ITEM
1. BUSINESS
In
this Annual Report on Form 10-K, unless the context indicates otherwise, “Clubhouse Media,” the “Company,” “we,”
“our,” “ours” or “us” refer to Clubhouse Media Group, Inc., a Nevada corporation, and its subsidiaries,
including West of Hudson Group, Inc., a Delaware corporation, and its subsidiaries.
Business
Overview
We
are an influencer-based social media firm and digital talent management agency. Our Company offers management, production and deal-making
services to our handpicked influencers, a management division for individual influencer clients, and an investment arm for joint ventures
and acquisitions for companies in the social media influencer space. Our management team consists of successful entrepreneurs with financial,
legal, marketing, and digital content creation expertise.
Through
our subsidiary, West of Hudson Group, Inc. (“WOHG”), we currently generate revenues primarily from (i) through Doiyen, LLC
(“Doiyen”), a 100% wholly owned subsidiary of WOHG, talent management of social media influencers; (ii) through WOH Brands,
LLC (“WOH Brands”), a 100% wholly owned subsidiary of WOHG, which operates Honeydrip.com, a
new digital platform with a focus on the empowerment of creators. The site allows creators to connect with fans and sell exclusive photo
and video content; (iii) through Digital Influence Inc. (doing business as Magiclytics), a 100% wholly owned subsidiary of WOHG
(“Magiclytics”), providing predictive analytics for content creation brand deals; and (iv) for paid promotion by companies
looking to utilize such social media influencers to promote their products or services. We solicit companies for potential marketing
collaborations and cultivated content creation, work with the influencers and the marketing entity to negotiate and formalize a brand
deal and then execute the deal and receive a certain percentage from the deal. In addition to the in-house brand deals, we generate income
by providing talent management and brand partnership deals to external influencers.
WOHG
is the 100% owner and sole member and manager of each of these entities pursuant to each of the limited liability company agreements
and bylaws, where applicable, that govern these entities, and has complete and exclusive discretion in the management and control of
the affairs and business of WOH Brands, Doiyen, and Magiclytics possesses all powers necessary to carry out the purposes and business
of these entities. WOHG is entitled to the receipt of all income (and/or losses) that these entities generate.
In
addition to the above, WOHG is the 100% owner of two other limited liability companies – Clubhouse Studios, LLC, which holds most
of our intellectual property, and DAK Brands, LLC, each incorporated in the State of Delaware on May 13, 2020. However, each of these
entities has minimal or no operations, and is not intended to have any material operations in the near future.
For
the fiscal year ended December 31, 2021, Clubhouse Media generated revenues of $4,253,765 and reported a net loss of $22,245,656 and
negative cash flow from operating activities of $7,970,357. As noted in the consolidated financial statements of Clubhouse Media, as
of December 31, 2021, Clubhouse Media had an accumulated deficit of $24,904,074. There is substantial doubt regarding the
ability of Clubhouse Media to continue as a going concern as a result of its historical recurring losses and negative cash flows from
operations as well as its dependence on private equity and financings. See “Risk Factors—Clubhouse Media has a history of
operating losses and its management has concluded that factors raise substantial doubt about its ability to continue as a going concern
and the auditor of Clubhouse Media has included explanatory paragraphs relating to its ability to continue as a going concern in its
audit report for the twelve months ended December 31, 2021.”
Principal
Products and Services
Our
current principal products and services are comprised of (i) our talent management services and (ii) our brand development and content
creation and (iii) Honeydrip.com.
“The
Clubhouse” Online Presence
“The
Clubhouse” network previously consisted of physical locations. In 2021, we determined to focus exclusively on our talent management
services and our brand development and content creation. Accordingly, we closed our physical Clubhouses in 2021. There are numerous “Clubhouse”
accounts owned by The Clubhouse, with a following across Instagram, Snapchat, YouTube, and TikTok. These accounts are directly held by
us (as opposed to the Clubhouse team of influencers) and therefore we have direct access to the followers of these accounts, which we
consider to be our followers.
Talent
Management and Digital Agency Services
Doiyen,
our indirectly wholly owned subsidiary, is a talent management company and digital agency for social media influencers and generates
revenues based on the earnings of its influencer-clients (or “Creators”) by receiving a percentage of the earnings of its
Creators. Certain influencers enter into an Exclusive Management Agreement (each, a “Management Agreement”). Through Doiyen,
we seek to represent some of the world’s top talent in the world of social media. We plan to hire experienced talent and management
agents as well as build our support and administrative resources seeking to expand operations. Our influencers include entertainers,
content creators, and style icons.
We
are dedicated to helping Doiyen’s influencer-clients build their brands, maintain creative control of their destinies, and diversify
and grow their businesses through “The Clubhouse,” providing them opportunities to increase their monetization potential
and amplify their reach.
Paid
Promotion
Doiyen
and its Creators (both contracted and third party) primarily generate revenue from companies paying for promotion for their brands,
products, and/or services.
The
primary type of arrangement through which we will receive revenues from these activities through Doiyen is:
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As
a talent management company and digital agency, Doiyen generates revenues based on the earnings of its influencer-clients
Creators by receiving a percentage of the earnings of its Creators. Creators are often sought after directly by companies for specific
branding and/or promotional opportunities. In these situations, the client-company would contract with the Creator directly, and
such services provided by the Creator would fall under the Management Agreement, and Doiyen would receive a percentage of the earnings
of the Creator for such services as described above. |
Companies
that contract with Doiyen to provide such promotional activities for their advertising campaigns or custom content requests generally
either prepay for services or request credit terms. Such agreements typically provide for either a non-refundable deposit, or a cancellation
fee if the agreement is canceled by Doiyen prior to completion our promotional services.
Brand
Development and Content Creation
Through
WOH Brands, a 100% wholly owned subsidiary of WOHG, we engage and also plan to engage in a number of activities with respect to brand
development and incubation, content creation, and technology development, as follows:
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Content
Creation: original long and short form content creation for streaming services or other platforms involved in content distribution; |
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Brand
Development and Product Sales: acquiring or creating in-house brands and selling products in various categories, including apparel,
beauty, and other lifestyle brands; and |
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Technology:
Through Magiclytics, we provide predictive analytics for content creation brand deals. In September 2021, the Company launched
its subscription-based site HoneyDrip.com, a new digital platform designed and owned by Clubhouse Media Group with a focus on the
empowerment of creators. The site allows creators to connect with fans and sell exclusive photo and video content |
Brand
Development
On
May 19, 2020, WOH Brands began to engage in brand development, with a focus on creating apparel, beauty, and other lifestyle brands with
quality product offerings. Through WOH Brands, our indirectly wholly-owned subsidiary, we intend to acquire, enter into joint ventures
or launch best-in-class brands with an objective of innovation and product uniqueness, derived from demographic data, market research,
and omni-channel experiences.
WOH
Brands is primarily focused on creating brands on our behalf and may consider joint-ventures with other established companies in the
consumer-packaged goods space for purposes of brand and production creation. WOH Brands will not provide its branding or product services
to third parties outside of the Clubhouse Media-family of companies other than companies with which it may enter into a joint venture
or other companies it contracts with to do so.
As
of the date of this Prospectus, WOH Brands has only sold a minimal amount of products, and has only generated minimal revenues.
Content
Creation
WOH
Brands acts as an internal studio for us, with the ability to develop ideas for, produce, and film content.
Magiclytics
provides predictive analytics for content creation brand deals.
As
of the date of this Annual Report on Form 10-K, WOH Brands’ activities in this area have been limited to assisting in the production
of paid-promotional content for companies that have engaged Doiyen or Doiyen’s Creators for brand and product promotion, as well
as content-creation for Clubhouse, for which WOH Brands does not receive compensation. WOH Brands’ activities in this capacity
include filming, photography, and graphic design.
Planned
Operations
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Brand
Development. As stated above, WOH Brands intends to acquire, enter into joint ventures with, or create new brands in apparel,
beauty, and other lifestyle categories in the future. We believe that we are in a unique position to gather data intelligence from
our dealings with paid brand deals. While companies pay Doiyen and our influencers to promote their products or services, we gain
firsthand insight into what type of brands (and their corresponding products and services) resonate with our demographic. We believe
that this information better positions WOH Brands in deciding what type of product or service to acquire or build. WOH Brands will
not provide its brand development services to third parties outside of the Clubhouse Media-family of companies, but may engage in
joint ventures with third parties. |
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Content
Creation. In the future, WOH Brands intends to create entertainment content for streaming services and other platforms in
the entertainment and/or social media space. WOH Brands expects it could receive ad revenues, revenues for licensing, and/or revenues
for sales of content to purchasers in this space. |
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Technology
Development / Software. WOH Brands also intends to continue to develop its Magiclytics software, which provides predictive
ROI on influencer campaigns. |
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Subscription
Services. In September 2021, the Company launched its subscription-based site HoneyDrip.com, a new digital platform designed
and owned by Clubhouse Media Group with a focus on the empowerment of creators. The site allows creators to connect with fans and
sell exclusive photo and video content. We plan to continue to expand the number of users and creators on the site. |
INDUSTRY
OVERVIEW
Social
Media and Influencer Marketing and Promotion
Around
the world, marketing is a key strategy for brands to obtain exposure, achieve better recall, communicate themes and drive increased
consumer engagement. Globally, in 2018, there was an estimated spend of $66 billion on sponsorships, up from $43 billion in 2008,
according to Statista 2019-Worldwide; IEG; 2007 to 2017. As for the overall advertising landscape, Zenith estimated
that global advertising spending will reach $705 billion in 2021, up from $634 billion
in 2019, and will rise to $873 billion by 2024.
Advertising
has shifted significantly towards social media over the last few years, and social media influencers who are the primary form of advertisement
distribution is highly disorganized. We believe that one of the most important aspects of building a company or launching a product is
social media marketing. According to Sprout Social, as of January 2022, there are 3.96 billion total social media users across
all platforms. This makes social media marketing a great tool for any company.
According
to a Business Insider Intelligence report titled “Influencer Marketing: State of the social media influencer market in 2021”
originally published in December 2019 and updated February 2021, influencer marketing spending has grown significantly since
2015 and is expected to reach $13.8 billion annually by 2021. According to the same source, currently 78% of companies spend over 10%
of their marketing budget on influencer marketing and 11% of companies allocate more than 40% of their marketing budget on influencer
marketing and the percentage is expected to grow as more companies become comfortable with the channel. Also according to the same source,
companies surveyed about influencer marketing noted that content quality, aligned target audience demographic and engagement rate were
the three most important determinants in choosing influencer partners and that the two most important goals for influencer marketing
based on survey responses were increasing brand awareness and reaching new audiences in order to expand their existing customer base.
Furthermore, according to Influencer Marketing Hub, the influencer marketing spend is projected to reach $16.4 billion in 2022.
We
intend to capitalize on this growing social media and influencer based advertising spending, utilizing our Clubhouse influencers to attract
advertisers directly, as well as generating business for Creators, for which we will receive compensation pursuant to our Management
Agreements.
Competition
As
a talent management company through Doiyen, we compete against other talent management companies that are specific to the social media
influencer space, such as IZEA and Viral Nation. We compete with these other companies on the basis of our brand name, reputation for
access to industry participants and desirable projects, as well as pricing.
For
our brands and products, we currently compete primarily with other specialty retailers, higher-end department stores and Internet businesses
that engage in the retail sale of women’s and men’s apparel, accessories and similar merchandise targeting customers aged
12 to 30. We believe the principal basis upon which we compete are design, quality, and price. We believe that our primary competitive
advantage is high visibility, which we can achieve through our network of Clubhouse influencers.
For
our platform Honeydrip.com, we directly compete with OnlyFans, an industry leader. HoneyDrip differentiates itself from OnlyFans by being
an Invite only site, our site is female empowering, and we offer an inhouse account management services for creators.
In
the future, we expect to compete with other content-creators for placement on streaming services and other content platforms, with technology
and software companies in the social media space, and with companies making lifestyle and/or beauty products marketed to social media
audiences.
We
seek to effectively compete with such competitors by out-scaling our competition, focusing on in-house business infrastructure and providing
superior support and management services for our Clubhouse influencers. We strive to have more physical locations than other influencer-house
networks. Currently, we are unaware of any other company that is combining into one business the various business aspects in which we
engage. In addition, we believe the experience of our management team provides us with a significant advantage in the social media influencer
business, as participants in this space have traditionally lacked the business experience that our executive management team possesses,
which we intend to use to our advantage. Notwithstanding, we may not be able to effectively compete with such competitors.
Customers
Our
customers include our influencer-clients, or Creators (through Doiyen), companies that contract directly with us (through Doiyen) for
paid promotion, and the consumers that purchase our products (through WOH Brands).
Doiyen
and its Creators have already worked with a number of notable brands, including, but not limited to, Fashion Nova, Spotify, McDonalds,
Amazon, and Boohoo.
Sales
and Marketing
We
generally attract clients through our social media presence across various platforms, including YouTube, Instagram, and TikTok.
As
a respected name in the social media influencer industry, we are often approached by influencers who want us to represent them (through
DoiyenWe also scout for up-and-coming talented influencers on various social media platforms, who we then attempt to engage as clients.
For
paid promotion, we generally receive inbound inquiries for promotional opportunities from companies looking to promote their brands or
products. Doiyen also has a sales team to reach out to specific brands that we believe fits a specific influencer’s style, which
is another way we generate business.
All
products that we sell are marketed through our Clubhouse team of influencers, who provide promotion and marketing social media posts
on our behalf.
Government
Regulation
We
are subject to various federal, state and local laws, both domestically and internationally, governing matters such as:
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licensing
laws for talent management companies, such as California’s Talent Agencies Act; |
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licensing,
permitting and zoning; |
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health,
safety and sanitation requirements; |
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harassment
and discrimination, and other similar laws and regulations; |
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compliance
with the Foreign Corrupt Practices Act (“FCPA”) and similar regulations in other countries; |
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data
privacy and information security; |
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marketing
activities; |
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environmental
protection regulations; |
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imposition
by the U.S. and/or foreign countries of trade restrictions, restrictions on the manner in which content is currently licensed and
distributed and ownership restrictions; and |
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government
regulation of the entertainment industry. |
We
monitor changes in these laws and believe that we are in material compliance with applicable laws and regulations. See “Risk Factors—Risks
Related to Our Business—We are subject to extensive U.S. and foreign governmental regulations, and our failure to comply with these
regulations could adversely affect our business.”
Our
entertainment and content businesses are also subject to certain regulations applicable to our use of Internet web sites and mobile applications
such as Tik Tok, Instagram and YouTube. We maintain various web sites and mobile applications that provide information and content regarding
our businesses and offer merchandise for sale. The operation of these web sites and applications may be subject to a range of federal,
state and local laws.
Due
to our involvement in products, we are subject to laws governing advertising and promotions, privacy laws, safety regulations, consumer
protection regulations and other laws that regulate retailers and govern the promotion and sale of merchandise. We monitor changes in
these laws and believe that we are in material compliance with applicable laws.
Intellectual
Property
We
currently do not own any patents, trademarks or any other intellectual property at this time.
The
Company filed a trademark application on April 15, 2020, with the United States Patent and Trademark Office (“USPTO”) under
Application Serial No. 90649015 for the mark “Clubhouse Media Group.” The application can be found at https://tmsearch.uspto.gov/bin/showfield?f=doc&state=4807:hxdnrn.3.1
and is identified with this image:
Overview
of the Business of West of Hudson Group, Inc.
WOHG,
our directly wholly owned subsidiary, was incorporated on May 19, 2020 under the laws of the State of Delaware. WOHG is primarily a holding
company, and operates various aspects of its business through its operating subsidiaries of which WOHG is the 100% owner and sole member,
and which are as follows:
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Doiyen—a
talent management company that provides representation to Clubhouse influencers, as further described below. |
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WOH
Brands—a content-creation studio, social media marketing company, technology developer, and brand incubator, as further described
below. It owns and operates HoneyDrip.com, a new digital platform designed and owned by Clubhouse Media Group with a focus on the
empowerment of creators. The site allows creators to connect with fans and sell exclusive photo and video content |
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Magiclytics—a
company that provides predictive analytics for content creation brand deals. |
Doiyen,
formerly named WHP Management, LLC, and before that named WHP Entertainment LLC, is a California limited liability company formed on
January 2, 2020. Doiyen was acquired by WOHG on July 9, 2020 pursuant to an exchange agreement between WOHG and Doiyen, pursuant to which
WOHG acquired 100% of the membership interests of Doiyen in exchange for 100 shares of common stock of WOHG. As described above, Doiyen
is a talent management company for social media influencers, and seeks to represent some of the world’s top talent in the world
of social media. Doiyen is the entity with which our influencers contract.
WOH
Brands is a Delaware limited liability company formed on May 19, 2020 by WOHG. As described above, WOH Brands engages and also plans
to engage in a number of activities, with respect to brand development and incubation, content creation, and technology development.
Magiclytics
is a Wyoming corporation formed on July 2, 2018. The Company acquired a 100% interest in Magiclytics on February 3, 2021. As described
above, Magiclytics provides predictive analytics for content creation brand deals.
WOHG
is the 100% owner and sole member and manager of each of these entities pursuant to each of the limited liability company agreements
and bylaws, where applicable, that govern these entities, and has complete and exclusive discretion in the management and control of
the affairs and business of WOH Brands, Doiyen, and Magiclytics possesses all powers necessary to carry out the purposes and business
of these entities. WOHG is entitled to the receipt of all income (and/or losses) that these entities generate.
In
addition to the above, WOHG is the 100% owner of two other limited liability companies – Clubhouse Studios, LLC, which holds most
of our intellectual property, and DAK Brands, LLC, each incorporated in the State of Delaware on May 13, 2020. However, each of these
entities has minimal or no operations as of the date of this Prospectus and are not intended to have any material operations in the near
future.
Organizational
Structure
The
following diagram reflects our organization structure:
Effects
of Coronavirus on the Company
Due
to the digital/remote nature of our business, we believe that the effects of Coronavirus on the company are limited.
Organizational
History
Clubhouse
Media Group, Inc. was incorporated under the laws of the State of Nevada on December 19, 2006 with the name Tongji Healthcare Group,
Inc. by Nanning Tongji Hospital, Inc. (“NTH”). On the same day, Tongji, Inc., our wholly owned subsidiary, was incorporated
in the State of Colorado. Tongji, Inc. was later dissolved on March 25, 2011.
NTH
was established in Nanning in the province of Guangxi of the People’s Republic of China (“PRC” or “China”)
by the Nanning Tongji Medical Co. Ltd. and an individual on October 30, 2003.
NTH
was a designated hospital for medical insurance in the city of Nanning and Guangxi province with 105 licensed beds. NTH specializes in
the areas of internal medicine, surgery, gynecology, pediatrics, emergency medicine, ophthalmology, medical cosmetology, rehabilitation,
dermatology, otolaryngology, traditional Chinese medicine, medical imaging, anesthesia, acupuncture, physical therapy, health examination,
and prevention.
On
December 27, 2006, Tongji, Inc. acquired 100% of the equity of NTH pursuant to an Agreement and Plan of Merger, pursuant to which NTH
became a wholly owned subsidiary of Tongji Inc. Pursuant to the Agreement and Plan of Merger, we issued 15,652,557 shares of common stock
to the shareholders of NTH in exchange for 100% of the issued and outstanding shares of common stock of NTH. The acquisition of NTH was
accounted for as a reverse acquisition under the purchase method of accounting since the shareholders of NTH obtained control of the
entity. Accordingly, the reorganization of the two companies was recorded as a recapitalization of NTH, with NTH being treated as the
continuing operating entity. The Company, through NTH, thereafter operated the hospital, until the Company eventually sold NTH, as described
below.
Effective
December 31, 2017, under the terms of a Bill of Sale, we agreed to sell, transfer convey and assign forever all of its rights, title
and interest in its equity ownership interest in its subsidiary, NTH, to Placer Petroleum Co., LLC, an Arizona limited liability company.
Pursuant to the Bill of Sale, consideration for this sale, transfer conveyance and assignment is Placer Petroleum Co, LLC assuming all
assets and liabilities of NTH as of December 31, 2017. As a result of the Bill of Sale, the related assets and liabilities of Nanning
Tongji Hospital, Inc. was reported as discontinued operations effective December 31, 2017. Thereafter, the Company had minimal operations.
On
May 20, 2019, pursuant to Case Number A-19-793075-P, Nevada’s 8th Judicial District, Business Court entered and Order Granting
Application of Joseph Arcaro as Custodian of Tongji Healthcare Group, Inc. pursuant to NRS 78.347(1)(b), pursuant to which Joseph Arcaro
was appointed custodian of the Company and given authority to reinstate the Company with the State of Nevada under NRS 78.347. On May
23, 2019, Joseph Arcaro filed a Certificate of Reinstatement of the Company with the Secretary of State of the State of Nevada. In addition,
on May 23, 2019, Joseph Arcaro filed an Annual List of the Company with the Secretary of State of the State of Nevada, designating himself
as President, Secretary, Treasurer and Director of the Company for the filing period of 2017 to 2019. On November 13, 2019, Mr. Arcaro
filed a Motion to Terminate Custodianship of Tongji Healthcare Group, Inc. pursuant to NRS 78.650(4) with the District Court in Clark
County Nevada. On December 6, 2019, the court granted Mr. Arcaro’s motion, and the custodianship was terminated.
Effective
May 29, 2020, Joseph Arcaro, our Chief Executive Officer, President, Secretary, Treasurer and sole director and the beneficial owner,
through his ownership of Algonquin Partners Inc. (“Algonquin”), of 65% of the Company’s common stock, entered into
a Stock Purchase Agreement (the “Stock Purchase Agreement”) by and among West of Hudson Group, Inc., the Company, Algonquin,
and Mr. Arcaro. Pursuant to the terms of the SPA, WOHG agreed to purchase, and Algonquin agreed to sell, 30,000,000 shares of the Company’s
common stock in exchange for payment by WOHG to Algonquin of $240,000 (the “Stock Purchase”). Thereafter, WOHG distributed
the 30,000,000 shares of the Company among the shareholders of WOHG. The Stock Purchase closed on June 18, 2020, resulting in a change
of control of the Company.
On
July 7, 2020, we amended our articles of incorporation whereby we increased our authorized capital stock to 550,000,000 shares, comprised
of 500,000,000 shares of common stock, par value $0.001 and 50,000,000 shares of preferred stock, par value $0.001.
Share
Exchange Agreement – West of Hudson Group, Inc.
On
August 11, 2020, we entered into the Share Exchange Agreement with (i) WOHG; (ii) each of the WOHG Shareholders; and (iii) Mr. Ben-Yohanan
as the Shareholders’ Representative.
Pursuant
to the terms of the Share Exchange Agreement, the parties agreed that the Company would acquire 100% of WOHG’s issued and outstanding
capital stock, in exchange for the issuance to the WOHG Shareholders of a number of shares of the Company’s common stock to be
determined at the closing of the Share Exchange Agreement.
On
November 12, 2020, the Company filed a Certificate of Designations with the Secretary of State of Nevada to designate one share of the
preferred stock of the Company as the Series X Preferred Stock of the Company.
The
closing of the Share Exchange Agreement occurred on November 12, 2020. Pursuant to the terms of the Share Exchange Agreement, the Company
acquired 200 shares WOHG’s common stock, par value $0.0001 per share, representing 100% of the issued and outstanding capital stock
of WOHG, in exchange for the issuance to the WOHG Shareholders of 46,811,195 shares of the Company’s common stock (the “Share
Exchange”). As a result of the Share Exchange, WOHG became a wholly owned subsidiary of the Company.
In
addition, on November 20, 2020, pursuant to the Share Exchange Agreement and subsequent Waiver, the Company issued and sold to Amir Ben-Yohanan
one share of Series X Preferred Stock, at a purchase price of $1.00. This one share of Series X Preferred Stock has a number of votes
equal to all of the other votes entitled to be cast on any matter by any other shares or securities of the Company plus one, but will
not have any economic or other interest in the Company.
The
Share Exchange is intended to be a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
(the “Code”), and the Share Exchange Agreement is intended to be a “plan of reorganization” within the meaning
of the regulations promulgated under Section 368(a) of the Code and for the purpose of qualifying as a tax-free transaction for federal
income tax purposes.
On
November 12, 2020, pursuant to the closing of the Share Exchange Agreement, we acquired WOHG, and WOHG thereafter became our wholly owned
subsidiary, and the business of WOHG became the business of the Company going forward.
Recent
Developments of West of Hudson Group, Inc.
On
August 3, 2020, on behalf of WOHG, Amir Ben-Yohanan, our Chief Executive Officer, entered into a lease agreement for a term ending July
31, 2021 for $50,000 a month (for the property currently being used for the Dobre Brothers House – Beverly Hills location.)
The Company terminated its lease agreement for the Dobre Brothers House effective September 1, 2021. At the time of
the termination of this lease, the Company had a month-to-month tenancy at this location, as contemplated under the lease after the expiration
of the initial term of the lease on July 31, 2021. This lease was terminated in the 4th quarter of 2021.
On
September 4, 2020, on behalf of WOHG, Mr. Ben-Yohanan, our Chief Executive Officer, entered into a one-year lease agreement for $40,000
a month for the “Weheartfans House – Bel-Air” Clubhouse. Neither Amir Ben-Yohanan nor WOHG renewed the
lease upon its expiration.
On
September 6, 2020, WOHG entered into an agreement to rent the property for Clubhouse Europe until November 5, 2020,
for 4,000 euros per month and to be extended month to month thereafter. This lease was terminated in the 4th quarter of 2021.
On
August 18, 2020, on behalf of the Company, Amir Ben-Yohanan, our Chief Executive Officer, entered into a one-year lease agreement for
a term commencing on February 1, 2021 and ending January 31, 2022 for $12,500 a month (for the property currently being used for the Society
Las Vegas – Las Vegas location). As of July 31, 2021, the Company and the landlord mutually agreed to terminate the lease
without penalty.
On
March 4, 2021, the Company entered into a three-month lease agreement for a term ending June 15, 2021 for $34,000.00 per month (for the
property currently being used for the Just a House – Los Angeles location.) This lease was not renewed.
As
of December 31, 2021, Mr. Ben-Yohanan, our Chief Executive Officer has advanced $2,269,864 to WOHG to pay WOHG’s operating expenses.
Name
Change
On
November 2, 2020, the Company filed a Certificate of Amendment with the Secretary of State of Nevada in order to amend its Articles of
Incorporation to change the Company’s name from “Tongji Healthcare Group, Inc.” to “Clubhouse Media Group, Inc.”
On
January 20, 2021, Financial Industry Regulatory Authority (“FINRA”) approved our name change from “Tongji Healthcare
Group, Inc.” to “Clubhouse Media Group, Inc.” and approved the change the symbol of our common stock from “TONJ”
to “CMGR.”
Share
Exchange Agreement - Magiclytics
On
February 3, 2021, the Company entered into an Amended and Restated Share Exchange Agreement (the “A&R Share Exchange Agreement”)
by and between the Company, Magiclytics, each of the shareholders of Magiclytics (the “Magiclytics Shareholders”) and Christian
Young, as the representative of the Magiclytics Shareholders (the “Shareholders’ Representative”). Christian Young
is the President, Secretary, and a Director of the Company, and is also an officer, director, and significant shareholder of Magiclytics.
The
A&R Share Exchange Agreement amended and restated in its entirety the previous Share Exchange Agreement between the same parties,
which was executed on December 3, 2020 . The A&R Share Exchange Agreement replaces the Share Exchange Agreement in its
entirety.
Pursuant
to the terms of the A&R Share Exchange Agreement, the Company agreed to acquire from the Magiclytics Shareholders, who hold an aggregate
of 5,000 shares of Magiclytics’ common stock, par value $0.01 per share (the “Magiclytics Shares”), all 5,000 Magiclytics
Shares, representing 100% of Magiclytics’ issued and outstanding capital stock, in exchange for the issuance by the Company to
the Magiclytics Shareholders of the 734,689 shares of the Company’s common stock based on a $3,500,000 valuation of Magiclytics,
to be apportioned between the Magiclytics Shareholders pro rata based on their respective ownership of Magiclytics Shares.
On
February 3, 2021 (the “Magiclytics Closing Date”), the parties closed on the transactions contemplated in the A&R Share
Exchange Agreement, and the Company agreed to issue 734,689 shares of Company common stock to the Magiclytics Shareholders in exchange
for all 5,000 Magiclytics Shares (the “Magiclytics Closing”). On February 3, 2021, pursuant to the closing of the Share Exchange
Agreement, we acquired Magiclytics, and Magiclytics thereafter became our wholly owned subsidiary.
At
the Magiclytics Closing, we agreed to issue to Christian Young and Wilfred Man each 330,610 shares of Company Common Stock, representing
45% each, or 90% in total of the Company common stock which we agreed to issue to the Magiclytics Shareholders at the Magiclytics Closing.
As of February 7, 2021, we have not issued the 734,689 shares to the Magiclytics shareholders.
The
number of shares of the Company common stock issued at the Magiclytics Closing was based on the fair market value of the Company common
stock as initially agreed to by the parties, which is $4.76 per share (the “Base Value”). The fair market value was determined
based on the volume weighted average closing price of the Company common stock for the twenty (20) trading day period immediately prior
to the Magiclytics,. In the event that the initial public offering price per share of the Company common stock in this offering pursuant
to Regulation A is less than the Base Value, then within three (3) business days of the qualification by the Securities and Exchange
Commission (the “SEC”) of the Offering Statement forming part of this Prospectus, the Company will issue to the Magiclytics
Shareholders a number of additional shares of Company common stock equal to:
|
1. |
$3,500,000
divided by the initial public offering price per share of the Company common stock in this offering pursuant to Regulation A, minus |
|
2. |
734,689. |
The
resulting number of shares of the Company common stock pursuant to the above calculation will be referred to as the “Additional
Shares”, and such Additional Shares will also be issued to the Magiclytics Shareholders pro rata based on their respective ownership
of Magiclytics Shares. The Company issued additional 140,311 shares in November 2021 based on the offering price of $4 in the Regulation
A offering.
In
addition to the exchange of shares between the Magiclytics Shareholders and the Company described above, on the Magiclytics Closing Date
the parties took a number of other actions in connection with the Magiclytics Closing pursuant to the terms of the A&R Share Exchange
Agreement:
|
(i) |
The
Board of Directors of Magiclytics (the “Magiclytics Board”) expanded the size of the Magiclytics Board to 3 persons and
named Simon Yu, a current officer and director of the Company as a director of the Magiclytics Board. |
|
(ii) |
The
Magiclytics Board named Wilfred Man as the Chief Executive Officer of Magiclytics, Christian Young as the President and Secretary
of the Magiclytics and Simon Yu as the Chief Operating Officer of Magiclytics. |
Further,
immediately following the Magiclytics Closing, the Company assumed responsibility for all outstanding accounts payables and operating
costs to continue operations of Magiclytics including but not limited to payment to any of its vendors, lenders, or other parties in
which Magiclytics engages with in the regular course of its business.
Management
Agreement—Alden Reiman Agency
Effective
August 20, 2021, the Company entered into an exclusive management agreement with Alden Reiman, an influencer-based marketing and media
firm with a vast, global social media reach, announces that Alden
Reiman has joined Clubhouse Media as a consultant. In this role, Reiman will, on an exclusive
basis, use his best efforts to obtain brand and sponsorship deals for Clubhouse Media, talent and third-party clients.
Management
Agreement—TheTinderBlog
Effective
June 10, 2021, the Company entered into an exclusive management agreement pursuant to which it will manage, invest in and help grown
“TheTinderBlog” (Instagram.com/thetinderblog), a large and highly successful Instagram meme account. TheTinderBlog
is an official partner of Facebook. TheTinderBlog boasts over 4.2 million followers acquired over its six-year existence, as well as
a seven-figure annual net income built on nearly one billion web impressions per month. TheTinderBlog has also attracted major advertisers,
including McDonald’s, Amazon Prime, Dunkin Donuts, Samsung, among others. This management agreement was terminated in the 4th
quarter of 2021.
Clubhouse
Creator Affiliate Program
In
June 2021, we launched the Clubhouse Creator Affiliate Program. Through this program, we invite young social media creators from all
over the world to join the Clubhouse network, promote the Clubhouse brand and grow their social media network with us. To date, over
18 creators with a total reach of well over 100 million followers have signed up and partnered with us and we expect many more to do
the same. These creators will serve as Clubhouse ambassadors worldwide.
CONVERTIBLE
PROMISSORY NOTES
Convertible
Promissory Note – Scott Hoey
On
September 10, 2020, the Company entered into a note purchase agreement with Scott Hoey, pursuant to which, on same date, the Company
issued a convertible promissory note to Mr. Hoey the aggregate principal amount of $7,500 for a purchase price of $7,500 (“Hoey
Note”).
The
Hoey Note had a maturity date of September 10, 2022 and bore interest at 8% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the Hoey Note, and the Company may prepay all or any portion
of the principal amount and any accrued and unpaid interest at any time without penalty. Mr. Hoey had the right, until the Indebtedness
is paid in full, to convert all, but only all, of the then-outstanding Indebtedness into shares of Company common stock at a conversion
price of 50% of the volume weighted average of the closing price (“VWAP”) during the 20-trading day period immediately prior
to the option conversion date, subject to customary adjustments for stock splits, etc. occurring after the issuance date.
On
December 8, 2020, the Company issued to Mr. Hoey 10,833 shares of Company common stock upon the conversion of the $7,500 convertible
promissory note issued to Mr. Hoey at a conversion price of $0.69 per share.
Since
the conversion price is based on 50% of the VWAP during the 20-trading day period immediately prior to the option conversion date, the
Company has determined that the conversion feature is considered a derivative liability for the Company, which is detailed in Note 12.
The
balance of the Hoey Note as of December 31, 2021 and 2020 was $0 and $0, respectively.
Convertible
Promissory Note – Cary Niu
On
September 18, 2020, the Company entered into a note purchase agreement with Cary Niu, pursuant to which, on same date, the Company issued
a convertible promissory note to Ms. Niu the aggregate principal amount of $50,000 for a purchase price of $50,000 (“Niu Note”).
The
Niu Note has a maturity date of September 18, 2022 and bears interest at 8% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the Niu Note, and the Company may prepay all or any portion
of the principal amount and any accrued and unpaid interest at any time without penalty. Ms. Niu will have the right, until the Indebtedness
is paid in full, to convert all, but only all, of the then-outstanding Indebtedness into shares of Company common stock at a conversion
price of 30% of the volume weighted average of the closing price during the 20-trading day period immediately prior to the option conversion
date, subject to customary adjustments for stock splits, etc. occurring after the issuance date.
Since
the conversion price is based on 30% of the VWAP during the 20-trading day period immediately prior to the option conversion date, the
Company has determined that the conversion feature is considered a derivative liability for the Company, which is detailed in Note 12.
The
balance of the Niu Note as of December 31, 2021 and 2020 was $50,000 and $50,000, respectively.
Convertible
Promissory Note – Jesus Galen
On
October 6, 2020, the Company entered into a note purchase agreement with Jesus Galen, pursuant to which, on same date, the Company issued
a convertible promissory note to Mr. Galen the aggregate principal amount of $30,000 for a purchase price of $30,000 (“Galen Note”).
The
Galen Note has a maturity date of October 6, 2022 and bears interest at 8% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the Galen Note, and the Company may prepay all or any portion
of the principal amount and any accrued and unpaid interest at any time without penalty. Mr. Galen will have the right, until the Indebtedness
is paid in full, to convert all, but only all, of the then-outstanding Indebtedness into shares of Company common stock at a conversion
price of 50% of the volume weighted average of the closing price during the 20-trading day period immediately prior to the option conversion
date, subject to customary adjustments for stock splits, etc. occurring after the issuance date.
Since
the conversion price is based on 50% of the VWAP during the 20-trading day period immediately prior to the option conversion date, the
Company has determined that the conversion feature is considered a derivative liability for the Company, which is detailed in Note 12.
The
balance of the Galen Note as of December 31, 2021 and 2020 was $30,000 and $30,000, respectively.
Convertible
Promissory Note – Darren Huynh
On
October 6, 2020, the Company entered into a note purchase agreement with Darren Huynh, pursuant to which, on same date, the Company issued
a convertible promissory note to Mr. Huynh the aggregate principal amount of $50,000 for a purchase price of $50,000 (“Huynh Note”).
The
Huynh Note has a maturity date of October 6, 2022, and bears interest at 8% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the Huynh Note, and the Company may prepay all or any portion
of the principal amount and any accrued and unpaid interest at any time without penalty. Mr. Huynh will have the right, until the Indebtedness
is paid in full, to convert all, but only all, of the then-outstanding Indebtedness into shares of Company common stock at a conversion
price of 50% of the volume weighted average of the closing price during the 20-trading day period immediately prior to the option conversion
date, subject to customary adjustments for stock splits, etc. occurring after the issuance date.
Since
the conversion price is based on 50% of the VWAP during the 20-trading day period immediately prior to the option conversion date, the
Company has determined that the conversion feature is considered a derivative liability for the Company, which is detailed in Note 12.
The
balance of the Huynh Note as of December 31, 2021 and 2020 was $0 and $50,000, respectively.
Convertible
Promissory Note – Wayne Wong
On
October 6, 2020, the Company entered into a note purchase agreement with Wayne Wong, pursuant to which, on same date, the Company issued
a convertible promissory note to Mr. Wong the aggregate principal amount of $25,000 for a purchase price of $25,000 (“Wong Note”).
The
Wong Note has a maturity date of October 6, 2022, and bears interest at 8% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the Wong Note, and the Company may prepay all or any portion
of the principal amount and any accrued and unpaid interest at any time without penalty. Mr. Wong will have the right, until the Indebtedness
is paid in full, to convert all, but only all, of the then-outstanding Indebtedness into shares of Company common stock at a conversion
price of 50% of the volume weighted average of the closing price during the 20-trading day period immediately prior to the option conversion
date, subject to customary adjustments for stock splits, etc. occurring after the issuance date.
Since
the conversion price is based on 50% of the VWAP during the 20-trading day period immediately prior to the option conversion date, the
Company has determined that the conversion feature is considered a derivative liability for the Company, which is detailed in Note 12.
The
balance of the Wong Note as of December 31, 2021 and 2020 was $0 and $25,000, respectively.
Convertible
Promissory Note – Matthew Singer
On
January 3, 2021, the Company entered into a note purchase agreement with Matthew Singer, pursuant to which, on same date, the Company
issued a convertible promissory note to Mr. Singer the aggregate principal amount of $13,000 for a purchase price of $13,000 (“Singer
Note”).
The
Singer Note had a maturity date of January 3, 2023, and bore interest at 8% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the Singer Note, and the Company may prepay all or any portion
of the principal amount and any accrued and unpaid interest at any time without penalty. Mr. Singer had the right, until the Indebtedness
is paid in full, to convert all, but only all, of the then-outstanding Indebtedness into shares of Company common stock at a conversion
price of 70% of the volume weighted average of the closing price during the 20-trading day period immediately prior to the option conversion
date, subject to customary adjustments for stock splits, etc. occurring after the issuance date.
On
January 26, 2021, the Company issued to Matthew Singer 8,197 shares of Company common stock upon the conversion of the convertible promissory
note issued to Mr. Singer in the principal amount of $13,000 on January 3, 2021 at a conversion price of $1.59 per share.
Since
the conversion price is based on 70% of the VWAP during the 20-trading day period immediately prior to the option conversion date, the
Company has determined that the conversion feature is considered a derivative liability for the Company, which is detailed in Note 12.
The
balance of the Singer Note as of December 31, 2021 and 2020 was $0 and $0, respectively.
Convertible
Promissory Note – ProActive Capital SPV I, LLC
On
January 20, 2021, the Company entered into a securities purchase agreement (the “ProActive Capital SPA”) with ProActive Capital
SPV I, LLC, a Delaware limited liability company (“ProActive Capital”), pursuant to which, on same date, the Company (i)
issued a convertible promissory note to ProActive Capital the aggregate principal amount of $250,000 for a purchase price of $225,000,
reflecting a $25,000 original issue discount (the “ProActive Capital Note”), and in connection therewith, sold to ProActive
Capital 50,000 shares of Company Common Stock at a purchase price of $0.001 per share. In addition, at the closing of this sale, the
Company reimbursed ProActive Capital the sum of $10,000 for ProActive Capital’s costs in completing the transaction, which amount
ProActive Capital withheld from the total purchase price paid to the Company.
The
ProActive Capital Note has a maturity date of January 20, 2022 and bears interest at 10% per year. No payments of the principal amount
or interest are due prior to the maturity date other than as specifically set forth in the ProActive Capital Note, and the Company may
prepay all or any portion of the principal amount and any accrued and unpaid interest at any time without penalty.
The
ProActive Capital Note (and the principal amount and any accrued and unpaid interest) is convertible into shares of Company Common Stock
at ProActive Capital’s election at any time following the time that the SEC qualifies the Company’s offering statement related
to the Regulation A Offering, at a conversion price equal to 70% of the Regulation A Offering Price of the Company Common Stock in the
Regulation A Offering, and is subject to a customary beneficial ownership limitation of 9.99%, which may be waived by ProActive Capital
on 61 days’ notice to the Company. The conversion price is subject to customary adjustments for any stock splits, etc. which occur
following the determination of the conversion price.
The
$25,000 original issue discount, the fair value of 50,000 shares issued, and the beneficial conversion features were recorded as debt
discounts and amortized over the term of the note. Therefore, the total debt discounts at the inception date of this convertible promissory
note were $217,024.
The
balance of the ProActive Capital Note as of December 31, 2021 and 2020 was $250,000 and $0, respectively.
First
Convertible Promissory Note – GS Capital Partners
On
January 25, 2021, the Company entered into a securities purchase agreement (the “GS Capital #1”) with GS Capital Partners,
LLC (“GS Capital”), pursuant to which, on same date, the Company (i) issued a convertible promissory note to GS Capital the
aggregate principal amount of $288,889 for a purchase price of $260,000, reflecting a $28,889 original issue discount (the “GS
Capital Note”), and in connection therewith, sold to GS Capital 50,000 shares of Company Common Stock at a purchase price of $0.001
per share. In addition, at the closing of this sale, the Company reimbursed GS Capital the sum of $10,000 for GS Capital’s costs
in completing the transaction, which amount GS Capital withheld from the total purchase price paid to the Company.
The
GS Capital Note has a maturity date of January 25, 2022, and bears interest at 10% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the GS Capital Note, and the Company may prepay all or any
portion of the principal amount and any accrued and unpaid interest at any time without penalty.
The
GS Capital Note (and the principal amount and any accrued and unpaid interest) is convertible into shares of Company Common Stock at
GS Capital’s election at any time following the time that the SEC qualifies the Company’s offering statement related to the
Regulation A Offering, at a conversion price equal to 70% of the Regulation A Offering Price of the Company Common Stock in the Regulation
A Offering, and is subject to a customary beneficial ownership limitation of 9.99%, which may be waived by GS Capital on 61 days’
notice to the Company. The conversion price is subject to customary adjustments for any stock splits, etc. which occur following the
determination of the conversion price.
The
$28,889 original issue discounts, the fair value of 50,000 shares issued, and the beneficial conversion features were recorded as debt
discounts and amortized over the term of the note. Therefore, the total debt discounts at the inception date of this convertible promissory
note were $288,889.
The
entire principal balance and interest were converted in the quarter ended June 30, 2021. The balance of the GS Capital #1 as of December
31, 2021 and December 31, 2020 was $0 and $0, respectively. The Company signed the restructuring agreement below to return
the shares for the new GS note #1, as if the initial conversion had not occurred.
Convertible
Promissory Note – New GS Note #1
On
November 26, 2021, the Company entered into an Amendment and Restructuring Agreement (the “Restructuring Agreement”) with
GS Capital Partners, LLC to replacement GS Capital #1 as disclosed above. GS
Capital sold to the Company, and the Company redeemed from GS Capital, the 107,301 Converted Shares, and in exchange therefor, the Company
issued to GS Capital a new convertible promissory note in the aggregate principal amount of $300,445 (the “New GS Note #1”).
The
New GS Note #1 has a maturity date of May 31, 2022 and bears interest at 10% per year. No payments of the principal amount or interest
are due prior to the Maturity Date, other than as specifically set forth in the Note, and there is no prepayment penalty.
The
New GS Note #1 provides GS Capital with conversion rights to convert all or any part of the outstanding and unpaid principal amount of
the New Note from time to time into fully paid and non-assessable shares of the Company’s common stock, at a conversion price of
$1.00, subject to adjustment as provided in the New Note and subject to a 9.99% equity blocker.
The
New GS Note #1 contains customary events of default, including, but not limited to, failure to pay principal or interest on the New Note
when due. If an event of default occurs and continues uncured, GS Capital may declare all or any portion of the then outstanding principal
amount of the New Note, together with all accrued and unpaid interest thereon, due and payable, and the New Note will thereupon become
immediately due and payable.
The
balance of the New GS Note #1 as of December 31, 2021 and 2020 was $300,445 and $0, respectively.
Convertible
Promissory Note – GS Capital Partners #2
On
February 19, 2021, the Company entered into another securities purchase agreement with GS Capital (the “GS Capital #2”),
pursuant to which, on same date, the Company issued a convertible promissory note to GS Capital the aggregate principal amount of $577,778
for a purchase price of $520,000, reflecting a $57,778 original issue discount, and in connection therewith, sold to GS Capital 100,000
shares of Company’s common stock, par value $0.001 per share at a purchase price of $100, representing a per share price of $0.001
per share. In addition, at the closing of this sale, the Company reimbursed GS Capital the sum of $10,000 for GS Capital’s costs
in completing the transaction, which amount GS Capital withheld from the total purchase price paid to the Company.
The
GS Capital Note has a maturity date of February 19, 2022 and bears interest at 10% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the GS Capital Note, and the Company may prepay all or any
portion of the principal amount and any accrued and unpaid interest at any time without penalty.
The
GS Capital Note (and the principal amount and any accrued and unpaid interest) is convertible into shares of the Company Common Stock
at GS Capital’s election at any time following the time that the Securities and Exchange Commission (the “SEC”) qualifies
the Company’s offering statement related to the Company’s planned offering of Company Common Stock pursuant to Regulation
A (the “Regulation A Offering”) under the Securities Act of 1933, as amended (the “Securities Act”). At such
time, the GS Capital Note (and the principal amount and any accrued and unpaid interest) will be convertible at a conversion price equal
to 70% of the initial offering price of the Company Common Stock in the Regulation A Offering, subject to a customary beneficial ownership
limitation of 9.99%, which may be waived by GS Capital on 61 days’ notice to the Company. The conversion price is subject to customary
adjustments for any stock splits, etc. which occur following the determination of the conversion price.
The
$57,778 original issue discounts, the fair value of 100,000 shares issued, and the beneficial conversion features were recorded as debt
discounts and amortized over the term of the note. Therefore, the total debt discounts at the inception date of this convertible promissory
note were $577,778.
GS
Capital converted $96,484 and $3,515 accrued interest in the quarter ended June 30, 2021. The balance of the GS Capital #2 Note as of
September 30, 2021 and December 31, 2020 was $481,294 and $0, respectively. The shares have not been issued as of September 30, 2021.
On
November 26, 2021, the Company entered into an Amendment and Restructuring Agreement (the “Restructuring Agreement”) with
GS Capital Partners, LLC to cancel the conversion exercised in the quarter ended June 30, 2021. The balance
of the GS Capital #2 Note as of December 31, 2021 and 2020 was $577,778 and $0, respectively.
Convertible
Promissory Note – GS Capital Partners #3
On
March 16, 2021, the Company entered into another securities purchase agreement with GS Capital (the “GS Capital #3”), pursuant
to which, on same date, the Company issued a convertible promissory note to GS Capital the aggregate principal amount of $577,778 for
a purchase price of $520,000, reflecting a $57,778 original issue discount, and in connection therewith, sold to GS Capital 100,000 shares
of Company’s common stock, par value $0.001 per share at a purchase price of $100, representing a per share price of $0.001 per
share. In addition, at the closing of this sale, the Company reimbursed GS Capital the sum of $10,000 for GS Capital’s costs in
completing the transaction, which amount GS Capital withheld from the total purchase price paid to the Company.
The
GS Capital Note has a maturity date of March 22, 2022 and bears interest at 10% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the GS Capital Note, and the Company may prepay all or any
portion of the principal amount and any accrued and unpaid interest at any time without penalty.
The
GS Capital Note (and the principal amount and any accrued and unpaid interest) is convertible into shares of the Company Common Stock
at GS Capital’s election at any time following the time that the SEC qualifies the Company’s offering statement related to
the Company’s planned offering of Company Common Stock pursuant to Regulation A under the Securities Act. At such time, the GS
Capital Note (and the principal amount and any accrued and unpaid interest) will be convertible at a conversion price equal to 70% of
the initial offering price of the Company Common Stock in the Regulation A Offering, subject to a customary beneficial ownership limitation
of 9.99%, which may be waived by GS Capital on 61 days’ notice to the Company. The conversion price is subject to customary adjustments
for any stock splits, etc. which occur following the determination of the conversion price.
The
$57,778 original issue discount, the fair value of 100,000 shares issued, and the beneficial conversion features were recorded as debt
discounts and amortized over the term of the note. Therefore, the total debt discounts at the inception date of this convertible promissory
note were $577,778.
The
balance of the GS Capital #3 Note as of December 31, 2021 and 2020 was $577,778 and $0, respectively.
Convertible
Promissory Note – GS Capital Partners #4
On
April 1, 2021, the Company entered into another securities purchase agreement with GS Capital (the “GS Capital #4”), pursuant
to which, on same date, the Company issued a convertible promissory note to GS Capital the aggregate principal amount of $550,000 for
a purchase price of $500,000, reflecting a $50,000 original issue discount, and in connection therewith, sold to GS Capital 45,000 shares
of Company’s common stock, par value $0.001 per share at a purchase price of $45, representing a per share price of $0.001 per
share. In addition, at the closing of this sale, the Company reimbursed GS Capital the sum of $10,000 for GS Capital’s costs in
completing the transaction, which amount GS Capital withheld from the total purchase price paid to the Company.
The
GS Capital Note #4 has a maturity date of April 1, 2022 and bears interest at 10% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the GS Capital Note, and the Company may prepay all or any
portion of the principal amount and any accrued and unpaid interest at any time without penalty.
The
GS Capital Note (and the principal amount and any accrued and unpaid interest) is convertible into shares of the Company Common Stock
at GS Capital’s election at any time following the time that the SEC qualifies the Company’s offering statement related to
the Company’s planned offering of Company Common Stock pursuant to Regulation A under the Securities Act. At such time, the GS
Capital Note (and the principal amount and any accrued and unpaid interest) will be convertible at a conversion price equal to 70% of
the initial offering price of the Company Common Stock in the Regulation A Offering, subject to a customary beneficial ownership limitation
of 9.99%, which may be waived by GS Capital on 61 days’ notice to the Company. The conversion price is subject to customary adjustments
for any stock splits, etc. which occur following the determination of the conversion price.
The
$50,000 original issue discounts, the fair value of 45,000 shares issued, and the beneficial conversion features were recorded as debt
discounts and amortized over the term of the note. Therefore, the total debt discount at the inception date of this convertible promissory
note were recorded at $550,000.
The
balance of the GS Capital Note #4 as of December 31, 2021 and 2020 were $550,000 and $0, respectively.
Convertible
Promissory Note – GS Capital Partners #5
On
April 29, 2021, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with GS Capital,
pursuant to which, on same date, the Company issued a convertible promissory note to GS Capital in the aggregate principal amount of
$550,000 for a purchase price of $500,000, reflecting a $50,000 original issue discount (the “GS Capital Note #5”) and, in
connection therewith, sold to GS Capital 125,000 shares of the Company’s common stock, par value $0.001 per share (the “Company
Common Stock”) at a purchase price of $125, representing a per share price of $0.001 per share. In addition, at the closing of
this sale, the Company reimbursed GS Capital the sum of $5,000 for GS Capital’s costs in completing the transaction, which amount
GS Capital withheld from the total purchase price paid to the Company.
The
April 2021 GS Capital Note #5 has a maturity date of April 29, 2022 and bears interest at 10% per year. No payments of the principal
amount or interest are due prior to the maturity date other than as specifically set forth in the GS Capital Note #5, and the Company
may prepay all or any portion of the principal amount and any accrued and unpaid interest at any time without penalty.
The
GS Capital Note #5 (and the principal amount and any accrued and unpaid interest) is convertible into shares of the Company’s common
stock, par value $0.001 per share (the “Company Common Stock”) at GS Capital’s election at any time following the time
that the SEC qualifies the Company’s offering statement related to the Company’s planned offering of Company Common Stock
pursuant to Regulation A under the Securities Act. At such time, the GS Capital Note #5 (and the principal amount and any accrued and
unpaid interest) will be convertible at a conversion price equal to 70% of the initial offering price of the Company Common Stock in
the Regulation A Offering, subject to a customary beneficial ownership limitation of 9.99%, which may be waived by GS Capital on 61 days’
notice to the Company. The conversion price is subject to customary adjustments for any stock splits, etc. which occur following the
determination of the conversion price.
The
$50,000 original issue discounts, the fair value of 125,000 shares issued, and the beneficial conversion features were recorded as debt
discounts and amortized over the term of the note. Therefore, the total debt discount at the inception date of this convertible promissory
note were recorded at $550,000.
The
balance of the GS Capital Note #5 as of December 31, 2021 and 2020 was $550,000 and $0, respectively.
Convertible
Promissory Note – GS Capital Partners #6
On
June 3, 2021, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with GS Capital,
pursuant to which, on same date, the Company issued a convertible promissory note to GS Capital in the aggregate principal amount of
$550,000 for a purchase price of $500,000, reflecting a $50,000 original issue discount (the “GS Capital Note #6”) and, in
connection therewith, sold to GS Capital 85,000 shares of the Company’s common stock, par value $0.001 per share (the “Company
Common Stock”) at a purchase price of $85, representing a per share price of $0.001 per share. In addition, at the closing of this
sale, the Company reimbursed GS Capital the sum of $5,000 for GS Capital’s costs in completing the transaction, which amount GS
Capital withheld from the total purchase price paid to the Company.
The
GS Capital Note #6 has a maturity date of June 3, 2022 and bears interest at 10% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the GS Capital Note #6, and the Company may prepay all or
any portion of the principal amount and any accrued and unpaid interest at any time without penalty.
The
GS Capital Note #6 (and the principal amount and any accrued and unpaid interest) is convertible into shares of the Company’s common
stock, par value $0.001 per share (the “Company Common Stock”) at GS Capital’s election at any time following the time
that the SEC qualifies the Company’s offering statement related to the Company’s planned offering of Company Common Stock
pursuant to Regulation A under the Securities Act. At such time, the GS Capital Note #6 (and the principal amount and any accrued and
unpaid interest) will be convertible at a conversion price equal to 70% of the initial offering price of the Company Common Stock in
the Regulation A Offering, subject to a customary beneficial ownership limitation of 9.99%, which may be waived by GS Capital on 61 days’
notice to the Company. The conversion price is subject to customary adjustments for any stock splits, etc. which occur following the
determination of the conversion price.
The
$50,000 original issue discounts, the fair value of 85,000 shares issued, and the beneficial conversion features were recorded as debt
discounts and amortized over the term of the note. Therefore, the total debt discount at the inception date of this convertible promissory
note were recorded at $550,000.
The
balance of the GS Capital Note #6 as of December 31, 2021 and 2020 was $550,000 and $0, respectively.
Convertible
Promissory Note – Tiger Trout Capital Puerto Rico
On
January 29, 2021, the Company entered into a securities purchase agreement (the “Tiger Trout SPA”) with Tiger Trout Capital
Puerto Rico, LLC, a Puerto Rico limited liability company (“Tiger Trout”), pursuant to which, on same, date, the Company
(i) issued a convertible promissory note in the aggregate principal amount of $1,540,000 for a purchase price of $1,100,000, reflecting
a $440,000 original issue discount (the “Tiger Trout Note”), and (ii) sold to Tiger Trout 220,000 shares Company common stock
for a purchase price of $220.00.
The
Tiger Trout Note has a maturity date of January 29, 2022, and bears interest at 10% per year. No payments of the principal amount or
interest are due prior to the maturity date other than as specifically set forth in the Tiger Trout Note, and the Company may prepay
all or any portion of the principal amount and any accrued and unpaid interest at any time without penalty, provided however, that if
the Company does not pay the principal amount and any accrued and unpaid interest by July 2, 2021, an additional $50,000 is required
to be paid to Tiger Trout at the time the Tiger Trout Note is repaid, if the Company repays the Tiger Trout Note prior to its maturity
date.
If
the principal amount and any accrued and unpaid interest under the Tiger Trout Note has not been repaid on or before the maturity date,
that will be an event of default under the Tiger Trout Note. If an event of default has occurred and is continuing, Tiger Trout may declare
all or any portion of the then-outstanding principal amount and any accrued and unpaid interest under the Tiger Trout Note (the “Indebtedness”)
due and payable, and the Indebtedness will become immediately due and payable in cash by the Company. Further, Tiger Trout will have
the right, until the Indebtedness is paid in full, to convert all, but only all, of the then-outstanding Indebtedness into shares of
Company common stock at a conversion price of $0.50 per share, subject to customary adjustments for stock splits, etc. occurring after
the issuance date. The Tiger Trout Note contains a customary beneficial ownership limitation of 9.99%, which may be waived by Tiger Trout
on 61 days’ notice to the Company.
The
$440,000 original issue discount, the fair value of 220,000 shares issued, and the beneficial conversion features were recorded as debt
discounts and amortized over the term of the note. Therefore, the total debt discounts at the inception date of this convertible promissory
note were $1,540,000.
The
balance of the Tiger Trout Note as of December 31, 2021 and December 31, 2020 was $1,590,000 and $0, respectively.
Convertible
Promissory Note – Eagle Equities LLC
On
April 13, 2021, the Company entered into a securities purchase agreement (the “Eagle SPA”) with Eagle Equities LLC (“Eagle
Equities”), pursuant to which, on same date, the Company issued a convertible promissory note to Eagle Equities in the aggregate
principal amount of $1,100,000 for a purchase price of $1,000,000, reflecting a $100,000 original issue discount (the “Eagle Equities
Note”), and, in connection therewith, sold to Eagle Equities 165,000 shares of Company’s common stock, par value of $0.001
per share (the “Company Common Stock”) at a purchase price of $165.00, representing a per share price of $0.001 per share.
In addition, at the closing of this sale, the Company reimbursed Eagle Equities the sum of $10,000 for Eagle Equities’ costs in
completing the transaction, which amount Eagle Equities withheld from the total purchase price paid to the Company.
The
Eagle Equities Note has a maturity date of April 13, 2022 and bears interest at 10% per year. No payments of the principal amount or
interest are due prior to the maturity date other than upon the circumstances set forth in the Eagle Equities Note – specifically,
if (i) the SEC qualifies the Company’s offering statement related to the Company’s planned offering of Company Common Stock
pursuant to Regulation A under the Securities Act; and (ii) the Company receives $3,500,000 in net proceeds from such Regulation A Offering,
then Company must repay the principal amount and any accrued and unpaid interest on the Eagle Equities Note within three (3) business
days from the date of such occurrence. The Company may prepay all or any portion of the principal amount and any accrued and unpaid interest
at any time without penalty.
The
Eagle Equities Note (and the principal amount and any accrued and unpaid interest) is convertible into shares of the Company Common Stock
at Eagle Equities’ election at any time following the time that the SEC qualifies the Company’s offering statement related
to the Company’s planned offering of Company Common Stock pursuant to Regulation A under the Securities Act. At such time, the
Eagle Equities Note (and the principal amount and any accrued and unpaid interest) will be convertible in restricted shares of Company
Common Stock at a conversion price equal to 70% of the initial offering price of the Company Common Stock in the Regulation A Offering,
subject to a customary beneficial ownership limitation of 9.99%, which may be waived by Eagle Equities on 61 days’ notice to the
Company. The conversion price is subject to customary adjustments for any stock splits, etc. which occur following the determination
of the conversion price. Alternatively, if the SEC has not qualified the Company’s offering statement related to the Company’s
planned offering of Company Common Stock pursuant to Regulation A under the Securities Act by October 10, 2021, and Eagle Equities Note
has not yet been fully repaid, then Eagle Equities will have the right to convert the Eagle Equities Note (and the principal amount and
any accrued and unpaid interest) into restricted shares of Company Common Stock at a conversion price of $6.50 per share (subject to
customary adjustments for any stock splits, etc., which occur following April 13, 2021).
The
$100,000 original issue discounts, the fair value of 165,000 shares issued, and the beneficial conversion features were recorded as debt
discounts and amortized over the term of the note. Therefore, the total debt discount at the inception date of this convertible promissory
note were recorded at $1,100,000.
The
balance of the Eagle Equities Note as of December 31, 2021 and 2020 was $1,100,000 and $0, respectively.
Convertible
Promissory Note – Labrys Fund, LP
On
March 11, 2021, the Company entered into a securities purchase agreement (the “Labrys SPA”) with Labrys Fund, LP (“Labrys”),
pursuant to which the Company issued a 10% promissory note (the “Labrys Note”) with a maturity date of March 11, 2022 (the
“Labrys Maturity Date”), in the principal sum of $1,000,000. In addition, the Company issued 125,000 shares of its common
stock to Labrys as a commitment fee pursuant to the Labrys SPA. Pursuant to the terms of the Labrys Note, the Company agreed to pay to
$1,000,000 (the “Principal Sum”) to Labrys and to pay interest on the principal balance at the rate of 10% per annum. The
Labrys Note carries an original issue discount (“OID”) of $100,000. Accordingly, on the Closing Date (as defined in the Labrys
SPA), Labrys paid the purchase price of $900,000 in exchange for the Labrys Note. Labrys may convert the Labrys Note into the Company’s
common stock (subject to the beneficial ownership limitations of 4.99% in the Labrys Note) at any time at a conversion price equal to
$10.00 per share.
The
Company may prepay the Labrys Note at any time prior to the date that an Event of Default (as defined in the Labrys Note) occurs at an
amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium) plus $750.00 for
administrative fees. The Labrys Note contains customary events of default relating to, among other things, payment defaults, breach of
representations and warranties, and breach of provisions of the Labrys Note or Labrys SPA.
Upon
the occurrence of any Event of Default, the Labrys Note shall become immediately due and payable and the Company shall pay to Labrys,
in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued interest multiplied
by 125% (the “Default Amount”). Upon the occurrence of an Event of Default, additional interest will accrue from the date
of the Event of Default at the rate equal to the lower of 16% per annum or the highest rate permitted by law.
The
$100,000 original issue discounts, the fair value of 125,000 shares issued, and the beneficial conversion features were recorded as debt
discounts and amortized over the term of the note. Therefore, the total debt discounts at the inception date of this convertible promissory
note were $1,000,000.
For
the nine months ended September 30, 2021, the Company paid $455,000 cash to reduce the balance of the convertible promissory note from
Labrys Fund, LP. The balance of the Labrys Note as of December 31, 2021 and 2020 was $545,000 and $0, respectively.
Convertible
Promissory Note – Amir Ben-Yohanan
On
February 2, 2021, the Company and Amir Ben-Yohanan, its Chief Executive Officer, entered into a promissory note in the total principal
amount of $2,400,000 (the “Amir 2021 Note”) to replace the Amir 2020 note. The Amir 2021 Note memorializes a $2,400,000 loan
that Mr. Ben-Yohanan previously advanced to the Company and its subsidiaries to fund their operations. The Amir 2021 Note bears simple
interest at a rate of 8% per annum, and the Company may prepay all or any portion of the principal amount and any accrued and unpaid
interest of the Amir 2021 Note at any time without penalty.
At
the time of the qualification by the SEC, pursuant to Regulation A under the Securities Act, $1,000,000 of the Indebtedness shall, automatically
and without any further action of the Company or the Holder, be converted into a number of restricted fully paid and non-assessable shares
of shares of common stock, par value $0.001 per share, of the Company equal to (i) $1,000,000 divided by (ii) the price per share of
the Common Stock as offered in the Prospectus.
As
of June 11, 2021, the Company received notice of qualification by the SEC. Accordingly, the principal balance of $1,000,000 has been
converted to common stock and recorded under shares to be issued until it is issued.
The
balance as of December 31, 2021 and December 31, 2020 were $1,269,864 and $0, respectively. The final maturity date of the Amir 2021
Note is February 2, 2024.
Rui
Wu – Note Purchase Agreement, Convertible Promissory Note, Warrant, and Security Agreement
On
August 27, 2021, the Company entered into a note purchase agreement (the “Rui Wu Note Purchase Agreement”) with Rui Wu, an
individual (“Rui Wu”), with an effective date of August 26, 2021, pursuant to which, on same date, the Company issued a convertible
promissory note to Rui Wu in the aggregate principal amount of $550,000 for a purchase price of $500,000, reflecting a $50,000 original
issue discount (the “Rui Wu Note”) and, in connection therewith, issued to Rui Wu a Warrant to purchase 125,000 shares
of the Company’s common stock, par value $0.001 per share (the “Company Common Stock”) at an exercise price of $2.00
per share, subject to adjustment (the “Rui Wu Warrant”). In addition, in connection with the Rui Wu Note Purchase Agreement,
the Company entered into a Security Agreement on same date with Rui Wu, pursuant to which the Company’s obligations under the Rui
Wu Note were secured by a first priority lien and security interest on all of the assets of the Company (the “Rui Wu Security Agreement”).
While each of the Rui Wu Warrant, Security Agreement, Note, and Note Purchase Agreement have an effective date and/or effective issue
date of August 26, 2021, each was entered into and/or issued on August 27, 2021.
The
Rui Wu Note has a maturity date of August 26, 2022 and bears interest at 10% per year. No payments of the principal amount or interest
are due prior to the maturity date other than as specifically set forth in the Rui Wu Note, and the Company may prepay all or any portion
of the principal amount and any accrued and unpaid interest at any time without penalty.
The
Rui Wu Note (and the principal amount and any accrued and unpaid interest) is convertible into shares of Company Common Stock at any
time following August 26, 2021 until the note is repaid. The conversion price per share of Common Stock shall initially mean the lesser
of (i) $1.00 or (ii) 75% of the lowest daily volume weighted average price of the Common Stock during the 20 Trading Days (as defined
in the Rui Wu Note) immediately preceding the date of the respective conversion. The conversion price is subject to customary adjustments
for any stock splits, etc. which occur following the determination of the conversion price.
The
Rui Wu Note contains customary events of default, including, but not limited to:
|
● |
if
the Company fails to pay the then-outstanding principal amount and accrued interest on the Rui Wu Note on any date any such amounts
become due and payable, and any such failure is not cured within three business days of written notice thereof by Rui Wu; or |
|
● |
the
Company fails to remain compliant with the Depository Trust Company (“DTC”), thus incurring a “chilled” status
with DTC; or |
|
● |
any
trading suspension is imposed by the SEC under Section 12(j) or Section 12(k) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”); or |
|
● |
the
occurrence of any delisting of the Company Common Stock from any securities exchange on which the Company Common Stock is listed
or suspension of trading of the Company Common Stock on the OTC Markets. |
If
an event of default has occurred and is continuing, Rui Wu may declare all or any portion of the then-outstanding principal amount of
the Rui Wu Note, together with all accrued and unpaid interest thereon, due and payable, and the Rui Wu Note shall thereupon become immediately
due and payable in cash and Rui Wu will also have the right to pursue any other remedies that Rui Wu may have under applicable law. In
the event that any amount due under the Rui Wu Note is not paid as and when due, such amounts shall accrue interest at the rate of 18%
per year, simple interest, non-compounding, until paid.
The
$50,000 original issue discounts, the fair value of 125,000 warrants issued, and the conversion features were recorded as debt discounts
and amortized over the term of the note. Therefore, the total debt discount at the inception date of this convertible promissory note
were recorded at $550,000. For the excess amount of derivative liability, the Company recorded accretion expense of $514,850 at the inception
date of this note.
The
balance of the Riu Wu Note as of December 31, 2021 and 2020 was $550,000 and $0, respectively.
Chris
Etherington – Note Purchase Agreement, Convertible Promissory Note, Warrant, and Security Agreement
On
August 27, 2021, the Company entered into a note purchase agreement (the “Chris Etherington Note Purchase Agreement”) with
Chris Etherington, with an effective date of August 26, 2021, pursuant to which, on same date, the Company issued a convertible promissory
note to Mr. Etherington in the aggregate principal amount of $165,000 for a purchase price of $150,000, reflecting a $15,000 original
issue discount (the “Chris Etherington Note”) and, in connection therewith, issued to Mr. Etherington a Warrant to purchase
37,500 shares of the Company’s common stock, par value $0.001 per share (the “Company Common Stock”) at an exercise
price of $2.00 per share, subject to adjustment (the “Chris Etherington Warrant”). In addition, in connection with the Chris
Etherington Note Purchase Agreement, the Company entered into a Security Agreement on same date with Mr. Etherington, pursuant to which
the Company’s obligations under the Chris Etherington Note were secured by a first priority lien and security interest on all of
the assets of the Company (the “Chris Etherington Security Agreement”). While each of the Chris Etherington Warrant, Security
Agreement, Note, and Note Purchase Agreement have an effective date and/or effective issue date of August 26, 2021, each was entered
into and/or issued on August 27, 2021.
The
Chris Etherington Note has a maturity date of August 26, 2022 and bears interest at 10% per year. No payments of the principal amount
or interest are due prior to the maturity date other than as specifically set forth in the Chris Etherington Note, and the Company may
prepay all or any portion of the principal amount and any accrued and unpaid interest at any time without penalty.
The
Chris Etherington Note (and the principal amount and any accrued and unpaid interest) is convertible into shares of Company Common Stock
at any time following August 26, 2021 until the note is repaid. The conversion price per share of Common Stock shall initially mean the
lesser of (i) $1.00 or (ii) 75% of the lowest daily volume weighted average price of the Common Stock during the 20 Trading Days (as
defined in the Chris Etherington Note) immediately preceding the date of the respective conversion. The conversion price is subject to
customary adjustments for any stock splits, etc. which occur following the determination of the conversion price.
The
Chris Etherington Note contains customary events of default, including, but not limited to:
|
● |
if
the Company fails to pay the then-outstanding principal amount and accrued interest on the Chris Etherington Note on any date any
such amounts become due and payable, and any such failure is not cured within three business days of written notice thereof by Mr.
Etherington; or |
|
● |
the
Company fails to remain compliant with the Depository Trust Company (“DTC”), thus incurring a “chilled” status
with DTC; or |
|
● |
any
trading suspension is imposed by the SEC under Section 12(j) or Section 12(k) of the Exchange Act; or |
|
● |
the
occurrence of any delisting of the Company Common Stock from any securities exchange on which the Company Common Stock is listed
or suspension of trading of the Company Common Stock on the OTC Markets. |
If
an event of default has occurred and is continuing, Mr. Etherington may declare all or any portion of the then-outstanding principal
amount of the Chris Etherington Note, together with all accrued and unpaid interest thereon, due and payable, and the Chris Etherington
Note shall thereupon become immediately due and payable in cash and Mr. Etherington will also have the right to pursue any other remedies
that Mr. Etherington may have under applicable law. In the event that any amount due under the Chris Etherington Note is not paid as
and when due, such amounts shall accrue interest at the rate of 18% per year, simple interest, non-compounding, until paid.
The
$15,000 original issue discounts, the fair value of 37,500 warrants issued, and the conversion features were recorded as debt discounts
and amortized over the term of the note. Therefore, the total debt discount at the inception date of this convertible promissory note
were recorded at $165,000. For the excess amount of derivative liability, the Company recorded accretion expense of $160,538 at the inception
date of this note.
The
balance of the Chris Etherington Note as of December 31, 2021 and 2020 was $165,000 and $0, respectively.
Convertible
Promissory Note – Sixth Street Lending LLC #1
On
November 18, 2021, the Company entered into a securities purchase agreement (the “Sixth Street #1 Securities Purchase Agreement”)
with Sixth Street Lending LLC (“Sixth Street”), pursuant to which, on the same date, the Company issued a convertible promissory
note to Sixth Street in the aggregate principal amount of $224,000 for a purchase price of $203,750, reflecting a $20,250 original issue
discount (the “Sixth Street #1 Note”). At closing, the Company reimbursed Sixth Street the sum of $3,750 for Sixth Street’s
costs in completing the transaction.
The
Sixth Street Note #1has a maturity date of November 18, 2022 (the “Maturity Date”) and bears interest at 10% per year. No
payments of the principal amount or interest are due prior to the Maturity Date, other than as specifically set forth in the Note. The
Company may not prepay the Sixth Street Note prior to the Maturity Date, other than by way of a conversion initiated by Sixth Street.
The
Sixth Street #1 Note provides Sixth Street with conversion rights to convert all or any part of the outstanding and unpaid principal
amount of the Sixth Street Note from time to time into fully paid and non-assessable shares of the Company’s Common Stock, par
value $0.001 (“Common Stock”). Conversion rights are exercisable at any time during the period beginning on May 17, 2022
(180 days from when the Sixth Street Note was issued) and ending on the later of (i) the Maturity Date and (ii) the date of payment of
the amounts due upon an uncured event of default. Any principal that Sixth Street elects to convert will convert at the Conversion Price,
which is a Common Stock per share price equal to the lesser of a Variable Conversion Price and $1.00. The Variable Conversion Price is
75% of the Market Price, which is the lowest dollar volume-weighted average sale price (“VWAP”) during the 20-trading day
period ending on the trading day immediately preceding the conversion date. VWAP is based on trading prices on the principal market for
Company Common Stock or, if none, OTC. Currently, the Common Stock trades OTC. In no event is Sixth Street entitle to convert any portion
of the Sixth Street Note upon which conversion Sixth Street and its affiliates would beneficially own more than 4.99% of the outstanding
shares of Company Common Stock.
The
Sixth Street #1 Note contains customary events of default, including, but not limited to: (1) failure to pay principal or interest on
the Sixth Street Note when due; (2) failure to issue and transfer Common Stock upon exercise of Sixth Street of its conversion rights;
(3) an uncured breach of any of the Company’s other material obligations contained in the Sixth Street Note; and (4) the Company’s
breach of any representation or warranty in the Securities Purchase Agreement or other related agreements.
If
an event of default occurs and continues uncured, the Sixth Street Note becomes immediately due and payable. If an event of default occurs
because the Company fails to issue shares of Common Stock to Sixth Street within three business days of receiving a notice of conversion
from Sixth Street, the Company shall pay an amount equal to 200% of the Default Amount (defined below) in full satisfaction of the Company’s
obligations under the Sixth Street Note. If an event of default occurs for any other reason that continues uncured (except in the case
of appointment of a receiver, bankruptcy, liquidation, or a similar default), the Company shall pay an amount equal to 150% of the Default
Amount (defined below) in full satisfaction of the Company’s obligations under the Sixth Street Note.
The
“Default Amount” is equal to the sum of (a) accrued and unpaid interest on the principal amount of the Sixth Street Note
to the date of payment plus (b) default interest, which is calculated based on a rate of 22% per year (inclusive of the 10% interest
per year that would be due absent an event of default), plus (c) certain other amounts that may be owed under the Sixth Street Note.
The
balance of the Sixth Street #1 note as of December 31, 2021 and 2020 was $224,000 and $0, respectively.
Convertible
Promissory Note – Sixth Street Lending LLC #2
On
December 9, 2021, the Company entered into a Securities Purchase Agreement, (the “Sixth Street #2 purchase agreemen”) dated
December 9, 2021, by and between the Company and Sixth Street Lending LLC (the “Buyer”). Pursuant to the terms of the SPA,
the Company agreed to issue and sell, and the Buyer agreed to purchase (the “Purchase”), a convertible note in the aggregate
principal amount of $93,500 (the “Sixth Street #2 Note “). The Note has an original issue discount of $8,500, resulting in
gross proceeds to the Company of $85,000.
The
Sixth Street #2 Note bears interest at a rate of 10% per annum and matures on December 9, 2022. Any amount of principal or interest on
the Note which is not paid when due will bear interest at a rate of 22% per annum. The Note may not be prepaid in whole or in part except
as provided in the Note by way of conversion at the option of the Buyer.
The
Buyer has the right from time to time, and at any time during the period beginning on the date that is 180 days following December 9,
2021 and ending on the later of (i) December 9, 2022, and (ii) the date of payment of the Default Amount (as defined in the Note), to
convert all or any part of the outstanding and unpaid principal amount of the Note into common stock, subject to a 4.99% equity blocker.
The
conversion price of the Sixth Street #2 Note equals the lesser of the Variable Conversion Price (as hereinafter defined) and $1.00. The
“Variable Conversion Price” means 75% multiplied by the lowest VWAP (as defined in the Note) for the Company’s common
stock during the 20 trading date period ending on the latest complete trading day prior to the conversion date.
The
balance of the Sixth Street #2 note as of December 31, 2021 and 2020 was $93,500 and $0, respectively.
Convertible
Note – Fast Capital, LLC
On
January 13, 2022, the Company entered into a Securities Purchase Agreement, (the “SPA”) dated as of January 10, 2022, by
and between the Company and Fast Capital, LLC (the “Buyer”). Pursuant to the terms of the SPA, the Company agreed to issue
and sell, and the Buyer agreed to purchase (the “Purchase”), a 10% convertible note in the aggregate principal amount of
$120,000 (the “Note”). The Note has an original issue discount of $10,000, resulting in gross proceeds to the Company of
$110,000.
The
Note bears interest at a rate of 10% per annum and matures on January 10, 2023. The Note may be prepaid or assigned with the following
penalties/premiums:
Prepay
Date |
|
Prepay
Amount |
On
or before 30 days |
|
115%
of principal plus accrued interest |
31
– 60 days |
|
120%
of principal plus accrued interest |
61
– 90 days |
|
125%
of principal plus accrued interest |
91
– 120 days |
|
130%
of principal plus accrued interest |
121
– 150 days |
|
135%
of principal plus accrued interest |
151
– 180 days |
|
140%
of principal plus accrued interest |
The
Note may not be prepaid after the 180th day.
The
Buyer has the right from time to time, and at any time after 180 days to convert all or any part of the outstanding and unpaid principal
amount of the Note into common stock, subject to a 4.99% equity blocker.
The
conversion price of the Note equals 70% of the lowest trading price of the Company’s common stock for the 20 prior trading days,
including the day upon which a notice of conversion is delivered.
Convertible
Note – Sixth Street Lending LLC
On
January 12, 2022, the Company entered into a Securities Purchase Agreement, (the “SPA”) dated January 12, 2022, by and between
the Company and Sixth Street Lending LLC (the “Buyer”). Pursuant to the terms of the SPA, the Company agreed to issue and
sell, and the Buyer agreed to purchase (the “Purchase”), a convertible promissory note in the aggregate principal amount
of $70,125 (the “Note”). The Note has an original issue discount of $6,375, resulting in gross proceeds to the Company of
$63,750.
The
Note bears interest at a rate of 10% per annum and matures on January 12, 2023. Any amount of principal or interest on the Note which
is not paid when due will bear interest at a rate of 22% per annum. The Note may not be prepaid in whole or in part except as provided
in the Note by way of conversion at the option of the Buyer.
The
Buyer has the right from time to time, and at any time during the period beginning on the date that is 180 days following January 12,
2022 and ending on the later of (i) January 12, 2023, and (ii) the date of payment of the Default Amount (as defined in the Note), to
convert all or any part of the outstanding and unpaid principal amount of the Note into common stock, subject to a 4.99% equity blocker.
The
conversion price of the Note equals the lesser of the Variable Conversion Price (as hereinafter defined) and $1.00. The “Variable
Conversion Price” means 75% multiplied by the lowest VWAP (as defined in the Note) for the Company’s common stock during
the 20 trading date period ending on the latest complete trading day prior to the conversion date.
Amendment
No. 1 to Tiger Trout Convertible Note
On
January 29, 2021, the Company issued to Tiger Trout Capital Puerto Rico, LLC (“Tiger Trout”) a convertible promissory note
in the aggregate principal amount of $1,540,000 for a purchase price of $1,100,000, reflecting a $440,000 original issue discount (the
“Tiger Trout Note”). The Tiger Trout Note had a maturity date of January 29, 2022. On January 28, 2022, the parties to the
Tiger Trout Note entered into Amendment No. 1 to Convertible Promissory Note, dated as of January 25, 2022 (the “Note Amendment”).
Pursuant to the terms of the Note Amendment, the maturity date of the Tiger Trout Note was extended to August 24, 2022. As consideration
for Tiger Trout’s agreement to extend the maturity date, the principal amount of the Tiger Trout Note was increased by $388,378,
to be a total of $1,928,378. As of January 25, 2022, the indebtedness under the Tiger Trout Note was $2,083,090, comprised of $1,928,378
of principal and $154,712 of accrued interest. Following January 25, 2022, interest will continue to accrue on the principal amount of
$1,928,378 at an interest rate of 10%.
The
parties further agreed that to the extent the indebtedness under the Tiger Trout Note has not been earlier repaid or converted to common
stock as set forth therein, in the event that the Company completes a firm commitment underwritten public offering of its common stock
that results in the common stock being successfully listed on the Nasdaq Global Market, the Nasdaq Capital Market, the New York Stock
Exchange or the NYSE American prior to the maturity date of the Tiger Trout Note, as amended by the Note Amendment, then, following completion
of the initial public offering, the Company will use the proceeds to repay indebtedness under the Tiger Trout Note in full.
Except
as set forth in the Note Amendment, the terms of the Tiger Trout Note remain in full force and effect.
Amendment
No. 1 to ProActive Note
On
January 20, 2021, the Company issued to ProActive Capital SPV I, LLC (“ProActive”) a convertible promissory note in the aggregate
principal amount of $250,000 for a purchase price of $225,000, reflecting a $25,000 original issue discount (the “ProActive Note”).
The ProActive Note had a maturity date of January 20, 2022. On February 8, 2022, the parties to the ProActive Note entered into Amendment
No. 1 to Convertible Promissory Note, dated as of February 4, 2022 (the “Note Amendment”). Pursuant to the terms of the Note
Amendment, the maturity date of the ProActive Note was extended to September 20, 2022. As consideration for ProActive’s agreement
to extend the maturity date, the principal amount of the ProActive Note was increased by $50,000, to be a total of $300,000. As of February
4, 2022, the indebtedness under the ProActive Note was $275,000, comprised of $250,000 of principal and $25,000 of accrued interest.
Following February 4, 2022, interest will continue to accrue on the principal amount of $300,000 at an interest rate of 10%.
The
parties further agreed that to the extent the indebtedness under the ProActive Note has not been earlier repaid or converted to common
stock as set forth therein, in the event that the Company completes a firm commitment underwritten public offering of its common stock
that results in the common stock being successfully listed on the Nasdaq Global Market, the Nasdaq Capital Market, the New York Stock
Exchange or the NYSE American prior to the maturity date of the ProActive Note, as amended by the Note Amendment, then, following completion
of the initial public offering, the Company will use the proceeds to repay indebtedness under the ProActive Note in full.
Except
as set forth in the Note Amendment, the terms of the ProActive Note remain in full force and effect.
Convertible
Note – ONE44 Capital LLC
On
February 16, 2022, the Company entered into a Securities Purchase Agreement, (the “ONE44 SPA”) by and between the Company
and ONE44 Capital LLC (“ONE44”). Pursuant to the terms of the ONE44 SPA, the Company agreed to issue and sell, and ONE44
agreed to purchase (the “Purchase”), a convertible promissory note in the aggregate principal amount of $175,500 (the “ONE44
Note”). The ONE44 Note has an original issue discount of $17,500, resulting in gross proceeds to the Company of $158,000. Pursuant
to the terms of the ONE44 SPA, the Company also agreed to issue 400,000 shares of restricted common stock to ONE44 as additional consideration
for the purchase of the ONE44 Note.
The
ONE44 Note bears interest at a rate of 4% per annum and matures on February 16, 2023. Interest must be paid in common stock. The ONE44
Note may be prepaid with the following penalties/premiums:
Prepay
Date |
|
Prepay
Amount |
≤
60 days |
|
120%
of principal plus accrued interest |
61-120
days |
|
130%
of principal plus accrued interest |
121-150
days |
|
140%
of principal plus accrued interest |
151-180
days |
|
150%
of principal plus accrued interest |
The
ONE44 Note may not be prepaid after the 180th day.
ONE44
is entitled, at its option, at any time after the sixth monthly anniversary of cash payment, to convert all or any amount then outstanding
under the ONE44 Note into shares of common stock at a price per share equal to 65% of the average of the three lowest daily VWAPs of
the Company’s common stock for the 20 prior trading days, subject to a 4.99% equity blocker and subject to the terms of the ONE44
Note.
If
an Event of Default (as defined in the ONE44 Note) occurs, unless cured within five days or waived, ONE44 may consider the ONE44 Note
immediately due and payable and interest will accrue at a rate of 24% per annum, in addition to certain other remedies.
FinTekk
AP and Rick Ware Racing Agreements
On
July 12, 2021, the Company entered into a Joint Services Agreement (the “Agreement”) with FinTekk AP, LLC, a Texas limited
liability company (“FinTekk”), and Rick Ware Racing, LLC (“RWR”). FinTekk and RWR are professional motorsports
racing and marketing companies providing services focused specifically in the NASCAR Cup Series, NASCAR Xfinity Series, the IndyCar Racing
Series, and the IMSA Sports Car Championship Series. Pursuant to the Agreement, FinTekk and RWR agreed to provide certain services to
the Company, and the Company agreed to provide certain services to RWR.
In
general, FinTekk will provide the Company with marketing and branding consulting services utilizing the RWR racing platform, and will
promote the Company as the primary brand for the NASCAR race events in which RWR participates in conjunction with the RWR platform.
RWR
will provide racing car drivers as well as NASCAR and development team drivers and athletes currently competing in motor racing; and
RWR will engage and integrate its social media team with the Company team members to collaborate, promote and market the Company to the
racing fan bases of NASCAR and IndyCar through the use of each other’s social and digital media platforms.
The
Company will engage and integrate its social media/influencer member network and production teams with RWR team members to collaborate,
promote and market RWR racing efforts and racing and driver story lines through various media platforms operated or familiar to the Company.
The
respective services of the parties under the Agreement will apply with respect to 11 races occurring from July 18, 2021 to September
26, 2021 (the “Events”); and the compensation under the Agreement for the respective services is payable with respect to
each of the Events, as follows:
|
● |
In
return for the provision by FinTekk of its services, for each Event the Company will issue FinTekk 51,146 shares of the Company’s
common stock, which will be issued on the first business day following the completion of the applicable Event. |
|
● |
In
return for the provision by RWR of its services, for each Event the Company will pay RWR $113,636, which shall be due and payable
to RWR on the first business day following the completion of the applicable Event. |
|
● |
In
return for the provision by the Company of its services, for each Event RWR will pay the Company $90,909, which will be due and payable
to the Company on the second business day following the completion of the applicable Event. |
Alden
Reiman Agreement
On
August 20, 2021, the Company entered into a consulting agreement with Alden Reiman. In general, the consultant will make best efforts
to obtain brand deals, sponsorships deals, and other revenue generating activities for Clubhouse and its roster of talent. Consultant
may utilize the Clubhouse’s name when providing such Services.
In
exchange for above services, the Company will pay Alden Reiman a signing bonus of $30,000 and a consulting fee of $32,000 per month in
equal weekly installments as an independent contractor during the Term. The initial term was two months and it automatically renews for
additional two month increments and still effective as of the date of this filing.
Yomtubian
Consulting Agreement
On
June 10, 2021, the Company entered into a consulting agreement with Joseph Yomtubian. Pursuant to the terms of the consulting agreement,
Mr. Yomtubian agreed to provide to the Company certain management consulting and business advisory services. In exchange for such services,
the Company agreed to pay Mr. Yomtubian $20,000 monthly. The consulting agreement has a term of one year and terminated in the 4th
quarter of 2021.
Young
Consulting Agreement
On
February 3, 2021, in connection with (but not pursuant to) the closing of the A&R Share Exchange Agreement relating to Magiclytics,
the Company entered in a consulting agreement with Chris Young, the President, Secretary, and a Director of the Company. Mr. Young is
greater than 5% stockholder of the company.
As
compensation for Mr. Young’s services pursuant to the Consulting Agreement, the Company agreed to issue to Mr. Young shares of
Company Common Stock upon the completion of certain milestones, as follows:
|
(i) |
Upon
the first to occur of (i) Magiclytics actually receiving $500,000 in gross revenue following the Effective Date; and (ii) Magiclytics
having conducted 1,250 Campaigns (subject to certain conditions) following the Effective Date, the Company will issue to Mr. Young
a number of shares of Company Common Stock equal to (i) $393,750, divided by (ii) the VWAP (as defined in the Consulting Agreement)
as of the date that the earlier of this clause (i) and clause (ii) below have occurred (the “Tranche 1 Satisfaction Date”). |
|
|
|
|
(ii) |
Upon
the first to occur of (i) Magiclytics actually receiving an additional $500,000 in gross revenue following the Tranche 1 Satisfaction
Date; and (ii) Magiclytics having conducted an additional 1,250 Campaigns (subject to certain conditions) following the Tranche 1
Satisfaction Date, the Company will issue to Mr. Young a number of shares of Company Common Stock equal to (i) $393,750, divided
by (ii) the VWAP as of the date that the earlier of clause (i) above and this clause (ii) of have occurred (the “Tranche 2
Satisfaction Date”). |
|
|
|
|
(iii) |
Upon
the first to occur of (i) Magiclytics actually receiving an additional $500,000 in gross revenue following the Tranche 2 Satisfaction
Date; and (ii) Magiclytics having conducted an additional 1,250 Campaigns (subject to certain conditions) following the Tranche 2
Satisfaction Date, the Company will issue to Mr. Young a number of shares of Company Common Stock equal to (i) $393,750, divided
by (ii) the VWAP as of the date that the earlier of clause (i) and clause (ii) above have occurred (the “Tranche 3 Satisfaction
Date”). |
Call
Agreements
On
March 12, 2021, Harris Tulchin, a Director of the Company, entered into separate “Call Agreements” with each of Amir Ben-Yohanan,
a Director and the Chief Executive Officer of the Company, and Christian Young, a former Director and the former President and Secretary
of the Company. The call agreements allowed Harris Tulchin to acquire certain shares from Amir Ben-Yohanan and Christian
Young at any time before November 13, 2025
Employment
Agreements
Simon
Yu Employment Agreement
On
April 9, 2021, the Company entered into an employment agreement with Simon Yu, its then-Chief Operating Officer. Pursuant to this employment
agreement, Mr. Yu agreed to serve as Chief Operating Officer of the Company, reporting to the Chief Executive Officer of the Company
(or other person determined by the Chief Executive Officer or the Company’s Board of Directors (the “Board”). As compensation
for Mr. Yu’s services, the Company agreed to pay Mr. Yu an annual base salary of $380,000 (the “Base Salary”) comprised
of two parts a “Cash Portion”, and an “Optional Portion”. The Cash Portion is a monthly cash payment of $15,000
– or $180,000 on an annual basis. The remaining $200,000 per year – the Optional Portion – was payable as follows:
|
(i) |
If
the Company’s Board determines that the Company has sufficient cash on hand to pay all or a portion of the Optional Portion
in cash, such amount shall be paid in cash. |
|
(ii) |
If
the Board determines that the Company does not have sufficient cash on hand to pay all of the Optional Portion in cash, then the
portion of the Optional Portion which the Board determines that the Company has sufficient cash on hand to pay in cash will be paid
in cash, and the remainder (the “Deferred Portion”) will either: |
|
(a) |
be
paid at a later date, when the Board determines that the Company has sufficient cash on hand to enable the Company to pay the Deferred
Portion; or |
|
(b) |
will
not be paid in cash – and instead, the Company will issue shares of Company Common Stock equal to (A) the Deferred Portion,
divided by (B) the VWAP (as defined in the employment agreement) as of the date of issuance of such shares of Company Common Stock. |
In
addition, pursuant to the employment agreement, Mr. Yu was entitled to be paid discretionary annual bonuses as determined by the Board
(currently intended to be a maximum of $250,000 per year), and was also entitled to receive fringe benefits, such as, but not limited
to, reimbursement for reimbursement for all reasonable and necessary out-of-pocket business, entertainment and travel, vacation days,
and certain insurances.
The
initial term of the employment agreement was one year from the effective date of the agreement (i.e. April 9, 2022), unless earlier terminated.
Thereafter, the term is automatically extended on an annual basis for terms of one year each, unless either the Company or Mr. Yu provides
notice to the other party of their desire to not so renew the term of the agreement (as applicable) at least 30 days prior to the expiration
of the then-current term.
Mr.
Yu’s employment with the Company was “at will,” meaning that either Mr. Yu or the Company may terminate Mr. Yu’s
employment at any time and for any reason, subject to certain terms and conditions.
The
Company may terminate the employment agreement at any time, with or without “cause”, as defined in the employment agreement
and Mr. Yu may terminate the employment agreement at any time, with or without “good reason”, as defined in the employment
agreement. If the Company terminates the employment agreement for cause or Mr. Yu terminates the employment agreement without good reason,
Mr. Yu will be entitled to be paid any unpaid salary owed or accrued, including the issuance of any shares of Company Common Stock owed
or accrued (as compensation) as of the termination date. In the event that there was any Deferred Portion which had been agreed to be
paid in cash, such Deferred Portion instead will be paid in shares of Company Common Stock as though such amount had been agreed to be
paid via the issuance of shares of Company Common Stock. Mr. Yu will also be entitled to payment for any unreimbursed expenses as of
the termination date. However, any unvested portion of any equity granted to Mr. Yu will be immediately forfeited as of the termination
date.
On
October 8, 2021, Mr. Yu resigned from all officer and director positions with the Company.
Harris
Tulchin Employment Agreement
On
April 9, 2021, the Company entered into employment agreement with Harris Tulchin. Pursuant to this employment agreement, Mr. Tulchin
agreed to serve as Chief Operating Officer of the Company, reporting to the Chief Executive Officer of the Company (or other person determined
by the Chief Executive Officer or the Company’s Board of Directors (the “Board”)). As compensation for Mr. Tulchin’s
services, the Company agreed to pay Mr. Tulchin an annual base salary of $380,000 (the “Base Salary”) comprised of two parts
a “Cash Portion”, and an “Optional Portion”. The Cash Portion is a monthly cash payment of $15,000 – or
$180,000 on an annual basis. The remaining $200,000 per year – the Optional Portion – is payable as follows:
|
● |
If
the Company’s Board determines that the Company has sufficient cash on hand to pay all or a portion of the Optional Portion
in cash, such amount shall be paid in cash. |
|
● |
If
the Board determines that the Company does not have sufficient cash on hand to pay all of the Optional Portion in cash, then the
portion of the Optional Portion which the Board determines that the Company has sufficient cash on hand to pay in cash will be paid
in cash, and the remainder (the “Deferred Portion”) will either be paid at a later date, when the Board determines that
the Company has sufficient cash on hand to enable the Company to pay the Deferred Portion; or will not be paid in cash – and
instead, the Company will issue shares of Company Common Stock equal to (A) the Deferred Portion, divided by (B) the VWAP (as defined
in the employment agreement) as of the date of issuance of such shares of Company Common Stock. |
In
addition, pursuant to the employment agreement, Mr. Tulchin is entitled to be paid discretionary annual bonuses as determined by the
Board (currently intended to be a maximum of $250,000 per year), and is also entitled to receive fringe benefits, such as, but not limited
to, reimbursement for reimbursement for all reasonable and necessary out-of-pocket business, entertainment and travel, vacation days,
and certain insurances.
The
initial term of the employment agreement is one year from the effective date of the agreement (i.e. April 9, 2022), unless earlier terminated.
Thereafter, the term is automatically extended on an annual basis for terms of one year each, unless either the Company or Mr. Tulchin
provides notice to the other party of their desire to not so renew the term of the agreement (as applicable) at least 30 days prior to
the expiration of the then-current term.
Mr.
Tulchin’s employment with the Company shall be “at will,” meaning that either Mr. Tulchin or the Company may terminate
Mr. Tulchin’s employment at any time and for any reason, subject to certain terms and conditions.
The
Company may terminate the employment agreement at any time, with or without “cause”, as defined in the employment agreement
and Mr. Tulchin may terminate the employment agreement at any time, with or without “good reason”, as defined in the employment
agreement. If the Company terminates the employment agreement for cause or Mr. Tulchin terminates the employment agreement without good
reason, Mr. Tulchin will be entitled to be paid any unpaid salary owed or accrued, including the issuance of any shares of Company Common
Stock owed or accrued (as compensation) as of the termination date. In the event that there was any Deferred Portion which had been agreed
to be paid in cash, such Deferred Portion instead will be paid in shares of Company Common Stock as though such amount had been agreed
to be paid via the issuance of shares of Company Common Stock. Mr. Tulchin will also be entitled to payment for any unreimbursed expenses
as of the termination date. However, any unvested portion of any equity granted to Mr. Tulchin will be immediately forfeited as of the
termination date.
Amir
Ben-Yohanan Employment Agreement
On
April 11, 2021, the Company entered into an employment agreement with Amir Ben-Yohanan for Mr. Ben-Yohanan to serve as Chief Executive
Officer of the Company. As compensation for Mr. Ben-Yohanan’s services, the Company agreed to pay Mr. Ben-Yohanan an annual base
salary of $400, 000 (the “Base Salary”) comprised of two parts a “Cash Portion”, and an “Optional
Portion”. The Cash Portion is a monthly cash payment of $15,000 – or $180,000 on an annual basis. The remaining $200 ,000
per year – the Optional Portion – is payable as follows:
|
● |
If
the Company’s Board determines that the Company has sufficient cash on hand to pay all or a portion of the Optional Portion
in cash, such amount shall be paid in cash. |
|
|
|
|
● |
If
the Board determines that the Company does not have sufficient cash on hand to pay all of the Optional Portion in cash, then the
portion of the Optional Portion which the Board determines that the Company has sufficient cash on hand to pay in cash will be paid
in cash, and the remainder (the “Deferred Portion”) will either be paid at a later date, when the Board determines that
the Company has sufficient cash on hand to enable the Company to pay the Deferred Portion; or will not be paid in cash – and
instead, the Company will issue shares of Company Common Stock equal to (A) the Deferred Portion, divided by (B) the VWAP (as defined
in the employment agreement) as of the date of issuance of such shares of Company Common Stock. |
In
addition, pursuant to the employment agreement, Mr. Ben-Yohanan is entitled to be paid discretionary annual bonuses as determined by
the Board (currently intended to be a maximum of $250,000 per year), and is also entitled to receive fringe benefits, such as, but not
limited to, reimbursement for reimbursement for all reasonable and necessary out-of-pocket business, entertainment and travel, vacation
days, and certain insurances.
The
initial term of the employment agreement is one year from the effective date of the agreement (i.e. April 9 , 2022), unless
earlier terminated. Thereafter, the term is automatically extended on an annual basis for terms of one year each, unless either the Company
or Mr. Ben-Yohanan provides notice to the other party of their desire to not so renew the term of the agreement (as applicable) at least
30 days prior to the expiration of the then-current term.
Mr.
Ben-Yohanan’s employment with the Company shall be “at will,” meaning that either Mr. Ben-Yohanan or the Company may
terminate Mr. Ben-Yohanan’s employment at any time and for any reason, subject to certain terms and conditions.
The
Company may terminate the employment agreement at any time, with or without “cause”, as defined in the employment agreement
and Mr. Ben-Yohanan may terminate the employment agreement at any time, with or without “good reason”, as defined in the
employment agreement. If the Company terminates the employment agreement for cause or Mr. Ben-Yohanan terminates the employment agreement
without good reason, Mr. Ben-Yohanan will be entitled to be paid any unpaid salary owed or accrued, including the issuance of any shares
of Company Common Stock owed or accrued (as compensation) as of the termination date. In the event that there was any Deferred Portion
which had been agreed to be paid in cash, such Deferred Portion instead will be paid in shares of Company Common Stock as though such
amount had been agreed to be paid via the issuance of shares of Company Common Stock. Mr. Ben-Yohanan will also be entitled to payment
for any unreimbursed expenses as of the termination date. However, any unvested portion of any equity granted to Mr. Ben-Yohanan will
be immediately forfeited as of the termination date.
The
terms of Mr. Ben-Yohanan’s employment agreement are identical to the terms of the employment agreements of Simon Yu and Harris
Tulchin described above, except for the following terms:
|
● |
Mr.
Ben-Yohanan’s Base Salary is $400,000 per year |
|
● |
Mr.
Ben-Yohanan reports only to the Board of Directors of the Company. |
Christian
Young Employment Agreement
On
April 11, 2021, the Company entered into an employment agreement with Christian Young for Mr. Young to serve as President of the Company.
As compensation for Mr. Young’s services, the Company agreed to pay Mr. Young an annual base salary of $380,000 (the “Base
Salary”).
Mr.
Young’s employment agreement was the same as Mr. Tulchin’s and Mr. Yu’s agreements except as indicated below.
The
Company and Mr. Young acknowledged that each of them are also the parties to that certain Consulting Agreement, dated as of February
3, 2021 (the “Consulting Agreement”), and that the Consulting Agreement and Mr. Young’s employment agreement will operate
independently of each other – except that in the event of a conflict between this employment agreement and the Consulting Agreement,
the terms and conditions of this employment agreement will control.
On
October 8, 2021, Mr. Young resigned from all officer and director positions with the Company.
Kaplun
Appointment as Chief Financial Officer, Kaplun Executive Employment Agreement & Kaplun Restricted Stock Award
On
October 7, 2021, the Company’s Board of Directors appointed Dmitry Kaplun as the Company’s Chief Financial Officer. In connection
with Mr. Kaplun’s appointment, the Company and Mr. Kaplun entered into an executive employment agreement dated as of October 7,
2021 (the “Employment Agreement”). Pursuant to the terms of the Employment Agreement, the Company agreed to pay Mr. Kaplun
an annual base salary of $280,000. In addition, the Company agreed to grant to Mr. Kaplun on the effective date of the Employment Agreement
and on each anniversary thereof a number of restricted shares of common stock equal to (i) $100,000, divided by (ii) the lesser of (A)
$1.70 (as the same may be adjusted) and (B) 80% of the VWAP as of the grant date. Each restricted stock grant will vest ratably over
the calendar year following the grant date, vesting as to 25% of the number of shares of common stock in the restricted stock grant at
the end of each calendar quarter of such year, as provided in the Employment Agreement. Mr. Kaplun will also be paid discretionary annual
bonuses if and when declared by the Board.
The
Employment Agreement has an initial term ending on the earlier of (i) the first anniversary of the effective date of the Employment Agreement,
and (ii) the time of the termination of Mr. Kaplun’s employment. in accordance with the provisions herein. The initial term and
any renewal term will automatically be extended for one or more additional terms of one year each, unless either the Company or Mr. Kaplun
provides notice to the other party at least 30 days prior to the expiration of the then-current term.
The
Company may terminate Mr. Kaplun’s employment at any time, with or without Cause (as defined in the Employment Agreement), subject
to the terms and conditions of the Employment Agreement. In the event that the Company terminates Mr. Kaplun’s employment with
Cause, subject to the terms of the Employment Agreement, (i) the Company will pay to Mr. Kaplun unpaid base salary and benefits then
owed or accrued, and any unreimbursed expenses; and (ii) any unvested portion of the restricted stock grants and any other equity granted
to Mr. Kaplun will immediately be forfeited as of the termination date.
In
the event that the Company terminates Mr. Kaplun’s employment without Cause, subject to the terms and conditions of the Employment
Agreement, (i) the Company will pay to Mr. Kaplun any base salary, bonuses, and benefits then owed or accrued, and any unreimbursed expenses;
(ii) the Company will pay to Mr. Kaplun, in one lump sum, an amount equal to the base salary that would have been paid to Mr. Kaplun
for a three-month period; and (iii) any equity grant already made to Mr. Kaplun will, to the extent not already vested, be deemed automatically
vested.
Mr.
Kaplun may resign at any time, with or without Good Reason (as defined in the Employment Agreement). In the event that Mr. Kaplun resigns
with Good Reason, the Company will pay to Mr. Kaplun the amounts, and Mr. Kaplun will, subject to the terms of the Employment Agreement,
be entitled to such benefits (including without limitation any vesting of unvested shares under any equity grant), that would have been
payable to Mr. Kaplun or which Mr. Kaplun would have received had Mr. Kaplun’s employment been terminated by the Company without
Cause.
In
the event that Mr. Kaplun resigns without Good Reason, the Company will pay to Mr. Kaplun the amounts, and Mr. Kaplun will be entitled,
subject to the terms of the Employment Agreement, to such benefits (including without limitation any vesting of unvested shares under
any equity grant), that would have been payable to Mr. Kaplun or which Mr. Kaplun would have received had Mr. Kaplun’s employment
been terminated by the Company with Cause.
The
Employment Agreement contains customary representations and warranties of the parties, and customary provisions relating to confidentiality
obligations, indemnification, and miscellaneous provisions.
Pursuant
to the terms of the Employment Agreement, the Board granted Mr. Kaplun 58,824 shares of restricted common stock on October 7, 2021. Twenty-five
percent of the shares vest on each of the three-month, six-month, nine-month and 12-month anniversaries of the grant date.
Additional
Compensation for Directors
For
the year ended December 31, 2021, the Board of Directors approved and paid $485,000 cash bonuses to its directors.
Resignations
of Simon Yu and Christian Young
On
October 8, 2021, each of Christian Young, our then-President, Secretary and Director, and Simon Yu, our then-Chief Operating Officer
and Director, resigned from all officer and director positions with the Company, effective immediately.
Musina
Board Appointment
On
October 9, 2021, the Board appointed Massimiliano Musina to serve as a member of the Company’s Board of Directors. In connection
with Mr. Musina’s appointment, the Company and Mr. Musina entered into an Independent Director Agreement dated October 12, 2021
(the “Director Agreement”). Pursuant to the Director Agreement, Mr. Musina agreed to serve as an independent director of
the Company during the term of the Director Agreement. The term of the Director Agreement is from October 12, 2021 until Mr. Musina either
resigns or is removed from his position as a director or until his death.
Pursuant
to the terms of the Director Agreement, the Company agreed to issue to Mr. Musina each quarter a number of shares of common stock having
a fair market value of $25,000, in exchange for Mr. Musina’s service as a member of the Company’s Board of Directors. The
number of shares of common stock to be issued will be calculated by dividing $25,000 by the VWAP, as further described in the Director
Agreement. Pursuant to the Director Agreement, the Company agreed to reimburse Mr. Musina for all reasonable out-of-pocket expenses incurred
by him in attending any in-person meetings, provided that he complies with the generally applicable policies, practices and procedures
of the Company for submission of expense reports, receipts or similar documentation of such expenses. Any reimbursements for allocated
expenses (as compared to out-of-pocket expenses of Mr. Musina in excess of $500.00) must be approved in advance by the Company.
The
Director Agreement contains customary representations and warranties of the parties, and customary provisions relating to confidentiality
obligations, and miscellaneous provisions.
Advisory
Board
On
April 2, 2021, the Company established an advisory board (“Advisory Board”) to provide guidance and advice to the directors
and officers of the Company regarding technical and business matters. The advisory board has no voting powers. The Advisory Board currently
consists of two members: Andrew Omori and Perry Simon.
Andrew
Omori. On April 2, 2021, the Company entered into a consulting agreement with Andrew Omori and appointed Mr. Omori
to the Advisory Board of the Company with monthly payment of $30,000 by the Company’s shares. The Company amended the agreement
on September 13, 2021 and reduced the monthly payment to $15,000. Mr. Omori is a partner at Andreessen Horowitz, one of Silicon Valley’s
most prominent and successful venture capital firms, with $17.6 billion in assets under management. Andreessen Horowitz is well known
for leading investments in hit social audio app, Clubhouse (which is not owned, and is not otherwise affiliated with, the Company), as
well as Airbnb and Coinbase. Prior to joining Andreessen Horowitz, Mr. Omori served as a VP at JMP Group and as a successful technology
investment banker. Mr. Omori has dedicated his career to helping technology companies scale and has worked with a variety of social companies
including Snap, Pinterest, Roblox, and the Clubhouse app. Mr. Omori will advise the Board of Directors and the Company regarding optimal
pathways for monetizing the Company’s operations as well as providing the Company with access to relationships, branding opportunities,
and partnerships that hold the potential for further gains in shareholder value.
Perry
Simon. On April 15, 2021, the Company entered into a consulting agreement with Perry Simon and appointed Mr. Simon
to the Advisory Board of the Company. Mr. Simon is the former executive vice president of Primetime at NBC Entertainment, where he helped
develop and supervise some of television’s most iconic series, including “Cheers,” “The Golden Girls,”
“Law and Order,” “L.A. Law,” “Miami Vice,” “Frasier,” Seinfeld, and “The Cosby
Show.” He is also a former General Manager at PBS former Managing Director at BBC Worldwide America, former President of Viacom
Productions and former executive officer at Paul Allen’s Vulcan Productions. Over the past 20 years, Mr. Simon has helped to facilitate
the rapid growth of mission-driven programming, driving large gains in audience size and fan engagement, and winning multiple awards
along the way (Golden Globes, Emmys, and Peabodys). Mr. Simon will advise the Company on non-profit and social impact activities, as
well as other business, financial, and organizational matters, and access his extensive entertainment industry relationships and knowledge
for content development, acquisition, and deal structures.
Gary
Marenzi
On
January 4, 2022, Gary Marenzi, a member of the Board of Directors of the Company, resigned from his position as a Board member, effectively
immediately. Mr. Marenzi’s resignation is not the result of any disagreement with the Company on any matter relating to the Company’s
operations, policies or practices.
Employees
We
currently have 6 full time employees, including Amir Ben-Yohanan, our Chief Executive Officer, Dmitry Kaplun, our Chief Financial Officer,
and Harris Tulchin, our Chief Business Affairs Officer and Chief Legal Officer. We also contract with a number of consultants that assist
in various aspects of our operations.
We
believe that a diverse workforce is important to our success. As we grow our business, we will focus on the hiring, retention and advancement
of women and underrepresented populations, and to cultivate an inclusive and diverse corporate culture. The Company has hired a Human
Resources consultant to evaluate and implement our ongoing human capital needs. We will continue to evaluate our use of human capital
measures or objectives in managing our business such as the factors we employ or seek to employ in the development, attraction and retention
of personnel and maintenance of diversity in our workforce.
In
the future, we also intend to provide our employees and their families with access to a variety of innovative, flexible and convenient
health and wellness programs, including benefits that provide protection and security so they can have peace of mind concerning events
that may require time away from work or that impact their financial well-being; that support their physical and mental health by providing
tools and resources to help them improve or maintain their health status and encourage engagement in healthy behaviors; and that offer
choice where possible so they can customize their benefits to meet their needs and the needs of their families.
We
also expect to provide robust compensation and benefits programs to help meet the needs of our employees.
ITEM
1A. RISK FACTORS
Below
is a summary of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:
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We
have a history of operating losses, our management has concluded that factors raise substantial doubt about our ability to continue
as a going concern, and our auditors have included explanatory paragraphs relating to our ability to continue as a going concern
in their audit reports for the fiscal years ended December 31, 2021 and 2020. |
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We
are a holding company and our principal asset is our 100% equity interest in WOHG, through which we own 100% of each of WOHG’s
limited liability company operating subsidiaries, and accordingly we are dependent upon distributions from such operating subsidiaries
to pay taxes and other expenses. |
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WOHG
is an early-stage company with a limited operating history. Such limited operating history of WOHG may not provide an adequate basis
to judge our future prospects and results of operations. |
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Since
inception of WOHG, WOHG has experienced losses, and we may have to further reduce our costs by curtailing future operations to continue
as a business. |
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There
are no assurances we will realize the anticipated benefits from the acquisition of WOHG. |
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The
current outbreak of the coronavirus may have a negative effect on our ability to conduct our business and operations and may also
cause an overall decline in the economy as a whole and could materially harm our Company. |
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We
may be adversely affected by political tensions between the United States and China. |
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We
may fail to successfully execute our business plan. |
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Our
acquisition strategy creates risks for our business. |
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We
may not be able to effectively manage our growth and the increased complexity of our business, which could negatively impact our
brand and financial performance. |
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We
may suffer from lack of availability of additional funds. |
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Our
substantial amount of indebtedness may adversely affect our cash flow and our ability to operate our business, remain in compliance
with debt covenants and make payments on our indebtedness. |
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The
ability of our Chief Executive Officer, Amir Ben-Yohanan, to control our business may limit or eliminate minority stockholders’
ability to influence corporate affairs. |
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Our
business is subject to fluctuations that are not predictable, which subjects our business to increase risks. |
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Our
business depends on our ability to provide customers and followers with interesting and useful content, which in turn depends on
the content contributed by the content creators. |
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Changes
in public and consumer tastes and preferences and industry trends could reduce demand for our services and content offerings and
adversely affect our business. |
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Our
ability to generate revenue from discretionary and corporate spending, such as corporate sponsorships and advertising, is subject
to many factors, including many that are beyond our control. |
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We
may not be able to adapt to or manage new content distribution platforms or changes in consumer behavior resulting from new technologies. |
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Because
our success depends substantially on our ability to maintain a professional reputation, adverse publicity concerning us, one of our
businesses, our Creators or our key personnel could adversely affect our business. |
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We
depend on the relationships of our talent managers and other key personnel with clients across many categories, including fashion,
music, digital, and sponsorship. |
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Our
success depends, in part, on our continuing ability to identify, recruit and retain qualified and experienced talent managers. If
we fail to recruit and retain suitable talent managers or if our relationships with our talent managers change or deteriorate, it
could adversely affect our business. |
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Our
failure to identify, sign and retain influencer-clients could adversely affect our business. |
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The
markets in which we operate are highly competitive, both within the United States and internationally. |
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We
operate in a fast-evolving industry, and we are in the early stage of our business. We cannot guarantee that our monetization strategies
will be successfully implemented or generate sustainable revenues and profit. |
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We
rely on technology, such as our information systems, to conduct our business. Failure to protect our technology against breakdowns
and security breaches could adversely affect our business. |
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The
commercial success of our products is dependent, in part, on factors outside our control. |
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Increases
in the costs of content may have an adverse effect on our business, financial condition and results of operations. |
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In
our paid promotion business, if we are unable to prove that our advertising and sponsorship solutions provide an attractive return
on investment for our customers, our financial results could be harmed. |
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We
will be attempting to launch brands in new markets and with new products. Our inability to effectively execute our business plan
in relation to these new brands could negatively impact our business. |
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Our
management team’s attention may be diverted by acquisitions and searches for new acquisition targets, and our business and
operations may suffer adverse consequences as a result. |
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We
may be unable to scale our operations successfully. |
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Economic
conditions or changing consumer preferences could adversely impact our business. |
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Our
intellectual property rights are valuable, and if we are unable to protect them or are subject to intellectual property rights claims,
our business may be harmed. |
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We
may be found to have infringed the intellectual property rights of others, which could expose us to substantial damages or restrict
our operations. |
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As
a creator and a distributor of content over the internet, we face potential liability for legal claims based on the nature and content
of the materials that we create or distribute. |
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We
are subject to extensive U.S. and foreign governmental regulations, and our failure to comply with these regulations could adversely
affect our business. |
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Our
results of operations, which are reported in U.S. dollars, could be adversely affected if currency exchange rates fluctuate substantially
in the future. |
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Our
amended and restated bylaws provide that state or federal court located within the state of Nevada will be the sole and exclusive
forum for substantially all disputes between us and our shareholders, which could limit its stockholders’ ability to obtain
a favorable judicial forum for disputes with us or our directors, officers or other employees. |
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Stockholders
are bound by the fee-shifting provision contained in our amended and restated bylaws, which may discourage you to pursue actions
against us. |
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As
a result of being a public company, we are subject to additional reporting and corporate governance requirements that will require
additional management time, resources and expense. |
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We
may not have sufficient insurance coverage and an interruption of our business or loss of a significant amount of property could
have a material adverse effect on our financial condition and operations. |
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We
could become involved in claims or litigations that may result in adverse outcomes. |
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Trading
on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for our
security holders to resell their common stock. |
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Our
stock price is likely to be highly volatile because of several factors, including a limited public float. |
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Our
common stock has been in the past, and may be in the future, a “penny stock” under SEC rules. It may be more difficult
to resell securities classified as “penny stock.” |
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FINRA
sales practice requirements may also limit a shareholder’s ability to buy and sell our stock. |
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If
we fail to maintain effective internal control over financial reporting, the price of our securities may be adversely affected. |
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We
are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley
Act”), and if we fail to continue to comply, our business could be harmed and the price of our securities could decline. |
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Our
privately issued common stock is subject to risks arising from restrictions on reliance on Rule 144 by shell companies or former
shell companies. |
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The
sale and issuance of additional shares of our common stock could cause dilution as well as the value of our common stock to decline. |
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Substantial
future sales of shares of our common stock could cause the market price of our common stock to decline. |
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Provisions
of our articles of incorporation and bylaws may delay or prevent a takeover which may not be in the best interests of our stockholders. |
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We
do not expect to pay dividends in the foreseeable future. |
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We
encourage you, however, to read the full risk factors presented below. |
RISKS
RELATED TO OUR BUSINESS
We
have a history of operating losses, our management has concluded that factors raise substantial doubt about our ability to continue as
a going concern, and our auditors have included explanatory paragraphs relating to our ability to continue as a going concern in their
audit reports for the fiscal years ended December 31, 2021 and 2020.
We
have a history of operating losses and have incurred cash flow deficits. For the fiscal years ended December 31, 2021 and 2020, we reported
net losses of $22,245,656 and $2,577,721, respectively, and negative cash flow from operating activities of $7,970,357 and $1,967,551,
respectively. As of December 31, 2021, we had an aggregate accumulated deficit of $24,904,074. There is substantial doubt regarding our
ability to continue as a going concern as a result of our historical recurring losses and negative cash flows from operations, as well
as our dependence on private equity and financings. We anticipate that we will continue to report losses and negative cash flow for the
foreseeable future. Our management has concluded that our historical recurring losses from operations and negative cash flows from operations,
as well as our dependence on private equity and other financings, raise substantial doubt about our ability to continue as a going concern.
Our auditors have included explanatory paragraphs relating to our ability to continue as a going concern in their audit reports for the
fiscal years ended December 31, 2021 and 2020, respectively.
The
consolidated financial statements of Clubhouse Media do not include any adjustments that might result from the outcome of this uncertainty.
These adjustments would likely include substantial impairment of the carrying amount of our assets and potential contingent liabilities
that may arise if we are unable to fulfill various operational commitments. In addition, the value of our securities would be greatly
impaired. Our ability to continue as a going concern is dependent upon generating sufficient cash flow from operations and obtaining
additional capital and financing. If our ability to generate cash flow from operations is delayed or reduced and we are unable to raise
additional funding from other sources, we may be unable to continue in business.
We
are a holding company and our principal asset is our 100% equity interest in WOHG, through which we own 100% of each of WOHG’s
limited liability company operating subsidiaries, and accordingly we are dependent upon distributions from such operating subsidiaries
to pay taxes and other expenses.
We
are a holding company and our principal asset is our 100% equity interests in WOHG. WOHG operates through its subsidiary wholly owned
limited liability companies, of which it owns 100% of each. Accordingly, we are dependent upon distributions from our operating subsidiaries
to pay taxes and other expenses. If our operating subsidiaries do not generate sufficient revenues such that they can provide distributions
to us, we may be unable to pay our taxes and other expenses which would have a materially adverse effect on our business operations and
our Company as a whole.
WOHG
is an early-stage company with a limited operating history. Such limited operating history of WOHG may not provide an adequate basis
to judge our future prospects and results of operations.
On
November 12, 2020, pursuant to the closing of the Share Exchange Agreement, we acquired WOHG, and WOHG thereafter became our wholly owned
subsidiary, and the business of WOHG became the business of the Company going forward. WOHG has limited experience and a limited operating
history in which to assess its future prospects as a company. In addition, the market for the products and services offered through WOHG
is highly competitive. If we fail to successfully develop and offer the products and services offered through WOHG in an increasingly
competitive market, we may not be able to capture the growth opportunities associated with them or recover our development and marketing
costs, and our future results of operations and growth strategies could be adversely affected. The limited history of WOHG may not provide
a meaningful basis for investors to evaluate our business, financial performance, and prospects.
Since
inception of WOHG, WOHG has experienced losses, and we may have to further reduce our costs by curtailing future operations to continue
as a business.
Since
inception of WOHG, WOHG has had operating losses and its cash flow has been inadequate to support its ongoing operations. Its ability
to fund its capital requirements out of its available cash and cash generated from its operations depends on a number of factors, including
its ability to gain interest in its products and services and continue growing its existing operations and its ability to raise funds
as needed. If we cannot continue to generate positive cash flow from operations, we will have to reduce our costs and try to raise working
capital from other sources. These measures could materially and adversely affect our ability to execute our operations and expand our
business.
There
are no assurances we will realize the anticipated benefits from the acquisition of WOHG.
Our
future success will depend, in part, on our ability to realize the anticipated growth opportunities and synergies from combining Clubhouse
Media and WOHG. The combined company may encounter the following difficulties, costs and delays involved in integrating these operations:
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failure
to integrate both companies’ businesses and operations; |
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failure
to successfully manage relationships with customers and other important relationships; |
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failure
of customers to continue using the services of the combined company; |
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challenges
encountered in managing larger operations; |
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the
loss of key employees; |
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failure
to manage the growth and growth strategies of both companies; |
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diversion
of the attention of management from other ongoing business concerns; |
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potential
incompatibility of technologies and systems; and |
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potential
impairment charges incurred to write down the carrying amount of intangible assets generated as a result of the mergers. |
If
the combined company’s operations do not meet the expectations of the pre-existing customers of our companies before, then these
customers may cease doing business with the combined company altogether, which would harm our results of operations and financial condition.
If the management team is not able to develop strategies and implement a business plan that successfully addresses these difficulties,
we may not realize the anticipated benefits of combining the companies. In particular, we are likely to realize lower earnings per share,
which may have an adverse impact on our Company and the market price of our common stock.
The
current outbreak of the coronavirus may have a negative effect on our ability to conduct our business and operations and may also cause
an overall decline in the economy as a whole and could materially harm our Company.
Due
to the digital/remote nature of our business, we believe that coronavirus would have a limited impact on our operations.
We
may be adversely affected by political tensions between the United States and China.
Political
tensions between the United States and China have escalated due to, among other things, trade disputes, the COVID-19 outbreak and sanctions
imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the central government
of the PRC. On August 6, 2020, then-President Donald Trump issued an executive order requiring ByteDance to sell TikTok to an American
company, or risk being banned in the United States entirely. While ByteDance ultimately complied with this executive order, TikTok was
not banned in the United States, and it is unclear what the Biden administration’s position with respect to TikTok will be, a ban
of a social media platform on which our influencers have acquired significant followers, such as TikTok, would have a material adverse
effect on our business, prospects, financial condition and results of operations. Furthermore, there have been recent media reports on
deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital
markets. If any legislation were to be enacted or any regulations were to be adopted along these lines that ultimately had the effect
of harming or outright banning a social media platform utilized by our Company and/or its influencers, it could have a material adverse
effect on our business and operations.
We
may fail to successfully execute our business plan.
Our
shareholders may lose their entire investment if we fail to execute our business plan. Our prospects must be considered in light of the
following risks and uncertainties, including but not limited to, competition, the erosion of ongoing revenue streams, the ability to
retain experienced personnel and general economic conditions. We cannot guarantee that we will be successful in executing our business
plan. If we fail to successfully execute our business plan, we may be forced to cease operations, in which case our shareholders may
lose their entire investment.
Our
acquisition strategy creates risks for our business.
We
expect that we will pursue acquisitions of other businesses, assets or technologies to grow our business. We may fail to identify attractive
acquisition candidates or we may be unable to reach acceptable terms for future acquisitions. We might not be able to raise enough cash
to compete for attractive acquisition targets. If we are unable to complete acquisitions in the future, our ability to grow our business
at our anticipated rate will be impaired.
We
may pay for acquisitions by issuing additional shares of our common stock, which would dilute our shareholders, or by issuing debt, which
could include terms that restrict our ability to operate our business or pursue other opportunities and subject us to meaningful debt
service obligations. We may also use significant amounts of cash to complete acquisitions. To the extent that we complete acquisitions
in the future, we likely will incur future depreciation and amortization expenses associated with the acquired assets. We may also record
significant amounts of intangible assets, including goodwill, which could become impaired in the future. Acquisitions involve numerous
other risks, including:
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difficulties
integrating the operations, technologies, services and personnel of the acquired companies; |
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challenges
maintaining our internal standards, controls, procedures and policies; |
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diversion
of management’s attention from other business concerns; |
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over-valuation
by us of acquired companies; |
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litigation
resulting from activities of the acquired company, including claims from terminated employees, customers, former shareholders and
other third parties; |
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insufficient
revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired companies; |
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insufficient
indemnification or security from the selling parties for legal liabilities that we may assume in connection with our acquisitions; |
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entering
markets in which we have no prior experience and may not succeed; |
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risks
associated with foreign acquisitions, such as communication and integration problems resulting from geographic dispersion and language
and cultural differences, compliance with foreign laws and regulations and general economic or political conditions in other countries
or regions; |
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potential
loss of key employees of the acquired companies; and |
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impairment
of relationships with clients and employees of the acquired companies or our clients and employees as a result of the integration
of acquired operations and new management personnel. |
We
may not be able to effectively manage our growth and the increased complexity of our business, which could negatively impact our brand
and financial performance.
As
we grow our business, we may incur increasing costs, such as operating costs and marketing costs. If such expansion is not properly managed,
it may adversely affect our financial and operating resources without achieving the desired effects.
As
we only have a limited history of operating our business at its current scale, it is difficult to evaluate our current business and future
prospects, including our ability to grow in the future. In addition, our costs and expenses may increase rapidly as we expand our business.
Continued growth could also strain our ability to maintain reliable service levels for our clients and customers, develop and improve
our operational, financial, legal and management controls, and enhance our reporting systems and procedures. Our costs and expenses may
grow faster than our revenues and may be greater than what we anticipate. If we are unable to generate adequate revenues and to manage
our costs and expenses, we may continue to incur losses in the future and may not be able to achieve or subsequently maintain profitability.
Managing our growth will require significant expenditures and the allocation of valuable management resources. If we fail to achieve
the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition could be harmed.
We
may suffer from lack of availability of additional funds.
We
expect to have ongoing needs for working capital in order to fund operations and to continue to expand our operations. To that end, we
will be required to raise additional funds through equity or debt financing. However, there can be no assurance that we will be successful
in securing additional capital on favorable terms, if at all. If we are successful, whether the terms are favorable or unfavorable, there
is a potential that we will fail to comply with the terms of such financing, which could result in severe liability for our Company.
If we are unsuccessful, we may need to (a) initiate cost reductions; (b) forego business development opportunities; (c) seek extensions
of time to fund liabilities, or (d) seek protection from creditors. In addition, any future sale of our equity securities would dilute
the ownership and control of your shares and could be at prices substantially below prices at which our shares currently trade. Our inability
to raise capital could require us to significantly curtail or terminate our operations altogether. We may seek to increase our cash reserves
through the sale of additional equity or debt securities. The sale of convertible debt securities or additional equity securities could
result in additional and potentially substantial dilution to our shareholders. The incurrence of indebtedness would result in increased
debt service obligations and could result in operating and financing covenants that would restrict our operations and liquidity. In addition,
our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties.
In
addition, if we are unable to generate adequate cash from operations, and if we are unable to find sources of funding, it may be necessary
for us to sell all or a portion of our assets, enter into a business combination, or reduce or eliminate operations. These possibilities,
to the extent available, may be on terms that result in significant dilution to our shareholders or that result in our shareholders losing
all of their investment in our Company.
Our
substantial amount of indebtedness may adversely affect our cash flow and our ability to operate our business, remain in compliance with
debt covenants and make payments on our indebtedness.
Our
substantial level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal
of, interest on or other amounts due with respect to our indebtedness. Our indebtedness could have other important consequences to you
as a stockholder. For example, it could:
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make
it more difficult for us to satisfy our obligations with respect to our indebtedness and any failure to comply with the obligations
of any of our debt instruments, including financial and other restrictive covenants, could result in an event of default under the
senior secured credit facility and the senior subordinated note; |
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make
us more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government
regulation; |
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require
us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability
of our cash flows to fund working capital, capital expenditures, acquisitions and other general corporate purposes; |
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limit
our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; |
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place
us at a competitive disadvantage compared to our competitors that have less debt; and |
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limit
our ability to borrow additional amounts for working capital, capital expenditures, acquisitions, debt service requirements, execution
of our business strategy or other purposes. |
Any
of the above listed factors could materially adversely affect our business, financial condition and results of operations.
The
ability of our Chief Executive Officer, Amir Ben-Yohanan, to control our business may limit or eliminate minority stockholders’
ability to influence corporate affairs.
Voting
control of the Company is held by our Chief Executive Officer, Mr. Ben-Yohanan, through the share of Series X Preferred Stock he holds.
This share of Series X Preferred Stock has a number of votes at any time equal to (i) the number of votes then held or entitled
to be made by all other equity or debt securities of the Company, or pursuant to any other agreement, contract or understanding of the
Company, plus (ii) one. In addition, as of March 21, 2022, Mr. Ben-Yohanan beneficially owned 57,059,335 shares of our common stock,
which represents 51.2% of the voting power of our outstanding common stock. Because of this voting control through the shares
of Series X Preferred Stock and the common stock he beneficially owns, he is able to significantly influence membership of our Board
of Directors, as well as all other matters requiring stockholder approval. The interests of our Chief Executive Officer may differ from
the interests of other stockholders with respect to the issuance of shares, business transactions with or sales to other companies, selection
of other officers and directors and other business decisions. The minority stockholders will have no way of overriding decisions made
by our Chief Executive Officer.
Our
business is subject to fluctuations that are not predictable, which subjects our business to increase risks.
Our
business is subject to fluctuations with respect to both our influencers and the number of followers on social media we are able to access
through our influencers and our own social media channels. Either party may terminate the Management Agreement upon 30 days’ notice
without cause. As such, our roster of Clubhouse influencers can change rapidly and significantly, which also affects the number of social
media followers we can access, which we believe is a material factor in our ability to generate revenues. For example, at least one of
our Clubhouse influencers has over 11 million followers as of March 21, 2022. If this influencer were to leave our Clubhouse,
we would immediately lose access to those followers through our Creator Occupancy Agreement. Further, followers on social
media in general often fluctuate significantly due to external factors that are not predictable. The unexpected loss of one or more of
our influencers and/or a reduction in the number of ours or our influencers’ followers could have a negative impact on our business.
Our
business depends on our ability to provide customers and followers with interesting and useful content, which in turn depends on the
content contributed by the content creators.
The
quality of the content offered by our influencers and their followers’ level of engagement are critical to our success. In order
to attract and retain users and compete effectively, we must offer interesting and useful content and enhance followers’ viewing
experience. It is vital to our operations that we remain sensitive to and responsive to evolving public and consumer preferences and
offer content that appeals to our followers and customers. We have also been providing our content creators with support and guidance
in various forms, including technical support for content distribution, editing and uploading. However, we cannot assure you that our
content creators can contribute to create popular contents. If our content creators cease to contribute content, or their uploaded content
fails to attract or retain our followers and customers, we may experience a decline in our business and suffer a reduction in revenue.
Changes
in public and consumer tastes and preferences and industry trends could reduce demand for our services and content offerings and adversely
affect our business.
Our
ability to generate revenues is highly sensitive to rapidly changing consumer preferences and industry trends, as well as the popularity
of the talent, brands and owners of IP we represent, and the assets we own. Our success depends on our influencers’ ability to
create quality content through popular social media channels that meet the changing preferences of the broad consumer market and respond
to competition from an expanding array of choices facilitated by technological developments in the delivery of content. Our operations
and revenues are affected by consumer tastes and entertainment trends, which are unpredictable and subject to change and may be affected
by changes in the social and political climate. Changes in consumers’ tastes or a change in the perceptions of our business partners,
whether as a result of the social and political climate or otherwise, could adversely affect our operating results. Our failure to avoid
a negative perception among consumers or anticipate and respond to changes in consumer preferences, including in the form of content
creation or distribution, could result in reduced demand for our product and/or content offerings, or a reduced social media followings
and business opportunities for our Creators, which could have an adverse effect on our business, financial condition and results of operations.
Our
ability to create popular, social media-based entertainment content is increasingly important to the success of our business and our
ability to generate revenues. The production of entertainment content is inherently risky because the revenues we derive from various
sources primarily depend on our ability to reach large audiences and satisfy consumer tastes and expectations in a consistent manner.
The popularity of our content and owned assets is affected by our ability to maintain or develop strong brand awareness and target key
audiences, the sources and nature of competing content offerings, the time and manner in which consumers acquire and view some of our
entertainment products and the options available to advertisers for reaching their desired audiences. Consumer tastes change frequently
and it is a challenge to anticipate what offerings will be successful at any point in time. We invest substantial capital in our content
and owned assets, including in the creation of original content, before learning the extent to which it will achieve popularity with
consumers. A lack of popularity of these, our other content offerings or our owned assets, as well as labor disputes, unavailability
of a star performer, equipment shortages, cost overruns, disputes with production teams or adverse weather conditions, could have an
adverse effect on our business, financial condition and results of operations.
Our
ability to generate revenue from discretionary and corporate spending, such as corporate sponsorships and advertising, is subject to
many factors, including many that are beyond our control.
Our
business depends on discretionary consumer and corporate spending. Many factors related to corporate spending and discretionary consumer
spending, including economic conditions affecting disposable consumer income such as unemployment levels, fuel prices, interest rates,
changes in tax rates and tax laws that impact companies or individuals and inflation can significantly impact our operating results.
While consumer and corporate spending may decline at any time for reasons beyond our control, the risks associated with our businesses
become more acute in periods of a slowing economy or recession, which may be accompanied by reductions in corporate sponsorship and advertising.
During periods of reduced economic activity, many consumers have historically reduced their discretionary spending and advertisers have
reduced their sponsorship and advertising expenditures, which can result in a reduction in sponsorship opportunities. There can be no
assurance that consumer and corporate spending will not be adversely impacted by current economic conditions, or by any future deterioration
in economic conditions, thereby possibly impacting our operating results and growth. A prolonged period of reduced consumer or corporate
spending could have an adverse effect on our business, financial condition and results of operations.
We
may not be able to adapt to or manage new content distribution platforms or changes in consumer behavior resulting from new technologies.
We
must successfully adapt to and manage technological advances in our industry, including the emergence of alternative social media platforms.
If we are unable to adopt or are late in adopting technological changes and innovations, it may lead to a loss of consumers viewing our
content, and a corresponding reduction in revenues from advertisers. It may also lead to a reduction in ours or our Creators’ ability
to monetize new platforms. Our ability to effectively generate revenue from new content distribution platforms and viewing technologies
will affect our ability to maintain and grow our business. Emerging forms of content distribution may provide different economic models
and compete with current distribution methods (such as Instagram and TikTok) in ways that are not entirely predictable, which could reduce
demand for promotional posts by our team of influencers. We must also adapt to changing consumer behavior driven by advances in technology.
If we fail to adapt our distribution methods and content to emerging technologies and new distribution platforms, our ability to generate
revenue from our targeted audiences may decline and could result in an adverse effect on our business, financial condition and results
of operations.
Because
our success depends substantially on our ability to maintain a professional reputation, adverse publicity concerning us, one of our businesses,
our Creators or our key personnel could adversely affect our business.
Our
professional reputation is essential to our continued success and any decrease in the quality of our reputation could impair our ability
to, among other things, recruit and retain qualified and experienced talent managers and other key personnel, retain or attract Creators,
and retain or attract advertisers, purchasers of our products, (i.e. our customers). Our overall reputation may be negatively impacted
by a number of factors, including negative publicity concerning us, members of our management, our Creators, our customers, and other
key personnel. Any adverse publicity relating to such individuals or entities that we employ or represent, or to our Company, including
from reported or actual incidents or allegations of illegal or improper conduct, such as harassment, discrimination or other misconduct,
could result in significant media attention, even if not directly relating to or involving WOHG, and could have a negative impact on
our professional reputation, potentially resulting in termination of contracts, our inability to attract new customer or client relationships,
or the loss or termination of such employees’ services, all of which could adversely affect our business, financial condition and
results of operations. Our professional reputation could also be impacted by adverse publicity relating to one or more of our owned or
majority owned brands or businesses.
We
depend on the relationships of our talent managers and other key personnel with clients across many categories, including fashion, music,
digital, and sponsorship.
We
depend heavily upon relationships that our talent managers and other key personnel have developed with our influencer-clients, as well
as our corporate customers that utilize our team of influencers for advertising and paid promotion. The personal relationships that our
talent managers, influencers, and other key personnel have developed with brands and other key business contacts help us to secure access
to sponsorships, endorsements, professional contracts, events and other opportunities for our Creators, which is critical to our success.
Due to the importance of those contacts to us, a substantial deterioration in these relationships, or substantial loss of talent managers
or other key personnel who maintain these relationships, could adversely affect our business. In particular, our talent management business
is dependent upon the highly personalized relationships between our team at Doiyen LLC and their Creators – i.e. the influencers
with whom we contract with and represent. A substantial deterioration in the team managing a client may result in a deterioration in
our relationship with, or the loss of, the clients represented by that manager. The substantial loss of multiple talent managers could
have an adverse effect on our business, financial condition and results of operations. Our talent managers and other key personnel are
not party to long-term contracts and, in any event, can leave our Company with little or no notice. We can give no assurance that all
or any of these individuals will remain with us or will retain their associations with key business contacts.
Our
success depends, in part, on our continuing ability to identify, recruit and retain qualified and experienced talent managers. If we
fail to recruit and retain suitable talent managers or if our relationships with our talent managers change or deteriorate, it could
adversely affect our business.
Our
success depends, in part, upon our continuing ability to identify, recruit and retain qualified and experienced talent managers. There
is great competition for qualified and experienced talent managers in the social media industry, and we cannot assure you that we will
be able to continue to hire or retain a sufficient number of qualified persons to meet our requirements, or that we will be able to do
so under terms that are economically attractive to us. Any failure to retain certain talent managers could lead to the loss of sponsorship
and other engagements and have an adverse effect on our business, financial condition and results of operations.
Our
failure to identify, sign and retain influencer-clients could adversely affect our business.
We
derive substantial revenue from the engagements, sponsorships, and branding deals entered into by our influencer-clients. We depend on
identifying, signing and retaining as clients those influencers with significant social media followings, that are deemed to be favorable
candidates for companies to utilize for advertising, promotion, and branding. Our competitive position is dependent on our continuing
ability to attract, develop and retain such clients whose work is likely to achieve a high degree of value and recognition as well as
our ability to provide such clients with sponsorships, endorsements, professional contracts, productions, events and other opportunities.
Our failure to attract and retain these clients, an increase in the costs required to attract and retain such clients, or an untimely
loss or retirement of these clients could adversely affect our financial results and growth prospects. We have not entered into written
agreements with many of the clients we represent. These clients may decide to discontinue their relationship with us at any time and
without notice. In addition, the clients with whom we have entered into written contracts may choose not to renew their contracts with
us on reasonable terms or at all or they may breach or seek to terminate these contracts. If any of our clients decide to discontinue
their relationships with us, whether they are under a contract or not, we may be unable to recoup costs expended to develop and promote
them and our financial results may be adversely affected. Further, the loss of such clients could lead other of our clients to terminate
their relationships with us.
The
markets in which we operate are highly competitive, both within the United States and internationally.
We
face competition from a variety of other domestic and foreign companies. We face competition from alternative providers of the content,
services, and products we and our Creators offer and from other forms of entertainment in a rapidly changing and increasingly fragmented
marketplace. There are other companies and individuals currently providing similar products and services as us in the social media influencer
industry. Our competitors include, but are not limited to, Hype House, Glam House and any other social media influencer collectives and/or
talent management companies specializing in representing influencers, each of which may have greater financial and other resources than
us. We may be unable to successfully compete with these competitors, and may expend significant resources without success. Further, any
increased competition, which may not be foreseeable, or our failure to adequately address any competitive factors, could result in reduced
demand for our content, clients or key brands, which could have an adverse effect on our business, financial condition and results of
operations.
We
operate in a fast-evolving industry, and we are in the early stage of our business. We cannot guarantee that our monetization strategies
will be successfully implemented or generate sustainable revenues and profit.
We
are in the early stage of our business, and our monetization model is evolving. We generate revenues primarily by providing our users
with valuable content. We also generate revenues from advertising and other services. We cannot assure you that we can successfully implement
the existing monetization strategies to generate sustainable revenues, or that we will be able to develop new monetization strategies
to grow our revenues. If our strategic initiatives do not enhance our ability to monetize or enable us to develop new monetization approaches,
we may not be able to maintain or increase our revenues or recover any associated costs. In addition, we may introduce new products and
services to expand our revenue streams, including products and services with which we have little or no prior development or operating
experience. If these new or enhanced products or services fail to engage users, content creators or business partners, we may fail to
diversify our revenue streams or generate sufficient revenues to justify our investments and costs, and our business and operating results
may suffer as a result.
We
rely on technology, such as our information systems, to conduct our business. Failure to protect our technology against breakdowns and
security breaches could adversely affect our business.
We
rely on technology, such as our information systems and social media platforms, to conduct our business. This technology is vulnerable
to service interruptions and security breaches from inadvertent or intentional actions by our employees, partners and vendors, or from
attacks by malicious third parties. Such attacks are of ever-increasing levels of sophistication and are made by groups and individuals
with a wide range of motives and expertise, including organized criminal groups, “hacktivists,” nation states and others.
The techniques used to breach security safeguards evolve rapidly, and they may be difficult to detect for an extended period of time,
and the measures we take to safeguard our technology may not adequately prevent such incidents.
While
we have taken steps to protect our confidential and personal information and invested in information technology, there can be no assurance
that our efforts will prevent service interruptions or security breaches in our systems or the unauthorized or inadvertent wrongful use
or disclosure of confidential information. Such incidents could adversely affect our business operations, reputation and client relationships.
Any such breach would require us to expend significant resources to mitigate the breach of security and to address matters related to
any such breach, including the payment of fines. Although we maintain an insurance policy that covers data security, privacy liability
and cyber-attacks, our insurance may not be adequate to cover losses arising from breaches or attacks on our systems. We also may be
required to notify regulators about any actual or perceived personal data breach as well as the individuals who are affected by the incident
within strict time periods.
In
addition, our use of social media presents the potential for further vulnerabilities. For instance, we may be subject to boycotts, spam,
spyware, ransomware, phishing and social engineering, viruses, worms, malware, DDOS attacks, password attacks, man-in-the-middle attacks,
cybersquatting, impersonation of employees or officers, abuse of comments and message boards, fake reviews, doxing and swatting. While
we have internal policies in place to protect against these vulnerabilities, we can make no assurances that we will not be adversely
affected should one of these events occur.
The
commercial success of our products is dependent, in part, on factors outside our control.
The
commercial success of our products is dependent upon unpredictable and volatile factors beyond our control, such as the success of our
competitors’ products. Our failure to attract market acceptance and a sustainable competitive advantage over our competitors would
materially harm our business.
Increases
in the costs of content may have an adverse effect on our business, financial condition and results of operations.
We
need to produce or acquire popular content. The production and acquisition of such content depends on our ability to retain our content
creators. As our business develops, we may incur increasing revenue-sharing costs to compensate our content creators of producing original
content. Increases in market prices for licensed content may also have an adverse effect on our business, financial condition and results
of operations. If we are not able to procure licensed content at commercially acceptable costs, our business and results of operations
will be adversely impacted. In addition, if we are unable to generate sufficient revenues to outpace the increase in market prices for
licensed content, our business, financial condition and results of operations may be adversely affected. We rely on our team to generate
creative ideas for original content and to supervise the original content origination and production process, and we intend to continue
to invest resources in content production. If we are not able to compete effectively for talents or attract and retain top influencers
at reasonable costs, our original content production capabilities would be negatively impacted.
In
our paid promotion business, if we are unable to prove that our advertising and sponsorship solutions provide an attractive return on
investment for our customers, our financial results could be harmed.
Our
ability to grow revenue from our paid promotion business will be dependent on our ability to demonstrate to marketers that their marketing
campaigns with us provide a meaningful return on investment relative to offline and other online opportunities. Our ability, however,
to demonstrate the value of advertising and sponsorship on paid promotion business properties will depend, in part, on the quality of
our products and contents, the actions taken by our competitors to enhance their offerings, whether we meet the expectations of our customers
and a number of other factors. If we are unable to maintain sophisticated and high-quality contents that provide value to our customers
or demonstrate our ability to provide value to our customers, our financial results will be harmed.
We
will be attempting to launch brands in new markets and with new products. Our inability to effectively execute our business plan in relation
to these new brands could negatively impact our business.
We
are attempting launch new product brands into markets in which we have no experience offering products. Launching new products into new
markets is risky, and requires extensive marketing and business expertise. There can be no assurances we will have the capital, personnel
resources, or expertise to be successful in launching these new business efforts.
Our
management team’s attention may be diverted by acquisitions and searches for new acquisition targets, and our business and operations
may suffer adverse consequences as a result.
Mergers
and acquisitions are time intensive, requiring significant commitment of our management team’s focus and resources. If our management
team spends too much time focused on acquisitions or on potential acquisition targets, our management team may not have sufficient time
to focus on our existing business and operations. This diversion of attention could have material and adverse consequences on our operations
and our ability to be profitable.
We
may be unable to scale our operations successfully.
Our
growth strategy will place significant demands on our management and financial, administrative and other resources. Operating results
will depend substantially on the ability of our officers and key employees to manage changing business conditions and to implement and
improve our financial, administrative and other resources. If we are unable to respond to and manage changing business conditions, or
the scale of its operations, then the quality of its services, its ability to retain key personnel, and its business could be harmed.
Economic
conditions or changing consumer preferences could adversely impact our business.
A
downturn in economic conditions in one or more of the Company’s markets could have a material adverse effect on our results of
operations, financial condition, business and prospects. Although we attempt to stay informed of government and customer trends, any
sustained failure to identify and respond to trends could have a material adverse effect on our results of operations, financial condition,
business and prospects.
Our
intellectual property rights are valuable, and if we are unable to protect them or are subject to intellectual property rights claims,
our business may be harmed.
The
content created by Clubhouse influencers, including the rights related to that content, are important assets for us, as are the “Clubhouse
Media Group” and “Clubhouse BH” names. We do not hold any patents protecting our intellectual property, and we have
only filed a trademark application for “The Clubhouse” recently, which has not yet been granted as of the date of this annual
report. The Company subsequently fell out of the trademark response period and was deemed abandoned. The Company has since filed a petition
to revive the abandoned application to continue the pursuit of the trademark. Various events outside of our control pose
a threat to our intellectual property rights as well as to our business. Regardless of the merits of the claims, any intellectual property
claims could be time-consuming and expensive to litigate or settle. In addition, if any claims against us are successful, we may have
to pay substantial monetary damages or discontinue any of our practices that are found to be in violation of another party’s rights.
We also may have to seek a license to continue such practices, which may significantly increase our operating expenses or may not be
available to us at all. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant
impairment of our intellectual property rights could harm our business or our ability to compete.
We
may be found to have infringed the intellectual property rights of others, which could expose us to substantial damages or restrict our
operations.
We
expect to be subject to legal claims that we have infringed the intellectual property rights of others. The ready availability of damages
and royalties and the potential for injunctive relief have increased the costs associated with litigating and settling patent infringement
claims. Any claims, whether or not meritorious, could require us to spend significant time, money, and other resources in litigation,
pay damages and royalties, develop new intellectual property, modify, design around, or discontinue existing products, services, or features,
or acquire licenses to the intellectual property that is the subject of the infringement claims. These licenses, if required, may not
be available at all or have acceptable terms. As a result, intellectual property claims against us could have a material adverse effect
on our business, prospects, financial condition, operating results and cash flows.
As
a creator and a distributor of content over the internet, we face potential liability for legal claims based on the nature and content
of the materials that we create or distribute.
Failure
to identify and prevent illegal or inappropriate content from being created or distributed by our influencer may subject us to liability.
To the extent that U.S. and foreign authorities find any content being created or distributed by our influencer objectionable, they may
require us to limit or eliminate the dissemination of such content in the form of take-down orders, or otherwise. We may have to conduct
a self-inspection by taking a comprehensive review of the content created by us. However, there can be no assurance that we can identify
all the videos or other content that may violate relevant laws and regulations.
We
are subject to extensive U.S. and foreign governmental regulations, and our failure to comply with these regulations could adversely
affect our business.
Our
operations are subject to federal, state and local laws, statutes, rules, regulations, policies and procedures in the United States and
around the world, which are subject to change at any time, governing matters such as:
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licensing
laws for talent agencies, such as California’s Talent Agencies Act; |
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health,
safety and sanitation requirements; |
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harassment
and discrimination, and other labor and employment laws and regulations; |
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compliance
with the U.S. Americans with Disabilities Act of 1990; |
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compliance
with the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”) and similar regulations in other countries,
which prohibit U.S. companies and their intermediaries from engaging in bribery or other prohibited payments to foreign officials
and require companies to keep books and records that accurately and fairly reflect the transactions of the Company and to maintain
an adequate system of internal accounting controls; |
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compliance
with applicable antitrust and fair competition laws; |
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compliance
with international trade controls, including applicable import/export regulations, and sanctions and international embargoes that
may limit or restrict our ability to do business with specific individuals or entities or in specific countries or territories; |
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compliance
with anti-money laundering and countering terrorist financing rules, currency control regulations, and statutes prohibiting tax evasion
and the aiding or abetting of tax evasion; |
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marketing
activities; |
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compliance
with current and future privacy and data protection laws imposing requirements for the processing and protection of personal or sensitive
information, including the GDPR and the E.U. e-Privacy Regulation; |
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compliance
with cybersecurity laws imposing country-specific requirements relating to information systems and network design, security, operations,
and use; |
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compliance
with laws or regulations that regulate the content contained within videos, games and other content formats created by our influencers; |
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tax
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imposition
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Noncompliance
with these laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, other enforcement
actions, disgorgement of profits, significant fines, damages, other civil and criminal penalties or injunctions, reputational harm, adverse
media coverage, and other collateral consequences. Multiple or repeated failures by us to comply with these laws and regulations could
result in increased fines or proceedings against us. If any subpoenas or investigations are launched, or governmental or other sanctions
are imposed, or if we do not prevail in any possible civil or criminal litigation, our business, results of operations and financial
condition could be materially harmed. In addition, responding to any action will likely result in a materially significant diversion
of management’s attention and resources and significant defense costs and other professional fees. Enforcement actions and sanctions
could further harm our business, results of operations and financial condition. While we attempt to conduct our business and operations
in a manner that we believe to be in compliance with such laws and regulations, there can be no assurance that a law or regulation will
not be interpreted or enforced in a manner contrary to our current understanding. In addition, the promulgation of new laws, rules and
regulations could restrict or unfavorably impact our business, which could decrease demand for our services, reduce revenue, increase
costs or subject us to additional liabilities.
In
some United States and foreign jurisdictions, we may have direct and indirect interactions with government agencies and state-affiliated
entities in the ordinary course of our business. In the event that we fail to comply with the regulations of a particular jurisdiction,
whether through our acts or omissions or those of third parties, we may be prohibited from operating in those jurisdictions, which could
lead to a decline in various revenue streams in such jurisdictions, and could have an adverse effect on our business, financial condition
and results of operations.
We
are also required to comply with economic sanctions laws imposed by the United States or by other jurisdictions where we do business,
which may restrict our transactions in certain markets, and with certain customers, business partners and other persons and entities.
As a result, we are not permitted to, directly or indirectly (including through a third party intermediary), procure goods, services,
or technology from, or engage in transactions with, individuals and entities subject to sanctions. While we believe we have been in compliance
with sanctions requirements, there can be no guarantee that we will remain in compliance. Any violation of corruption or sanctions laws
could result in fines, civil and criminal sanctions against us or our employees, prohibitions on the conduct of our business (e.g., debarment
from doing business with International Development Banks and similar organizations) and damage to our reputation, which could have an
adverse effect on our business, financial condition and results of operations.
Our
results of operations, which are reported in U.S. dollars, could be adversely affected if currency exchange rates fluctuate substantially
in the future.
As
we expect to expand our international operations, we become more exposed to the effects of fluctuations in currency exchange rates. We
generally collect revenue from our international markets in the local currency. Rapid appreciation of the U.S. dollar against these foreign
currencies can harm our reported results and cause the revenue derived from our foreign users to decrease. Such appreciation could increase
the costs of purchasing our products to our customers outside of the U.S., adversely affecting our business, results of operations and
financial condition.
We
will also incur expenses for employee compensation and other operating expenses at our non-U.S. locations in the local currency. Fluctuations
in the exchange rates between the U.S. dollar and other currencies could result in the dollar equivalent of our expenses being higher
which may not be offset by additional revenue earned in the local currency. This could have a negative impact on our reported results
of operations.
Our
amended and restated bylaws provide that state or federal court located within the state of Nevada will be the sole and exclusive forum
for substantially all disputes between us and our shareholders, which could limit its stockholders’ ability to obtain a favorable
judicial forum for disputes with us or our directors, officers or other employees.
Section
7.4 of our amended and restated bylaws provides that “[u]nless the Corporation consents in writing to the selection of an alternative
forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action
asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation
or the Corporation’s stockholders, (iii) an action asserting a claim arising pursuant to any provision of the Nevada Revised Statutes,
or (iv) any action asserting a claim governed by the internal affairs doctrine shall be a state or federal court located within the state
of Nevada, in all cases subject to the court’s having personal jurisdiction over the indispensable parties named as defendants.”
This exclusive forum provision is intended to apply to claims arising under Nevada state law and would not apply to claims brought pursuant
to the Exchange Act or Securities Act, or any other claim for which the federal courts have exclusive jurisdiction. The exclusive forum
provision in our amended and restated bylaws will not relieve us of our duty to comply with the federal securities laws and the rules
and regulations thereunder, and shareholders will not be deemed to have waived our compliance with these laws, rules and regulations.
This
exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum of its choosing for disputes with
us or our directors, officers or other employees, which may discourage lawsuits against us or our directors, officers or other employees.
In addition, shareholders who do bring a claim in the state or federal court in the State of Nevada could face additional litigation
costs in pursuing any such claim, particularly if they do not reside in or near Nevada. The state or federal court of the State of Nevada
may also reach different judgments or results than would other courts, including courts where a shareholder would otherwise choose to
bring the action, and such judgments or results may be more favorable to us than to our shareholders. However, the enforceability of
similar exclusive forum provisions in other companies’ bylaws has been challenged in legal proceedings, and it is possible that
a court could find this type of provision to be inapplicable to, or unenforceable in respect of, one or more of the specified types of
actions or proceedings. If a court were to find the exclusive forum provision contained in our amended and restated bylaws to be inapplicable
or unenforceable in an action, we might incur additional costs associated with resolving such action in other jurisdictions.
Stockholders
are bound by the fee-shifting provision contained in our amended and restated bylaws, which may discourage you to pursue actions against
us.
Section
7.4 of our amended and restated bylaws provides that “[i]f any action is brought by any party against another party, relating to
or arising out of these Bylaws, or the enforcement hereof, the prevailing party shall be entitled to recover from the other party reasonable
attorneys’ fees, costs and expenses incurred in connection with the prosecution or defense of such action.”
In
the event you initiate or assert a claims against us, in accordance with the dispute resolution provisions contained in our amended and
restated bylaws, and you do not, in a judgment prevail, you will be obligated to reimburse us for all reasonable costs and expenses incurred
in connection with such claim, including, but not limited to, reasonable attorney’s fees and expenses and costs of appeal, if any.
THE
FEE SHIFTING PROVISION CONTAINED IN THE AMENDED AND RESTATED BYLAWS IS NOT INTENDED TO BE DEEMED A WAIVER BY ANY HOLDER OF COMMON STOCK
OF THE COMPANY’S COMPLIANCE WITH THE U.S. FEDERAL SECURITIES LAWS AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER. THE FEE
SHIFTING PROVISION CONTAINED IN THE BYLAWS DO NOT APPLY TO CLAIMS BROUGHT UNDER THE EXCHANGE ACT AND SECURITIES ACT.
As
a result of being a public company, we are subject to additional reporting and corporate governance requirements that will require additional
management time, resources and expense.
As
a public company we are obligated to file with the SEC annual and quarterly information and other reports that are specified in the Exchange
Act. We are also subject to other reporting and corporate governance requirements under the Sarbanes-Oxley Act and the rules and regulations
promulgated thereunder, all of which impose significant compliance and reporting obligations upon us and require us to incur additional
expense in order to fulfill such obligations.
We
may not have sufficient insurance coverage and an interruption of our business or loss of a significant amount of property could have
a material adverse effect on our financial condition and operations.
We
currently do not maintain any insurance policies against loss of key personnel and business interruption as well as product liability
claims. If such events were to occur, our business, financial performance and financial position may be materially and adversely affected.
We
could become involved in claims or litigations that may result in adverse outcomes.
From
time-to-time we may be involved in a variety of claims or litigations. Such proceeding may initially be viewed as immaterial but could
prove to be material. Litigations are inherently unpredictable and excessive verdicts do occur. Given the inherent uncertainties in litigation,
even when we can reasonably estimate the amount of possible loss or range of loss and reasonably estimable loss contingencies, the actual
outcome may change in the future due to new developments or changes in approach. In addition, such claims or litigations could involve
significant expense and diversion of management’s attention and resources from other matters.
RISKS
RELATING TO OUR COMMON STOCK
Trading
on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for our security
holders to resell their common stock.
Our
common stock currently trades on the OTC Pink tier of OTC Market Group LLC’s Marketplace under the symbol “CMGR.” The
OTC Market is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides information
on current “bids” and “asks,” as well as volume information. Trading in securities quoted on the OTC Markets
is often thin and characterized by wide fluctuations in trading prices, due to many factors, some of which may have little to do with
our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating
performance. Moreover, the OTC Markets is not a stock exchange, and trading of securities on the OTC Markets is often more sporadic than
the trading of securities listed on a quotation system like Nasdaq Capital Market or a stock exchange like the NYSE American. These factors
may result in investors having difficulty reselling any shares of our common stock.
Our
stock price is likely to be highly volatile because of several factors, including a limited public float.
The
market price of our common stock has been volatile in the past and the market price of our common stock is likely to be highly volatile
in the future. You may not be able to resell shares of our common stock following periods of volatility because of the market’s
adverse reaction to volatility.
Other
factors that could cause such volatility may include, among other things:
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or anticipated fluctuations in our operating results; |
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absence of securities analysts covering us and distributing research and recommendations about us; |
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we
may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held; |
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overall
stock market fluctuations; |
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announcements
concerning our business or those of our competitors; |
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actual
or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms; |
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conditions
or trends in the industry; |
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litigation; |
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changes
in market valuations of other similar companies; |
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future
sales of common stock; |
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departure
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Any
of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market in
general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to the operating
performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock, regardless
of our actual operating performance.
Our
common stock is considered a “penny stock” under SEC rules. It may be more difficult to resell securities classified as “penny
stock.”
Our
common stock is a “penny stock” under applicable SEC rules (generally defined as non-exchange traded stock with a per-share
price below $5.00). Unless we successfully list our common stock on a national securities exchange, or maintain a per-share price above
$5.00, these “penny stock” rules impose additional sales practice requirements on broker-dealers that recommend the purchase
or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited investors.”
For example, broker-dealers must determine the appropriateness for non-qualifying persons of investments in penny stocks. Broker-dealers
must also provide, prior to a transaction in a penny stock not otherwise exempt from the rules, a standardized risk disclosure document
that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer
with current bid and offer quotations for the penny stock, disclose the compensation of the broker-dealer and its salesperson in the
transaction, furnish monthly account statements showing the market value of each penny stock held in the customer’s account, provide
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.
Legal
remedies available to an investor in “penny stocks” may include the following:
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If
a “penny stock” is sold to the investor in violation of the requirements listed above, or other federal or states securities
laws, the investor may be able to cancel the purchase and receive a refund of the investment. |
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If
a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and firms
that committed the fraud for damages. |
These
requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes
subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers
from effecting transactions in our securities, which could severely limit the market price and liquidity of our securities. If our common
stock is a “penny stock,” these requirements may restrict the ability of broker-dealers to sell our common stock and may
affect your ability to resell our common stock.
Many
brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not invest
in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the increased financial
risk generally associated with these investments.
For
these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time, if
ever, our common stock will not be classified as a “penny stock” in the future.
FINRA
sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In
addition to the “penny stock” rules described above, FINRA has adopted Rule 2111 that requires a broker-dealer to have reasonable
grounds for believing that an investment is suitable for a customer before recommending the investment. 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
are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act and if we fail to continue to comply, our business
could be harmed and the price of our securities could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act require an annual assessment of internal control over financial
reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting firm.
The standards that must be met for management to assess the internal control over financial reporting as effective are evolving and complex,
and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect to incur significant
expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to predict how long it will take
or costly it will be to complete the assessment of the effectiveness of our internal control over financial reporting for each year and
to remediate any deficiencies in our internal control over financial reporting. As a result, we may not be able to complete the assessment
and remediation process on a timely basis. In the event that our Chief Executive Officer or Chief Financial Officer determines that our
internal control over financial reporting is not effective as defined under Section 404, we cannot predict how regulators will react
or how the market prices of our securities will be affected; however, we believe that there is a risk that investor confidence and the
market value of our securities may be negatively affected.
Our
privately issued common stock is subject to risks arising from restrictions on reliance on Rule 144 by shell companies or former shell
companies.
Under
a regulation of the SEC known as “Rule 144,” a person who beneficially owns restricted securities of an issuer and who is
not an affiliate of that issuer may sell them without registration under the Securities Act provided that certain conditions have been
met. One of these conditions is that such person has held the restricted securities for a prescribed period, which will be six months
for the common stock. However, Rule 144 is unavailable for the resale of securities issued by an issuer that is a shell company (other
than a business combination related shell company) or, unless certain conditions are met, that has been at any time previously a shell
company.
The
SEC defines a shell company as a company that has (a) no or nominal operations and (b) either (i) no or nominal assets, (ii) assets consisting
solely of cash and cash equivalents; or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets.
As a result of the share exchange in connection with the acquisition of WOHG, the Company ceased being a shell company as such term is
defined in Rule 12b-2 under the Exchange Act. While we believe that as a result of this share exchange, the Company ceased to be a shell
company, the SEC and others whose approval is required in order for shares to be sold under Rule 144 might take a different view.
Rule
144 is available for the resale of securities of former shell companies if and for as long as the following conditions are met:
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(i) |
the
issuer of the securities that was formerly a shell company has ceased to be a shell company, |
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(ii) |
the
issuer of the securities is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, |
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(iii) |
the
issuer of the securities has filed all Exchange Act reports and material required to be filed, as applicable, during the preceding
12 months (or such shorter period that the issuer was required to file such reports and materials), other than Current Reports on
Form 8-K; and |
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(iv) |
at
least one year has elapsed from the time that the issuer filed current comprehensive disclosure with the SEC reflecting its status
as an entity that is not a shell company known as “Form 10 Information.” |
Although
the Company filed Form 10 Information with the SEC on November 12, 2020, shareholders who receive the Company’s restricted securities
will not be able to sell them pursuant to Rule 144 without registration until the Company has met the other conditions to this exception
and then for only as long as the Company continues to meet the condition described in subparagraph (iii), above, and is not a shell company.
No assurance can be given that the Company will meet these conditions or that, if it has met them, it will continue to do so, or that
it will not again be a shell company.
The
sale and issuance of additional shares of our common stock could cause dilution as well as the value of our common stock to decline.
Stockholders
will be diluted and investors may suffer dilution in their net book value per share when we issue additional shares. We are authorized
to issue 500,000,000 shares of common stock. We anticipate that all or at least some of our future funding, if any, will be in the form
of equity financing from the sale of our common stock. If we do sell or issue more common stock, any investors’ investment in the
Company will be diluted. Dilution is the difference between what you pay for your stock and the net tangible book value per share immediately
after the additional shares are sold by us. If dilution occurs, any investment in the Company’s common stock could seriously decline
in value.
Substantial
future sales of shares of our common stock could cause the market price of our common stock to decline.
The
market price of shares of our common stock could decline as a result of substantial sales of our common stock, particularly sales by
our directors, executive officers and significant stockholders, a large number of shares of our common stock becoming available for sale
or the perception in the market that holders of a large number of shares intend to sell their shares.
Provisions
of our articles of incorporation and bylaws may delay or prevent a takeover which may not be in the best interests of our stockholders.
Provisions
of our amended and restated articles of incorporation and our bylaws, as amended, may be deemed to have anti-takeover effects, which
include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. Further,
our articles of incorporation, as amended, authorize the issuance of up to approximately 50,000,000 shares of preferred stock with such
rights and preferences as may be determined from time to time by our Board of Directors in their sole discretion. Our Board of Directors
may, without stockholder approval, issue series of preferred stock with dividends, liquidation, conversion, voting or other rights that
could adversely affect the voting power or other rights of the holders of our common stock.
We
do not expect to pay dividends in the foreseeable future.
We
do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development
and growth of our business. Therefore, investors will not receive any funds unless they sell their common stock, and stockholders may
be unable to sell their shares on favorable terms. We cannot assure you of a positive return on investment or that you will not lose
the entire amount of your investment in our common stock.