Gameznflix, Inc - Recent Material Event
<![CDATA[Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of Company's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting
company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act: Yes [ ] No [X].
The aggregate market value of the voting stock held by non-
affiliates of the Company as of March 31, 2008: $121,467. As of
March 31, 2008, the Company had 411,970,250 shares of common
stock issued and outstanding.
TABLE OF CONTENTS
PART I. PAGE
ITEM 1. BUSINESS 5
ITEM 1A. RISK FACTORS 13
ITEM 1B. UNRESOLVED STAFF COMMENTS 25
ITEM 2. PROPERTIES 25
ITEM 3. LEGAL PROCEEDINGS 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
PART II.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES 27
ITEM 6. SELECTED FINANCIAL DATA 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 28
ITEM 7A QUANTATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 39
ITEM 9A. CONTROLS AND PROCEDURES 40
ITEM 9A(T) CONTROLS AND PROCEDURES 40
ITEM 9B OTHER INFORMATION 42
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE 42
ITEM 11. EXECUTIVE COMPENSATION 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE 51
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 52
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 53
SIGNATURES 54
PART I.
ITEM 1. BUSINESS.
Business Development.
GameZnFlix, Inc. ("Company") was formed in Delaware in June 1997
under the name SyCo Comics and Distribution Inc. and is the
successor to a limited partnership named SyCo Comics and
Distribution formed under the laws of the Commonwealth of
Virginia on January 15, 1997, by Sy Robert Picon and William
Spears, the co-founders and principal stockholders of the
Company. On February 17, 1999, SyCo Comics and Distribution Inc.
changed its name to Syconet.com, Inc. With the filing of
Articles of Merger with the Nevada Secretary of State on April
12, 2002, the Company was redomiciled from Delaware to Nevada,
and its number of authorized common shares was increased to
500,000,000. On November 21, 2002, the Company amended its
articles of incorporation changing its name to Point Group
Holdings, Incorporated. On March 5, 2003, the Company again
amended the articles of incorporation so that (a) an increase in
the authorized capital stock of the Company can be approved by
the board of directors without shareholder consent; and (b) a
decrease in the issued and outstanding common stock of the
Company (a reverse split) can be approved by the board of
directors without shareholder consent. On July 11, 2003, the
Company amended its articles of incorporation to increase the
number of authorized common shares to 900,000,000. On January
26, 2004, the name of the Company was changed to "GameZnFlix,
Inc" by the filing of amended articles of incorporation. On
December 16, 2004, the Company amended the articles of
incorporation to increase the authorized common stock of the
Company to 2,000,000,000 shares. On July 19, 2005, the articles
of incorporation were further amended to increase the number of
authorized common shares to 4,000,000,000, and on March 21, 2006
increased to 25,000,000,000. On September 6, 2007, a reverse
split of common shares took place. On December 31, 2007,
100,000,000 shares of Series B common stock and 10,000,000 shares
of preferred stock were created by an amendment to the articles
of incorporation.
During the period of July 2002 to September 2002, the Company
acquired AmCorp Group, Inc., a Nevada Corporation, and Naturally
Safe Technologies, Inc. also a Nevada corporation. Currently,
Naturally Safe is current with its incorporation with the State of
Nevada, but does not have any business operations. In February
2005, AmCorp amended its articles of incorporation, changing its
name to GameZnFlix Racing and Merchandising, Inc. AmCorp provided
services to companies that desired to be listed on the OTCBB and
Naturally Safe held patents on a product that assisted Christmas
trees in retaining water. During the fiscal year ended December
31, 2002, AmCorp generated 26% of revenues and Naturally Safe
generated approximately 74% of revenues. During the fiscal year
ended December 31, 2003, AmCorp generated 2% of revenues and
Naturally Safe generated approximately 88% of revenues. In May
2003, the Company ceased operation of Prima International, LLC, a
wholly owned subsidiary of Naturally Safe. In September 2003, the
Company acquired Veegeez.com, LLC, a California limited liability company.
Business of the Company.
Veegeez.com provided its subscribers with access to its
video game library. In March 2004, the Company launched its
website, http://www.gameznflix.com. However, the Company did not
fully commence operations in the online DVD and video game rental
until September 2004. In May 2004, the veegeez web site ceased
operations and all traffic has been directed to the
www.gameznflix.com web site.
The Company currently provides subscribers with access to a
comprehensive library of Microsoft Xbox, Xbox 360, Sony
Playstation3, Playstation 2, Playstation, Nintendo Wii, Nintendo
Gamecube, and DVD's (hereinafter "titles"). The Company believes
its service is an alternative to store based gaming rentals and
that the Company offers a high level of customer service, quality
titles and product availability. The subscription plans allow
subscribers to have three to eight titles out at the same time
with no due dates, shipping charges or late fees for $8.99 per
month to $16.99 per month (three out package). Subscribers can
enjoy as many titles as they wish during their subscription time.
Titles are selected on the website www.gameznflix.com via the
queue system. The titles are shipped by first-class mail and can
be returned at their convenience using the enclosed prepaid
mailer. When a game and DVD has been returned, the subscriber's
next available selection is mailed to them.
Management believes that the Company is in a good position
to take advantage of the following market conditions:
- start-up opportunities in the on-line video game rental
business;
- the need for use of efficient distribution and financial
methods;
- under-served market that has growth opportunity; and
- existing video game rental companies' uneven track record in
providing customer service.
The Company's internally developed software enables it to
customize the website to meet customer needs and provide vital
business information. The Company's online interface with
customers eliminates the need for costly retail outlets and
allows it to serve a national customer base with low overhead costs.
The Company currently provides rental services to its
subscribers. In addition, it also sells new titles to subscribers
as well as non- members visiting the website. Plans are in place
to expand and provide sales of used DVD titles at a discounted
price and new video gaming accessories. The development of this
portion of the website is nearly completed. Management believes
that adding these additional services will complement the rental
service by increasing cash flow and capitalizing on impulse sales
to current subscribers.
The Company seeks to provide its customers with a large
selection of video game rental and DVD movie choices on a monthly
subscription basis. Customers can sign-up via the website to rent
titles of their choice. The titles are then shipped to the
customer via first class mail once they have made their
selection(s). Active subscribers can retain the titles for an
indefinite amount of time as long as they are active paying
subscribers. Customers can exchange their selections at anytime
by returning their title(s) in the pre-addressed package provided.
From November 2004, when the Company commenced tracking its
customer base, through December 2005, it has consistently
maintained a monthly customer base of approximately 3,000.
During 2006, the average number of active subscribers per month
approximated 13,000. As of December 31, 2007, the Company had
approximately 18,700 subscribers; this growth can be attributed
to increased public awareness of the Company. For the year ended
December 31, 2007, the amount of revenues that have been
generated from these subscriptions has totaled approximately $3,600,000.
Part of this public awareness of the Company resulted from a
service agreement entered into with Circuit City Stores, Inc.
("Circuit City") in October 2005 that provided for a pilot
program in 27 retail stores and on the Circuit City website to
promote the Company's services. On March 24, 2006, the Company
entered into a definitive co-marketing agreement with Circuit
City that calls for a scheduled rollout of services to all the
Circuit City stores that began in May 2006 and was completed in
December 2006. Although the overall number of subscribers
obtained from the initial pilot program was not considered
significant in relation to the overall number of new subscribers
through the end of 2006, the Company believes that its
relationship with Circuit City brought more prominence and
recognition to the Company. In March 2007, the relationship with
Circuit City was ended by Circuit City as it reorganized its
management teams.
In August 2006, the Company entered into an agreement with
the U.S. Army & Air Force Exchange ("AAFES") to provide video
game and movie rentals to all current and retired members of the
Army and Air Force personnel through the AAFES website. This
agreement with AAFES gives the Company access to more than 11
million military personnel, retirees and their families. In late
2007, the relationship with AAFES expanded by adding pre-paid
membership cards in the military base locations under AAFES.
The Company intends to continue to seek similar arrangements
with nationally known companies or agencies to further brand the
Company name.
Product and Service Description.
The Company offers DVD movie and video game rental services
and the ability to purchase new DVD movie and video game titles
to its subscribers. In addition, the Company also sells new DVD
movie and video game titles to non-members. Members can choose
from rental packages of three to eight titles outstanding at one
time on a monthly subscription basis with unlimited replacement
of products as long as they are an active subscriber.
The Company currently owns approximately 30,000 titles and
approximately 281,000 copies. In March 2004, the Company signed
a supply agreement with an entertainment distributor. The supply
agreement is designed to enable the Company to access the most
current DVD and video game titles for purposes of meeting rental
requests as well as all purchases. The Company owns all titles
that are rented to its subscribers. Titles are purchased based on
membership requests for a title and inventory is being built in
this way. In the event that a title is purchased through the
website, if the Company does not already own the title, then that
title is purchased to fulfill the request.
The Company's proprietary queue system and dynamic web
server-based database system automatically select the next title
a customer receives based on factors such as the subscriber's
next title preferences, title availability, length of time a
subscriber has been with the Company, and the subscriber's
subscription plan level.
All DVD's and games sold are offered to current subscribers
at a discount from the manufacturer's suggested retail price. In
the future, used titles will be sold and will be priced based on
the length of time the title has been in service, the current
market rate (as determined by on-line sites like Amazon.com, and
EBGames.com), and customer demand to maximize profit. For
example, most new games are sold for $49.99 at retail stores and
for $49.99 plus shipping from on-line stores. The Company offers
the games for $46.99 plus shipping charges paid by the customer.
The Company currently charges a flat rate of $3.00 per order for
shipping. Most online competitors utilize multiple shipping
rates, which incorporates a per piece charge as part of their
shipping calculations.
Like some of its competitors, the Company offers a toll free
customer service phone number 12 hours per day, five days per
week (Monday - Friday). The Company also takes customer
inquiries and requests via e-mail and maintains a policy to
answer each e-mail within 24 - 48 hours of receipt.
Competition.
(a) Game Rentals.
The Company's competition for game rentals comes in two main forms:
- Chain rental stores - The Company's indirect competitors
include traditional retail stores that offer video game
rentals such as Blockbuster, Hollywood Video, and other
national and local video rental stores. These companies are
formidable, established competitors for video game rentals.
The primary business of these companies is the renting of
movies and not video games. Additionally, late returns are
assessed stringent daily late fees by some of these chain
rental stores for relatively short rental periods.
- Online competitors - Currently there are approximately 12
direct competitors that provide online video game rentals.
Some competitors include AngelGamer.com, DVDAvenue.com,
Gamez2go.com, Govojo.com, Midwest-games.com, RedOctane.com,
Rent-a-realm.com, Gamefly.com, and Videogamealley.com. Each
of these competitors offers rental packages on a monthly
subscription basis with offerings of one to eight games
available at varying prices.
The Company competes on product availability, customer service
and product availability information.
DVD Rentals.
The Company's competition for DVD rentals comes in the
following forms:
- Chain rental stores - there are a number of retail stores
located across the country that rent DVD's. These retail
stores have a national image, high volume, multiple
locations and general familiarity.
- Other local video rental stores - the number and size of
these competitors varies, but is not substantial. They are
competing against the chains in an attempt to offer lower
prices and a more customer friendly staff.
- Online competitors - the number of online competitors is
growing. Management is aware of 12 other online services,
such as NetFlix.com (the dominant force in this sector).
Competitors vary in their service offerings.
In summary, management believes that in order to be
successful the Company must provide its subscribers with the best
possible renting experience and a willingness to develop a long-
standing relationship. The Company must offer a high level of
customer service, reliable product availability, and a responsive
and efficient website to deliver the service.
Sale of DVD's and Games.
In November 2004, the Company commenced selling new DVD and
video games. The offering of these products for sale has been
integrated with the existing website and has accounted for
approximately 42% of revenue on a monthly basis. Management
believes these new offerings will complement the current rental
service as many subscribers have indicated that they rent games
to decide which games they would like to buy in the future.
Chain rental stores and other local rental stores also sell
DVD's. In addition, DVD's are sold by large retailers, including
Wal Mart, Target, and Best Buy.
Fulfillment.
In February 2005, the Company ceased using the services of
National Fulfillment, Incorporated to meet fulfillment needs and
internalized the fulfillment. During the past quarter, the
Company has re-designed its distribution network so that now
makes use of seven United States Postal Service ("USPS") centers
located in California (2), Florida, Maryland, Massachusetts,
Texas, and Washington. These USPS postal drop centers, which have
been developed with the cooperation of the USPS, are
strategically located to service the subscriber base in each of
their respective regions. There are two warehousing centers
located in Colorado and Kentucky that house the inventory of
video games and DVD titles for shipment
Delivery of the titles is provided by first class mail.
During 2005, the Company was able to negotiate a new mailer
envelope with the USPS that reduced overall postage cost and
decreased the delivery turnaround time from 7 to 2 days. The
average cost, after the new mailer, of delivery for the shipment
is $1.38. The delivery of each subsequent game costs $0.69 for
shipment to the customer and $0.69 for each return.
Each workday, the Company's distribution centers process the
titles to be shipped for that day. Each distribution center
delivers the outgoing titles to the USPS by a cutoff time
established by the local USPS office in order to make the mail on
that day. After dropping off the outgoing titles, the personnel
receive the return titles and then process the returned titles
back into inventory through the use of scanners. Each return
title is verified to be the correct title, matches the member who
returns it and that the title is in good working condition.
Technology.
All orders are taken by credit card via website at
GameZnFlix.com and processed through Authorize.Net and the
Company's Humboldt Bank merchant account. Data resulting from
customer sales transactions is transferred to the proprietary
database system. This database system provides the necessary
information for accounting, sales, customer service, inventory
management, and marketing information needs and is accessible
directly through any Internet connection.
Marketing.
The Company's target market for games is the hard core gamer
that purchases and rents games on a regular basis. The Company
also targets the DVD movie rental market similar to NetFlix.com
and Blockbuster.com. The Company is targeting subscribers of
other services through its affiliate program, which is a
commission based referral program that is administered through an
affiliate tracking software. These affiliates consist of
websites that drive consumers to the Company's website for a fee.
The participants in this program are not affiliated with the
Company outside of their participation in the affiliate program.
Participants in the affiliate program can receive up to $70.00
for each new subscriber directed to the Company by that affiliate
that elects to use the service. The commission schedule is tied
to the type of account the subscriber whom the affiliate sends to
the Company (a $70 commission would be for an annual membership
signup). In addition, there are other programs where the Company
pays a range from $10.00 to $25.00 per member based on the volume
the affiliate provides the Company.
The Company also has a special program offered to the US
military, including active duty, veterans, reservists, National
Guardsmen, DOD employees and their dependents. These individuals
receive roughly a 10% discount on the standard rates. They are
also offered shipping to any military base throughout the world.
Since the target market for game rentals is already renting
games from traditional rental stores, the most important market
needs are a higher level of support and service, a greater value
for the money they spend, and greater product availability. One
of the key points of the Company's strategy is the focus on hard-
core gamers that know and understand these needs and are looking
to pay less, and spend less time to have them filled.
The Company believes the most obvious and important trend in
the market is an increase in the number of people playing video
games. Management also believes that video game players are
becoming more and more unsatisfied with the current video game
rental stores due to late fees, short rental times and a general
lack of customer service support are all strong reasons why video
game players are looking for an alternative.
The Company believes a third trend is ever-greater
connectivity, with more people on the Internet and purchasing
more items over the Internet. Items such as computer hardware,
apparel, consumer electronics, office supplies, toys, movies, and
video games are all experiencing an increasing number of online sales.
An estimated 15% of the current subscriber base is college
students. Advertisement in school newspapers, on college
websites, and other advertising media will be placed at college
campuses in targeted cities. The Company also intends to
participate in direct marketing opportunities in conjunction with
back-to-school events on these campuses. The Company's first
opportunity in this regard will be with the universities in the
vicinity of Nashville, Tennessee.
In February 2004, the Company retained the services of
AdSouth Partners, Inc., a national ad agency, to assist in the
launch and marketing of the website http://www.gameznflix.com.
Through AdSouth Partners, the Company commenced a direct
television response advertising campaign that covered 13
different national television channels with five different
commercials, starring Dennis Coleman (a television and movie
actor) and Ben Curtis (the former star of Dell television
commercials). The prepaid television ad campaign covered the
period from April 2004 to February 2005 on a monthly basis. The
last advertisement in this campaign was a commercial that aired
during the 4th quarter of the 2005 Super Bowl on three local
television stations. In 2005, the Company did not have any major
television advertising campaigns planned and ended its
relationship with AdSouth Partners. Due to software issues, the
Company is unable to determine the effect that this advertising
had on subscriptions and revenue.
In 2005, the Company continued to market online through the
affiliate program and expanded it to assist in membership growth.
The Company's other advertising and marketing programs will move
away from national advertising and focus on areas in the
proximity of distribution centers. The Company intends to
utilize media such as print, radio, outdoor and others where
appropriate. This marketing program was launched in Nashville,
Tennessee and expanded to other markets throughout 2005.
The Company will also be utilizing "grass-roots" tactics
that may include local market sponsorships, direct marketing
opportunities via kiosks, corporate gift programs, employee
benefits programs, member referral programs and other areas that
will help the Company penetrate target markets.
In February 2005, the Company commenced marketing activities
through its wholly owned subsidiary GameZnFlix Racing and
Merchandising, Inc. In connection with these activities, the
Company sponsored a local drag racing car that covered the local
Kentucky and Tennessee areas. In accordance with the drag racing
team, the Company paid entry fees and pre-approved travel
expenses to attend races in consideration for the placement of
the Company name on the racecar, trailer and tow vehicle. The
Company also received half of all winnings and reimbursement of expenses.
In September 2006, the Company launched a cross-country tour
visiting 12 cities in a motor coach "wrapped" in GameZnFlix
advertisements (mobile advertising). The Company believes this
cross-country tour provided a successful grass roots marketing
campaign of GameZnFlix around the country. The Company ran a
similar marketing campaign in 2007 and will strive to secure
affiliate relationships for cross advertisements of each other's
products/services.
Research and Development.
During the fiscal year ended December 31, 2006, the Company
engaged in research and development activities, including the
development of online games, broadband delivery of rental
inventory and satellite television. The portion of the Company's
operating costs that is allocable to research and development is
immaterial and the results of these activities are GNF
Entertainment and GNFDigital.com.
Strategy and Implementation Summary.
In order to successfully implement the business plan, the
Company must:
- emphasize service and support;
- differentiate its service from the competition;
- establish its service offering as a clear and viable
alternative to time period rentals;
- build a relationship-oriented business;
- become subscribers' video game rental site of choice; and
- ensure that all orders are delivered timely and accurately.
Employees.
The Company currently has 14 employees. The employees
operate in the following areas:
- purchasing (2 employees)
- customer service (4 employees)
- general business operations and management (2 employees)
- website operations (2 employees)
- warehouse operations (4 employees)
ITEM 1A. RISK FACTORS.
Risks Relating to the Business.
(a) The Company Has a History of Losses That May Continue.
The Company incurred net losses of $10,501,867 for the
year ended December 31, 2007 and $10,840,259 for the year ended
December 31, 2006. The Company cannot provide assurance that it
can achieve or sustain profitability on a quarterly or annual
basis in the future. If revenues grow more slowly than
anticipated, or if operating expenses exceed expectations or
cannot be adjusted accordingly, the Company will continue to
incur losses. The Company will continue to incur losses until it
is able to establish significant rentals of DVD's and video games
over the Internet. The Company's possible success is dependent
upon the successful development and marketing of its website and
products, as to which there is no assurance. Any future success
that the Company might enjoy will depend upon many factors,
including factors out of the Company's control or which cannot be
predicted at this time. These factors may include changes in or
increased levels of competition, including the entry of
additional competitors and increased success by existing
competitors, changes in general economic conditions, increases in
operating costs, including costs of supplies, personnel and
equipment, reduced margins caused by competitive pressures and
other factors. These conditions may have a materially adverse
effect upon the Company or may force it to reduce or curtail operations.
(b) Ability to Attract and Retain Subscribers Will Affect the
Company's Business.
The Company must continue to attract and retain subscribers.
To succeed, it must continue to attract subscribers who have
traditionally used video and game retailers, video and game
rental outlets, cable channels, such as HBO and Showtime and pay-
per-view. The Company's ability to attract and retain
subscribers will depend in part on its ability to consistently
provide its subscribers a high quality experience for selecting,
viewing or playing, receiving and returning titles. If consumers
do not perceive the service offering to be of quality, or if the
Company introduces new services that are not favorably received,
it may not be able to attract or retain subscribers. If the
efforts to satisfy its existing subscribers are not successful,
it may not be able to attract new subscribers, and as a result,
revenues will be adversely affected.
The Company must minimize the rate of loss of existing
subscribers while adding new subscribers. Subscribers cancel
their subscription to the Company's service for many reasons,
including a perception that they do not use the service
sufficiently, delivery takes too long, the service is a poor
value and/or customer service issues are not satisfactorily
resolved. The Company must continually add new subscribers to
replace subscribers who cancel and to grow the business beyond
the current subscriber base. If too many subscribers cancel the
Company's service, or if the Company is unable to attract new
subscribers in numbers sufficient to grow the business, operating
results will be adversely affected. Further, if excessive
numbers of subscribers cancel the service, the Company may be
required to incur significantly higher marketing expenditures
than currently anticipated to replace these subscribers with new
subscribers.
Subscribers to the service can view as many titles and/or
play games as they want every month and, depending on the service
plan, may have out between three and six titles at a time. With
the Company's use of nine shipping centers and the associated
software and procedural upgrades, the Company has reduced the
transit time titles. As a result, subscribers have been able to
exchange more titles each month, which has increased operating
costs. As the Company established additional planned shipping
centers or further refines its distribution process, it may see a
continued increase in usage by subscribers. If subscriber
retention does not increase or operating margins do not improve
to an extent necessary to offset the effect of increased
operating costs, operating results will be adversely affected.
Subscriber demand for titles may increase for a variety of
other reasons beyond the Company's control, including promotion
by studios and seasonal variations in movie watching. Subscriber
growth and retention may be affected adversely if the Company
attempts to increase monthly subscription fees to offset any
increased costs of acquiring or delivering titles and games.
The "GameZnFlix" brand is young, and the Company must
continue to build strong brand identity. To succeed, the Company
must continue to attract and retain a number of owners of DVD and
video game players who have traditionally relied on store-based
rental outlets and persuade them to subscribe to its service
through its website. The Company may be required to incur
significantly higher advertising and promotional expenditures
than currently anticipated to attract numbers of new subscribers.
The Company believes that the importance of brand loyalty will
increase with a proliferation of DVD and game subscription
services and other means of distributing titles. If these
efforts to promote and maintain its brand are not successful,
operating results and ability to attract and retain subscribers
will be affected adversely.
(c) Inability to Use Current Marketing Channels May Affect
Ability to Attract New Subscribers.
The Company may not be able to continue to support the
marketing of its service by current means if such activities are
no longer available or are adverse to the business. In addition,
the Company may be foreclosed from certain channels due to
competitive reasons. If companies that currently promote the
Company's service decide to enter this business or a similar
business, the Company may no longer be given access to such
channels. If the available marketing channels are curtailed, the
Company's ability to attract new subscribers may be affected adversely.
(d) Selection of Certain Titles by Subscribers.
Certain titles cost the Company more to acquire depending on
the source from whom they are acquired and the terms on which
they are acquired. If subscribers select these titles more often
on a proportional basis compared to all titles selected, DVD or
game acquisition expenses could increase, and gross margins could
be adversely affected.
(e) Mix of Acquisition Sources May Affect Subscriber Levels.
The Company utilizes a mix of incentive-based and fixed-cost
marketing programs to promote its service to potential new
subscribers. The Company obtains a portion of its new
subscribers through online marketing efforts, including third
party banner ads, direct links and an active affiliate program.
While the Company opportunistically adjusts its mix of incentive-
based and fixed-cost marketing programs, it attempts to manage
the marketing expenses to come within a prescribed range of
acquisition cost per subscriber. To date, the Company has been
able to manage its acquisition cost per subscriber; however, if
it is unable to maintain or replace sources of subscribers with
similarly effective sources, or if the cost of existing sources
increases, subscriber levels may be affected adversely and the
cost of marketing may increase.
(f) Competition.
The market for on-line rental of DVD's and video
games is competitive and the Company expects competition to
continue to increase. In addition, the companies with whom it
has relationships could develop products or services, which
compete with the Company's products or services. Also, some
competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, and
greater brand recognition. The Company also expects to face
additional competition as other established and emerging
companies enter the market for on-line rentals. To be
competitive, the Company believes that it must, among other
things, invest resources in developing new products, improving
current products and maintaining customer satisfaction. Such
investment will increase the Company's expenses and affect its
profitability. In addition, if it fails to make this investment,
the Company may not be able to compete successfully with its
competitors, which could have a material adverse effect on its
revenue and future profitability.
(g) Any Significant Disruption in Service on the Website Could
Result in Loss of Subscribers.
Subscribers and potential subscribers access the Company's
service through its website, where the title selection process is
integrated with the delivery processing systems and software. The
Company's reputation and ability to attract, retain and serve
subscribers is dependent upon the reliable performance of the
website, network infrastructure and fulfillment processes.
Interruptions in these systems could make the website unavailable
and hinder the ability to fulfil selections. Service
interruptions or the unavailability of the website could diminish
the overall attractiveness of the subscription service to
existing and potential subscribers.
The Company's servers utilize a number of techniques to
track, deter and thwart attacks from computer viruses, physical
or electronic break-ins and similar disruptions, which could lead
to interruptions and delays in the service and operations as well
as loss, misuse or theft of data. The Company currently uses
both hardware and software to secure its systems, network and,
most importantly, its data from these attacks. This includes
several layers of security in place for the Company's protection
and that of its members' data. The Company also has procedures
in place to ensure that the latest security patches and software
are running on the servers - thus maintaining another level of security.
Any attempts by hackers to disrupt the website service or
internal systems, if successful, could harm the business, be
expensive to remedy and damage the Company's reputation. The
Company does not have an insurance policy that covers expenses
related to direct attacks on the website or internal systems.
Any significant disruption to the website or internal computer
systems could result in a loss of subscribers and adversely
affect the business and results of operations.
(h) Potential Delivery Issues Could Result in the Loss of
Subscribers.
The Company relies exclusively on the USPS to deliver DVD's
and games from its shipping centers and to return DVD's and games
from subscribers. The Company is subject to risks associated
with using the public mail system to meet shipping needs,
including delays caused by bioterrorism, potential labor activism
and inclement weather. The Company's DVD's and games are also
subject to risks of breakage during delivery and handling by the
U.S. Postal Service. The risk of breakage is also impacted by
the materials and methods used to replicate DVD's and games. If
the entities replicating DVD's and games use materials and
methods more likely to break during delivery and handling or the
Company fails to timely deliver DVD's and games to subscribers,
subscribers could become dissatisfied and cancel the service,
which could adversely affect operating results. In addition,
increased breakage rates for DVD's and games will increase the
Company's cost of acquiring titles.
(i) There May be a Change in Government Regulation of the
Internet or Consumer Attitudes Towards Use of the Internet.
The adoption or modification of laws or regulations relating
to the Internet or other areas of the business could limit or
otherwise adversely affect the manner in which the Company
currently conducts its business. In addition, the growth and
development of the market for online commerce may lead to more
stringent consumer protection laws, which may impose additional
burdens on the Company. If the Company is required to comply
with new regulations or legislation or new interpretations of
existing regulations or legislation, this compliance could cause
the Company to incur additional expenses or alter its business model.
The manner in which Internet and other legislation may
be interpreted and enforced cannot be precisely determined and
may subject either the Company or its customers to potential
liability, which in turn could have an adverse effect on the
business, results of operations and financial condition. The
adoption of any laws or regulations that adversely affect the
popularity or growth in use of the Internet could decrease the
demand for the Company's subscription service and increase the
cost of doing business.
In addition, if consumer attitudes toward use of the
Internet change, consumers may become unwilling to select their
entertainment online or otherwise provide the Company with
information necessary for them to become subscribers. Further,
the Company may not be able to effectively market its services
online to users of the Internet. If the Company is unable to
interact with consumers because of changes in their attitude
toward use of the Internet, subscriber acquisition and retention
may be affected adversely.
(j) Any Required Expenditures as a Result of Indemnification
Will Result in an Increase in Expenses.
The Company's bylaws include provisions to the effect that it
may indemnify any director, officer, or employee. In addition,
provisions of Nevada law provide for such indemnification, as well
as for a limitation of liability of directors and officers for
monetary damages arising from a breach of their fiduciary duties.
Any limitation on the liability of any director or officer, or
indemnification of any director, officer, or employee, could
result in substantial expenditures being made by the Company in
covering any liability of such persons or in indemnifying them.
(k) The Company's Success Is Largely Dependent on the Abilities
of Its Management and Employees.
The Company's success is largely dependent on the personal
efforts and abilities of its senior management. The loss of
certain members of the Company's senior management, including its
chief executive officer, could have a material adverse effect on
our business and prospects.
Risks Relating to the Financing Arrangements.
(a) There are a Large Number of Shares Underlying the
Convertible Debenture and Warrants; Sale of These Shares may
Depress the Market Price of the Common Stock.
On November 11, 2004, the Company entered into a Securities
Purchase Agreement with Golden Gate Investors, Inc. for the sale
of (i) $150,000 convertible debenture and (ii) a warrant to
purchase 15,000,000 shares of common stock.
The debenture bears interest at 4 3/4%, matures three
years from the date of issuance, and is convertible into common
stock, at Golden Gate's option. The debenture is convertible into
the number of shares of common stock equal to the principal
amount of the debenture multiplied by 110, less the product of
the conversion price multiplied by 100 times the dollar amount of
the debenture, and the entire foregoing result shall be divided
by the conversion price. The conversion price for the debenture
is the lesser of (i) $0.20, (ii) 82% of the average of the three
lowest volume weighted average prices during the twenty trading
days prior to the conversion, or (iii) 82% of the volume weighted
average price on the trading day prior to the conversion. The
warrant is exercisable into 15,000,000 shares of common stock at
an exercise price of $1.09 per share.
On January 17, 2006, the Company entered into an Addendum to
Convertible Debenture and Warrant to Purchase Common Stock with
Golden Gate in which the debenture was increased to $300,000 and
an additional warrant to purchase 15,000,000 shares of common
stock was issued (also exercisable at $1.09 per share).
La Jolla Cove Investors, Inc. ("LJCI") was a party to a
Securities Purchase Agreement and accompanying 7_ %Convertible
Debenture, Warrant to Purchase Common Stock and Registration
Rights Agreement with RMD Technologies, Inc. (collectively, as
amended, "RMD Documents"), pursuant to which LJCI had advanced a
total of $250,000 to RMD Technologies, Inc. (the "RMD Advance").
LJCI assigned its interest in the RMD Documents and the RMD
Advance to Golden Gate. Under another Addendum to Convertible
Debenture and Warrant to Purchase Common Stock, dated May 24,
2008, Golden Gate agreed to deliver an aggregate of $825,000 in
cash and other transferable rights and obligations to the Company
("GGI Prepayment"). The GGI Prepayment represented a prepayment
towards the future exercise of warrant shares under the two
warrants. Under this Addendum, Golden Gate delivered to the
Company $275,000 of the GGI Prepayment in cash ("First
Prepayment"), and upon the earlier to occur of (i) the date that
$100,000 or less of the First Prepayment remains outstanding
after the application of the remaining amount of the First
Prepayment to the exercise of warrant shares under the Warrants
pursuant to the terms of this Addendum, or (ii) the date that is
thirty days from the date of this Addendum, Golden Gate
transfered the RMD Advance and the RMD Documents to the Company.
Such transfer of the RMD Advance from Golden Gate to the Company
is to constitute $250,000 of the GGI Prepayment ("Second
Prepayment"). For so long as any amount of the First Prepayment
remains outstanding, such sums from the First Prepayment are
first applied to any exercise of warrant shares under the
warrants by Golden Gate, as set forth thereunder, until all of
the First Prepayment shall be so applied.
Upon the earlier to occur of (i) the date that $100,000 or
less of the Second Prepayment remains outstanding after the
application of the remaining amount of the Second Prepayment to
the exercise of the warrant shares under the warrants pursuant to
the terms of this Addendum, or (ii) the date that is thirty days
from the date hereof, Golden Gate delivered the remaining
$300,000 of the GGI Prepayment in cash ("Third Prepayment") to
the Company. Such transfer of the Third Prepayment constituted
the final payment due from Golden Gate to the Company. For so
long as any amount of the Second Prepayment remains outstanding,
such sums from the Second Prepayment are first applied to any
exercise of the warrant shares under the warrants by Golden Gate
prior to any amount of the Third Prepayment being applied to such
exercises, until all of the Second Prepayment is so applied.
In the event that any portion of the GGI Prepayment remains
outstanding and not applied to the exercise of warrant shares by
Golden Gate under the warrants (including any portion of the GGI
Prepayment for which warrant shares have not been delivered to
GGI upon an exercise by Golden Gate under the warrants) upon or
after the date that is nine months from the date of this
Addendum, the Company will, upon written request from Golden
Gate, refund all such outstanding amounts of the GGI Prepayment
to Golden Gate within five days from the date of Golden Gate's
delivery to the Company of the written request of such refund.
In connection only with each Conversion under the Debenture
that is associated with any of the GGI Prepayment (as defined
herein) (such Conversions collectively referred to herein as the
"Subsequent Conversions") the Discount Multiplier for the
Subsequent Conversions shall be equal to the lesser of (i) $0.20,
or (ii) 90% of the average of the 3 lowest Volume Weighted
Average Prices during the 20 Trading Days prior to Holder's
election to convert, or (iii) 90% of the Volume Weighted Average
Price on the Trading Day prior to Holder's election to convert.
On May 29, 2007, the Company and Golden Gate entered into an
Assignment and Assumption Agreement in connection with the
assignment and transfer to the Company all of RMD's rights,
obligations, interests and liabilities under the RMD Transaction.
On June 15, 2007, the Company and Golden Gate entered into
another Addendum to Convertible Debenture and Warrant to Purchase
Common Stock. Under this Addendum, Golden Gate delivered an
aggregate of $175,000 in cash to the Company within three days of
the date of this Addendum ("GGI June Prepayment"). The GGI June
Prepayment represents a prepayment towards the future exercise of
warrant shares under the warrants.
In the event that any portion of the GGI June Prepayment
remains outstanding and not applied to the exercise of warrant
shares by Golden Gate under the warrants (including any portion
of the GGI June Prepayment for which warrant shares have not been
delivered to Golden Gate upon an exercise by Golden Gate under
the warrants) upon or after the date that is nine months from the
date of this Addendum, the Company will, upon written request
from Golden Gate, refund all such outstanding amounts of the GGI
June Prepayment to Golden Gate within five days from the date of
Golden Gate's delivery to the Company of the written request of
such refund. This did not occur and since the nine month period
has now expired, the Company and Golden Gate are in the process
of renegotiating an extended due date for the debenture.
On September 17, 2007, the Company and Golden Gate entered
into a Rescission Agreement in connection with a rescission of
the Assignment and Assumption Agreement, dated as of May 29,
2007. This rescission was made due to certain issues that arose
in connection with the involvement of RMD Technologies, Inc. in
this transaction.
As of March 31, 2008, the Company had 411,970,250 shares of
common stock issued and outstanding balance of the debenture as
of that date of $146,907 that may be converted into an estimated
65,675,430,894 shares of common stock based on the closing price
of $0.0003 (conversion price is 82% of that amount: $0.000246) as
of that date, and outstanding warrants to purchase 15,965,900
shares of common stock. In addition, the number of shares of
common stock issuable upon conversion of the outstanding
debenture may increase if the market price of the common stock
declines. All of the shares, including all of the shares
issuable upon conversion of the debenture and upon exercise of
the warrants, may be sold without restriction. The sale of these
shares may adversely affect the market price of the common stock.
The continuously adjustable conversion price feature of the
debenture could require the Company to issue a substantially
greater number of shares, which will cause dilution to existing
stockholders.
The Company's obligation to issue shares upon conversion of
the debenture to Golden Gate Investors, Inc. is essentially
limitless. The following is an example of the amount of shares
of common stock that are issuable, upon conversion of the balance
of the debenture of $146,907 as of March 31, 2008 (excluding
accrued interest), based on market prices 25%, 50% and 75% below
the closing market price as of March 31, 2008 of $0.0003:
Effective Number % of
% Below Price Per Conversion of Shares Outstanding
Market Share Price Issuable Stock
25% $0.000225 $0.0001845 87,572,140,921 99.53%
50% $0.000150 $0.0001230 131,365,552,845 99.69%
75% $0.000075 $0.0000615 262,745,869,919 99.85%
(1) Based on outstanding shares of common stock of 411,970,250
as of March 31, 2008
As illustrated, the number of shares of common stock issuable
upon conversion of the debenture will increase if the market
price of the stock declines, which will cause dilution to
existing stockholders.
(b) The Continuously Adjustable Conversion Price Feature of
the Debentures May Encourage Short Selling of the Common Stock.
Golden Gate is contractually required to exercise its
warrants and convert its debenture on a concurrent basis, subject
to certain conditions. The issuance of shares in connection with
the exercise of the warrants and conversion of the debenture
results in the issuance of shares at an effective 18% discount to
the trading price of the common stock prior to the conversion.
The significant downward pressure on the price of the common
stock as Golden Gate converts and sells material amounts of
common stock could encourage short sales by investors. This could
place further downward pressure on the price of the common stock.
Golden Gate could sell common stock into the market in
anticipation of covering the short sale by converting its
securities, which could cause the further downward pressure on
the stock price. In addition, not only the sale of shares issued
upon conversion or exercise of debenture and warrants, but also
the mere perception that these sales could occur, may adversely
affect the market price of the common stock.
(c) The Issuance of Shares upon Conversion of the Debenture and
Exercise of the Warrants May Cause Dilution to Existing Stockholders.
The issuance of shares upon conversion of the debenture and
exercise of the warrants may result in substantial dilution to
the interests of other stockholders since Golden Gate may
ultimately convert and sell the full amount issuable on
conversion. Although Golden Gate may not convert the debenture
and/or exercise the warrants if such conversion or exercise would
cause it to own more than 9.9% of the Company's outstanding
common stock, this restriction does not prevent Golden Gate from
converting and/or exercising some of its holdings and then
converting the rest of its holdings. In this way, Golden Gate
could sell more than this limit while never holding more than
this limit. There is no upper limit on the number of shares that
may be issued which will have the effect of further diluting the
proportionate equity interest and voting power of holders of the
common stock.
(d) If the Company is Unable to Issue Shares Upon
Conversion of Debenture, Penalties are Required to be Paid to
Golden Gate.
If the Company is unable to issue shares of common
stock upon conversion of the debenture as a result of the
inability to increase the authorized shares of common stock or as
a result of any other reason, the Company is required to:
- pay late payments to Golden Gate for late issuance of common
stock upon conversion of the debenture, in the amount of
$100 per business day after the delivery date for each
$10,000 of debenture principal amount being converted.
- in the event the Company is prohibited from issuing common
stock, or fails to timely deliver common stock on a delivery
date, or upon the occurrence of an event of default, then at
the election of Golden Gate, the Company must pay to Golden
Gate a sum of money determined by multiplying up to the
outstanding principal amount of the debenture designated by
Golden Gate by 130%, together with accrued but unpaid
interest thereon.
- if ten days after the date the Company is required to
deliver common stock to Golden Gate pursuant to a
conversion, Golden Gate purchases (in an open market
transaction or otherwise) shares of common stock to deliver
in satisfaction of a sale by Golden Gate of the common stock
which it anticipated receiving upon such conversion (a "Buy-
In"), then the Company is required to pay in cash to Golden
Gate the amount by which its total purchase price (including
brokerage commissions, if any) for the shares of common
stock so purchased exceeds the aggregate principal and/or
interest amount of the convertible debenture for which such
conversion was not timely honored, together with interest
thereon at a rate of 15% per annum, accruing until such
amount and any accrued interest thereon is paid in full.
In the event that the Company is required to pay
penalties to Golden Gate or redeem the debenture held by Golden
Gate, the Company may be required to curtail or cease its
operations.
(e) Repayment of Debentures, If Required, Would Deplete Available Capital.
Any event of default under the debenture with Golden Gate
could require the early repayment of the debenture at a price
equal to 125% of the amount due under the debenture. The Company
anticipates that the full amount of the debenture, together with
accrued interest, will be converted into shares of its common
stock, in accordance with the terms of the debenture. If the
Company is required to repay the debenture, it would be required
to use its limited working capital and/or raise additional funds.
If the Company were unable to repay the debenture when required,
Golden Gate could commence legal action against the Company and
foreclose on assets to recover the amounts due. Any such action
may require the Company to curtail or cease operations.
Risks Relating to the Common Stock.
(a) Common Stock Price May Be Volatile.
The trading price of the Company's common stock may
fluctuate substantially. The price of the common stock may be
higher or lower than the price you pay for your shares, depending
on many factors, some of which are beyond the Company's control
and may not be directly related to its operating performance.
These factors include the following:
- Price and volume fluctuations in the overall stock market
from time to time;
- Significant volatility in the market price and trading
volume of securities of business development companies or
other financial services companies;
- Changes in regulatory policies with respect to business
development companies;
- Actual or anticipated changes in earnings or fluctuations in
operating results;
- General economic conditions and trends;
- Loss of a major funding source; or
- Departures of key personnel.
Due to the continued potential volatility of the stock
price, the Company may be the target of securities litigation in
the future. Securities litigation could result in substantial
costs and divert management's attention and resources from the
business.
(b) Absence of Cash Dividends May Affect Investment Value of
Common Stock.
The board of directors does not anticipate paying cash
dividends on the common stock for the foreseeable future and
intends to retain any future earnings to finance the growth of the
Company's business. Payment of dividends, if any, will depend,
among other factors, on earnings, capital requirements and the
general operating and financial conditions of the Company as well
as legal limitations on the payment of dividends out of paid-in capital.
(c) No Assurance of a Public Trading Market and Risk of Low
Priced Securities May Affect Market Value of Common Stock.
The Securities and Exchange Commission ("SEC") has adopted a
number of rules to regulate "penny stocks." Such rules include
Rule 3a51-1 and Rules 15g-1 through 15g-9 under the Securities
Exchange Act of 1934, as amended. Because the securities of the
Company may constitute "penny stocks" within the meaning of the
rules (as any equity security that has a market price of less
than $5.00 per share or with an exercise price of less than $5.00
per share, largely traded in the Over the Counter Bulletin Board
or the Pink Sheets), the rules would apply to the Company and to
its securities.
The SEC has adopted Rule 15g-9 which established sales
practice requirements for certain low price securities. Unless
the transaction is exempt, it shall be unlawful for a broker or
dealer to sell a penny stock to, or to effect the purchase of a
penny stock by, any person unless prior to the transaction: (i)
the broker or dealer has approved the person's account for
transactions in penny stock pursuant to this rule and (ii) the
broker or dealer has received from the person a written agreement
to the transaction setting forth the identity and quantity of the
penny stock to be purchased. In order to approve a person's
account for transactions in penny stock, the broker or dealer
must: (a) obtain from the person information concerning the
person's financial situation, investment experience, and
investment objectives; (b) reasonably determine that transactions
in penny stock are suitable for that person, and that the person
has sufficient knowledge and experience in financial matters that
the person reasonably may be expected to be capable of evaluating
the risks of transactions in penny stock; (c) deliver to the
person a written statement setting forth the basis on which the
broker or dealer made the determination (i) state in a
highlighted format that it is unlawful for the broker or dealer
to effect a transaction in penny stock unless the broker or
dealer has received, prior to the transaction, a written
agreement to the transaction from the person; and (ii) state in a highlighted
format immediately preceding the customer signature line that
(iii) the broker or dealer is required to provide the person with
the written statement; and (iv) the person should not sign and
return the written statement to the broker or dealer if it does
not accurately reflect the person's financial situation,
investment experience, and investment objectives; and (d) receive
from the person a manually signed and dated copy of the written
statement. It is also required that disclosure be made as to the
risks of investing in penny stock and the commissions payable to
the broker-dealer, as well as current price quotations and the
remedies and rights available in cases of fraud in penny stock
transactions. Statements, on a monthly basis, must be sent to
the investor listing recent prices for the penny stock and
information on the limited market.
There has been only a limited public market for the common
stock of the Company. This common stock is currently traded on
the Over the Counter Bulletin Board ("OTCBB"). As a result, an
investor may find it difficult to dispose of, or to obtain
accurate quotations of the market value of the common stock. The
regulations governing penny stocks, as set forth above, sometimes
limit the ability of broker-dealers to sell the Company's common
stock and thus, ultimately, the ability of the investors to sell
their securities in the secondary market.
Potential stockholders of the Company should also be aware
that, according to SEC Release No. 34-29093, the market for penny
stocks has suffered in recent years from patterns of fraud and
abuse. Such patterns include (i) control of the market for the
security by one or a few broker-dealers that are often related to
the promoter or issuer; (ii) manipulation of prices through
prearranged matching of purchases and sales and false and
misleading press releases; (iii) "boiler room" practices
involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and
undisclosed bid-ask differential and markups by selling broker-
dealers; and (v) wholesale dumping of the same securities by
promoters and broker dealers after prices have been manipulated
to a desired level, along with the resulting inevitable collapse
of those prices and with consequent investor losses.
(d) Failure To Remain Current In Reporting Requirements Could
Result In Delisting From The Over The Counter Bulletin Board.
Companies trading on the OTCBB, such as the Company, 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 the Company fails to remain current in its
reporting requirements, the Company could be delisted from the OTCBB.
In addition, the National Association of Securities Dealers,
Inc., which operates the OTCBB, has been approved by the SEC to
implement a change to its Eligibility Rule. The change makes
those OTCBB issuers that are cited for filing delinquency in
their Forms 10-KSB/Form 10-QSB three times in a 24-month period
and those OTCBB issuers removed for failure to file such reports
two times in a 24-month period ineligible for quotation on the
OTCBB for a period of one year. Under this proposed rule, a
company filing within the extension time set forth in a Notice of
Late Filing (Form 12b-25) would not be considered late. This
rule would not apply to a company's Current Reports on Form 8-K.
As a result of these rules, the market liquidity for Company
securities could be severely adversely affected by limiting the
ability of broker-dealers to sell the Company's common stock and
the ability of stockholders to sell their securities in the
secondary market.
(e) Failure to Maintain Market Makers May Affect Value of
Company's Stock.
If the Company is unable to maintain National Association of
Securities Dealers, Inc. member broker/dealers as market makers,
the liquidity of the common stock could be impaired, not only in
the number of shares of common stock which could be bought and
sold, but also through possible delays in the timing of
transactions, and lower prices for the common stock than might
otherwise prevail. Furthermore, the lack of market makers could
result in persons being unable to buy or sell shares of the
common stock on any secondary market. There can be no assurance
the Company will be able to maintain such market makers.
(f) Shares Eligible For Future Sale.
Most of the shares currently held by management have been
issued in reliance on the private placement exemption under the
Securities Act of 1933. Such shares will not be available for
sale in the open market without separate registration except in
reliance upon Rule 144 under the Securities Act of 1933. In
general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares acquired in a non-
public transaction for at least one year, including persons who
may be deemed affiliates of the Company (as that term is defined
under that rule) would be entitled to sell within any three-month
period a number of shares that does not exceed 1% of the then
outstanding shares of common stock, provided that certain current
public information is then available. If a substantial number of
the shares owned by these stockholders were sold pursuant to Rule
144 or a registered offering, the market price of the common
stock at that time could be adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not Applicable.
ITEM 2. PROPERTIES.
The Company currently owns $548,806 in fixed assets,
$281,361 ($7,643,907 less amortization of $7,362,546) of DVD and
video game inventory and $1,313,531 ($1,572,750 less amortization
of $259,219) of film libraries. The Company's corporate office
is located in Franklin, Kentucky at the chief executive officer's
home-based office; the Company does pay rent for this office.
The Company's leased properties are located at:
California (north): 4600 Roseville Road, Suite 160, North
Highlands, California 95660; three year pre-paid lease (commenced
in July 2006), with a rent of $1,700 per month for a 1,096 square
foot space.
California (south): 20705 South Western Avenue, Suite 209,
Torrance, California 98032; three year pre-paid lease (commenced
in September 2006), with a rent of $893 per month for a 703
square foot space.
Colorado: 18234 County Road 24, Sterling, Colorado 80751; 2,600
square foot space being provided rent free to Company.
Florida: 600 South North Lake Boulevard, #270, Altamonte
Springs, Florida 32701; three year pre-paid lease (commenced in
April 2006), with a rent of $1,244 per month for a 950 square
foot space.
Kentucky: 130 West Kentucky Avenue, Franklin, Kentucky 42134;
five year lease (commenced in January 2006), with a rent of
$4,150 per month for a 5,600 square foot space.
Massachusetts: 12 Harvard Street, Front Suite, Worcester,
Massachusetts; two year pre-paid lease (commenced in March 2006),
with a rent of $800 per month for a 950 square foot space.
Texas: 4747 Irving Boulevard, Suite 243, Dallas, Texas 75247;
one year pre-paid lease (commenced in July 2006), with a rent of
$2,400 per month for a 1,440 square foot space.
Washington: 6627 South 191st Place, #F101, Kent, Washington
98032; two year pre-paid lease (commenced in September 2006),
with a rent of $1,090 per month for a 505 square foot space.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company may become party to
litigation or other legal proceedings that the Company considers
to be a part of the ordinary course of the business. There are
no material legal proceedings to report, except as follows:
(a) On February 8, 2008, an action was filed in the United
States District Court, Western District of Pennsylvania, entitled
Mobile Satellite Communications v. GameZnFlix, Inc. et al. In
this action, the plaintiff claims that it was damaged as a result
of the termination of the agreement covering leased television
channels by GNF Entertainment, LLC. The Company has filed an
answer and this matter is now in the discovery stage.
Management believes the Company has meritorious claims and
defenses to the plaintiff's claims and ultimately will prevail on
the merits. However, this matter remains in the early stages of
litigation and there can be no assurance as to the outcome of the
lawsuit. Litigation is subject to inherent uncertainties, and
unfavorable rulings could occur. Were unfavorable rulings to
occur, there exists the possibility of a material adverse impact
of money damages on the Company's financial condition, results of
operations, or liquidity of the period in which the ruling
occurs, or future periods.
(b) On February 15, 2008, an action was filed in the United
States District Court, District of Kentucky (Bowling Green
Division), entitled Peppe v. GameZnFlix Inc. et al. In this
action, a past employee of the Company claims damages in
connection with an employment agreement with the Company. On
March 11, 2008, the Company filed an answer and counter claim in
this action for breach of the employment agreement. This matter
is now in the discovery stage.
Management believes the Company has meritorious claims and
defenses to the plaintiff's claims and ultimately will prevail on
the merits. However, this matter remains in the early stages of
litigation and there can be no assurance as to the outcome of the
lawsuit. Litigation is subject to inherent uncertainties, and
unfavorable rulings could occur. Were unfavorable rulings to
occur, there exists the possibility of a material adverse impact
of money damages on the Company's financial condition, results of
operations, or liquidity of the period in which the ruling
occurs, or future periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In October 2007, the Company sought and obtained the vote of
a majority of the outstanding shares of common stock by a
definitive proxy statement for an amendment to the articles of
incorporation for the following:
(a) To amend the Company's articles of incorporation
to authorize Ten Million (10,000,000) shares of preferred
stock; and
(b) To amend the Company's articles of incorporation to
authorize One Hundred Million (100,000,000) shares of Series
B common stock.
On December 31, 2007, more than twenty days after the filing of a
definitive information statement, an amendment to the articles of
incorporation was filed with the Nevada Secretary of State.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS,
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information.
The Company's common stock began trading on the Over the
Counter Bulletin Board under the symbol "SYCD". With the change
in name to "Point Group Holdings, Incorporated", the symbol
changed to "PGHI" on December 13, 2002. The symbol was changed
to "GZFX" effective on February 6, 2004 with the change in the
name of the Company to "GameZnFlix, Inc." With the reverse split
of the Company's common stock on September 6, 2007, the symbol
was changed to "GMFX." The range of closing prices shown below
is as reported by this market.
The quotations shown reflect inter-dealer prices, without
retail mark-up, markdown or commission and may not necessarily
represent actual transactions, and are shown to reflect the 1 for
1,000 reverse split of the common stock that occurred on
September 6, 2007.
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended on December 31, 2007
High Low
Quarter Ended December 31, 2007 $0.10 $0.0017
Quarter Ended September 30, 2007 $0.40 $0.20
Quarter Ended June 30, 2007 $0.80 $0.40
Quarter Ended March 31, 2007 $1.80 $0.70
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended on December 31, 2006
High Low
Quarter Ended December 31, 2006 $5.00 $1.00
Quarter Ended September 30, 2006 $6.00 $4.00
Quarter Ended June 30, 2006 $15.00 $5.00
Quarter Ended March 31, 2006 $16.00 $7.00
Holders of Common Equity.
As of March 31, 2008, the Company had approximately 347
stockholders of record of its common stock. The number of
registered stockholders excludes any estimate of the number of
beneficial owners of common shares held in street name.
Dividend Information.
The Company has not declared or paid a cash dividend to
stockholders since it was organized. The board of directors
presently intends to retain any earnings to finance the
operations and does not expect to authorize cash dividends in the
foreseeable future. Any payment of cash dividends in the future
will depend upon the Company's earnings, capital requirements and
other factors.
Equity Securities Sold Without Registration.
There were no sales of unregistered (restricted) securities
during the three months ended on December 31, 2007.
There were no purchases of common stock of the Company by
the Company or its affiliates during the three months ended
December 31, 2007.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following management's discussion and analysis of
financial condition and results of operations is based upon, and
should be read in conjunction with, our audited financial
statements and related notes included elsewhere in this Form 10-
K, which have been prepared in accordance with accounting
principles generally accepted in the United States.
Overview.
The Company, through its website www.gameznflix.com, is an
online video game and DVD movie rental business dedicated to
providing subscribers a quality rental experience. The Company
offers subscribers a reliable, web-based alternative to
traditional store-based DVD and video game rentals on a national
scale with an extensive library of video game and DVD titles. The
Company offers subscribers several different subscription plans
ranging from $8.99 per month to $16.99 per month. The Company's
more popular $16.99 per month subscription plan allows
subscribers to have up to three DVD and video game titles out at
the same time with no due dates, late fees, or shipping charges.
Subscribers select titles at the Company's website which are then
sent via U.S mail with a prepaid return mailer. The Company
offers a high level of customer service, quality DVD and video
game titles, and superior product availability.
In December 2004, the Company launched its website,
www.gameznflix.com, and became fully operational in September
2004. In conjunction with the website, the Company runs ad
campaigns designed to create awareness among our target consumers
and generate traffic to the website.
In October 2005, the Company entered into an agreement with
Circuit City Stores, Inc. ("Circuit City") that provided for a
pilot program in 27 retail stores and on the Circuit City website
to promote services. On December 24, 2006, the Company entered
into a definitive co-marketing agreement with Circuit City that
specified a scheduled rollout of services to all the Circuit City
stores beginning in May 2006 with a complete rollout by the end
of December 2006. Although the overall number of subscribers
obtained from the initial pilot program was not considered
significant in relation to the overall number of new subscribers
added during the quarter ended December 31, 2005 and the quarter
ended December 31, 2006, the Company believes that our
relationship with Circuit City brought more prominence and
recognition to the Company. The current agreement with Circuit
City ended in December 2007.
In August 2006, the Company entered into an agreement with
the U.S. Army & Air Force Exchange ("AAFES") to provide video
game and movie rentals to all current and retired members of the
Army and Air Force personnel through the AAFES website. The
agreement with AAFES gives the Company access to more than 11
million military personnel, retirees and their families. During
the fall of 2007, the Company further expanded its work with
AAFES by developing an in store prepaid membership card. This
program has been launched in late December 2007 with shipment of
the cards to the AAFES central warehouse for their delivery to
its military base locations.
The Company will continue to seek similar relationships with
nationally known companies or agencies to further brand the
company name.
In May 2007, the Company joined Mid-Night Gaming, a
McDonald's restaurant cross-country tour visiting 10 cities in a
motor coach wrapped in GameZnFlix advertisements (mobile
advertising). At each chosen McDonald's location, the group of
sponsors (Nintendo, Coca Cola, 1UP, Best Buy, 2K Sports, IPlay
and Spike) of the Mid-Night Gaming completion setup and allowed
the public experience video gaming.
The Company anticipates running a similar marketing campaign
in 2008 and will strive to secure affiliate partnerships for
cross advertisements of each other's products/services.
During the first quarter of 2007, the Company retained
Moroch, an advertising and marketing firm, to perform data
collection, focus groups and market analysis of the current
console video game and DVD rental market as well as the Company's
position within that market. The results of this study confirmed
management's position that the Company has evolved into a gamer-
driven source for console video games and DVD rentals. The report
included a number of strategies to better position the Company
within its target market, as well as ways to better serve and
communicate with existing members. The Company has taken the
strategies and applied them to its business model. This included
a complete redesign of the website, development of new USPS
mailer and marketing plan.
For the Company to see an increase growth will require it to
make more significant capital investment in library content.
Management continues to seeking investment opportunities with the
financial communities to meet this need. The Company's current
infrastructure will allow it to service approximately 150,000
monthly subscribers before such significant investment would be
required. The Company closely monitors its monthly growth rate
to properly anticipate the timing of additional investment in
library content, distribution infrastructure, and technology.
During the past quarter, the Company has re-designed its
distribution network so that it now makes use of seven USPS
centers located in California (2), Florida, Maryland,
Massachusetts, Texas, and Washington. These USPS postal drop
centers, which have been developed with the cooperation of the
USPS, are strategically located to service the subscriber base in
each of their respective regions. There are two warehousing
centers located in Colorado and Kentucky that house the inventory
of video games and DVD titles for shipment. During the previous
quarter, this system under went testing and the distribution
network achieved its goals of 100% order fulfillment on a daily
basis, 100% processing of returned mailers on a daily basis and
overall success upgrading the integrity and rental ability of the
inventory. The results of this re-design have allowed the
Company to reduce its employees by 31 and reduce related
warehouse expenses.
The Company has evaluated and continues to evaluate its
operations and operational needs. During 2005 and again in 2007,
it was able to negotiate a new mailer envelope with the USPS that
reduced overall postage cost and decreased the delivery
turnaround time from seven to two days.
During 2006, the Company launched GNF Entertainment Network,
a 24/7 proprietary first run and off-network programming
broadcasted on IA-5 Transponder 5 and Transponder 27 Intel Sat
System and can be viewed online at www.gnfent.com. GNF provided
two channels for network programming: the movie channel and game
and music channel. GNF Entertainment Network was closed after
being unable to reach its financial projections.
The Company's GNFDigital.com was an online retail site
offering movies and premium video programs for digital download.
GNFDigital enabled consumers to preview, purchase and download
movies on-demand. Using Microsoft's Windows Media digital rights
management system, the Company controlled whether individual
titles are offered for electronic sell-through, digital rental
(48 hours), or limited use (e.g., 10 plays). The Company has
closed down GNFDigital.com due to personnel resigning and not
being able to support the website.
During the last quarter of 2007, the Company's membership
continued a steady decrease and has become stable as the 2007-
year closed. Management recognizes that although growth did not
happen as it had in the previous quarter; this was primarily the
result of not being able to purchase new inventory at the levels
demanded by members.
Results of Operations.
(a) Revenues.
The Company had gross revenues of $3,597,028 for the year
ended December 31, 2007 compared to $1,884,678 for the year ended
December 31, 2006, an increase of $1,712,350 or approximately
91%. Gross revenues increased significantly during the year
ended December 31, 2007 compared to the prior period primarily
due to a greater subscriber base compared to same period in 2006
by a monthly subscriber base average of 18,700 compared to 13,000
in the prior year fueled by more market awareness of the
Company's services and brand do to an advertising campaign run
during the first quarter of 2007. This campaign while it drove
an increase in memberships during the first quarter also depleted
the budgets for the entire year of 2007 and has placed the
Company in a weak financial position.
As of the end of December 31, 2007, the Company had
approximately 18,530 total subscribers. The Company continues to
focus on growing its subscriber base through marketing and an
affiliate partnership program. The Company's churn rate is
approximately 25% for the year ended December 31, 2007 as
compared with the prior period of approximately 73%. Churn rate
is calculated by dividing customer cancellations in the period by
the sum of beginning subscribers and gross subscriber additions,
and then divided by the number of months in the period. Customer
cancellations during the year ended December 31, 2007, includes
cancellations from gross subscriber additions, which is included
in the gross subscriber additions in the denominator. The
decrease in churn rate is attributed to adding telephone customer
service support and buying of inventory to meet current demand.
(b) Cost of Revenues.
The Company had cost of revenues of $5,734,261 for the year
ended December 31, 2007 compared to $3,366,147 for the year ended
December 31, 2006, an increase of $2,368,114 or approximately
70%. Cost of revenues increased as a percentage to gross
revenues during 2007 compared to 2006 primarily due to a change
of expensing inventory as requested by the SEC accounting
department to bring the Company's reporting in line with other
reporters within the video rental industry.
(c) Advertising.
The Company had advertising expenses of $1,649,739 for the
year ended December 31, 2007 compared to $2,407,505 for the year
ended December 31, 2006, a decrease of $757,766, or approximately
31%. Such advertising consisted of direct marketing through
print, radio and online Internet advertising.
(d) Selling, General and Administrative Expenses.
The Company had selling, general and administrative expenses
of $5,103,844 for the year ended December 31, 2007 compared to
$3,927,104 for the year ended December 31, 2006, an increase of
$1,176,740 or approximately 30%. The increase in selling, general
and administrative expenses was principally due to the writing
off of accounts receivables and ending of various projects and an
increase in related payroll expenses during the first quarter of
2007. The related payroll expenses have been reduced during the
second through fourth quarters of 2007 as the Company down sized
to offset the higher expenses of the first quarter.
(e) Consulting Fees.
The Company had consulting fees of $1,386,380 for the year
ended December 31, 2007 compared to $3,042,320 for the year ended
December 31, 2006, a decrease of $1,655,940 or approximately 54%.
Decrease in consulting fees during the year ended December 31,
2007 compared to the prior period was primarily a result of
decreased need of business consultants which was widely utilized
during 2006 to aid in developing a more effective marketing
program and continued development of the business. The Company
does not anticipate needing the same level of consulting fees
related to development of the business and believes such related
expenses will decrease further in 2008.
(f) Net Loss.
The Company had a net loss of $10,501,867 for the year ended
December 31, 2007 compared to $10,840,259 for the year ended
December 31, 2006, a decrease of $338,392 or approximately 3%.
The decreases in net losses are the result of the factors
mentioned above. The Company anticipates having a recurring net
loss during 2008.
Factors That May Affect Operating Results.
The Company's operating results can vary significantly
depending upon a number of factors, many of which are outside its
control. General factors that may affect operating results
include:
- market acceptance of and changes in demand for services;
- a small number of customers account for, and may in future
periods account for, substantial portions of the Company's
revenue, and revenue could decline because of delays of
customer orders or the failure to retain customers;
- gain or loss of clients or strategic relationships;
- announcement or introduction of new services by the Company
or by its competitors;
- price competition;
- the ability to upgrade and develop systems and infrastructure
to accommodate growth;
- the ability to introduce and market services in accordance
with market demand;
- changes in governmental regulation; and
- reduction in or delay of capital spending by clients due to
the effects of terrorism, war and political instability.
The Company believes that planned growth and profitability
will depend in large part on the ability to promote its services,
gain subscribers, and expand relationship with current
subscribers. Accordingly, the Company intends to invest in
marketing, strategic partnerships, and development of the
customer base. If the Company is not successful in promoting its
services and expanding the customer base, this may have a
material adverse effect on financial condition and the ability to
continue to operate the business.
Operating Activities.
The net cash used in operating activities was $1,188,150 for
the year ended December 31, 2007 compared to $8,494,173 for the
year ended December 31, 2006, a decrease of $7,306,023 or
approximately 86%. This decrease is attributed to many changes
from period to period, including an increase in depreciation and
amortization, the payment of stock based compensation, and an
increase in accounts payable and accrued expenses.
Investing Activities.
Net cash used in investing activities was $1,695,514 for the
year ended December 31, 2007 compared to $6,138,661 for the year
ended December 31, 2006, a decrease of $4,443,147 or
approximately 72%. This decrease resulted from decreased
purchases of DVD's and games, film library, and other fixed assets.
Liquidity and Capital Resources.
As of December 31, 2007, the Company had total current
assets of $297,252 and total current liabilities of $3,105,723
resulting in a working capital deficit of $2,808,471. The cash
balance as of December 31, 2007 totaled $24,976. The cash flow
from financing activities for the year ended December 31, 2007
resulted in a surplus of $2,566,006. Overall, cash and cash
equivalents for the year ended December 31, 2007 decreased by $317,658.
The net cash provided by financing activities was $2,566,006
for the twelve months ended December 31, 2007 from proceeds from
stock issuances under the financing arrangement with Golden Gate,
as discussed below. The Company's current cash and cash
equivalents balance will be sufficient to fund its operations for
the next twelve months. The Company currently has approximately
$25,000 in stock subscriptions receivable that it believes will
be collected in the next six months.
The Company's continued operations, as well as the full
implementation of its business plan (including allocating
resources to increase library content, distribution
infrastructure and technology) will depend upon its ability to
raise additional funds through bank borrowings and equity or debt
financing. In connection with this need for funding, the Company
entered into a financing arrangement with Golden Gate: A
Securities Purchase Agreement with Golden Gate on November 11,
2004 for the sale of (i) $150,000 in convertible debenture and
(ii) a warrant to buy 15,000,000 shares of common stock.
The debenture bears interest at 4 3/4%, matures three years
from the date of issuance, and is convertible into Company common
stock, at Golden Gate's option. The debenture is convertible into
the number of shares of common stock equal to the principal
amount of the debenture multiplied by 110, less the product of
the conversion price multiplied by 100 times the dollar amount of
the debenture, and the entire foregoing result shall be divided
by the conversion price. The conversion price for the
convertible debenture is the lesser of (i) $0.20, (ii) 82% of the
average of the three lowest volume weighted average prices during
the twenty trading days prior to the conversion, or (iii) 82% of
the volume weighted average price on the trading day prior to the
conversion. Accordingly, there is in fact no limit on the number
of shares into which the debenture may be converted. However, in
the event that the market price of the Company's common stock is
less than $0.015, the Company will have the option to prepay the
debenture at 150% rather than having the debenture converted. If
the Company elects to prepay the debenture, Golden Gate may
withdraw its conversion notice. In addition, Golden Gate is
obligated to exercise the warrant concurrently with the
submission of a conversion notice.
The warrant is exercisable into 15,000,000 shares of common
stock at an exercise price of $1.09 per share. As of December
31, 2007, a total of 7,113,525 shares were issued related to the
warrant providing the Company approximately $7,884,820.
Golden Gate has contractually agreed to restrict its ability
to convert the debentures and/or exercise its warrants and
receive shares of the Company's common stock such that the number
of shares of common stock held by its and its affiliates after
such conversion or exercise does not exceed 9.99% of the then
issued and outstanding shares of common stock.
The Company filed another registration statement under Form
SB-2 during the first quarter of 2006 related to an amendment of
the Securities Purchase Agreement with Golden Gate in which the
debenture was increased to $300,000 and an additional warrant for
15,000,000 shares of common stock was issued (also exercisable at
$1.09 per share into 20,339,100 shares of common stock, providing
future funding of approximately $16,350,000). In connection with
the increased debenture, $150,000 was disbursed to the Company in
January 2006. As of December 31, 2007, a total of 6,500,000
shares were issued related to this new warrant, providing the
Company approximately $7,100,000.
Under another Addendum to Convertible Debenture and Warrant
to Purchase Common Stock, dated May 24, 2007, Golden Gate agreed
to deliver an aggregate of $825,000 in cash and other
transferable rights and obligations to the Company ("GGI
Prepayment"). The GGI Prepayment represents a prepayment towards
the future exercise of warrant shares under the two warrants.
Under this Addendum, Golden Gate delivered to the Company
$275,000 of the GGI Prepayment in cash ("First Prepayment"), and
upon the earlier to occur of (i) the date that $100,000 or less
of the First Prepayment remains outstanding after the application
of the remaining amount of the First Prepayment to the exercise
of warrant shares under the Warrants pursuant to the terms of
this Addendum, or (ii) the date that is thirty days from the date
of the Addendum, Golden Gate is to transfer the RMD Advance and
the RMD Documents (as defined under Item 1A) to the Company.
Such transfer of the RMD Advance from Golden Gate to the Company
constituted $250,000 of the GGI Prepayment ("Second
Prepayment"). For so long as any amount of the First Prepayment
remains outstanding, such sums from the First Prepayment are
first applied to any exercise of warrant shares under the
warrants by Golden Gate, as set forth thereunder, until all of
the First Prepayment shall be so applied.
Upon the earlier to occur of (i) the date that $100,000 or
less of the Second Prepayment remains outstanding after the
application of the remaining amount of the Second Prepayment to
the exercise of the warrant shares under the Warrants pursuant to
the terms of this Addendum, or (ii) the date that is thirty days
from the date hereof, Golden Gate delivered the remaining
$300,000 of the GGI Prepayment in cash ("Third Prepayment") to
the Company. Such transfer of the Third Prepayment constituted
the final payment due from Golden Gate to the Company. For so
long as any amount of the Second Prepayment remains outstanding,
such sums from the Second Prepayment are first applied to any
exercise of the warrant shares under the warrants by Golden Gate
prior to any amount of the Third Prepayment being applied to such
exercises, until all of the Second Prepayment is so applied.
In the event that any portion of the GGI Prepayment remains
outstanding and not applied to the exercise of warrant shares by
Golden Gate under the Warrants (including any portion of the GGI
Prepayment for which warrant shares have not been delivered to
GGI upon an exercise by Golden Gate under the warrants) upon or
after the date that is nine months from the date of this
Addendum, the Company will, upon written request from Golden
Gate, refund all such outstanding amounts of the GGI Prepayment
to Golden Gate within five days from the date of Golden Gate's
delivery to the Company of the written request of such refund.
In connection only with each Conversion under the Debenture
that is associated with any of the GGI Prepayment (as defined
herein) (such Conversions collectively referred to herein as the
"Subsequent Conversions") the Discount Multiplier for the
Subsequent Conversions shall be equal to the lesser of (i) $0.20,
or (ii) 90% of the average of the 3 lowest Volume Weighted
Average Prices during the 20 Trading Days prior to Holder's
election to convert, or (iii) 90% of the Volume Weighted Average
Price on the Trading Day prior to Holder's election to convert.
On May 29, 2007, the Company and Golden Gate entered into an
Assignment and Assumption Agreement in connection with the
assignment and transfer to the Company all of RMD's rights,
obligations, interests and liabilities under the RMD Transaction.
On June 15, 2007, the Company and Golden Gate entered into
another Addendum to Convertible Debenture and Warrant to Purchase
Common Stock. Under this Addendum, Golden Gate delivered an
aggregate of $175,000 in cash to the Company within three days of
the date of this Addendum ("GGI June Prepayment"). The GGI June
Prepayment represents a prepayment towards the future exercise of
warrant shares under the warrants.
In the event that any portion of the GGI June Prepayment
remains outstanding and not applied to the exercise of warrant
shares by Golden Gate under the warrants (including any portion
of the GGI June Prepayment for which warrant shares have not been
delivered to Golden Gate upon an exercise by Golden Gate under
the warrants) upon or after the date that is nine months from the
date of this Addendum, the Company will, upon written request
from Golden Gate, refund all such outstanding amounts of the GGI
June Prepayment to Golden Gate within five days from the date of
Golden Gate's delivery to the Company of the written request of
such refund. This did not occur and since the nine month period
has now expired, the Company and Golden Gate are in the process
of renegotiating an extended due date for the debenture.
On September 17, 2007, the Company and Golden Gate entered
into a Rescission Agreement in connection with a rescission of
the Assignment and Assumption Agreement, dated as of May 29,
2007. This rescission was made due to certain issues that arose
in connection with the involvement of RMD Technologies, Inc. in
this transaction.
Whereas the Company has been successful in the past in
raising capital, no assurance can be given that these sources of
financing will continue to be available to it and/or that demand
for equity/debt instruments will be sufficient to meet its
capital needs, or that financing will be available on terms
favorable to the Company. The financial statements do not
include any adjustments relating to the recoverability and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
If funding is insufficient at any time in the future, the
Company may not be able to take advantage of business
opportunities or respond to competitive pressures, or may be
required to reduce the scope of planned product development and
marketing efforts, any of which could have a negative impact on
business and operating results. In addition, insufficient
funding may have a material adverse effect on the Company's
financial condition, which could require it to:
- curtail operations significantly;
- sell significant assets;
- seek arrangements with strategic partners or other parties
that may require the Company to relinquish significant rights
to products, technologies or markets; or
- explore other strategic alternatives including a merger or
sale of the Company.
To the extent that the Company raises additional capital
through the sale of equity or convertible debt securities, the
issuance of such securities may result in dilution to existing
stockholders. If additional funds are raised through the issuance
of debt securities, these securities may have rights, preferences
and privileges senior to holders of common stock and the terms of
such debt could impose restrictions on the Company's operations.
Regardless of whether cash assets prove to be inadequate to meet
the Company's operational needs, the Company may seek to
compensate providers of services by issuance of stock in lieu of
cash, which may also result in dilution to existing stockholders.
Inflation.
The impact of inflation on the Company's costs and the
ability to pass on cost increases to its customers over time is
dependent upon market conditions. The Company is not aware of
any inflationary pressures that have had any significant impact
on its operations over the past quarter and the Company does not
anticipate that inflationary factors will have a significant
impact on future operations.
Off-Balance Sheet Arrangements.
The Company does not maintain off-balance sheet arrangements
nor does it participate in non-exchange traded contracts
requiring fair value accounting treatment.
Critical Accounting Policies.
The SEC has issued Financial Reporting Release No. 60,
"Cautionary Advice Regarding Disclosure About Critical Accounting
Policies" ("FRR 60"), suggesting companies provide additional
disclosure and commentary on their most critical accounting
policies. In FRR 60, the SEC has defined the most critical
accounting policies as the ones that are most important to the
portrayal of a company's financial condition and operating
results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make
estimates of matters that are inherently uncertain. Based on
this definition, the Company's most critical accounting policies
include: (a) use of estimates in the preparation of financial
statements; (b) DVD and video game libraries; (c) revenue
recognition and cost of revenue; and (d) non-cash compensation
valuation. The methods, estimates and judgments the Company uses
in applying these most critical accounting policies have a
significant impact on the results the Company reports in its
financial statements.
(a) Use of Estimates in the Preparation of Financial Statements.
The preparation of financial statements requires the Company
to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going
basis, management evaluates these estimates, including those
related to revenue recognition and concentration of credit risk.
The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions.
(b) DVD and Video Game Libraries.
As of December 31, 2007, the Company had invested over
$281,000 (after depreciation) in its DVD and video game libraries
resulting in approximately 30,000 DVD and video game titles
available for rental. The Company acquires DVD's and video games
from distributors through a direct purchase agreement. Such
purchases are recorded at the historical cost. The Company
depreciates its DVD and video game libraries on a straight-line
basis over a twelve-month period. The Company has not assigned a
salvage value since it is the Company's intention to not sell
these libraries. In the event that a portion of the libraries is
sold as a result of slow moving title rentals, the Company will
re-evaluate its policy of depreciation in relation to the salvage value.
(c) Revenue Recognition and Cost of Revenue.
Subscription revenues are recognized ratably during each
subscriber's monthly subscription period. Refunds to subscribers
are recorded as a reduction of revenues. Revenues from sales of
DVD and video games are recorded upon shipment.
Cost of subscription revenues consists of fulfillment
expenses, and postage and packaging expenses related to DVD and
video games provided to paying subscribers. Cost of DVD sales
include the net book value of the DVD sold and, where applicable,
a contractually specified percentage of the sales value for the
DVD that are subject to revenue share agreements.
(d) Non-Cash Compensation Valuation.
The Company has issued, and intends to issue, shares of
common stock to various individuals and entities for management,
legal, consulting, and marketing services. These issuances will
be valued at the fair market value of the services provided and
the number of shares issued is determined, based upon the open
market closing price of common stock as of the date of each
respective transaction. These transactions will be reflected as
a component of consulting and professional fees in the statement
of operations.
Forward Looking Statements.
Information in this Form 10-K contains "forward looking
statements" within the meaning of Rule 175 of the Securities Act
of 1933, as amended, and Rule 3b-6 of the Securities Act of 1934,
as amended. When used in this Form 10-K, the words "expects,"
"anticipates," "believes," "plans," "will" and similar expressions
are intended to identify forward-looking statements. These are
statements that relate to future periods and include, but are not
limited to, statements regarding the adequacy of cash,
expectations regarding net losses and cash flow, statements
regarding growth, the need for future financing, dependence on
personnel, and operating expenses.
Forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially
from those projected. These forward-looking statements speak only
as of the date hereof. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to
reflect any change in its expectations with regard thereto or any
change in events, conditions or circumstances on which any such
statement is based.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Audited financial statements as of and for the year ended
December 31, 2007, and for the year ended December 31, 2006 are
presented in a separate section of this report following Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
(a) Effective on January 1, 2006, Smith & Company, the
independent registered public accounting firm who was previously
engaged as the principal accountant to audit the Company's
financial statements, changed its accounting practice from a
corporation to a professional limited liability company named
Child, Van Wagoner & Bradshaw, PLLC. As this is viewed as a
separate legal entity, the Company terminated its accounting
arrangement with Smith & Company. The decision to change
principal accountants was approved by the Company's Audit
Committee and subsequently approved by the Board of Directors.
Smith & Company audited the Company's financial statements
for the fiscal years ended December 31, 2004 and 2003. This
firm's report on these financial statements was modified as to
uncertainty that the Company will continue as a going concern;
other than this, the accountant's report on the financial
statements for those periods neither contained an adverse opinion
or a disclaimer of opinion, nor was qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the fiscal years ended December 31, 2004 and 2003,
and the subsequent interim period preceding such change, there
were no disagreements with Smith & Company on any matter of
accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. In addition, there
were no "reportable events" as described in Item
304(a)(1)(iv)(B)1 through 3 of Regulation S-B that occurred
during the fiscal years ended December 31, 2004 and 2003, and the
subsequent interim period preceding such change.
(b) On January 1, 2006, the Company engaged Child, Van
Wagoner & Bradshaw, PLLC, as successor to Smith & Company, as its
independent registered public accounting firm to audit the
Company's financial statements. During the fiscal years ended
December 31, 2004 and 2003, and the subsequent interim period
prior to engaging this firm, neither the Company (nor someone on
its behalf) consulted the newly engaged accountant regarding any matter.
ITEM 9A. CONTROLS AND PROCEDURES.
Not applicable.
ITEM 9A(T). CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange
Act) that are designed to ensure that information required to be
disclosed in its periodic reports filed under the Exchange Act is
recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to management,
including the principal executive officer/principal financial
officer, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the
Company's management carried out an evaluation, under the
supervision and with the participation of the principal executive
officer/principal financial officer, of disclosure controls and
procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of
the Exchange Act). Based upon the evaluation, the principal
executive officer/principal financial officer concluded that the
Company's disclosure controls and procedures were effective at a
reasonable assurance level to ensure that information required to
be disclosed by it in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC's
rules and forms. In addition, the principal executive
officer/principal financial officer concluded that the Company's
disclosure controls and procedures were effective at a reasonable
assurance level to ensure that information required to be
disclosed in the reports that the Company files or submits under
the Exchange Act is accumulated and communicated to the Company's
management, including the principal executive officer/principal
financial officer, to allow timely decisions regarding required
disclosure.
Management's Annual Report on Internal Control over Financial
Reporting.
The Company's management also is required to assess and
report on the effectiveness of our internal control over
financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 ("Section 404"). The Company has been
preparing to be in compliance with Section 404 for our fiscal
year ending December 31, 2008 and only recently became aware of
the need to comply with Section 404 for our fiscal year ended
December 31, 2007. Therefore, the Company has not completed all
of the evaluations necessary to issue guidance on the status of
its internal controls. Although management has selected the
framework set forth by the Committee of Sponsoring Organizations
of the Treadway Commissions in its Internal Control-Integrated
Framework to make its assessment and report as required by
Section 404, and the Company has been working to implement this
framework to enable us to complete its assessment on its internal
control over financial reporting for the year ending December 31,
2008, in accordance with Section 404, the framework was not in
place to allow management to fully assess and report on our
internal control over financial reporting for the fiscal year
ended December 31, 2007.
While the Company is in the process of evaluating its
internal control over financial reporting, the Company has not
yet been able to complete its assessment of which, if any,
control deficiencies constitute "material weaknesses" as defined
under Public Accounting Oversight Board Auditing Standard No. 5.
Therefore, the Company has not yet determined whether its
internal control over financial reporting is effective as of
December 31, 2007. However, the Company is aware of the
following weaknesses:
- the need to hire an in-house accountant trained in U.S.
generally accepted accounting principles;
-the need to upgrade its accounting software so as to provide
for more timely access to financial reports; and
- inadequate planning and execution of the Company's Section
404 project to meet the requirements of the Sarbanes-Oxley
Act of 2002 on a timely basis.
Notwithstanding the foregoing, the reportable conditions and
other areas of the Company's internal control over financial
reporting identified by it as needing improvement have not
resulted in a material restatement of the financial statements.
Nor is management aware of any instance where such reportable
conditions or other identified areas of weakness has resulted in
a material misstatement or omission in any report the Company has
filed with the SEC.
Management's inability to complete an assessment of the
Company's internal control over financial reporting in accordance
with Section 404 for the year ended December 31, 2007, does not
necessarily imply that a significant deficiency or material
weakness exists in the Company's internal control over financial
reporting. A material weakness is a deficiency, or a combination
of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material
misstatement of the Company's annual or interim financial
statements will not be prevented or detected on a timely basis.
Management is not aware of any material weaknesses in the
Company's internal control over financial reporting, and nothing
has come to the attention of management that causes them to
believe that any material inaccuracies or errors exist in our
financial statements as of December 31, 2007. Despite the fact
management has not currently identified any material weaknesses
in our internal control over financial reporting, it is possible
that as management continues to evaluate the Company's internal
control over financial reporting, management could discover a
material weakness.
This annual report does not include an attestation report of
our independent registered public accounting firm regarding
internal control over financial reporting. Management's report
was not subject to attestation by this firm pursuant to temporary
rules of the SEC that permit the Company to provide only
management's report in this annual report.
Inherent Limitations of Control Systems.
Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, will be or have
been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts
of some persons, by collusion of two or more people, and/or by
management override of the control. The design of any system of
controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions; over time, controls may become
inadequate because of changes in conditions, and/or the degree of
compliance with the policies and procedures may deteriorate.
Because of the inherent limitations in a cost-effective internal
control system, misstatements due to error or fraud may occur and
not be detected.
Changes in Internal Control Over Financial Reporting.
There have not been any changes in the Company's internal
control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fourth quarter of 2007 that have materially affected, or are
reasonably likely to materially affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE.
Directors and Executive Officers.
The names, ages, and respective positions of the directors and
executive officers of the Company are set forth below. The
directors named below will serve until the next annual meeting of
stockholders or until their successors are duly elected and have
qualified. Directors are elected for a term until the next annual
stockholders' meeting. Officers will hold their positions at the
will of the board of directors, absent any employment agreement,
of which none currently exist or are contemplated.
There are no family relationships between any two or more of
the directors or executive officers. There are no arrangements or
understandings between any two or more of the directors or
executive officers. There is no arrangement or understanding
between any of the directors or executive officers and any other
person pursuant to which any director or officer was or is to be
selected as a director or officer, and there is no arrangement,
plan or understanding as to whether non-management stockholders
will exercise their voting rights to continue to elect the current
board of directors. There are also no arrangements, agreements or
understandings between non-management stockholders that may
directly or indirectly participate in or influence the management
of the Company's affairs. There are no other promoters or control
persons of the Company. There are no legal proceedings involving
the executive officers or directors of the Company, except that
Mr. Fleming is named in the action discussed in Item 3(a) of this report.
John J. Fleming, Chief Executive Officer/Secretary/Director.
Mr. Fleming, age 59, was the managing partner of AFI
Capital, LLC, a venture capital company, located in San Diego,
California for the 5 years (before joining GameZnFlix in
September 2002). Before AFI Capital, Mr. Fleming managed Fleming
& Associates, a business-consulting firm that provided services
to companies looking to create business plans and/or review
current plans in order to move forward with fund raising from
both private and public sectors.
Mark Crist, Director.
Mr. Crist, age 49, has a widely varied background in
business development. In 1979, he founded Manufacturer's Revenue
Service, a commercial collection agency located in Tustin,
California. In 1984 he negotiated the sale of that business to a
division of Dunn & Bradstreet and thereafter left to become a
partner in the marketing services firm of Jay Abraham &
Associates. In 1985, he founded the Computer Trivia Fan User
Group (CTFUG) as a public benefit, non-profit organization to
promote the playing of online trivia contests.
Mr. Crist held the position of chief executive officer and
president of GamesGalore.com from 1996 to 2001, a company that
among other things supplies trivia contest content to users of
America Online. Since May of 2001, he has served as president
and director of Diamond Hitts Production, Inc. (Pink Sheets:
DHTT). Mr. Crist is an alumnus of California State University at
Northridge.
Compliance with Section 16(a) of the Securities Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's directors, certain officers and persons
holding 10% or more of the Company's common stock to file reports
regarding their ownership and regarding their acquisitions and
dispositions of the Company's common stock with the Securities
and Exchange Commission ("SEC"). Such persons are required by
SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely upon a review of Forms 3 and 4 and amendments
thereto furnished to the Company under Rule 16a-3(d) during
fiscal 2007, and certain written representations from executive
officers and directors, the Company is aware that the following
required reports were not timely filed: Form 4's to report the
sale by Mr. Crist on November 9, 2007 of 525,000 shares of common
stock and on November 16, 2007 of 46,429 shares of common stock.
The Company is unaware that any other required reports were not
timely filed.
Corporate Governance.
(a) Code of Ethics.
The Company has not adopted a code of ethics that applies to
the Company's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions. The Company has not adopted such a
code of ethics because all of management's efforts have been
directed to building the business of the Company; at a later
time, the board of directors may adopt such a code of ethics.
(b) Audit Committee.
The Company's audit committee consists of Mr. Fleming, who
is not an independent director. The audit committee has not
adopted a written charter. Currently, the Audit Committee has no
"financial expert," as that term is defined in Item 407(d)(5) of
Regulation S-K.
The primary responsibility of the Audit Committee is to
oversee the financial reporting process on behalf of the
Company's board of directors and report the result of their
activities to the board. Such responsibilities include, but are
not limited to, the selection, and if necessary the replacement,
of the Company's independent registered public accounting firm,
review and discuss with such independent registered public
accounting firm: (i) the overall scope and plans for the audit,
(ii) the adequacy and effectiveness of the accounting and
financial controls, including the Company's system to monitor and
manage business risks, and legal and ethical programs, and (iii)
the results of the annual audit, including the financial
statements to be included in the annual report on Form 10-K.
The Company's policy is to pre-approve all audit and
permissible non-audit services provided by the independent
registered public accounting firm. These services may include
audit services, audit-related services, tax services and other
services. Pre-approval is generally provided for up to one year
and any pre-approval is detailed as to the particular service or
category of services and is generally subject to a specific
budget. The independent registered public accounting firm and
management are required to periodically report to the audit
committee regarding the extent of services provided by the
independent registered public accounting firm in accordance with
this pre-approval, and the fees for the services performed to
date. The audit committee may also pre-approve particular
services on a case-by-case basis.
(c) Other Committee of the Board of Directors.
Other than the Audit Committee, the Company presently does
not have a compensation committee, nominating committee, an
executive committee of the board of directors, stock plan
committee or any other committees.
(d) Recommendation of Nominees.
There have been no changes to the procedures by which
security holders may recommend nominees to the Company's board of
directors.
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table.
The following table presents compensation information for the
year ended December 31, 2007 for the persons who served as
principal executive officer and each of the two other most highly
compensated executive officers whose aggregate salary and bonus
was more than $100,000 in such year.
<TABLE>
<CAPTION>
Nonqualified
Non-Equity Deferred
Name and Stock Option Incentive Plan Compensation All Other
Principal Salary Bonus Awards Award(s) Compensation Earnings Compensation Total
Position Year ($) ($) ($) ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
John Fleming,
CEO (1) 2007 $135,833 - - - - - - $135,833
2006 $263,250 - - - - - - $263,250
2005 $200,000 - - - - - - $200,000
Donald N. 2007 $100,625 - - - - - - $100,625
Gallent, 2006 $200,000 - - - - - - $200,000
former Pres. 2005 $175,000 - $140,000(3) - - - - $315,000
(2)
Arthur De 2007 $ 60,000 - - - - - - $ 60,000
Joya, 2006 $ 46,000 - $ 82,500 - - - - $128,500
former 2005 $ 30,000 - $ 24,500 - - - - $ 54,500
</TABLE>
(1) Mr. Fleming was appointed chief executive officer and a
director on September 12, 2002.
(2) Mr. Gallent was appointed president and a director on
February 3, 2005. He resigned both positions on May 24, 2007.
(3) On March 11, 2005, the Company issued 20,000,000 restricted
shares of common stock to Mr. Gallent as an employment incentive.
These shares were valued at $140,000 ($0.007 per share).
(4) Mr. De Joya was appointed chief financial officer on
July 9, 2004. He resigned this position on December 14, 2007.
Executive Officer Contracts.
John Fleming.
On September 25, 2005, the Company entered into a three-year
employment agreement with Mr. Fleming in his capacity as chief
executive officer (see Exhibit 10.4). Under this agreement, he
agrees that he will at all times faithfully, industriously, and
to the best of his ability, experience, talents, and training
perform all the duties that may be required of and from him
pursuant to the express and implicit terms hereof, to the
reasonable satisfaction of the Company. The agreement provides a
minimum base salary of $200,000 per year with fifteen percent
annual increases and participation in other employee benefit
plans. Mr. Fleming is entitled to stock options at the
discretion of the Company's board of directors.
Should the Company's board of directors vote to remove Mr.
Fleming from employment by the Company, he will be entitled to
receive the following: (a) balance of wages outlined in this
agreement from the date of the board's vote to the end of the
agreement; (b) 100,000,000 restricted shares of the Company's
common stock; and (c) continue health/medical plan insurance
benefits for the balance of the agreement under the existing
health/medical plan. This agreement may not be terminated by
either party, except that the Company may terminate Mr. Fleming
for cause in the event any of the following enumerated events
occur: (a) he fails to work for the Company at a level of
competency satisfactory to the board of directors; (b) he engages
in any activity that brings disrepute and harm to the Company;
(c) he fails a drug test (that is, he tests positive for the use
of illegal drugs or substances); and (d) he has become
permanently disabled for a period in excess of six months.
As an integral part of this agreement, Mr. Fleming agrees
that for a period of three years from the date his employment
with the Company is terminated, he will not, directly or
indirectly, in any manner or capacity, as principal, agent,
partner, officer, director, employee, stockholder, guarantor,
consultant, investor, creditor, member of any association, or
otherwise, engage in any facet of the business that had been
conducted by the Company, anywhere in the United States of
America, except with the prior written consent of the Company.
Outstanding Equity Awards at Fiscal Year-End Table.
Option Awards
<TABLE>
<CAPTION>
Option Awards Stock Awards
Equity
Equity Incentive
Equity Incentive Plan Awards:
Incentive Plan Awards Market or
Plan Wards: Market Number of Payout Value
Number of Number of Number of Number of Value of Unearned ]]> |