Item
1.01 Entry into a Material Definitive Agreement.
On
November 8, 2018, nFüsz, Inc., a Nevada corporation (“our”, “we,” or “us”) entered into
an Agreement and Plan of Merger (the “Merger Agreement”), by and among Sound Concepts, Inc., a Utah corporation (“Sound
Concepts”), NF Merger Sub, Inc., a Utah corporation (“Merger Sub 1”), NF Acquisition Company, LLC, a Utah limited
liability company (“Merger Sub 2”), the shareholders of Sound Concepts (the “Shareholders”), the shareholders’
representative (the “Shareholder Representative”), and us, pursuant to which we will acquire Sound Concepts (the “Sound
Concepts Acquisition”) through a two-step merger, consisting of merging Merger Sub 1 with and into Sound Concepts, with
Sound Concepts surviving the “first step” of the merger as our wholly-owned subsidiary (and the separate corporate
existence of Merger Sub 1 will cease) and, immediately thereafter, merging Sound Concepts with and into Merger Sub 2, with Merger
Sub 2 surviving the “second step” of the merger such that upon the conclusion of the “second step” of
the merger, the separate corporate existence of Sound Concepts will cease and Merger Sub 2 will continue its limited liability
existence under Utah law as the surviving entity and as our wholly-owned subsidiary (collectively, the “Merger”).
Consideration
On the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the
Merger (the “Effective Time”), each share of Sound Concepts’ capital stock issued and outstanding immediately
prior to the Effective Time (the “Sound Concepts Capital Stock”) will be cancelled and converted into the right to
receive a proportionate share of $25,000,000 of value (the “Closing Merger Consideration”), to be payable through a
combination of a cash payment by us of $15,000,000 (the “Acquisition Cash Payment”) and the issuance of shares of our
common stock (the “Common Stock”) with a fair market value of $10,000,000 (the “Acquisition Stock”). The
Closing Merger Consideration is not subject to any closing working capital adjustment or post-closing working capital adjustment.
Escrow
Agreement
Pursuant
to the Merger Agreement, at or prior to the closing of the Sound Concepts Acquisition (the “Closing”), Sound Concepts
will deliver to us an executed escrow agreement (the “Escrow Agreement”). In accordance with the Escrow Agreement,
at the Closing, we will deposit that number of shares of our Common Stock obtained by dividing $2,500,000 by the price of our
Common Stock at the Closing pursuant to the terms of the Merger Agreement (the “Escrow Shares”) with the escrow agent
for the purpose of securing the indemnification obligations of the Shareholders set forth in the Merger Agreement.
Representations,
Warranties, and Indemnities
Sound
Concepts, the Shareholders, Merger Sub 1, Merger Sub 2, and we made customary representations, warranties, and indemnities subject
to, in some cases, exceptions and qualifications as will be set forth in a disclosure schedule to the Merger Agreement (the “Disclosure
Schedules”).
Covenants
and Other Agreements
Sound
Concepts, the Shareholders, Merger Sub 1, Merger Sub 2, and we agreed to certain covenants and other agreements, including, among
others, (i) covenants requiring Sound Concepts and the Shareholders to not solicit other acquisition bids or proposals, (ii) covenants
regarding non-solicitation and non-competition, and (iii) covenants requiring Sound Concepts and the Shareholders to provide us
with annual financial statements for the years ended December 31, 2017 and 2016 that have been audited by an independent certified
public accounting firm that is registered under the Public Company Accounting Oversight Board and interim financial statements
for the six-month periods ended June 30, 2018 and 2017, which are attached to this Current Report as Exhibit 99.1.
Conditions
to Closing the Sound Concepts Acquisition
Completion
of the Sound Concepts Acquisition is subject to the satisfaction or waiver of certain conditions. In addition to customary closing
conditions, our obligation to complete the Sound Concepts Acquisition is conditioned upon the consummation of an underwritten
public offering of shares of our Common Stock and receipt by us of offering proceeds that will be used to pay for all or a portion
of the Acquisition Cash Payment (the “Offering Condition”). Nothing herein shall constitute an offer to sell or the
solicitation of an offer to buy any of the securities in our anticipated offering of shares of our Common Stock.
Closing
Subject
to the conditions of the Merger Agreement, the closing of the Sound Concepts Acquisition will occur by electronic exchange of
documents no later than three business days after the last of the closing conditions, including, without limitation, the Offering
Condition, has been satisfied or waived. Currently, we anticipate the closing of the Sound Concepts Acquisition to occur in the
first quarter of fiscal 2019; however, there can be no assurance that the Sound Concepts Acquisition will close in the first quarter
of fiscal 2019, or at all.
Termination
of the Merger Agreement
The
Merger Agreement may be terminated under certain circumstances, including, but not limited to: (i) the mutual written consent
of Sound Concepts and us; (ii) by us if there has been a breach, inaccuracy in, or failure to perform any representation, warranty,
covenant, or agreement made by Sound Concepts or the Shareholders pursuant to the Merger Agreement that would give rise to the
failure of any of the closing conditions and such breach, inaccuracy, or failure has not been cured within 10 days of Sound Concepts’
receipt of written notification of such breach from us; provided, that, none of Merger Sub 1, Merger Sub 2, or us is then in material
breach of any provision of the Merger Agreement; (iii) by us if any of Merger Sub 1’s, Merger Sub 2’s, and our closing
conditions, including the Offering Condition, have not been, or if it becomes apparent that any of such conditions will not be,
fulfilled by January 31, 2019, unless such failure is due to our failure to perform or comply with any of the covenants, agreements,
or conditions required to be performed or complied with by it prior to the Closing of the Sound Concepts Acquisition; (iv) by
Sound Concepts if there has been a breach, inaccuracy in, or failure to perform any representation, warranty, covenant, or agreement
made by Merger Sub 1, Merger Sub 2, or us pursuant to the Merger Agreement that would give rise to the failure of any of the closing
conditions and such breach, inaccuracy, or failure has not been cured within 10 days of our receipt of written notice of such
breach from Sound Concepts; provided, that neither Sound Concepts or the Shareholders is then in material breach of any provision
of the Merger Agreement; (v) by Sound Concepts if any of Sound Concepts’ or the Shareholders’ closing conditions have
not been, or if it becomes apparent that any of such conditions will not be, fulfilled by January 31, 2019, unless such failure
is due to Sound Concepts’, or the Shareholders’, failure to perform or comply with any of the covenants, agreements,
or conditions to be performed or complied with by it or them prior to the Closing of the Sound Concepts Acquisition; and (vi)
by Sound Concepts or us if (1) there is any law that makes consummation of the transactions contemplated by the Merger Agreement
illegal or otherwise prohibited or (2) any governmental authority issued a governmental order restraining or enjoining the transactions
contemplated by the Merger Agreement, and such governmental order has become final and non-appealable.
Letter
Agreements
Also
on November 8, 2018, Merger Sub 1, Merger Sub 2, Sound Concepts, the Shareholders, the Shareholders’ Representative, and
us entered into a letter agreement (the “Letter Agreement”) with the specific intention that the provisions thereof
shall relate to and, until the Closing of the Merger, defer the effectiveness or completion of certain provisions of the Merger
Agreement, which provisions must be completed at or prior to the Closing.
The
parties agreed that (i) the Disclosure Schedules will be finalized and, we anticipate, approved by us prior to the Closing, (ii)
the parties will appoint an escrow agent to hold the Escrow Shares and, in connection therewith, the escrow agent and the parties
will enter into an Escrow Agreement, the form of which will be subsequently agreed to by the parties, prior to the Closing, (iii)
each Shareholder will execute a “lock-up” agreement, the form of which will be subsequently agreed to by the parties,
prior to the Closing, and (iv) the directors and officers of the surviving entity will be determined prior to Closing. The Letter
Agreement further provides that, if we reject any part of the Disclosure Schedules, then, after reasonable and good faith negotiations
between Sound Concepts and us, either party may terminate the Merger Agreement in accordance with its terms. Similarly, if the
parties are unable to agree as to any material provisions of the Escrow Agreement and “lock up” agreements within
a reasonable time period, then, and only then, may any Shareholder or us terminate the Merger Agreement in accordance with its
terms.
On
November 12, 2018, Merger Sub 1, Merger Sub 2, Sound Concepts, the Shareholders, the Shareholders’ Representative, and us
entered into an additional letter agreement (the “Second Letter Agreement”) with the intention of modifying
Sections 9.01(b)(ii) and 9.01(c)(ii) of the Merger Agreement to change each date referenced therein from January 31, 2019 to February
28, 2019.
Business
of Sound Concepts
Sound Concepts is an established
25-year-old business with approximately 80 employees, based in American Fork, Utah, providing digital marketing and sales
support services, including a video-based mobile sales application, to the direct sales industry. Their sales application,
offered as a SaaS application, is marketed under the brand name Brightools and is offered as a white-labeled application to
large corporate enterprises engaged in the network marketing and affiliate marketing industry. Sound Concepts currently has
approximately 75 clients in the network marketing and affiliate marketing sector, which include Young Living, Isagenix,
Vasayo, Nu Skin, Nerium, Forever Living, Seacret, among many others. The Brightools app is a comprehensive sales, lead
generation, and customer relationship management tool specifically designed to meet the needs of direct sales representatives
and others engaged in network marketing and affiliate marketing sales. The Brightools app also incorporates recruiting tools,
sales representative training, and education tools, and includes instant notification capabilities to notify sales reps on
their mobile devices when a prospect has engaged in shared content. Brightools allows sales reps to share sales and product
video content with their prospects via email and text, post content directly to social media, access corporate sales and
product training materials, and receive analytics data and other engagement information regarding their prospects’
interactions with the digital sales content distributed through the app. Brightools also tracks customer purchases and allows
corporate to monitor field activity to track the effectiveness of campaigns as well as compliance. In addition, sales reps
can order physical product samples and purchase customizable brochures, invites, thank-you cards, and more, for
direct delivery to customers and prospects all through the application. The synergies of the digital and physical tools
provide sales reps with unique solutions to engage their prospects, acquire customers, close sales, and grow their
businesses. Brightools is available on, and compatible with, virtually all mobile devices and is currently in use in over 48
different countries. As of the date hereof, Sound Concepts has more than 490,000 current users of its Brightools app,
representing an increase of more than 127,000 users since August 2018.
We
believe that Sound Concepts’ business is highly complementary to our own, and the combination of their technology, customer
base, and human capital with our own, including the integration of our interactive video technology into Brightools, among other
synergies and enhancements, will result in increased shareholder value.
Sound
Concept’s principal executive office is located at 782 South Auto Mall Drive, Suite A, American Fork, Utah 84003.
Its telephone number at that location is (801) 225-9520.
Retention
of Certain Sound Concepts Key Employees
The
parties intend that McKinley J. Oswald, Jason Matheny, Colby Allen, and JJ Oswald will be employed by us following the Closing
of the Sound Concepts Acquisition under terms and conditions agreed upon and to be memorialized in written employment
agreements entered into with each key employee prior to Closing. The following is a brief summary of the business experience
and education of each key employee.
McKinley
J. Oswald, Chief Executive Officer of Sound Concepts
McKinley
J. Oswald, age 43, has served as the Chief Executive Officer of Sound Concepts since 2014. His full-time contributions at Sound
Concepts began after graduating from the University of Utah in 1998. In 2001, Mr. Oswald and his partners purchased Sound
Concepts, and over the past 17 years have introduced numerous innovations that significantly expanded the company’s
offerings and revenue generation capabilities, including the development of the Brightools platform. Mr. Oswald
has been principally responsible for establishing the culture and direction of Sound Concepts and has helped position Sound
Concepts at the forefront of the industry by securing customer relationships with many of the leading direct sales,
network marketing, and affiliate marketing companies, and partnerships with industry experts.
Jason
Matheny, Chief Technology Officer of Sound Concepts
Jason
R. Matheny, age 48, has served as Sound Concepts’ Chief Technology Officer since 2014. After graduating with a bachelor’s
degree in accounting from the University of Utah, he went on to obtain his MBA from Brigham Young University. Coupling his education
with his versatility has allowed Mr. Matheny to take on a variety of responsibilities during his more than 25 years at Sound Concepts.
Since Mr. Matheny and his partners purchased Sound Concepts in 2001, he has served in a variety of roles, including Chief Financial
Officer. Currently, Mr. Matheny oversees all aspects of the company’s technology team, having played an instrumental role
in launching the digital Brightools platform and leading the Brightools team in doubling its growth each of the last two
years.
Colby
Allen, Chief Operations Officer of Sound Concepts
Colby
Allen, age 44, has served as the Chief Operating Officer of Sound Concepts since 2014. Previously, Mr. Allen served as Chief Sales
Officer. During the course of his career, Mr. Allen has utilized his skill set to focus on the creation of online and offline
tools that help companies more effectively communicate their value proposition. Mr. Allen has overseen the
integration of the Brightools platform with Sound Concepts’ on-demand marketing and sample delivery tools.
His experience has helped improve virtually every aspect of Sound Concepts’ operations and ensured that Sound
Concepts’ digital tools and physical operations operate synergistically. Mr. Allen earned a Bachelor of Science
degree in Business Marketing from the University of Phoenix (magna cum laude).
JJ
Oswald, Chief Sales Officer of Sound Concepts
JJ
Oswald, age 41, is the Chief Sales Officer of Sound Concepts, a position he has held since 2014. Prior to joining Sound Concepts,
Mr. Oswald owned an event rental company, and assisted in growing revenues by 400% before eventually selling the company. He joined
the Sound Concepts team in 2007 and brought with him a wide array of sales experience with a focus on developing and maintaining
robust and mutually beneficial relationships with clients. Mr. Oswald has played a key role in the design of many of
the sales tools contained within the Brightools platform. These tools have proven instrumental in driving significant revenue
increases and the overall growth and adoption of the Brightools platform.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Sound Concepts
The
following discussion and analysis of the results of operations and financial condition of Sound Concepts for the fiscal years
ended December 31, 2017 and 2016 and six-month periods ended June 30, 2018 and 2017, should be read in conjunction with the financial
statements and related notes and the other financial information that are included as Exhibits to this Current Report on Form
8-K.
Results
of Operations
Six
Months Ended June 30, 2018 compared to the Six Months Ended June 30, 2017
Revenues
Revenue for the six months ended June 30,
2018 decreased by approximately $1.1 million, or 15%, to approximately $5.9 million, as compared to approximately $6.9 million
for the six months ended June 30, 2017. Historically, Sound Concepts primarily had two lines of business: (1) corporate kits,
which consists of “starter kits” for corporations to use for their marketing needs, and (2) fulfillments, which consists
of various custom products used for marketing purposes at conferences and other events. Recently, Sound Concepts began moving
away from the fulfillment business model to an on-demand business model. The decrease in revenues for the six months ended June
30, 2018 primarily related to a decrease of approximately $1.7 million in the number of corporate kits sold as a customer
moved its business closer to its corporate headquarters and a decrease of approximately $803,000 in fulfillment orders
due to a temporary slowdown as Sound Concepts began to shift resources from stock-to-order fulfillment business to a higher margin
print on-demand business. The overall decrease was offset by an increase in Sound Concepts’ digital revenue of $486,000,
or 36%, driven by an expansion of their customer base.
Cost
of Revenues
Cost
of revenues for the six months ended June 30, 2018 decreased by approximately $695,000, or 19%, to approximately $3.0 million
as compared to approximately $3.7 million for the six months ended June 30, 2017. The primary decrease in cost of revenues is
attributed to a decrease in sales of corporate kits and fulfillment orders offset by increased digital costs associated with the
increase in revenue.
Gross
Profit
Gross
profit for the six months ended June 30, 2018 decreased by approximately $366,000, or 11%, to approximately $2.9 million as compared
to approximately $3.3 million for the six months ended June 30, 2017. The gross profit percentage was 49% for the six months ended
June 30, 2018, as compared to 47% for the six months ended June 30, 2017.
Research
and Development Expenses
Research
and development expenses for the six months ended June 30, 2018 increased by approximately $382,000, or 61%, to approximately
$1.0 million, as compared to approximately $629,000 for the six months ended June 30, 2017. The increase was primarily due to
increased wages for staff and product development costs related to the growth of the digital business.
General
and Administrative Expenses
General
and administrative expenses for the six months ended June 30, 2018 decreased by approximately $531,000, or 26%, to approximately
$1.5 million, as compared to approximately $2.0 million for the six months ended June 30, 2017. The decrease was primarily driven
by the shift from the fulfillment model to an on-demand model. The shift towards an on-demand model lowered conference and other
event costs. In addition, Sound Concepts recovered bad debt expense that was previously written-off.
Operating
Income
Operating
income for the six months ended June 30, 2018 decreased by approximately $217,000, or 35%, to approximately $407,000, as compared
to approximately $624,000 for the six months ended June 30, 2017. The decrease in operating income was driven by the decrease
in gross profit of $366,000 offset by the decrease in operating expenses of $149,000.
Fiscal
Year Ended December 31, 2017 compared to Fiscal Year Ended December 31, 2016
Revenues
Revenue
for the year ended December 31, 2017 decreased by approximately $1.1 million, or 9%, to approximately $11.5 million, as compared
to approximately $12.7 million for the year ended December 31, 2016. The decrease primarily related to a $2.5 million decrease
in sales of corporate kits as a customer moved its business closer to its corporate headquarters. The decrease was offset by an
increase in Sound Concepts’ digital revenue of $1.4 million, or 81%, driven by an expansion of their customer base.
Cost
of Revenues
Cost
of revenues for the year ended December 31, 2017 decreased by approximately $2.3 million, or 27%, to approximately $6.3 million,
as compared to approximately $8.6 million for the year ended December 31, 2016. The decrease is primary attributed to fewer corporate
kits sold offset by increased digital costs associated with the increase in revenue.
Gross
Profit
Gross
profit for the year ended December 31, 2017 increased by approximately $1.2 million, or 29%, to approximately $5.3 million, as
compared to approximately $4.1 million for the year ended December 31, 2016. The gross profit percentage was 46% for the year
ended December 31, 2017, as compared to 32% for the year ended December 31, 2016. The increase in gross profit was attributable
to the change in revenue mix from Sound Concepts’ traditional corporate kit and fulfillment businesses to the higher margin
digital business within the network marketing vertical. Digital gross profit as a percentage total gross profit increased from
33% in 2016 to 51% in 2017. As Sound Concepts continues to shift its business to digital, it anticipates
the gross profit percentage will continue to increase.
Research
and Development Expenses
Research
and development expenses for the year ended December 31, 2017 increased by approximately $341,000, or 25%, to approximately $1.7
million as compared to approximately $1.4 million for the year ended December 31, 2016. The increase was primarily due to additional
support and product development costs related to the growth of the digital business.
General
and Administrative Expenses
General
and administrative expenses for the year ended December 31, 2017 increased by approximately $111,000, or 3%, to approximately
$3.5 million as compared to approximately $3.4 million for the year ended December 31, 2016. The increase was principally the
effect of an increase in a lease of a digital press. The digital press allows for the reduction of inventory, flexibility with
client updates and increased efficiency.
Operating
Loss
Operating
loss for the year ended December 31, 2017 decreased by approximately $734,000, or 99%, to approximately $8,000 as compared to
$742,000 for the year ended December 31, 2016. The decrease in operating loss was driven by the increase in gross profit of approximately
$1.2 million offset by an increase in operating expenses of $452,000.
Liquidity
and Capital Resources
As
of June 30, 2018, Sound Concepts’ cash on hand was $263,000. Sound Concepts has relied on cash flows provided
by operations to fund operations and operating obligations. Sound Concepts has been growing its revenue, which has
contributed to the growth of its gross profit. Sound Concepts expects to incur increases in operating expenses as
it further invests to develop and roll out the technology.
On
December 27, 2016, Sound Concepts entered into a financing agreement with a financial institution, Zions National First Bank (ZB,
N.A.) (“Zions”), to obtain a line of credit. The financing agreement entered into by and between Sound Concepts and
Zions provided Sound Concepts with a revolving credit facility in an aggregate principal amount not to exceed $500,000 at any
time (the “Revolving Line”). The Revolving Line is secured by Sound Concepts’ assets, bears average interest
at a rate of 4% per annum, matures every anniversary, but automatically renews for additional one-year periods, until terminated
by the parties. The Revolving Line matures on December 27, 2018. As of June 30, 2018, the amount outstanding under the Revolving
Line was $175,000. As of October 29, 2018, the amount outstanding under the Revolving Line is $0. In addition, Sound Concepts
has a note payable of $35,000.
Management
believes that Sound Concepts’ cash on hand and cash flows expected to be generated from operations will be sufficient to
fund Sound Concepts’ net cash requirements through November 2019. It is anticipated that Sound Concepts will not need to
borrow from its Revolving Line.
Net
Cash Provided by Operating Activities
Net
cash provided by operating activities was approximately $294,000 for the six months ended June 30, 2018, compared to approximately
($78,000) for the six months ended June 30, 2017. Cash provided by operating activities for the six months ended June 30, 2018
was primarily the result of net income of $419,000 and cash collections from accounts receivable of $101,000, deferred revenue
of $62,000, and customer deposits of $61,000, offset by a decrease in accounts payable of $268,000 and accrued expenses of $122,000.
Cash provided by operating activities for the six months ended June 30, 2017 was primarily the result of net income of $624,000
offset by a decrease in accounts payable of $620,000 and a decrease in customer deposits of $170,000.
Net
Cash Used in Investing Activities
Net
cash used in investing activities was approximately $50,000 for the six months ended June 30, 2018, compared to approximately
$7,000 used by investing activities for the six months ended June 30, 2017. The net cash used in investing activities for the
six months ended June 30, 2018 and 2017 was principally attributable to the purchases of property and equipment.
Net
Cash Used in Financing Activities
Net
cash used in financing activities was approximately $59,000 for the six months ended June 30, 2018, as compared to approximately
$3,000 for the six months ended June 30, 2017. During the six months ended June 30, 2018 and 2017, cash flows used in financing
activities consisted of a decrease in the credit line of $105,000 offset by an increase in notes payable of $29,000 and a repayment
of a related party loan of $17,000.
Off-Balance
Sheet Arrangements
None.
Critical
Accounting Policies
Use
of Estimates
Sound
Concepts’ financial statements were prepared in conformity with GAAP, which requires management to make estimates and assumptions
that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ
materially from these estimates. The accounting estimates and assumptions that require management’s most significant, difficult,
and subjective judgment include the collectability of accounts receivable, inventory obsolescence, assessment of useful lives
and recoverability of long-lived assets, and accruals for potential liabilities, among others. Actual results experienced by Sound
Concepts may differ from management’s estimates.
Allowance
for Doubtful Accounts
Accounts
receivable are stated at a gross invoice amount less an allowance for doubtful accounts. Sound Concepts continually monitors customer
payments and maintains a reserve for estimated losses resulting from its customers’ inability to make required payments.
In determining the reserve, Sound Concepts evaluates the collectability of its accounts receivable based upon a variety of factors.
In cases where Sound Concepts becomes aware of circumstances that may impair a specific customer’s ability to meet its financial
obligations, Sound Concepts records a specific allowance against amounts due. For all other customers, Sound Concepts recognizes
allowances for doubtful accounts based on its historical write-off experience in conjunction with the length of time the receivables
are past due, customer creditworthiness, geographic risk and the current business environment. Actual future losses from uncollectible
accounts may differ from Sound Concepts estimates.
The
allowance for doubtful accounts was $94,000 as of June 30, 2018, $10,000 and $34,000 as of December 31, 2017 and 2016, respectively.
Impairment
of Long-Lived Assets
Long-lived
assets primarily include property and equipment. In accordance with the provision of ASC 360, Sound Concepts generally conducts
its annual impairment evaluation of its long-lived assets in the fourth quarter of each year, or more frequently if indicators
of impairment exist, such as a significant sustained change in the business climate.
As
at June 30, 2018, December 31, 2017 and 2016, Sound Concepts determined there were no indicators of impairment of its property
and equipment.
Revenue
Recognition
Sound
Concepts derives its revenue primarily from providing digital marketing and sales support services, f
rom
customized print products and training materials, to branded apparel and digital tools, as demanded by its customers.
Revenue
is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable, and
collectability of the resulting receivable is reasonably assured. Determining whether and when these criteria have been satisfied
requires Sound Concepts to make assumptions and judgments that could have a significant impact on the timing and amount of revenue
it reports.
Sound
Concepts also charges certain customers setup or installation fees for the creation and development of websites and phone application.
These fees are accounted as part of deferred revenues and amortized over the estimated life of the agreement.
Sound
Concepts adopted ASC 606 starting January 1, 2018 around its revenue from contracts with customers. The adoption did not have
a significant impact on Sound Concepts revenue recognition including its set-up income from customers.
Income
Taxes
Sound
Concepts is a limited liability company treated as a partnership for federal and state income tax purposes with all income tax
liabilities and/or benefits of Sound Concepts being passed through to the member. As such, no recognition of federal or state
income taxes for Sound Concepts or its subsidiaries that are organized as limited liability companies have been provided for in
the accompanying financial statements. Any uncertain tax position taken by the member is not an uncertain position of Sound Concepts.
There
was no taxable income and therefore no distributions in the years ended December 31, 2017 and 2016 respectively, as well as in
the six months ended June 30, 2018 and 2017 respectively.