This Annual Report includes forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the Exchange Act). These statements are based on managements beliefs and assumptions, and on information currently available to management. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements also include statements in which words such as expect, anticipate, intend, plan, believe, estimate, consider or similar expressions are used.
Forward-looking statements are not guarantees of future performance. They involve risks, uncertainties and assumptions. The Companys future results and shareholder values may differ materially from those expressed in these forward-looking statements. Readers are cautioned not to put undue reliance on any forward-looking statements.
Item 1.
BUSINESS
Momentous Entertainment Group, Inc. (MMEG or the Company) was founded by Kurt E. Neubauer as Financial Equity Partners, Inc., a Texas company, in 2004 and was incorporated as a C corporation under the laws of the State of Nevada as Momentous Entertainment Group, Inc. in November 2013. We had very limited activities until June 2011 when we started designing a detailed business plan focused on four key business segments that receive revenues from their own specific target markets. The business segments also share synergies and products cross selling opportunities amongst themselves. This significantly increases their available addressable market and number of potential buyers, resulting in an increased sales and revenue generating potential.
The Company has evolved into an online social media network company. It is vertically organized into four business areas:
1)
Social Networking;
2)
Social Gaming;
3)
Ecommerce sold consumer products and services; and
4)
OTT (
O
ver-
T
he-
T
op) streaming media content creation and distribution.
Current Status
MMEG is an online social media network company. It is vertically organized into four business segment areas: social networking, social gaming, ecommerce sold consumer products and services, and OTT (
O
ver-
T
he-
T
op) streaming media content creation and distribution. With more than 11 million online registered users worldwide, the Companys value proposition serves multiple stakeholders: Social network users; Online gamers; OTT content users; Consumers looking to buy products and services through our e-commerce portal and our social network.
Our principal efforts for the next few months will be preparing and developing the following:
1.
Social Media Network
On February 8, 2017, the Company executed a Share Exchange Agreement with the shareholders of VZ Network Holdings, Inc., a Delaware company (the Selling Company or VZ), purchasing all the issued and outstanding shares of VZ for 10,000 shares of newly-issued preferred C stock of MMEG, with VZ becoming a wholly-owned subsidiary of MMEG. VZ owns 100% of the equity of Poolworks (Germany) Ltd, a German company with offices in Berlin. The Companys preferred C stock has a stated or liquidation value of $1,000 per share, or an aggregate of $10,000,000, as to all shares of Company Series C Preferred Stock. Poolworks (Germany), Ltd. owns and operates the social media networking platforms studiVZ and meinVZ directed and offered primarily to individuals, located in the Republic of Germany.
The studiVZ platform was founded in 2005 in Berlin and received investment capital from Lukasz Gadowski, Georg von Holtzbrinck Publishing Group and the Samwer brothers. It was acquired along with meinVZ by Georg von Holtzbrinck Publishing Group in 2007 for 85 million euros, and then by financiers Michael Pope and Adam Levin in 2012. Today, studiVZ and meinVZ has nearly 10 million registered users and over 41M ad impressions, largely in the German-speaking countries of Germany, Switzerland and Austria.
4
MMEG is committed to relaunching the Poolworks (Germany) Ltd. web and mobile platforms to increase user engagement and retention. Users will see expanded video features such as a new OTT streaming service and easy-to-use e-commerce capabilities to attract a wider audience and additional revenue. The executive team at MMEG is committed to maintaining a strong focus on information security for its users, something that competing German social networks continue to neglect.
2.
Social Gaming
The Company closed on a Letter of Intent acquiring the assets of ChimeraCompanyGames.com in March 2017. ChimeraCompanyGames.com is a well-established game platform with a portfolio of seven popular games and a loyal user community containing over 1 million users and 550,000 email addresses which produce an excellent ADPU (Average Dollar Per User) that exceeds the gaming industry average
.
The asset purchase includes two website domains, www.ChimeraCompanyGames.com and www.ChimeraCompany.com, all online and social media games currently available on these websites, several Facebook social media accounts, all current customer accounts which include one million unique users, and 550,000 email addresses. The games within the Chimera portfolio include:
a)
The Mob: Rise of the Don
b)
Monster Island
c)
Renegade
d)
Zombie Rezurrection
e)
Syndicate
f)
Mercenary Star
g)
Heroes: Knights of the Realm
The assets are monetized by offering free to play games on social media and web portals with premium currency sold in the game. The current primary driver of user traffic comes from Facebook, but additional customers play the games directly on the Chimera games website portal at www.chimeracompanygames.com. MMEG will be expanding the worldwide usage and revenue generation of these social games by making them available on MMEGs previously acquired Poolworks (Germany) Ltd (MeinVZ and StudiVZ) social media networks in Germany, Austria and Switzerland.
3.
Ecommerce Marketing
On February 27, 2017, the Company executed a Letter of Intent to acquire the Neurofuse, CY CogniYouth and Neuromega products from BD Health Partners LLC for $500,000 with $225,000 in cash and a $275,000 note payable.
NEUROFUSE, https://www.neurofuse.com/focus/, is a unique ecommerce retailer that provides cutting edge, scientifically advanced nootropic supplements. The company develops unique formulations based on scientific studies that prove sufficient evidence to their effectiveness in focus, energy and memory retention. All products that they supply come from their contracted Federal Food & Drug Administration inspected and approved multi-million dollar facilities. They are also all GMP certified, meaning: Good Manufacturing Practice, which assures that each and every time, customers receive the exact same potent, and effective product blends.
The Company plans to close on the Letter of Intent in the second quarter of 2017. No assurances can be made that the acquisition will close.
We cannot predict the likelihood or timing of the successful achievement of any of the foregoing operating plans.
4.
Online Streaming Distribution and Content Development
The Company is planning to deliver film, TV and sports content on a video on demand and subscription business model to its wholly-owned subsidiary, VZ Networks, Incs subsidiary, Poolworks (Germany) Ltd., one of Germanys largest social media platform with almost 10 million members. The Company will source the film, TV and sports content from their Hollywood and global relationships, and work with a designated video delivery platform to fulfill the integration into the social media websites. Revenues will be split with Poolworks (Germany), Ltd.
5
Reality TV Series
The Companys two planned reality TV series, The Bobby Earnhardt Show and Dennis Gile: Quarterback Academy, are seeking potential promotional representation and parties interested in broadcasting the shows. We are currently in discussions to determine the next steps.
The agreement with Bobby Earnhardt involves a potential television series and related ancillary materials in connection therewith. If a series is produced, of which there are no assurances as to the likelihood of this happening, Mr. Earnhardt will be entitled to 12% of the net profits, if any. The agreement with Dennis Gile involves a potential television series and related ancillary materials in connection therewith for which Mr. Gile will receive a weekly fee of $1,500 to $3,000 during production of a show. He may also become eligible to receive 8 to 12% of profits if a show is produced and distributed. There are no assurances that a show will ever be produced.
Music
The Company has started work on a third album; title
Crossing From Here to Eternity
which will feature singing artist Suzanne Olmon and a special appearance by Grammy award-winner singer, Cynthia Clawson. The work will be focused on the adult contemporary listening market to offer the broadest appeal possible and afford us the opportunity for radio airtime play, and being rated on platforms such as Billboard. The album is currently in the planning and rehearsal phase with plans of moving into the recording studio by the second quarter of 2017.
Summary of Current Roll-up Strategy
MMEG is developing a roll-up strategy to acquire distribution technology companies such as social media platforms, subscription based platforms and ecommerce products that can utilize these platforms for the delivery of both content and e-commerce sold products at the same time. MMEG will look to acquire products and technologies to be used in the development of a portal to allow access to the companys products and content over the internet and via mobile devices. The portal will stream MMEGs products and services, allow the sale and download of music, video and other intellectual properties owned and marketed by the company. The content will be developed using known and newly discovered talent under long-term contracts to Momentous.
In addition to the Companys roll-up strategy, MMEG will concentrate on reality content production for its Earnhardt and Gile Sports related reality projects for the next 12 months because of the agreements in place and additional ones being negotiated.
Co-Productions
involve raising and providing funds for films that have started production and require additional financing. If we are able to obtain financing through management contacts, we could be selective in these ventures which potentially benefit MMEG for several reasons, including that MMEG can be the last money in and the first money out, resulting in a potential shorter investment span than the other investors. The co-financing scenarios and requirements would look like this:
*
A studio project that is well-packaged with a good script, key actors, and notable director;
*
An independent film project that is well-packaged with a good script, key actors, and notable Director with 50% financing in place; or
*
An independent film project that is well-packaged with a good script, key actors, and notable director with worldwide distribution in place.
Studios also often hire film production companies to produce films from their large inventories because they do not have the time and/or financial capability to undertake these projects due to emphasis being placed on larger mega productions. When the studio and the production company agree on a budget for the film, the production company keeps the difference between the budget and the actual cost of production, as well as a producers fee and a fixed percentage of the films income from all distribution sources.
MMEGs ability to produce quality films at or under budget will stem from low overhead and strong relationships with industry suppliers. As MMEG will not receive funds (other than the producers fee which is paid over the course of production) from the studio until after the film is delivered, interim financing will be arranged to cover the cost of producing the film. A completion bond will be mandatory. We cannot provide any assurances as to the likelihood of being able to obtain interim financing or a completion bond.
Acquisition to Rights of Finished Films: we will identify potentially profitable, generally low-budget, films through our network of independent filmmakers as well as industry festivals and trade shows like Sundance, Tribeca, Cannes, and Toronto.
6
While it is possible that one or more of these films will be distributed in theaters, our business plan only relates to revenue sources from non-theatrical outlets.
We will negotiate to acquire the rights to license (as sales agent) these films for a period of seven to 25 years in return for a commission ranging from 10-30% of the licensing fees paid by the distributors. In some cases, we will incur minimal upfront costs including: advances to the filmmaker, costs for finalizing the film, and marketing costs. Upon signing a sales agent contract, we and the filmmakers will agree on the market attendance fees, trailer/artwork and other marketing costs. These costs, along with any advances to the filmmaker and/or costs to complete the film, will be recouped before any proceeds are paid to the filmmaker. We estimate that we will incur costs of approximately $25,000 to $150,000 per film to prepare marketing materials including the production of a trailer, artwork, etc.
MMEG will market these films to distributors in domestic by utilizing its relationships with distributors for various markets, as well as through industry shows and conferences. In the future, MMEG will consider distributing in international markets to be determined. However, no specific plans exist at this time and will not be undertaken unless and until we have the resources to do so.
Musical Concerts: our business plan includes the sponsoring of live concerts and other musical events. On March 24, 2016, we incorporated a wholly-owned subsidiary, Music One Corp., which will be the entity that manages these events.
All aspects of MMEGs business plans require financing to implement. The Company is seeking such financing in a variety of places. No assurances can be given as to the likelihood or timing of receiving the necessary financing to implement all or any part of MMEGs business plan.
Competition
The competition in the film and reality television industries ranges from major film production companies and networks to small independent film makers and distributors.
The videogames industry is highly competitive with multiple customer segments on multiple technology platforms. Most video games are not successful. The industry is highly competitive in terms of getting funding and/or contracts. In addition, the costs, risks, and complexities of developing games are continually increasing, making the entire process more difficult and competitive.
The competition in the social media industry is driven by consumer and business needs for information and entertainment. The profitability of individual companies depends on their ability to deliver relevant information to consumers and to offer advertisers desirable target markets. Large companies enjoy economies of scale in marketing and in their ability to develop and maintain multiple websites. Smaller companies can compete by focusing on niche markets. The US industry is highly concentrated: the top 50 companies account for about 80% of revenue.
Advertising is a major source of revenue, and Google holds the largest share. Facebook holds the second-largest share. Other market leaders include Microsoft, Yahoo!, and Twitter.
Companies in the internet publishing, broadcasting, and search portal industry also compete with other publishers and broadcasters, and with the internet-related businesses of leading technology and entertainment companies. Primary competitors for advertising spending include television, newspapers, magazines, and radio companies.
The competition for e-commerce solutions is extremely competitive and we may find ourselves unable to compete effectively. Because there are relatively low barriers to entry in the e-commerce market, we expect continued intense competition as current competitors expand their product offerings and new competitors enter the market. In addition, our clients and partners may become competitors in the future. Increased competition is likely to result in price reductions, reduced margins, longer sales cycles and a decrease or loss of our market share, any of which could negatively impact our revenue and earnings.
Most of these competitors have significantly more financial resources than do we. Our principal method to compete is to utilize the knowledge, experience and contacts of our management team. We cannot provide any assurances as to the likelihood of our success in this regard.
Intellectual Property
We have no patents or similar assets.
7
Employees
We have four employees, including our founder and President, Kurt E. Neubauer. Mr. Neubauer devotes full time to MMEG. John Pepe, our Chief Operating Officer, devotes approximately 90% of his time to MMEG. Tim Williams, Executive Vice President, devotes 90% of his time to MMEG. Laureen Falco, Chief Accounting Officer devotes 90% of her time to MMEG. The Company engaged David Micek as Senior Vice-President of Corporate Development through a consulting agreement. Mr. Micek devotes 100% of his time to MMEG.
There is no written employment contract or agreement with Messrs. Neubauer, Pepe or Williams and Ms. Falco.
ITEM 1A.
RISK FACTORS
You should be aware that there are various risks to an investment in our common stock. You should carefully consider these risk factors, together with all of the other information included in this Report, before you decide to invest in shares of our common stock.
If any of the following risks develop into actual events, then our business, financial condition, results of operations and/or prospects could be materially adversely affected. If that happens, the market price of our common stock, if any, could decline, and investors may lose all or part of their investment.
Risks Related to the Business
1
.
We have a limited operating history an entertainment and social networking company in which to evaluate our business.
We plan on being an entertainment and social networking company. However, we have been unable to implement much of this new business model because of financing and resource constraints and limitations. To date, we have limited revenues from our entertainment and social networking segments upon which an evaluation of our future success or failure can be made. Current and future Company assets, including entertainment and social networking properties that may be obtained in the future, may not be suitable for development unless additional financing is secured. No assurances of any nature can be made to investors that we will be profitable or that it will remain in business. There can be no assurances that our management will be successful in managing the Company as an entertainment and social networking company.
2.
Our independent registered auditors report includes an explanatory paragraph stating that there is substantial doubt about our ability to continue as a going concern.
We have no committed sources of debt or equity financing. Our independent registered auditors included an explanatory paragraph in their opinion on our financial statements as of, and for the year ended December 31, 2016 that states that this lack of resources causes substantial doubt about our ability to continue as a going concern. No assurances can be given that we will generate sufficient revenue or obtain necessary financing to continue as a going concern.
3.
Momentous is and will continue to be completely dependent on the services of our three founders, the loss of any of one or more of whose services may cause our business operations to cease, and we will need to engage and retain qualified employees and consultants to further implement our strategy.
Our operations and business strategy are completely dependent upon the knowledge and business connections of Mr. Neubauer, our President, Chief Executive Officer and Chairman, Mr. Pepe, our Secretary and Chief Operations Officer, and Mr. Williams, our Executive Vice President of Business Development. They are under no contractual obligation to remain employed by us. If one or more should choose to leave us for any reason or become ill and are unable to work for an extended period before we have hired additional personnel, our operations will likely fail. Even if we are able to find additional personnel, it is uncertain whether we could find someone who could develop our business along the lines described in this prospectus. We will fail without the services of each of our three founders or an appropriate replacement(s).
8
We intend to acquire key-man life insurance on the lives of Messrs. Neubauer and Pepe naming us as the beneficiary when and if we obtain the resources to do so and if they are insurable at the time of application. We have not yet procured such insurance, and there is no guarantee that we will be able to obtain such insurance in the future. Accordingly, it is important that we are able to attract, motivate and retain highly qualified and talented personnel and independent contractors.
4.
Because the entertainment industry is intensely competitive and we lack the name recognition and resources of many of our competitors, we may never generate any revenues or become profitable.
The entertainment industry is highly competitive. We believe that a motion pictures theatrical success is dependent upon public acceptance, marketing technology, advertising and the quality of the production. Some of the production and distribution companies with which we will compete to varying extents are The Weinstein Company, Jerry Bruckheimer Films, Miramax Films, Lions Gate Entertainment Corp., Sony Pictures Entertainment, Inc., New Line Cinema, a subsidiary of Time Warner, Universal Studios, 20th Century Fox Film Corporation, a subsidiary of News Corp., Buena Vista Motion Pictures Group, a collection of affiliated motion picture studios all subsidiaries of The Walt Disney Company, Paramount Pictures Corporation, a subsidiary of Viacom, and Troma Entertainment, Inc. These competitors are significantly larger than we are, have a long-standing business relationship with customers, vendors and financial institutions, and have established staying power in the industry over the past 20 years.
Our management believes that in recent years there has been an increase in competition in virtually all facets of the motion picture industry. With increased alternative distribution channels for many types of entertainment, the motion picture business competes more intensely than previously with all other types of entertainment activities, as well as television. While increased use of pay-per-view television, pay television channels, and home video products are potentially beneficial, there is no guarantee that we will be able to successfully penetrate these markets. Failure to penetrate these potential distribution channels would have a material adverse impact on our results of operations and ability to maintain operations.
5.
We may be unable to obtain or license entertainment media that will be popular in the marketplace.
We will seek to obtain license entertainment media developed by others. If we are unable to do so or if the entertainment media that we do acquire or license is not well-received in the marketplace, our operations will fail.
6.
Our businesses currently face a wide range of competition, and our businesses and results of operations could be adversely affected if we do not compete effectively.
All of our businesses operations are intensely competitive, consumer-driven and rapidly changing environments and compete with a growing number of companies that provide a broad range of communications products and services and entertainment, news and information content to consumers. Technological changes are further intensifying and complicating the competitive landscape and influencing consumer behavior.
7.
If we fail to retain existing users or add new users, or if our users decrease their level of engagement with our products, our revenue, financial results, and business may be significantly harmed.
The size of our user base and our users level of engagement are critical to our success. Our financial performance will be significantly determined by our success in adding, retaining, and engaging active users of our products, particularly for Poolworks (Germany) Ltd. and Chimera® Games. If people do not perceive our products to be useful, reliable, and trustworthy, we may not be able to attract or retain users or otherwise maintain or increase the frequency and duration of their engagement. A number of other social networking companies that achieved early popularity have since seen their active user bases or levels of engagement decline, in some cases precipitously. There is no guarantee that we will not experience a similar erosion of our active user base or engagement levels. Our user engagement patterns have changed over time, and user engagement can be difficult to measure, particularly as we introduce new and different products and services. Any number of factors could potentially negatively affect user retention, growth, and engagement, including if:
·
users increasingly engage with other competitive products or services;
·
we fail to introduce new products or services that users find engaging or if we introduce new products or services that are not favorably received;
·
users feel that their experience is diminished as a result of the decisions we make with respect to the frequency, prominence, format, size, and quality of ads that we display;
·
users have difficulty installing, updating, or otherwise accessing our products on mobile devices as a result of actions by us or third parties that we rely on to distribute our products and deliver our services;
9
·
user behavior on any of our products changes, including decreases in the quality and frequency of content shared on our products and services;
·
we are unable to develop products for mobile devices that users find engaging, that work with a variety of mobile operating systems and networks, and that achieve a high level of market acceptance;
·
there are decreases in user sentiment about the quality or usefulness of our products or concerns related to privacy and sharing, safety, security, or other factors;
·
we are unable to manage and prioritize information to ensure users are presented with content that is appropriate, interesting, useful, and relevant to them;
·
we are unable to obtain or attract engaging third-party content;
·
users adopt new technologies where our products may be displaced in favor of other products or services, or may not be featured or otherwise available;
·
there are adverse changes in our products that are mandated by legislation, regulatory authorities, or litigation, including settlements or consent decrees;
·
technical or other problems prevent us from delivering our products in a rapid and reliable manner or otherwise affect the user experience, such as security breaches or failure to prevent or limit spam or similar content;
·
we adopt terms, policies, or procedures related to areas such as sharing or user data that are perceived negatively by our users or the general public;
·
we elect to focus our user growth and engagement efforts more on longer-term initiatives, or if initiatives designed to attract and retain users and engagement are unsuccessful or discontinued, whether as a result of actions by us, third parties, or otherwise;
·
we fail to provide adequate customer service to users, marketers, developers, or other partners;
If we are unable to maintain or increase our user base and user engagement, our revenue and financial results may be adversely affected. Any decrease in user retention, growth, or engagement could render our products less attractive to users, marketers, and developers, which is likely to have a material and adverse impact on our revenue, business, financial condition, and results of operations. If our active user growth rate continues to slow, we will become increasingly dependent on our ability to maintain or increase levels of user engagement and monetization in order to drive revenue growth.
8.
Our business is highly competitive. Competition presents an ongoing threat to the success of our business.
We compete with companies that sell advertising, as well as with companies that provide social and communication products and services that are designed to engage users and capture time spent on mobile devices and online. We face significant competition in every aspect of our business, including from companies that facilitate communication and the sharing of content and information, companies that enable marketers to display advertising, and companies that provide development platforms for applications developers. We compete with companies that offer products across broad platforms that replicate capabilities we provide. For example, Google has integrated social functionality into a number of its products, including search, video, and Android. We also compete with companies that develop applications, particularly mobile applications, that provide social or other communications functionality, such as messaging, photo- and video-sharing, and micro-blogging, as well as companies that provide regional social networks that have strong positions in particular countries. In addition, we face competition from traditional, online, and mobile businesses that provide media for marketers to reach their audiences and/or develop tools and systems for managing and optimizing advertising campaigns. We also compete with companies that develop and deliver virtual reality products and services.
Some of our current and potential competitors may have significantly greater resources or better competitive positions in certain product segments, geographic regions or user demographics than we do. These factors may allow our competitors to respond more effectively than us to new or emerging technologies and changes in market conditions. We believe that some of our users, particularly our younger users, are aware of and actively engaging with other products and services similar to, or as a substitute for, Poolworks (Germany) Ltd. products and services, and we believe that some of our users have reduced their use of and engagement with Poolworks (Germany) Ltd. in favor of these other products and services. In the event that our users increasingly engage with other products and services, we may experience a decline in use and engagement in key user demographics or more broadly, in which case our business would likely be harmed.
10
Our competitors may develop products, features, or services that are similar to ours or that achieve greater acceptance, may undertake more far-reaching and successful product development efforts or marketing campaigns, or may adopt more aggressive pricing policies. In addition, developers whose mobile and web applications are integrated with Poolworks (Germany) Ltd. or our other products may use information shared by our users through our products in order to develop products or features that compete with us. Some competitors may gain a competitive advantage against us in areas where we operate, including: by integrating competing platforms, applications, or features into products they control such as mobile device operating systems, search engines, or web browsers; by making acquisitions; by limiting or denying our access to advertising measurement or delivery systems; by limiting our ability to deliver, target, or measure the effectiveness of ads; by imposing fees or other charges related to our delivery of ads; by making access to our products more difficult; or by making it more difficult to communicate with our users. As a result, our competitors may acquire and engage users or generate advertising or other revenue at the expense of our own efforts, which may negatively affect our business and financial results. In addition, from time to time, we may take actions in response to competitive threats, but we cannot assure you that these actions will be successful or that they will not negatively affect our business and financial results.
We believe that our ability to compete effectively depends upon many factors both within and beyond our control, including:
·
the popularity, usefulness, ease of use, performance, and reliability of our products compared to our competitors products;
·
the size and composition of our user base;
·
the engagement of our users with our products and competing products;
·
the timing and market acceptance of products, including developments and enhancements to our or our competitors products;
·
our ability to distribute our products to new and existing users;
·
our ability to monetize our products;
·
the frequency, size, format, quality, and relative prominence of the ads displayed by us or our competitors;
·
customer service and support efforts;
·
marketing and selling efforts, including our ability to measure the effectiveness of our ads and to provide marketers with a compelling return on their investments;
·
our ability to establish and maintain developers interest in building mobile and web applications that integrate with Poolworks (Germany) Ltd. and our other products;
·
our ability to establish and maintain publisher interest in integrating their content with Poolworks (Germany) Ltd. and our other products;
·
changes mandated by legislation, regulatory authorities, or litigation, including settlements and consent decrees, some of which may have a disproportionate effect on us;
·
acquisitions or consolidation within our industry, which may result in more formidable competitors;
·
our ability to attract, retain, and motivate talented employees, particularly software engineers, designers, and product managers;
·
our ability to cost-effectively manage and grow our operations; and
·
our reputation and brand strength relative to those of our competitors.
If we are not able to compete effectively, our user base and level of user engagement may decrease, we may become less attractive to developers and marketers, and our revenue and results of operations may be materially and adversely affected.
9.
We operate in new and rapidly changing industries which make it difficult to evaluate our business and prospects.
Social games, from which we derive a portion of our revenue, is a new and rapidly evolving industry. The growth of the social game industry and the level of demand and market acceptance of our games are subject to a high degree of uncertainty. Our future operating results will depend on numerous factors affecting the social game industry, many of which are beyond our control, including: continued worldwide growth in the adoption and use of Facebook and other social networks, changes in consumer demographics and public tastes and preferences, the availability and popularity of other forms of entertainment, the worldwide growth of personal computer, broadband Internet and mobile device users, and the rate of any such growth; and general economic conditions, particularly economic conditions adversely affecting discretionary consumer spending.
Our ability to plan for game development, distribution and promotional activities will be significantly affected by our ability to anticipate and adapt to relatively rapid changes in the tastes and preferences of our current and potential players. New and different types of entertainment may increase in popularity at the expense of social games. A decline in the popularity of social games in general, or our games in particular would harm our business and prospects.
11
10.
A small number of games have generated a majority of the revenue by Chimera® Games prior to its recent acquisition by us, and we must launch and enhance new games that attract and retain a significant number of paying players in order to grow our revenue and sustain our competitive position.
A small number of games provide for a majority of revenue by
Chimera® Games prior to its recent acquisition by us, and we expect that this dependency on a limited number of games will continue for the foreseeable future. Our growth depends on our ability to consistently launch new games that achieve significant popularity. Each of our games requires significant engineering, marketing and other resources to develop, launch and sustain via regular upgrades and expansions, and such costs on average have increased. Our ability to successfully launch, sustain and expand games and attract and retain paying players largely depends on our ability to: anticipate and effectively respond to changing game player interests and preferences, anticipate or respond to changes in the competitive landscape, attract, retain and motivate talented game designers, product managers and engineers, develop, sustain and expand games that are fun, interesting and compelling to play and on which players want to spend money, effectively market new games and enhancements to our existing players and new players, minimize launch delays and cost overruns on new games and game expansions, minimize downtime and other technical difficulties, and acquire high quality assets, personnel and companies.
It is difficult to consistently anticipate player demand on a large scale, particularly as we develop new games in new genres or new markets, including international markets and mobile platforms. If we do not successfully launch games that attract and retain a significant number of paying players and extend the life of our existing games, our market share, reputation and financial results will be harmed.
11.
If our top games do not continue to be popular, our results of operations could be harmed.
In addition to creating new games that are attractive to a significant number of paying players, we must extend the life of games included in the acquisition, in particular our most successful games. For a game to remain popular, we must constantly enhance, expand or upgrade the game with new features that paying players find attractive. Such constant enhancement requires the investment of significant resources, particularly with older games and such costs on average have increased. We may not be able to successfully enhance, expand or upgrade our current games. Any reduction in the amounts players spend on our most popular games, any decrease in the popularity of our games or social games in general, any breach of game-related security or prolonged server interruption, any loss of rights to any intellectual property underlying such games, or any other adverse developments relating to our most popular games, could harm our results of operations.
12.
Action by governments to restrict access to Poolworks (Germany) Ltd. or our other products in their countries could substantially harm our business and financial results.
It is possible that governments of one or more countries may seek to censor content available on Poolworks (Germany) Ltd. or our other products in their country, restrict access to our products from their country entirely, or impose other restrictions that may affect the accessibility of our products in their country for an extended period of time or indefinitely. In addition, government authorities in other countries may seek to restrict access to our products if they consider us to be in violation of their laws, and certain of our products have been restricted by governments in other countries from time to time. In the event that content shown on Poolworks (Germany) Ltd. or our other products is subject to censorship, access to our products is restricted, in whole or in part, in one or more countries, or other restrictions are imposed on our products, or our competitors are able to successfully penetrate new geographic markets or capture a greater share of existing geographic markets that we cannot access or where we face other restrictions, our ability to retain or increase our user base and user engagement may be adversely affected, we may not be able to maintain or grow our revenue as anticipated, and our financial results could be adversely affected.
13.
Our new products and changes to existing products could fail to attract or retain users or generate revenue and profits.
Our ability to retain, increase, and engage our user base and to increase our revenue depends heavily on our ability to continue to evolve our existing products and to create successful new products, both independently and in conjunction with developers or other third parties. We may introduce significant changes to our existing products or acquire or introduce new and unproven products, including using technologies with which we have little or no prior development or operating experience. If new or enhanced products fail to engage users, marketers, or developers, or if we are unsuccessful in our monetization efforts, we may fail to attract or retain users or to generate sufficient revenue, operating margin, or other value to justify our investments and our business may be adversely affected.
12
14.
If we are not able to maintain and enhance our brands, or if events occur that damage our reputation and brands, our ability to expand our base of users, marketers, and developers may be impaired, and our business and financial results may be harmed.
We believe that our brands have or will significantly contribute to the success of our business. We also believe that maintaining and enhancing our brands is critical to expanding our base of users, marketers, and developers. Many of our new users may be referred by existing users. Maintaining and enhancing our brands will depend largely on our ability to continue to provide useful, reliable, trustworthy, and innovative products, which we may not do successfully. We may introduce new products or terms of service or policies that users do not like, which may negatively affect our brands. Additionally, the actions of our developers or advertisers may affect our brands if users do not have a positive experience using third-party applications integrated with our products or interacting with parties that advertise through our products. We will also continue to experience media, legislative, or regulatory scrutiny of our decisions regarding user privacy and other issues, which may adversely affect our reputation and brands. We also may fail to provide adequate customer service, which could erode confidence in our brands. Our brands may also be negatively affected by the actions of users that are deemed to be hostile or inappropriate to other users, by the actions of users acting under false or inauthentic identities, by the use of our products or services to disseminate information that is deemed to be misleading (or intended to manipulate opinions), by perceived or actual efforts by governments to obtain access to user information for security-related purposes, or by the use of our products or services for illicit, objectionable, or illegal ends. Maintaining and enhancing our brands may require us to make substantial investments and these investments may not be successful. Certain of past actions have eroded confidence in our brands, and if we fail to successfully promote and maintain our brands or if we incur excessive expenses in this effort, our business and financial results may be adversely affected.
15.
Security breaches and improper access to or disclosure of our data or user data, or other hacking and phishing attacks on our systems, could harm our reputation and adversely affect our business.
Our industry is prone to cyber-attacks by third parties seeking unauthorized access to our data or users data. Any failure to prevent or mitigate security breaches and improper access to or disclosure of our data or user data could result in the loss or misuse of such data, which could harm our business and reputation and diminish our competitive position. In addition, computer malware, viruses, social engineering (predominantly spear phishing attacks), and general hacking have become more prevalent in our industry, have occurred on our systems in the past, and will occur on our systems in the future. As a result of our possible future prominence, we believe that we will be a particularly attractive target for such breaches and attacks. Such attacks may cause interruptions to the services we provide, degrade the user experience, cause users to lose confidence and trust in our products, or result in financial harm to us. Our efforts to protect our company data or the information we receive may also be unsuccessful due to software bugs or other technical malfunctions; employee, contractor, or vendor error or malfeasance; government surveillance; or other threats that evolve. In addition, third parties may attempt to fraudulently induce employees or users to disclose information in order to gain access to our data or our users data. Although we have developed or in the process of developing systems and processes that are designed to protect our data and user data, to prevent data loss, and to prevent or detect security breaches, we cannot assure you that such measures will provide absolute security.
In addition, some of our developers or other partners, such as those that help us measure the effectiveness of ads, may receive or store information provided by us or by our users through mobile or web applications integrated with Poolworks (Germany) Ltd. We provide limited information to such third parties based on the scope of services provided to us. However, if these third parties or developers fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our data or our users data may be improperly accessed, used, or disclosed.
Affected users or government authorities could initiate legal or regulatory actions against us in connection with any security breaches or improper disclosure of data, which could cause us to incur significant expense and liability or result in orders or consent decrees forcing us to modify our business practices. Any of these events could have a material and adverse effect on our business, reputation, or financial results.
13
16.
Our Poolworks (Germany) Ltd. business is subject to complex and evolving foreign laws and regulations regarding privacy, data protection, competition, consumer protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, monetary penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.
Our Poolworks (Germany) Ltd. property is subject to a variety of laws and regulations abroad that involve matters central to our business, including privacy, data protection, and personal information, rights of publicity, content, intellectual property, advertising, marketing, distribution, data security, data retention and deletion, personal information, electronic contracts and other communications, competition, protection of minors, consumer protection, telecommunications, product liability, taxation, economic or other trade prohibitions or sanctions, securities law compliance, and online payment services. The introduction of new products, expansion of our activities in certain jurisdictions, or other actions that we may take may subject us to additional laws, regulations, or other government scrutiny. In addition, foreign data protection, privacy, competition, and other laws and regulations can impose different obligations or be more restrictive than those in the United States.
These foreign laws and regulations, which in some cases can be enforced by private parties in addition to government entities, are constantly evolving and can be subject to significant change. As a result, the application, interpretation, and enforcement of these laws and regulations are often uncertain, particularly in the new and rapidly evolving industry in which we operate, and may be interpreted and applied inconsistently from country to country and inconsistently with our current policies and practices. Such actions could affect the manner in which we provide our services or adversely affect our financial results.
Proposed or new legislation and regulations could also significantly affect our business. There currently are a number of proposals pending before foreign legislative and regulatory bodies. In addition, the European Commission has approved a data protection regulation, known as the General Data Protection Regulation (GDPR), which has been finalized and is due to come into force in or around May 2018. The GDPR will include operational requirements for companies that receive or process personal data of residents of the European Union that are different than those currently in place in the European Union, and that will include significant penalties for non-compliance. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services.
These laws and regulations, as well as any associated inquiries or investigations or any other government actions, may be costly to comply with and may delay or impede the development of new products, result in negative publicity, increase our operating costs, require significant management time and attention, and subject us to remedies that may harm our business, including fines or demands or orders that we modify or cease existing business practices.
17.
We may incur liability as a result of information retrieved from or transmitted over the Internet or published using our products or as a result of claims related to our products.
We could face claims relating to information that is published or made available on our products. In particular, the nature of our business exposes us to claims related to defamation, dissemination of misinformation or news hoaxes, intellectual property rights, rights of publicity and privacy, personal injury torts, or local laws regulating hate speech or other types of content. We could incur significant costs investigating and defending such claims and, if we are found liable, significant damages. We could also face orders restricting or blocking our services in particular geographies as a result of content hosted on our services. If any of these events occur, our business and financial results could be adversely affected.
18.
We plan to continue to make acquisitions, which could harm our financial condition or results of operations and may adversely affect the price of our common stock.
As part of our business strategy, we have made and intend to continue to make acquisitions to add specialized employees and complementary companies, products, or technologies. We may not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. In some cases, the costs of such acquisitions may be substantial. There is no assurance that we will receive a favorable return on investment for these or other acquisitions.
We may pay substantial amounts of cash or incur debt to pay for acquisitions, which could adversely affect our liquidity. The incurrence of indebtedness would also result in increased fixed obligations, increased interest expense, and could also include covenants or other restrictions that would impede our ability to manage our operations. We may also issue equity securities to pay for acquisitions. In addition, any acquisitions we announce could be viewed negatively by users, marketers, developers, or investors, which may adversely affect our business or the price of our common stock.
14
We may also discover liabilities or deficiencies associated with the companies or assets we acquire that were not identified in advance, which may result in significant unanticipated costs. The effectiveness of our due diligence review and our ability to evaluate the results of such due diligence are dependent upon the accuracy and completeness of statements and disclosures made or actions taken by the companies we acquire or their representatives, as well as the limited amount of time in which acquisitions are executed. In addition, we may fail to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. Acquisitions may also result in our recording of significant additional expenses to our results of operations and recording of substantial finite-lived intangible assets on our balance sheet upon closing. Any of these factors may adversely affect our financial condition or results of operations.
19.
We may not be able to successfully integrate our acquisitions and we may incur significant costs to integrate and support the companies we acquire.
The integration of acquisitions requires significant time and resources, and we may not manage these processes successfully. Our ability to successfully integrate complex acquisitions is unproven, particularly with respect to companies that have significant operations or that develop products where we do not have prior experience. We are making substantial investments of resources to support these acquisitions, which will result in significant ongoing operating expenses and may divert resources and management attention from other areas of our business. We cannot assure you that these investments will be successful. If we fail to successfully integrate the companies we acquire, we may not realize the benefits expected from the transaction and our business may be harmed.
20.
Our products and internal systems rely on software that is highly technical, and if it contains undetected errors or vulnerabilities, our business could be adversely affected.
Our products and internal systems rely on software, including software developed or maintained internally and/or by third parties, that is highly technical and complex. In addition, our products and internal systems depend on the ability of such software to store, retrieve, process, and manage immense amounts of data. The software on which we rely has contained, and will in the future contain, undetected errors, bugs, or vulnerabilities. Some errors may only be discovered after the code has been released for external or internal use. Errors, vulnerabilities, or other design defects within the software on which we rely may result in a negative experience for users and marketers who use our products, delay product introductions or enhancements, result in targeting, measurement, or billing errors, compromise our ability to protect the data of our users and/or our intellectual property or lead to reductions in our ability to provide some or all of our services. In addition, any errors, bugs, vulnerabilities, or defects discovered in the software on which we rely, and any associated degradations or interruptions of service, could result in damage to our reputation, loss of users, loss of revenue, or liability for damages, any of which could adversely affect our business and financial results.
21.
Payment transactions may subject us to additional regulatory requirements and other risks that could be costly and difficult to comply with or that could harm our business.
Our users will be able to purchase virtual and digital goods from developers that offer applications using our payments infrastructure on the Poolworks (Germany) Ltd. and Chimera® Games websites. We are subject to a variety of laws and regulations in the United States and Europe, including those governing anti-money laundering and counter-terrorist financing, money transmission, gift cards and other prepaid access instruments, electronic funds transfer, charitable fundraising, and import and export restrictions.
Depending on how our payment products evolves, we may also be subject to other laws and regulations including those governing gambling, banking, and lending. In some jurisdictions, the application or interpretation of these laws and regulations is not clear. Our efforts to comply with these laws and regulations could be costly and result in diversion of management time and effort and may still not guarantee compliance. In the event that we are found to be in violation of any such legal or regulatory requirements, we may be subject to monetary fines or other penalties such as a cease and desist order, or we may be required to make product changes, any of which could have an adverse effect on our business and financial results.
In addition, we may be subject to a variety of additional risks as a result of payments transactions, including:
·
increased costs and diversion of management time and effort and other resources to deal with bad transactions or customer disputes;
·
potential fraudulent or otherwise illegal activity by users, developers, employees, or third parties;
·
restrictions on the investment of consumer funds used to transact payments; and
·
additional disclosure and reporting requirements.
15
22.
We have international operations and plan to continue expanding our operations abroad where we have limited operating experience, and this may subject us to increased business and economic risks that could affect our financial results.
We have significant international operations and plan to continue the international expansion of our business operations and the translation of our products. We currently make Poolworks (Germany) Ltd. websites available in Germany language only but may offer more than 100 different languages in the future, and we have offices or data centers in Germany. We may enter new international markets where we have limited or no experience in marketing, selling, and deploying our products. We also outsource certain operational functions to third-party vendors globally. If we fail to deploy, manage, or oversee our international operations successfully, our business may suffer. In addition, we are subject to a variety of risks inherent in doing business internationally, including:
·
political, social, or economic instability;
·
risks related to legal, regulatory, and other government scrutiny applicable to U.S. companies with sales and operations in foreign jurisdictions, including with respect to privacy, tax, law enforcement, content, trade compliance, intellectual property, and terrestrial infrastructure matters;
·
potential damage to our brand and reputation due to compliance with local laws, including potential censorship or requirements to provide user information to local authorities;
·
fluctuations in currency exchange rates and compliance with currency controls;
·
foreign exchange controls and tax regulations that might prevent us from repatriating cash earned in countries outside the United States or otherwise limit our ability to move cash freely, and impede our ability to invest such cash efficiently;
·
higher levels of credit risk and payment fraud;
·
enhanced difficulties of integrating any foreign acquisitions;
·
burdens of complying with a variety of foreign laws;
·
reduced protection for intellectual property rights in some countries;
·
difficulties in staffing, managing, and overseeing global operations and the increased travel, infrastructure, and legal compliance costs associated with multiple international locations;
·
compliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and similar laws in other jurisdictions; and
·
compliance with statutory equity requirements and management of tax consequences.
If we are unable to expand internationally and manage the complexity of our global operations successfully, our financial results could be adversely affected.
23.
Piracy of the original motion pictures that we plan to produce or distribute may reduce our revenues and potential earnings.
Based on conversations that we have had with industry participants, we believe that piracy losses in the motion picture industry have increased substantially over the past decade. In certain regions of the world, motion picture piracy has been a major issue for some time. With the proliferation of the DVD format around the globe, along with other digital recording and playback devices, losses from piracy have spread more rapidly in North America and Europe. Piracy of original motion pictures that we produce and/or distribute may adversely impact the gross receipts realized from these films, which could have a material adverse effect on our future business, results of operations or financial condition.
24.
Our four officers will make all decisions concerning their compensation for the foreseeable future. These decisions may not be in the best interests of other investors.
There are no employment contracts with any of our four executive officers at this time; nor are there any agreements for compensation in the future. Their compensation has not been fixed or based on any percentage calculations. They will make all decisions determining the amount and timing of compensation for the foreseeable future until, if ever, we establish a compensation committee of the board of directors. Their decisions about compensation may not be in the best interests of other shareholders.
16
25.
We are subject to the periodic reporting requirements of the Exchange Act that will require us to incur audit fees and legal fees in connection with the preparation of such reports. These additional costs could reduce or eliminate our ability to earn a profit.
We are required to file periodic reports with the SEC pursuant to the Exchange Act and the rules and regulations promulgated thereunder. In order to comply with these requirements, our independent registered public accounting firm will have to review our financial statements on a quarterly basis and audit our financial statements on an annual basis. Moreover, our legal counsel will have to review and assist in the preparation of such reports. The costs charged by these professionals for such services cannot be specifically (need to fix formatting here) predicted at this time because factors such as the number and type of transactions that we engage in and the complexity of our reports cannot be determined at this time and will have a major effect on the amount of time to be spent by our auditors and attorneys. The incurrence of such costs will obviously be an expense to our operations and thus have a negative effect on our ability to meet our overhead requirements and earn a profit. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock, if a market ever develops, could drop significantly.
26.
Our internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and/or directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a material effect on the financial statements.
Our internal controls may become inadequate or ineffective if our operations grow, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision.
27.
Our operating results in the entertainment industry will fluctuate significantly from period to period.
Like participants in the entertainment industry, our revenues and results of operations will be significantly dependent upon the timing of releases and the commercial success of the motion pictures and other media that we distribute, none of which can be predicted with certainty. In addition, we will only be able to issue a very limited number of films or other media in any individual accounting period. The level of market acceptance for each release is likely to vary and may vary greatly. Accordingly, our revenues and results of operations may fluctuate significantly from period to period, and the results of any one period may not be indicative of the results for any future periods.
In accordance with generally accepted accounting principles and industry practice, we intend to amortize film costs using the individual-film-forecast method under which such costs are amortized for each film in the ratio that revenue earned in the current period for such title bears to managements estimate of the total revenues to be realized from all media and markets for such title. To comply with this accounting principle, our management plans to regularly review, and revise when necessary, our total revenue estimates on a title-by-title basis, which may result in a change in the rate of amortization and/or a write-down of the film asset to net realizable value. Results of operations in future years should be dependent upon our amortization of film costs and may be significantly affected by periodic adjustments in amortization rates. The likelihood of the Companys reporting of losses is increased because the industrys accounting method requires the immediate recognition of the entire loss in instances where it is expected that a motion picture should not recover the Companys investment.
Similarly, should any of our films be profitable in a given period, we will recognize that profit over the entire revenue stream expected to be generated by the individual film.
17
28.
Film production budgets may and often do increase and film production spending may exceed such budgets.
It is common for future film budgets to increase as the production process is underway for a variety of factors including, but not limited to, (1) escalation in compensation rates of people required to work on the projects, (2) number of personnel required to work on the projects, (3) equipment needs, (4) the enhancement of existing or the development of new proprietary technology and (5) the addition of facilities to accommodate the amended or unseen requirements of the project. Due to production exigencies, which are often difficult to predict, it is not uncommon for film production spending to exceed film production budgets, and our projects may not be completed within the budgeted amounts. In addition, when production of each film is completed, we may incur significant carrying costs associated with transitioning personnel on creative and development teams from one project to another. This situation becomes more severe if several projects are being undertaken at the same time or planned to be done contiguously.
Our limited resources may not permit us to meet unexpected costs during productions. If such cost excesses occur and we are unable to arrange for the necessary financial needs, our operations may cease.
29.
If we are alleged or accused of having infringed on the intellectual property or other rights of third parties, we could be subject to significant liability for damages and invalidation of our proprietary rights.
Our business activities are and will be highly dependent upon intellectual property, a field that has encountered increasing litigation in recent years. If third parties allege that we have infringed on their intellectual property rights, privacy rights or publicity rights or have defamed them, we could become a party to litigation. These claims and any resulting lawsuits could subject us to significant liability for damages and invalidation of our proprietary rights and/or restrict our ability to publish and distribute the infringing or defaming content. In addition, defending such cases involves significant levels of legal costs. There can be no assurance that we would prevail in any such litigation. If we were to lose a litigation relating to intellectual property, we could be forced to pay monetary damages and to cease the sale of certain products or the use of certain technology. Any of the foregoing may adversely affect our business and may cause us to cease operations.
30.
There are significant potential conflicts of interest
Our key personnel and directors have other investments and involvements in other entities and, accordingly, these individuals may have conflicts of interest in allocating time among various business activities. During other business activities, certain key personnel may become aware of business opportunities which may be appropriate for presentation to us, as well as the other entities with which they are affiliated. As such, there may have conflicts of interest in determining to which entity a particular business opportunity should be presented.
We cannot provide assurances that our efforts to eliminate the potential impact of conflicts of interest will be effective.
Risks Related to Our Common Stock
31.
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through issuance of additional shares of our common stock.
We have no committed source of financing. Wherever possible, our board of directors will attempt to use non-cash consideration to satisfy obligations or to acquire rights to or licenses for films or other products. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued. In addition, if a trading market develops for our common stock, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. These actions will result in dilution of the ownership interests of existing shareholders may further dilute common stock book value, and that dilution may be material.
18
32.
The interests of shareholders may be hurt because we can issue shares of our common stock to individuals or entities that support existing management with such issuances serving to enhance existing managements ability to maintain control of our Company.
Our four executive officers and directors own a significant majority of outstanding shares. In addition, our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued common shares. Such issuances may be issued to parties or entities committed to supporting existing management and the interests of existing management which may not be the same as the interests of other shareholders. Although transactions, other than those described in this annual report are not currently being contemplated or discussed, our ability to issue shares without shareholder approval serves to enhance existing managements ability to maintain control of our Company or participate in other transactions, including entering into possible business combinations, without the support of other shareholders.
33.
Our chief executive officer controls all corporate activities and can approve all transactions, including mergers, without the approval of other shareholders.
Our chief executive officer holds preferred shares that give him the right to 51% in all shareholder votes. Therefore, he effectively controls all corporate activities and can approve transactions, including possible mergers, issuance of shares and compensation levels, without the approval of other shareholders. His decisions may not be consistent with or in the best interests of other shareholders.
34.
Our articles of incorporation provide for indemnification of officers and directors at our expense and limit their liability that may result in a major cost to us and hurt the interests of our shareholders because corporate resources may be expended for the benefit of officers and/or directors.
Our Articles of Incorporation at Article XI provide for indemnification as follows: No director or officer of the Corporation shall be personally liable to the Corporation or any of its stockholders for damages for breach of fiduciary duty as a director or officer; provided, however, that the foregoing provision shall not eliminate or limit the liability of a director or officer: (i) for acts or omissions which involve intentional misconduct, fraud or knowing violation of law; or (ii) the payment of dividends in violation of Section of the Nevada Revised Statutes. Any repeal or modification of an Article by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation of the personal liability of a director or officer of the Corporation for acts or omissions prior to such repeal or modification.
We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification for liabilities arising under federal securities laws, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in connection with our activities, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is likely to materially reduce the market and price for our shares, if such a market ever develops.
35.
Any market that develops in shares of our common stock will be subject to the penny stock regulations and restrictions pertaining to low priced stocks that will create a lack of liquidity and make trading difficult or impossible.
Our shares will be considered a penny stock. Rule 3a51-1 of the Exchange Act establishes the definition of a penny stock, for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. This classification will severely and adversely affect any market liquidity for our common stock.
19
36.
The market for penny stocks has experienced frauds and abuses that could adversely impact our investors in our stock.
Company management believes that the market for penny stocks has suffered from patterns of fraud and abuse. Such patterns include:
·
Control of the market for the security by one or a few broker-dealers that are often related to the promotor or issuer;
·
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
·
Boiler room practices involving high pressure sales tactics and unrealistic price projections by sales persons;
·
Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
·
Wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
37.
Our board of directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders and with the ability to affect adversely stockholder voting power and perpetuate their control.
Our articles of incorporation allow us to issue shares of preferred stock without any vote or further action by our stockholders.
Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval, including large blocks of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
38.
The ability of our executive officers and directors to control our business may limit or eliminate minority shareholders ability to influence corporate affairs.
Our executive officers and directors will beneficially own in excess of 60% of our outstanding preferred stock. Because of their beneficial stock ownership, they will be in a position to continue to elect our board of directors, decide all matters requiring stockholder approval, including potential mergers or business changes, and determine our policies. The interests of our executive officers and directors may differ from the interests of other shareholders with respect to the issuance of shares, business transactions with or sales to other companies, selection of officers and directors and other business decisions. The minority shareholders would have no way of overriding decisions made by our executive officers and directors. This level of control may also have an adverse impact on the market value of our shares because our four executive officers may institute or undertake transactions, policies or programs that may result in losses, may not take any steps to increase our visibility in the financial community and/or may sell sufficient numbers of shares to significantly decrease our price per share.
39.
We do not expect to pay cash dividends in the foreseeable future.
We have never paid cash dividends on our common stock. We do not expect to pay cash dividends on our common stock at any time in the foreseeable future. The future payment of dividends directly depends upon our future earnings, capital requirements, financial requirements and other factors that our board of directors will consider. Since we do not anticipate paying cash dividends on our common stock, return on your investment, if any, will depend solely on an increase, if any, in the market value of our common stock.
40.
Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested director transactions, conflicts of interest and similar matters.
The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and enacted by the SEC, the New York and American Stock Exchanges and the Nasdaq Stock Market, as a result of Sarbanes-Oxley, require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges or the Nasdaq Stock Market. Because we are not presently required to comply with many of the corporate governance provisions and because we chose to avoid incurring the substantial additional costs associated with such compliance any sooner than legally required, we have not yet adopted these measures.
20
We do not currently have independent audit or compensation committees. As a result, our president and the other three officers have the ability, among other things, to determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations.
We intend to comply with all corporate governance measures relating to director independence as and when required. However, we may find it very difficult or be unable to attract and retain qualified officers, directors and members of board committees required to provide for our effective management as a result of Sarbanes-Oxley Act of 2002. The enactment of the Sarbanes-Oxley Act of 2002 has resulted in a series of rules and regulations by the SEC that increase responsibilities and liabilities of directors and executive officers. The perceived increased personal risk associated with these recent changes may make it costlier or deter qualified individuals from accepting these roles.
41.
We could be removed from the OTCBB if we fail to remain current with our financial reporting requirements.
Companies trading on the OTCBB must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTCBB. If we fail to remain current in our reporting requirements, we would be removed from the OTCBB. As a result, the market liquidity of our securities, if any, could be severely adversely affected by limiting the ability of broker-dealers to trade our securities and the ability of stockholders to sell their securities in the secondary market.
42.
Our financial statements may not be comparable to those of companies that comply with new or revised accounting standards.
We have elected to take advantage of the benefits of the extended transition period that Section 107 of the JOBS Act provides an emerging growth company, as provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Our financial statements may, therefore, not be comparable to those of companies that comply with such new or revised accounting standards. Because the JOBS Act has only recently been enacted, we cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, here may be a less active trading market for our common stock and our stock price may be more volatile.
43.
Our status as an emerging growth company under the JOBS Act OF 2012 may make it more difficult to raise capital when we need to do so.
Because of the exemptions from various reporting requirements provided to us as an emerging growth company and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
44.
We will incur increased costs and demands upon management as a result of complying with the laws and regulations that affect public companies, which could materially adversely affect our results of operations, financial condition, business and prospects
.
As a public company and particularly after we cease to be an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. Based on discussions with our professionals, these costs may reach $100,000 per year during the first four years following the effective date of our Registration Statement. These requirements include compliance with provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the SEC and NASDAQ. In addition, our management team will also have to adapt to the requirements of being a public company. We expect that compliance with these rules and regulations will substantially increase our legal and financial compliance costs and will make some activities more time- consuming and costly.
The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our managements attention from other business concerns, they could have a material adverse effect on our results of operations, financial condition, business and prospects.
21
However, for as long as we remain an emerging growth company as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We may take advantage of these reporting exemptions until we are no longer an emerging growth company.
45.
We will not be required to comply with certain provisions of the Sarbanes-Oxley Act for as long as we remain an emerging growth company.
We are not currently required to comply with the SEC rules that implement Sections 302 and 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with certain of these rules, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Though we will be required to disclose changes made in our internal control procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the later of (i) the year following our first annual report required to be filed with the SEC or (ii) the date we are no longer an emerging growth company as defined in the JOBS Act.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.
46.
Reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
As an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
For all of the foregoing reasons and others set forth herein, an investment in the Companys securities in any market which may develop in the future involves a high degree of risk.
Item 1B.