approval by our board of directors.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial
ownership of our capital stock by:
|
•
|
each person, or group
of affiliated persons, known by us to beneficially own more than 5% of our common stock;
|
|
•
|
each of our named executive
officers;
|
|
•
|
each of our directors;
and
|
|
•
|
all of our current executive
officers, directors and director nominees as a group.
|
Beneficial ownership is determined according to the rules of the
SEC and generally means that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or
investment power of that security. Except as indicated by the footnotes below, we believe, based on the information furnished to
us, that the persons named in the table below have sole voting and investment power with respect to all shares of common stock
shown that they beneficially own, subject to community property laws where applicable. The information does not necessarily indicate
beneficial ownership for any other purpose, including for purposes of Sections 13(d) and 13(g) of the Securities Act.
Our calculation of the number of shares beneficially owned and the
percentage of beneficial ownership is based upon 8,537,511 shares outstanding as of February 7, 2017.
Unless otherwise indicated, the address of each beneficial owner
listed in the table below is c/o Monster Digital, Inc., 2655 Park Center Drive, Unit C, Simi Valley, California 93065.
|
|
As of February 7, 2017
|
|
Name of Beneficial Owner
|
|
Number of Shares
Beneficially
Owned
|
|
|
Percentage
Beneficially
Owned
|
|
Named Executive Officers and directors
|
|
|
|
|
|
|
|
|
David H. Clarke
|
|
|
787,181
|
(1)
|
|
|
9.2
|
|
Jonathan Clark
|
|
|
250,000
|
|
|
|
2.9
|
|
Stephen R. Brownsell
|
|
|
135,000
|
|
|
|
1.6
|
|
Marcus S. Matejka
|
|
|
58,000
|
(2)
|
|
|
*
|
|
David Olert
|
|
|
56,834
|
(3)
|
|
|
*
|
|
Robert B. Machinist
|
|
|
15,000
|
|
|
|
*
|
|
Christopher Miner
|
|
|
15,000
|
|
|
|
*
|
|
Steven Barre
|
|
|
15,000
|
|
|
|
*
|
|
All executive officers and directors as a group (total of 8 persons)
|
|
|
1,332,015
|
(2)(3)(4)
|
|
|
15.5
|
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
Monster, Inc.
(5)
|
|
|
590,697
|
|
|
|
6.8
|
|
Noel Lee
(5)(6)
|
|
|
590,697
|
|
|
|
6.8
|
|
|
*
|
Represents beneficial ownership
of less than 1% of the outstanding common stock.
|
(1)
|
Includes 442,191 shares held by Mr. Clarke, 18,068 shares held
by Leslie Clarke, Mr. Clarke’s wife, and 285,928 shares held by GBS Holdings, Inc., an entity which may be deemed
controlled by Mr. Clarke but which is owned by Leslie Clarke and the children of Mr. Clarke. Also includes warrants to
purchase 30,472 shares of common stock held by Mr. Clarke and 10,522 shares of common stock held by GBS Holdings, Inc. Mr.
Clarke may be deemed the indirect beneficial owner of these securities since he has shared sale, voting and
investment control over the securities with his wife. The address of GSB Holdings, Inc. and Mr. Clarke is 14179 Laurel Trail,
Wellington, Florida 33414e.
|
|
|
(2)
|
Includes stock options to
purchase 18,000 shares of common stock.
|
|
|
(3)
|
Includes stock options to purchase 16,834 shares of common
stock.
|
|
|
(4)
|
Includes warrants to purchase
30,472 shares of common stock held by Mr. Clarke and 10,522 shares of common stock held by GBS Holdings, Inc.
|
|
|
(5)
|
Represents 382,575 shares
held by Monster, Inc. and warrants to purchase 208,122 shares of common stock held by Noel Lee, the Chief Executive Officer and
sole shareholder of Monster, Inc.
|
|
|
(6)
|
Mr. Lee may be deemed the
indirect beneficial owner of these securities since he has sole sale, voting and investment control over the securities. The address
of Monster, Inc. and Mr. Lee is 455 Valley Drive, Brisbane, CA 94005.
|
LEGAL MATTERS
The validity of the common stock being offered by this prospectus
has been passed upon by Manatt, Phelps & Phillips LLP.
EXPERTS
The consolidated financial statements of Monster Digital, Inc. and
Subsidiary as of December 31, 2015 and 2014 and for the years then ended included in this prospectus have been audited by CohnReznick
LLP, an independent registered public accounting firm, as stated in their report appearing herein which includes an explanatory
paragraph relating to our ability to continue as a going concern. Such financial statements have been so included in reliance upon
the report of such firm given upon its authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Upon the effectiveness of registration statement of which this prospectus
forms a part or our earlier registration of a class of our securities under Section 12 of the Exchange Act, we will be required
to file annual, quarterly and current reports and proxy statements and other information with the SEC. Prior to that time, we are
not required to file such reports, but expect to do so as a “voluntary filer” under the Exchange Act. You may read
and copy any document that we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, on official
business days during the hours of 10:00 am and 3:00 pm. Please call the SEC at 1-800-SEC-0330 for further information on the Public
Reference Room. All filings we make with the SEC are also available on the SEC’s web site at http://www.sec.gov. Our website
address is http://www.monsterdigital.com. We have not incorporated by reference into this prospectus the information on our website,
and you should not consider it to be a part of this document.
We have filed with the SEC a registration statement on Form S-1
under the Securities Act with respect to the shares of common stock being offered by this prospectus. This prospectus is part of
that registration statement. This prospectus does not contain all of the information set forth in the registration statement or
the exhibits to the registration statement. For further information with respect to us and the shares we are offering pursuant
to this prospectus, you should refer to the complete registration statement and its exhibits. Statements contained in this prospectus
as to the contents of any contract, agreement or other document referred to are not necessarily complete, and you should refer
to the copy of that contract or other documents filed as an exhibit to the registration statement. You may read or obtain a copy
of the registration statement at the SEC’s public reference room and website referred to above.
MONSTER DIGITAL, INC.
AND SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 2015 and 2014
CONTENTS
Report of Independent Registered Public Accounting
Firm
The Board of Directors and Stockholders
Monster Digital, Inc.
We have audited the accompanying consolidated
balance sheets of Monster Digital, Inc. and Subsidiary as of December 31, 2014 and 2015, and the related consolidated statements
of operations, shareholders’ deficit and cash flows for the years then ended. Monster Digital, Inc. and Subsidiary’s
management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits 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 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 also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 audits provide 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 Monster Digital, Inc. and Subsidiary
as of December 31, 2014 and 2015, and the results of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial
statements, the Company has incurred net losses and negative cash flows from operating activities for the years ended December
31, 2014 and 2015 and has an accumulated deficit as of December 31, 2015. These matters, among others, raise substantial doubt
about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described
in Note 2. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ CohnReznick LLP
Roseland, New Jersey
April 20, 2016, except for the effects of the matter discussed in the last paragraph of Note 11 which are as of June 6, 2016 and
June 23, 2016.
MONSTER DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
|
2014
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
97,000
|
|
|
$
|
119,000
|
|
Accounts receivable, net of allowances of $664,000 and $99,000, respectively
|
|
|
3,569,000
|
|
|
|
644,000
|
|
Inventories
|
|
|
2,587,000
|
|
|
|
633,000
|
|
Prepaid expenses and other
|
|
|
68,000
|
|
|
|
141,000
|
|
Total current assets
|
|
|
6,321,000
|
|
|
|
1,537,000
|
|
Trademark, net of amortization of $54,000
|
|
|
—
|
|
|
|
2,548,000
|
|
Deferred IPO and debt issuance costs
|
|
|
48,000
|
|
|
|
1,102,000
|
|
Deposits and other assets
|
|
|
42,000
|
|
|
|
14,000
|
|
Total assets
|
|
$
|
6,411,000
|
|
|
$
|
5,201,000
|
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
5,051,000
|
|
|
$
|
215,000
|
|
Accounts payable
|
|
|
1,613,000
|
|
|
|
1,021,000
|
|
Accrued expenses
|
|
|
4,198,000
|
|
|
|
3,311,000
|
|
Customer refund
|
|
|
—
|
|
|
|
1,850,000
|
|
Due to related parties
|
|
|
502,000
|
|
|
|
510,000
|
|
Notes payable, net
|
|
|
35,000
|
|
|
|
3,988,000
|
|
Total current liabilities
|
|
|
11,399,000
|
|
|
|
10,895,000
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders’ deficit
|
|
|
|
|
|
|
|
|
Preferred stock; 10,000,000 shares authorized — none issued
|
|
|
—
|
|
|
|
—
|
|
Common stock; $.0001 par value; 100,000,000 shares authorized; 2,841,090 and 3,702,865 shares issued and outstanding, respectively
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
12,146,000
|
|
|
|
20,181,000
|
|
Accumulated deficit
|
|
|
(17,134,000
|
)
|
|
|
(25,875,000
|
)
|
Total shareholders’ deficit
|
|
|
(4,988,000
|
)
|
|
|
(5,694,000
|
)
|
Total liabilities and shareholders’ deficit
|
|
$
|
6,411,000
|
|
|
$
|
5,201,000
|
|
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
MONSTER DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Year Ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
Revenue
|
|
$
|
11,343,000
|
|
|
$
|
8,266,000
|
|
Cost of goods sold
|
|
|
11,109,000
|
|
|
|
7,840,000
|
|
Gross profit
|
|
|
234,000
|
|
|
|
426,000
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
542,000
|
|
|
|
333,000
|
|
Selling and marketing
|
|
|
3,722,000
|
|
|
|
2,928,000
|
|
General and administrative
|
|
|
2,646,000
|
|
|
|
3,625,000
|
|
Total operating expenses
|
|
|
6,910,000
|
|
|
|
6,886,000
|
|
Operating loss
|
|
|
(6,676,000
|
)
|
|
|
(6,460,000
|
)
|
Other expenses
|
|
|
|
|
|
|
|
|
Interest and finance expense
|
|
|
1,661,000
|
|
|
|
1,381,000
|
|
Debt conversion expense
|
|
|
2,707,000
|
|
|
|
898,000
|
|
Total other expenses
|
|
|
4,368,000
|
|
|
|
2,279,000
|
|
Loss before income taxes
|
|
|
(11,044,000
|
)
|
|
|
(8,739,000
|
)
|
Provision for income taxes
|
|
|
13,000
|
|
|
|
2,000
|
|
Net loss
|
|
$
|
(11,057,000
|
)
|
|
$
|
(8,741,000
|
)
|
Loss Per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(3.95
|
)
|
|
$
|
(2.65
|
)
|
Number of shares used in computation
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
2,800,632
|
|
|
|
3,294,066
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONSTER DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
|
|
Common Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Deficit
|
|
Balance at December 31, 2013
|
|
|
2,783,853
|
|
|
$
|
—
|
|
|
$
|
5,541,000
|
|
|
$
|
(6,077,000
|
)
|
|
$
|
(536,000
|
)
|
Stock purchase warrants issued with convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
735,000
|
|
|
|
—
|
|
|
|
735,000
|
|
Exchange of debt for equity
|
|
|
391,890
|
|
|
|
—
|
|
|
|
5,870,000
|
|
|
|
—
|
|
|
|
5,870,000
|
|
Cancellation of founders’ shares in debt for equity exchange
|
|
|
(334,653
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,057,000
|
)
|
|
|
(11,057,000
|
)
|
Balance at December 31, 2014
|
|
|
2,841,090
|
|
|
|
—
|
|
|
|
12,146,000
|
|
|
|
(17,134,000
|
)
|
|
|
(4,988,000
|
)
|
Stock purchase warrants issued with convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
335,000
|
|
|
|
—
|
|
|
|
335,000
|
|
Exchange of debt for equity
|
|
|
160,654
|
|
|
|
—
|
|
|
|
2,272,000
|
|
|
|
—
|
|
|
|
2,272,000
|
|
Cancellation of founders’ shares in debt for equity exchange
|
|
|
(2,028
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Cancellation of founders’ shares in connection with rights offering
|
|
|
(157,603
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of common stock in connection with trademark license
|
|
|
382,575
|
|
|
|
—
|
|
|
|
2,103,000
|
|
|
|
—
|
|
|
|
2,103,000
|
|
Issuance of common stock in connection with consulting agreement
|
|
|
84,170
|
|
|
|
—
|
|
|
|
179,000
|
|
|
|
—
|
|
|
|
179,000
|
|
Issuance of common stock for cash
|
|
|
394,007
|
|
|
|
—
|
|
|
|
2,969,000
|
|
|
|
—
|
|
|
|
2,969,000
|
|
Amortization of non-cash stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
177,000
|
|
|
|
—
|
|
|
|
177,000
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,741,000
|
)
|
|
|
(8,741,000
|
)
|
Balance at December 31, 2015
|
|
|
3,702,865
|
|
|
$
|
—
|
|
|
$
|
20,181,000
|
|
|
$
|
(25,875,000
|
)
|
|
$
|
(5,694,000
|
)
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONSTER DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Year ended December 31,
|
|
|
|
2014
|
|
|
2015
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,057,000
|
)
|
|
$
|
(8,741,000
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
—
|
|
|
|
356,000
|
|
Amortization of deferred debt issuance costs and debt discount
|
|
|
1,147,000
|
|
|
|
583,000
|
|
Amortization of trademark
|
|
|
—
|
|
|
|
54,000
|
|
Debt conversion expense
|
|
|
2,707,000
|
|
|
|
898,000
|
|
Accrued interest on debt converted to equity
|
|
|
98,000
|
|
|
|
—
|
|
Provision for doubtful accounts
|
|
|
401,000
|
|
|
|
179,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,100,000
|
)
|
|
|
2,746,000
|
|
Inventories
|
|
|
(1,843,000
|
)
|
|
|
1,954,000
|
|
Prepaid expenses and other
|
|
|
82,000
|
|
|
|
(73,000
|
)
|
Other assets
|
|
|
(17,000
|
)
|
|
|
28,000
|
|
Accounts payable
|
|
|
2,928,000
|
|
|
|
(585,000
|
)
|
Accrued expenses
|
|
|
1,321,000
|
|
|
|
(887,000
|
)
|
Customer refund
|
|
|
—
|
|
|
|
1,850,000
|
|
Due to related party
|
|
|
(119,000
|
)
|
|
|
(92,000
|
)
|
Net cash used in operating activities
|
|
|
(7,452,000
|
)
|
|
|
(1,730,000
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Private placement offering
|
|
|
—
|
|
|
|
2,969,000
|
|
Proceeds from short-term loan – related party
|
|
|
460,000
|
|
|
|
100,000
|
|
Payments on short-term loan – related party
|
|
|
—
|
|
|
|
(151,000
|
)
|
Proceeds from issuance of convertible debt and warrants
|
|
|
3,466,000
|
|
|
|
1,645,000
|
|
Proceeds from issuance of bridge financing
|
|
|
—
|
|
|
|
2,955,000
|
|
Proceeds from credit facility
|
|
|
14,599,000
|
|
|
|
6,902,000
|
|
Payments on credit facility
|
|
|
(10,337,000
|
)
|
|
|
(11,738,000
|
)
|
Payments on trademark note payable
|
|
|
—
|
|
|
|
(50,000
|
)
|
Deferred financing costs
|
|
|
(640,000
|
)
|
|
|
(880,000
|
)
|
Net cash provided by financing activities
|
|
|
7,548,000
|
|
|
|
1,752,000
|
|
Net increase (decrease) in cash
|
|
|
96,000
|
|
|
|
22,000
|
|
Cash, beginning of the year
|
|
|
1,000
|
|
|
|
97,000
|
|
Cash, end of the year
|
|
$
|
97,000
|
|
|
$
|
119,000
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
370,000
|
|
|
$
|
333,000
|
|
Income taxes
|
|
$
|
13,000
|
|
|
$
|
2,000
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Exchange of debt for equity
|
|
$
|
5,870,000
|
|
|
$
|
2,272,000
|
|
Issuance of common stock in connection with trademark license
|
|
|
—
|
|
|
|
2,103,000
|
|
Accrued deferred IPO and debt issuance costs
|
|
$
|
45,000
|
|
|
$
|
592,000
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BUSINESS ACTIVITY
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
: Monster Digital,
Inc. (“MDI”), a Delaware corporation (formed in November 2010), and its subsidiary, SDJ Technologies, Inc. (“SDJ”)
(collectively referred to as the “Company”), is an importer of high-end memory storage products and flash memory to
be marketed and sold under the Monster Digital brand name pursuant to a long-term licensing agreement with Monster, Inc. Such memory
storage products include high-end, rugged Solid State Drives (“SSDs”), Solid State Hybrid Drives (“SSHDs”)
and removable flash memory secured digital cards (“SDs”). The Company sources its products from China, Taiwan and Hong
Kong.
Basis of Presentation
: The
consolidated financial statements of MDI and its subsidiary SDJ have been prepared in accordance with accounting principles generally
accepted in the United States of America.
Principles of Consolidation
: The
consolidated financial statements include accounts of MDI and SDJ. All significant intercompany transactions have been eliminated
in consolidation.
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 certain estimates and assumptions that affect the reported amounts of assets and liabilities (including sales returns,
price protection allowances, bad debts, inventory reserves, warranty reserves, and asset impairments), disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ significantly from those estimates.
Concentration of Cash
: The
Company maintains its cash in bank accounts which, at times, may exceed federally insured limits. The Company has not experienced
any losses in such accounts. Management believes the Company is not exposed to any significant credit risk on its cash balances.
Accounts Receivable
: Accounts
receivable are carried at original invoice amount less allowance for doubtful accounts. Management determines the allowance for
doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Accounts
receivable are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received.
Accounts receivable are considered to be past due if any portion of the receivable balance is outstanding for more than 90 days
past the customer’s granted terms. The Company does not charge interest on past due balances or require collateral on its
accounts receivable. As of December 31, 2014 and 2015, the allowance for doubtful accounts is approximately $664,000 and $99,000,
respectively.
Inventory
: Inventory is stated
at the lower of cost or market, with cost being determined on the weighted average cost method of accounting. The Company purchases
finished goods and materials to assemble kits in quantities that it anticipates will be fully used in the near term. Changes in
operating strategy, customer demand, and fluctuations in market values can limit the Company’s ability to effectively utilize
all products purchased and can result in finished goods with above-market carrying costs which may cause losses on sales to customers.
The Company’s policy is to closely monitor inventory levels, obsolescence and lower market values compared to costs and,
when necessary, reduce the carrying amount of its inventory to its market value. As of December 31, 2014 and 2015, inventory on
hand was comprised primarily of finished goods ready for sale.
Advertising
: Advertising
costs are charged to expense when incurred. Advertising costs, which include market development expenses, were $603,000 and $300,000
for the years ended December 31, 2014 and 2015, respectively.
M
ONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BUSINESS ACTIVITY
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
Fair Value of Financial
Instruments
: Fair value is an exit price, representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair
value is a market-based measurement that should be determined based on the assumptions that market participants would use in
pricing an asset or liability. Fair value is based on a hierarchy of valuation techniques, which is determined on whether the
inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the Company’s own market assumptions. These two types of inputs
create a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
Level 1:
|
Quoted prices for identical instruments in active markets.
|
|
Level 2:
|
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
Level 3:
|
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
All stock purchase warrants (see Note 5) are
valued under methods of fair value under the Level 3 tier, as described above.
The carrying amount for other financial instruments,
which include cash, accounts receivable, accounts payable, notes payable and line of credit, approximate fair value based upon
their short term nature and maturity.
Revenue Recognition
: Revenue
is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists,
(2) the sales price is fixed or determinable, (3) collectability is reasonably assured, and (4) products have been shipped and
the customer has taken ownership and assumed the risk of loss. Distributors and retailers take full ownership of their product
upon delivery and sales are fully recognized at that time.
Revenue is reduced by reserves for price protection,
sales returns, allowances and rebates. Our reserve estimates are based upon historical data as well as projections of sales, customer
inventories, market conditions and current contractual sales terms. If the Company reduces the list price of its products, certain
customers may receive a credit from the Company (i.e. price protection). The Company estimates the impact of such pricing changes
on a regular basis and adjusts its allowances accordingly. Amounts charged to operations for price protection are calculated based
on actual price changes on individual products and customer inventory levels. The reserve is then reduced by actual credits given
to these customers at the time the credits are issued. We calculate the allowance for doubtful accounts and provision for sales
returns and rebates based on management’s estimate of the amount expected to be uncollectible or returned on specific accounts.
We provide for future returns, price protection and rebates at the time the products are sold. We calculate an estimate of future
returns of product by analyzing units shipped, units returned and point of sale data to ascertain consumer purchases and inventory
remaining with retail to establish anticipated returns. Price protection is calculated on a product by product basis. The objective
of price protection is to mitigate returns by providing retailers with credits to ensure maximum consumer sales. Price protection
is granted to retailers after they have presented the Company an affidavit of existing inventory.
The Company also offers market development
credits to certain of its customers. These credits are also charged against revenue.
Shipping and Handling Costs
: Historically,
the Company has not charged its customers for shipping and handling costs, which is a component of marketing and selling expenses.
These costs totaled approximately $283,000 in 2014 and $329,000 in 2015.
Income Taxes
: Deferred tax
assets and liabilities are determined based on the temporary differences between the financial reporting and tax basis of assets
and liabilities and net operating loss carryforwards, applying enacted statutory tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that some or all of the
deferred tax assets will not be realized.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BUSINESS ACTIVITY
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
The Company uses a two-step approach to recognizing
and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight
of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution
of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is
more likely than not to be realized upon settlement. As of December 31, 2014 and 2015, there are no known uncertain tax positions.
The Company policy is to classify the liability
for unrecognized tax benefits as current to the extent that it is more likely than not to be realized upon settlement and to the
extent that the Company anticipates payment (or receipt) of cash within one year. The Company recognizes interest and penalties,
if any, related to unrecognized tax benefits in the tax provision.
Product Warranty
: The Company’s
memory products are sold under various limited warranty arrangements ranging from three years to five years on solid state drives
and a limited lifetime warranty on all other products. Company policy is to establish reserves for estimated product warranty costs
in the period when the related revenue is recognized. The Company has the right to return defective products to the manufacturer.
As of December 31, 2014 and 2015, the Company has established a warranty reserve of $156,000 and $234,000, respectively, which
are included in accrued expenses in the accompanying consolidated balance sheets. Activity in the product warranty liability is
as follows:
Balance December 31, 2013
|
|
$
|
46,000
|
|
Increase for 2014 sales
|
|
|
153,000
|
|
Settlements and payments
|
|
|
(43,000
|
)
|
Balance December 31, 2014
|
|
|
156,000
|
|
Increase for 2015 sales
|
|
|
140,000
|
|
Settlements and payments
|
|
|
(62,000
|
)
|
Balance December 31, 2015
|
|
$
|
234,000
|
|
Research and Development:
The
Company incurs costs to improve the appeal and functionality of its products. Research and development costs are charged to expense
when incurred.
Earnings (Loss) per Share:
Basic
earnings (loss) per share is calculated by dividing net earnings (loss) (all of which is attributable to common stockholders) by
the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is calculated
similarly but includes potential dilution from the exercise of common stock options, warrants and conversion of debt to equity,
except when the effect would be anti-dilutive. Diluted earnings (loss) per share is computed using the “treasury stock method.”
For 2014 and 2015, warrants outstanding for 122,239 and 325,093 shares of common stock, respectively, and 71,040 stock options
and $38,000 in convertible notes payable in 2015 have been excluded from the computation of diluted loss per share because their
effect was anti-dilutive.
Reclassification
: Certain
prior year amounts have been reclassified for consistency with current period presentation.
Recently Issued Accounting
Pronouncements
— In April 2014, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2014-08,
Presentation of Financial Statements (Topic 205) and
Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of
an Entity
. Under ASU 2014-08, only disposals that represent a strategic shift that has (or will have) a major effect on
the entity’s results and operations would qualify as discontinued operations, which could include a disposal of a major
geographical area, a major line of business, a major equity method investment, or other major parts of an entity. ASU 2014-08
also expands the disclosure requirements for disposals of operations to include more information about assets, liabilities,
income and expenses and requires entities to disclose information about disposals of individually significant components. ASU
2014-08 is effective in the first quarter of 2015, with early adoption permitted. ASU 2014-08 could impact our consolidated
financial results in the event of a transaction as described above.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BUSINESS ACTIVITY
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 is based on the principle that revenue is recognized to depict
the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets
recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective in the first quarter of 2018, with early
adoption not permitted and requires either a retrospective or a modified retrospective approach to adoption. We have not yet selected
a transition method and are currently evaluating the effect that the updated standard will have on our consolidated financial statements
and related disclosures.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements — Going Concern
, which requires that management of an entity should
evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that the financial statements are issued or available to
be issued. This update will become effective beginning January 1, 2017, with early adoption permitted. The provisions of this standard
are not expected to significantly impact the Company.
In April 2015, the FASB issued ASU 2015-03,
Interest — Imputation of Interest
, which requires that debt issuance costs related to a recognized debt
liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability instead
of being presented as an asset. Debt disclosures will include the face amount of the debt liability and the effective interest
rate. The update requires retrospective application and represents a change in accounting principle. The update is effective for
fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously
issued. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. The standard requires entities to measure most inventory
“at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must
measure inventory at the lower of cost or market (market in this context is defined as one of three different measures, one of
which is net realizable value). The standard is effective for the Company prospectively beginning January 1, 2017. The Company
is currently evaluating the impact of the adoption of this guidance on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which requires lessees to recognize assets and liabilities for the rights and obligations created by
most leases on their balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is permitted. ASU 2016-02 requires modified retrospective adoption for all
leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The
Company is currently evaluating the impact the standard may have on its consolidated financial statements and related disclosures.
Other pronouncements issued by the FASB or
other authoritative accounting standards groups with future effective dates are either not applicable or not significant to the
consolidated financial statements of the Company.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 — GOING CONCERN
As of December 31, 2015, the Company has negative
working capital of approximately $9,358,000, has a capital deficit of approximately $5,694,000, and has incurred cumulative net
losses from its inception of approximately $25,875,000. These circumstances raise substantial doubt as to the Company’s ability
to continue as a going concern. In response to this uncertainty, Management has taken certain measures to date in 2016 and has
plans for the remainder of 2016 and beyond, with the objective of alleviating this concern. They include the following:
|
•
|
Subsequent to December
31, 2015, the Company raised $263,000, net of offering costs, upon the issuance of promissory notes. Also subsequent to December
31, 2015, the Company raised $583,000, net of offering costs, upon the issuance of Series A preferred stock.
|
|
•
|
In order to meet customers’
needs for consumer products, the Company is continuing to develop new products to complement existing products and expand overall
product offerings, with the objective of increasing revenue and gross profit percentages. The Company will offer new products
in its action sports line and is also planning several new memory product offerings in 2016.
|
While the Company believes it will be successful
in obtaining the necessary financing to fund its operations, there are no assurances that such additional funding will be achieved
and that it will succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to
continue in existence.
NOTE 3 — DEBT FINANCING
Credit Facility
In November 2013, the Company entered into
a 12 month, $2 million accounts receivable based credit facility with Marquette Commercial Finance. In September 2014, the available
credit was increased to $8 million. The facility provided for a maximum advance rate of 80% against eligible receivables. The credit
facility carried a per-annum interest rate of a base rate plus 3.5% (subject to a minimum of 6.75%), with the base rate being the
greater of the prime lending rate or LIBOR plus 2.0%. In addition, there were fees for managing the facility. At December 31, 2014,
the total amount outstanding under the credit facility was $5,006,000. Outstanding borrowings under the facility were collateralized
by substantially all assets of the Company.
In March 2015, Marquette Commercial Finance
notified the Company of its intent to terminate the contract and that it would continue to finance sales transactions with specific
customers until such time that the Company is able to establish a credit facility with a different finance company.
In June 2015, the Company secured an accounts
receivable financing facility with Bay View Funding. The new contract provides for maximum funding of $4 million and a factoring
fee of 1.35% for the first 30 days and .45% for each 10-day period thereafter that the financed receivable remains outstanding.
Upon the execution of this contract, the balance owed to Marquette was repaid and that contract was terminated. The total amount
outstanding under this Facility as of December 31, 2015 was $215,000. There are no financial or similar covenants associated with
this facility.
Purchase Order Purchase Agreement
In April 2014, the Company entered into
a purchase order purchase agreement with Brookridge Funding (“Brookridge”). Under the agreement, the Company
could present and assign to Brookridge customer purchase orders. Upon acceptance, Brookridge received right, title and
interest in the purchase order and all funds that could come due as a result of the purchase order. Brookridge purchased
accepted purchase orders at a price not in excess of the cost of the applicable inventory required to fulfill the purchase
order. Fees accrued at a rate of 2% of the funded amount for the first 20 days and an additional 1% for each 10 day period
that the amount remains unpaid thereafter. As of December 31, 2014, the amount due Brookridge under this agreement was
$45,000, which was included in the caption “line of credit” on the accompanying consolidated balance sheet. As of
December 31, 2015 there was nothing owed to Brookridge as Brookridge terminated this agreement on October 28, 2015.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — DEBT FINANCING
– (continued)
Convertible Debt
In March 2014, the Company initiated a private
placement offering to issue convertible promissory Notes. Between March and December 2014, a total of $3,466,000 of convertible
notes were issued. Direct costs incurred in connection with the offering totaled $640,000 cash plus warrants issued to the placement
agent with an estimated value of $63,000. The Notes are due 12 months following their issuance and bear interest at 6% per annum,
payable in shares of common stock at the conversion rate of the Note.
For each $1,000 principal amount of Notes,
the holder received 44.90 Note warrants and 15.69 Vesting warrants, both of which are exercisable at $22.28 per share. Unexercised
Note warrants expire 5 years following their issuance while the Vesting warrants expire 3 years following the vesting date.
In conjunction with the convertible debt offering,
the Company issued a total of 210,019 stock purchase warrants to Note holders and 14,314 stock purchase warrants to the placement
agent. The Company accounted for these warrants in accordance with FASB ASC 470-20,
Debt with Conversion and Other Options
.
The Company computed the value of the warrants using the Black-Scholes option pricing model (see Note 5) and recorded the fair
value of warrants by allocating a portion of the proceeds to note holders’ warrants, based on their relative fair value,
as a reduction to the carrying amount of the convertible debt. The discount recorded in connection with the warrant valuation is
amortized over the term of the convertible notes and is recognized as non-cash interest expense.
The Company recorded a discount to the debt
of $735,000 for the calculated fair value of the warrants issued in conjunction with the convertible notes in 2014. Also in connection
with the issuance of convertible notes in 2014, the Company incurred debt issuance costs in the form of cash totaling $640,000.
The debt discount and deferred debt issuance costs are amortized over the term of the convertible notes and is recognized as a
non-cash interest expense using the effective interest method, resulting in an imputed interest rate of approximately 66% per annum.
In 2014, a total of approximately $660,000 in non-cash interest expense was recognized as a result of the amortization of the debt
discount and deferred debt issuance costs related to convertible debt.
Debt to Equity Exchange Offer
In December 2014, the Company extended an offer
to its convertible Note holders for the exchange of convertible Notes, accrued interest and common stock purchase warrants into
common stock. In the offer, the conversion rate on the principal amount of Notes was reduced from $22.28 per share to $14.85 per
share, with accrued interest being cancelled. Furthermore, in exchange for the cancellation of all warrants, the Note holders received
.07 shares of common stock for every .13 shares that would have been issued upon exercise of the warrants.
As further inducement to the offer, for the
new shares issued in connection with the exchange offer, the Company’s principal shareholder agreed to put back to the Company
an equal number of shares owned by him (to a maximum of 336,682 shares) and have such shares cancelled.
Through December 31, 2014, a total of
$3,428,000 in convertible Notes had been converted to equity pursuant to the exchange offer. As a result of the foregoing
exchange, $5,870,000 was credited to additional paid-in capital, which is the net amount of the principal of the Notes,
unpaid accrued interest, unamortized debt discount, and the debt conversion expense. The debt conversion expense of
$2,707,000 represents the estimated fair value of all securities and other consideration transferred in the exchange
transaction in excess of the fair value of securities issuable pursuant to the original conversion terms. For the year ended
December 31, 2015, the Company continued its private offering of convertible Notes concurrent with a related offer to
exchange the notes for shares of common stock on the terms indicated above. During the year, gross proceeds of $1,645,000
were raised in the offering from the issuance of convertible Notes payable. In March 2015, these Notes were converted to
common stock pursuant to the exchange offer, resulting in an inducement charge of $898,000. As a result of these
transactions, an additional 158,625 common shares were issued during the year. As of December 31, 2014 and 2015, a total of
$35,000 and $38,000, respectively, in principal of convertible Notes payable remain outstanding. These Notes matured in the
second quarter of 2015 and remain outstanding as of December 31, 2015.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 — DEBT FINANCING
– (continued)
Promissory notes
From October through December 31, 2015, the
Company issued promissory notes; the notes are due and payable at the earlier of one year from the date of issuance or the closing
date of the Company’s initial public offering, bear an interest rate of 15% that is accrued upon issuance, irrespective of
whether the promissory note is outstanding for part or full term until maturity, and have a loan origination fee of $.225 for each
dollar loaned. The loan origination fee associated with the notes as of December 31, 2015 was $665,000 and was recorded as accrued
interest and debt discount to the notes payable and is being amortized over the life of the notes. Debt discount amortized as interest
expense in 2015 was approximately $101,000. All principal, fees and interest are payable on the due date. As of December 31, 2015,
a total of $3.0 million in principal of these notes payable remains outstanding. These notes mature in the fourth quarter of 2016.
Subsequent to December 31, 2015, the Company issued an additional $263,000 in promissory notes under the same terms.
Due to Monster, Inc
.
In addition to the issuance of shares of common
stock and common stock purchase warrants (see Note 5), the Company has agreed to pay Monster, Inc. $500,000 as consideration for
use of the name Monster Digital, Inc. pursuant to Amendment No. 3 to the Trademark License Agreement between the Company and Monster,
Inc. Of this total balance, the Company agreed to pay $125,000 in December, 2015 and the balance from the proceeds of the planned
IPO. The Company paid $50,000 of the $125,000 in December 2015 and the balance in January, 2016.
Notes payable consists of the following:
|
|
December 31,
2014
|
|
|
December 31,
2015
|
|
Note payable, convertible debt
|
|
$
|
35,000
|
|
|
$
|
38,000
|
|
Due to Monster, Inc.
|
|
|
—
|
|
|
|
450,000
|
|
Interest and loan origination fee accrued related to
promissory notes payable and accrued at issuance
|
|
|
—
|
|
|
|
1,108,000
|
|
Promissory notes payable, 2015 bridge loans, net $563,000 debt discount
|
|
|
—
|
|
|
|
2,392,000
|
|
Total
|
|
$
|
35,000
|
|
|
$
|
3,988,000
|
|
NOTE 4 — ACCRUED EXPENSES
Accrued expenses consist of the following:
|
|
December 31,
2014
|
|
|
December 31,
2015
|
|
Royalties
|
|
$
|
488,000
|
|
|
$
|
103,000
|
|
Market development credits
|
|
|
497,000
|
|
|
|
336,000
|
|
Price protection
|
|
|
348,000
|
|
|
|
563,000
|
|
Return reserves
|
|
|
2,152,000
|
|
|
|
891,000
|
|
Others
|
|
|
713,000
|
|
|
|
1,418,000
|
|
Total
|
|
$
|
4,198,000
|
|
|
$
|
3,311,000
|
|
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — STOCKHOLDERS’
EQUITY
Reverse stock split
By action by written consent of the Company’s
stockholders effective as of November 6, 2015, the Company’s stockholders approved a reverse stock split in a range of between
one-for-five and one-for-twelve, such exact amount to be determined by the Company’s Board of Directors prior to the effective
date of a planned equity offering. On January 7, 2016, the Board of Directors of the Company approved a one-for-11.138103 reverse
stock split. All share and per share information in these consolidated financial statements, except for par value and authorized
shares, have been amended to reflect the reverse stock split.
Common Stock Purchase Warrants
: From
2011 through June 30, 2015, the Company issued common stock purchase warrants in connection with the initial formation of the Company,
the execution of a license agreement, and the issuance of convertible notes payable. All warrants have been valued on the date
of their issuance using the Black-Sholes option pricing model using various assumptions regarding stock price volatility, risk-free
interest rates, expected dividend rates, and expected term of the contract. Through December 31, 2015, none of the warrants have
been exercised, and for the years ended December 31, 2014 and 2015, 207,716 and 99,681 warrants, respectively, have been canceled
in connection with the exchange offer described above (see Note 3).
In August 2015, the Company issued 191,289
common stock purchase warrants in connection with an Advisory Board Agreement with Noel Lee, the Chief Executive Officer of Monster,
Inc., and recognized a $156,000 charge related to the issuance. As of December 31, 2014 and 2015, warrants to purchase 122,239
and 325,093 shares of common stock, respectively, are outstanding. Unexercised warrants will expire from 2016 to 2019.
The Company utilizes the Black-Scholes valuation
method to value warrants. The expected life represents the contractual terms. The expected volatility was estimated by analyzing
the historic volatility of similar public companies. No dividend payouts were assumed as the Company has not historically paid,
and is not anticipating to pay, dividends in the foreseeable future. The risk-free rate of return reflects the interest rate offered
for US treasury rates over the expected life of the warrants.
A summary of significant assumptions used to
estimate the fair value of the warrants issued in August 2015 are as follows:
Fair value of warrants issued
|
|
$
|
.89
|
|
Expected term (years)
|
|
|
5.0
|
|
Risk-free interest rate
|
|
|
1.60
|
%
|
Volatility
|
|
|
45.4
|
%
|
Dividend yield
|
|
|
None
|
|
Common stock purchase rights offering
: In
April 2015, the Company initiated a common stock purchase rights offering to its existing shareholders. The offering consists of
108,138 Units, with each Unit consisting of 3 newly issued shares of common stock and 2 shares of common stock owned by the Company’s
principal shareholder and chairman. Each Unit is offered for $44.55, with all proceeds going to the Company. In April 2015 through
September 2015, the Company closed on the sale of approximately 78,801 Units (representing 236,405 newly issued common shares)
and has received net proceeds of approximately $2,969,000.
Restricted Shares
: In August
2015, the Company issued 84,170 shares of restricted common stock to the Company’s Chairman of the Board pursuant to a consulting
agreement. The consulting agreement was effective in May 2015 and $179,000 of compensation expense was recognized in the year ending
December 31, 2015 related to the stock issuance. In August 2015, the Company issued 382,575 shares of restricted common stock in
connection to the Trademark License Agreement with Monster, Inc.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 — STOCKHOLDERS’
EQUITY – (continued)
The fair value of the 382,575 shares approximating
$2,103,000 were recorded as part of the Trademark in August 2015. In regards to the valuation of the Company’s common stock,
the Board of Directors engaged an independent third party valuation of the Company. Factors included in the valuation included
the Company’s present value of future cash flows, its capital structure, valuation of comparable companies, its existing
licensing agreements and the growth prospects for its product line. These factors were incorporated into an income approach and
a market approach in order to derive an overall valuation of the Company’s common stock of $5.49 per share at August 2015.
Preferred Stock
: Subsequent
to December 31, 2015, the Company issued a confidential Private Placement Memorandum (“PPM”) for a maximum of 3,000,000
shares of Series A Convertible Preferred Stock, with a purchase price of $1.00 per share and convertible into one share of the
Company’s common stock and having an 8%, noncumulative dividend. Pursuant to the PPM, 731,400 shares have been subsequently
subscribed for net proceeds of approximately $583,000.
NOTE 6 — STOCK OPTIONS
In 2012, the Company’s Board of Directors
approved the 2012 Omnibus Incentive Plan (the “Plan”) which allows for the granting of stock options, stock appreciation
rights, awards of restricted stock and restricted stock Units, stock bonuses and other cash and stock-based performance awards.
A total of 101,005 shares of common stock have been approved and reserved for issuance under the Plan. In November 2015, the Company’s
stockholders approved a 269,345 share increase in that number of shares reserved for issuance under the Plan such that a total
of 370,350 shares of common stock have been approved and reserved for issuance under the Plan. As of December 31, 2015, 71,040
options had been granted under the Plan. There were 101,005 and 299,309 options available for grant at December 31, 2014 and 2015,
respectively.
On December 23, 2015, the Company authorized
restricted stock grants under its 2012 Omnibus Incentive Plan of 13,467 shares to David Clarke in connection with his appointment
as the Company’s President and Chief Executive Officer and 33,668 shares to Neal Bobrick in connection with his appointment
as the Company’s Executive Vice President, Sales and Marketing, grants accepted and effective subsequent to December 31,
2015.
In addition, options to acquire 16,834 and
33,668 shares at an exercise price per share equal to the initial public offering price of the shares included as a component of
the Units offering by means of this offering will be granted at the effective date of this offering to David Olert, the Company’s
Chief Financial Officer, and Neal Bobrick, respectively.
The Company follows the provision of the ASC
Topic 718,
Compensations — Stock Compensation
which requires the measurement and recognition of compensation
expense for all stock-based payment awards made to employees and non-employee directors, including employee stock options. Stock
compensation expense based on the grant date fair value estimated in accordance with the provisions of ASC 718 is generally recognized
as an expense over the requisite service period.
No options were granted in 2014. In 2015, the
following stock option grants were made:
Option Date
|
|
Options
Granted
|
|
|
Exercise
Price
|
|
|
Estimated
Fair Value
of Underlying
Stock
|
|
|
Intrinsic
Value
|
|
May 2015
|
|
|
71,040
|
|
|
$
|
29.71
|
|
|
$
|
5.79
|
|
|
|
None
|
|
The Company’s Board of Directors granted
options for 71,040 shares of common stock to certain employees on May 8, 2015. The option prices were determined based on such
factors as recent equity transactions and other factors as deemed necessary and relevant in the circumstances. The exercise prices
for options granted were set by the Company’s Board of Directors at a premium over fair market value of its commons stock
at the time the grants were authorized.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 — STOCK OPTIONS – (continued)
In regards to the valuation of the Company’s
common stock, the Board of Directors engaged an independent third party valuation of the Company. Factors included in the valuation
included the Company’s present value of future cash flows, its capital structure, valuation of comparable companies, its
existing licensing agreements and the growth prospects for its product line. These factors were incorporated into an income approach
and a market approach in order to derive an overall valuation of the Company’s common stock of $5.79 per share at May 8,
2015.
The Company utilizes the Black-Scholes valuation
method to value stock options and recognizes compensation expense over the vesting period. The expected life represents the period
that the Company’s stock-based compensation awards are expected to be outstanding. The Company uses a simplified method provided
in Securities and Exchange Commission release Staff Accounting Bulletin No. 110 which averages an awards weighted average vesting
period and contractual term for “plain vanilla” share options. The expected volatility was estimated by analyzing the
historic volatility of similar public companies. No dividend payouts were assumed as the Company has not historically paid, and
is not anticipating to pay, dividends in the foreseeable future. The risk-free rate of return reflects the weighted average interest
rate offered for U.S. treasury rates over the expected life of the options.
A summary of significant assumptions used to
estimate the fair value of the stock options granted in the year ended December 31, 2015 are as follows:
Weighted average fair value of options granted
|
|
$
|
0.45
|
|
Expected term (years)
|
|
|
6.0 to 6.25
|
|
Risk-free interest rate
|
|
|
1.89
|
%
|
Volatility
|
|
|
45.4
|
%
|
Dividend yield
|
|
|
None
|
|
The Company recorded non-cash stock-based compensation
of $21,000 during the year ended December 31, 2015 related to the issuance of stock options. There was no stock-based compensation
recognized in 2014. An additional $15,000 of stock-based compensation remains to be amortized over 32 months.
A summary of option activity for the Plan as
of December 31, 2015 and changes for the year then ended are represented as follows:
|
|
Number of
Options
|
|
|
Weighted
Avg.
Exercise Price
|
|
|
Weighted
Average
Remaining
Contract
Term
(Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Options outstanding January 1, 2015
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
71,040
|
|
|
|
29.71
|
|
|
|
9.50
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2015
|
|
|
71,040
|
|
|
$
|
29.71
|
|
|
|
9.50
|
|
|
$
|
—
|
|
NOTE 7 — RELATED PARTY TRANSACTIONS
Office and Warehouse Usage
: In
2014, the Company occupied a portion of office and warehouse space from SDJ Partners, LLC, a limited liability company owned by
Sirjang Tandon, Devinder Tandon, and Jawahar Tandon. Jawahar Tandon and Devinder Tandon are founders and Directors of SDJ Technologies,
Inc., Jawahar Tandon is a current Director of and Devinder Tandon is a former Director of Monster Digital, Inc. and Jawahar Tandon
serves as Chief Executive Officer of both entities. The Company leased the facilities on a month-to-month basis. Rent expense for
the year ended December 31, 2014 was approximately $54,000. In 2015, the Company relocated to a facility that is leased from an
unrelated party and therefore discontinued its leasing arrangement with SDJ Partners, LLC.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 — RELATED PARTY TRANSACTIONS
– (continued)
Administrative Support
: Tandon
Enterprises, Inc., a related party, provided administrative, accounting, and operational support to the Company in 2014. The Company
reimbursed Tandon Enterprises, Inc. based on the actual costs incurred. The fees for the years ended December 31, 2014 and 2015
totaled $172,000 and $0, respectively. There were no unpaid administrative support fees at December 31, 2015.
Marketing Services
: Pursuant
to an arrangement with the Company, 4PAC, LLC, an entity owned by Tayel Tandon, the wife of Vivek Tandon, the Company’s Executive
Vice President, Operations and its former President and Chief Operating Officer, has provided marketing services to the Company
commencing February 2015 at the rate of $5,000 per month, plus expenses. For the year ended December 31, 2015, the Company paid
4PAC, LLC an aggregate of $57,790. Subsequent to December 31, 2015, the Company discontinued the arrangement with 4PAC, LLC.
Borrowings
: From time to
time, the Company receives short-term, non-interest bearing loans from Tandon Enterprises, Inc. for the purpose of funding temporary
working capital needs. For the year ended December 31, 2014, the Company borrowed $151,000, net of repayments, and repaid net $151,000
during the year ended December 31, 2015.
Employment Agreement
: The
Company has an Executive Employment Agreement with Jawahar Tandon (“Executive”) to serve as the Company’s Chief
Executive Officer. The agreement expired May 30, 2015 and was renewed automatically for an additional (1) year effective June 1,
2015 and shall be renewed each anniversary date thereafter. The agreement can be terminated by either party with 60 days’
notice prior to May 30, 2015 or any subsequent period thereafter. The Company shall pay the Executive a base annual salary of $250,000,
which may be increased at the discretion of the Company. The Executive will be entitled to an annual bonus of up to 30% of the
base salary, and is allotted a monthly automobile and country club membership allowance totaling $3,500. Additionally, the Company
is to pay 100% of the Executive’s healthcare and medical premiums. At December 31, 2014 and 2015, there were no unpaid expenses
under this agreement. Effective December 23, 2015, Mr. Tandon resigned as Chief Executive Officer and is subsequently not paid
a salary by the Company.
In September 2015, David Clarke, the Company’s
Chairman of the Board and a significant stockholder of the Company, loaned the Company $100,000 further to a promissory note bearing
interest at 5% per annum, principal and unpaid interest payable on demand.
Due to (from) related parties consists of the
following at December 31, 2014 and 2015:
|
|
December 31,
2014
|
|
|
December 31,
2015
|
|
Tandon Enterprises, Inc.
|
|
$
|
632,000
|
|
|
$
|
322,000
|
|
SDJ Partners LLC
|
|
|
88,000
|
|
|
|
88,000
|
|
Shareholders/Officers
|
|
|
(218,000
|
)
|
|
|
100,000
|
|
Total
|
|
$
|
502,000
|
|
|
$
|
510,000
|
|
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — INCOME TAXES
For the years ended December 31, 2014 and 2015,
the income tax provision of $13,000 and $2,000, respectively, consists of state income taxes currently paid or payable.
The deferred tax asset is comprised of the
following:
|
|
2014
|
|
|
2015
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
4,678,000
|
|
|
$
|
8,174,000
|
|
Accrued warranty
|
|
|
77,000
|
|
|
|
42,000
|
|
Other accrued expenses
|
|
|
1,224,000
|
|
|
|
1,253,000
|
|
Total deferred tax assets
|
|
|
5,979,000
|
|
|
|
9,469,000
|
|
Valuation Allowance
|
|
|
(5,979,000
|
)
|
|
|
(9,469,000
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The ultimate realization of the deferred tax
asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.
As of December 31, 2015, the state and federal net operating loss carryforwards are approximately $12,183,000 and $14,611,000,
respectively. Due to the uncertainty surrounding the realization of these deferred tax assets, the Company has recorded a 100%
valuation allowance. Net operating loss carryforwards expire between the years 2029 and 2035. Tax years ended December 31, 2014,
2013 and 2012 are open and subject to audit.
The reconciliation of the U.S. statutory rate
with the Company’s effective test rate is summarized as follows:
|
|
2014
|
|
|
2015
|
|
|
|
% of pre-tax
Earnings
|
|
|
% of pre-tax
Earnings
|
|
Federal tax
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State tax, net
|
|
|
(6.1
|
)
|
|
|
(6.1
|
)
|
Non-deductible expenses
|
|
|
0.2
|
|
|
|
8.4
|
|
Change in valuation allowance
|
|
|
42.8
|
|
|
|
31.9
|
|
Miscellaneous
|
|
|
(2.9
|
)
|
|
|
(0.2
|
)
|
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Management is not aware of any uncertain tax
positions and does not expect the total amount of recognized tax benefits to change significantly in the next twelve months.
NOTE 9 — CUSTOMER AND VENDOR
CONCENTRATIONS
Customers
:
Approximately 24%, 24%, and 8% of the Company’s
gross sales were made to three customers for the year ended December 31, 2014. At December 31, 2014, the amount included in outstanding
accounts receivable related to these three customers was approximately $4,900,000.
Approximately 19%, 18%, and 12% of the Company’s
gross sales were made to three customers for the year ended December 31, 2015. At December 31, 2015, the amount included in outstanding
accounts receivable related to these three customers was approximately $239,000.
Vendors
:
Approximately 80% of the Company’s purchases
were provided by one vendor for the year ended December 31, 2014. At December 31, 2014, the amount in accounts payable related
to this vendor was $36,000.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — CUSTOMER AND VENDOR
CONCENTRATIONS – (continued)
Approximately 46% of the Company’s purchases
were provided by three vendors for the year ended December 31, 2015. At December 31, 2015, the amount in accounts payable related
to these vendors was $24,000.
NOTE 10 — COMMITMENTS AND
CONTINGENCIES
Royalty
The Company entered into the initial trademark
license agreement with Monster, Inc., (formerly Monster Cable Products, Inc.) effective July 7, 2010. In 2012, the agreement was
amended giving the Company exclusive rights to utilize the name “Monster Digital” on memory products for a period of
25 years (expires July 7, 2035) under the following payment schedule of royalties to Monster, Inc. This license agreement contains
various termination clauses that include (i) change in control, (ii) breach of contract and (iii) insolvency, among others. The
Company is required to remit royalty payments to Monster, Inc. on or before the 30
th
day following the end of each calendar
quarter. At any time during the term of the agreement, a permanent license may be negotiated.
The royalty schedule became effective in August
2011 and was further amended in April 2012. As amended, royalties under this contract are as follows:
|
•
|
Years 1 (2012) and 2: Royalties
on all sales excluding sales to Monster, Inc. at a rate of four (4) percent, with no minimum.
|
|
•
|
Years 3 through 5: Minimum
royalty payments of $50,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
|
|
•
|
Years 6 through 10: Minimum
royalty payments of $125,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
|
|
•
|
Years 11 through 15: Minimum
royalty payments of $187,500 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
|
|
•
|
Years 16 through 25: Minimum
royalty payments of $250,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
|
Effective July 1, 2014, the royalty rate on
certain products was reduced from 4% to 2% for a period of 12 months, based on a mutual understanding between the Company and the
licensor.
For the years ended December 31, 2014 and 2015,
royalty expense amounted to approximately $572,000 and $262,000, respectively, which is included as a component of selling and
marketing expenses in the accompanying consolidated statements of operations (see also Note 4). The Company was not in compliance
with the royalty remittance policy for each period presented in the accompanying consolidated financial statements.
Operating Lease
The Company occupies executive offices in Simi
Valley, CA pursuant to a lease through January 31, 2018 at a monthly rental rate of $13,850.
Customer payment agreement
In July 2015, the Company entered into an agreement
with a customer under which the Company will pay the customer a total of $835,000 owed to the customer for promotional and other
credits related to sales that occurred in 2014. The credits were accrued as contra-sales in 2014. Under the terms of the agreement,
there is no interest and the Company will make 12 monthly payments of $65,000 beginning in August 2015, and one final payment of
$65,000 in August 2016. The Company was in compliance with the payment agreement at December 31, 2015 but has subsequently missed
three payments in 2016. The balance owed under this agreement at December 31, 2015 was $445,000.
MONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — COMMITMENTS AND
CONTINGENCIES – (continued)
Legal matters
The Company is subject to certain legal proceedings
and claims arising in connection with the normal course of its business. In the opinion of management, the reserve established
for the three cases noted below is adequate so that the claims will have no material adverse effect on its consolidated financial
position, results of operations or cash flows.
On March 9, 2015, Memphis Electronics, Inc.
filed a complaint against SDJ and the Company, case no. 4:15-cv-1104; in U.S. District Court for the Southern District of Texas.
The complaint alleged breach of contract and tort for an alleged order or orders for computer components. Plaintiff’s claims
are based in contract and tort (negligent and intentional misrepresentations) relating to nonpayment of approximately $275,000
for goods ordered. The Company intends to vigorously defend the action.
On August 18, 2015, Phison Electronics Corp.
filed a complaint against SDJ, case no. 115 CV284516, in California Superior Court in Santa Clara County. The complaint alleged
breach of contract and breach of implied covenant of good faith and fair dealing resulting in claimed damages of approximately
$585,000 in connection with SDJ’s alleged failure to purchase products manufactured on its account by Phison Electronics
Corp. SDJ believes the claims are without merit and intends to vigorously defend the action.
On August 28, 2015, Unigen Corporation filed
a complaint against SDJ, case no. HG15-78385, in California Superior Court in Alameda County. The complaint alleged breach of contract
for an alleged order or orders for 219,200 specially constructed computer components. The complaint seeks $180,000 in lost profit;
$678,669 for the cost of parts ordered; and $35,000 in incidental expenses. SDJ believes the claims are without merit and intends
to vigorously defend the action.
On February 16, 2016 the Company received a
letter from GoPro, Inc., or GoPro, alleging that the Company infringes on at least five U.S. patents held by GoPro, and requesting
that confirm in writing that the Company will permanently cease the sale and distribution of its Villain camera, along with any
camera accessories, including the waterproof camera case and standard housing. The five patents specifically identified by GoPro
in the letter were U.S. Patent No. D710,921: camera housing design, U.S. Patent No. D702,747: camera housing design, U.S. Patent
No. D740,875: camera housing design, U.S. Patent No. D737,879: camera design and U.S. Patent No. 721,935: camera design. Based
upon our preliminary review of these patents, the Company believes it has some defenses to GoPro’s allegations, although
there can be no assurance that the Company will be successful in defending against these allegations or reaching a business resolution
that is satisfactory to us.
The supplier of the Company’s Villain
camera has contractually represented and warranted that it owns or has paid royalties to any and all intellectual property, designs,
software, hardware, packaging, components, manuals and any other portion, part or element that is or may be subject to the Villain
and the parts and accessories thereof sourced by the supplier. This supplier has contractually agreed to pay any claims, damages,
or costs that the Company suffers as a result of the patent infringement or a violation of international, U.S. or state laws or
regulations as detailed in the prior sentence.
NOTE 11 — SUBSEQUENT EVENTS
Management review of subsequent events
Management has performed an analysis of the
activities and transactions subsequent to December 31, 2015 to determine the need for any adjustments to and/or disclosure within
the consolidated financial statements. This analysis has been performed through April 20, 2016, the date the consolidated financial
statements were available to be issued.
On June 6, 2016 and June 23, 2016, the Company’s
stockholders approved an additional one-for-1.2578616 and one-for-1.06 reverse stock split, respectively. All share and per share
information in these consolidated financial statements, except for par value and authorized shares, have been amended to reflect
the reverse stock splits.
MONSTER DIGITAL, INC.
AND SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 2016
CONTENTS
MONSTER DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except shares and
par value)
|
|
December 31,
2015
|
|
|
September 30,
2016
|
|
|
|
(Note 1)
|
|
|
(unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
119
|
|
|
$
|
2,970
|
|
Accounts receivable, net of allowances of $99 and $252, respectively
|
|
|
644
|
|
|
|
928
|
|
Inventories
|
|
|
633
|
|
|
|
1,789
|
|
Prepaid expenses and other
|
|
|
141
|
|
|
|
440
|
|
Total current assets
|
|
|
1,537
|
|
|
|
6,127
|
|
Trademark, net of amortization of $54 and $152, respectively
|
|
|
2,548
|
|
|
|
2,450
|
|
Deferred IPO costs
|
|
|
619
|
|
|
|
—
|
|
Deposits and other assets
|
|
|
14
|
|
|
|
14
|
|
Total assets
|
|
$
|
4,718
|
|
|
$
|
8,591
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
215
|
|
|
$
|
—
|
|
Accounts payable
|
|
|
1,021
|
|
|
|
388
|
|
Accrued expenses
|
|
|
3,311
|
|
|
|
3,275
|
|
Customer refund
|
|
|
1,850
|
|
|
|
1,840
|
|
Due to related parties
|
|
|
510
|
|
|
|
—
|
|
Notes payable
|
|
|
3,505
|
|
|
|
38
|
|
Total current liabilities
|
|
|
10,412
|
|
|
|
5,541
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders’ equity (deficit)
|
|
|
|
|
|
|
|
|
Preferred stock; 10,000,000 shares authorized; no shares issued and outstanding
|
|
|
—
|
|
|
|
—
|
|
Common stock; $.0001 par value; 100,000,000 shares authorized; 3,702,865 and 7,339,050 shares issued and outstanding, respectively
|
|
|
—
|
|
|
|
—
|
|
Additional paid-in capital
|
|
|
20,181
|
|
|
|
33,880
|
|
Accumulated deficit
|
|
|
(25,875
|
)
|
|
|
(30,830
|
)
|
Total shareholders’ equity (deficit)
|
|
|
(5,694
|
)
|
|
|
3,050
|
|
Total liabilities and shareholders’ equity (deficit)
|
|
$
|
4,718
|
|
|
$
|
8,591
|
|
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
MONSTER DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, except per share amounts)
(unaudited)
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
6,827
|
|
|
$
|
2,999
|
|
Cost of goods sold
|
|
|
6,034
|
|
|
|
2,430
|
|
Gross profit
|
|
|
793
|
|
|
|
569
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
288
|
|
|
|
168
|
|
Selling and marketing
|
|
|
1,563
|
|
|
|
1,777
|
|
General and administrative
|
|
|
3,083
|
|
|
|
3,322
|
|
Total operating expenses
|
|
|
4,934
|
|
|
|
5,267
|
|
Operating loss
|
|
|
(4,141
|
)
|
|
|
(4,698
|
)
|
Other (income) expense, net
|
|
|
|
|
|
|
|
|
Interest and finance expense
|
|
|
705
|
|
|
|
812
|
|
Gain on conversion of debt
|
|
|
-
|
|
|
|
(557
|
)
|
Debt conversion expense
|
|
|
898
|
|
|
|
-
|
|
Total other (income) expense
|
|
|
1,603
|
|
|
|
255
|
|
Loss before income taxes
|
|
|
(5,744
|
)
|
|
|
(4,953
|
)
|
Provision for income taxes
|
|
|
1
|
|
|
|
2
|
|
Net Loss
|
|
$
|
(5,745
|
)
|
|
$
|
(4,955
|
)
|
|
|
|
|
|
|
|
|
|
Loss Per Share
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
(1.82
|
)
|
|
$
|
(1.05
|
)
|
Number of Shares used in Computation
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
3,156
|
|
|
|
4,721
|
|
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
MONSTER DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF SHAREHOLDERS’
EQUITY (DEFICIT)
(Dollars in thousands, except shares)
(unaudited)
|
|
Common Stock
|
|
|
Preferred
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2015
|
|
|
3,702,865
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
20,181
|
|
|
$
|
(25,875
|
)
|
|
$
|
(5,694
|
)
|
Issuance of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
2,802,430
|
|
|
|
—
|
|
|
|
2,393
|
|
|
|
—
|
|
|
|
2,393
|
|
Conversion of preferred to common stock
|
|
|
756,806
|
|
|
|
—
|
|
|
|
(2,802,430
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exchange of debt for equity
|
|
|
782,244
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,520
|
|
|
|
—
|
|
|
|
3,520
|
|
Issuance of common stock and warrants in IPO net of issuance costs
|
|
|
2,025,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,843
|
|
|
|
—
|
|
|
|
6,843
|
|
Issuance of restricted shares of common stock
|
|
|
72,135
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Amortization of non-cash stock-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
943
|
|
|
|
—
|
|
|
|
943
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,955
|
)
|
|
|
(4,955
|
)
|
Balance September 30, 2016
|
|
|
7,339,050
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
33,880
|
|
|
$
|
(30,830
|
)
|
|
$
|
3,050
|
|
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
MONSTER DIGITAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,745
|
)
|
|
$
|
(4,955
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
283
|
|
|
|
943
|
|
Amortization of deferred debt issuance costs and debt discount
|
|
|
483
|
|
|
|
740
|
|
Amortization of trademark
|
|
|
21
|
|
|
|
98
|
|
Gain on conversion of debt to common stock
|
|
|
—
|
|
|
|
(557
|
)
|
Debt conversion expense
|
|
|
898
|
|
|
|
—
|
|
Provision for doubtful accounts
|
|
|
160
|
|
|
|
153
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,942
|
|
|
|
(437
|
)
|
Inventories
|
|
|
1,406
|
|
|
|
(1,156
|
)
|
Prepaid expenses and other
|
|
|
(141
|
)
|
|
|
(299
|
)
|
Other assets
|
|
|
28
|
|
|
|
—
|
|
Accounts payable
|
|
|
(202
|
)
|
|
|
(633
|
)
|
Accrued expenses
|
|
|
(959
|
)
|
|
|
(124
|
)
|
Customer refund
|
|
|
1,843
|
|
|
|
(10
|
)
|
Due to related parties
|
|
|
(59
|
)
|
|
|
—
|
|
Net cash used in operating activities
|
|
|
(42
|
)
|
|
|
(6,237
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock, net
|
|
|
—
|
|
|
|
2,393
|
|
Private placement offering
|
|
|
2,969
|
|
|
|
—
|
|
Private placement issuance costs
|
|
|
(414
|
)
|
|
|
—
|
|
Short-term loan – related party, net
|
|
|
(51
|
)
|
|
|
—
|
|
Proceeds from issuance of IPO common stock and warrants
|
|
|
—
|
|
|
|
8,151
|
|
IPO costs
|
|
|
—
|
|
|
|
(689
|
)
|
Payments on bridge financing
|
|
|
—
|
|
|
|
(462
|
)
|
Proceeds from issuance of bridge financing
|
|
|
—
|
|
|
|
406
|
|
Proceeds from issuance of convertible debt and warrants
|
|
|
1,645
|
|
|
|
—
|
|
Proceeds from credit facility
|
|
|
6,969
|
|
|
|
581
|
|
Payments on credit facility
|
|
|
(10,782
|
)
|
|
|
(785
|
)
|
Payments on trademark note payable
|
|
|
—
|
|
|
|
(450
|
)
|
Deferred financing costs
|
|
|
(337
|
)
|
|
|
(57
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(1
|
)
|
|
|
9,088
|
|
Net (decrease) increase in cash
|
|
|
(43
|
)
|
|
|
2,851
|
|
Cash, beginning of the period
|
|
|
97
|
|
|
|
119
|
|
Cash, end of the period
|
|
$
|
54
|
|
|
$
|
2,970
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
221
|
|
|
$
|
55
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Reclassification of deferred IPO costs
|
|
$
|
—
|
|
|
$
|
619
|
|
Exchange of debt for equity upon IPO
|
|
$
|
—
|
|
|
$
|
3,520
|
|
Deferred IPO costs
|
|
$
|
218
|
|
|
$
|
—
|
|
Stock purchase warrants issued with debt
|
|
$
|
335
|
|
|
$
|
—
|
|
Issuance of common stock in connection with trademark purchase
|
|
$
|
2,103
|
|
|
$
|
—
|
|
Exchange of debt for equity
|
|
$
|
2,272
|
|
|
$
|
—
|
|
The accompanying Notes to Consolidated Financial
Statements are an integral part of these statements.
M
ONSTER DIGITAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BUSINESS
ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
: Monster Digital, Inc. (“MDI”),
a Delaware corporation (formed in November 2010), and its subsidiary, SDJ Technologies, Inc. (“SDJ”) (collectively
referred to as the “Company”), is an importer of high-end memory storage products, flash memory and action sports cameras
marketed and sold under the Monster Digital brand name acquired under a long-term licensing agreement with Monster, Inc. The Company
sources its products from China, Taiwan and Hong Kong.
Public Offering
: The Company closed its initial public offering
(the “Offering”) on July 13, 2016 and its common stock and warrants are listed on the Nasdaq Capital Market under the
symbols “MSDI” and “MSDIW”, respectively. The Offering generated gross proceeds of $9,132,750 on the sale
of 2,025,000 common shares at $4.50 per share and 2,025,000 warrants at $0.01 per warrant.
Basis of Presentation
: The accompanying unaudited
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States (“U.S. GAAP”) for interim financial information and with the SEC’s instructions for interim financial
information. They do not include all information and footnotes necessary for a fair presentation of financial position, operating
results and cash flows in conformity with U.S. GAAP for complete financial statements. These consolidated financial statements
should be read in conjunction with the consolidated financial statements and related notes for the year ended December 31, 2015
which are included in Form S-1 filed by the Company that was declared effective on July 7, 2016. In the opinion of management,
all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the operating
results for the periods presented have been included in the interim periods. Operating results for the three and nine months ended
September 30, 2016 are not necessarily indicative of the results that may be expected for other interim periods or the year ending
December 31, 2016. For interim financial reporting purposes, income taxes are recorded based upon estimated annual effective income
tax rates taking into consideration discrete items occurring in a quarter. The consolidated balance sheet as of December 31, 2015
is derived from the 2015 audited financial statements.
Principles of Consolidation
: The consolidated
financial statements include the accounts of MDI and SDJ. All significant intercompany transactions have been eliminated in consolidation.
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
certain estimates and assumptions that affect the reported amounts of assets and liabilities (including sales returns, price protection
allowances, bad debts, inventory reserves, warranty reserves, and asset impairments), disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ significantly from those estimates
Concentration of Cash
: The Company maintains its
cash in bank accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such
accounts. Management believes the Company is not exposed to any significant credit risk on its cash balances.
Accounts Receivable
: Accounts receivable are carried
at original invoice amount less allowance for doubtful accounts. Management determines the allowance for doubtful accounts by identifying
troubled accounts and by using historical experience applied to an aging of accounts. Accounts receivable are written off when
deemed uncollectible. Recoveries of receivables previously written off are recorded when received. Accounts receivable are considered
to be past due if any portion of the receivable balance is outstanding for more than 90 days past the customer’s granted
terms. The Company does not charge interest on past due balances or require collateral on its accounts receivable. As of December
31, 2015 and September 30, 2016, the allowance for doubtful accounts was approximately $99,000 and $252,000, respectively.
Inventories
: Inventories are stated at the lower
of cost or market, with cost being determined on the weighted average cost method of accounting. The Company purchases finished
goods and materials to assemble kits in quantities that it anticipates will be fully used in the near term. Changes in operating
strategy, customer demand, and fluctuations in market values can limit the Company’s ability to effectively utilize all products
purchased and can result in finished goods with above-market carrying costs which may cause losses on sales to customers. The Company’s
policy is to closely monitor inventory levels, obsolescence and lower market values compared to costs and, when necessary, reduce
the carrying amount of its inventory to its market value. As of December 31, 2015 and September 30, 2016, inventory on hand was
comprised primarily of finished goods ready for sale and packaging and supplies.
Fair Value of Financial Instruments
: Fair value
is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should
be determined based on the assumptions that market participants would use in pricing an asset or liability. Fair value is based
on a hierarchy of valuation techniques, which is determined on whether the inputs to those valuation techniques are observable
or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the
Company’s own market assumptions. These two types of inputs create a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value as follows:
|
Level 1:
|
Quoted prices for identical
instruments in active markets.
|
|
Level 2:
|
Quoted prices for similar
instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable in active markets.
|
|
Level 3:
|
Valuations derived from valuation
techniques in which one or more significant inputs or significant value drivers are unobservable.
|
The carrying amount for other financial instruments, which include
cash, accounts receivable, accounts payable, and line of credit, approximate fair value based upon their short term nature and
maturity.
Revenue Recognition
: Revenue is realized or realizable
and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) the sales price is
fixed or determinable, (3) collectability is reasonably assured, and (4) products have been shipped and the customer has taken
ownership and assumed the risk of loss. Distributors and retailers take full ownership of their product upon delivery and sales
are fully recognized at that time.
Revenue is reduced by reserves for price protection, sales returns,
allowances and rebates. Our reserve estimates are based upon historical data as well as projections of sales, customer inventories,
market conditions and current contractual sales terms. If the Company reduces the list price of its products, certain customers
may receive a credit from the Company (i.e. price protection). The Company estimates the impact of such pricing changes on a regular
basis and adjusts its allowances accordingly. Amounts charged to operations for price protection are calculated based on actual
price changes on individual products and customer inventory levels. The reserve is then reduced by actual credits given to these
customers at the time the credits are issued. We calculate the allowance for doubtful accounts and provision for sales returns
and rebates based on management’s estimate of the amount expected to be uncollectible or returned on specific accounts. We
provide for future returns, price protection and rebates at the time the products are sold. We calculate an estimate of future
returns of product by analyzing units shipped, units returned and point of sale data to ascertain consumer purchases and inventory
remaining with retail to establish anticipated returns. Price protection is calculated on a product by product basis. The objective
of price protection is to mitigate returns by providing retailers with credits to ensure maximum consumer sales. Price protection
is granted to retailers after they have presented the Company an affidavit of existing inventory.
The Company also offers market development credits (“MDF credits”)
to certain of its customers. These credits are also charged against revenue.
Shipping and Handling Costs
: Historically, the
Company has not charged its customers for shipping and handling costs, which is a component of marketing and selling expenses.
These costs totaled approximately $175,000 and $24,000 in the three months ended September 30, 2015 and 2016, respectively, and
approximately $269,000 and $118,000 in the nine months ended September 30, 2015 and 2016. respectively.
Income Taxes
: Deferred tax assets and liabilities
are determined based on the temporary differences between the financial reporting and tax basis of assets and liabilities and net
operating loss carryforwards, applying enacted statutory tax rates in effect for the year in which the differences are expected
to reverse. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will
not be realized.
The Company uses a two-step approach to recognizing and measuring
uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related
appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more likely
than not to be realized upon settlement. As of December 31, 2015 and September 30, 2016, there are no known uncertain tax positions.
The Company’s policy is to classify the liability for unrecognized
tax benefits as current to the extent that it is more likely than not to be realized upon settlement and to the extent that the
Company anticipates payment (or receipt) of cash within one year. The Company recognizes interest and penalties, if any, related
to unrecognized tax benefits in the tax provision.
Product Warranty
: The Company’s memory products
are sold under various limited warranty arrangements ranging from three years to five years on solid state drives and a limited
lifetime warranty on all other products. Company policy is to establish reserves for estimated product warranty costs in the period
when the related revenue is recognized. The Company has the right to return defective products to the manufacturer. As of December
31, 2015 and September 30, 2016, the Company has established a warranty reserve of $234,000 and $217,000, respectively. The warranty
reserve is included in accrued expenses in the accompanying consolidated balance sheets.
Research and Development
: The Company incurs costs
to improve the appeal and functionality of its products. Research and development costs are charged to expense when incurred.
Earnings (Loss) per Share
: Basic earnings (loss)
per share is calculated by dividing net earnings (loss) attributable to common stockholders by the weighted-average number of shares
of common stock outstanding during the period. Diluted earnings (loss) per share is calculated similarly but includes potential
dilution from the exercise of common stock warrants and options and conversion of debt to equity, except when the effect would
be anti-dilutive. Earnings (loss) per share are computed using the “treasury stock method.” At September 30, 2016,
outstanding warrants to acquire 3,755,100 shares of common stock (2,025,000 issued further to the Offering, 1,405,007 issued in
connection with the conversion of preferred stock and bridge loans upon closing of the Offering and 325,093 other warrants), 96,602
stock options, and $38,000 in convertible notes payable have been excluded from the computation of diluted loss per share because
their effect was anti-dilutive.
Recently Issued Accounting Pronouncements
— In
April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-08,
Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity
. Under ASU 2014-08, only disposals that represent a strategic
shift that has (or will have) a major effect on the entity’s results and operations would qualify as discontinued operations,
which could include a disposal of a major geographical area, a major line of business, a major equity method investment, or other
major parts of an entity. ASU 2014-08 also expands the disclosure requirements for disposals of operations to include more information
about assets, liabilities, income and expenses and requires entities to disclose information about disposals of individually significant
components. ASU 2014-08 is effective in the first quarter of 2015, with early adoption permitted. ASU 2014-08 could impact our
consolidated financial results in the event of a transaction as described above.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606).
ASU 2014-09 is based on the principle that revenue is recognized to depict
the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty
of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets
recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective in the first quarter of 2018 and requires
either a retrospective or a modified retrospective approach to adoption. We have not yet selected a transition method and are currently
evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation
of Financial Statements — Going Concern
, which requires that management of an entity evaluate whether there
are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue
as a going concern within one year after the date that the financial statements are issued or available to be issued. This update
will become effective beginning December 31, 2016, with early adoption permitted. The provisions of this standard are not expected
to significantly impact the Company.
In April 2015, the FASB issued ASU 2015-03,
Interest — Imputation
of Interest
, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet
as a direct deduction from the carrying amount of the related debt liability instead of being presented as an asset. Debt disclosures
will include the face amount of the debt liability and the effective interest rate. The update requires retrospective application
and represents a change in accounting principle. The update is effective for fiscal years beginning after December 15, 2015 and
was adopted as of January 1, 2016. The adoption of ASU 2015-03 did not have a material impact on the Company’s consolidated
financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330):
Simplifying the Measurement of Inventory
. The standard requires entities to measure most inventory “at the lower of cost
and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower
of cost or market (market in this context is defined as one of three different measures, one of which is net realizable value).
The standard is effective for the Company prospectively beginning January 1, 2017. The Company is currently evaluating the impact
of the adoption of this guidance on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic
842)
, which requires lessees to recognize assets and liabilities for the rights and obligations created by most leases on their
balance sheet. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. Early application is permitted. ASU 2016-02 requires modified retrospective adoption for all leases existing
at, or entered into after, the date of initial application, with an option to use certain transition relief. The Company is currently
evaluating the impact the standard may have on its consolidated financial statements and related disclosures.
Other pronouncements issued by the FASB or other authoritative accounting
standards groups with future effective dates are either not applicable or not significant to the consolidated financial statements
of the Company.
NOTE 2 — GOING
CONCERN
As of September 30, 2016, the Company has incurred cumulative net
losses from its inception of approximately $31 million and has incurred a year to date loss of approximately $5 million. These
circumstances raise substantial doubt as to the Company’s ability to continue as a going concern. In response to this uncertainty,
Management has taken certain measures in 2015 and to date in 2016 and has plans for the remainder of 2016 and beyond, with the
objective of alleviating this concern. They include the following:
|
•
|
On July 13, 2016, the Company
received gross proceeds of approximately $9.1 million upon closing the Offering.
|
|
•
|
In order to meet customers’
needs for consumer products, the Company is continuing to develop new products to complement existing products and expand overall
product offerings, with the objective of increasing revenue and gross profit percentages. The Company introduced two new action
sports camera in the third quarter of 2016 and will be introducing additional new action sports cameras in 2017.
|
While the Company believes it will be successful in obtaining the
necessary financing to fund its operations, there are no assurances that such additional funding will be achieved and that it will
succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts of liabilities that might be necessary should the Company be unable to continue in existence.
NOTE 3 — DEBT
AND EQUITY FINANCING
Credit Facility
In June 2015, the Company secured an accounts receivable financing
facility with Bay View Funding. The contract provides for maximum funding of $4 million and a factoring fee of 1.35% for the first
30 days and .45% for each 10-day period thereafter that the financed receivable remains outstanding. Upon the execution of this
contract, the balance owed under a prior credit facility was repaid and that contract was terminated. The total amount outstanding
under this facility as of December 31, 2015 and September 30, 2016 was $215,000 and $0, respectively. There are no financial or
similar covenants associated with this facility.
Debt to Equity Exchange Offer
In December 2014, the Company extended an offer to its convertible
Note holders for the exchange of convertible Notes, accrued interest and common stock purchase warrants into common stock. In the
offer, the conversion rate on the principal amount of the Notes was reduced from $22.27 per share to $14.85 per share, with accrued
interest being cancelled. Furthermore, in exchange for the cancellation of all warrants, the Note holders received .07 shares of
common stock for every .13 shares that would have been issued upon exercise of the warrants.
As further inducement to the offer for the new shares issued in
connection with the exchange offer, the Company’s principal shareholder agreed to put back to the Company an equal number
of shares owned by him (to a maximum of 336,682 shares) and have such shares cancelled.
Through December 31, 2014, a total of $3,428,000 in convertible
Notes had been converted to equity pursuant to the exchange offer. As a result of the foregoing exchange, $5,870,000 was credited
to additional paid-in capital, which is the net amount of the principal of the Notes, unpaid accrued interest, unamortized debt
discount, and the debt conversion expense. For the year ended December 31, 2015, the Company continued its private offering of
convertible Notes concurrent with a related offer to exchange the notes for shares of common stock on the terms indicated above.
During the nine-month period ended September 30, 2015, gross proceeds of $1,645,000 were raised in the offering from the issuance
of convertible Notes payable. In March 2015, these Notes were converted to common stock pursuant to the exchange offer, resulting
in an inducement charge of $898,000. As a result of these transactions, an additional 158,265 common shares were issued during
the period. As of December 31, 2015 and September 30, 2016, a total of $38,000 in principal of convertible Notes payable remain
outstanding. These Notes matured in the second quarter of 2015 and remain outstanding as of September 30, 2016.
Promissory notes
From October 2015 through March 7, 2016, the Company issued promissory
notes; the notes are due and payable at the earlier of one year from the date of issuance or the closing date of the Company’s
initial public offering, bear an interest rate of 15% that is accrued upon issuance, irrespective of whether the promissory note
is outstanding for part or full term until maturity, and have a loan origination fee of $.225 for each dollar loaned. The loan
origination fee associated with the notes as of September 30, 2016 was $756,000 and was recorded as accrued interest and debt discount
to the notes payable and is being amortized over the life of the notes. Debt discount amortized as interest expense in the three
and nine months ended September 30, 2016 was approximately $25,000 and $389,000, respectively. All principal, fees and interest
were payable on the due date. In July 2016, the Company completed the Offering whereby 90% of the outstanding promissory notes
totaling $3,024,000 were converted to 672,000 shares of common stock and 672,000 warrants at the offering price of $4.50 per share.
The 15% accrued interest and the 22.5% origination fee were waived as part of the conversion. The remaining, unconverted $336,000
of promissory notes were paid out of the proceeds of the Offering along with the accrued interest and origination fee attributable
to those notes. As of December 31, 2015, a total of $3.0 million in principal of these notes payable was outstanding and no balance
is due as of September 30, 2016.
Due to Monster, Inc
.
In addition to the issuance of shares of common stock and common
stock purchase warrants (see Note 5), the Company has agreed to pay Monster, Inc. $500,000 as consideration for use of the name
Monster Digital, Inc. pursuant to Amendment No. 3 to the Trademark License Agreement between the Company and Monster, Inc. Of this
total balance, the Company agreed to pay $125,000 in December 2015 and the balance from the proceeds of the planned Offering. The
Company paid $50,000 of the $125,000 in December 2015, $75,000 in January 2016 and the full remaining balance due in September
2016.
Notes payable consists of the following (in thousands):
|
|
December 31,
2015
|
|
|
September 30,
2016
|
|
Note payable, convertible debt
|
|
$
|
38
|
|
|
$
|
38
|
|
Due to Monster, Inc.
|
|
|
450
|
|
|
|
—
|
|
Interest and loan origination fee accrued related to promissory notes payable and accrued at issuance
|
|
|
1,108
|
|
|
|
—
|
|
Promissory notes payable, 2015 bridge loans, net of debt discount of $563 and $0, respectively, and net of debt issuance cost of $483 and $0, respectively
|
|
|
1,909
|
|
|
|
—
|
|
Total
|
|
$
|
3,505
|
|
|
$
|
38
|
|
NOTE 4 — ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
|
|
December 31,
2015
|
|
|
September 30,
2016
|
|
Royalties
|
|
$
|
103
|
|
|
$
|
125
|
|
Market development credits
|
|
|
336
|
|
|
|
112
|
|
Price protection
|
|
|
563
|
|
|
|
139
|
|
Return reserves
|
|
|
891
|
|
|
|
218
|
|
Reserve for legal contingencies
|
|
|
300
|
|
|
|
468
|
|
Accrued purchase orders
|
|
|
123
|
|
|
|
982
|
|
Others
|
|
|
995
|
|
|
|
1,231
|
|
Total
|
|
$
|
3,311
|
|
|
$
|
3,275
|
|
NOTE 5 — STOCKHOLDERS’ EQUITY
Common Stock Purchase Warrants
: From 2011 through
June 30, 2015, the Company issued common stock purchase warrants in connection with the initial formation of the Company, the execution
of a license agreement, and the issuance of convertible notes payable. All warrants have been valued on the date of their issuance
using the Black-Scholes option pricing model using various assumptions regarding stock price volatility, risk-free interest rates,
expected dividend rates, and expected term of the contract. Through September 30, 2016, none of the warrants have been exercised,
and for the year ended December 31, 2015 and nine months ended September 30, 2016, 99,681 warrants have been canceled in connection
with the exchange offer described above (see Note 3).
In August 2015, the Company issued 191,289 common stock purchase
warrants in connection with an Advisory Board Agreement with Noel Lee, the Chief Executive Officer of Monster, Inc., and recognized
a $156,000 charge related to the issuance. As of December 31, 2015 and September 30, 2016, warrants to purchase 325,093 shares
of common stock are outstanding. Unexercised warrants will expire from 2016 to 2019.
The Company utilizes the Black-Scholes valuation method to value
warrants. The expected life represents the period that these warrants are expected to be outstanding. The expected volatility was
estimated by analyzing the historic volatility of similar public companies. No dividend payouts were assumed as the Company has
not historically paid, and is not anticipating to pay, dividends in the foreseeable future. The risk-free rate of return reflects
the interest rate offered for US treasury rates over the expected life of the warrants.
A summary of significant assumptions used to estimate the fair value
of the warrants issued in August 2015 are as follows:
Fair value of warrants issued
|
|
$
|
.89
|
|
Expected term (years)
|
|
|
5.0
|
|
Risk-free interest rate
|
|
|
1.60
|
%
|
Volatility
|
|
|
45.4
|
%
|
Dividend yield
|
|
|
None
|
|
Common Stock Purchase Rights Offering
: In April
2015, the Company initiated a common stock purchase rights offering to its existing shareholders. The offering consists of 108,138
Units, with each Unit consisting of 2 newly issued shares of common stock and 3 shares of common stock owned by the Company’s
principal shareholder and chairman. Each Unit is offered for $44.55, with all proceeds going to the Company. In April 2015 through
September 2015, the Company closed on the sale of approximately 78,800 Units (representing 236,403 newly issued common shares)
and has received net proceeds of approximately $2,969,000.
Reverse Stock Splits
: By action by written consent of the
Company’s stockholders effective as of November 6, 2015, the Company’s stockholders approved a reverse stock split
in a range of between one-for-five and one-for-twelve, such exact amount to be determined by the Company’s Board of Directors
prior to the effective date of a planned equity offering. On January 7, 2016, the Board of Directors of the Company approved a
one-for-11.138103 reverse
stock split. On June 6, 2016, the Board of Directors of the Company
approved an additional one-for-1.2578616 reverse stock split. On June 23, 2016, the Board of Directors of the Company approved
an additional one-for-1.06 reverse stock split. All share and per share information in these consolidated financial statements,
except for par value and authorized shares, have been amended to reflect the reverse stock splits.
Restricted Shares
: In August 2015, the Company
issued 84,170 shares of restricted common stock to the Company’s Chairman of the Board pursuant to a consulting agreement.
The consulting agreement was effective in May 2015 and $69,000 and $110,000 of compensation expense was recognized in the three
and nine months ended September 30, 2015, respectively. Also related to the stock issuance, $68,000 and $205,000 of compensation
expense was recognized in the three and nine months ended September 30, 2016, respectively.
In August 2015, the Company issued 382,575
shares of restricted common stock in connection to the Trademark License Agreement with Monster, Inc. The fair value of the 382,575
shares approximating $2,103,000 were recorded as part of the Trademark in August 2015. In regards to the valuation of the Company’s
common stock, the Board of Directors engaged an independent third party valuation of the Company. Factors included in the valuation
included the Company’s present value of future cash flows, its capital structure, valuation of comparable companies, its
existing licensing agreements and the growth prospects for its product line. These factors were incorporated into an income approach
and a market approach in order to derive an overall valuation of the Company’s common stock of $5.49 per share at August
2015.
In August 2016, the Company authorized the issuance of 545,000 shares
of restricted common stock pursuant to employment agreements and recognized $66,000 of compensation expense during the three months
ended September 30, 2016 related to the restricted shares. Also in August 2016, the Company authorized the issuance of 40,000 shares
of restricted common stock pursuant to a services agreement with an investment relations firm and recognized $16,000 of compensation
expense related to restricted shares during the three months ended September 30, 2016. In addition, the Company authorized the
issuance of 125,000 shares of restricted common stock to Jawahar Tandon pursuant to a consulting agreement and recognized $563,000
of compensation expense related to the restricted shares during the three months ended September 30, 2016.
Preferred Stock
: In March 2016, the Company issued a confidential
Private Placement Memorandum (“PPM”) for a maximum of 3,000,000 shares of Series A Convertible Preferred Stock, with
a purchase price of $1.00 per share and convertible into one share of the Company’s common stock and having an 8%, noncumulative
dividend. Pursuant to the PPM, as of June 30, 2016, 2,802,430 shares of Series A Preferred Stock were subscribed for net proceeds
of approximately $2.4 million. In July 2016, the Company completed the Offering in which all shares of Series A Preferred Stock
was converted into 622,762 shares of common stock and 622,762 warrants at the public offering price of $4.50 per share and the
issuance of 134,044 shares of common stock further to the conversion.
NOTE 6 — STOCK
OPTIONS
In 2012, the Company’s Board of Directors approved the 2012
Omnibus Incentive Plan (the “Plan”) which allows for the granting of stock options, stock appreciation rights, awards
of restricted stock and restricted stock Units, stock bonuses and other cash and stock-based performance awards. A total of 101,005
shares of common stock have been approved and reserved for issuance under the Plan. In November 2015, the Company’s stockholders
approved a 269,345 share increase in that number of shares reserved for issuance under the Plan such that a total of 370,350 shares
of common stock have been approved and reserved for issuance under the Plan. As of December 31, 2015 and September 30, 2016, 71,040
options had been granted under the Plan. During the nine months ended September 30, 2016, 60,940 options were forfeited for employees
who were no longer with the Company and were returned to the pool of available options.
On December 23, 2015, the Company authorized restricted stock grants
under its 2012 Omnibus Incentive Plan of 13,467 shares to David Clarke in connection with his appointment as the Company’s
President and Chief Executive Officer and 33,668 shares to Neal Bobrick in connection with his appointment as the Company’s
Executive Vice President, Sales and Marketing, grants accepted and effective January 4, 2016. The Company recorded non-cash stock-based
compensation of $21,000 and $65,000 during the three and nine months ended September 30, 2016, respectively, related to the issuance
of restricted stock. An additional $194,000 of stock-based compensation remains to be recognized over 27 months.
On the effective date of the Offering, 25,000 shares of restricted
stock were granted to each of David Olert, the Company’s Chief Financial Officer, Vivek Tandon, the Company’s Executive
Vice President - Operations and Marc Matejka, the Company’s Vice President of Operations as well as 36,332 restricted shares
to Neal Bobrick, its Executive Vice President – Sales and Marketing.
Concurrently, 10,000 shares of restricted stock
were granted to each of the Company’s four outside directors.
The Company recorded non-cash stock-based compensation
of $80,000 during the three months ended September 30, 2016 related to these issuances of restricted stock. An additional $601,000
of stock-based compensation remains to be recognized over 45 months.
Also granted on the effective date of the Offering were previously
approved options to acquire 16,834 and 33,668 common shares at an exercise price per share of $4.50 to David Olert and Neal Bobrick,
respectively. Options to purchase 18,000 common shares at an exercise price per share of $4.50 were granted each to Vivek Tandon
and Marc Matejka. The Company recorded non-cash stock-based compensation of $12,000 during the three months ended September 30,
2016 related to these issuances of common stock options. An additional $164,000 of stock-based compensation remains to be recognized
over 45 months.
In August 2016, pursuant to a services agreement, the Company granted
options to acquire 38,143 shares of common stock to an investor relations firm and recognized $2,000 of non-cash stock-based compensation
related to the issuance during the three months ended September 30, 2016. An additional $32,000 of stock-based compensation remains
to be recognized over 9 months.
The Company follows the provision of ASC Topic 718,
Compensations
– Stock Compensation
which requires the measurement and recognition of compensation expense for all stock-based payment
awards made to employees and non-employee directors, including employee stock options. Stock compensation expense based on the
grant date fair value estimated in accordance with the provisions of ASC 718 is generally recognized as an expense over the requisite
service period.
In 2015 and 2016, the following stock option grants were made:
Option Date
|
|
Options
Granted
|
|
|
Exercise
Price
|
|
|
Estimated
Fair
Value of
Underlying
Stock
|
|
|
Intrinsic
Value
|
|
May 2015
|
|
|
71,040
|
|
|
$
|
29.71
|
|
|
$
|
5.79
|
|
|
|
None
|
|
July 2016
|
|
|
86,502
|
|
|
$
|
4.50
|
|
|
$
|
4.50
|
|
|
|
None
|
|
August 2016
|
|
|
6,004
|
|
|
$
|
5.00
|
|
|
$
|
3.00
|
|
|
|
None
|
|
August 2016
|
|
|
7,230
|
|
|
$
|
7.00
|
|
|
$
|
3.00
|
|
|
|
None
|
|
August 2016
|
|
|
9,986
|
|
|
$
|
9.00
|
|
|
$
|
3.00
|
|
|
|
None
|
|
August 2016
|
|
|
14,923
|
|
|
$
|
11.00
|
|
|
$
|
3.00
|
|
|
|
None
|
|
The Company’s Board of Directors granted options for 71,040
shares of common stock to certain employees on May 8, 2015. The option prices were determined based on such factors as recent equity
transactions and other factors as deemed necessary and relevant in the circumstances. The exercise prices for options granted were
set by the Company’s Board of Directors at a premium over fair market value of its common stock at the time the grants were
authorized.
In regards to the valuation of the Company’s common stock
prior to the Offering, the Board of Directors engaged an independent third party valuation of the Company. Factors included in
the valuation included the Company’s present value of future cash flows, its capital structure, valuation of comparable companies,
its existing licensing agreements and the growth prospects for its product line. These factors were incorporated into an income
approach and a market approach in order to derive an overall valuation of the Company’s common stock of $5.79 per share at
May 8, 2015.
The Company utilizes the Black-Scholes valuation method to value
stock options and recognizes compensation expense over the vesting period. The expected life represents the period that the Company’s
stock-based compensation awards are expected to be outstanding. The Company uses a simplified method provided in Securities and
Exchange Commission release Staff Accounting Bulletin No. 110 which averages an awards weighted average vesting period and contractual
term for “plain vanilla” share options. The expected volatility was estimated by analyzing the historic volatility
of similar public companies. No dividend payouts were assumed as the Company has not historically paid, and is not anticipating
to pay, dividends in the foreseeable future. The risk-free rate of return reflects the weighted average interest rate offered for
U.S. treasury rates over the expected life of the options.
A summary of significant assumptions used to estimate the fair value
of the stock options granted in 2015 are as follows:
Weighted average fair value of options granted
|
|
$
|
0.45
|
|
Expected term (years)
|
|
|
6.0 to 6.25
|
|
Risk-free interest rate
|
|
|
1.89
|
%
|
Volatility
|
|
|
45.4
|
%
|
Dividend yield
|
|
|
None
|
|
A summary of significant assumptions used to estimate the fair value
of the stock options granted in 2016 are as follows:
Weighted average fair value of options granted
|
|
$
|
1.70
|
|
Expected term (years)
|
|
|
6.0 to 10.0
|
|
Risk-free interest rate
|
|
|
1.21% to 1.51
|
%
|
Volatility
|
|
|
45.4
|
%
|
Dividend yield
|
|
|
None
|
|
The Company recorded non-cash stock-based compensation related to
stock options of $28,000 during the nine months ended September 30, 2016. An additional $197,000 of stock-based compensation related
to stock options remains to be amortized over 45 months.
A summary of option activity for the Plan as of September 30, 2016
and changes for the nine months then ended are represented as follows:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contract
Term (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Options outstanding January 1, 2016
|
|
|
71,040
|
|
|
$
|
29.71
|
|
|
|
9.50
|
|
|
$
|
—
|
|
Granted
|
|
|
124,645
|
|
|
|
5.81
|
|
|
|
9.83
|
|
|
|
—
|
|
Forfeited
|
|
|
(60,940
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2016
|
|
|
134,745
|
|
|
$
|
7.60
|
|
|
|
9.75
|
|
|
$
|
—
|
|
NOTE 7 — RELATED PARTY TRANSACTIONS
Borrowings
: From time to time, the Company receives
short-term, non-interest bearing loans from Tandon Enterprises, Inc. for the purpose of funding temporary working capital needs.
For the nine months ended September 30, 2016, the Company borrowed $24,000, net of repayments. The $346,100 owed to Tandon Enterprises
at June 30, 2016 was converted into 76,911 shares of common stock and warrants at the effective date of the Offering.
In September 2015 David Clarke, the Company’s Chairman of
the Board and a significant stockholder of the Company, loaned the Company $100,000 further to a promissory note bearing interest
at 5% per annum, principal and unpaid interest payable on demand. In addition, Mr. Clarke incurred expenses on behalf of the Company
totaling approximately $50,000. Concurrent with the closing of the Offering, the loan and liability related to the expenses were
converted into 33,333 shares of common stock and 33,333 warrants at the public offering price of $4.50.
NOTE 8 — INCOME TAXES
For the nine months ended September 30, 2015 and 2016, respectively,
there was a $1,000 and $2,000 income tax provision recorded related to state minimum taxes due. The Company’s income tax
provision generally consists of state income taxes currently paid or payable.
The ultimate realization of the deferred tax asset is dependent
upon the generation of future taxable income during the periods in which temporary differences become deductible. Due to the uncertainty
surrounding the realization of these deferred tax assets, the Company has recorded a 100% valuation allowance. Net operating loss
carryforwards expire between the years 2029 and 2035. Tax years ended December 31, 2014, 2013 and 2012 are open and subject to
audit.
The effective income tax provision as a percentage of pre-tax loss
differs from expected combined federal and state income tax of 40% as a result of the full valuation allowance.
Management is not aware of any uncertain tax positions and does
not expect the total amount of recognized tax benefits to change significantly in the next twelve months.
NOTE 9 — CUSTOMER
AND VENDOR CONCENTRATIONS
Customers
:
Approximately 69% of the Company’s gross sales were made to
three customers with each exceeding 10% of total gross sales for the nine months ended September 30, 2015. Approximately 42% of
the Company’s gross sales were made to one customer for the nine months ended September 30, 2016. At September 30, 2016,
the amount included in outstanding accounts receivable related to this customer was approximately $684,000.
Vendors
:
Approximately 69% of the Company’s purchases were provided
by four vendors for the nine months ended September 30, 2015. Approximately 95% of the Company’s purchases were provided
by three vendors for the nine months ended September 30, 2016. At September 30, 2016, the amount in accounts payable related to
these vendors was approximately $21,000.
NOTE 10 — COMMITMENTS
AND CONTINGENCIES
Royalty
The Company entered into the initial trademark license agreement
with Monster, Inc. (formerly Monster Cable Products, Inc.) effective July 7, 2010. In 2012, the agreement was amended giving the
Company exclusive rights to utilize the name “Monster Digital” on memory products for a period of 25 years (expires
July 7, 2035) under the following payment schedule of royalties to Monster, Inc. This license agreement contains various termination
clauses that include (i) change in control, (ii) breach of contract and (iii) insolvency, among others. The Company is required
to remit royalty payments to Monster, Inc. on or before the 30
th
day following the end of each calendar quarter. At
any time during the term of the agreement, a permanent license may be negotiated.
The royalty schedule became effective in August 2011 and was further
amended in April 2012. As amended, royalties under this contract are as follows:
|
•
|
Years 1 (2012) and 2: Royalties
on all sales excluding sales to Monster, Inc. at a rate of four (4) percent, with no minimum.
|
|
•
|
Years 3 through 6: Minimum
royalty payments of $50,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
|
|
•
|
Years 7 through 10: Minimum
royalty payments of $125,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
|
|
•
|
Years 11 through 15: Minimum
royalty payments of $187,500 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
|
|
•
|
Years 16 through 25: Minimum
royalty payments of $250,000 per quarter up to a maximum of four (4) percent of all sales excluding sales to Monster, Inc.
|
Effective July 1, 2014, the royalty rate on certain products was
reduced from 4% to 2% for a period of 12 months, based on a mutual understanding between the Company and the licensor.
For the three months ended September 30, 2015 and 2016, royalty
expense amounted to approximately $44,000 and $125,000, respectively. For the nine months ended September 30, 2015 and 2016, royalty
expense amounted to approximately $112,000 and $246,000, respectively, and is included as a component of selling and marketing
expenses in the accompanying consolidated statements of operations (see Note 4).
Operating Lease
The Company occupies executive offices in Simi Valley, CA pursuant
to a lease through January 31, 2018 at a monthly rental rate of $13,850.
Customer Payment Agreement
In July 2015, the Company entered into an agreement with a customer
under which the Company will pay the customer a total of $835,000 owed to the customer for promotional and other credits related
to sales that occurred in 2014. The credits were accrued as contra-sales in 2014. Under the terms of the agreement, there is no
interest and the Company will make 12 monthly payments of $65,000 beginning in August 2015, and one final payment of $65,000 in
August 2016. The Company is not in compliance with the payment agreement and the balance owed is $445,000 at September 30, 2016.
Legal Matters
The Company is subject to certain legal proceedings and claims arising
in connection with the normal course of its business. In the opinion of management, the reserve established for the three cases
noted below is adequate so that the claims will have no material adverse effect on its consolidated financial position, results
of operations or cash flows.
On March 9, 2015, Memphis Electronics, Inc. (“MEI”)
filed a complaint against SDJ and the Company, case no. 4:15-cv-1104; in U.S. District Court for the Southern District of Texas.
The complaint alleged breach of contract and tort for an alleged order or orders for computer components. Plaintiff’s claims
are based in contract and tort (negligent and intentional misrepresentations) relating to nonpayment of approximately $275,000
for goods ordered. In August 2016, the Company settled the complaint for (i) a payment of $170,000 to MEI, (ii) the return from
MEI of the components that were in dispute, and (iii) the parties mutually releasing each other from all claims that were filed
or that could have been filed in this litigation.
On August 18, 2015, Phison Electronics Corp. (“Phison”)
filed a complaint against SDJ, case no. 115 CV284516, in California Superior Court in Santa Clara County. The complaint alleged
breach of contract and breach of implied covenant of good faith and fair dealing resulting in claimed damages of approximately
$585,000 in connection with SDJ’s alleged failure to purchase products manufactured on its account by Phison. While the complaint
has been filed, Phison has not yet served it. For this reason, the Court dismissed the case, without prejudice, for failure of
Phison to file a return of service and no case is currently pending. SDJ believes the claims are without merit.
On August 28, 2015, Unigen Corporation (“Unigen”) filed
a complaint against SDJ, case no. HG15-78385, in California Superior Court in Alameda County. The complaint alleged breach of contract
for an alleged order or orders for 219,200 specially constructed computer components. The complaint seeks $180,000 in lost profit;
$678,669 for the cost of parts ordered; and $35,000 in incidental expenses. In February 2016, the Company met with Unigen in an
attempt to mediate the matter. However, the mediation was not successful. The parties were required to engage in a second mediation
before December 31, 2016 to be followed by a January 6, 2017 settlement conference. On October 26, 2016, the parties met again
to mediate the matter and entered into a stipulated settlement whereby SDJ is to pay Unigen $225,000 within thirty days at which
time the case will be dismissed with prejudice. This settlement amount has been fully accrued in a legal reserve.
On February 16, 2016, we received a letter from GoPro, Inc., or
GoPro, alleging that we infringe on at least five U.S. patents held by GoPro, and requesting that we confirm in writing that we
will permanently cease the sale and distribution of our Villain camera, along with any camera accessories, including the waterproof
camera case and standard housing. The five patents specifically identified by GoPro in the letter were U.S. Patent No. D710,921:
camera housing design, U.S. Patent No. D702,747: camera housing design, U.S. Patent No. D740,875: camera housing design, U.S. Patent
No. D737,879: camera design and U.S. Patent No. 721,935: camera design. Based upon our preliminary review of these patents, we
believe we have some defenses to GoPro’s allegations. Our outside counsel has been in discussion with GoPro’s outside
counsel and has forwarded them material which we believe supports defense to these allegations, all in an effort to move the matter
to resolution. As of yet, there is no final resolution to this matter and there can be no assurance that we will be successful
in defending against these allegations or reaching a business resolution that is satisfactory to us.
The supplier of our Villain camera
has contractually represented and warranted that it owns or has paid royalties to any and all intellectual property, designs, software,
hardware, packaging, components, manuals and any other portion, part or element that is or may be subject to the Villain and the
parts and accessories thereof sourced by the supplier. This supplier has contractually agreed to pay any claims, damages, or costs
that we suffer as a result of the patent infringement or a violation of international, U.S. or state laws or regulations as detailed
in the prior sentence.
MONSTER DIGITAL, INC.
333,333 Shares of Common Stock
PROSPECTUS
Dated ,
2017
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
As used in this Part II, unless the context indicates or otherwise
requires, the terms the “registrant”, “we”, “us”, “our”, and the “Company”
refer to Monster Digital, Inc., a Delaware corporation, and its wholly owned subsidiary.
Item 14. Indemnification of Directors
and Officers
Section 145 of the Delaware General Corporation
Law authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers in terms
sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act of 1933, as amended. Our amended and restated certificate of incorporation provides
for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General
Corporation Law, and our amended and restated bylaws provide for indemnification of our directors, officers, employees and other
agents to the maximum extent permitted by the Delaware General Corporation Law.
We have entered into indemnification agreements
with our directors and executive officers, whereby we have agreed to indemnify our directors and executive officers to the fullest
extent permitted by law, including indemnification against expenses and liabilities incurred in legal proceedings to which the
director or executive officer was, or is threatened to be made, a party by reason of the fact that such director or executive officer
is or was our director, officer, employee or agent, provided that such director or executive officer acted in good faith and in
a manner that the director or executive officer reasonably believed to be in, or not opposed to, the our best interest. At present,
there is no pending litigation or proceeding involving any of our directors or executive officers regarding which indemnification
is sought, nor are we aware of any threatened litigation that may result in claims for indemnification.
We maintain insurance policies that indemnify
our directors and officers against various liabilities arising under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended, that might be incurred by any director or officer in his capacity as such.
Item 15. Recent Sales of Unregistered
Securities.
The following sets forth information regarding
all unregistered securities sold since the inception of the registrant.
In August 2012, SDJ, Inc., the predecessor
of the registrant, became a wholly-owned subsidiary of the registrant further to a share exchange agreement. In connection with
this reorganization, 100% of the issued and outstanding securities of SDJ were exchanged for securities of the registrant. An aggregate
of 2,235,058 shares of common stock was issued to the shareholders of SDJ, Inc. (7 persons). The registrant relied upon Rule 506
of Regulation D with respect to the issuant; all issuees were accredited investors.
In August 2012, the registrant issued Tandon
Enterprises, Inc. an aggregate of 67,337 shares of common stock further to a license and sublicense agreement. The registrant relied
upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.
In August 2012, the registrant issued Noel
Lee, the Chief Executive Officer of Monster, Inc., a five year warrant to acquire 16,834 shares of common stock at a per share
exercise price of $29.71. The registrant relied upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited
investor.
Between May 2012 and June 2013, the registrant
issued an aggregate of 524,914 shares of common stock to a total of 94 investors at a per share price of $14.85. In connection
with the offering, the registrant issued Westpark Capital LLC five year placement agent warrants to purchase up to an aggregate
of 59,810 shares of common stock at a per share exercise price of $14.85. The registrant relied upon Rule 506 of Regulation D with
respect to the issuance; all issuees were accredited investors.
Between April 2014 and March 2015, the registrant
issued an aggregate of $5,110,224 of 6% promissory notes convertible into shares of the registrant’s common stock at a conversion
price of $22.28, plus five year warrants to purchase up to 327,954 shares of common stock at a per share exercise price of $22.28.
The notes and warrants were issued to an aggregate of 80 investors. In connection with the offering, the registrant issued WestPark
Capital LLC five year placement agent warrants to purchase up to an aggregate of 29,121 shares of common stock at a per share exercise
price of $22.28. The registrant relied upon Rule 506 of Regulation D with respect to the issuant; all issuees were accredited investors.
Between December 2014 and March 2015, the registrant
effected an exchange offer whereby all holders of convertible promissory note and warrants referenced above were offered the ability
to exchange such securities for shares of the common stock of the registrant as follows: (i) for the settlement of all outstanding
balances (principal and accrued interest) under each note at the rate of .07 shares of common stock of the registrant for each
$14.85 in outstanding principal amount of the note and (ii) for the cancellation of all warrants, .07 shares of common stock for
each .13 shares of common stock issuable upon exercise of the warrants. Further to the exchange offer, Jawahar Tandon, the registrant’s
former Executive Chairman of the Board and former Chief Executive Officer, agreed that for each new share issued by the registrant
further to the exchange offer up to 336,682 shares, he would cancel .07 shares of common stock of the registrant beneficially held
by him. An aggregate of 481,119 shares of common stock were issued by the registrant pursuant to the exchange offer and the J Tandon
Irrevocable Trust cancelled 336,682 shares of common stock. The registrant relied upon Rule 506 of Regulation D with respect to
the issuant; all issuees were accredited investors.
In December 2014, the registrant issued 57,236
shares of our common stock to a non-executive employee of WestPark Capital for assistance in effecting an exchange offer of the
aforementioned notes and warrants for shares of our common stock which we effected between December 2014 and March 2015. The registrant
relied upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.
Between April and August 2015, the registrant
effected a rights offering to existing shareholders of the registrant and to new investors. Further to the rights offering, for
every $44.55 invested, the investor would receive .20 newly issued shares of the registrant and Jawahar Tandon, the registrant’s
former Executive Chairman of the Board and former Chief Executive Officer, would transfer .13 shares of common stock beneficially
held by him to the investor. For the sake of expediency, the registrant agreed to issue all shares to investors in the rights offering
and Mr. Tandon would cancel those shares he would otherwise have had to transfer further to the rights offering. An aggregate of
394,008 shares of common stock were issued by the registrant to 85 investors, 157,603 shares of which represented shares which
would have otherwise been transferred by Mr. Tandon and which were simultaneously cancelled by the J Tandon Irrevocable Family
Trust and J Tandon Irrevocable Partnership Trust. The registrant relied upon Rule 506 of Regulation D with respect to the issuant;
all issuees were accredited investors.
In May 2015, the registrant issued David H.
Clarke, the registrant’s Chief Executive Officer, an aggregate of 84,170 shares of common stock further to a consulting agreement.
The registrant relied upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.
In May 2015, the registrant issued an aggregate
of 71,040 stock options to 12 employees at a per share exercise price of $29.71. The registrant relied upon Rule 701 with respect
to the issuance.
Further to the private placement of common
stock effected by the registrant between May 2012 and June 2013, the J Tandon Irrevocable Family Trust agreed to transfer .07 share
beneficially held by it for each .34 shares purchased by investors further to the private placement if the data memory division
of Tandon Enterprises, Inc. was not transferred to the registrant. Since said division was not transferred, the J Tandon Irrevocable
Family Trust was obligated to transfer an aggregate of 104,983 shares of common stock beneficially held by it to investors in the
private placement. For the sake of expediency, the registrant agreed to issue all such shares to investors in the private placement
and the J Tandon Irrevocable Family Trust cancelled an identical number of shares, such shares issued in June 2015.
In August 2015, further to an amended trademark
license agreement with Monster, Inc. further to which the registrant was granted the right to use the name Monster Digitial, Inc.
as its corporate name, the registrant issued Monster, Inc. an aggregate of 382,575 shares of common stock. The registrant relied
upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.
In August 2015, the registrant issued Noel
Lee a warrant to purchase up to 191,289 shares of common stock at a per share exercise price of $14.85 further to an advisory board
agreement. The registrant relied upon Rule 506 of Regulation D with respect to the issuance; the issuee was an accredited investor.
Pursuant to the registrant’s decision
to cancel its proposed acquisition of Syrma Technologies Pvt. Ltd., in September 2015 Jawahar Tandon, the registrant’s former
Executive Chairman of the Board and former Chief Executive Officer, and Devinder Tandon, one of the registrant’s significant
stockholders and a former director, offered in the aggregate to each stockholder who purchased shares of the registrant for cash
the opportunity to receive .07 additional shares from Mssrs. Tandon’s beneficial holdings for each .41 shares purchased from
the registrant by such stockholder. Stockholders holding an aggregate of 1,279,056 shares accepted the offer; an aggregate of 216,971
shares from the Tandon’s beneficial holdings were afforded these stockholders from each of Jawahar Tandon’s and Devinder
Tandon’s beneficial holdings. For the sake of expediency, the registrant issued these shares directly to electing stockholders
and Mssrs. Tandon cancelled in the aggregate an equivalent number of shares beneficially held by them for each share referenced
further to the previous sentence.
In October 2015, the registrant issued David
H. Clarke, the registrant’s Chief Executive Officer, an aggregate of 67,337 shares of common stock further to his agreement
to serve as Executive Chairman of the Board. The registrant relied on Rule 506 of Regulation D with respect to the issuance; each
of the issuee was an accredited investor.
In December 2015, the registrant issued David
H. Clarke and Neal Bobrick 13,467 and 33,668 shares of common stock, respectively further to their agreements to serve as the registrant’s
President and Chief Executive Officer and Executive Vice President, Sales and Marketing, respectively. The registrant relied on
Rule 506 of Regulation D with respect to the issuance; each of the issuees were accredited investors.
In March 2016, the registrant authorized the
issuance of 3,000,000 shares of its Series A Preferred Stock, at a per share price of $1.00. An aggregate of 2,802,430 shares of
Series A Preferred Stock were issued; each of the issuees were accredited investors.
Between October 2015 and March 2016, the registrant
entered into an agreements to issue up to an aggregate of $4.0 million principal amount of promissory notes, or bridge notes, to
certain of its principal stockholders, each of whom, as a result of their stockholding in the registrant, had a pre-existing relationship
with the registrant. Holders of approximately $3.0 million of such bridge notes agreed to convert all principal due under such
notes immediately prior to the consummation of the registrant’s initial public offering into common stock and warrants at
the initial public offering price of the common stock. Jawahar Tandon and Devinder Tandon offered in the aggregate to each holder
who agreed to convert bridge notes into shares of common stock and warrants or who purchased shares of the registrant’s Series
A Preferred Stock, which automatically converts into shares of common stock and warrants, one share from Mssrs. Tandon’s
beneficial holdings for each share of common stock issued further to the aforementioned conversion (but excluding shares issuable
upon exercise of the warrants issued further to the conversion) (the “Conversion Additional Shares”). For the sake
of expediency, the registrant issued the Conversion Additional Shares directly to such holders and Mssrs. Tandon, and Tandon Enterprises,
Inc. canceled in the aggregate an equivalent number of shares beneficially held by them for each Conversion Additional Share referenced
further to the previous sentence. The D Tandon Irrevocable Family Trust beneficially owned 479,065 shares of common stock prior
to the Conversion; as a result of the Conversion, all shares held by the D Tandon Irrevocable Family Trust were cancelled. Further
to a Share Cancellation Agreement dated June 1, 2016 by and among the registrant, the D Tandon Irrevocable Family Trust, the J
Tandon Irrevocable Family Trust and Tandon Enterprises, Inc. (the “Share Cancellation Agreement”), Tandon Enterprises,
Inc. and the J Tandon Irrevocable Family Trust agreed to cancel any shortfall in the number of shares that the D Tandon Irrevocable
Family Trust would have been required to cancel further to the Conversion. As a result of the aforementioned shortfall, Tandon
Enterprises Inc. canceled all 67,337 shares held by it prior to the Conversion and all 72,863 shares to be issued to it as described
above further to the Conversion. Further to the Share Cancellation Agreement, the J Tandon Irrevocable Family Trust agreed to cancel
any shortfall in the number of shares that Tandon Enterprises agreed to cancel to cover any referenced shortfall by the D Tandon
Irrevocable Family Trust. The J Tandon Irrevocable Family Trust owned 647,651 shares of common stock prior to the Conversion; as
a result of the Conversion, all shares held by the J Tandon Irrevocable Family Trust were cancelled. Further to the Share Cancellation
Agreement, the registrant agreed to issue any additional shares that the D Tandon Irrevocable Family Trust, the J Tandon Irrevocable
Family Trust and Tandon Enterprises, Inc. could not cancel to cover shares that are required to be cancelled further to the Conversion.
As all shares held by the D Tandon Irrevocable Family Trust, the J Tandon Irrevocable Family Trust and Tandon Enterprises, Inc.
were cancelled further to the Conversion. In connection therewith the registrant issued 134,043 shares of common stock at the effective
date of its initial public offering to investors in the Conversion. All of the issues are accredited investors.
In November 2016, the registrant issued 333,333
shares of common stock to an investor at a per share price of $1.50 and 152,250 shares of common stock to David Clarke, the registrant’s
Chief Executive Officer, at a per share price of $1.60. The registrant relied upon Rule 506 of Regulation D with respect to the
issuance; all issuees were accredited investors.
None of the foregoing transactions involved
any underwriters, underwriting discounts or commissions, or any public offering. We believe that the offers, sales and issuances
of the above securities were exempt from registration under the Securities Act by virtue of Section 4(a)(2) of the Securities Act
or Regulation D promulgated thereunder as transactions by an issuer not involving any public offering, or in reliance on Rule 701
promulgated under Section 3(b) of the Securities Act because the transactions were pursuant to compensatory benefit plans or contracts
relating to compensation as provided under Rule 701. The recipients of the securities in each of these transactions represented
their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were placed upon the stock certificates issued in these transactions. We believe all recipients
had adequate information about us or had adequate access, through their relationships with us, to information about us.
Item 16. Exhibits and Financial Statement
Schedules.
|
(a)
|
Exhibits
. We
have filed the exhibits listed on the accompanying Exhibit Index, which is incorporated herein by reference.
|
|
(b)
|
Financial Statement Schedules
. All schedules
have been omitted because the information required to be presented in them is not applicable or is shown in the consolidated
financial statements or related notes.
|
Item 17. Undertakings
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.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by 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 Securities
Act of 1933, as amended, and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes
that:
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(1)
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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.
|
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(2)
|
For the purpose of determining
any liability under the Securities Act, as amended, 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.
|
|
(3)
|
In a primary offering
of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used
to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
|
|
(i)
|
Any preliminary prospectus
or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
|
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(ii)
|
Any free writing prospectus
relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
|
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(iii)
|
The portion of any other
free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities
provided by or on behalf of the undersigned registrant; and
|
|
(iv)
|
Any other communication
that is an offer in the offering made by the undersigned registrant to the purchaser.
|
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
MONSTER DIGITAL, INC.
|
|
|
|
Date: February 13, 2017
|
By:
|
/s/ David Clarke
|
|
|
David Clarke.
|
|
|
Chief Executive Officer
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that
each person whose signature appears below constitutes and appoints David Clarke and Jonathan Clark, and each of them, as his true
and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration
Statement and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents or any of them, or his
or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ David Clarke
|
|
Chief Executive Officer and
|
|
February 13, 2017
|
David Clarke
|
|
Chairman of the Board
(Principal Executive Officer
)
|
|
|
|
|
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|
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/s/ David Olert
|
|
Chief Financial Officer (
Principal Financial
|
|
February 13, 2017
|
David Olert
|
|
and Accounting Officer
)
|
|
|
|
|
|
|
|
/s/ Jonathan Clark
|
|
Interim President and Director
|
|
February 13, 2017
|
Jonathan Clark
|
|
|
|
|
|
|
|
|
|
/s/ Christopher Miner
|
|
Director
|
|
February 13, 2017
|
Christopher Miner
|
|
|
|
|
|
|
|
|
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/s/ Robert Machinist
|
|
|
|
|
Robert Machinist
|
|
Director
|
|
February 13, 2017
|
|
|
|
|
|
/s/ StevenBarre
|
|
|
|
|
Steven Barre
|
|
Director
|
|
February 13, 2017
|
EXHIBIT INDEX
Exhibit
Number
|
|
Description of Exhibit
|
3.1
|
|
Certificate of Incorporation of Monster Digital, Inc., as amended.†
|
3.2
|
|
Bylaws of Monster Digital, Inc., as amended.†
|
3.3
|
|
Certificate of Designations of the Series A Convertible Preferred Stock of Monster Digital, Inc.†
|
4.1
|
|
Form of Registrant’s Common Stock Certificate.†
|
4.2
|
|
Form of Registrant’s Warrant Certificate.†
|
4.3
|
|
Form of Warrant Agreement by and between Monster Digital, Inc. and Corporate Stock Transfer, Inc.†
|
5.1
|
|
Opinion of Manatt, Phelps & Phillips, LLP
|
10.1
|
|
2012 Omnibus Incentive Plan.†
|
10.2
|
|
Form of Option Agreement and Option Grant Notice under the 2012 Omnibus Incentive Plan.†
|
10.3
|
|
Form of Restricted Stock Award Agreement and Notice of Grant of Restricted Stock Award under the 2012 Omnibus Incentive Plan.†
|
10.4
|
|
Form of Restricted Stock Award Agreement and Notice of Grant of Restricted Stock Unit Award under the 2012 Omnibus Incentive Plan.†
|
10.5
|
|
Trademark License Agreement dated July 7, 2010 by and between SDJ Technologies, Inc. and Monster Cable Products, Inc., as amended.†
|
10.6
|
|
Building lease dated October 28, 2014 relating to registrant’s executive offices located at 2655 Park Center Drive, Unit C, Simi Valley, CA.†
|
10.7
|
|
Purchase Order Purchase Agreement dated April 15, 2014 by and between MidCorp Credit, LLC d/b/a Brookridge Trading and SDJ Technologies, Inc.†
|
10.8
|
|
Factoring Agreement dated June 3, 2015 by and between CSNK Working Capital Financial Corp. d/b/a Bay View Funding and SDJ Technologies, Inc.†
|
10.9
|
|
Advisory Board Agreement dated effective as of August 18, 2015 by and between Noel Lee and registrant.†
|
10.10
|
|
Warrant dated August 18, 2015 held by Noel Lee.†
|
10.11
|
|
Consulting Agreement dated May 7, 2015 by and between registrant and David Clarke.†
|
10.12
|
|
License and Sublease Agreement dated May 2012 by and between Tandon Enterprises, Inc. and SDJ Technologies, Inc.†
|
10.13
|
|
Non-Competition and Non-Solicitation Agreement dated May 2012 by and between Tandon Enterprises, Inc.†
|
10.14
|
|
Services Agreement dated May 2012 by and between Tandon Enterprises, Inc. and SDJ Technologies, Inc.†
|
10.15
|
|
Employment Agreement dated June 1, 2012 by and between Tandon Digital, Inc. and Jawahar Tandon.†
|
10.16
|
|
Contract Manufacturer Agreement dated January 22, 2016 by and between SDJ Technologies, Inc. DBA Monster Digital, Inc. and Shuoying Digital Science & Technology (China) Co., Ltd.†
|
10.17
|
|
Share Cancellation Agreement dated June 1, 2016 by and among Monster Digital, Inc., the J Tandon Irrevocable Family Trust, the D Tandon Irrevocable Family Trust and Tandon Enterprises, Inc.†
|
10.19
|
|
Executive Employment Agreement dated June 6, 2016 by and between Monster Digital, Inc. and Mark Matejka.†
|
10.21
|
|
Executive Employment Agreement dated June 6, 2016 by and between Monster Digital, Inc. and David Olert.†
|
10.22
|
|
Consulting Agreement dated May 26, 2016 by and between Monster Digital, Inc. and Jonathan Orban.†
|
10.23
|
|
Registration
Rights Agreement dated November 10, 2017 by and between Monster Digital, Inc. and Gibralt Capital Corporation.
|
21.1
|
|
List of Subsidiaries
†
|
23.1
|
|
Consent
of CohnReznick LLP.
|
23.2
|
|
Consent of Manatt, Phelps & Phillips LLP (contained in Exhibit 5.1).
|
24.1
|
|
Power of Attorney (contained on signature page hereto).
|
|
†
|
Incorporated by reference to same exhibit number to Registration
Statement on Form S-1 File No. 333-207938 as filed with the SEC.
|
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