This Annual Report on Form 10-K contains forward-looking statements, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations. The words may, will, should, could, would, expect, plan, anticipate, forecast, believe, estimate, predict, propose, intend, potential, continue or the negative of these terms, and other similar expressions or comparable terminology are intended to identify forward-looking statements. We have based these forward-looking statements largely on current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in Item 1A. Risk Factors of this report, as well as in our consolidated financial statements and related notes, and the other financial information appearing elsewhere in this report and our other filings with the U.S. Securities and Exchange Commission (SEC). Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.
Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. All forward-looking statements in this report are made as of the date hereof, based on information available to us as of the date hereof. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances, other than as required by the federal securities laws. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not guarantee future results, levels of activity, performance or achievements, and we caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this report. Among the key factors that may have a direct bearing on the companys operating results are risks and uncertainties described under Risk Factors, including those attributable to our limited operations and concerns about our ability to raise capital.
As used herein, VGTel, we, our, us, the Company and similar terms include VGTel, Inc. and its subsidiaries, unless the context indicates otherwise.
ITEM 1. BUSINESS.
Overview
VGTels mission is to become a leader in multi-platform entertainment. This will initially be accomplished by capitalizing on the current demand for 4K and 8K digital content. Our strategy includes building and operating facilities that house visualization/restoration technology for scanning and converting films into UHD (ultra high definition) digital format and then commercially distributing those films to giant screen format theaters, OEMs and UHD broadcasters. To date, we have converted the following four films: Adrenaline Rush, Alaska: Spirit of the Wild, Amazing Journeys, and Bears. Additionally, we plan to monetize and leverage our scanning facilities by opening them up to the marketplace for other entities seeking scanning and restoration services. In addition, we will develop and produce original 4K and 8K content through newly-formed joint ventures or wholly-owned subsidiaries with independent film makers who have a proven track record, one of which we are currently in talks to acquire.
We are a New York corporation, incorporated on February 5, 2002 under the name Tribeka Tek, Inc. In January 2006, we changed our corporate name to VGTel, Inc. by filing an amended certificate of incorporation. Our principal executive offices are located at 400 Rella Boulevard, Suite 174, Suffern, New York 10901, and our telephone number at this address is (845) 368-0110. Our current website, www.360entertainmentandproductions.com, is being revised to reflect our multi-platform production and entertainment business model.
Information contained on our website is not a part of this report. Our common stock is traded on the OTCQB marketplace under the symbol VGTL.
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Our Strategy
Our primary objective is to become an industry leader in the multi-platform entertainment industry. Key elements of our strategy include the following:
Capitalize on the demand for 4K and 8K content.
Our efforts will be focused on building and operating multiple scanning lines throughout the United States wherein the company will scan (convert) existing 16mm, 35mm and even 70mm content to UHD 4K and 8K formats. These converted movies will be licensed to giant screen theaters, commercial broadcast channels and other media platforms. These scanning lines will also serve to provide a rights bank of content with long-lived revenue streams for the company which could meet and exceed ten year revenue cycles from the initial scanned and converted film content. We intend to continue to invest heavily in these efforts.
Monetize and leverage our scanning facilities.
In addition to scanning and converting films for VGTel, our facilities will be fully leveraged and optimized by being made available to the broader marketplace for other entities looking to outsource the conversion of their 16mm, 35mm and 70mm films.
Develop and produce original 4K and 8K content.
Additionally we plan to develop and produce original 4K and 8K content through newly formed wholly owned subsidiaries and/or joint ventures. This original content will be licensed and distributed to giant screen theaters, broadcast media and commercial ventures such as experiential amusement rides, DVDs and other media.
Expand with acquisitions and business development partnerships.
We seek to expand our core assets from acquisitions of local and regional businesses, to which we can then apply our expertise, resources and brand to scale the business. During 2014, our focus will be expanded to acquire businesses with proven track records and technology talent that can help us expand our business.
Distribution
Our primary distribution channels will be through the businesses we acquire, either utilizing the existing sales force or by forming our own direct sales force. We expect to continue to leverage affiliate relationships to extend the distribution of our platforms.
We will also actively leverage our sales force and industry relationships to drive traffic to our scanning facilities for contract revenue and also build relationships with content owners and distributors as we expand our rights bank of UHD 4K and 8K content for licensing.
Marketing
Marketing will be an important element of our business operations. Our primary marketing channels will include attending and participating in trade shows, leveraging industry referrals, well coordinated public relations campaigns as well as on-line advertising and traditional off-line advertising.
We are currently in the process of revamping our website to more accurately reflect the services and the products we offer as well as serving as a platform for leveraging marketing automation tools that will allow us to more effectively engage and convert interested prospects.
Our Customers and Operators
To drive growth over the long term, we will expand the number and variety of our services and products available through a sales force. We will solicit feedback from our customers and operators such as distributors, film producers and film owners to ensure their objectives are met and they are satisfied with our services.
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Operations
Our business operations will be divided into the following core functions to address the needs of our customers.
Sales Force.
Sales will typically be handled through relationships with distributors of film content and distribution companies. Occasionally, there might arise a need to employ sales staff to attend trade shows and film festivals and other events promoting the sales and distribution of films and film content in digital formats. Working through relationships with existing distribution companies means splitting revenue and residuals but allows the company to operate with less overhead.
Operations.
Through our wholly-owned subsidiary, Motion Picture Scanning Services, Inc. (MPSS), we will operate several scanning facilities throughout the United States and from time to time contract with existing third party scanning facilities in order to fill large orders of film conversions to UHD 4K protocol. Some film and other content will require additional services beyond scanning. For example, there are back end services such as dust busting, alignment, retouching and color enhancements, which will also be services provided by MPSS on a case by case basis. Collectively these services are more commonly referred to as post production services. These post production services will require additional time, expertise and of course, cost. Clients will be made aware of the cost of these additional services ahead of time on an a la carte basis. The most efficient way for a company to assess the services required is to receive client content beforehand and triage this content to evaluate the condition of the content and arrive at the appropriate service levels, timeframes and price points.
Customer Service.
Our customer service department will be responsible for answering questions from customers. They will process requests carefully and individually, as the types and levels of services will run a gamut. Utilizing a client intake process to evaluate the content and articulate in writing the recommendations will greatly enhance the customer service experience for our clientele. We would expect relationships to be built and ongoing as often the provider/owner of the content is delivering a small number of their overall library or holdings as in the case of a film studio/production company who might own hundreds/thousands of films but will seek to scan a handful at a time. High quality customer service is even more of a must for a company such as ours since the field of customers/clients is relatively small compared to a retail business. The upside is that if the company becomes known for high quality work and customer service, it is likely to have repeat customers for a long time.
Technology.
We will employ technology developed and owned by the company and will potentially lead to patents being filed on software developed and processes in place. The company will seek to stay ahead of the competition by adapting hardware and software to meet and exceed the current UHD 4K protocols and the 6K, 8K, 12K and beyond which are yet to come.
We intend to devote a substantial portion of our resources to developing new technologies and features and improving our core technologies. Our technology team will be focused on the design and development of new features and products, as well as maintaining the high quality of resolution and clarity in the content to be scanned.
Competition
Although we believe we will be able to compete favorably on the factors described above, we anticipate that larger, more established companies may directly compete with us. Our potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources and larger customer bases than we will have initially. These factors may allow our competitors to benefit from their existing customer base with lower acquisition costs or to respond more quickly than we can to new or emerging technologies and changes in customer requirements. We may also have some advantages through our slight size and flat organizational development which will allow us to respond more quickly to changes in the marketplace. As demand shifts to higher resolution protocols or even those yet to be defined, a poised company can adjust accordingly to capture clients and market share as the market shifts and emerges.
Government Regulation
Our activities currently are subject to no particular regulation by governmental agencies other than that routinely imposed on corporate businesses. However, a number of our potential customers, such as film producers and distributors, are in regulated industries. We cannot predict the impact of future regulations on either our company or our potential customers.
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Intellectual Property
We will protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We will control access to our proprietary technology by performing the services in house and developing our own software protocols and improvements and by filing patent pending where applicable. We believe the current software being put to use has the elements to qualify for a patent pending filing.
In addition, we will also rely on a combination of trade secrets, copyrights, trademarks, service marks, trade dress, domain names and patents to protect our intellectual property.
Circumstances outside our control could pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in the United States or other countries in which we operate. In addition, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. In addition, protecting our intellectual property rights is costly and time-consuming. Any unauthorized disclosure or use of our intellectual property could make it more expensive to do business and harm our operating results.
Companies in the Internet, social media technology and other industries may own large numbers of patents, copyrights and trademarks or other intellectual property rights and may request license agreements, threaten litigation or file suit against us based on allegations of infringement or other violations of intellectual property rights.
Employees
As of June 25, 2014, our two executive officers perform services as contract, non-employee officers of our company, devoting as much time as needed to lead our company. From time to time, we may utilize other independent consultants to perform specific jobs. We expect, with planned growth, to hire employees in the future.
Available Information
The Company electronically files reports with the SEC. The public may read and copy any materials the Company has filed with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Copies of the Companys Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are also available free of charge through the Companys website (www.360entertainmentandproductions.com), as soon as reasonably practicable after electronically filing with or otherwise furnishing such information to the SEC, and are available in print to any stockholder who requests it.
ITEM 1A. RISK FACTORS.
Our business, prospects, financial condition, operating results and the trading price of our common stock could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. In assessing the risks described below, you should also refer to the other information contained in this Annual Report on Form 10-K, including Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes in this report.
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Risks Related to Our Business
Our business is difficult to evaluate because we have only begun our operations and currently have no operating history.
As we currently have only minimal operations, minimal revenues and only minimal assets, there is a risk that we will be unable to continue as a going concern and start up a viable business or consummate a business combination. We discontinued our investments in previous businesses that were not successful. We have only minimal operations, and minimal revenues and/or earnings from operations since the discontinuation of our previous businesses. We have few significant assets and/or financial resources. We will, in all likelihood, continue to sustain operating expenses without sufficient corresponding revenues, at least until we are successful in expanding our current business or through the consummation of a business combination. This may result in our incurring a net operating loss that will increase continuously until we can start up a successful business or consummate a business combination with a profitable business opportunity.
We do not expect to have significant revenues in fiscal 2015.
Our business will not have significant revenues until we expand our current library of content scanned to UHD 4K protocol and distribute those scanned films through licensing agreements. Additionally, the company will have limited revenue from operations until it executes additional contracts with content owners/distributors for films to be scanned to meet the new UHD 4K protocols. Finally, the revenue to be derived from original productions like the one in which VGTL will receive 7.5% of the revenue generated from the film is delayed until completion, editing and distribution of the film which is likely not to be before spring 2015. We are a development stage company and currently have limited revenues from operations. We will not realize significant revenues until we expand the current business or merge with or acquire other successful operating business.
We may incur losses in the future as we expand our business.
We had an accumulated deficit of $8,129,256 as of March 31, 2014. We anticipate that our profitability will be impacted as we continue to invest in our growth, through increased spending in some areas and through hiring the necessary personnel to bring our products and services to market. These efforts may prove more difficult than we currently anticipate, and we may not succeed in realizing the benefits of these efforts in a short time frame, or at all. Many of our efforts to generate revenue from our business are new and unproven, and any failure to increase our revenue could prevent us from attaining or increasing our profitability. We cannot be certain that we will be able to attain or increase profitability on a quarterly or annual basis. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and results of operations may suffer.
The growth of our business depends on the successful development and introduction of innovative new products.
Our growth depends on the success of our MPSS, Inc scanning services and other related services as well as our intended production of original and UHD 4K content. Additional factors impacting the growth of our current business include the continued demand for UHD 4K film content and the scanning services and additional services we can provide to meet that ongoing need.
A failure of a key information technology system could adversely impact the Companys ability to conduct business.
The Company relies extensively on information technology systems in order to conduct its business. These systems include, but are not limited to, programs and processes relating to communicating within the Company and with other parties, ordering and managing materials from suppliers, shipping products to customers and distributors, processing transactions, summarizing and reporting results of operations, complying with regulatory legal or tax requirements and other processes involved in managing the business. Although the Company has network security measures in place, the systems may be vulnerable to computer viruses, security breaches and other similar disruptions from unauthorized users. While the Company will have business continuity plans in place, if the systems are damaged or cease to function properly due to any number of causes, including the poor performance or failure of third-party service providers, catastrophic events, power outages, security breaches, network outages, failed upgrades or other similar events, and if the business continuity plans do not effectively resolve such issues on a timely basis, the Company may suffer interruptions in the ability to manage or conduct business which may adversely impact the Companys business.
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We face potential competitors with significantly greater financial, marketing and other resources who could attract customers away from our offerings.
Many of our potential competitors have longer operating histories, significantly greater financial, marketing and other resources and larger customer bases than we do. These factors may allow our competitors to benefit from their existing customer base with lower customer acquisition costs or to respond more quickly than we can to new or emerging technologies and changes in end-user habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to build larger customer bases or generate revenue from their customer bases more effectively than we do. Our competitors may offer deals that are similar to the deals we offer or that achieve greater market acceptance than the deals we offer. This could attract customers away from our offerings, reduce our market share and adversely impact our gross margin.
There is intense competition for business start-ups and private companies suitable for a merger transaction of the type we contemplate.
We are in a highly competitive market for a small number of business opportunities. A large number of established and well-financed entities, including small public companies and venture capital firms, are active in mergers and acquisitions of companies that may be desirable target candidates for us. Nearly all these entities have significantly greater financial resources, technical expertise and managerial capabilities than we do; consequently, we will be at a competitive disadvantage in identifying possible business opportunities and successfully completing a business combination. This reduces the likelihood of our consummating a successful business combination.
The time and cost of preparing a private company to become a public reporting company may preclude us from entering into a merger or acquisition with the most attractive private companies.
Target companies that fail to comply with SEC reporting requirements may delay or preclude acquisition. Sections 13 and 15(d) of the Exchange Act require reporting companies to provide certain information about significant acquisitions, including certified financial statements for the company acquired, covering one, two, or three years, depending on the relative size of the acquisition. The time and additional costs that may be incurred by some target entities to prepare these statements may significantly delay or essentially preclude consummation of an acquisition. Otherwise suitable acquisition prospects that do not have or are unable to obtain the required audited statements may be inappropriate for acquisition so long as the reporting requirements of the Exchange Act are applicable.
We may become subject to regulations or rules which would adversely affect our operations or ability to consummate a transaction.
Although we are subject to the reporting requirements under the Exchange Act, we do not expect to become subject to regulation under the Investment Company Act of 1940, as amended (the Investment Company Act), since we do not intend to engage in the business of investing or trading in securities. If we engage in business combinations which result in our holding passive investment interests, we could be subject to regulation under the Investment Company Act. If so, we would be required to register as an investment company and could be expected to incur significant registration and compliance costs.
Any potential acquisition or merger with a foreign company may subject us to additional risks.
If we enter into a business combination with a foreign concern, we will be subject to risks inherent in business operations outside of the United States. These risks include, for example, currency fluctuations, regulatory problems, punitive tariffs, unstable local tax policies, trade embargoes, risks related to shipment of raw materials and finished goods across national borders and cultural and language differences. Foreign economies may differ favorably or unfavorably from the United States economy in growth of gross national product, rate of inflation, market development, rate of savings, and capital investment, resource self-sufficiency and balance of payments positions, and in other respects.
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The loss of one or more key members of our management team, or our failure to attract, integrate and retain other highly qualified personnel in the future, could harm our business.
The loss of key personnel, including key members of management and our marketing, sales, product development and technology personnel could disrupt our operations and have an adverse effect on our ability to grow our business. Moreover, many members of our management will be new to our team or will have been recently promoted to new roles. As we become a more mature company, we may find our recruiting and retention efforts more challenging. If we do not succeed in attracting, hiring and integrating excellent personnel, or retaining and motivating existing personnel, we may be not be able to manage our business effectively.
We may have exposure to greater than anticipated tax liabilities.
Our income tax obligations are based on our corporate operating structure, including the manner in which we develop, value, and use our intellectual property and the scope of our international operations. The tax laws applicable to our international business activities, including the laws of the United States and other jurisdictions, are subject to interpretation. The taxing authorities of the jurisdictions in which we operate may challenge our methodologies for valuing developed technology or intercompany arrangements, which could increase our worldwide effective tax rate and harm our financial position and results of operations. In addition, our future income taxes could be adversely affected by greater earnings in jurisdictions that have higher statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, or accounting principles. We are subject to regular review and audit by both U.S. federal and state and foreign tax authorities. Any adverse outcome of such a review or audit could have a negative effect on our financial position and results of operations. In addition, the determination of our worldwide provision for income taxes and other tax liabilities requires significant judgment by management, and there are many transactions where the ultimate tax determination is uncertain. Although we believe that our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.
Failure to comply with federal, state and international privacy laws and regulations, or the expansion of current or the enactment of new privacy laws or regulations, could adversely affect our business.
A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data. The existing privacy-related laws and regulations are evolving and subject to potentially differing interpretations. In addition, various federal, state and foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. Several Internet companies have incurred substantial penalties for failing to abide by the representations made in their privacy policies and practices. In addition, several states have adopted legislation that requires businesses to implement and maintain reasonable security procedures and practices to protect sensitive personal information and to provide notice to consumers in the event of a security breach. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any data-related consent orders, Federal Trade Commission requirements or orders or other federal, state or international privacy or consumer protection-related laws, regulations or industry self-regulatory principles could result in claims, proceedings or actions against us by governmental entities or others or other liabilities, which could adversely affect our business. In addition, a failure or perceived failure to comply with industry standards or with our own privacy policies and practices could result in a loss of subscribers or merchant partners and adversely affect our business. Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of third party web cookies for behavioral advertising. The regulation of these cookies and other current online advertising practices could adversely affect our business.
We may not be able to adequately protect our intellectual property rights or may be accused of infringing intellectual property rights of third parties.
As we develop our business, we would regard our customers/operators list, trademarks, service marks, copyrights, patents, trade dress, trade secrets, proprietary technology, merchant lists, sales methodology and similar intellectual property as critical to our success, and we would rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with our employees and others to protect our proprietary rights. Effective intellectual property protection may not be available in every country in which our products are made available. We also may not be able to acquire or maintain appropriate domain names or trademarks in all countries in which we would do business. Furthermore, regulations governing domain names may not protect our trademarks and similar proprietary rights. We may be unable to prevent third parties from acquiring and using domain names that are similar to, infringe upon or diminish the value of our trademarks and other proprietary rights. We may be unable to prevent third parties from using and registering our trademarks, or trademarks that are similar to, or diminish the value of, our trademark in some countries.
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We may not be able to discover or determine the extent of any unauthorized use of our proprietary rights. Third parties that license our intellectual property rights also may take actions that diminish the value of our proprietary rights or reputation. The protection of our intellectual property may require the expenditure of significant financial and managerial resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary rights. We may be subject to lawsuits and disputes related to our intellectual property and service offerings. The costs of engaging in such litigation and disputes are considerable, and there can be no assurances that favorable outcomes will be obtained.
We may expect to be subject to third party claims that we infringe on others proprietary rights or trademarks in the future. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us or the payment of damages by us. We may need to obtain licenses from third parties who allege that we have infringed their rights, but such licenses may not be available on terms acceptable to us or at all. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims.
Our business will depend on a strong brand, and if we are not able to maintain and enhance our brand, or if we receive unfavorable media coverage, our ability to expand our base of customers and operators will be impaired and our business and operating results will be harmed.
We believe that the brand identity that we will have developed will significantly contribute to the success of our business. We also believe that maintaining and enhancing our brand will be critical to expanding our base of customers and operators. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain our brand, or if we incur excessive expenses in this effort, our business, operating results and financial condition will be materially and adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Maintaining and enhancing our brand will depend largely on our ability to be an industry leader and to continue to provide reliable, trustworthy and high quality products and services, which we may not do successfully.
Acquisitions, joint ventures and strategic investments could result in operating difficulties, dilution and other harmful consequences.
Our strategy has been based on acquiring a number of companies. We expect to continue to evaluate, consider and potentially consummate a wide array of potential strategic transactions, including acquisitions and dispositions of businesses, joint ventures, technologies, services, products and other assets and minority investments. We may not realize the anticipated benefits of any or all of our acquisitions and investments, or we may not realize them in the timeframe expected. In addition, the integration of an acquisition could divert managements time and the companys resources. If we pay for an acquisition or a minority investment in cash, it would reduce our cash available for operations or cause us to incur debt, and if we pay with our stock, it could be dilutive to our stockholders. Additionally, we may not have the ability to exert control over our joint ventures and minority investments, and therefore we would be dependent on others in order to realize their potential benefits.
We intend to issue more shares to either recruit highly talented individuals in our management team or for a merger or acquisition, which will result in substantial dilution.
Our certificate of incorporation authorizes the issuance of a maximum of 200,000,000 shares of common stock and a maximum of 10,000,000 shares of preferred stock. Recruitment of highly qualified management personnel suitable for a business start up or a merger or acquisition effected by us may result in the issuance of additional securities without stockholder approval and may result in substantial dilution in the percentage of our common stock held by our then existing stockholders. Moreover, the common stock issued in any merger or acquisition transaction may be valued on an arbitrary or non-arms-length basis by our management, resulting in an additional reduction in the percentage of common stock held by our then existing stockholders. Our board of directors has the power to issue any or all of such authorized but unissued shares without stockholder approval. To the extent that additional shares of common stock or preferred stock are issued in connection with a business start up or business combination or otherwise, dilution to the interests of our stockholders will occur and the rights of the holders of common stock might be materially and adversely affected.
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We are authorized to issue preferred stock, which could be used to prevent a change in control that could otherwise be beneficial to most stockholders.
Our certificate of incorporation authorizes the issuance of up to 10,000,000 shares of preferred stock with designations, rights and preferences determined from time to time by our board of directors. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. There can be no assurance that we will not issue such preferred stock in the future.
At times, our stock is thinly traded, you may be unable to sell at or near ask prices or at all if you need to liquidate your shares.
In the past, the shares of our common stock were not traded on the OTCQB marketplace, meaning that the number of persons interested in purchasing our common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven, early stage company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. Consequently, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer, which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. A broader or more active public trading market for our common shares may never develop or, if developed, be sustained, or even that current trading levels will be sustained. Due to these conditions, you may not be able to sell your shares at or near ask prices or at all. This risk may increase if more investors attempt to sell stock over a short time period.
Broker-dealer requirements applicable to penny stock may affect our trading and liquidity.
Section 15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2 promulgated thereunder by the SEC, require broker-dealers dealing in penny stock, such as our shares, to provide potential investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the document before effecting any transaction in a penny stock for the investors account. Potential investors in our common stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be penny stock. Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the account of any investor for transactions in such stocks before selling any penny stock to that investor. This procedure requires the broker-dealer to (i) obtain from the investor information concerning his or her financial situation, investment experience and investment objectives; (ii) reasonably determine, based on that information, that transactions in penny stocks are suitable for the investor and that the investor has sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide the investor with a written statement setting forth the basis on which the broker-dealer made the determination in (ii) above; and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investors financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult for holders of our common stock to resell their shares to third parties or to otherwise dispose of them in the market or otherwise.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:
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The basis on which the broker or dealer made the suitability determination; and
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That the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading, as well as commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
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Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling shareholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common stock, if and when our common stock becomes publicly traded. In addition, the liquidity for our Common Stock may decrease, with a corresponding decrease in the price of our common stock.
If we fail to remain current on our reporting requirements, we could be removed from the OTCQB marketplace, which would limit the ability of broker-dealers to sell our securities and the ability of shareholders to sell their securities in the secondary market.
Companies trading on the OTCQB marketplace must be reporting issuers under Section 12 of the Exchange Act, and must be current in their reports under Section 13 of the Exchange Act, in order to maintain price quotation privileges on the OTCQB. This report is being filed before the applicable annual Form 10-K deadline. If we fail to remain current on our reporting requirements, we could be removed from OTCQB trading. As a result, the market liquidity for our securities could be adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of shareholders to sell their securities in the secondary market.
Provisions in our charter documents and under New York law could discourage a takeover that stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:
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Our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors.
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Our certificate of incorporation does not provide for cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates.
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Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us.
As a New York corporation, we are also subject to certain New York anti-takeover provisions. Under New York law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on New York law to prevent or delay an acquisition of us.
We will continue to incur significant costs as a result of being a public company.
We face increased legal, accounting, administrative and other costs and expenses as a public company that we would not incur as a private company. The Sarbanes-Oxley Act of 2002, including the requirements of Section 404, as well as new rules and regulations subsequently implemented by the Securities and Exchange Commission, or the SEC, the Public Company Accounting Oversight Board and the exchange on which our common stock is quoted, impose additional reporting and other obligations on public companies. Compliance with these public company requirements increases our costs and makes some activities more time-consuming. In connection with the preparation of our financial statements for the fiscal year ended March 31, 2014, our independent registered accounting firm identified a material weakness because of certain deficiencies involving internal controls. The material weakness identified did not result in the restatement of any previously reported financial statements or any other related financial disclosures, nor does management believe that it had any effect on the accuracy of our financial statements for that reporting period. The existence of this issue could adversely affect us, our reputation or investor perceptions of us. It also may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers. Advocacy efforts by stockholders and third parties may also prompt even more changes in corporate governance and reporting requirements. The additional reporting and other obligations imposed on us by these rules and regulations have increased our legal and financial compliance costs and the costs of our related legal, accounting and administrative activities significantly. These increased costs require us to divert a significant amount of money that we could otherwise use to expand our business and achieve our strategic objectives.
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Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.
We may in the future be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. Additional equity financing may dilute the interests of our common stockholders, and debt financing, if available, may involve restrictive covenants and could reduce our profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.
Risks Related to Ownership of Our Common Stock
The trading price of our common stock is highly volatile.
Our common stock began trading on the OTCQB marketplace on February 14, 2011 and since that date has fluctuated considerably. During the past 52 weeks, our shares have traded from a high of $1.90 per share to a low of $0.25 per share. We expect that the trading price of our stock will continue to be volatile due to variations in our operating results and also may change in response to other factors, including factors specific to technology companies, many of which are beyond our control. Among the factors that could affect our stock price are:
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our earnings announcements, including any financial projections that we may choose to provide to the public, any changes in these projections or our failure for any reason to meet these projections or projections made by research analysts;
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the amount of shares of our common stock that are available for sale;
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the relative success of competitive products or services;
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the publics response to press releases or other public announcements by us or others, including our filings with the SEC and announcements relating to litigation;
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speculation about our business in the press or the investment community;
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future sales of our common stock by our significant stockholders, officers and directors;
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changes in our capital structure, such as future issuances of debt or equity securities;
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our entry into new markets;
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regulatory developments in the United States or foreign countries;
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strategic actions by us or our competitors, such as acquisitions, joint ventures or restructuring; and
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changes in accounting principles.
We expect the stock price volatility to continue for the foreseeable future as a result of these and other factors.
We do not expect to pay dividends and investors should not buy our common stock expecting to receive dividends.
We do not anticipate that we will declare or pay any dividends in the foreseeable future. Consequently, you will only realize an economic gain on your investment in our common stock if the price appreciates. You should not purchase our common stock expecting to receive cash dividends. Since we do not anticipate paying future dividends, and there may be limited trading, then you may not have any manner to liquidate or receive any payment on your investment. Therefore, our failure to pay dividends may cause you to not see any return on your investment even if we are successful in our business operations. In addition, because we do not anticipate paying dividends in the future, we may have trouble raising additional funds that could affect our ability to expand business operations.