PRELIMINARY OFFERING CIRCULAR DATED MAY 12, 2016

8tracks, Inc.

51 Sharon Street

San Francisco, California 94114

 415-841-3260

www.8tracks.com

  SHARES OF SERIES A PREFERRED STOCK

SEE “SECURITIES BEING OFFERED” AT PAGE 33

*See the “Plan of Distribution” for details regarding the compensation payable to placement agents in connection with this offering. The company has engaged SI Securities, LLC to serve as its sole and exclusive placement agent to assist in the placement of its securities.

The company expects that the amount of expenses of the offering that it will pay will be approximately $75,000, not including state filing fees.

The offering will terminate at the earlier of: (1) the date at which the maximum offering amount has been sold, (2) the date which is one year from this offering being qualified by the Commission, or (3) the date at which the offering is earlier terminated by the company in its sole discretion. The offering is being conducted on a best-efforts basis without any minimum target. The company may undertake one or more closings on a rolling basis. After each closing, funds tendered by investors will be available to the company.

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL OF ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SOLICITATION MATERIALS. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER THE COMMISSION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

GENERALLY NO SALE MAY BE MADE TO YOU IN THIS OFFERING IF THE AGGREGATE PURCHASE PRICE YOU PAY IS MORE THAN 10% OF THE GREATER OF YOUR ANNUAL INCOME OR NET WORTH. DIFFERENT RULES APPLY TO ACCREDITED INVESTORS AND NON-NATURAL PERSONS. BEFORE MAKING ANY REPRESENTATION THAT YOUR INVESTMENT DOES NOT EXCEED APPLICABLE THRESHOLDS, WE ENCOURAGE YOU TO REVIEW RULE 251(d)(2)(i)(C) OF REGULATION A. FOR GENERAL INFORMATION ON INVESTING, WE ENCOURAGE YOU TO REFER TO www.investor.gov.

This offering is inherently risky. See “Risk Factors” on page 8.

Sales of these securities will commence on approximately       , 2016.

The company is following the “Offering Circular” format of disclosure under Regulation A.

AN OFFERING STATEMENT PURSUANT TO REGULATION A RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. INFORMATION CONTAINED IN THIS PRELIMINARY OFFERING CIRCULAR IS SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED BEFORE THE OFFERING STATEMENT FILED WITH THE COMMISSION IS QUALIFIED. THIS PRELIMINARY OFFERING CIRCULAR SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR MAY THERE BE ANY SALES OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL BEFORE REGISTRATION OR QUALIFICATION UNDER THE LAWS OF SUCH STATE. THE COMPANY MAY ELECT TO SATISFY ITS OBLIGATION TO DELIVER A FINAL OFFERING CIRCULAR BY SENDING YOU A NOTICE WITHIN TWO BUSINESS DAYS AFTER THE COMPLETION OF THE COMPANY’S SALE TO YOU THAT CONTAINS THE URL WHERE THE FINAL OFFERING CIRCULAR OR THE OFFERING STATEMENT IN WHICH SUCH FINAL OFFERING CIRCULAR WAS FILED MAY BE OBTAINED.

TABLE OF CONTENTS

In this Offering Circular, the term “8tracks,” “we,” “us,” “our,” or “the company” refers to 8tracks, Inc.

THIS OFFERING CIRCULAR MAY CONTAIN FORWARD-LOOKING STATEMENTS AND INFORMATION RELATING TO, AMONG OTHER THINGS, THE COMPANY, ITS BUSINESS PLAN AND STRATEGY, AND ITS INDUSTRY. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY, AND INFORMATION CURRENTLY AVAILABLE TO THE COMPANY’S MANAGEMENT. WHEN USED IN THE OFFERING MATERIALS, THE WORDS “ESTIMATE,” “PROJECT,” “BELIEVE,” “ANTICIPATE,” “INTEND,” “EXPECT” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH CONSTITUTE FORWARD LOOKING STATEMENTS. THESE STATEMENTS REFLECT MANAGEMENT’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE THE COMPANY’S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE FORWARD-LOOKING STATEMENTS. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE ON WHICH THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE OR UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER SUCH DATE OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.

RISK FACTORS

The SEC requires the company to identify risks that are specific to its business and its financial condition. The company is still subject to all the same risks that all companies in its business, and all companies in the economy, are exposed to. These include risks relating to economic downturns, political and economic events and technological developments (such as hacking and the ability to prevent hacking). Additionally, early-stage companies are inherently more risky than more developed companies. You should consider general risks as well as specific risks when deciding whether to invest.

Our auditor has issued a “going concern” opinion. We may not have enough funds to sustain the business until it becomes profitable. Even if we raise funds through a crowdfunding round, we may not accurately anticipate how quickly we may use the funds and if it is sufficient to return the business to profitability.

We face significant market competition.

We face intense competition from other streaming music and radio providers. Some of these providers are large internet companies that can offer streaming music at a loss or with little or no profits for an extended period of time, such as Apple and Google. Other competitors are large, well-funded streaming music companies that have already established themselves as market leaders with strong brand name recognition, such as Spotify and Pandora. Our business model is primarily dependent on generating more advertising revenue than what we pay in royalties to content owners. Due to scale economies in advertising sales, streaming music competitors that sell advertising limit our market share, and therefore our ability to compete for advertising dollars to make us profitable.

We are a comparatively early stage company and have not yet generated consistent revenues.

8tracks has incurred a net loss in the last fiscal year, has fewer than ten years of operating history and has had limited revenues generated since inception. There is no assurance that we will once again be profitable or generate sufficient revenues to pay dividends to the holders of the shares. We do not believe that we will be able to generate profits without successfully managing our royalty costs, finding our own valuable niche in a crowded sector, and making our offering more appealing to advertisers. We have never declared or paid cash dividends on any of our capital stock and currently do not anticipate paying any cash dividends after this offering or in the foreseeable future.

We currently rely on statutory licenses and various regulations.

As discussed in “The Company’s Business – Regulation and Copyright”, a significant portion of our content is licensed under statutory licenses created under the U.S. Copyright Act and similar laws in Canada. We believe that after the closing of this Offering and paying SoundExchange outstanding back royalties, we will be in compliance with the terms of the licenses. However, there is always a risk of litigation, such as charges of copyright infringement, non-compliance or claims for non-applicability of or eligibility under those licenses. If we are deemed to have violated the exclusive rights of any copyright owners for which we do not have defenses at law or equity or the protection of one or more statutory licenses, then we could be forced to settle claims of infringement or modify or product offerings, or both. Further, if we are unable to raise the amount sought in this Offering, there is a significant chance we will not be able to pay past royalties and comply with the terms of the licenses.

We operate in a market that is subject to changing statutory provisions and regulations and interpretations of those statutory provisions and regulations. Regulatory authorities and legislative bodies pass inconsistent and constantly changing laws and regulations, including in the areas related to intellectual property, data protection and the internet. Further, not everyone agrees with statutory interpretations, and lawsuits could change the regulatory landscape on short notice. In particular, we are reliant on various domestic and international laws and regulations to determine our ability and method to stream content. Changes in laws and regulations or different interpretations of those laws and regulations could hinder our ability to operate profitably and therefore continue as a business.

We are dependent on licenses for the rights to content for our public playlists.

We are dependent on the content either licensed to us or made available by our users, and our ability to legally stream content is dependent on negotiated as well as statutory licenses. For all these licenses, there is no guarantee that the rates we currently pay will continue beyond the terms of the licenses. Nor is there any guarantee that we could enter into new licenses on terms that are favorable enough to enable us to be profitable. Although the current statutory licenses under which we primarily operate in the United States expire in five years, regulatory bodies could modify and change the scheme to make it too expensive for us to stream our content.

We have limited our functionality in the markets outside of the United States and Canada.

As of February 2016, users can no longer stream music through our mobile applications outside of the United States and Canada, and the music provided on the web to those other markets is now streamed through YouTube, using metadata sourced from 8tracks. In the last quarter of 2015, less than 10% of our revenue was generated from advertising sales outside the US and Canada, and we expect to lose a significant percentage of this revenue. There is no guarantee that we will be able to recoup this loss in revenue from other sources, including higher advertising rates and subscription fees.

Market trends could impact our ability to maintain our business plan.

We operate in a constantly evolving field. The most significant trends impacting 8tracks are the shift from music downloads to on-demand streaming, and the desire by larger streaming competitors to offer a “one-size-fits-all” service that delivers both lean-back, radio-style streaming alongside lean-forward, on-demand streaming. Though we still only offer limited, radio-style functionality, we have designed our services to accommodate these trends. Our accommodations include directly licensing music to create a library for our DJs (so less need to upload music) and focusing on developments that enhance and differentiate our service, such as better communication of our unique value and partnering with on-demand services in complementary ways. There is no guarantee that our modifications will enable us to succeed or that we will continue to have the ability to adapt to the needs in the market.

We plan to work with record labels to obtain content for our playlists, and some labels might require equity as part of the deal.
As part of our business strategy, we negotiate with record labels to obtain content for our playlists to be streamed over our website and applications. In doing so, certain record labels might require equity in our company. The issuance of equity in this manner could result in dilution to our stockholders.

Our revenues and profits are subject to fluctuations.

It is difficult to accurately forecast our advertising revenues and operating results, and these could fluctuate in the future due to a number of factors. These factors may include adverse changes in: number of listeners and listener hours, sales performance, royalty costs, infrastructure and streaming costs, headcount and other operating costs, and general economic, industry and regulatory conditions and requirements. The company's operating results may fluctuate from year to year due to the factors listed above and others not listed. At times, these fluctuations may be significant and could impact our ability to operate our business.

If we cannot raise sufficient funds we will not succeed.

For the past year, we have operated at a loss. Our loss for 2015 was $2,608,924. Though we believe we will return to profitability within the next two years, if we are unable to raise enough money in the Offering we will be unable to pay the costs needed for us to continue operations, including past royalties and general operating expenses. Additional fundraising in the future may be offered at a lower valuation, which would dilute the interest of investors in this offering, or on more favorable terms – for example, debt financing, which could be positioned ahead of the investors in this offering in terms of seniority.

We depend on key personnel.

Our future success depends on the efforts of a small number of key personnel, including our founder David Porter and our engineering team. Our engineering team is responsible for the smooth streaming of content and placement of advertising. There can be no assurance that we will be successful in attracting and retaining the personnel we require to operate, improve and market our website and mobile applications, and to compete with other music content providers.

There is no current market for any of our shares of stock.

There is no formal marketplace for the resale of the Series A Preferred Stock. Shares of Series A Preferred Stock may be traded on the over-the-counter market to the extent any demand exists. Investors should assume that they may not be able to liquidate their investment for some time, or be able to pledge their shares as collateral.

Investors will be subject to the terms of the Subscription Agreement.

As part of this investment, each investor will be required to agree to the terms of the Subscription Agreement included as Exhibit 4 to the Offering Statement of which this Offering Circular is part. By each investor’s execution of the Subscription Agreement and under the terms thereof, each investor will join as a party to the Amended and Restated Investors’ Rights Agreement dated as of , 2016, as entered into by the company with the holders of the company’s Series Seed Preferred Stock, Series Seed Preferred Stock and certain holders of Common Stock. The Amended and Restated Investors’ Rights Agreement has been filed as an exhibit to the company’s Offering Statement of which this Offering Circular is part.

Our stock is non-voting; voting control is in the hands of a few large stockholders.

The Series A Preferred Shares we are offering are non-voting, so you will not be able to influence our policies or any other corporate matter, including the election of directors, changes to our company’s governance documents, expanding the employee option pool, and any merger, consolidation, sale of all or substantially all of our assets, or other major action requiring stockholder approval. The class and voting structure of our stock has the effect of concentrating voting control with a few people or entities, and some of these larger stockholders include, or have the right to designate, executive officers and directors of our Board. These few people and entities make all major decisions regarding the company. As your stock is non-voting, you will not have a say in these decisions.

DILUTION

Dilution means a reduction in value, control, or earnings of the shares the investor owns.

Immediate dilution

An early-stage company typically sells its shares (or grants options over its shares) to its founders and early employees at a very low cash cost, because they are, in effect, putting their “sweat equity” into the company. Occasionally, strategic partners are also interested in investing at an early stage. When the company seeks cash investments from outside investors, like you, the new investors typically pay a much larger sum for their shares than the founders, early employees, or investors from prior financings, which means that the cash value of your stake is diluted because each share of the same type is worth the same amount, and you paid more for your shares than earlier investors did for theirs. Dilution may also be caused by pricing securities at a value higher than book value or expenses incurred in the offering.

The following table compares the price that new investors are paying for their shares with the effective cash price paid by existing shareholders, giving effect to full conversion of all outstanding stock options and warrants, and assuming that the shares are sold at $3.20 per share. The schedule presents shares and pricing as issued and reflects all transactions since inception, which gives investors a better picture of what they will pay for their investment compared to the company’s insiders than just including such transactions for the last 12 months, which is what the SEC requires.

The following table demonstrates the dilution that new investors will experience upon investment in the Company.  This table uses the Company’s net tangible book value as of December 31, 2015 of $(109,941), which is derived from the net equity of the Company in the December 31, 2015 financial statements. This tangible net book value is then adjusted to contemplate conversion all other convertible instruments outstanding at current that would provide proceeds to the Company, which assumes exercise of all options (1,187,740 shares) and warrants (29,844 shares) outstanding through current.  Such conversions would provide $722,251 of proceeds and result in the issuance of 1,217,584 shares of common stock, which are considered in the figures used in the calculations presented in the table.

The tables present three scenarios for the convenience of the reader: a $1,000,000 raise from this offering, a $6,000,000 raise from this offering, and a fully subscribed $11,000,000 raise from this offering (maximum offering).

The next table is the same as the previous, but adds in consideration of authorized but unissued stock options, presenting the fully diluted basis. This adds 320,227 pre-financing shares outstanding and is not adjusted for potential conversion proceeds on the hypothetical exercise of these options. 

The final table is the same as the previous two, but removes the assumptions of conversion of options and warrants and consideration of authorized but unissued stock options, instead only presenting issued shares (common shares, plus the assumption of conversion of all issued and outstanding preferred shares).

Future dilution

Another important way of looking at dilution is the dilution that happens due to future actions by the company. The investor’s stake in a company could be diluted due to the company issuing additional shares. In other words, when the company issues more shares, the percentage of the company that you own will go down, even though the value of the company and your shareholding may go up. You will own a smaller piece of a larger company. This increase in number of shares outstanding could result from a stock offering (such as an initial public offering, another crowdfunding round, a venture capital round, angel investment), agreements with record labels and copyright holders to obtain the rights to additional content, employees exercising stock options, or by conversion of certain instruments (e.g. convertible bonds, preferred shares or warrants) into stock.

If the company decides to issue more shares, an investor could experience value dilution, with each share being worth less than before, and will experience control dilution, with the total percentage an investor owns being less than before. There may also be earnings dilution, with a reduction in the amount earned per share (though this typically occurs only if the company offers dividends, and most early stage companies are unlikely to offer dividends, preferring to invest any earnings into the company).

The type of dilution that hurts early-stage investors most occurs when the company sells more shares in a “down round,” meaning at a lower valuation than in earlier offerings. An example of how this might occur is as follows (numbers are for illustrative purposes only):

This type of dilution might also happen upon conversion of convertible notes into shares. Typically, the terms of convertible notes issued by early-stage companies provide that in the event of another round of financing, the holders of the convertible notes get to convert their notes into equity at a “discount” to the price paid by the new investors, i.e., they get more shares than the new investors would for the same price. Additionally, convertible notes may have a “price cap” on the conversion price, which effectively acts as a share price ceiling. Either way, the holders of the convertible notes get more shares for their money than new investors. In the event that the financing is a “down round” the holders of the convertible notes will dilute existing equity holders, and even more than the new investors do, because they get more shares for their money. Investors should pay careful attention to the amount of convertible notes that the company has issued (and may issue in the future), and the terms of those notes.

If you are making an investment expecting to own a certain percentage of the company or expecting each share to hold a certain amount of value, it’s important to realize how the value of those shares can decrease by actions taken by the company. Dilution can make drastic changes to the value of each share, ownership percentage, voting control, and earnings per share.

USE OF PROCEEDS TO ISSUER

The net proceeds of a fully subscribed offering to the issuer, after the expenses of the offering (payment to SeedInvest, and legal, accounting and related expenses), will be approximately $10,100,000. We plan to use these proceeds as follows:

Approximately $2,292,000 or 23% of the net proceeds, has not been allocated for any particular purpose. At the discretion of the company, those funds will be used to increase the size of our engineering, product, sales, and marketing teams; expand our music library; and actively market the service to listeners, DJ and brands to increase our user base.

Because the offering is a “best efforts” offering without a minimum offering amount, we may close the offering without sufficient funds for all the intended purposes set out above. If the offering size were to be $5,000,000, then we estimate that the net proceeds to the issuer would be approximately $4,550,000. In such an event, 8tracks will adjust its use of proceeds by reducing adjustment of salaries to market rates and by reducing planned growth in our employee headcount, content acquisition and marketing campaigns. The company will still use the proceeds for payments to employees and SoundExchange as specified above.

The company reserves the right to change the above use of proceeds if management believes it is in the best interests of the company.

THE COMPANY’S BUSINESS

Overview

8tracks, Inc. was founded in 2006 to provide “crowd-curated” internet radio. We launched our website on August 8, 2008. In April 2011, we launched on iOS, followed by our Android launch seven months later. In August 2011, we hired our first full-time employees. Since 2011, we have sought to improve our offering for listeners, DJs and advertisers. We periodically introduce updated versions of our website and iOS and Android applications.

Roughly 1% of our audience curates and publishes playlists through our website. All of our users are able to listen to these public playlists from any of our platforms, including our website, iOS mobile application and Android mobile application.

Our business is supported primarily through advertising and secondarily through subscription. Our advertising revenue accounted for 98% of our revenues in 2015.

Principal Products and Services

In the United States and Canada, 8tracks provides “crowd-curated” internet radio that is available through our website and through applications on both iOS and Android platforms. In the rest of the world, users can listen to playlists through a series of YouTube videos embedded on our website.

In essence, 8tracks offers two main features: playlist creation and listening.

Most of our users do not create playlists but simply listen to a selection of playlists from those who do. Roughly 1% of our users create playlists; we refer to such users as “DJs”. Other users can then listen to those playlists, and more than 2 million playlists are available on the platform today. DJs create playlists by uploading music to our servers or by selecting tracks from our licensed music library; adding context through a title, cover art (like a “mixtape” from the 1980s), description, and tags that classify the playlist by genre, activity, mood or other theme; and then publish on the platform and through social media. Listeners, in turn, can select a playlist based on the artists included therein or the DJ’s tags. As listeners use 8tracks, we track preferences and automatically present on the home screen those playlists most relevant for their taste and context.

Though playlist creation is currently limited to our website, by the end of 2016, we are planning to include this feature as part of our mobile applications.

These services are provided to 8track users through the following two main models:

Technology and Distribution

We use laptops and a variety of SaaS tools in developing our services, including Amazon Web Services for hosting and streaming. 8tracks delivers its product to web-based listeners over the internet and in the United States and Canada to mobile applications listeners on iOS and Android platforms.

Market

Our market is digital radio and streaming music listening from the consumer perspective, and digital and radio advertising from the brand perspective.

Our customers are listeners who tune into the website or apps, DJs who create the programming, brands who market to our audience, and artists and labels who benefit from paid or organic promotion on the network. A recent Edison Research study estimates that in the United States in 2016, 155 million or 57% of Americans ages 12 and up listen to digital radio or stream music at least once a month, and 136 million or 50% in the same age bracket listen or stream at least once a week.

According to the Financial Times, the global radio market is $46 billion, including both internet and terrestrial radio. Driven by growth in wireless broadband penetration and internet-enabled devices, we believe this market will continue to shift from terrestrial delivery to IP-based delivery in future.

Our Value

We serve this market by providing a highly relevant, deep, lean-back listening experience – you press play and then sit back and listen. We believe 8tracks delivers a more relevant listening experience (based on taste and context) than that offered by traditional radio and competitors in internet radio.

From a functional standpoint, 8tracks is:

From the standpoint of unique value proposition, 8tracks features:

Strategy

8tracks seeks both audience growth and marginal profitability.

The key performance indicators (KPIs) by which we evaluate the success of our strategy include:

We have focused on listener conversion and retention to drive growth. We can increase the likelihood that a new visitor to the website or apps will click play, have an enjoyable listening experience, and come back to listen again through a variety of tactics, including:

We continue to leverage, and seek to improve, the low-cost ways in which we have historically attracted new listeners and amassed our current audience, including:

However, we will execute other, traditional marketing tactics in 2016-18, including:

Advertising revenue is a function of audience (MAU and listeners), engagement (hours per user) and monetization (RPM). In addition to the initiatives noted above, which are designed to drive audience growth and engagement, we will:

Because advertising sales feature scale economies – it’s easier to sell ads, and at higher CPMs, if the platform is larger – we will also seek to strike direct deals with record labels to achieve near-term reductions in royalties (as well as to populate our music library) as we seek to increase the size of our audience.

Advertising Revenues

We receive the majority of our revenues through advertising. The majority of our advertising revenues are derived from advertisements for brands that seek to reach our audience in the United States and Canada. Advertising is typically priced on a CPM (cost per thousand) basis; this is the price an advertiser pays for every 1,000 impressions of their ad. CPMs vary based by sales channel and ad product.

We sell our advertisements through three channels:

We offer three primary types of ad products:

Subscription Revenues

Subscription revenues are derived from a paid-subscription service, 8tracks Plus. We currently offer two subscription plans – a flat fee for six months of service available on all of our platforms and an annual plan available on our iOS platform. Subscription revenues accounted for 1.7% of our revenues in 2015, and 0.8% of our revenues in 2014.

Competition

We compete for listeners with other internet radio and streaming music providers, including Pandora, Spotify, Google’s YouTube, Apple Music, iHeartRadio and SoundCloud. Our closest competitors, Pandora and iHeartRadio, also offer lean-back, radio-style listening or pureplay listening. These two pureplay internet radio services are currently larger than us. Other competitors provide interactive, on-demand streaming (where the listener can select a specific song, album or artist) or a one-size-fits-all service, which combines internet radio and on-demand steaming. YouTube, Spotify and SoundCloud have a significant concentration of listeners in our core demographic (18-24 specifically and millennials broadly), and all three provide a combined service.

Like other radio services, 8tracks is supported by advertising and free to consumers. Therefore, we compete for advertising dollars with other streaming music providers that offer an advertising-supported business model, in particular Pandora and Spotify.

Regulation and Copyright

We operate in a highly regulated sector, and the music content we stream is subject to copyrights. In the United States, the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998 (collectively, the “Copyright Act”) create statutory licenses that allow us to stream sound recordings lawfully released to the public with the consent of the copyright owners of such recordings to our users without having to obtain direct licenses from each of the copyright owners. In order to operate under these licenses, we must comply with various statutory conditions as well as regulations implemented pursuant to the statutory licenses. We must also pay applicable sound recording performance and reproduction royalties to SoundExchange, the non-profit organization that is currently designated to collect and distribute those sound recording royalties.

Under these licenses, the Copyright Royalty Board (the “CRB”) determines the applicable royalty rates. Until December 31, 2015, the rates we used were determined through a settlement agreement that webcasters reached with SoundExchange, called the Pureplay Settlement. Effective January 1, 2016 and through the next five years, the CRB determined a new rate scheme.

There is a similar statutory scheme in Canada.

The statutory licenses are only relevant to the extent that we do not have direct licenses. We have been pursuing direct licenses to increase the size of our music library and have closed deals with indie labels, indie label aggregators, and independent artist aggregators. However, we still pay approximately 85% our sound recording performance royalties to SoundExchange under the statutory licenses.

We also pay music publishers (owners of the music compositions underlying licensed sound recordings) for the right to publicly perform the musical works embodied in sound recordings. These performance royalties are paid to ASCAP, BMI, and SESAC in the United States, and SOCAN in Canada

Outside of the United States and Canada, there are a variety of laws and regulatory schemes that protect music content. In the rest of the world, listeners can listen to the songs included in 8tracks playlists by streaming corresponding music videos that are offered through the YouTube player embedded on the 8tracks website rather than by streaming directly from our own servers.

Suppliers

Our main suppliers are our music content providers: record labels, performing artists, music publishers, and their agents and representatives. Please see “The Company’s Business – Regulation and Copyright” for more details.

Employees

We currently have 21 full-time employees working primarily out of San Francisco, California. Most of our advertising sales team is based in New York, New York, and we have one full-time employee in Chicago, Illinois. Currently, we engage four part-time contractors and one full-time contractor.

Research and Development
During the last two fiscal years, the company has not invested in company-sponsored research and development activities.

Trademarks

We have trademarks for 8tracks and our logo in the United States, the European Community, the Russian Federation, Japan and Australia. We also have a trademark for 8tracks in China. We do not own any patents.

Litigation

The company is not involved in any litigation, and its management is not aware of any pending or threatened legal actions relating to its intellectual property, conduct of its business activities, or otherwise.

THE COMPANY’S PROPERTY

We do not own any significant property. We lease our space in San Francisco, California from Mark Hamilton, who is also an investor in 8tracks. In New York, New York, we lease office space from WeWork.

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

Operating Results

8tracks launched in August 2008 and began generating revenues in March 2009. 8tracks has generated revenues in each of the three prior fiscal years. Though we have realized net profits in the past, we currently operate at a net loss.

Revenue totaled $3,095,269 in 2015 and $3,928,253 in 2014, a decrease of $832,984 (21%). Our revenue is derived primarily from our advertising. Advertising revenue is the product of two unaudited metrics:

We calculate advertising revenue for ad-based users as ATH x RPM, divided by 1,000. ATH reflects our scale of operations – how much consumer attention we command over the course of a month – and delivers the “fuel” for monetization through advertising or other revenue models. ATH is, in turn, the product of two unaudited metrics:

ATH totaled 19.8 million in December 2015 and 28.3 million in December 2014, a decrease of 8.5 million (30%). This was largely attributable to a decline in MAU, which totaled 5.7 million in December 2015 and 7.8 million in December 2014, a decrease of 2.1 million (27%). We calculate MAU by tracking the number of unique people who visit our mobile apps (for which login is required) and website (for which login is not required but cookies are used for tracking). As a visitor could access our website from multiple computers or delete cookies on any one computer, MAU is an approximate gauge and could overstate the actual number of unique active users in a month.

While hours per user also declined by 8% (to 3.4 in December 2015 from 3.7 in December 2014), the decline in MAU has been the most significant drag on our revenues over the past two years. We attribute the decline in MAU to both internal and external factors. Perhaps most significant, we have lacked sufficient financial resources to hire the required engineering, product and marketing talent to drive acquisition, conversion and retention of our users. Instead, we have focused on direct advertising sales and content acquisition in order to push for long-term profitability. In addition, we believe MAU has suffered as a result of the cannibalistic effect of Spotify’s growth, in particular from its introduction of a free mobile offering in December 2013.

To drive MAU and ATH in future, 8tracks we plan to focus on authentic, low-cost marketing; distribution partnerships; a simpler, more relevant listener experience; lifecycle marketing; and easier playlist creation.

In contrast to ATH, RPM measures the efficacy with which we turn our consumer attention into revenue – particularly advertising revenue. Stated another way, RPM answers the question “How much revenue can we generate per hour (or per thousand hours) streamed?” The RPM we earn from advertisers depends on the mix and frequency of advertising types (e.g. display, video, native) presented to a user over the course of an hour, on average, and the average price of each ad type (typically based on “cost per thousand impressions” or CPM).

On an overall basis, RPM totaled $17.35 in the fourth quarter of 2015 and $14.06 in the fourth quarter of 2014. However, over the past two years, we have focused on increasing RPM in the United States. In the fourth quarter of 2013, we hired our first director of advertising sales, and we recently hired our first direct seller in Canada; our sales team has since grown from 1 to 6 full-time contributors, including direct sellers in the United States and Canada, sales planning, account management, and advertising operations. Our sales team has sought to increase RPM by increasing the number and magnitude of campaigns sold directly and by selling ad types that command higher CPMs, including video ads and native ads. Native ads match the content of our platform and include bespoke sponsored playlists developed for or by brands. The sales team also works with premium partners (e.g., VICE) to sell ads. Our remaining ad inventory (remnant), including nearly all of our inventory outside the US and Canada, is sold through ad networks or programmatic exchanges, which deliver relatively lower CPMs.

The increase in RPM over the past two years was driven by sales in the United States. Accordingly, we have observed changes in RPM as follows:

To drive RPM in future, 8tracks will focus on hiring more sellers in the right markets; creating innovative, high-margin advertising products that target our millennial audience in an authentic way; better marketing of our advertising products; and collaboration with sales partners.

In February 2016, we shut off streaming to listeners outside the US and Canada. In the fourth quarter of 2015, ROW accounted for less than 10% of advertising revenue.

While advertising accounted for more than 98% of our total revenue in 2015 and 99% of our total revenue in 2014, subscription revenue from 8tracks+ (our ad-free offering) grew to $51,346 (1.7% of total revenue) in 2015 from $30,342 (0.8% of total revenue) in 2014. Due to limited resources, we had not focused on our subscription product but believe it represents an area of potential growth. We plan to re-price and re-position the basic 8tracks+ offering, and we will consider the potential for interactive features to enhance it (e.g. more skips, playlist caching) through direct deals with record labels. During 2015 and 2014, revenue from sources other than advertising and subscription represented 0.5% or less of our total revenue.

Cost of revenue totaled $2,044,933 in 2015 and $1,644,688 in 2014, an increase of $400,245 (24%), driven by an increase in content acquisition costs. Since January 2014, 8tracks has paid royalty rates available under the Pureplay Settlement. New statutory sound recording royalty rates took effect in January 2016 and will remain in place for the next five years, growing, if at all, based upon changes in the CPI index. As the new royalties are calculated on a per-play basis, we expect the cost of revenue to grow roughly in line with increases in ATH. Please see “The Company’s Business – Regulation and Copyright” for more details.

Operating expenses totaled $3,639,685 in 2015 and $2,282,163 in 2014, an increase of $1,357,522 (59%). The primary components of this increase were:

As of April 29, 2016, the company had 21 full-time employees and 1 full-time contractor, representing approximately $162,000 in monthly operating expenses. By December 2016, we plan to have 31 full time employees, representing approximately $350,000 in monthly operating expenses. These hires will primarily increase the size of our engineering, sales, and marketing teams. We anticipate further increases in compensation and benefits as we adjust current salaries to market rates in order to reward and retain our talent. We also expect further increases in general and administrative costs as we move to a new office space at market rent.

Our net loss totaled $2,608,924 in 2015; our net income totaled $1,402 in 2014. Our net loss was primarily driven by three factors, as noted above:

Although 8tracks is not currently profitable, we expect a return to profitability in 2017 based on growth in MAU, hours per user, and RPM -- which taken together drive revenue. For example, in December 2017, we forecast ATH at 47 million, monetized at an average RPM of $42, reflecting total monthly revenue of just under $2 million. At this scale, we would pay roughly $1 million in cost of revenue (92% of which comprises sound recording and music composition royalties), resulting in just under $1 million in gross profit. Assuming roughly $400,000 in payroll and other monthly operating costs, we would generate $600,000 in monthly earnings before interest, taxes, depreciation and amortization (EBITDA).

As bolstered by requisite hires in engineering, product, marketing and sales, our team will focus on the strategy outlined above to acquire new traffic in a cost-effective manner, convert and retain a listeners at higher rates, and monetize that attention through improvements in our advertising and subscription models.

Liquidity and Capital Resources

In April 2015, 8tracks entered into a loan agreement with Silicon Valley Bank, which issued two loans to the company: a revolving line of credit and a growth capital loan.

The revolving line of credit allows 8tracks to borrow up to $2 million against 80% of eligible accounts receivable. As of December 31, 2015, we owed $560,659 under this line of credit, which accrues interest at a variable rate equal to prime plus 1% (4.5% as of December 31, 2015). Our working capital revolving credit line matures in April 2017 although earlier repayments may be necessary depending on fluctuations in our accounts receivable.

The growth capital loan allows 8tracks to borrow up to $500,000. As of December 31, 2015, we owed the full $500,000 available under the loan, which accrues interest at a variable rate equal to prime plus 2.75% (6.25% as of December 31, 2015). Beginning on January 1, 2016, 36 monthly payments of $13,889 principal, plus all accrued but unpaid interest at each payment date, are due monthly until maturity on December 1, 2018.

We have provided Silicon Valley Bank a warrant to purchase 25,712 shares at a strike price of $0.70.

8tracks closed its first institutional round of funding in October 2011. Through the sale of shares under Regulation D of the Series Seed Preferred Stock and the Series Seed 2 Preferred Stock, 8tracks received over $3.3 million. Investors in these offerings included venture firms and angels, such as Index Ventures, Andreessen Horowitz, SoftTech, 14W (backed by Len Blavatnik), Pete Tong, Steve Aoki and a number of individuals in the traditional and digital music sectors.

The company is currently is offering Series Seed 2 Preferred Stock under Regulation D to private investors. Since December 31, 2015, and as of March 15, 2016, we have sold $317,000 of Series Seed 2 Preferred Stock in that offering.

Trend Information

As 8tracks has a significant concentration of its audience in the 18-24 (college) demographic, we typically see higher levels of MAU and ATH between college midterms and finals each semester, in late first quarter and across the second quarter and in late third quarter and across the fourth quarter. Over time, we have also seen a steady shift to listening on mobile devices and we expect this trend to continue.

As noted above, we will continue to hire new ad sellers in order to increase the volume of direct sales and thus RPM. From a sector standpoint, we typically observe higher levels of advertising sales in the fourth quarter as advertisers promote products for the holidays.

As sound recording royalties – which comprise the vast majority of cost of revenue – are calculated on a per-play basis, and the platform averages 15 song plays per hour, we expect the cost of revenue to grow roughly in line with increases in ATH. Our operating expenses, on the other hand, will likely increase by 25-50% as we adjust current salaries to market ranges, hire more employees (particularly engineers), and move to a new office space.

DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

David Porter, Chief Executive Officer and Sole Director

David Porter is currently our Chief Executive Officer. He has served in that position since founding 8tracks, from October 2006 to the present date. Prior to joining 8tracks, he was the General Manager and Director of Business Development for Live365, from January 2003 to May 2006, and oversaw all non-technical operations, reaching profitability in 2005.  In that position, he was responsible for strategic planning, distribution partnerships, marketing for the company’s “consumer broadcasting” subscription offering, financial analysis and high-level product planning.

Prior to this role, he was Manager of Business Development at Live365, a role in which he planned, created and executed partnerships, with a focus on internet radio devices. He also acted as financial controller for part of this period.

Prior to business school, David was an auditor at Arthur Andersen in London and Chicago.  He holds an MBA from the University of California at Berkeley and a BS degree in accountancy from the University of Illinois in Champaign-Urbana, graduating Bronze Tablet (top 3% of class), and is a CPA.

Sam Filer, Director of Finance & Operations

Sam Filer is currently our Director of Finance & Operations. He has served in that position from August 2015 to the present date. Prior to joining us, he was Head of Finance at Life360 between April 2014 and June 2015, where he managed a successful $50 million Series C financing and upgraded the operational IT system to Netsuite. Between August 2012 and January 2014, he was Product Manager at Zynga, where he launched Running with Friends, which reached number one on the iOS charts.

Sam holds an MBA from the University of California at Berkeley, which he attended between 2010 and 2012. Prior to this, he worked as an investor for CVC Credit Partners and Elgin Capital, a UK hedge fund. He qualified as a Chartered Accountant with PricewaterhouseCoopers in 2006 and graduated from Oxford University in 2002 with a degree in Physics.

Peter Buettner, VP of Engineering

Peter Buettner has served as VP of Engineering at 8tracks since October 2015. Prior to joining 8tracks, he built and led Bottleshake's engineering team for almost a year. From February 2011 through August 2014, he was Senior Engineering Director at Zynga, where he broke new ground in mobile gaming on iOS, Android, Kindle and web, and held the Game Studio COO role, leading hiring for all functional groups, finances (P&L) and personnel/HR issues, as well as due-diligence and onboarding of acquisitions.

From 2006 to 2011, Peter was Director of Client Software Systems at Gracenote, which was acquired by Sony in 2008. While in this role, he helped lead and grow the front-end engineering team from 10 to 50 members, both domestically and internationally, and also managed the design, development and production of Gracenote's award-winning digital media recognition and content delivery platform. 

Before Gracenote, Peter spent over a decade working at Dolby Laboratories, where he became Senior Engineering Manager of the Technology Development Group and helped grow the team from 3 to 20 members. Peter spent 5 years on Dolby's R&D team, where his work earned him an Emmy Award for "Outstanding achievement in engineering development of Dolby E" in 2005.

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS

For the fiscal year ended December 31, 2015, we compensated our executive officers as follows:

(1) The executives received medical and health benefits, generally available to all salaried employees.

(2) For the fiscal year ended December 31, 2015, 26,260 options granted to Remi Gabillet under the 2006 Stock Plan, as amended and restated, vested.

For the fiscal year ended December 31, 2015, David Porter, the sole director, was not compensated for his services as a Director.

SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITYHOLDERS

(1) Based on 4,138,530 shares of common stock on 3,069,390 shares of preferred stock outstanding prior to this Offering.

(2) This calculation is the amount the person owns now, plus the amount that person is entitled to acquire. That amount is then shown as a percentage of the outstanding amount of securities in that class if no other person exercised their rights to acquire those securities. The result is a calculation of the maximum amount that person could ever own based on their current and acquirable ownership, which is why the amounts in this column may not add up to 100% for each class.

(3) For the purposes of the Preferred Stock, Index Ventures V (Jersey), L.P., Yucca (Jersey) SLP, Index Ventures V Parallel Entrepreneur Fund (Jersey), L.P. and Index Ventures Associates V Limited are under common control.

INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS

We have not entered into any transactions in which the management or related persons have interest in outside of the ordinary course of our operations.

SECURITIES BEING OFFERED

General

The company is offering Series A Preferred Stock to investors in this offering.

The following description summarizes important terms of the company's capital stock. This summary does not purport to be complete and is qualified in its entirety by the provisions of the Amended and Restated Certificate of Incorporation and its Bylaws, copies of which have been filed as Exhibits to the Offering Statement of which this Offering Circular is a part. For a complete description of 8tracks, Inc.'s capital stock, you should refer to its Amended and Restated Certificate of Incorporation, and Bylaws, and applicable provisions of the Delaware General Corporation Law.

Immediately following the completion of this offering, 8tracks, Inc.'s authorized capital stock will consist of 20,000,000 shares of Common Stock, $0.0001 par value per share, and 7,950,000 shares of Preferred Stock, $0.0001 par value per share, of which 2,500,000 designated as Series Seed Preferred Stock, 1,850,000 shares are designated as Series Seed 2 Preferred Stock, and 3,600,000 of those shares are designated as Series A Preferred Stock.

As of May 12, 2016, the outstanding shares of 8tracks, Inc. included: 4,138,530 shares of Common Stock, 2,280,418 shares of Series Seed Preferred Stock, and 788,972 shares of Series Seed 2 Preferred Stock. 

Common Stock

Dividend Rights

Holders of Common Stock are not entitled to receive dividends, as may be declared from time to time by the board of directors out of legally available funds, unless such dividends are paid ratably to the holders of Common Stock and Preferred Stock based on the number of shares of Common Stock which would be held by each stockholder if all of the Preferred Stock was converted at the then-effective conversion rate applicable to such shares of Preferred Stock. The company has never declared or paid cash dividends on any of its capital stock and currently does not anticipate paying any cash dividends after this offering or in the foreseeable future.

Voting Rights

Each holder of Common Stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including the election of directors, but excluding matters that relate solely to the terms of a series of Preferred Stock.

Right to Receive Liquidation Distributions

In the event of the company's liquidation, dissolution, or winding up, holders of its Common Stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of the company's debts and other liabilities and the satisfaction of the liquidation preferences granted to the holders of all shares of the outstanding Preferred Stock.

Rights and Preferences

Holders of the company's Common Stock have no preemptive, conversion, or other rights, and there are no redemptive or sinking fund provisions applicable to the company's Common Stock.

Series Seed Preferred Stock and Series Seed 2 Preferred Stock

The company has authorized the issuance of two seed series of Preferred Stock. The series are designated Series Seed Preferred Stock and Series Seed 2 Preferred Stock (together the "Designated Preferred Stock"). Each series of Designated Preferred Stock contains substantially similar rights, preferences, and privileges.

Dividend Rights

Holders of Designated Preferred Stock are entitled to receive dividends, as may be declared from time to time by the board of directors out of legally available funds. Those dividends are paid ratably to the holders of Common Stock and Preferred Stock based on the number of shares of Common Stock which would be held by each stockholder if all of the Preferred Stock was converted to Common Stock under the terms of the company's Amended and Certificate of Incorporation. The company has never declared or paid cash dividends on any of its capital stock and currently does not anticipate paying any cash dividends after this offering or in the foreseeable future.

Voting Rights

Each holder of Designated Preferred Stock is entitled to one vote for each share of Common Stock, which would be held by each stockholder if all of the Preferred Stock was converted into Common Stock. Fractional votes are not permitted and if the conversion results in a fractional share, it will be rounded to the closest whole number. Holders of Preferred Stock are entitled to vote on all matters submitted to a vote of the stockholders, including the election of directors, as a single class with the holders of Common Stock. Specific matters submitted to a vote of the stockholders require the approval of a majority of the holders of Designated Preferred Stock voting as a separate class. These matters include any vote to:

Right to Receive Liquidation Distributions

In the event of the company's liquidation, dissolution, or winding up, holders of its Designated Preferred Stock are entitled to liquidation preference superior to holders of the Common Stock and pari passu with holders of Series A Preferred Stock. Holders of Designated Preferred Stock will receive an amount for each share equal to greater of (i) the original price paid ($0.8833 per share for Series Seed Preferred Stock and $2.1824 per share for Series Seed 2 Preferred Stock, both adjusted for any stock split, stock dividend, recapitalization, or otherwise) plus any declared but unpaid dividends or (ii) the amount payable had all Preferred Stock been converted to Common Stock. If, upon such liquidation, dissolution or winding up, the assets and funds that are distributable to the holders of all Preferred Stock are insufficient to permit the payment to such holders of the full amount of their respective liquidation preference, then all of such assets and funds will be distributed ratably among the holders of the Preferred Stock in proportion to the full preferential amounts to which they would otherwise be entitled to receive.

Rights and Preferences

The Designated Preferred Stock of is convertible into the Common Stock of the company as provided by Section 3 of the Amended and Restated Certificate of Incorporation. Each share of Designated Preferred Stock is convertible at the option of the holder of the share as any time after issuance and prior to the closing of any transaction that constitutes liquidation event of the company. The conversion price of the Designated Preferred Stock is equal to the issue price subject to anti-dilution protective provisions that will be applied to adjust the number of shares of Common Stock issuable upon conversion of the shares of the respective series of Designated Preferred Stock.

Additionally, each share of the Designated Preferred Stock will automatically convert into the Common Stock of the company immediately prior to the closing of a firm commitment underwritten public offering, registered under the Securities Act of 1933 or by the occurrence of an event voted on by the majority of Designated Preferred Stock holders. The shares will convert in the same manner as the voluntary conversion.

Holders of our Designated Preferred Stock have a right of co-sale and a right of first refusal to purchase shares in new securities the company may propose to sell after the date of that agreement. The right of first refusal in the agreement will end if the company makes an initial public offering.

Holders of our Designated Preferred Stock and Series A Preferred Stock have preference over Common Stock.

Series A Preferred Stock

Dividend Rights

Holders of our Series A Preferred Stock are entitled to receive dividends, if any, as may be declared from time to time by the board of directors out of legally available funds. Series A Preferred Stock will receive dividends, if any, in preference to the holders of Common Stock and Designated Preferred Stock.

The dividends are not cumulative and are available when, as, and if declared by the Board. There is no requirement or penalty for us to declare dividends. We have never declared or paid cash dividends on any of our capital stock and currently do not anticipate paying any cash dividends after this offering or in the foreseeable future.

Right to Receive Liquidation Distributions

In the event of the company's liquidation, dissolution, or winding up, holders of its Series A Preferred Stock are entitled to liquidation preference superior to holders of the Common Stock and pari passu with holders of Designated Preferred Stock. Holders of Series A Preferred Stock will receive an amount for each share equal to greater of (i) the original price paid ($3.20 per share adjusted for any stock split, stock dividend, recapitalization, or otherwise) plus any declared but unpaid dividends or (ii) the amount payable had all Preferred Stock been converted to Common Stock. If, upon such liquidation, dissolution or winding up, the assets and funds that are distributable to the holders of all Preferred Stock are insufficient to permit the payment to such holders of the full amount of their respective liquidation preference, then all of such assets and funds will be distributed ratably among the holders of the Preferred Stock in proportion to the full preferential amounts to which they would otherwise be entitled to receive.

Conversion to Common Stock

Holders of the Series A Preferred stock will have the right to convert their shares to Common Stock at any time, and will automatically convert into the Common Stock of the company immediately prior to the closing of a firm commitment underwritten public offering, registered under the Securities Act of 1933 or by the occurrence of an event voted on by the majority of Designated Preferred Stock holders. The conversion rate may change from time to time if we complete a stock split, reorganization, recapitalization, or the like, but the initial conversion rate will be one-to-one.

Redemption

The Series A Preferred Stock, like the other series of preferred stock, is not redeemable.

Voting Rights

The Series A Preferred Stock is non-voting except as required under law. Generally, this means that the holders of Series A Preferred Stock may vote if any proposed amendment to the powers, preferences or special rights of the Series A Preferred Stock would affect the holders of the Series A Preferred Stock adversely, but will not adversely affect the other series of Designated Preferred Stock. The holders of Series A Preferred Stock are subject to a drag-along provision as set forth in the Investors’ Rights Agreement, pursuant to which each holder of Series A Preferred Stock agrees that, in the event the Company’s Board and the holders of a majority of the Company’s voting stock vote in favor of a sale of the company, then such holder of Series A Preferred stock will vote in favor of the transaction if such vote is solicited, refrain from exercising dissenters’ rights with respect to such sale of the Company, and deliver any documentation or take other actions reasonably required, amongst other covenants.

Rights and Preferences

The Series A Preferred Stock of is convertible into the Common Stock of the company as provided by Section 3 of the Amended and Restated Certificate of Incorporation. Each share of Series A Preferred Stock is convertible at the option of the holder of the share as any time after issuance and prior to the closing of any transaction that constitutes liquidation event of the company. The conversion price of the Series A Preferred Stock is equal to the issue price subject to anti-dilution protective provisions that will be applied to adjust the number of shares of Common Stock issuable upon conversion of the shares of the respective series of Series A Preferred Stock.

Additionally, each share of the Series A Preferred Stock will automatically convert into the Common Stock of the company immediately prior to the closing of a firm commitment underwritten public offering, registered under the Securities Act of 1933 or by the occurrence of an event voted on by the majority of Designated Preferred Stock holders. The shares will convert in the same manner as the voluntary conversion.

Holders of Series A Preferred Stock do not, by virtue thereof, have any rights of first offer with respect to future issuances of Company capital stock, rights to require the Company to redeem the Series A Preferred Stock, rights to demand registration of the Series A Preferred Stock, or rights to receive certain information described in the Company’s Investors’ Rights Agreement.

The Series A Preferred Stock may be transferred to a prospective transferee in accordance with certain restrictions, including but not limited to, written agreement of the prospective transferee to be bound by the terms of the Subscription Agreement. These restrictions include restrictions on transferability and resale, including a lock-up period in the event of a public offering, as set forth in the Subscription Agreement. The lock up provides that the holders of Series A Preferred Stock, along with all other holders of preferred stock and large holders of Common Stock, will not transfer any such stock within the 180-day period following an initial public offering. The shares are not subject to additional restrictions on transferability in the company’s corporate documents, but are subject to transferability restrictions pursuant to the securities laws. The company may require an opinion of counsel, reasonably satisfactory to the company, that such offer, sale or transfer complies with the Securities Act of 1933 and any applicable state securities laws.

Holders of our Series A Preferred Stock and Designated Preferred Stock have preference over Common Stock.

PLAN OF DISTRIBUTION AND SELLING SECURITYHOLDERS

Plan of Distribution

The company is offering up to 3,437,500 shares of Series A Preferred Stock, as described in this Offering Circular. The company has engaged SI Securities, LLC as its sole and exclusive placement agent to assist in the placement of its securities. SI Securities, LLC is under no obligation to purchase any securities or arrange for the sale of any specific number or dollar amount of securities.

Commissions and Discounts

The following table shows the total discounts and commissions payable to the placement agents in connection with this offering:

Placement Agent Warrants

The company has agreed to issue to SI Securities, LLC, for nominal consideration, a warrant to purchase up to a total of  5% of the shares of Series A Preferred Stock. The shares of Series A Preferred Stock issuable upon exercise of this warrant will have identical rights, preferences, and privileges to those being offered by this Offering Circular. This warrant will (i) be exercisable at 100% of the per share public offering price; (ii) be exercisable until the date that is 5 years from the qualification date of this offering; (iii) contain automatic cashless exercise provisions upon a liquidity event or expiration; (iv) contain customary weighted average anti-dilution price protection provisions and immediate cashless exercise provisions and will not be callable by the company; (v) contain customary reclassification, exchange, combinations or substitution provisions (including with respect to convertible indebtedness); and (vi) contain other customary terms and provisions. The exercise price and number of shares issuable upon exercise of the warrant may be adjusted in certain circumstances including in the event of a share dividend, or the company's recapitalization, reorganization, merger or consolidation.

This warrant has been deemed compensation by FINRA and is therefore subject to a 180-day lock-up pursuant to FINRA Rule 5110(g)(1). In accordance with FINRA Rule 5110(g)(1), neither this warrant nor any securities issuable upon exercise of this warrant may be sold, transferred, assigned, pledged or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the qualification economic disposition of such securities by any person for a period of 180 days immediately following the qualification date or commencement of sales of this offering, except to any placement agent and selected dealer participating in the offering and their bona fide officers or partners and except as otherwise provided for in FINRA Rule 5110(g)(2). In addition, this warrant grants its holders “piggyback” registration rights for periods of seven years from the qualification date of this offering.

Other Terms

The company is obligated to reimburse SI Securities, LLC for up to a maximum amount of $12,500 in actual accountable out-of-pocket expenses.

Except as set forth above, the company is not under any contractual obligation to engage SI Securities, LLC to provide any services to the company after this offering, and has no present intent to do so. However, SI Securities, LLC may, among other things, introduce the company to potential target businesses or assist the company in raising additional capital, as needs may arise in the future. If SI Securities, LLC provides services to the company after this offering, the company may pay SI Securities, LLC fair and reasonable fees that would be determined at that time in an arm’s length negotiation.

SI Securities, LLC intends to use an online platform provided by SeedInvest Technology, LLC, an affiliate of SI Securities, LLC, at the domain name www.seedinvest.com (the “Online Platform”) to provide technology tools to allow for the sales of securities in this offering.

Selling Security holders

No securities are being sold for the account of security holders; all net proceeds of this offering will go to the company.

Investors’ Tender of Funds

After the Offering Statement has been qualified by the Commission, the company will accept tenders of funds to purchase the Series A Preferred Stock. The company may close on investments on a “rolling” basis (so not all investors will receive their shares on the same date). Upon closing, funds tendered by investors will be made available to the company for its use.

In order to invest you will be required to subscribe to the Offering via the Online Platform and agree to the terms of the Offering, Subscription Agreement, which includes the adoption of the Investors’ Rights Agreement, and any other relevant exhibit attached thereto.

In the event that it takes some time for the company to raise funds in this offering, the company will rely on income from sales, funds raised in an offering from accredited investors, credit available from Silicon Valley Bank and cash on hand of $.4 million as of December 31, 2015.

FINANCIAL STATEMENTS

8tracks, Inc.

A Delaware Corporation

Financial Statements and Independent Auditor’s Report

December 31, 2015 and 2014

8TRACKS, INC.

TABLE OF CONTENTS 

To the Board of Directors of

8tracks, Inc.

San Francisco, California

INDEPENDENT AUDITOR’S REPORT

Report on the Financial Statements

We have audited the accompanying financial statements of 8tracks, Inc., which comprise the balance sheets as of December 31, 2015 and 2014, and the related statements of operations, comprehensive loss, changes in stockholders’ equity (deficiency), and cash flows for the years then ended, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatements.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Artesian CPA, LLC

1624 Market Street, Suite 202 | Denver, CO 80202

p: 877.968.3330 f: 720.634.0905

info@ArtesianCPA.com | www.ArtesianCPA.com

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 8tracks, Inc., as of December 31, 2015 and 2014, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.

Emphasis of Matter Regarding Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 2 to the financial statements, the Company has experienced negative cash flows from operating activities of $2,141,463 and $483,422 and comprehensive losses of $2,640,886 and $1,499 for the years ended December 31, 2015 and 2014, both respectively, and has an accumulated deficit of $3,413,229 and $804,305 as of December 31, 2015 and 2014, respectively. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.

/s/ Artesian CPA, LLC

Denver, Colorado

March 23, 2016

Artesian CPA, LLC

1624 Market Street, Suite 202 | Denver, CO 80202

p: 877.968.3330 f: 720.634.0905

info@ArtesianCPA.com | www.ArtesianCPA.com

8tracks, Inc.

BALANCE SHEETS

As of December 31, 2015 and 2014

See Independent Auditor’s Report and accompanying notes, which are an integral part of these financial statements.

8tracks, Inc.

STATEMENTS OF OPERATIONS

For the years ended December 31, 2015 and 2014

See Independent Auditor’s Report and accompanying notes, which are an integral part of these financial statements.

8tracks, Inc.

STATEMENTS OF COMPREHENSIVE LOSS

For the years ended December 31, 2015 and 2014

See Independent Auditor’s Report and accompanying notes, which are an integral part of these financial statements.

8tracks, Inc.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)

For the years ended December 31, 2015 and 2014

See Independent Auditor’s Report and accompanying notes, which are an integral part of these financial statements.

8tracks, Inc.

STATEMENTS OF CASH FLOWS

For the years ended December 31, 2015 and 2014

See Independent Auditor’s Report and accompanying notes, which are an integral part of these financial statements.

NOTE 1: NATURE OF OPERATIONS

8tracks, Inc. (the “Company”) was incorporated on October 13, 2006 under the laws of the State of Delaware and is licensed to do business in the state of California, where its principal offices are located. The Company offers “crowd curated” internet radio. An estimated 1% of its user base curates and publishes playlists; the other 99% visit the mobile applications or website to tune in. The business is supported primarily through advertising (native, video, and display) and secondarily through subscription.

NOTE 2: GOING CONCERN

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company has experienced negative cash flows from operating activities of $2,141,463 and $483,422 and comprehensive losses of $2,640,886 and $1,499 for the years ended December 31, 2015 and 2014, both respectively, and has an accumulated deficit of $3,413,229 and $804,305 as of December 31, 2015 and 2014, respectively. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern for the next twelve months is dependent upon its ability to generate cash from operating activities or to raise additional capital to finance its operations. No assurance can be given that the Company will be successful in these efforts.

Management’s plans to address this substantial doubt to the Company’s ability to continue as a going concern are as follows:

The Company's decline in revenue in 2015 was primarily attributable to a decline in audience (listeners) and engagement (average hours per listener). Instead of seeking growth in listeners and hours, much of the Company's focus shifted instead to monetization (tracked by "RPM" or revenue per 1,000 hours). The Company is seeking additional capital in 2016.  New funding would allow the Company to hire requisite talent in engineering, product, and marketing, and focus on growth in its audience (listeners) and level of engagement (hours per listener) as well as monetization (RPM). 

The Company has historically performed limited traditional marketing.  Through new funding and new hires in marketing, the Company will seek to improve search engine optimization, build better tools to encourage organic sharing of playlists, and pursue traditional marketing tactics. The Company will continue to drive listener conversion and retention in a number of ways: improving the first-time user experience; personalizing the user experience based on taste and context; creating a music library to support mobile playlist creation without the need for uploads; and integrating with one or more on-demand services. To increase RPM, the Company intends to hire more advertising salespeople in key markets; develop and improve its native ad product suite; and revise the product, pricing, and positioning of its ad-free subscription (8tracks Plus).

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) and Article 8 of Regulation S-X of the rules and regulations of the Securities and Exchange Commission (SEC). All of the Company's operations are considered one operating segment.

The Company adopted the calendar year as its basis of reporting.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents, Investments, and Concentration of Cash Balance

The Company classifies all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company classifies investments as either short-term or long-term based on each instrument's underlying contractual maturity date. Investments with maturities of twelve months or less are classified as short-term and those with maturities greater than twelve months are classified as long-term.

At times during the year, the Company may maintain funds on deposit at its banks in excess of FDIC insurance limits.

Cash, cash equivalents, and restricted cash consisted of the following:

Our short-term money market investments are classified as cash equivalents. No unrealized gains or losses were recognized during the years ended December 31, 2015 and 2014.

Foreign Currency is denoted in Canadian Dollars (CAD) and converted into U.S. Dollars (USD). The December 31, 2015 balance was converted into United States Dollar using a rate of 1.38540 CAD per USD.

The Company had entered into a cash collateral agreement in connection with a credit card account. As of December 31, 2015, $75,000 of cash held was restricted as collateral on the credit card balance.

Fair Value of Financial Instruments

FASB ASC 825, "Financial Instruments" requires that the Company disclose estimated fair values of financial instruments. The carrying amounts reported on the balance sheet for assets and liabilities qualifying as financial instruments are a reasonable estimate of fair value.

As defined in FASB ASC 820, "Fair Value Measurements", fair value is the price 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. In determining fair value, the Company utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the examination of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as exchange-traded instruments and listed equities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (e.g., quoted prices of similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active).

Level 3 - Unobservable inputs for the asset or liability. Financial instruments are considered Level 3 when their fair values are determined using pricing models, discounted cash flows or similar techniques and at least one significant model assumption or input is unobservable.

A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. All investments held at December 31, 2015 and 2014 are classified as Level 1 within the fair value hierarchy.

Accounts Receivable

The Company invoices at the beginning of each reporting period based on the amount of accrued revenue from the previous period. Payments received can lag between 1 to 3 months from invoice date. Several contracts are denoted in foreign currencies and have been converted as of the date of the invoice at conversion rates then in effect. The Company assesses its accounts receivable based on historical loss patterns, current receivables aging, and assessments of specific identifiable customer accounts considered at risk or uncollectible.  The Company also considers any changes to the financial condition of its customers and any other external market factors that could impact the collectability of the receivables in the determination of the allowance for doubtful accounts.  Based on these assessments, the Company determined that an allowance for doubtful accounts on its accounts receivable balance as of December 31, 2015 and 2014 was not necessary.

Property and Equipment

Property and equipment is carried at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Additions and betterments are capitalized. The cost and related accumulated depreciation of property and equipment sold or otherwise disposed of are removed from the accounts and any gain or loss is reflected in the current year’s earnings.

Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amounts to the future undiscounted cash flows the assets are expected to generate. If property and equipment are considered to be impaired, the impairment to be recognized equals the amount by which the carrying value of the asset exceeds its fair market value. There were no material write-offs during the years ended December 31, 2015 or 2014.

The Company primarily follows the straight-line method of depreciation utilizing the following lives:

Convertible Instruments

U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional as that term is described under applicable U.S. GAAP.

When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.  Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. The Company also records, when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.

Revenue Recognition

The Company recognizes revenue when four basic criteria are met: (1) persuasive evidence exists of an arrangement with the customer reflecting the terms and conditions under which the products or services will be provided; (2) delivery has occurred or services have been provided; (3) the fee is fixed or determinable; and (4) collection is reasonably assured. We consider a signed agreement, a binding insertion order or other similar documentation to be persuasive evidence of an arrangement. Collectability is assessed based on a number of factors, including transaction history and the creditworthiness of a customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognition as deferred revenue.

Advertising Revenue 

The Company generates advertising revenue primarily from audio, display, and video advertising. The Company generates the majority of its advertising revenue through the delivery of advertising impressions sold on a cost per thousand, or CPM, basis. In determining whether an arrangement exists, we ensure that a binding arrangement, such as an insertion order or a fully executed customer-specific agreement, is in place. Revenue is generally recognized based on delivery information from campaign trafficking systems.

The Company also generates advertising revenue pursuant to arrangements with advertising agencies and brokers. Under these arrangements, agencies and brokers are provided the ability to sell advertising inventory on our service directly to advertisers. We report this revenue net of amounts due to agencies and brokers as the Company is not the primary obligor under these arrangements, and therefore, we do not set the pricing and do not establish or maintain the relationship with the advertisers.

Subscription and Other Revenue

Subscription and other revenue is generated primarily through the sale of a premium version of the Company’s service which currently includes advertisement-free access and higher audio quality on supported devices. The Company offers six month and annual subscription options. Revenues under these arrangements are recognized over the term of the subscription.

Multiple-element arrangements

The Company enters into arrangements with customers to sell advertising packages that include different media placements or ad services that are delivered at the same time, or within close proximity of one another. We recognize the relative fair value of the media placements or ad services as they are delivered assuming all other revenue recognition criteria are met.

Cost of Revenue - Content Acquisition Costs:

Content acquisition costs principally consist of royalties paid for music streamed to our listeners. Royalties are currently calculated under statutory licenses or negotiated rates documented in agreements. The majority of our royalties are payable based on a cost-per-play of a sound recording, while in other cases our royalties are payable based on a percentage of our revenue or a formula that involves a combination of per performance and revenue metrics. For royalty arrangements under negotiation, we accrue for estimated royalties based on the available facts and circumstances and adjust these estimates as more information becomes available.

During the years ended December 31, 2015 and 2014, the Company reported royalties based on playback of at least 30 seconds of a song. Subsequent to December 31, 2015 and 2014, the Company revised its policy to report royalty obligations based on playback of any portion of a song, which will result in higher “costs of revenue – content acquisition costs” on the Statement of Operations in future periods. This matter is further discussed in Note 9 to these financial statements.

Compensation & Benefits

Compensation and benefits consists primarily of employee-related costs, including salaries, commissions and benefits related to employees, health insurance, recruiting, and payroll taxes.

Sales and Marketing

Sales and marketing expenses include transaction processing commissions on subscription purchases through mobile app stores, external sales and marketing expenses such as brand marketing, public relations expenses, costs related to music events, agency platform, and media measurement expenses.

General and Administrative

General and administrative consists primarily of internal information technology, rent, utilities, travel, bad debt expense, subscriptions and software licenses, depreciation, and other administrative expenses.

Professional Services

Professional services costs include outside legal, accounting services, and outside consultants and contractors.

Stock-Based Compensation

The Company has established a stock-based incentive program as discussed in more detail in Note 6. The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation.  Under the fair value recognition provisions of ASC 718, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period, which is generally the option vesting period.  The Company uses the Black-Scholes option pricing model to determine the fair value of stock options.  

Income Taxes

The Company uses the liability method of accounting for income taxes as set forth in ASC 740, Income Taxes.  Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax basis of assets and liabilities using tax rates expected to be in effect during the years in which the basis differences reverse.  A valuation allowance is recorded when it is unlikely that the deferred tax assets will be realized.  The Company assesses its income tax positions and records tax benefits for all years subject to examination based upon its evaluation of the facts, circumstances and information available at the reporting date.  In accordance with ASC 740-10, for those tax positions where there is a greater than 50% likelihood that a tax benefit will be sustained, our policy will be to record the largest amount of tax benefit that is more likely than not to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.  For those income tax positions where there is less than 50% likelihood that a tax benefit will be sustained, no tax benefit will be recognized in the financial statements. The Company has determined that there are no material uncertain tax positions.

The Company files income tax returns in the United States and is subject to income tax examinations for its U.S. federal income taxes for the preceding three years and, in general, is subject to state and local income tax examinations for the preceding three years.

Net Earnings or Loss per Share

Net earnings or loss per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding during the period, excluding shares subject to redemption or forfeiture. The Company presents basic and diluted net earnings or loss per share.  Basic and diluted net earnings or loss per share reflect the actual weighted average of common shares issued and outstanding during the period. Potentially dilutive securities are excluded from the computation of the diluted net earnings or loss per share if their inclusion would be anti-dilutive, and consist of the following items on the basis of common shares upon full conversion as of December 31, 2015 and 2014:

All potentially dilutive securities are anti-dilutive for the years ended December 31, 2015 and 2014, and therefore, diluted net loss per share is the same as basic net loss per share for each year.

Concentrations on Accounts Receivable

The Company has concentrations of credit risk related to trade receivables where McCann New York and Carat USA - Media Accounting represent 17% and 13% of the accounts receivable balance as of December 31, 2015, respectively. Additionally, Starcom MediaVest Group, Inc. and Carat USA - Media Accounting represent 19% and 11% of the accounts receivable balance as of December 31, 2014, respectively. If one or more of these vendors did not satisfy their obligations, it could have a material impact on the Company.

Offering Costs

The Company complies with the requirements of FASB ASC 340-10-S99-1 with regards to offering costs. Prior to the completion of an offering, offering costs will be capitalized as deferred offering costs on the balance sheet. The deferred offering costs will be charged to stockholders’ equity upon the completion of an offering or to expense if the offering is not completed. No offering costs are capitalized as of December 31, 2015 or 2014.

NOTE 4: NOTES PAYABLE

In April 2015, the Company entered into a loan agreement with Silicon Valley Bank which issued two loans to the Company: Revolving Loan and Growth Capital Loan.

Revolving Loan: The loan is based off of the Company’s eligible account receivables balance, and allows for borrowing of up to the lessor of $2,000,000 or the borrowing base (defined in the agreement as eligible accounts receivable multiplied by 80%). The loan balance as of December 31, 2015 was $560,659. The loan matures two years after issuance on April 28, 2017 and has a variable interest rate of prime plus 1% (4.5% as of December 31, 2015). The revolving line may be terminated prior to the stated maturity date (April 28, 2017) date upon: (i) by borrower, effective three business days after written notice to the lender (subject to a $20,000 fee for early termination if within the first year of the note agreement); (ii) by the lender at any time after the occurrence and during the continuance of an event of default. No payments are due on this loan prior to the maturity date, subject to the maximum loan amount and compliance with all other provisions of the agreement. The lender may suspend advances at its discretion. The loan is secured by the all of the Company’s assets and its accounts receivable.

Growth Capital Loan: The Growth Capital Loan allowed for up to two advances through December 31, 2015 in an amount not to exceed $500,000. The Company had drawn the full $500,000 during 2015 and this amount remained outstanding as of December 31, 2015. This loan bears a variable interest rate of prime plus 2.75% (6.25% as of December 31, 2015). Interest only payments were required commencing on June 1, 2015, and continued monthly thereafter for the duration of the interest-only period, which ended December 31, 2015. Thereafter, commencing on January 1, 2016, 36 monthly payments of $13,889 principal, plus all accrued but unpaid interest at each payment date, are due monthly until maturity on December 1, 2018. Prepayment is allowed without penalty and mandatory prepayment of all outstanding principal and accrued interest, penalties, and fees is triggered by default under the terms of the agreement. A default interest rate of an additional 5% becomes applicable in the event of a default event, as defined in the agreement. The loan is secured by substantially all assets of the Company.

Interest expenses were paid to date as of December 31, 2015. Total interest expense on the loans was $19,596 for the year ended December 31, 2015.

The loans are subject to various covenants, including reporting covenants, borrowing base eligibility covenants, and negative covenants limiting the Company’s rights to dispose of assets, changes of control, adding new offices or business locations without prior authorization of the lender, change of jurisdictions, legal name, or organizational structure, moving collateral, and other items as defined in the agreement. All accounts receivable are sent to a lockbox in the custody of the lender.

Common stock warrants were issued in conjunction with these notes, as described in Note 6.

The following schedule presents the Company’s notes payable principal due by maturity year:

NOTE 5: STOCKHOLDERS’ EQUITY

The Company filed amended and restated articles of incorporation on August 1, 2014, authorizing the issuance of 10,100,000 shares of $0.0001 par common stock and 3,150,000 shares of $0.0001 par preferred stock, designated as 2,500,000 shares of Series Seed Preferred Stock and 650,000 shares of Series Seed-2 Preferred Stock.

This filing granted preferred stockholders certain rights and privileges in the event of a liquidation event including a liquidation preference equal to the greater of: a) original purchase price (defined as $0.8833 per share for Series Seed Preferred Stock and $2.1824 per share for Series Seed-2 Preferred Stock, both adjusted for any stock split, stock dividend, recapitalization, or otherwise) plus any declared but unpaid dividends; b) such amount per share as would have been payable had all shares of preferred stock been converted into common stock immediately prior to such liquidation event. It also established conversion rights where each share of preferred stock is convertible at the option of the holder, without payment of additional consideration, at any time, into such number of fully paid and non-assessable shares of common stock as is determined by dividing the original purchase price for such share of preferred stock by the conversion price for such share of preferred stock in effect at the time of the conversion. The conversion price for each share of preferred stock shall mean the original issue price for such share of preferred stock, with certain dilution protections for stock splits, combinations, or other similar transactions.

The Company has reserved 2,546,404 and 1,492,659 shares of common stock as of December 31, 2015 and 2014, respectively, under the 2006 Stock Plan, with the increase approved by the Company in January of 2015.

Common Stock

4,138,530 and 4,117,698 shares of common stock are outstanding as of December 31, 2015 and 2014, respectively. Issuances of common stock during the years ended December 31, 2015 and 2014 were 20,832 and 29,749 shares, both respectively, related to the exercise of stock options. These stock option exercises provided proceeds of $9,216 and $7,140 for the years ended December 31, 2015 and 2014, respectively.

Certain founder shares were subject to restricted stock purchase agreements where shares were vested over a period of time of continuous service. As of December 31, 2015 and 2014 all such shares were fully vested.

Preferred Stock

2,924,194 shares of preferred stock are outstanding as of each December 31, 2015 and 2014. These shares were designed as 2,280,418 shares of Series Seed Preferred Stock and 643,776 shares of Series Seed-2 Preferred Stock, as of each December 31, 2015 and 2014. 643,776 shares of Series Seed-2 Preferred Stock were issued at $2.1824 per share, providing proceeds of $1,405,000, during the year ended December 31, 2014

NOTE 6: SHARE-BASED PAYMENTS

Stock Plan

The Company has adopted the 2006 Stock Plan, as Amended and Restated (the “Plan”), which provides for the grant of shares of stock options, stock purchase rights, and stock awards (performance shares) to employees, non-employee directors, and non-employee consultants. Under the Plan, the number of shares available to be granted during the life of the plan is 2,546,404 and 1,492,659 as of December 31, 2015 and 2014, respectively, with the increase approved by the Company in January of 2015. The option exercise price is generally granted at the underlying stock’s fair market value at the date of the grant, and the maximum term of an option is ten years. The amounts granted each calendar year to an employee or non-employee is limited depending on the type of award. Shares available for grant under the Plan amounted to 320,227 and 28,591 as of December 31, 2015 and 2014, respectively. Total shares granted over the life of the plan amounted to 2,767,157 and 1,862,311, with 540,980 and 398,243 of forfeitures added back into the plan, as of December 31, 2015 and 2014, all respectively. Additionally, 755,500 stock purchase rights were issued and exercised prior to creation of the 2006 Stock Plan.

Vesting generally occurs over a period of immediately to four years. A summary of information related to stock options for the years ended December 31, 2015 and 2014 is as follows: