ITEM 1. BUSINESS
BACKGROUND
We are a development stage company that was incorporated under the laws of the
State of Nevada on May 4, 2010 under the name "Advanced Cellular, Inc." with an
initial focus on developing and commercializing a performance management system
to be used by cellular network operators.
On February 20, 2013, we effected a 5 for 1 forward stock split of all of its
issued and outstanding shares of common stock (the "Stock Split"). On October
28, 2013, upon approval from the Financial Industry Regulatory Authority
("FINRA"), we effected a name change to "Makism 3D Corp."
On October 29, 2013, we entered into and consummated a voluntary share exchange
transaction with Umicron Ltd., a private limited company organized under the
laws of England and Wales ("Umicron"), and the shareholders of Umicron ("Selling
Shareholders") pursuant to a Stock Exchange Agreement (the "Exchange Agreement")
by and among the Company, Umicron, and the Selling Shareholders. As a result of
the Exchange Transaction, the Selling Shareholders acquired approximately 50.67%
of our issued and outstanding common stock, Umicron became our wholly-owned
subsidiary, and we acquired the business and operations of Umicron (the
"Exchange Transaction").
Our mission is to design and build the most desirable consumer and professional
level 3D printers. We believe there is enormous scope for innovation within the
design, usability, and engineering of 3D printers. Accordingly, we are
developing a reliable and cost-effective solution for the home, professional,
and educational markets for 3D printers.
Our offices are currently located at Suite R, Bristol Court, Martlesham Business
Park, IP5 3RY, United Kingdom. Our telephone number is 011-44-1473-621351.
STRATEGY
We are focused on the manufacture of a cost effective professional-grade 3D
printer targeted at the home, professional, and educational markets.
Our 3D printer, named "Wideboy" will include components and design features
similar to those found in commercial 3D printing applications. Wideboy will
initially be optimised for use with common Poly Lactic Acid (PLA) material to
enable users to produce fast, accurate and low-cost prototypes. The near-term
goal of the Company is to produce an entire range of 3D printers that utilize a
range of useful materials. We believe that our first product - the "Wideboy"
will be an affordable introduction to 3D printing technology for the average
customer.
Upon successful manufacture of the "Wideboy" 3D printer, we intend to distribute
initially to the United Kingdom (U.K.) market, with the goal of refining our
distribution strategy before we invest in additional facilities. At present, we
lease an industrial site in Martlesham Heath, United Kingdom. Once distribution,
returns and support infrastructure are well established in the U.K. market, we
plan to replicate our operational strategy in the European markets.
We plan on manufacturing and assembling our first 3D printer, the "Wideboy" in
China.
We will seek to enter the retail arena once the "Wideboy" has a proven
distribution infrastructure within the U.K.
Our objective is to develop a less costly solution that addresses what we
believe to be weaknesses within the current state of the 3D printing industry,
including (i) the lack of application for many existing machines due to limited
choice of materials (usually PLA)(ii) the industrial look of many machines which
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often looks out of place in a casual setting, and (iii) high expenses for
machines, especially for single users. We believe current reliable systems
remain cost prohibitive for many industries including, the advanced home user,
professional user, and educational markets. Professional-grade machines are
often shared between many users. Our objective is to develop a system that can
match the capabilities of higher-end professional systems but at a price point
manageable for individual users to purchase for use within the educational,
home, and professional segments.
Our printer will target the home, professional, and educational markets. We
believe the educational and professional segments are typically already familiar
with the creation of 3D models and are technically proficient enough to fully
utilize our technology. We intend to appease these market segments by placing a
strong emphasis on design, reliable engineering, and straight-forward usability.
We believe our business model is a reaction to the recent influx of unreliable
low-cost home user systems which fail to meet users' expectations.
The average price point of a personal 3D printer averaged $1,208 in 2013, up
from $1,138 in 2012. Recent figures estimate the number of personal 3D printers
sold in 2013 was 72,503 generating estimated revenue of $87,600,000 worldwide.
Growth within this market in the last four years (2010 - 2013) was 171.4%. The
average price point of a professional-grade machine was $90,370 in 2013, up from
$75,000 in 2012. This represents a 75 times difference in selling prices between
these two market segments. Wohlers Associates predicts that the most substantial
growth in 2014 will be in systems priced in the range of $5,000 - $20,000. Our
product will be a low cost solution in this market.
Our strategy is to position ourselves early in the 3D printing market as a brand
known for high quality manufacturing. Additionally, we plan to target the home
user market in 2014, with a mass produced product that we believe will meet
consumers' needs and expectations.
We believe our competitive advantages include:
* A system designed with an emphasis on scalable manufacturing by
utilizing only freely available components;
* Innovative design that distinguishes our product from other competing
3D printing systems in our segment;
* Early targeting of affordable, reliable systems designed for
manufacture;
* Ability to deliver a more consistent product rapidly to worldwide
markets;
* Greater reliability is achieved by delivering a simplified product
without untested features;
* Early targeting of an unsaturated market between the low end ($1,200)
and high end ($10,000);
* Ability to compete at the low end of the market by providing a cost
effective machine reliable enough for light-commercial use;
* Alternative to higher cost professional machines, our systems include
essential commercial features but will arrive in a more manageable,
effective, and user friendly package; and
* Potential to meet high-volume orders more rapidly than our
competitors.
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PRODUCTS
* WIDEBOY PERSONAL 3D PRINTER - a mid-range personal 3D printer for the
consumer, professional and educational markets. Wideboy will feature
professional grade design features at an affordable price
* TEMPERATURE CONTROLLED BUILD CHAMBER - a future upgrade for our
Wideboy 3D printer whereby the build chamber will be enclosed and can
maintain a constant set temperature.
* HIGH TEMPERATURE DUAL EXTRUDER CONFIGURATION - a future upgrade for
our Wideboy 3D printer whereby a dual extruder configuration optimized
for use of support material.
* BIO-COMPATIBLE EXTRUDER USING SYRINGE BASED METHODS - a future upgrade
whereby the extruder carriage is adapted for a compressed air-driven
syringe with needle valve intended to offer compatibility with organic
matter or food stuffs (pastes).
* PROFESSIONAL GRADE LASER SINTERING DEVICE - a new commercial-grade 3D
printer that utilizes selective laser sintering technology to produce
cost effective metal parts. The machine will take form of a white
goods appliance and will be designed for advanced home, workshop and
commercial-use.
* 3D IMAGE PROCESSING - a cluster of integrated image sensors allowing
delivery of visual feedback from printed material.
* 3D SCANNING OR RECOGNITION - Image sensors located inside the build
chamber allow low-medium resolution 3D scans or the capability to
reference objects against a repository of high resolution printable
models.
* WEB-BASED REPOSITORY FOR PRINTABLE 3D MODELS - an online database for
high quality, useful 3D printable files available for free or at cost.
* PACKAGED FILAMENT SUPPLIES - a filament cartridge for use with our
'"Wideboy'" 3D printer. The cartridge may be moisture sealed, may
contain moving parts, and may include sensors.
* FILAMENT CARTRIDGE LOADING SYSTEM - a method of automating or
simplifying the material replenishment process within a 3D printer
whereby moving parts inside either the cartridge or 3D printer are
activated upon recognition of a microchip such as an erasable
programmable read only memory ship (EPROM) or similar process.
ADVANTAGES OF WIDEBOY
* High-quality injection molded case;
* Optimized for fast, low cost models;
* Established open-source support infrastructure for firmware and
electronics;
* High-rigidity steel chassis designed for manufacture;
* High quality, easily obtainable components;
* Good compatibility with common, low-cost PLA filament.
* Open filament system;
* Returns infrastructure, customers can quickly receive replacement
systems;
* Planned certification - CE and FCC; and
* Potentially safer to use within an educational setting due to
restricted access to moving parts and non-toxic material residue.
DISADVANTAGES OF WIDEBOY
* Poor compatibility with high-temperature thermoplastics;
* Modifications to the mechanics cannot easily be made without voiding
the warranty;
* High development costs and increased time-to-market due to chosen
manufacturing techniques; and
* Priced higher than machines at the low end of the home market (below
$500).
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REVENUES AND CUSTOMERS
We plan to sell our products under the "Makism 3D" brand to the home,
professional, and educational markets within the 3D printing industry.
The opportunity in this market includes:
* Low penetration of low cost professional market (under $5,000);
* Growth rate of industry is high and under speculated;
* Scope for innovation within design for manufacture and software; and
* Greater application within creative industry and thus a wider scope
for marketing.
Our sales strategy will focus on an approach that is directed to providing 3D
content-to-print solutions to meet a wide range of customer needs, including
traditional prototyping, 3D printing, print-on-demand services, and rapid
manufacturing. We intend to generate revenue through the following methods:
* Online sales of Wideboy through our website;
* Sales of additional printing materials through our website;
* Extended warranties;
* Extended support plans;
* Distribution through authorized re-sellers;
* Business-to-business sales to educational institutions and creative
businesses; and
* Eventual sales of re-furbished `Wideboy' 3D printers.
We intend to focus our initial sales efforts in the U.K., Europe and U.S. Our
initial target customer base will encompass the following:
HOME USERS
* General/hobbyist
* Home workshop
* Home office
* Home studio
CREATIVE CUSTOMERS
* Product designers
* Industrial design houses
* Jewelers
* Animators
* Metal working/cast making
* Artists
* Fashion
* Furniture design
PROFESSIONAL CUSTOMERS
* Architectural practices
* Dental practices
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* General practices/doctors
* Prosthetics
* Engineering
* Marketing
* Advertising
EDUCATIONAL
* Pre-school/nursery
* Middle/high school
* Higher education/undergraduate
* PHD/research
TECHNOLOGY
The principle technology used by our 3D printers is an additive manufacturing
technology referred to as Fused Filament Fabrication. In this process,
thermoplastics are heated to above their glass transition temperature and
deposited by an extrusion head onto a platform layer-by-layer. The extruder head
follows a path determined by a computer-aided-manufacturing (CAM) software
package, and the part is built from the bottom up, one layer at a time. The
layer thickness and vertical dimensional accuracy is determined by the extruder
die diameter, which ranges from 0.013 to 0.005 inches. In the X-Y plane, 0.001
inch resolution is achievable.
A range of thermoplastic materials are available including ABS, polyamide,
polycarbonate, polyethylene, polypropylene, and investment casting wax.
INTELLECTUAL PROPERTY
Our success depends in part upon our ability to protect our core technology and
intellectual property. To establish and protect our proprietary rights, we will
rely on a combination of patents, patent applications, trademarks, copyrights,
trade secrets, including know-how, license agreements, confidentiality
procedures, non-disclosure agreements with third parties, employee disclosure
and invention assignment agreements, and other contractual rights.
Upon receipt of adequate financing, we plan to file patents on our hardware
designs and common law trademarks.
MANUFACTURING
We will manufacture the Wideboy personal 3D printer through third-party
manufacturers. There are no current plans to manufacture any elements of the
Wideboy on-site in the U.K.
Successful manufacture of our Wideboy 3D printer will rely on relationships
established with specialist engineering firms located in the U.K. and/or China.
These may consist of one or more relationships established with engineering
firms to manufacture and deliver our manufactured parts. Our 3D printer design
currently utilizes injection molding, steel formed parts, and machined parts, as
well as incorporating off-the-shelf components into the design.
There are several elements that will be injection molded in our design, the most
substantial being the 'shell' or exterior which requires a high level of finish.
Other elements which are to be located within the interior of the shell do not
require a high surface finish and will be less costly to produce.
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DISTRIBUTION AND MARKETING
DISTRIBUTION
Our first distribution facility is located in Martlesham, U.K. From these
premises, we intend to distribute fully assembled and tested machines directly
to our customers and/or distribution partners from sales made primarily through
our company website.
Once our sales levels reach a certain threshold, we also plan to employ a direct
sales organization, including salespersons that will operate in various areas of
the world and establish relationships with potential and existing customers. We
believe that a direct selling relationship with our customers is an important
building block for the success of our business. Our goal is to establish a
strong collaborative aspect to the relationship with our customers by
emphasizing and expanding the lines of communication with them. We hope to
achieve this in part through an emphasis on direct sales.
We also intend to use sales agents, authorized resellers and distributors to
supplement the sales of our products in areas of the world that our direct sales
staff does not operate.
Additionally, we intend to distribute our products from a retail premises in the
near future, the location of which is yet to be confirmed.
MARKETING
We believe that attendance at trade shows that showcase our products will
provide the initial traction for interest in the our brand in the market place.
In addition to 3D-printing related trade shows, we plan to establish a presence
at key creative and design-based events, such as those relating to design and
fashion.
We also plan to lend a number of our Wideboy personal 3D printers to key media
outlets, particularly those concerned with new and emerging technology.
We will produce a number of video advertisements that will be hosted on our
company Youtube channel. This will give our customers an insight as to who we
are as a company and our values. These will be produced professionally by a
dedicated film team at a leading film-based University.
INDUSTRY
The term "3D printing" is defined by the ATSM T42 committee as the fabrication
of objects through the deposition of a material using a print head, nozzle, or
other printer technology. However, the term is often used synonymously with
additive manufacturing ("AM"). In particular it is associated with machines that
are lower in relative price, and/or overall functional capability.
APPLICATIONS FOR 3D PRINTERS
3D printers allow for the physical modeling of a design using a special class of
machine technology. These systems take data created from CAD files, CT and MRI
scan data, or 3D digitized data to quickly produce models, using an additive
approach. Traditionally, 3D printing has been used by organizations to
accelerate product development. Many companies use 3D printing models to test
form, fit and function to help improve the time to market.
Frequently, users report rapid pay-back times from using 3D printing, as they
accelerate their product development cycle and reduce post-design flaws through
more extensive design verification and testing.
A wide variety of end users and organizations use 3D printers. Current markets
and applications include: prototyping, tooling, metal casting, architecture,
medical, dental, and direct part production. Among the medical applications,
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prototyping is being used to produce accurate models of internal organs, bones
and skulls for pre-operative evaluations and for modeling of prostheses.
PERSONAL 3D PRINTERS
Personal 3D printers are AM machines that sell for less than
$5,000. This market has been expanding in recent years, with an influx of new
users, media attention, and a lot of hype. We believe there are more than 300
companies and teams developing personal 3D printers worldwide.
Print quality and machine reliability have increased considerably over the past
couple years, and many new printers now on the market include dual extruders,
automatic tram detection, and heated build platforms. We believe that except for
basic improvements, little actual innovation is occurring. Most printers copy
the RepRap (discussed below) reference design and improve upon it.
Manufacturing a 3D printer is a complex and difficult undertaking. Many startups
have paid little attention to the importance of design for manufacture. This
fact alone is a major reason for little innovation in this market segment.
Consumers may soon expect 3D printers to have reliability similar to that of
consumer electronics. We believe that many vendors overstate their machines
reliability and ease of use, while downplaying technical issues. We believe that
currently 3D printers are among the least reliable devices that a consumer can
purchase.
REPRAP PROJECT
RepRap is an open-source project founded by Adrian Bowyer at the University of
Bath. The project has about 25 core contributors and a vibrant community of
people working to build machines. In total, there are an estimated 300 RepRap
designs available. Several startups have simply put old RepRap machines in new
boxes and branded them as their own. This is a potential threat to the RepRap
project as these manufacturers focus on differentiating their machines from the
competition and don't actively contribute to the open-source project. These
manufacturers often use the open-source moniker as a marketing slogan to sell
their machines. The cost of RepRap machines has fallen steadily. Kits are now
available for $330-$800 and documentation has improved. Popular designs include
the Prusa, Mendel, and Huxley.
INDUSTRY GROWTH
REVENUE FROM AM WORLDWIDE
There is a strong demand for additive manufacturing products and services. The
compound annual growth rate (CAGR) of worldwide revenues produced by all
products and services over the past 25 years was 25.4%. In 2013 the growth was
34.9% (CAGR) valuing the industry at $3.07 billion.
The average selling price of a professional-grade industrial AM system in 2013
was $90,370, compared to $75,000 in 2012. Industrial AM systems are machines
that sell for more than $5,000. The average selling price of a personal 3D
printer was $1,208 in 2013, and $1,138 in 2012. The 2013 figures represent a
difference of 75 times between the two market segments.
Growth for personal 3D printer sales from 2010 through 2013 was 171.4%. The
total number of personal 3D printer sales in 2013 was 72,503, which generated an
estimated $87.6M in revenue.
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MATERIAL SALES
An estimated $522.8M was spent on materials for all AM systems worldwide in
2013. This in an increase of 26.8% over the $417M in 2012. This segment grew 23%
in 2011, and 22.1% in 2010.
MARKET OPPORTUNITY AND FORECAST
Unit sales of professional-grade, industrial grade systems are expected to grow
over the next several years. In 2014, Wohlers Associates believe that annual
sales will reach 11,000 units worldwide. Systems priced in the range of $5,000 -
$20,000 will be responsible for much of this growth.
Unit sales of personal 3D printers are also expected to double this year to an
estimated 70,000 units.
COMPETITION
3D printing is a new industry and the market is very turbulent with an influx of
competitors entering the market. The relationships between competitors,
customers and suppliers are continuously being redefined, which creates the need
for competitive forces to be regularly reassessed.
AM companies entering the personal 3D printing marketplace pose the greatest
competition to us. These companies hold key patents that could have the most
disruptive effects on the 3D printing industry. Barriers to entry into this
`home' market are high for these companies as they are typically concerned with
selling commercial machines which hold no significant brand equity within the
community driven `home market.' The recent acquisition of Makerbot Industries by
Stratasys Ltd., a leading professional-grade systems manufacturer, demonstrates
the value of such a brand within the `home' market. Makerbot is well positioned
to enter the low-end professional market due to its relative high price point
and brand recognition obtained by being one of the very first consumer-level 3D
printer manufacturers. Ford Motors recently installed a Makerbot Replicator 2 on
every engineer's desk.
CHALLENGES IN THE MARKET
* Quality may not be a priority for all customers; hobby users will
prefer low-cost printers.
* Relatively high price point may make one-off items more cost effective
through a printing service (i.e. Shapeways).
* The print quality of Shapeways parts are of much greater quality.
* The customer could buy a printer that is closer to their location;
U.S. customers may receive a printer faster from competitors based
locally.
* The customer may wait for a new product or a reaction from a competing
company.
* Marketplace will be crowded for the next few years.
* Low priced machines will occupy a large portion of the market.
GOVERNMENT REGULATION
In order to freely sell our products in the European Economic Area (EEA), we
must obtain CE marking. This is to declare that we as a manufacturer abide by
the requirements set out in applicable EU directives. CE marking indicates the
compliance with EU legislation of a product, wherever in the world manufactured.
By affixing a CE marking on our products we as a manufacture declare our
conformity with the legal requirements set out within the EU directives that
apply to it. Our products will conform to the general principles of the Low
Voltage Directive, which is a broad set of objectives for safety regulations
which allow electrical equipment to safely be used in other EU countries.
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Additionally, we intend to gain Federal Communications Commission (FCC) marking
for our Wideboy 3D printer. This mark certifies that the electromagnetic
interference from the device is under limits approved by the FCC. The FCC mark
is mandatory for all electronics equipment sold in the U.S. classified under
part 15 of the FCC regulations.
We are also subject to a number of U.S. federal and state, and foreign laws and
regulations that affect companies conducting business on the Internet, many of
which are still evolving and being tested in courts, and could be interpreted in
ways that could harm our business. These may involve user privacy, rights of
publicity, data protection, content, intellectual property, distribution,
electronic contracts and other communications, competition, protection of
minors, consumer protection, taxation and online payment services.
We will rely on legal and operational compliance programs, as well as local
counsel, to guide our businesses in complying with applicable laws and
regulations of the jurisdictions in which we do business.
We do not anticipate at this time that the cost of compliance with U.K., U.S.
and foreign laws will have a material financial impact on our operations,
business or financial condition, but there are no guarantees that new regulatory
and tariff legislation may not have a material negative effect on our business
in the future.
EMPLOYEES
Our team currently consists of two key people. Our backgrounds are mainly in
design, software, sales, marketing, recruitment, and business. We are looking to
expand our team, go into production, and market our product once we reach our
targeted investment goals.
All employees are required to execute non-disclosure agreements as part of their
employment. We believe our relations with our employees are good. None of our
employees are subject to collective bargaining agreements.
ITEM 1A. RISK FACTORS
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND OTHER INFORMATION IN THIS
REPORT BEFORE DECIDING TO INVEST IN OUR COMPANY. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
PROSPECTS FOR GROWTH COULD BE SERIOUSLY HARMED. AS A RESULT, THE TRADING PRICE
OF OUR COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT.
RISKS RELATING TO OUR COMPANY AND OUR INDUSTRY
WE MAY NOT BE ABLE TO INTRODUCE NEW 3D PRINTING SYSTEMS AND MATERIALS ACCEPTABLE
TO THE MARKET OR TO IMPROVE THE TECHNOLOGY AND SOFTWARE USED IN OUR CURRENT
SYSTEMS.
Our ability to compete in the 3D printing market depends, in large part, on our
success in enhancing our existing product lines and in developing new products.
Even if we successfully enhance existing systems or create new systems, it is
likely that new systems and technologies that we develop will eventually
supplant our existing systems or our competitors will create systems that will
replace ours. The rapid prototyping (RP) industry is subject to rapid and
substantial innovation and technological change. We may be unsuccessful at
enhancing existing systems or developing new systems or materials on a timely
basis, and any of our products may be rendered obsolete or uneconomical by our
or others' technological advances.
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IF THE 3D PRINTING MARKET DOES NOT CONTINUE TO ACCEPT OUR SYSTEMS, OUR REVENUES
MAY STAGNATE OR DECLINE.
We plan to derive a substantial portion of our sales from the sale of 3D
printers. If the market for 3D printers declines or if competitors introduce
products that compete successfully against ours, we may not be able to sustain
the sales of those products. If that happens, our revenues may not increase and
could decline.
IF WE ARE UNABLE TO MAINTAIN REVENUES AND GROSS MARGINS FROM SALES OF OUR
EXISTING PRODUCTS, OUR PROFITABILITY WILL BE ADVERSELY AFFECTED.
Our current strategy is to attempt to manage the prices of our 3D printers to
expand the market and increase sales. In conjunction with that strategy, we are
constantly seeking to reduce our direct manufacturing costs as well. Our
engineering and selling, general and administrative expenses, however, generally
do not vary substantially in relation to our sales. Accordingly, if our strategy
is successful and we increase our revenues while maintaining our gross margins,
our operating profits generally will increase faster as a percentage of revenues
than the percentage increase in revenues. Conversely, if our revenues or gross
margins decline, our operating profits generally will decline faster than the
decline in revenues or gross margins. Therefore, declines in our revenues may
lead to disproportionate reductions in our operating profits.
OUR REVENUE AND PROFITABILITY MAY BE NEGATIVELY AFFECTED BY ADVANCES IN
TECHNOLOGY THAT CREATE ALTERNATE FORMS OF 3D PRINTING AND RAPID PROTOTYPING
INDUSTRY.
The multimedia industry in general and the 3D printing and RP industry in
particular continue to undergo significant changes, primarily due to
technological developments. Due to this rapid growth of technology, we cannot
accurately predict the overall effect that such changes may have on the
potential revenue from and profitability of our products. Any future changes in
technology may change the way we operate our business and add unforeseen costs
to our business.
IF ANY OF OUR MANUFACTURING FACILITIES IS DISRUPTED, SALES OF OUR PRODUCTS WILL
BE DISRUPTED, AND WE COULD INCUR UNFORESEEN COSTS. INCORRECT - UPDATE
We manufacture our 3D printers at our facility in Cambridge. If the operations
of this facility are disrupted, we would be unable to fulfill customer orders
for the period of the disruption. We would not be able to recognize revenue on
orders that we could not ship, and we might need to modify our standard sales
terms to secure the commitment of new customers during the period of the
disruption and perhaps longer. Depending on the cause of the disruption, we
could incur significant costs to remedy the disruption and resume product
shipments. Such a disruption could have a material adverse effect on our
revenue, results of operations and earnings.
OUR FAILURE TO EXPAND OUR INTELLECTUAL PROPERTY PORTFOLIO COULD ADVERSELY AFFECT
THE GROWTH OF OUR BUSINESS AND RESULTS OF OPERATIONS.
Expansion of our intellectual property portfolio is one of the available methods
of growing our revenues and our profits. This involves a complex and costly set
of activities with uncertain outcomes. Our ability to obtain patents and other
intellectual property can be adversely affected by insufficient inventiveness of
our employees, by changes in intellectual property laws, treaties, and
regulations, and by judicial and administrative interpretations of those laws
treaties and regulations. Our ability to expand our intellectual property
portfolio could also be adversely affected by the lack of valuable intellectual
property for sale or license at affordable prices. There is no assurance that we
will be able to obtain valuable intellectual property in the jurisdictions where
we and our competitors operate or that we will be able to use or license that
intellectual property.
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IF WE ARE NOT ABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT
BE ABLE TO COMPETE EFFECTIVELY.
Our ability to compete depends in part upon the strength of our proprietary
rights in our technologies, brands and content. Currently, and going forward, we
expect to rely on a combination of U.S. and foreign patents, trademarks, trade
secret laws and license agreements to establish and protect our intellectual
property and proprietary rights. The efforts we have taken and expect to take to
protect our intellectual property and proprietary rights may not be sufficient
or effective at stopping unauthorized use of our intellectual property and
proprietary rights. In addition, effective trademark, patent, copyright and
trade secret protection may not be available or cost-effective in every country
in which our services are made available. There may be instances where we are
not able to fully protect or utilize our intellectual property in a manner that
maximizes competitive advantage. If we are unable to protect our intellectual
property and proprietary rights from unauthorized use, the value of our products
may be reduced, which could negatively impact our business. Our inability to
obtain appropriate protections for our intellectual property may also allow
competitors to enter our markets and produce or sell the same or similar
products. In addition, protecting our intellectual property and other
proprietary rights is expensive and diverts critical managerial resources. We
rely in part on our currently issued patents to support competitive position.
There can be no assurance that some of our patents will not be challenged at a
later date. There can be no guarantee that we will be successful in obtaining
additional patents that we may need at a later date to support certain growth
initiatives. Our ability to defend our patents, if they are challenged, or the
inability to obtain certain patents in the future, could have a material adverse
effect in future periods. If we are otherwise unable to protect our intellectual
property and proprietary rights, our business and financial results could be
adversely affected.
If we are forced to resort to legal proceedings to enforce our intellectual
property rights, the proceedings could be burdensome and expensive. In addition,
our proprietary rights could be at risk if we are unsuccessful in, or cannot
afford to pursue, those proceedings. In addition, the possibility of extensive
delays in the patent issuance process could effectively reduce the term during
which a marketed product is protected by patents.
The intellectual property to support our intermediate and long-term growth plans
continues to be developed and there can be no assurance that we will complete
such process. The addition of intellectual property to support this growth is
particularly dependent on the continued services of our technology team and its
ability to develop additional technologies to support such growth plans. If we
do not have the financial resources to develop the intellectual property to
fully support these growth plans, our ability to develop future products and
refinement of current products could be negatively impacted.
We may also need to obtain licenses to patents or other proprietary rights from
third parties. We may not be able to obtain the licenses required under any
patents or proprietary rights or they may not be available on acceptable terms.
If we do not obtain required licenses, we may encounter delays in product
development or find that the development, manufacture or sale of products
requiring licenses could be foreclosed. We may, from time to time, support and
collaborate in research conducted by universities and governmental research
organizations. We may not be able to acquire exclusive rights to the inventions
or technical information derived from these collaborations, and disputes may
arise over rights in derivative or related research programs conducted by us or
our collaborators.
WE MAY BE SUBJECT TO ALLEGED INFRINGEMENT CLAIMS.
Although we perform extensive patent and trademark searches, we may be subject
to intellectual property infringement claims from individuals, vendors and other
companies who have acquired or developed patents in the fields of 3D printing
for purposes of developing competing products or for the sole purpose of
asserting claims against us. Any claims that our products or processes infringe
the intellectual property rights of others, regardless of the merit or
resolution of such claims, could cause us to incur significant costs in
responding to, defending and resolving such claims, and may prohibit or
14
otherwise impair our ability to commercialize new or existing products. If we
are unable to effectively defend our processes, our market share, sales and
profitability could be adversely impacted.
AS OUR PATENTS EXPIRE, ADDITIONAL COMPETITORS USING OUR TECHNOLOGY COULD ENTER
THE MARKET, WHICH COULD REQUIRE US TO REDUCE OUR PRICES AND RESULT IN A
REDUCTION OF OUR MARKET SHARE. COMPETITORS' INTRODUCTION OF LOWER QUALITY
PRODUCTS USING OUR TECHNOLOGY COULD ALSO NEGATIVELY AFFECT THE REPUTATION AND
IMAGE OF OUR PRODUCTS IN THE MARKETPLACE.
Upon expiration of our patents, our competitors may introduce products using the
same technology as ours that have lower prices than those for our products. To
compete, we may need to reduce our prices, which would adversely affect our
revenues, margins and profitability. Additionally, the expiration of our patents
could reduce barriers to entry into the market for additive fabrication systems,
which could result in the reduction of our market share and earnings potential.
If competitors using our technology were to introduce products of inferior
quality, our potential customers may view our products negatively, which would
have an adverse effect on our image and reputation and on our ability to compete
with systems using other additive fabrication technologies.
OUR OPERATING RESULTS AND FINANCIAL CONDITION MAY FLUCTUATE.
Our operating results and financial condition may fluctuate from
quarter-to-quarter and year-to-year and are likely to continue to vary due to a
number of factors, many of which are not within our control. If our operating
results do not meet the expectations of securities analysts or investors, who
may derive their expectations by extrapolating data from recent historical
operating results, the market price of our common stock will likely decline.
Fluctuations in our operating results and financial condition may be due to a
number of factors, including, but not limited to, those listed below and those
identified throughout this "Risk Factors" section:
* changes in the amount that we spend to develop, acquire or license new
products, technologies or businesses;
* changes in the amount we spend to promote our products and services;
* changes in the cost of satisfying our warranty obligations and
servicing our installed base of systems;
* delays between our expenditures to develop and market new or enhanced
systems and consumables and the generation of sales from those
products;
* development of new competitive systems by others;
* changes in accounting rules and tax laws;
* the geographic distribution of our sales;
* our responses to price competition;
* market acceptance of our products;
* general economic and industry conditions that affect customer demand;
and
* our level of research and development activities.
WE HAVE NO REVENUES AND HAVE INCURRED LOSSES.
We currently have no revenues and we anticipate that our existing cash and cash
equivalents will not be sufficient to fund our longer term business needs and we
will need to generate significant revenue or receive additional investment to
continue operations. Based on our current business plan, we anticipate that we
will continue to incur losses through the year ending June 30, 2015.
OUR AUDITORS HAVE EXPRESSED UNCERTAINTY AS TO OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
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Primarily as a result of our recurring losses and our lack of liquidity, we
received a report from our independent auditors that includes an explanatory
paragraph describing the substantial uncertainty as to our ability to continue
as a going concern as of our fiscal year ended June 30, 2014.
IF WE FAIL TO RAISE ADDITIONAL CAPITAL, OUR ABILITY TO IMPLEMENT OUR BUSINESS
MODEL AND STRATEGY COULD BE COMPROMISED.
We have limited capital resources and operations. To date, our operations have
been funded entirely from the proceeds from limited revenues, equity and debt
financings. The Company currently does not have adequate capital or revenue to
meet its current or projected operating expenses. We anticipate needing
substantial additional capital in the near future to develop and market new
products, services and technologies. We currently do not have commitments for
financing to meet our longer term expected needs and we may not be able to
obtain additional financing on terms acceptable to us, or at all. Even if we
obtain financing for our near term operations and product development, we expect
that we will require additional capital beyond the near term. If we are unable
to raise capital when needed, our business, financial condition and results of
operations would be materially adversely affected, and we could be forced to
reduce or discontinue our operations. Debt financing, if obtained, may involve
agreements that include covenants limiting or restricting our ability to take
specific actions, such as incurring additional debt and could increase our
expenses, and would be required to be repaid regardless of its operating
results. Moreover, we may issue equity securities in connection with such debt
financing. Equity financing, even if obtained, could result in ownership and
economic dilution to our existing stockholders and/or require us to grant
certain rights and preferences to new investors. In addition, we may seek
additional capital due to favorable market conditions or strategic
considerations even if we believe we have sufficient funds for our current
operations.
We do not currently have credit facilities or arrangements in place as a source
of funds and there can be no assurance that we will be able to raise sufficient
additional capital or raise such capital on acceptable terms or raise such
capital when we need it. If such capital is not available on satisfactory terms,
or is not available at all, we may be required to delay, scale back or stop the
development of our products and/or cease its operations.
IF WE UNDERESTIMATE OUR OPERATING EXPENSES, WE MAY NOT BE ABLE TO FUND FUTURE
OPERATIONS.
To date, we have devoted substantially all of our efforts to research and
development, infrastructure building and initial marketing activities. There is
no guarantee that our cost estimates or projected sales volumes are accurate and
will be attained. An inability to meet sales volumes as forecast or to achieve
assumed cost figures could have a negative impact on our profitability, cash
flow and survival.
We expect our operating expenses to increase in connection with the continued
development of our products and expansion of its marketing activities. We may
also incur costs and expenses that are unexpected, in excess of amounts
anticipated or are otherwise not contemplated or provided for in connection with
our business plan. If these or other costs or expenses are incurred, it could
have a material adverse effect on our financial performance.
WE MAY ACQUIRE OR MAKE INVESTMENTS IN COMPANIES OR TECHNOLOGIES THAT COULD CAUSE
LOSS OF VALUE TO OUR STOCKHOLDERS AND DISRUPTION OF OUR BUSINESS.
Subject to our capital constraints, we intend to explore opportunities to
acquire companies or technologies in the future. Entering into an acquisition
entails many risks, any of which could adversely affect our business, including:
* Failure to integrate the acquired assets and/or companies with our
current business;
* The price we pay may exceed the value we eventually realize;
* Loss of share value to our existing stockholders as a result of
issuing equity securities as part or all of the purchase price;
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* Potential loss of key employees from either our current business or
the acquired business;
* Entering into markets in which we have little or no prior experience;
* Diversion of management's attention from other business concerns;
* Assumption of unanticipated liabilities related to the acquired
assets; and
* The business or technologies we acquire or in which we invest may have
limited operating histories, may require substantial working capital,
and may be subject to many of the same risks we are subject to.
SIGNIFICANT CHANGES IN GOVERNMENT REGULATION MAY HINDER SALES.
The production, distribution, sale and marketing of our products are subject to
the rules and regulations of various federal, state and local agencies, various
environmental statutes, and various other federal, state and local statutes and
regulations applicable to the production, transportation, sale, safety, and
advertising of or pertaining to our products. New statutes and regulations may
also be instituted in the future. Compliance with applicable federal and state
regulations is crucial to our success. Although we believe that we are in
compliance with applicable regulations, should the federal government or any
state in which we operate amend its guidelines or impose more stringent
interpretations of current laws or regulations, we may not be able to comply
with these new guidelines. Such regulations could require the reformulation of
certain products to meet new standards, market withdrawal or discontinuation of
certain products we are unable to redesign or reformulate, imposition of
additional record keeping requirements and expanded documentation regarding the
properties of certain products. Failure to comply with applicable requirements
could result in sanctions being imposed on us or the manufacturers of any of our
products, including but not limited to fines, injunctions, product recalls,
seizures and criminal prosecution. Further, if a regulatory authority finds that
a current or future product or production run is not in compliance with any of
these regulations, we may be required to have the packaging of our products
changed which may adversely affecting our financial condition and operations. We
are also unable to predict whether or to what extent a warning under any of
applicable statute would have an impact on costs or sales of our products.
WE FACE STRONG COMPETITION FROM LARGER AND WELL-ESTABLISHED COMPANIES, WHICH
COULD HARM OUR BUSINESS AND ABILITY TO OPERATE PROFITABLY.
Our industry is competitive. There are many different 3D printing and RP
companies in the United Kingdom and North America and our services will not be
unique to their services. Even though the industry is highly fragmented, it has
a number of large and well-established companies, which are profitable and have
developed a brand name. Aggressive marketing tactics implemented by our
competitors could impact our limited financial resources and adversely affect
our ability to compete in our market. Our inability to compete effectively with
larger companies could have a material adverse effect on our business
activities, financial condition and results of operations.
IF WE ARE UNABLE TO RETAIN OUR KEY OPERATING PERSONNEL AND ATTRACT ADDITIONAL
SKILLED OPERATING PERSONNEL, OUR DEVELOPMENT OF NEW PRODUCTS WILL BE DELAYED AND
OUR PERSONNEL COSTS WILL INCREASE.
Our growth plans require us to retain key employees in, and to hire additional
skilled employees to enhance existing products and develop new products. Our
inability to retain and hire key engineers and other employees could delay our
development and introduction of new products, which would adversely affect our
revenues. In addition, a possible shortage of such personnel in our region could
require us to pay more to retain and hire key employees, thereby increasing our
costs.
OUR BUSINESS DEPENDS SUBSTANTIALLY ON THE CONTINUING EFFORTS OF OUR EXECUTIVE
OFFICERS AND OUR BUSINESS MAY BE SEVERELY DISRUPTED IF WE LOSE THEIR SERVICES.
Our future success depends substantially on the continued services of our
executive officers. In particular, our performance depends, in large part, upon
our officers and their existing relationships in the industry. We do not
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maintain key man life insurance on any of our executive officers and directors.
If one or more of our executive officers are unable or unwilling to continue in
their present positions, we may not be able to replace them readily, if at all.
Therefore, our business may be severely disrupted, and we may incur additional
expenses to recruit and retain new officers. In addition, if any of our
executives joins a competitor or forms a competing company, we may lose some of
our customers.
WE ARE SUBJECT TO NEW CORPORATE GOVERNANCE AND INTERNAL CONTROL REPORTING
REQUIREMENTS, AND OUR COSTS RELATED TO COMPLIANCE WITH, OR OUR FAILURE TO COMPLY
WITH, EXISTING AND FUTURE REQUIREMENTS COULD ADVERSELY AFFECT OUR BUSINESS.
We may face new corporate governance requirements under the Sarbanes-Oxley Act
of 2002, as well as new rules and regulations subsequently adopted by the
Securities and Exchange Commission ("SEC") and the Public Company Accounting
Oversight Board. These laws, rules and regulations continue to evolve and may
become increasingly stringent in the future. In particular, under SEC rules, we
are required to include management's report on internal controls as part of our
annual report, pursuant to Section 404 of the Sarbanes-Oxley Act. The financial
cost of compliance with these laws, rules and regulations is expected to be
substantial. We cannot assure you that we will be able to fully comply with
these laws, rules and regulations that address corporate governance, internal
control reporting and similar matters. Failure to comply with these laws, rules
and regulations could materially adversely affect our reputation, financial
condition and the value of our securities.
RISKS RELATED TO DOING BUSINESS INTERNATIONALLY
OUR INTERNATIONAL OPERATIONS POSE CURRENCY RISKS, WHICH MAY ADVERSELY AFFECT OUR
OPERATING RESULTS.
Our operating results may be affected by volatility in currency exchange rates
and our ability to effectively manage our currency transaction and translation
risks. In general, we conduct our business, earn revenue and incur costs in the
local currency of the country in which we operate, which is pound sterling. As a
result, our international operations present risks from currency exchange rate
fluctuations. The financial condition and results of operations are reported in
the relevant local currency, pound sterling, and then translated to U.S. dollars
at the applicable currency exchange rate for inclusion in our consolidated
financial statements. We do not manage our foreign currency exposure in a manner
that would eliminate the effects of changes in foreign exchange rates.
Therefore, changes in exchange rates between any foreign currencies and the U.S.
dollar will affect the recorded levels of our foreign assets and liabilities, as
well as our revenues, cost of goods sold, and operating margins, and could
result in exchange losses in any given reporting period.
In the future, we may not benefit from favorable exchange rate translation
effects, and unfavorable exchange rate translation effects may harm our
operating results. In addition to currency translation risks, we incur currency
transaction risks whenever we enter into either a purchase or a sale transaction
using a different currency from the currency in which we receive revenues. In
such cases we may suffer an exchange loss because we do not currently engage in
currency swaps or other currency hedging strategies to address this risk.
Given the volatility of exchange rates, we can give no assurance that we will be
able to effectively manage our currency transaction and/or translation risks or
that any volatility in currency exchange rates will not have an adverse effect
on our results of operations.
THE CURRENT ECONOMIC ENVIRONMENT AND UNCERTAINTY IN THE EUROPEAN UNION COULD
MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
The failure of the European Union to stabilize the fiscal condition and
creditworthiness of its member economies, such as Greece, Portugal, Spain,
Ireland, and Italy, could have significant implications on our plans to expand
into the European Union. Certain European Union member states have significant
fiscal obligations, which have caused investor concern over such countries'
18
ability to continue to service their debt and foster economic growth. Currently,
the European debt crisis has caused liquidity to be less abundant. A weaker
European economy has caused and may continue to cause market participants to
lose confidence in the safety and soundness of European financial institutions
and the stability of European Union member economies, and may likewise affect
other global institutions and the stability of the global financial markets.
In addition, the possible abandonment of the Euro currency by one or more
members of the European Union could materially affect our business in the
future. Despite measures taken by the European Union to provide funding to
certain European Union member states in financial difficulties and by a number
of European countries to stabilize their economies and reduce their debt
burdens, it is possible that the Euro could be abandoned as a currency in the
future by countries that have already adopted its use. This could lead to the
re-introduction of individual currencies in one or more European Union member
states, or in more extreme circumstances, the dissolution of the European Union.
The effects on our business of a potential dissolution of the European Union,
the exit of one or more European Union member states from the European Union or
the abandonment of the Euro as a currency, are impossible to predict with
certainty, and any such events could have a material adverse effect on our
business, trading volumes and results of operations, particularly in the long
term.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS ASSOCIATED WITH THE
LEGISLATIVE, JUDICIAL, ACCOUNTING, REGULATORY, POLITICAL AND ECONOMIC RISKS AND
CONDITIONS SPECIFIC TO THE COUNTRIES OR REGIONS IN WHICH WE OPERATE, WHICH COULD
ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
We currently conduct operations in United Kingdom, and plan on expanding our
operations to additional international markets, including the United States,
European Union and China. Our future operating results in international markets
could be negatively affected by a variety of factors, most of which are beyond
our control. These factors include political conditions, including political
instability, economic conditions, legal and regulatory constraints, trade
policies, currency regulations, and other matters in any of the countries or
regions in which we operate, now or in the future.
Moreover, the economies of some of the countries in which we currently have, or
plan to have operations, have in the past suffered from high rates of inflation
and currency devaluations, which, if they occurred again, could adversely affect
our financial performance. Other factors which may impact our operations include
foreign trade, monetary and fiscal policies both of the United States and of
other countries, laws, regulations and other activities of foreign governments,
agencies and similar organizations, and risks associated with having numerous
officers located in countries which have historically been less stable than the
United States. Additional risks inherent in our international operations
generally include, among others, the costs and difficulties of managing
international operations, adverse tax consequences and greater difficulty in
enforcing intellectual property rights in countries other than the United
States.
CURRENT GLOBAL ECONOMIC CONDITIONS MAY ADVERSELY AFFECT OUR INDUSTRY, BUSINESS
AND RESULTS OF OPERATIONS.
The recent disruptions in the current global credit and financial markets has
led to diminished liquidity and credit availability, a decline in consumer
confidence, a decline in economic growth, an increased unemployment rate, and
uncertainty about economic stability. There can be no assurance that there will
not be further deterioration in credit and financial markets and confidence in
economic conditions. These economic uncertainties affect businesses such as ours
in a number of ways, making it difficult to accurately forecast and plan our
future business activities. The current adverse global economic conditions and
tightening of credit in financial markets may lead consumers to postpone
spending. We are unable to predict the likely duration and severity of the
current disruptions in the credit and financial markets and adverse global
economic conditions. If the current uncertain economic conditions continue or
further deteriorate, our business and results of operations could be materially
and adversely affected.
BECAUSE OUR ASSETS ARE LOCATED OUTSIDE OF THE UNITED STATES AND ALL OF OUR
DIRECTORS AND OFFICERS RESIDE OUTSIDE OF THE UNITED STATES, IT MAY BE DIFFICULT
FOR INVESTORS TO ENFORCE THEIR RIGHTS BASED ON UNITED STATES FEDERAL SECURITIES
19
LAWS OR ANY UNITED STATES COURT JUDGMENTS AGAINST US AND OUR OFFICERS AND
DIRECTORS.
Our operating company and all of our assets are currently located in the United
Kingdom. In addition, all of our current directors and officers reside outside
of the United States. It may therefore be difficult for investors in the United
States to enforce their legal rights based on the civil liability provisions of
the United States federal securities laws against us in the courts of either the
United States or the United Kingdom and, even if civil judgments are obtained in
United States courts, to enforce such judgments in United Kingdom courts.
FAILURE TO COMPLY WITH THE U.S. FOREIGN CORRUPT PRACTICES ACT OR OTHER
APPLICABLE ANTI-CORRUPTION LEGISLATION COULD RESULT IN FINES, CRIMINAL PENALTIES
AND AN ADVERSE EFFECT ON OUR BUSINESS.
We plan to operate in a number of countries throughout the world, including
countries known to have a reputation for corruption. We are committed to doing
business in accordance with applicable anti-corruption laws. We are subject,
however, to the risk that our affiliated entities or our respective officers,
directors, employees and agents may take action determined to be in violation of
such anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of
1977 and the U.K. Bribery Act of 2010, as well as trade sanctions administered
by the Office of Foreign Assets Control and the U.S. Department of Commerce. Any
such violation could result in substantial fines, sanctions, civil and/or
criminal penalties, curtailment of operations in certain jurisdictions, and
might adversely affect our results of operations. In addition, actual or alleged
violations could damage our reputation and ability to do business.
RISKS RELATED TO AN INVESTMENT IN OUR SECURITIES
OUR BOARD OF DIRECTORS DOES NOT INTEND TO DECLARE OR PAY ANY DIVIDENDS TO OUR
STOCKHOLDERS IN THE FORESEEABLE FUTURE.
The declaration, payment and amount of any future dividends will be made at the
discretion of our board of directors, and will depend upon, among other things,
the results of our operations, cash flows and financial condition, operating and
capital requirements, and other factors the board of directors considers
relevant. There is no plan to pay dividends in the foreseeable future, and if
dividends are paid, there can be no assurance with respect to the amount of any
such dividend.
NEVADA LAW AND OUR ARTICLES OF INCORPORATION AUTHORIZE US TO ISSUE SHARES OF
STOCK, WHICH SHARES MAY CAUSE SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS
AND/OR HAVE RIGHTS AND PREFERENCES GREATER THAN OUR COMMON STOCK.
Pursuant to our Articles of Incorporation, we currently have 100,000,000 shares
of common stock authorized and 50,000,000 shares of preferred stock authorized.
As of October 13, 2014, we have 60,000,000 shares of common stock issued and
outstanding and no shares of preferred stock issued and outstanding. As a
result, our Board of Directors has the ability to issue a large number of
additional shares of common stock without stockholder approval, which, if
issued, could cause substantial dilution to our existing stockholders. In
addition, we may elect to issue preferred stock or other securities in the
future having rights and preferences greater to our common stock. Pending
approval by a majority of our stockholders, our articles of incorporation will
provide that the Board may designate the rights and preferences of preferred
stock without a vote by the stockholders.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE, WHICH COULD NEGATIVELY
AFFECT SHAREHOLDERS' INVESTMENTS.
The market price for shares of our common stock may be volatile and may
fluctuate based upon a number of factors, including, without limitation,
business performance, news announcements or changes in general market
conditions.
20
Other factors, in addition to the those risks included in this section, that may
have a significant impact on the market price of our common stock include, but
are not limited to:
* quality deficiencies in products and services;
* international developments, such as technology mandates, political
developments or changes in economic policies;
* changes in recommendations of securities analysts;
* government regulations, including stock option accounting and tax
regulations;
* energy blackouts;
* acts of terrorism and war;
* widespread illness;
* proprietary rights or patent litigation;
* strategic transactions, such as acquisitions and divestitures; or
* rumors or allegations regarding our financial disclosures or
practices.
In the past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
If our stock price is volatile, we may be the target of securities litigation in
the future. Securities litigation could result in substantial costs and divert
management's attention and resources.
Shareholders should also be aware that, according to SEC Release No. 34-29093,
the market for "penny stock," such as our common stock, has suffered in recent
years from patterns of fraud and abuse. Such patterns include (1) control of the
market for the security by one or a few broker-dealers that are often related to
the promoter or issuer; (2) manipulation of prices through prearranged matching
of purchases and sales and false and misleading press releases; (3) boiler room
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (4) excessive and undisclosed
bid-ask differential and markups by selling broker-dealers; and (5) the
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. Our
management is aware of the abuses that have occurred historically in the penny
stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our securities.
The occurrence of these patterns or practices could increase the future
volatility of our share price.
SHARES OF OUR COMMON STOCK THAT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, REGARDLESS OF WHETHER SUCH SHARES ARE RESTRICTED OR
UNRESTRICTED, ARE SUBJECT TO RESALE RESTRICTIONS IMPOSED BY RULE 144, INCLUDING
THOSE SET FORTH IN RULE 144(I) WHICH APPLY TO A "SHELL COMPANY." IN ADDITION,
ANY SHARES OF OUR COMMON STOCK THAT ARE HELD BY AFFILIATES, INCLUDING ANY
RECEIVED IN A REGISTERED OFFERING, WILL BE SUBJECT TO THE RESALE RESTRICTIONS OF
RULE 144(I).
Pursuant to Rule 144 of the Securities Act of 1933, as amended ("Rule 144"), a
"shell company" is defined as a company that has no or nominal operations; and,
either no or nominal assets; assets consisting solely of cash and cash
equivalents; or assets consisting of any amount of cash and cash equivalents and
nominal other assets. As such, we may be deemed a "shell company" pursuant to
Rule 144 prior to the Exchange Transaction, and as such, sales of our securities
pursuant to Rule 144 are not able to be made until a period of at least twelve
months has elapsed from the date on which the filing of the Current Report on
Form 8-K reflecting the Company's change in status to a non-"shell company."
Therefore, any restricted securities we sell in the future or issue to
consultants or employees, in consideration for services rendered or for any
other purpose will have no liquidity until and unless such securities are
registered with the Commission and/or until a year after the date of the filing
of the Current Report on Form 8-K and we have otherwise complied with the other
requirements of Rule 144. As a result, it may be harder for us to fund our
21
operations and pay our employees and consultants with our securities instead of
cash. Furthermore, it will be harder for us to raise funding through the sale of
debt or equity securities unless we agree to register such securities with the
Commission, which could cause us to expend additional resources in the future.
Our previous status as a "shell company" could prevent us from raising
additional funds, engaging employees and consultants, and using our securities
to pay for any acquisitions (although none are currently planned), which could
cause the value of our securities, if any, to decline in value or become
worthless. Lastly, any shares held by affiliates, including shares received in
any registered offering, will be subject to the resale restrictions of Rule
144(i).
OUR STOCK IS CATEGORIZED AS A PENNY STOCK. TRADING OF OUR STOCK MAY BE
RESTRICTED BY THE SEC'S PENNY STOCK REGULATIONS WHICH MAY LIMIT A STOCKHOLDER'S
ABILITY TO BUY AND SELL OUR STOCK.
Our stock is categorized as a "penny stock". The SEC has adopted Rule 15g-9
which generally defines "penny stock" to be any equity security that has a
market price (as defined) less than $5.00 per share or an exercise price of less
than $5.00 per share, subject to certain exceptions. Our securities are covered
by the penny stock rules, which impose additional sales practice requirements on
broker-dealers who sell to persons other than established customers and
accredited investors. The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC which
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker-dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to effecting the transaction and must be given to the customer in writing
before or with the customer's confirmation. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that
the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities. We believe that the penny stock rules discourage investor interest
in and limit the marketability of our common stock.
FINRA SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY
AND SELL OUR STOCK.
In addition to the "penny stock" rules described above, the Financial Industry
Regulatory Authority ("FINRA") has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. Prior
to recommending speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information
about the customer's financial status, tax status, investment objectives and
other information. Under interpretations of these rules, FINRA believes that
there is a high probability that speculative low priced securities will not be
suitable for at least some customers. The FINRA requirements make it more
difficult for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and have an
adverse effect on the market for our shares.
WE MAY NOT QUALIFY TO MEET LISTING STANDARDS TO LIST OUR STOCK ON AN EXCHANGE.
The SEC approved listing standards for companies using reverse mergers to list
on an exchange may limit our ability to become listed on an exchange. We would
be considered a reverse merger company (i.e., an operating company that becomes
an Exchange Act reporting company by combining with a shell Exchange Act
reporting company) that cannot apply to list on NYSE, NYSE Amex or Nasdaq until
our stock has traded for at least one year on the U.S. OTC market, a regulated
foreign exchange or another U.S. national securities market following the filing
with the SEC or other regulatory authority of all required information about the
merger, including audited financials. We would be required to maintain a minimum
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$4 share price ($2 or $3 for Amex) for at least thirty (30) of the sixty (60)
trading days before our application and the exchange's decision to list. We
would be required to have timely filed all required reports with the SEC (or
other regulatory authority), including at least one annual report with audited
financials for a full fiscal year commencing after filing of the above
information. Although there is an exception for a firm underwritten IPO with
proceeds of at least $40 million, we do not anticipate being in a position to
conduct an IPO in the foreseeable future. In order for the minimum stock price
requirement to not apply, we must satisfy the one year trading requirement and
file at least four (4) annual reports with the SEC after the Exchange
Transaction. To the extent that we cannot qualify for a listing on an exchange,
our ability to raise capital will be diminished.
WE WILL BE REQUIRED TO INCUR SIGNIFICANT COSTS AND REQUIRE SIGNIFICANT
MANAGEMENT RESOURCES TO EVALUATE OUR INTERNAL CONTROL OVER FINANCIAL REPORTING
AS REQUIRED UNDER SECTION 404 OF THE SARBANES-OXLEY ACT, AND ANY FAILURE TO
COMPLY OR ANY ADVERSE RESULT FROM SUCH EVALUATION MAY HAVE AN ADVERSE EFFECT ON
OUR STOCK PRICE.
As a smaller reporting company as defined in Rule 12b-2 under the Securities
Exchange Act of 1934, as amended, we are required to evaluate our internal
control over financial reporting under Section 404 of the Sarbanes-Oxley Act of
2002 ("Section 404"). Section 404 requires us to include an internal control
report with the Annual Report on Form 10-K. This report must include
management's assessment of the effectiveness of our internal control over
financial reporting as of the end of the fiscal year. This report must also
include disclosure of any material weaknesses in internal control over financial
reporting that we have identified. Failure to comply, or any adverse results
from such evaluation could result in a loss of investor confidence in our
financial reports and have an adverse effect on the trading price of our equity
securities. Management believes that its internal controls and procedures are
currently not effective to detect the inappropriate application of U.S. GAAP
rules. Management realize there are deficiencies in the design or operation of
our internal control that adversely affect our internal controls which
management considers to be material weaknesses including those described below:
i) LACK OF FORMAL POLICIES AND PROCEDURES. The Company utilizes a third
party independent contractor for the preparation of its financial
statements. Although the financial statements and footnotes are
reviewed by our management, we do not have a formal policy to review
significant accounting transactions and the accounting treatment of
such transactions. The third party independent contractor is not
involved in the day to day operations of the Company and may not be
provided information from management on a timely basis to allow for
adequate reporting/consideration of certain transactions.
ii) AUDIT COMMITTEE AND FINANCIAL EXPERT. The Company does not have a
formal audit committee with a financial expert, and thus the Company
lacks the board oversight role within the financial reporting process.
(iii) INSUFFICIENT RESOURCES. The Company has insufficient quantity of
dedicated resources and experienced personnel involved in reviewing
and designing internal controls. As a result, a material misstatement
of the interim and annual financial statements could occur and not be
prevented or detected on a timely basis.
(iv) ENTITY LEVEL RISK ASSESSMENT. The Company did not perform an entity
level risk assessment to evaluate the implication of relevant risks on
financial reporting, including the impact of potential fraud related
risks and the risks related to non- routine transactions, if any, on
internal control over financial reporting. Lack of an entity-level
risk assessment constituted an internal control design deficiency
which resulted in more than a remote likelihood that a material error
would not have been prevented or detected, and constituted a material
weakness.
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(v) LACK OF PERSONNEL WITH GAAP EXPERIENCE. We lack personnel with formal
training to properly analyze and record complex transactions in
accordance with U.S.
Achieving continued compliance with Section 404 may require us to incur
significant costs and expend significant time and management resources. We
cannot assure you that we will be able to fully comply with Section 404 or that
we and our independent registered public accounting firm would be able to
conclude that our internal control over financial reporting is effective at
fiscal year end. As a result, investors could lose confidence in our reported
financial information, which could have an adverse effect on the trading price
of our securities, as well as subject us to civil or criminal investigations and
penalties.
In addition, our independent registered public accounting firm may not agree
with our management's assessment or conclude that our internal control over
financial reporting is operating effectively.
THE ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS, OFFICERS AND
EMPLOYEES UNDER NEVADA LAW AND THE EXISTENCE OF INDEMNIFICATION RIGHTS TO OUR
DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN SUBSTANTIAL EXPENDITURES BY OUR
COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR DIRECTORS, OFFICERS AND
EMPLOYEES.
Our Bylaws contain a provision permitting us to eliminate the personal
liability of our directors to our company and shareholders for damages for
breach of fiduciary duty as a director or officer to the extent provided by
Nevada law. We may also have contractual indemnification obligations under our
employment agreements with our officers. The foregoing indemnification
obligations could result in the Company incurring substantial expenditures to
cover the cost of settlement or damage awards against directors and officers,
which we may be unable to recoup. These provisions and resultant costs may also
discourage our company from bringing a lawsuit against directors and officers
for breaches of their fiduciary duties, and may similarly discourage the filing
of derivative litigation by our shareholders against our directors and officers
even though such actions, if successful, might otherwise benefit our company and
shareholders.