ITEM 1. BUSINESS
History
We were incorporated in the State of Delaware as Duane Street Corp. on November 17, 2011. Our original business, prior to the Contribution (as defined below), was discontinued.
On January 28, 2014, we consummated a contribution transaction (the "Contribution") with CÜR Media, LLC (formerly Raditaz, LLC), a limited liability company organized in the State of Connecticut on February 15, 2008, pursuant to a Contribution Agreement by and among the Company, CÜR Media, LLC, and the holders of a majority of CÜR Media, LLC's limited liability company membership interests (the "Contribution Agreement"). In connection with the Contribution, and in accordance with the terms and conditions of the Contribution Agreement, all outstanding securities of CÜR Media, LLC were exchanged for securities of the Company.
As a result of the Contribution, CÜR Media, LLC became our wholly owned subsidiary, and we adopted the business of CÜR Media, LLC, which was to develop and commercialize a streaming music application for listening on mobile devices and the web (the “Music Streaming Business”), as our sole line of business.
On January 31, 2014, we changed our name to CÜR Media, Inc., a name that more accurately represents our new business focus. In connection with the name change, we changed our OTC trading symbol to "CURM."
In addition, on January 31, 2014, we increased our number of authorized shares to 310,000,000 shares, consisting of (i) 300,000,000 shares of common stock par value $0.0001 per share (“Common Stock”), and (ii) 10,000,000 shares of preferred stock, par value $0.0001 per share (“Preferred Stock”).
Further, on January 31, 2014, our board of directors (“Board of Directors) authorized a 1.26953123-for-1 forward split of our Common Stock, in the form of a dividend, pursuant to which each holder of our Common Stock as of the record date received 1.19260815 additional shares of Common Stock for each one share owned.
In early 2016, the Company entered into agreements ("Music Label Agreements") with three music labels ("Music Labels"), pursuant to which the Company was provided limited, non-exclusive licenses to digitally distribute certain sound recordings and related materials owned or controlled by the Music Labels in connection with the Company’s CÜR-branded Internet music service, CÜR Music (“CÜR Music”), the music streaming product we are developing, within the United States and its territories, commonwealths, and possessions. However, we defaulted on the Music Label Agreements as a result of our failure to pay advances due to the Music Labels pursuant to such agreements, and two of the Music Label Agreements were subsequently terminated.
On February 16, 2016, we effected a 1-for-13 Reverse Stock Split of our outstanding shares of Common Stock. Share and per share numbers in this report relating to our Common Stock have been retrospectively adjusted to give effect to this Reverse Stock Split, unless otherwise stated.
As of August 2016, we terminated all of our employees and ceased significant operations, other than capital raising activities intended to continue our Music Streaming Business. These capital-raising activities were led by our Founder and then-sole director, Thomas Brophy.
On July 19, 2017, we received a “Wells Notice” from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”). The Wells Notice provides notification to the Company that the Staff has made a preliminary determination to recommend that the SEC institute administrative proceedings against the Company pursuant to Sections 12(j) and 12(k) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), based solely upon our failure to comply with our reporting obligations under Section 13(a) of the Exchange Act. Sections 12(j) grants the SEC the right, after notice and opportunity for a hearing, to revoke the registration of a security. Section 12(k) grants the SEC the right to suspend trading in a security.
In accordance with SEC rules, on August 25, 2017, we made a written submission to the SEC in response to the Wells Notice, in which, among other things, we conveyed the Company’s present intention to file the delinquent reports and become current with our SEC filing requirements and, as such, set forth the reasons why the proposed enforcement action should not be filed. While no assurances can be made, we believe that, as a result of making these filings, the SEC will have no further reason to institute the proposed administrative proceedings, or, if instituted, to continue such proceedings. However, there can be no assurance that the SEC will not bring an enforcement action against the Company, which could result in a trading suspension of our Common Stock and the de-registration of the Company’s securities under the Exchange Act. With this filing, we have filed all delinquent reports and are up to date with our SEC filing requirements.
On September 11, 2017, we entered into a term sheet (the “Term Sheet”) with CUR Holdings, Inc., a Delaware corporation (“Holdings”) pursuant to which the Company and Holdings agreed to consummate either a Merger (as defined below) or an Asset Transfer (as defined below), under certain circumstances. Pursuant to the Term Sheet, in the event the Company receives notification from the SEC that it will not institute the proposed administrative proceedings, or, if instituted, will discontinue such proceedings (“SEC Clearance”), Holdings will, subject to any required shareholder approval, merge with and into the Company, with the Company continuing as the surviving entity (the “Merger”);
provided, however
, that the boards of directors of the Company and Holdings may mutually agree to proceed with the Merger prior to receipt of SEC Clearance. If, however, the SEC commences the proposed administrative proceedings against the Company, and such proceedings result in the revocation of the registration of our Common Stock under the Exchange Act (“SEC Revocation”), the Company and Holdings will, subject to any required shareholder approval, enter into an asset purchase and sale transaction, pursuant to which Holdings will acquire all of the intellectual property and other assets and liabilities constituting our Music Streaming Business (the “Asset Transfer” and, together with the Merger, a “Combination Transaction”);
provided, however
, that the board of directors of the Company and Holdings may mutually agree to proceed with the Asset Transfer any time commencing on the ninety-first (91st) day after the effective date of the Term Sheet, as disclosed below.
In anticipation of the Combination Transaction (defined above), on November 16, 2017, Holdings consummated an initial closing (the “Initial Closing”) of its private placement offering (the “Preferred Stock Unit Offering”), to certain “accredited investors” (each, a “Unit Purchaser” and, collectively, the “Unit Purchasers”), intended to be exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D and/or Regulation S promulgated thereunder, of a minimum of $6,000,000 (the “Minimum Amount”) of units of securities of Holdings (each, a “Preferred Stock Unit” and, collectively, the “Preferred Stock Units”), at a purchase price of $5.15 per Preferred Stock Unit, with each Preferred Stock Unit consisting of (a) one (1) share of Series A convertible preferred stock of Holdings (each, a “Unit Share” and collectively, the “Unit Shares”), and (b) a 5-year warrant (each, a “Unit Warrant” and collectively, the “Unit Warrants”) to purchase 6.5087 shares of common stock of Holdings, at an exercise price of $1.00 per each full share.
In connection with the Initial Closing of the Preferred Stock Unit Offering, Holdings issued 1,195,033 Preferred Stock Units to the Unit Purchasers, consisting of 1,195,033 Unit Shares and 7,778,119 Unit Warrants, in consideration for gross proceeds of $6,154,362 from the Preferred Stock Unit Offering.
In connection with the Initial Closing of the Preferred Stock Unit Offering, a U.S. broker-dealer registered with FINRA, engaged on a non-exclusive basis as placement agent for the Preferred Stock Unit Offering (the “Placement Agent”), received a cash commission of $115,436, and warrants (“Placement Agent Warrants”) to purchase (a) 22,415 shares of Series A Preferred Stock of Holdings, with a term of five (5) years and an exercise price of $5.15 per share, and (b) 145,893 shares of common stock of Holdings, with a term of five (5) years and an exercise price of $1.00 per share.
Simultaneously with the closing of the Preferred Stock Unit Offering, Holdings consummated a private placement offering (the “$2.5 Million Note Offering” and, together with the Preferred Stock Unit Offering, the “Holdings Offerings”), to one “accredited investor” (the “New Note Purchaser”), intended to be exempt from registration under the Securities Act, pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D promulgated thereunder, of (a) a 12% senior secured promissory note of Holdings, in the principal amount of $2,500,000 (the “New Note”), with a term of twelve (12) months, at a purchase price of 100% of the face value amount of the New Note, and (b) 10-year warrants (the “New Note Warrants”) to purchase 1,000,000 shares of common stock of Holdings, at an exercise price per share of $0.0001.
In connection with the closing of the $2.5 Million Note Offering, the Placement Agent received a cash commission of $250,000, and warrants (“Second Placement Agent Warrants”) to purchase 383,800 shares of common stock of Holdings, with a term of five (5) years and an exercise price of $0.0001 per share.
The net proceeds from the Holdings Offerings, in the aggregate amount of $6,932,288 (after deducting fees and expenses related to the Holdings Offerings in the aggregate amount of $722,074 (including placement agent fees, legal fees and expenses and fees payable to the escrow agent)) are to be used to pay the required Label Advances (as defined below) to the Music Labels sufficient to allow Holdings and/or the Company to proceed with soliciting subscriptions for CÜR Music, and to extend a line of credit to the Company (the “Post-Closing Line of Credit Note”), for up to the full amount of the aggregate net proceeds from the Holdings Offerings (1) to enable the Company to pay outstanding accounts payable, employee deferred compensation, and monthly payments due by the Company under the New Note, and (2) for working capital and general corporate purposes. Management feels it can enter into structured settlements with vendors and streaming services. While there is a process for requesting and approving drawdowns, it is not formally documented, approval is on a case by case basis and the terms and associated interest on the Post-Closing Line of Credit Note is to be determined, and will be reflected in the definitive documentation for the transaction.
In addition, simultaneously with the Initial Closing of the Preferred Stock Unit Offering, the holders (the “Secured Noteholders”) of all of the Company’s existing 12% senior secured convertible promissory notes, in the aggregate principal amount of $2,515,000, with accrued and unpaid interest in the aggregate of $561,203 (each, a “Secured Note” and, collectively, the “Secured Notes”), assigned, conveyed, transferred to Holdings all of the Secured Noteholders’ right, title, interest and obligations in, to and under the Secured Notes, and all claims, suits, causes of action and any other rights thereunder, in exchange for units (each, a “Secured Note Conversion Unit” and, collectively, the “Secured Note Conversion Units”) of securities of Holdings, at an exchange rate of $2.00 of principal and interest due under the Secured Notes per unit, in an transaction intended to be exempt from registration under the Securities Act, pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D promulgated thereunder (the “Secured Note Assignment Transaction”). Each Secured Note Conversion Unit consisted of (a) one (1) share of common stock of Holdings (each, a “Secured Note Conversion Share” and, collectively, the “Secured Note Conversion Shares”), and (b) a 5-year warrant (each, a “Secured Note Conversion Warrant” and, collectively, the “Secured Note Conversion Warrants”) to purchase one (1) share of common stock of Holdings for every share of common stock of Holdings received upon exchange, at an exercise price per share equal to $1.00. Upon completion of the transaction, CÜR Media is now required to pay Holdings.
The Secured Note Assignment Transaction did not alter the obligation of the Company under the original Secured Notes.
In connection with the Secured Note Assignment Transaction, (a) Holdings issued 1,538,102 Secured Note Conversion Units, consisting of 1,538,102 Secured Note Conversion Shares, and 1,538,102 Secured Note Conversion Warrants, and (b) Holdings became the sole payee under the Secured Notes.
In connection with the Secured Note Assignment Transaction, the Placement Agent, received warrants (“Third Placement Agent Warrants”) to purchase (a) 86,377 shares of common stock of Holdings, with a term of five (5) years and an exercise price of $2.00 per share, and (b) 86,377 shares of common stock of Holdings, with a term of five (5) years and an exercise price of $1.00 per share.
Prior to the Initial Closing of the Preferred Stock Unit Offering, and as a condition thereto, Holdings renegotiated the content licensing agreements (“New Music Label Agreements”). Upon consummation of the Initial Closing of the Preferred Stock Unit Offering, Holdings paid advances due to the Music Labels under the New Music Label Agreements.
The Company joined one of the New Music Label Agreements, while the other New Music Label Agreements provide Holdings with the right to sublicense its rights under such agreement to the Company. The New Music Label Agreements enable the Company to digitally distribute sound recordings and related materials owned or controlled by the Music Labels in connection with our Internet music service, CÜR Music. The New Music Label Agreements released the Company of prior obligations under the original Music Label Agreements. At the current time, the Company does not have a contract with Holdings which requires payment for sublicenses and access to the sound recordings and related materials.
On November 16, 2017, the board of directors of Holdings increased the number of members constituting the board of directors from one (1) to three (3). The board of directors of Holdings then appointed Thomas Brophy, our President, Chief Executive Officer, Interim Chief Financial Officer and Treasurer, and a member of our Board of Directors, and Edward P. Swyer, a member of our Board of Directors, as members of the board of directors of Holdings.
Immediately following the Initial Closing of the Preferred Stock Unit Offering, Holdings issued one (1) share of its Series B voting preferred stock (“Series B Preferred Stock”) to William F. Duker, the President and Treasurer of Holdings, and a member of the board of directors of Holdings. Pursuant to the Certificate of Designation of Series B Voting Preferred stock of Holdings (the “Series B Certificate of Designation”), Mr. Duker, the holder of the Series B Preferred Stock, has the right (a) to elect the number of directors on the board of directors of Holdings constituting the majority, and (b) to approve any merger (including the Merger), asset sale (including the Asset Transfer), or other fundamental transaction to be effected by Holdings.
As mentioned above, if the Company receives SEC Clearance (or, at the discretion of the board of directors of the Company and Holdings, as described above), the Company and Holdings will consummate the Merger. The Company and Holdings anticipate that the Merger, if consummated, will qualify as a tax-free reorganization under the U.S. Internal Revenue Code. The Company and Holdings also anticipate that, if the Merger is consummated:
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the stockholders of Holdings will receive, in exchange for all of their issued and outstanding shares of capital stock of Holdings (including all issued and outstanding shares of preferred stock of Holdings), shares of the Company’s capital stock (including shares of Preferred Stock of the Company), at an exchange rate of 1-for-1, with appropriate adjustments and, otherwise, on their original terms and conditions;
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outstanding warrants to purchase shares of common stock of Holdings will be exchanged for warrants to purchase shares of the Company’s Common Stock, at the same ratio at which shares of outstanding capital stock of Holdings are exchanged for shares of the Company’s capital stock, with appropriate adjustments and, otherwise, on their original terms and conditions;
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the principal and any accrued and unpaid interest due under the Company’s existing 12% unsecured convertible promissory notes (the “Unsecured Notes”) will convert into units of the Company’s securities, at a conversion price of $2.00 of principal and interest due under said note per unit, each consisting of (a) one (1) share of the Company’s Common Stock, and (b) a 5-year warrant to purchase one (1) share of the Company’s Common Stock for every share of the Company’s Common Stock received upon conversion, at an exercise price equal to $1.00 per share;
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the Standard Holdings Note will be assigned and transferred to the Company, and the Company will become the payee under such note;
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the Line of Credit Note, the Secured Notes, and the Post-Closing Line of Credit Note will be forgiven and canceled by Holdings;
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the Company will assume the obligations under the $2,500,000 New Note; and
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the Company will assume the New Music Label Agreements with the Music Labels, if possible.
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As mentioned above, if there is an SEC Revocation of the Company’s Common Stock under the Exchange Act (or, at the discretion of the boards of directors of the Company and Holdings, as described above), the Company and Holdings will consummate the Asset Transfer. The Company and Holdings anticipate that, if the Asset Transfer is consummated:
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the Company’s stockholders will receive, in exchange for all of the assets and liabilities constituting the Company’s Music Streaming Business, shares of capital stock of Holdings, at a rate of 1-for-1 of equivalent classes of preferred and common stock, with appropriate adjustments and, otherwise, on their original terms and conditions;
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outstanding warrants and stock options to purchase shares of the Company’s Common Stock will be exchanged for warrants and stock options to purchase shares of common stock of Holdings, at the same ratio at which shares of the Company’s outstanding capital stock are exchanged for shares of capital stock of Holdings, with appropriate adjustments and, otherwise, on their original terms and conditions;
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if necessary, the board of directors of Holdings will adopt an Equity Incentive Plan (the “Holdings EIP”) with such number of shares available under the Holdings EIP that equals 15% of the fully diluted capitalization of Holdings after giving effect to the Asset Transfer, covering outstanding stock options to purchase shares of the Company’s Common Stock, and for the future issuance, at the discretion of the board of directors of Holdings, of incentive awards to officers, key employees, consultants and directors;
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the principal and any accrued and unpaid interest due under the Company’s existing Unsecured Notes will convert into units of securities of Holdings, at a conversion price of $2.00 per unit, each unit consisting of (a) one (1) share of common stock of Holdings, and (b) a 5-year warrant to purchase one (1) share of common stock of Holdings for every share of common stock of Holdings received upon conversion, at an exercise price equal to $1.00 per share;
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the Standard Holdings Note will remain payable to Holdings;
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the Line of Credit Note, the Secured Notes, and the Post-Closing Line of Credit Note will be forgiven and canceled by Holdings as partial consideration for the transfer to Holdings of the assets and liabilities constituting the Company’s Music Streaming Business;
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Holdings will remain responsible for the obligations under the $2,500,000 New Note; and
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any sublicenses under the relevant New Music Label Agreements with the Music Labels will terminate.
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Simultaneously with the closing of the Holdings Offerings, shareholders representing at least fifty-one percent (51%) of the voting capital stock of each of the Company and Holdings, and of the Unit Purchasers in the Preferred Stock Unit Offering and Secured Noteholders in the Secured Note Assignment transaction, entered into voting agreements, pursuant to which they agreed to vote in favor of the Combination Transaction, as applicable.
The Company and Holdings have two common members on their boards of directors. However, they are two separate and distinct entities with two completely different sets of officers running their day-to-day affairs, separate corporate offices where their books and records are separately kept, and very different shareholder bases. Further, while Holdings has agreed to extend a line of credit to the Company for up to the full amount of the aggregate net proceeds from the Holdings Offerings, drawdowns against the line of credit must be requested by the Company and approved by Holdings. Requests may be approved or rejected by Holdings on a case-by-case basis.
Following the closing of the Holdings Offerings, we appointed Thomas Brophy as President and Chief Executive Officer, John Egazarian as Head of Product, Chief Operating Officer, Michael Betts as Chief Technology Officer, and Kelly Sardo as Chief Financial Officer and Treasurer, and have hired five other full-time employees. We have restarted our business operations and expect to launch CÜR Music in the second or third quarter of 2018.
Our Business
CÜR Music, our CÜR-branded Internet music service, to be comprised of three progressively priced and increasingly functional tiers, will provide a paid subscription internet radio service offering listeners streaming music on the web and mobile devices. CÜR Music began as Raditaz, a free internet radio product, which was launched in 2012, and had iPhone and Android applications in addition to a website at www.raditaz.com. We took the Raditaz iPhone and Android applications, and our website, offline to focus our resources on the development of CÜR Music. As of the date of this Annual Report, we had devoted substantially all of our efforts to product development, raising capital and building our technology infrastructure. We expect to launch CÜR Music in the second or third quarter of 2018.
Our Service
CÜR Music is intended to be a new social streaming music experience that combines the listening experience of free internet radio products with an on-demand listening experience for listening on mobile devices and the web. CÜR Music will target consumers who are seeking a more comprehensive music streaming service than current free, ad-supported music streaming products. Upon launching, two subscription levels will be offered for a monthly cost to the consumer of starting at $1.99 for the first subscription level and $4.99 for the second subscription level. A full on-demand product is being developed and will be available post launch.
As designed, the CÜR Music product includes a hybrid model that includes many features that free, ad-supported internet radio products provide, without interruptive advertising, and with a limited on-demand offering. The limited on-demand offering is a CÜR8, eight songs chosen by the user for them to use on an on-demand basis. In addition, CÜR Music includes functionality that enables consumers to curate their playlists with photos and short personal videos and to share music with their friends. The product includes social features that allow users to follow and be followed by other users, view activity and listen to other users' limited on-demand CÜR8s.
Our primary business is CÜR Music, a music service that will give listeners access to millions of songs that can be listened to using CÜR Music's algorithmic internet radio stations, CÜR Music's genre and theme-based stations, and through CÜR Music's on-demand listening features. In addition to the ability to stream music, subscribers will be able to personalize their playlists, buy music downloads, share songs with friends and add photos and short personal videos to songs in their playlists and to songs in the sharing process.
Our business plan also includes a second revenue stream of personalized advertising, which we do not intend to interrupt a music stream, but targets a user's listening habits. We believe the advertising will be in the form of display ads, email and/or text messages. We intend to integrate personalized advertising into certain aspects of the CÜR Music product when we achieve a reasonable level of scale.
Our business plan further includes a third revenue stream from the sale of music, concert tickets and merchandise through our music streaming service, tailored to each listeners taste based on prior listening trends. We plan to begin to sell concert tickets and merchandise at a later date after the launch of CÜR Music.
In addition, our business plan includes distributing CÜR Music's music streaming service through Apple's iTunes App Store to iOS devices, Google's Google Play Store to Android devices and the internet among other distribution channels and platforms. At launch, we plan to have an iPhone application, an iPad application, an Android application and a website.
We plan to source our music from MusicNet, Inc. d/b/a Media Net Digital, Inc. We will use Amazon web services, and services from other technology providers, to support certain of the technological needs of the business.
In early 2016, the Company had entered into Music Label Agreements with certain Music Labels, pursuant to which the Company was provided limited, non-exclusive licenses to digitally distribute certain sound recordings and related materials owned or controlled by the Music Labels in connection with CÜR Music, within the United States and its territories, commonwealths, and possessions.
The Company was not able to make the initial payments required under the agreements when due on January 31, 2016. As a result, our Music Label Agreements with Sony Music Entertainment (“SME”) and UMG Recordings, Inc. (“UMG”) were terminated as a result of our failure to pay SME and UMG the advances due pursuant to such agreements, respectively. The Company also defaulted on its Music Label Agreement with Warner Music, Inc. (“WMG”) as a result of its failure to pay WMG the advance due pursuant to such agreement. WMG did not initiate termination of their agreement.
Prior to the Initial Closing of the Preferred Stock Unit Offering, and as a condition thereto, Holdings renegotiated the content licensing agreements (“New Music Label Agreements”). Upon consummation of the Initial Closing of the Preferred Stock Unit Offering, Holdings paid the Label Advances to the Music Labels pursuant to the New Music Label Agreements. We joined one of the New Music Label Agreements with one of the Music Labels, while the other New Music Label Agreements provide Holdings with the right to sublicense its rights under such agreement to the Company. The New Music Label Agreements enable Holdings and/or the Company to digitally distribute sound recordings and related materials owned or controlled by the Music Labels in connection with our Internet music service, CÜR Music. The Company and Holdings are required to pay certain minimum content fees over the term of the Content Agreements with Content Providers as follows: $15.1 million in the first year of the agreements, $24.5 million in the second year of the agreements, and $18.4 million in the third year of the agreements. The New Music Label Agreements released the Company of prior obligations under the original Music Label Agreements. At the current time, the Company does not have a contract with Holdings which requires payment for sublicenses and access to the sound recordings and related materials.
Now that the New Music Label Agreements are in place, we plan to have a team of software engineers, led by our management, working on enhancing the technology platform, as well as the iOS and Android applications and the CÜR Music website. We are currently fine-tuning the user interface and user experience of CÜR Music's iPhone, iPad and Android applications, our website, and our backend systems, and will continue to do so through launch. We plan to submit CÜR Music's iOS app and CÜR Music's Android app for approval by the iTunes App Store and the Google Play Store, respectively. We plan on developing the marketing timeline for marketing the launch of CÜR Music, which will include paid media, public relations, social media, event sponsorships and marketing through influencers. Success of those strategies will determine the amount of marketing spending allocated to each of these marketing strategies.
Not including non-cash expenses, we have spent approximately $22.9 million on research and development, sales and marketing and general and administrative costs to complete the development of the CÜR Music, in the time period since the Contribution in January 2014 and through the date of this filing. Of the total $22.9 million, approximately $16.3 million is related to research and development and approximately $6.6 million is related to general and administrative costs. In addition to the aforementioned costs, we expect to pay approximately $3 million dollars as prepayments in connection with the agreements that we have with the major music labels, independent labels and publishers.
Source and Content
On July 1, 2014 the Company entered into a data license and service agreement (the “Data License and Services Agreement”) with Rovi Data Solutions, Inc. and Veveo, Inc. (collectively, “Rovi”), acquiring the limited, non-exclusive, non- transferable right to use, display, communicate, reproduce and transmit data owned or controlled by Rovi. On September 8 and September 18, 2014, a first amendment and second amendment to the Data License and Service Agreement, respectively, were executed which expanded the original license to include custom development of search and voice capabilities. The Data License and Service Agreement remained in effect through and including March 14, 2017. The Company has the option to extend the term of this agreement for additional one-year periods. During the term of the Data License Agreement and as consideration for the grant of rights and license of Rovi’s data, the Company agreed to pay Rovi a monthly minimum charge during the development period, which is the period where data will be used for internal, non-public, non-commercial uses. The Company agreed to pay a minimum per month during the first initial term, subsequent to launch date until March 14, 2016. For each subsequent term, consideration paid was dependent on the number of subscribers to CUR Music. As of September 27, 2016, the Company’s Data License and Services Agreement with Rovi terminated as a result of the Company’s failure to pay Rovi past due balances for the services provided under the Agreement. As of December 31, 2017, the Company has not made any payments to Rovi however has accrued for balances due. The Company has not received a notice of default from Rovi.
With the Holdings Offerings complete, Holdings contracted with Gracenote, Inc. (“Gracenote”) for the services previously provided by Rovi to the Company.
We also entered into an agreement (the "MediaNet Service Agreement") with MusicNet, Inc. d/b/a MediaNet Digital, Inc. ("MediaNet") on November 10, 2014, from which we were to source our music. Pursuant to the agreement, MediaNet was to provide the Company a catalog of sound recordings and metadata that would enable and provide for the delivery of sound recordings to end users of the Company's CÜR Music application. The MediaNet Service Agreement was to remain in effect for a period of three years following the effective date of November 7, 2014. The MediaNet Service Agreement was to automatically renew for successive one-year terms unless terminated by MediaNet or the Company. Pursuant to the MediaNet Service Agreement, the Company was to pay a set-up fee to MediaNet prior to launch. In addition, the Company agreed to pay MediaNet a monthly technology licensing fee during the initial term, a monthly usage fee, and will pay for any additional professional services and technical assistance or customization. The Company is in default under the MediaNet Service Agreement with MediaNet as a result of the Company’s failure to pay MediaNet past due balances for the services they provided under the MediaNet Service Agreement. The unpaid monthly fees have been accrued by the Company. To date, the Company has not received a notice of default from MediaNet. The Company intends to cure the default and/or enter into a new contract with MediaNet now that it is adequately funded.
We entered into an agreement (“Master Subscription Agreement”) with Zuora, Inc. ("Zuora") on July 31, 2014. Pursuant to the Master Subscription Agreement with Zuora, we planned to use Zuora's technology platform to administer the subscription process related to credit card billing and collection. In accordance with the Master Subscription Agreement, Zuora was to provide the Company a non-exclusive, non-transferable worldwide limited license to use Zuora's online integrated subscription management, billing, and data analysis services. The initial order form covered the implementation and development period ending October 31, 2014. In addition, the Company agreed to an initial 36-month service term, subsequent to implementation through October 31, 2017. On October 12, 2016, the Company received a notice of default from Zuora, confirming that the Company was in default under its Master Subscription Agreement with Zuora as a result of its failure to pay Zuora past due balances for the services they provided under the Master Subscription Agreement. On July 31, 2017, the Company and Zuora signed a new order form (“New Order Form”) under the Master Subscription Agreement, providing for the full settlement and release of the parties from all obligations under the old order form, dated July 31, 2014, in consideration for entering into the New Order Form. Upon execution of the New Order Form, the Company paid Zuora $125,000 and accrued $25,000 as of December 31, 2017 for the first year of the three-year agreement for Zuora to provide subscription services to the Company.
We plan to use Amazon web services, and services from other technology providers, to support certain of the technological needs of the business.
Content Licensing
General
As previously reported, the Company had entered into agreements (“Music Label Agreements”) with certain music labels (“Music Labels”), pursuant to which the Company has been provided limited, non-exclusive licenses to digitally distribute certain sound recordings and related materials owned or controlled by the Music Labels in connection with the Company’s CÜR-branded Internet music service, CÜR Music, to be composed of three progressively priced and increasingly functional tiers, within the United States and its territories, commonwealths, and possessions. The Company had also entered into agreements (“Publishing Agreements”) with certain music publishing companies (“Music Publishers”) either directly or through a third party, pursuant to which the Company had been provided the non-exclusive right and license to use certain musical works owned, controlled and/or administered by the Music Publishers in connection with CÜR Music, within the United States and its territories, commonwealths, and possessions. The Music Label Agreements and Publishing Agreements may be collectively referred to herein as the “Content Agreements,” and the Music Labels and Music Publishers may be collectively referred to herein as the “Content Providers.”
The Company was not able to make initial payments when due under the Music Label Agreements. As a result, our Music Label Agreements with SME and UMG were terminated as a result of our failure to pay SME and UMG the advances due pursuant to such agreements, respectively. The Company also defaulted on its Music Label Agreement with WMG as a result of its failure to pay WMG the advance due pursuant to such agreement. WMG did not initiate termination of their agreement.
Prior to the Initial Closing of the Preferred Stock Unit Offering, and as a condition thereto, Holdings entered directly into the New Music Label Agreements with the Music Labels. Upon consummation of the Initial Closing of the Preferred Stock Unit Offering, Holdings paid the Label Advances to the Music Labels in the aggregate amount of $2,500,000. The Company joined one of the New Music Label Agreements, while the other New Music Label Agreements provide CÜR Holdings with the right to sublicense its rights under such agreement to the Company. The New Music Label Agreements enable Holdings and/or the Company to digitally distribute sound recordings and related materials owned or controlled by the Music Labels in connection with our Internet music service, CÜR Music. The New Music Agreements released the Company of prior obligations under the original Music Label Agreements. At the current time, the Company does not have a contract with Holdings which requires payment for sublicenses and access to the sound recordings and related materials.
The Company had previously entered into agreements ("Publishing Agreements") with certain music publishing companies ("Music Publishers"), pursuant to which the Company was provided the non-exclusive right and license to use certain musical works owned, controlled and/or administered by the Music Publishers (the "Publisher Materials") in connection with CÜR Music, within the United States and its territories, commonwealths, and possessions. The Company is currently in default of the Publishing Agreements and intends to enter into new agreements prior to the launch of CÜR Music.
We intend to enter into content licensing agreements with certain independent labels prior to the launch of CÜR Music. We plan to negotiate and execute other independent label content licensing agreements subsequent to the launch of CÜR Music. We also intend to enter into content licensing agreements with music publishers and performance rights organizations. When we enter into these content license agreements with these labels, publishers and performance rights organizations, our platform is expected to provide end users access to millions of sound recordings.
The Company and Holdings are required to pay certain minimum content fees over the term of the Content Agreements with Content Providers as follows: $15.1 million in the first year of the agreements, $24.5 million in the second year of the agreements, and $18.4 million in the third year of the agreements. Upon consummation of the Initial Closing of the Preferred Stock Unit Offering, Holdings paid the Label Advances to the Music Labels in the aggregate amount of $2,500,000. We expect to bring CÜR Music to market in the second or third quarter of 2018 and begin to generate subscription revenue. However, we need to raise a substantial amount of capital to fully implement our business plan, market CÜR Music, for additional content license costs, and for general working capital.
Marketing
We plan to bring a transformative music service to market by focusing intently on Millennials and creating a brand that is more personal and accessible than any other music service in the marketplace. Our marketing plan includes paid media, distribution arrangements, social media and event marketing.
Competition for Listeners
We will face competition from larger and more established media service providers. We must compete for the time and attention of listeners with more established companies offering similar services. We will compete on the basis of a number of factors, including quality of experience, relevance, acceptance and diversity of content, ease of use, price, accessibility, perceptions of ad load, brand awareness and reputation. We also will compete for listeners on the basis of our presence and visibility as compared with other providers that deliver content through the internet, mobile devices and consumer products. Many of our current and potential future competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories and larger marketing budgets, as well as substantially greater financial, technical and other resources. For additional details on risks related to competition for listeners, please refer to the section entitled "Risk Factors" below.
Our competitors include:
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Other Radio Providers.
We expect to compete for listeners with broadcast radio providers, including terrestrial radio providers such as iHeart Radio (formerly Clear Channel) and CBS and satellite radio providers such as Sirius XM among others. Many broadcast radio companies own large numbers of radio stations or other media properties. Many terrestrial radio stations have begun broadcasting digital signals, which provide high quality audio transmission. In addition, unlike participants in the emerging internet radio market, terrestrial and satellite radio providers, as aggregate entities of their subsidiary providers, generally enjoy larger established audiences and longer operating histories. Broadcast and satellite radio companies enjoy a significant cost advantage because we believe they pay a much lower percentage of revenue for transmissions of sound recordings.
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Internet Radio Provider
s. We also will compete directly with emerging non-interactive online radio providers such as Pandora, Spotify, Apple’s Apple Music, iHeart Radio, Slacker Personal Radio and CBS's Last.fm. We could face additional competition if known incumbents in the digital media space choose to enter the internet radio market.
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Other Audio Entertainment Providers.
We will face competition from providers of interactive on-demand audio content and pre-recorded entertainment, such as Spotify, Apple's Apple Music and iTunes Music Store, Napster, Google Play, Tidal and Amazon, among others that allow listeners to select the audio content that they stream or purchase. This interactive on-demand content is accessible in automobiles and homes, using portable players, mobile phones and other wireless devices. The audio entertainment marketplace continues to rapidly evolve, providing our listeners with a growing number of alternatives and new media platforms
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Other Forms of Media.
We will compete for the time and attention of our listeners with providers of other forms of in-home and mobile entertainment. To the extent existing or potential listeners choose to watch cable television, stream video from on-demand services such as Netflix, Hulu, VEVO or YouTube, or play interactive video games on their home-entertainment system, computer or mobile phone, rather than listen to the CÜR Music service, these content services pose a competitive threat.
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We believe our competitive advantages will include:
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Our product will not contain interruptive advertising. This feature will be attractive for all music listeners that do not want their music constantly interrupted with audio "ads."
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Our product enables users to share songs and integrate their music with photos and personal video.
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Our product is a hybrid music streaming service that offers internet radio style listening capability with an on-demand component that includes an 8-song musical selfie - the CÜR8.
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Our product features a unique, user interface and experience with our "buttonless player".
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Competition for Advertisers
We intend to generate a portion of our revenue from advertising on our website and mobile applications. We will be in competition for potential advertisers with other content providers for a share of our advertising customers' overall marketing budgets. We anticipate having to compete on the basis of a number of factors, including perceived return on investment, effectiveness and relevance of our advertising products, pricing structure and ability to deliver large volumes or precise types of ads to targeted demographics. We believe that our ability to deliver targeted and relevant ads across a wide range of platforms allows us to compete favorably on the basis of these factors and justify a long-term profitable pricing structure. However, the market for online and mobile advertising solutions is intensely competitive and rapidly changing, and with the introduction of new technologies and market entrants, we expect competition to intensify in the future. For additional details on risks related to competition, please refer to the section entitled "Risk Factors" below.
Terrestrial broadcast and to a lesser extent satellite radio are significant sources of competition for advertising dollars. These radio providers deliver ads across platforms that are more familiar to traditional advertisers than the internet might be. Advertisers may be reluctant to migrate advertising dollars to our internet-based platform. Additionally, we expect to compete for advertising dollars with other traditional media companies in television and print, such as ABC, CBS, FOX and NBC, cable television channel providers, national newspapers such as The New York Times and the Wall Street Journal and some regional newspapers. These traditional outlets present us with a number of competitive challenges in attracting advertisers, including large established audiences, longer operating histories, greater brand recognition and a growing presence on the internet.
Government Regulation
As a company that intends to conduct business on the internet, we will be subject to a number of foreign and domestic laws and regulations relating to consumer protection, information security, data protection and privacy, among other things. Many of these laws and regulations are still evolving and could be interpreted in ways that could harm our business. In the area of information security and data protection, the laws in several states require companies to implement specific information security controls to protect certain types of information. Likewise, all but a few states have laws in place requiring companies to notify users if there is a security breach that compromises certain categories of their information. Any failure on our part to comply with these laws may subject us to significant liabilities.
We are also subject to federal and state laws regarding privacy of listener data. Once we launch the CÜR Music product, we will adopt a privacy policy, which will describe our practices concerning the use, transmission and disclosure of listener information and will be posted on our website. Any failure to comply with our posted privacy policy or privacy-related laws and regulations could result in proceedings against us by governmental authorities or others, which could harm our business. Further, any failure by us to adequately protect the privacy or security of our listeners' information could result in a loss of confidence in our service among existing and potential listeners, and ultimately, in a loss of listeners and advertising customers, which could adversely affect our business.
Intellectual Property
Our success depends upon our ability to protect our technologies and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including trade secrets, trademarks, contractual restrictions, technological measures and other methods. We entered into confidentiality and proprietary rights agreements with our employees, consultants and business partners, and we control access to and distribution of our proprietary information.
We have registered the internet domain name www.curmusic.com for our website, as well as various other domain names. We have registered trademarks for "Raditaz," "Tunevision" and "CÜR."
Research and Development
Prior to launch, we are devoting substantially all of our financial and business focus to enhance the product, raise capital, negotiate content licensing arrangements and build our technology infrastructure.
Research and development expenses were approximately $6.6 million since inception through the year ended December 31, 2017, comprised primarily of employee wages and professional services associated with the CÜR Music application development of the user interface, user experience, back-end technology on all platforms, iOS, Android and Web. Research and Development also include the costs of content while in development and Beta.
Employees
On August 16, 2016, we had laid off all of our employees and ceased significant operations, other than capital raising activities intended to continue our Music Streaming Business. We hired an Investor Relations Analyst on January 8, 2017, but terminated his employment as of August 17, 2017. We recently appointed Thomas Brophy as President and Chief Executive Officer, John Egazarian as Head of Product, Chief Operating Officer, Michael Betts as Chief Technology Officer, and Kelly Sardo as Chief Financial Officer, Secretary and Treasurer, and have hired nine other full-time employees. As a result, as of the date hereof, we have thirteen full-time regular employees. None of our employees were or are covered by collective bargaining agreements. Generally, we considered our relations with our employees to be good. However, the Company has not yet paid its employees for work rendered during the first three quarters of 2016. Other than the 2016 accrued payroll, no other periods have been unpaid and accrued. It is the Company's intention to pay the accrued payroll as soon as practicable. Certain of the Company’s former employees have filed claims against the Company for payment of unpaid wages totaling $50,000 which remain outstanding. In addition, the Company has agreed to settlements on employee claims totaling $237,343 which also remain outstanding. The Company expects to pay these claims and settlements as soon as practicable.
Reports to Security Holders
We file annual, quarterly and current reports and other information with the SEC. You may read and copy any reports, statement or other information that we file with the SEC at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at (202) 551-8090 for further information on the public reference room. These SEC filings are also available to the public from commercial document retrieval services and at the Internet site maintained by the SEC at http://www.sec.gov.
ITEM 1A. RISK FACTORS
THIS ANNUAL REPORT CONTAINS CERTAIN STATEMENTS RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF OUR COMPANY. YOU ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS ANNUAL REPORT, INCLUDING THE MATTERS SET FORTH BELOW, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST IN OUR COMPANY. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS FOR GROWTH WOULD LIKELY SUFFER.
General Risks
We have a limited operating history upon which investors can evaluate our future prospects. We may never attain profitability.
We have been developing CÜR Music and have not yet begun any commercial operations. Historically, we were a shell company with a limited operating history in an unrelated business and no assets other than cash. Upon consummation of the Contribution with CÜR Media, LLC, we redirected our business focus towards the development and commercialization of a music streaming subscription service. Although CÜR Media, LLC was incorporated in 2008, it did not launch its Raditaz DMCA-compliant internet radio product until 2012. Subsequently, the Raditaz iPhone and Android applications and website were taken offline to focus resources on the development of CÜR Music, which we planned to launch once adequate funding was in place. Therefore, both the Company and CÜR Media, LLC have limited operating histories upon which an evaluation of our business plan or performance and prospects can be made. Our proposed operations are therefore subject to all of the risks inherent in light of the expenses, difficulties, complications and delays frequently encountered in connection with the formation of any new business, the development of a product, as well as those risks that are specific to our proposed business in particular. The risks include, but are not limited to, the possibility that we will not be able to develop functional and scalable products and services, or that although functional and scalable, our products and services will not be accepted in the market. To successfully introduce and market our products at a profit, we must establish brand name recognition and competitive advantages for our products. There are no assurances that the Company can successfully address these challenges. If it is unsuccessful, the Company and its business, financial condition and operating results will be materially and adversely affected.
Given our limited operating history, management has little basis on which to forecast future demand for our products. The current and future expense levels of the Company following the Contribution are based largely on estimates of planned operations and future revenues rather than experience. It is difficult to accurately forecast future revenues because the business of the Company is new, and its market has not been developed. We do not expect meaningful revenues until late 2018 or early 2019. If the forecasts for the Company prove incorrect, the business, operating results and financial condition of the Company will be materially and adversely affected.
We have a history of losses and we may not achieve or sustain profitability in the future.
We have incurred losses in each fiscal year since our incorporation in 2011, and CÜR Media, LLC has incurred losses in each fiscal year since its formation in 2008. We anticipate that our operating expenses will increase in the foreseeable future as we continue to invest to grow our business, acquire customers and develop our platform and new functionality. These efforts may prove more expensive than we currently anticipate, and we may not succeed in generating sufficient revenues to offset these higher expenses. If we are unable to do so, the Company and its business, financial condition and operating results could be materially and adversely affected.
We may not be able to secure additional financing.
On November 16, 2017, Holdings consummated the Holdings Offerings. The net proceeds from the Holdings Offerings, in the aggregate amount of $6,932,288 (after deducting fees and expenses related to the Holdings Offerings in the aggregate amount of $722,074 (including placement agent fees, legal fees and expenses and fees payable to the escrow agent)) are to be extended in a line of credit to the Company (the “Post-Closing Line of Credit Note”), for up to the full amount of the aggregate net proceeds from the Holdings Offerings.
If we are unable to finalize terms for the Post-Closing Line of Credit Note with Holdings, or are otherwise unable to raise additional financing, we will not have sufficient funds to complete the development of CÜR Music, make payments as they come due to music labels and publishers and to begin to execute our marketing plan. We may need to raise additional funds in order to fully implement our business plan, support our growth, develop new or enhanced services and products, respond to competitive pressures, acquire or invest in complementary or competitive businesses or technologies, or take advantage of unanticipated opportunities. We cannot be sure that this additional financing, will be available on acceptable terms or at all. Furthermore, any debt financing, if available, may involve restrictive covenants, which may limit our operating flexibility with respect to business matters. If additional funds are raised through the issuance of equity securities, the percentage ownership of our existing shareholders will be reduced, our shareholders may experience additional dilution in net book value, and such equity securities may have rights, preferences, or privileges senior to those of our existing shareholders. If adequate funds are not available on acceptable terms, or at all, we may be unable to develop or enhance our products and services, take advantage of future opportunities, repay debt obligations as they become due, or respond to competitive pressures, any of which would have a material adverse effect on our business, prospects, financial condition, and results of operations. However, if adequate funds are not available to us when we need them, and we are unable to commercialize our products giving us access to additional cash resources, we will be required to curtail or cease our operations.
Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern.
Our historical financial statements have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued a report on the Company's financial statements at December 31, 2017 and 2016, appearing elsewhere herein, that included an explanatory paragraph referring to our recurring net losses and accumulated deficit, and expressing substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity financing or other capital, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our products may not be accepted in the market.
We cannot be certain that CÜR Music, or other products or services we may develop or market, will achieve or maintain market acceptance. Market acceptance of our products depends on many factors, including our ability to license the necessary content from the music labels, performance rights organizations and publishers, to convince key opinion leaders to provide recommendations regarding our products, convince distributors and customers that our technology is an attractive alternative to other technologies, supply and service sufficient quantities of products directly or through marketing alliances, and price products competitively in light of the current macroeconomic environment. If our products are not accepted in market, the Company and its business, financial condition and operating results could be materially and adversely affected.
Business Risks
Online and mobile music services are an emerging market, which makes it difficult to evaluate our current business and future prospects.
The market for streaming music on the internet and on mobile devices has undergone rapid and dramatic changes in its relatively short history and is subject to significant challenges. As a result, the future revenue and income potential of our business is uncertain. You should consider our business and prospects in light of the risks and difficulties we encounter in this new and rapidly evolving market, which risks and difficulties include, among others:
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Our relatively new, evolving and unproven business model.
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Our ability to build our listener base and our paid subscriber base.
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Our ability to effectively convert users from free trial to our paid subscription service.
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Our ability to negotiate, finalize and maintain economically feasible agreements with the major and independent music labels, publishers and performance rights organizations.
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Our ability to attract advertisers and prove to advertisers that our advertising platform is effective enough to justify a pricing structure that is profitable to us.
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Our ability to develop and maintain relationships with makers of mobile devices, consumer electronics products and automobiles.
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Our ability to develop and maintain relationships with Apple's iTunes Store (App Store), Google's Google Play Store, and other distribution platforms.
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Our operation under an evolving music industry licensing structure that may change or cease to exist, which in turn may result in significant increase in operating expenses.
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Failure to successfully address these risks and difficulties, and other challenges associated with operating in a new and emerging market, could significantly harm our business, financial condition, results of operations, liquidity and prospects.
The Company has been dormant since mid-2016 and is planning to re-start operations.
We were forced to lay off our employees in August of 2016 due to our inability to raise the necessary funds to launch the CÜR Music. Since then our only significant activities were related to capital raising activities intended to continue our Music Streaming Business. These capital-raising activities were led by our Founder and then-sole director, Thomas Brophy. Now that the Holdings Offerings have been consummated, we intend to re-hire as many former employees as possible and to re-integrate with various vendors including Amazon Web Services, Zuora, MediaNet, among others. If we are unable to hire the necessary employees and/or are unable to integrate with certain of our vendors, our ability to complete the development of CÜR Music, launch CÜR Music and operate the business will be adversely impacted.
The Company plans to transition from Rovi to Gracenote.
We were previously integrated with Rovi to utilize their platform for generating music playlists and other information for CÜR Music users. We are transitioning to Gracenote for these services. If we are unable to fully integrate with Gracenote, our ability to complete the development of CÜR Music, launch CÜR Music and operate our business will be adversely impacted.
The Company has significant liabilities to certain vendors.
As the Company was encountering financial difficulties in 2016, we accumulated large accounts payable balances to various vendors. If we are unable to reach settlements on our accounts payable, vendors may file lawsuits against the Company. The costs to defend these lawsuits could be significant, and we may have to pay accounts payable balances including penalties and interest, which would adversely affect our business.
We have incurred significant operating losses in the past, and we may not be able to generate sufficient revenue to be profitable, or to generate positive cash flow on a sustained basis. In addition, our revenue growth rate may decline.
Since our inception in January 2014, we have incurred significant operating losses and as of December 31, 2017, had an accumulated deficit of $(23.4) million. For the years ended December 31, 2017 and 2016, our operating losses were $(2.3) million and $(6.4) million, respectively. We cannot assure you that we will generate sufficient revenue from the sale of our subscription service and our other revenue sources to offset the cost of our content and royalty expenses. If we cannot successfully earn revenue at a rate that exceeds the operational costs, including royalty expenses, associated with our service, we will not be able to achieve or sustain profitability or generate positive cash flow on a sustained basis.
We also expect our costs to increase in future periods, which could negatively affect our future operating results and ability to achieve profitability. We expect to continue to expend substantial financial and other resources on:
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securing top quality audio and video content from leading music labels, distributors, aggregators, as well as the publishing right to the underlying musical compositions;
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creating new forms of original content;
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our technology infrastructure, including website architecture, development tools, scalability, availability, performance, security, and disaster recovery measures;
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research and development, including investments in our research and development team and the development of new features;
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international expansion in an effort to increase our member base, engagement, and sales; and
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general administration, including legal and accounting expenses, related to being a public company.
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These investments may not result in increased revenue or growth in our business. If we fail to continue to grow our revenue and overall business, our business, operating results, and financial condition would be harmed.
We are a party to many license agreements which are complex and impose numerous obligations upon us which may make it difficult to operate our business, and a breach of such agreements could adversely affect our business, operating results, and financial condition.
Many of our license agreements are complex and impose numerous obligations on us, including obligations to, among other things:
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meet certain user and conversion targets in order to secure certain licenses and royalty rates;
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calculate and make payments based on complex royalty structures, which requires tracking usage of content on our Service that may have inaccurate or incomplete metadata necessary for such calculation;
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provide periodic reports on the exploitation of the content in specified formats;
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represent that we will obtain all necessary publishing licenses and consents and pay all associated fees, royalties, and other amounts due for the licensing of musical compositions;
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comply with certain marketing and advertising restrictions; and
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comply with certain security and technical specifications.
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Many of our license agreements grant the licensor the right to audit our compliance with the terms and conditions of such agreements. Some of our license agreements also include so-called “most favored nations” provisions which require that certain terms (including potentially the material terms) of such agreements are no less favorable than those provided to any similarly situated licensor. If triggered, these most favored nations provisions could cause our payments or other obligations under those agreements to escalate substantially. Additionally, some of our license agreements require consent to undertake certain business initiatives and without such consent, our ability to undertake new business initiatives may be limited. This could hurt our competitive position.
If we materially breach any of these obligations or any other obligations set forth in any of our license agreements, or if we use content in ways that are found to exceed the scope of such agreements, we could be subject to monetary penalties and our rights under such license agreements could be terminated, either of which could have a material adverse effect on our business, operating results, and financial condition. We have entered into settlement agreements requiring us to make substantial payments in the past, and may do so in the future, as a result of claims that we are in breach of certain provisions in, or have exceeded the scope of, our license agreements.
The Company received a Wells Notice from the SEC related to its delinquent financial statements.
On July 19, 2017, we received a “Wells Notice” from the Staff of the SEC. The Wells Notice provides notification to the Company that the Staff has made a preliminary determination to recommend that the SEC institute administrative proceedings against the Company pursuant to Sections 12(j) and 12(k) of the Exchange Act, based solely upon the Company’s failure to comply with its reporting obligations under Section 13(a) of the Exchange Act. Sections 12(j) grants the SEC the right, after notice and opportunity for a hearing, to revoke the registration of a security. Section 12(k) grants the SEC the right to suspend trading in a security.
At the time we received the Wells Notice, the Company had not filed its quarterly reports on Form 10-Q with the SEC for the quarters ended June 30, 2016, September 30, 2016, March 31, 2017 and June 30, 2017. The Company also had not filed its Annual Report on Form 10-K for the year ended December 31, 2016. As of this filing, the Company has filed all delinquent reports for fiscal years ended December 31, 2016 and 2017.
In accordance with SEC rules, on August 25, 2017, the Company made a written submission to the SEC in response to the Wells Notice, in which, among other things, it conveyed the Company’s present intention to file the delinquent reports and become current with its SEC filing requirements and, as such, set forth the reasons why the proposed enforcement action should not be filed. While no assurances can be made, the Company believes that, as a result of making these filings, the SEC will have no further reason to institute the proposed administrative proceedings, or, if instituted, to continue such proceedings. However, there can be no assurance that the SEC will not bring an enforcement action against the Company, which could result in a trading suspension of the Company’s Common Stock and the de-registration of the Company’s securities under the Exchange Act. Administrative proceedings, if instituted, will be held before an administrative law judge. If the SEC decides to institute the proposed administrative proceedings, our business and investors’ perception of our business will be adversely affected.
Our failure to manage growth, diversification and changes to our business could harm our business.
We currently have no revenue, but may encounter significant growth upon the anticipated launch of our product, CÜR Music. The failure to successfully manage and monetize any growth, and to successfully diversify our business in the future, could harm the success and longevity of our company.
Investing in our securities is considered a high-risk investment.
An investment in an early stage company such as ours involves a degree of risk. There can be no assurance that our online streaming music monthly subscription platform will be successful or profitable. If our streaming service id not successful, your entire investment may be lost.
We depend on key personnel to operate our business, and if we are unable to attract, retain, and integrate qualified personnel, our ability to develop and successfully grow our business could be harmed.
We believe that our future success is highly dependent on the continued services of our key officers, employees, and member of our Board of Directors, as well as our ability to attract and retain highly skilled and experienced technical personnel. During 2016, we were unable to raise the capital necessary to enable us to continue to operate our business and were forced to cease significant operations, other than capital raising activities meant to continue our Music Streaming Business. On August 16, 2016, we terminated Kelly Sardo as our Chief Financial Officer and Treasurer. In addition, on August 16, 2016, we terminated William Campbell as our Chief Strategy Officer, John Egazarian as our Chief Operating Officer, and Michael Betts as our Chief Technology Officer. We believe our future success is highly dependent on our ability to re-hire these key officers and employees and, at this time, we have already rehired John Egazarian, Michael Betts and Kelly Sardo. If we are not able to reach agreement to employ certain other key officers and employees, our operations could be adversely affected.
In addition, the departure of Thomas Brophy, our President and Chief Executive Officer, or any major change in our Board of Directors or management, such as the departure of our Directors, William West Duker or Edward Swyer could adversely affect our operations.
Expansion of our operations into new fields may subject us to additional business, legal, financial and competitive risks.
After the launch of CÜR Music, we may decide to provide non-musical content such as talk, comedy, news, weather, or other areas where we may have less experience or where we could be subject to additional business, legal, financial, and competitive risks. We have not identified a timeframe in which we may expand into new areas of content. Expanding into these additional areas could potentially have a negative effect on our overall business.
Users of the Raditaz application and/or website may not transition to CÜR Music.
We have taken our beta product, Raditaz, offline in order to develop CÜR Music. We intend to attempt to transition former beta users of Raditaz to CÜR Music through a targeted communication strategy. However, there are no assurances that users of Raditaz will transition to CÜR Music. If Raditaz's beta users do not transition to CÜR Music, CÜR Music's capital needs, results of operations, viability and growth prospects may be adversely affected.
Much of the success of our business plan relies on the accuracy of our business and customer research.
We engaged an outside research firm to conduct a research study regarding, among other things, the demand for CÜR Music's proposed product and features set. Our product was built and negotiations with the labels were conducted with the results of this research in mind. If the results of the research study prove to be inaccurate, our capital needs, results of operations, viability and growth prospects will be adversely affected.
If our efforts to attract prospective users and to retain existing users are not successful, our growth prospects and revenue will be adversely affected.
We plan to provide new users of CÜR Music with a free trial upon registration. Our ability to grow our business and generate revenue depends on obtaining, retaining and expanding our total user base. If we are not able to convert users of our free trial to become paying subscribers, our growth prospects and ability to generate revenues will be negatively impacted. Our ability to attract new users, retain existing users, and convert free trial users to subscribers depends in large part on our ability to continue to offer leading technologies and products, compelling content, superior functionality, and an engaging User experience. Some of our competitors, including Apple, Amazon, and Google, have developed, and are continuing to develop, devices for which their music streaming service is preloaded, which puts us at a significant competitive disadvantage. As consumer tastes and preferences change on the internet and with mobile devices and other internet-connected products, we will need to enhance and improve our existing service, introduce new services and features, and maintain our competitive position with additional technological advances and an adaptable platform. If we fail to keep pace with technological advances or fail to offer compelling product offerings and state-of-the-art delivery platforms to meet consumer demands, our ability to grow or sustain the reach of our service, attract and retain users, and increase our subscribers may be adversely affected.
In order to increase our free trial and paid subscribers we will need to address a number of challenges, including:
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providing users with a consistently high-quality and user-friendly experience;
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continuing to curate a catalog of content that consumers want to engage with on our service;
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continuing to innovate and keep pace with changes in technology and our competitors; and
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maintaining and building our relationships with the makers of consumer products such as mobile devices.
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We may not be able to successfully overcome each challenge, which could have a material adverse effect on our business, operating results, and financial condition.
The success of our products relies heavily on the use of search technologies and marketing campaigns to drive users to our websites and mobile applications.
We intend to utilize search technologies and services, to engage in marketing campaigns and referral relationships, to use social platforms, to use a marketing agency, and to use influencers, among other means, to drive user traffic to our websites and mobile applications. If we are unable to utilize search technologies and other services that generate significant traffic to our websites and mobile applications, or we are unable to enter into or continue distribution relationships that drive significant traffic to our websites and/or mobile applications, our business could be harmed, causing our revenues to decline.
Our current marketing budget may not be sufficient to obtain budgeted subscriber levels. We may have to spend more than our marketing plan calls for to obtain new subscribers.
We anticipate incurring significant expenses to obtain and maintain subscribers to CÜR Music. We will utilize a number of different channels and partnerships, including but not limited to social media partners, to do so and we may be required to expend greater resources on advertising, marketing and other brand-building efforts to preserve and enhance consumer awareness of our brand, which would adversely affect our operating results and may not be effective.
We may not be able to retain, find and/or hire employees with the necessary skills to maintain and enhance the necessary software applications that are necessary to operating and growing the business.
Premier technology software developers, designers and other technology personnel are in high demand in our industry. There may be competitors or other technology companies that have more capital to allocate for such personnel, making our search for such job positions more difficult and expensive, thus increasing our business expenses. As of August 16, 2016, we had laid off all of our employees and ceased significant operations other than capital raising activities meant to continue our Music Streaming Business. If we are unable to attract and retain certain of our former employees, or hire other qualified candidates, we may have difficulty completing the development of CÜR Music. If we are unable to complete the development of CÜR Music, we may not be able to commercially launch, which would have an adverse effect on our business.
If we cannot maintain our corporate culture as we grow, we could lose the innovation, teamwork and focus that contribute crucially to our business.
We believe that a critical component of our success is the corporate culture that we have prior to ceasing significant operations, which we believe fostered innovation, encouraged teamwork, cultivated creativity and promoted focus on execution. We invested substantial time, energy and resources in building a highly collaborative team that worked together effectively in a non-hierarchical environment designed to promote openness, honesty, mutual respect and pursuit of common goals. We may find it difficult to replicate that corporate culture, and, if we are able to replicate our previous corporate culture, we may find it difficult to maintain these valuable aspects of our corporate culture. Any failure to rebuild and preserve our culture could negatively impact our future success, including our ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
There are no assurances that our development team can build all of CÜR Music's planned product features.
While our application has been built and tested, since it has been offline since mid-2016, we now must re-integrate our software code and re-integrate with our vendors. Our software applications may not work as it did previously. We have designed and built CÜR Music to include features that may be considered ambitious and untested, such as a library of several million songs, on-demand playlists, unlimited song skip and repeat functionality, social features, lyric synchronization, photo and video integration and storage and more. The technology is extremely complex and there are no assurances that the product features will continue to function as built. If we are not able to prevent and or fix issues with the application, our capital needs, results of operations, viability and growth prospects will be adversely affected.
Our Service and software are highly technical and may contain undetected software bugs or vulnerabilities, which could manifest in ways that could seriously harm our reputation and our business.
Our Service and software are highly technical and complex. Our service, CÜR Music, or any other products we may introduce in the future, may contain undetected software bugs, hardware errors, and other vulnerabilities. These bugs and errors can manifest in any number of ways in our products, including through diminished performance, security vulnerabilities, malfunctions, or even permanently disabled products. We have a practice of rapidly updating our products and some errors in our products may be discovered only after a product has been used by users, and may, in some cases, be detected only under certain circumstances or after extended use. Any errors, bugs, or other vulnerabilities discovered in our code or backend after release could damage our reputation, drive away users, allow third parties to manipulate or exploit our software, lower revenue, and expose us to claims for damages, any of which could seriously harm our business.
We also could face claims for product liability, tort, or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and seriously harm our reputation and our business. In addition, if our liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our business could be seriously harmed.
If we fail to accurately predict and play music that our listeners enjoy, we may fail to retain existing and attract new subscribers, both online and offline.
Our personalized playlist generating system is being developed through a partnership with a digital entertainment service provider, Gracenote, and is being designed to enable us to predict listener music preferences and select music content tailored to our listeners' music tastes. While this third-party provider has invested significant resources in refining these technologies, we cannot assure you that such investments will continue in the future or yield an attractive return or that such refinements will be effective. The effectiveness of personalized playlist generating system depends in part on our ability to gather and effectively analyze large amounts of listener data and listener feedback, and we have no assurance that we will be successful in enticing listeners to provide feedback sufficient for our database to effectively predict and select new and existing songs. In addition, our ability to offer listeners songs that they have not previously heard and impart a sense of discovery depends on our ability to acquire and appropriately categorize additional songs that will appeal to our listeners' diverse and changing tastes. Our ability to predict and select music content that our listeners enjoy is critical to the perceived value of our service among listeners and failure to make accurate predictions would adversely affect our ability to attract and retain listeners, convert free listeners to paid subscribers, increase listener hours and sell advertising.
Various regulations as well as self-regulation related to privacy and data security concerns pose the threat of lawsuits and other liability, require us to expend significant resources, and may harm our business, operating results, and financial condition.
We intend to collect and utilize personal and other information from and about our users as they interact with our service. Various laws and regulations govern the collection, use, retention, sharing, and security of the data we receive from and about our users. Privacy groups and government bodies have increasingly scrutinized the ways in which companies link personal identities and data associated with particular users or devices with data collected through the internet, and we expect such scrutiny to continue to increase. Alleged violations of laws and regulations relating to privacy and data security, and any relevant claims, may expose us to potential liability and may require us to expend significant resources in responding to and defending such allegations and claims. Claims or allegations that we have violated laws and regulations relating to privacy and data security could in the future result in negative publicity and a loss of confidence in us by our users and our partners. Such claims or allegations also may subject us to fines, including by data protection authorities and credit card companies, and could result in the loss of our ability to accept credit and debit card payments.
Existing privacy-related laws and regulations in the United States and other countries are evolving and are subject to potentially differing interpretations, and various U.S. federal and state or other international legislative and regulatory bodies may expand or enact laws regarding privacy and data security-related matters. In recent years, U.S. lawmakers and regulators have expressed concern over electronic marketing and the use of third-party cookies, web beacons, and similar technology for online behavioral advertising.
We may find it necessary or desirable to join self-regulatory bodies or other privacy-related organizations that require compliance with their rules pertaining to privacy and data security. We also may be bound by contractual obligations that limit our ability to collect, use, disclose, share, and leverage user data and to derive economic value from it. New laws, amendments to, or reinterpretations of existing laws, rules of self-regulatory bodies, industry standards, and contractual obligations, as well as changes in our users’ expectations and demands regarding privacy and data security, may limit our ability to collect, use, and disclose, and to leverage and derive economic value from user data. Restrictions on our ability to collect, access and harness user data, or to use or disclose User data or any profiles that we develop using such data, may require us to expend significant resources to adapt to these changes, and would in turn limit our ability to stream personalized music content to our users and offer targeted advertising opportunities to our users.
In addition, any failure or perceived failure by us to comply with privacy or security laws, policies, legal obligations, industry standards, or any security incident that results in the unauthorized release or transfer of personal data may result in governmental enforcement actions and investigations, including fines and penalties, enforcement orders requiring us to cease processing or operate in a certain way, litigation and/or adverse publicity, including by consumer advocacy groups, and could cause our customers to lose trust in us, which could have an adverse effect on our reputation and business. Such failures could have a material adverse effect on our financial condition and operations. If the third parties we work with (for example, cloud-based vendors) violate applicable laws or contractual obligations or suffer a security breach, such violations also may put us in breach of our obligations under privacy laws and regulations and/or could in turn have a material adverse effect on our business.
We may incur expenses to comply with privacy and security standards and protocols imposed by law, regulation, self-regulatory bodies, industry standards, and contractual obligations. Increased regulation of data capture, analysis, and utilization and distribution practices, including self-regulation and industry standards, could increase our cost of operation, limit our ability to grow our operations, or otherwise adversely affect our business, operating results, and financial condition.
Changes in regulations or user concerns regarding privacy and protection of user data, or any failure or appearance of failure to comply with such laws, could diminish the value of our Service and cause us to lose users and revenue.
The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission, and security of personal information by companies operating over the internet have recently come under increased public scrutiny. The U.S. government, including the Federal Trade Commission and the Department of Commerce, may continue to review the need for greater regulation over the collection of information concerning consumer behavior on the internet, including regulation aimed at restricting certain targeted advertising practices. Various government and consumer agencies also have called for new regulation and changes in industry practices. Our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted, interpreted, or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices, the design of our website, services, features, or our privacy policy. In particular, the success of our business has been, and we expect will continue to be, driven by our ability to responsibly use the personal data that our users share with us. Therefore, our business could be harmed by any significant change to applicable laws, regulations, or industry practices regarding the use of our users’ personal data, for example regarding the manner in which disclosures are made and how the express or implied consent of users for the use of personal data is obtained. Such changes may require us to modify our services and features, possibly in a material manner, and may limit our ability to develop new services and features that make use of the data that our users voluntarily share with us. In addition, some of our developers or other partners, such as those that help us measure the effectiveness of marketing and/or ads, may receive or store information provided by us or by our users through mobile or web applications integrated with our service. We may provide limited information to such third parties based on the scope of services provided to us. However, if these third parties or developers fail to adopt or adhere to adequate data security practices, or in the event of a breach of their networks, our data or our Users’ data may be improperly accessed, used, or disclosed.
We are subject to a number of risks related to credit card and debit card payments that we plan to accept, and we may not be able to enter into economically favorable credit and debit card processing arrangements.
Our subscription business, which we project will make up more than 80-90% of our total revenue, will be completely dependent on our ability and third-party processors' abilities to process monthly subscription payments through credit and debit card processing methods. Any disruption in this service could adversely affect our business.
For credit and debit card payments, we will be required to pay interchange and other fees, which may increase over time. An increase in those fees would require us to either increase the prices we charge for our products, or suffer an increase in our operating expenses, either of which could adversely affect our business, financial condition and results of operations.
If we, or any of our processing vendors, have problems with our billing software or our third party's billing software, or the billing software malfunctions, it could have an adverse effect on our subscriber satisfaction and could cause one or more of the major credit card companies to disallow our continued use of their payment products. In addition, if our billing software or our third party's billing software fails to work properly and, as a result, we do not automatically charge our subscribers' credit cards on a timely basis or at all, our business, financial condition and results of operations could be adversely affected.
We will also be subject to payment card association operating rules, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it more difficult for us to comply. We will need to assess whether we are fully compliant with the Payment Card Industry, or PCI, Data Security Standard, or PCI DSS, a security standard with which companies that collect, store, or transmit certain data regarding credit and debit cards, credit and debit card holders, and credit and debit card transactions are required to comply. Our failure to comply fully with PCI DSS may violate payment card association operating rules, federal and state laws and regulations, and the terms of our contracts with payment processors and merchant banks. Such failure to comply fully also may subject us to fines, penalties, damages, and civil liability, and may result in the loss of our ability to accept credit and debit card payments. Further, there is no guarantee that, even if PCI DSS compliance is achieved, we will maintain PCI DSS compliance or that such compliance will prevent illegal or improper use of our payment systems or the theft, loss, or misuse of data pertaining to credit and debit cards, credit and debit card holders and credit and debit card transactions.
If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures and significantly higher credit card-related costs, each of which could adversely affect our business, financial condition and results of operations.
If we are unable to maintain our chargeback rate or refund rates at acceptable levels, credit card and debit card companies may increase our transaction fees or terminate their relationships with us. Any increases in our credit card and debit card fees could adversely affect our results of operations, particularly if we elect not to raise our rates for our service to offset the increase. The termination of our ability to process payments on any major credit or debit card would significantly impair our ability to operate our business.
We may experience a reduction or increase in the prices of our products, which would have a negative impact on our business and on our margins.
We anticipate charging a monthly fee for our base platform. We anticipate our base platform to represent as much as 85% of subscription revenues. Our business model is unproven, and if we have to adjust our subscription prices lower, the lower revenue could adversely affect our business. Conversely, if we have to adjust our subscription prices higher, it would be more difficult to attract and retain our subscribers, and the impact would likely cause a negative trend in our subscriber retention numbers, and could adversely affect our business.
Minimum guarantees required under certain of our license agreements for sound recordings and underlying musical compositions may limit our operating flexibility and may adversely affect our business, operating results, and financial condition.
Certain of our license agreements for sound recordings and musical compositions (both for mechanical rights and public performance rights) contain minimum guarantees and/or require that we make minimum guarantee payments. Such minimum guarantees related to our content acquisition costs are not always tied to our number of users, active users, paid subscribers, or the number of sound recordings and musical compositions used on our service. Accordingly, our ability to achieve and sustain profitability and operating leverage on our service in part depends on our ability to increase our revenue through increased sales of subscription services on terms that maintain an adequate gross margin. The duration of our license agreements that contain minimum guarantees is typically between one and three years, but our subscribers may cancel their subscriptions at any time. If our forecasts of subscriber acquisition do not meet our expectations or the number of our subscribers, our margins may be materially and adversely affected. To the extent our service revenue growth does not meet our expectations, our business, operating results, and financial condition also could be adversely affected as a result of such minimum guarantees. In addition, the fixed cost nature of these minimum guarantees may limit our flexibility in planning for, or reacting to, changes in our business and the market segments in which we operate.
We rely on estimates of the market share of licensable content controlled by each content provider, as well as our own user growth and forecasted advertising revenue, to forecast whether such minimum guarantees could be recouped against our actual content acquisition costs incurred over the duration of the license agreement. To the extent that these revenue and/or market share estimates underperform relative to our expectations, leading to content acquisition costs that do not exceed such minimum guarantees, our margins may be materially and adversely affected.
Difficulties in obtaining accurate and comprehensive information necessary to identify the compositions embodied in sound recordings on our service and the ownership thereof may impact our ability to perform our obligations under our licenses, affect the size of our catalog, impact our ability to control content acquisition costs, and lead to potential copyright infringement claims.
Comprehensive and accurate ownership information for the musical compositions embodied in sound recordings is often unavailable to us or difficult or, in some cases, impossible for us to obtain, sometimes because it is withheld by the owners or administrators of such rights. We currently rely on the assistance of third parties to determine this information. If the information provided to us or obtained by such third parties does not comprehensively or accurately identify the ownership of musical compositions, or if we are unable to determine which musical compositions correspond to specific sound recordings, it may be difficult or impossible to identify the appropriate rights holders to whom to pay royalties. This may make it difficult to comply with the obligations of any agreements with those rights holders.
In the United States, we also rely on the assistance of third parties to issue notices of intent (“NOIs”) to obtain a compulsory license under Section 115 of the Copyright Act to those copyright owners with whom we do not have a direct license agreement or, in the case of unknown copyright owners, to the United States Copyright Office. The lack of comprehensive and accurate ownership information or the inability to determine which musical compositions correspond to specific sound recordings can cause difficulties in issuing NOIs to the correct parties (including the United States Copyright Office) or serving NOIs in a timely manner and can otherwise cause difficulties in obtaining licenses. This could lead to a reduction of sound recordings available to be streamed on our Service, adversely impacting our ability to retain and expand our User base, and could make it difficult to ensure that we are fully licensed.
These challenges, and others concerning the licensing of musical compositions embodied in sound recordings on our service, may subject us to significant liability for copyright infringement, breach of contract, or other claims.
Our product is vulnerable to service disruptions and software problems.
Our users will be entirely dependent on our mobile phone application and website working properly for their enjoyment. Any disruption in these services could cause us to lose subscribers and harm our business.
Changes to our products, services, technologies, licenses or business practices or strategies may drive away customers.
Any change to our business model and/or CÜR Music product may cause a loss of subscribers and the inability to attract subscribers, which may adversely affect our business. Examples of such changes include, but are not limited to, a change or drop of certain CÜR Music features, increase or decrease in subscription rates, a decrease in the quality of music streamed, a shift to a smaller library of music, inability to keep pace with competitors, and maintaining relationships with makers of consumer products such as mobile phones, tablets, and automobiles.
As new demands strain our infrastructure, scalability issues may emerge, impeding performance.
The power to expand our music platform to support growing user communities, launch new services, integrate more data, and handle greater workloads is fundamental to business growth. Data management architectures have their scaling limits. If business requirements exceed those limits, the data management system may not scale to provide critical new services, may not respond quickly to growing users and complex functionality, may degrade with new applications and may not be able to meet service level commitments, resulting in a material adverse effect on our business.
If web, smartphones, tablets and connected TV devices, their operating systems or content distribution channels, including those controlled by our competitors, develop in ways that prevent our solutions from being delivered to their users, our ability to grow our business will be impaired.
Our business model depends upon the continued compatibility of our solutions with most internet-connected devices across online, mobile, tablet and connected TV distribution channels, as well as the major operating systems that run on them. The design of these devices and operating systems are controlled by third parties with whom we do not have any formal relationships. These third parties frequently introduce new devices, and from time to time, they may introduce new operating systems or modify existing ones. In some cases, the parties that control the development of internet-connected devices and operating systems include companies that we regard as our competitors, including some of our most significant competitors. For example, Google controls the Android operating system and also controls a significant number of mobile devices. Apple, Inc. controls iOS devices including mobile, tablet and computer devices. If our solutions were unable to work on these devices or operating systems, either because of technological constraints or because a maker of these devices or developer of these operating systems wished to impair our ability to provide our solutions on them, our ability to grow our business would be impaired.
If we experience lengthened sales cycles, our business operations may be adversely affected.
Our business will be dependent on revenue from subscription, advertising and song sales, and potentially merchandise and ticket sales. Our subscription transactions, song sales and other revenues will involve credit card processing. Any delays or lengthened sales cycles, delays in collect fees due from credit card companies and/or credit card transaction cancellations, may adversely affect our business.
Degradation in our stature and reputation in the market could harm our business.
Our CÜR brand name is very important to us. Any degradation in our stature and reputation in the market may adversely affect our business.
Our failure to drive advertising revenue could harm our business.
While we anticipate revenue from advertisements to be a non-core revenue generator and eventually make up approximately 5-10% of total revenue, advertising revenue will still be an important factor in determining our financial success. Advertising within the application is not planned for launch but is anticipated after launch once we achieve a reasonable number subscribers. Our ability to attract and retain advertisers, and ultimately to generate advertising revenue, depends on a number of factors, including, but not limited to, the number of users and subscribers and the number of listener hours on CÜR Music, keeping pace with changes in technology and the competition, and competing effectively for advertising dollars from other online marketing and media companies. Our failure to drive advertising revenue could adversely affect our business.
We may be unable to retain key advertisers, attract new advertisers or replace departing advertisers with advertisers that can provide comparable revenue to us.
Our success requires us to develop, maintain and expand our relationships with brand advertisers, including the ad agencies that represent them, and to develop new relationships with other brand advertisers and ad agencies. Advertising agreements generally do not include long-term obligations requiring them to purchase from us and are cancelable upon short notice and without penalty in accordance with standard terms and conditions for the purchase of internet advertising published by the Interactive Advertising Bureau. As a result, we have limited visibility as to our future advertising revenue streams from our advertisers.
Our advertisers' usage may decline or fluctuate as a result of a number of factors, including, but not limited to:
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the performance of their display and audio ad campaigns and their perception of the efficacy and efficiency of their advertising spending through CÜR Music;
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changes in the economic prospects of advertisers or the economy generally, which could alter current or prospective advertisers' spending priorities;
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our ability to deliver display, audio ad campaigns in full, i.e., our ability to serve each requested impression;
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their satisfaction with our solutions and our client support;
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the ability of our optimization algorithms underlying our solutions to deliver better rates of return ad spending dollars than competing solutions;
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seasonal patterns in advertisers' spending, which tend to be discretionary;
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the pricing of our or competing solutions; and
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reduction in spending levels or changes in brand advertisers' strategies regarding advertising spending.
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If a major advertiser decides to materially reduce its advertising spend, it could do so on short or no notice. We cannot assure that our advertisers will continue to use CÜR Music, or that we will be able to replace in a timely or effective manner departing advertisers with new advertisers from whom we generate comparable revenue. If any of these factors occur, our business would be adversely affected.
Unavailability of, or fluctuations in, third-party measurements of our audience may adversely affect our ability to grow advertising revenue.
Selling ads requires that we demonstrate to advertisers that our service has substantial reach, and we may rely on third parties to quantify the reach of our service. These third-party ratings may not reflect our true listening audience and the third parties may change their methodologies, either of which could adversely impact our business. Third-party independent rating agencies have not yet developed rating systems that comprehensively and accurately measure the reach of our service. We expect that in the future these rating agencies will begin to publish increasingly reliable information about the reach of our service. However, until then, in order to demonstrate to potential advertisers the reach of our service, we must supplement third-party ratings data with our internal research, which is perceived as less reliable than third- party numbers. If our mobile audience becomes rated, it is not clear whether the measurement technology of the third-party rating agencies will initially integrate with ours or whether their methodology will accurately reflect the value of our service. If such third-party ratings are inaccurate or we receive low ratings, our ability to convince advertisers of the benefits of our service would be adversely affected.
We will have significant competition from other services that stream music to users of the internet and mobile devices.
The streaming music industry is heavily saturated with competitors, many of which offer ad-supported free music listening. We do not plan for CÜR Music to have a free, ad-supported product, like many of our competitors. If we decide to integrate a free, ad-supported product into CÜR Music, our capital needs, results of operations, viability and growth prospects may be adversely affected.
Our users will access CÜR Music through mobile devices, tablets, the internet, automobiles and other platforms.
Our subscribers will access our music streaming product through various media platforms. If the cost of accessing streaming music, including CÜR Music, through cellular networks proves to be too expensive for potential subscribers or subscribers of CÜR Music, our capital needs, results of operations, viability and growth prospects may be adversely affected.
Many of our subscribers may purchase our service through on-line third-party stores.
Google and Apple assess a fee equal to 30% of purchases made within applications on their platforms (Android and iOS). If we are unable to have a significant percentage of our subscribers subscribe to CÜR Music through a web browser outside of these platforms, our business, financial condition and/or results of operations will be adversely affected. If we are unable to reach agreement with music labels on acceptable terms, where users subscribe through the Android and iOS platforms, our business, financial condition and/or results of operations will be adversely affected. Further, if Apple, Google, Amazon or other companies change the structure of their online stores, we may not be able to get customers to download our applications, which would adversely affect our business.
Many of our potential subscribers may be young and may not have access to credit cards or have the ability to pay for CÜR Music.
If we are unable to provide adequate payment options for younger potential subscribers, our business, financial condition and/or results of operations will be adversely affected.
If we fail to detect click fraud or other invalid clicks on ads, we could lose the confidence of our advertisers, which would cause our business to suffer.
Our business will rely on delivering positive results to our advertising customers. We will be exposed to the risk of fraudulent and other invalid clicks or conversions that advertisers may perceive as undesirable. A major source of invalid clicks could result from click fraud where a listener intentionally clicks on ads for reasons other than to access the underlying content of the ads. If fraudulent or other malicious activity is perpetrated by others and we are unable to detect and prevent it, or if we choose to manage traffic quality in a way that advertisers find unsatisfactory, the affected advertisers may experience or perceive a reduced return on their investment in our advertising products, which could lead to dissatisfaction with our advertising programs, refusals to pay, refund demands or withdrawal of future business. This could damage our brand and lead to a loss of advertisers and revenue.
We are at risk of attempts at unauthorized access to our service, and failure to effectively prevent and remediate such attempts could have an adverse impact on our business, operating results, and financial condition. Unauthorized access to our service may cause us to misstate key performance indicators, which once discovered, corrected, and disclosed, could undermine investor confidence in the integrity of our key performance indicators and could cause our stock price to drop significantly.
We may be impacted by attempts by third parties to manipulate and exploit our software for the purpose of gaining unauthorized access to our service. If we have fail to successfully detect and address such issues or if in the future we fail to successfully detect and address such issues, it may have artificial effects on our key performance indicators, such as Content Hours, Content Hours per MAU, and MAUs, which underlie, among other things, our contractual obligations with rights holders and advertisers, as well as harm our relationship with rights holders. This may impact our results of operations and could expose us to claims for damages including, but not limited to, from rights holders, any of which could seriously harm our business. It should be noted that since unauthorized access to our service happen through exploitation of software vulnerabilities, once a new method of doing so is developed by third parties, the level of unauthorized access (and attendant negative financial impact described above, if at all) may increase over time as third parties share the method until we find a way to prevent the unauthorized access, assuming we are able to do so at all. Moreover, once we detect and correct such unauthorized access and any key performance indicators it affects, investor confidence in the integrity of our key performance indicators could be undermined. These could have a material adverse impact on our business, operating results, and financial condition.
Failure to protect our intellectual property could substantially harm our business, operating results, and financial condition.
The success of our business depends on our ability to protect and enforce our patents, trade secrets, trademarks, copyrights, and all of our other intellectual property rights, including our intellectual property rights underlying our service. We attempt to protect our intellectual property under patent, trade secret, trademark, and copyright law through a combination of employee, third-party assignment and nondisclosure agreements, other contractual restrictions, technological measures, and other methods. These afford only limited protection and we are still early in the process of securing our intellectual property rights. Despite our efforts to protect our intellectual property rights and trade secrets, unauthorized parties may attempt to copy aspects of our song recommendation technology, or other technology, or obtain and use our trade secrets and other confidential information. Moreover, policing our intellectual property rights is difficult and time consuming. We cannot assure you that we would have adequate resources to protect and police our intellectual property rights, and we cannot assure you that the steps we take to do so will always be effective.
We have filed, and may in the future file, patent applications on certain of our innovations. It is possible, however, that these innovations may not be patentable. In addition, given the cost, effort, risks, and downside of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for some innovations. Furthermore, our patent applications may not issue as granted patents, the scope of the protection gained may be insufficient or an issued patent may be deemed invalid or unenforceable. We also cannot guarantee that any of our present or future patents or other intellectual property rights will not lapse or be invalidated, circumvented, challenged, or abandoned. Neither can we guarantee that our intellectual property rights will provide competitive advantages to us. Our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes could be limited by our relationships with third parties, and any of our pending or future patent applications may not have the scope of coverage originally sought. We cannot guarantee that our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak. We could lose both the ability to assert our intellectual property rights against, or to license our technology to, others and the ability to collect royalties or other payments.
We have registered trademarks for "Raditaz," "Tunevision" and "CÜR." We currently own the www.curmusic.com internet domain name and various other related domain names. Internet regulatory bodies generally regulate domain names. If we lose the ability to use a domain name in a particular country, we would be forced either to incur significant additional expenses to market our service within that country or, in extreme cases, to elect not to offer our service in that country. Either result could harm our business, operating results, and financial condition. The regulation of domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars, or modify the requirements for holding domain names. As a result, we may not be able to acquire or maintain the domain names that utilize our brand names in the United States or other countries in which we may conduct business in the future.
Litigation or proceedings before governmental authorities and administrative bodies may be necessary in the future to enforce our intellectual property rights, to protect our patent rights, trademarks, trade secrets, and domain names and to determine the validity and scope of the proprietary rights of others. Our efforts to enforce or protect our proprietary rights may be ineffective and could result in substantial costs and diversion of resources and management time, each of which could substantially harm our operating results. Additionally, changes in law may be implemented, or changes in interpretation of such laws may occur, that may affect our ability to protect and enforce our patents and other intellectual property.
Some of our services and technologies may use "open source" software, which may restrict how we use or distribute our service or require that we release the source code of certain services subject to those licenses.
Some of our services and technologies may incorporate software licensed under so-called "open source" licenses, including, but not limited to, the GNU General Public License and the GNU Lesser General Public License. Such open source licenses typically require that source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. Few courts have interpreted open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. We rely on multiple software programmers to design our proprietary technologies, and we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future. In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re- engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our services and technologies and materially and adversely affect our business, results of operations and prospects.
We are required to indemnify management and its affiliates for their good faith actions. Indemnification may cause any liability they incur to be paid by us.
We are required to indemnify management and its affiliates for any liabilities they incur in connection with business if incurred in good faith, in a manner reasonably believed to be in our best interests, and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Management is not liable to the company for any act or omission it may make in good faith and that it believes is in the company's best interest, except for acts of gross negligence or willful misconduct. Under certain circumstances, management will be entitled to indemnification from the company for losses it or any affiliate, employee, officer, director, or owner incurs in defending actions arising out of their position as or with management. These indemnification requirements could have a material adverse effect on our operations.
We may not be successful in distributing our products on the Internet or on mobile devices, or using a paid marketing strategy on the Internet, on mobile devices, on tablets, or offline.
More individuals are utilizing non-Personal Computer ("PC") devices to access the Internet, and versions of our services developed or optimized for these devices may not gain widespread adoption by users, manufacturers or distributors of such devices, or may not work on these devices, based on the broad range of unique technical requirements that may be established for each device by their manufacturers and distributors globally. If this occurs, it could materially and adversely affect our business, results of operations and prospects.
We may not be able to acquire the number of users projected in our financial model.
We may not be able to acquire the number of internet users and/or mobile phone users that is projected in our financial model or achieve the projected market penetration rates. If we are unable to do so, it would materially and adversely affect our business, results of operations and prospects.
We may not be able to launch our music streaming service on iPhone, Android and the web and associated tablets.
If we are not able to launch CÜR Music on iPhone, Android and/or the web and/or on associated tablets, our business, financial condition and/or results of operations will be adversely affected.
Government regulation of the internet is evolving, and unfavorable developments could have an adverse effect on our operating results.
Any changes in laws or regulations or new laws and regulations relating to our services could adversely affect our business, results of operations and our business prospects. If the government were to place limitations on the amount and type of content that can be streamed over networks, the internet and to mobile and other applications, our business, results of operations and our business prospects could be adversely affected.
We face competition from entities in our industry with substantially more capital, greater name recognition, more employees, greater resources, and longer operating histories than we do.
Significant competition from traditional offline music distribution competitors, from larger media companies like Apple, Google, Spotify, Amazon, Tidal and others, and from other online digital music services, as well as online theft or "piracy", could have a negative impact on our business.
We face many risks associated with our long-term plan to expand our operations outside of the United States, including difficulties obtaining rights to stream music on favorable terms, which could harm our business, operating results and financial condition.
Expanding our operations into international markets is an element of our long-term strategy. However, offering our service outside of the United States involves numerous risks and challenges.
Operating internationally requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required in establishing and expanding our international operations will produce desired levels of revenue or profitability. If we invest substantial time and resources to establish and expand our international operations and are unable to do so successfully and in a timely manner, our business and operating results will suffer.
We have no international operations and any future international expansion may expose us to several risks, such as difficulty adapting our solutions for international markets. As we have limited experience in marketing, selling and supporting our solutions abroad, and any future international expansion of our business will involve a variety of risks, including:
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localization of our solutions, including translation into foreign languages and adaptation for local practices;
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unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;
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differing labor regulations where labor laws may be more advantageous to employees as compared to the United States;
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more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information, particularly in the European Union;
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reluctance to allow personally identifiable data related to non- U.S. citizens to be stored in databases within the United States, due to concerns over the U.S. government's right to access information in these databases or other concerns;
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changes in a specific country's or region's political or economic conditions;
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challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;
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risks resulting from changes in currency exchange rates;
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limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;
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different or lesser intellectual property protection; and
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exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions.
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If we are unable to expand our business outside the United States as planned, our growth prospects and our ability to generate revenue will be negatively impacted.
Third Party Risks
We will rely on third parties to provide software and related services necessary for the operation of our business.
We are incorporating and including third-party software into and with our applications and service offerings and expect to continue to do so. The operation of our applications and service offerings could be impaired if errors occur in the third-party software that we use. It may be more difficult for us to correct any defects in third-party software because the development and maintenance of the software is not within our control. Accordingly, our business could be adversely affected in the event of any errors in this software. There can be no assurance that any third-party licensors will continue to make their software available to us on acceptable terms, to invest the appropriate levels of resources in their software to maintain and enhance its capabilities, or to remain in business. In addition, we have not requested and have not performed, or had performed, a freedom to operate or right to use investigation to determine whether the platform we intend to use to provide our music streaming service infringes any third-party patents. Any impairment in our relationship with these third-party licensors could have a material adverse effect on our business, results of operations, cash flow and financial condition.
Loss of partners and potential partners who provide content that we distribute to our customers could have a negative impact on our business.
Our technology and CÜR Music product will be dependent upon content and technology companies such as MediaNet, Amazon, Google, Apple, Microsoft, Gracenote, UMG, SME and WMG, and others, for the provision of digital music song library, creation of customized playlists and the hosting of our services. A loss of these content providers or a technical issue with these providers could materially disrupt our business and have a significant adverse effect on our business.
We will depend upon third party licenses for musical works and content and the ability to obtain these licenses, and/or change to or loss of these licenses could increase our operating costs or adversely affect our ability to retain and expand our listener base, and therefore could adversely affect our business.
We license all of CÜR Music's musical works, sound recordings and related content from major and independent music labels as well as publishers and performing rights organizations ("PROs"). We secure content from these owners and approvals from some of these owners with respect to CÜR Music's features that would grant our customers enhanced access to their licensed materials, such as on-demand play, song skipping, and offline listening, among others. The Company and Holdings have entered into the New Music Label Agreements. We intend to enter into content licensing agreements with certain independent labels and content aggregators, prior to the launch of CÜR Music. We also plan to negotiate and execute other independent label and content licensing agreements subsequent to the launch of CÜR Music. When we enter into these content licensing agreements with these labels, publishers and PROs, we expect that our platform will provide end users with access to millions of sound recordings.
To secure the rights to stream musical works embodied in sound recordings over the Internet to mobile devices, the web and other platforms, we will obtain licenses from publishers and performing rights organizations, for the benefit of copyright owners and pay royalties to copyright owners or their agents. Those who own copyrights in musical works are vigilant in protecting their rights and seek royalties that are very high in relation to the revenue that can be generated from the public performance of such works. There is no guarantee that the licenses available to us now will continue to be available in the future or that such licenses will be available at the royalty rates associated with the current licenses. If we are unable to secure and maintain rights to stream musical works or if we cannot do so on terms that are acceptable to us, our ability to stream music content to our listeners, and consequently our ability to attract and retain advertisers, will be adversely impacted.
In order to stream musical works embodied in sound recordings over the internet to mobile devices, the web and other platforms, we must obtain public performance licenses and pay license fees to performing rights organizations such as Broadcast Music, Inc., or BMI, SESAC, Inc., or SESAC, and the American Society of Composers, Authors and Publishers, or ASCAP, among others. These organizations represent the rights of songwriters and music publishers, and negotiate with copyright users such as us, collect royalties and distribute those royalties to the copyright owners they represent, namely songwriters and music publishers. Performing rights organizations have the right to audit our playlists and royalty payments, and any such audit could result in disputes over whether we have paid the proper royalties. If such a dispute were to occur, we could be required to pay additional royalties and the amounts involved could be material.
We also may be subject to claims including infringement claims by music publishers and songwriters, among others, based on our usage of certain musical works and for non-payment of royalties for such musical works. If such claims are made, we could be required to pay additional damages and/or additional royalties, and the amounts involved could be material.
If the three major music labels (UMG, SME and/or WMG) and/or independent music labels, content aggregators, publishers or PROs rescind permission for us to utilize the services of our back-end content delivery and infrastructure services partner, MediaNet and/or our music intelligence partner, Gracenote, or choose not to license streaming music services such as CÜR or other sources, our revenue numbers could be negatively impacted, and our business could be materially adversely impacted.
We may not be able to negotiate economically viable agreements with independent music publishers and Performing Rights Organizations.
We must license musical work rights from an array of music publishers and performing rights organizations. We are in the process of negotiating our agreements with the major, significant and other independent music publishers, and we expect to have secured these agreements rights prior to the launch of CÜR Music. If music publishers withdraw all or a portion of their musical works from performing rights organizations for public performances by means of digital transmissions, then we may be forced to enter into direct licensing agreements with these publishers at rates which may not be economically viable, or we may be unable to reach agreement with these publishers at all, which could adversely affect our business, our ability to launch CÜR Music, to attract and retain listeners, financial condition and results of operations. We intend to enter into licensing agreements on economically viable terms with performing rights organizations, and if we are unable to secure licenses on economically viable terms, this could adversely affect our ability to operate CÜR Music and our business.
We must license and pay for the content our product delivers to its users and the content owners must grant us permission for use.
Holdings and the Company have entered into the New Music Label Agreements for sound recordings and related content with the major Music Labels. These major Music Labels have agreed to license their content to us, and have also approved CÜR Music's features and functionality that will grant our customers enhanced access to their licensed sound recordings, such as on-demand play, song skipping, and offline listening, among others. We intend to enter into content licensing agreements with certain independent labels and content aggregators prior to the launch of CÜR Music. We plan to negotiate and execute other independent label content licensing agreements subsequent to the launch of CÜR Music. We also intend to enter into content licensing agreements with music publishers and PROs. We had previously finalized our agreement with SESAC, and had sent consent decree license requests to ASCAP and BMI. Through a combination of voluntary agreements, compulsory licenses and consent decree license requests, we expect our platform will provide end users access to approximately 5-10 million sound recordings. If we are unable to secure and maintain rights to stream and cache musical works, sound recordings and related content, or cannot secure and maintain these rights on terms that are acceptable to us, our business, or ability to attract and retain listeners, financial condition and results of operations could be adversely affected.
We have no control over the providers of our content, and our business may be adversely affected if our access to music is limited or delayed. The concentration of control of content by our major providers means that even one entity, or a small number of entities working together, may unilaterally affect our access to music and other content.
We rely on music rights holders, over whom we have no control, for the content we make available on our service. We cannot guarantee that these parties will always choose to license to us.
The music industry has a high level of concentration, which means that one or a small number of entities may, on their own, take actions that adversely affect our business.
Our business may be adversely affected if our access to music is limited or delayed because of deterioration in our relationships with one or more of these rights holders or if they choose not to license to us for any other reason. Rights holders also may attempt to take advantage of their market power to seek onerous financial terms from us, which could have a material adverse effect on our financial condition and results of operations.
Even if we are able to secure rights to sound recordings from record labels and other copyright owners, artists and/or artist groups may object and may exert public or private pressure on third parties to discontinue licensing rights to us, hold back content from us, or increase royalty rates. As a result, our ability to continue to license rights to sound recordings is subject to convincing a broad range of stakeholders of the value and quality of our Service.
To the extent that we are unable to license a large amount of content or the content of certain popular artists, our business, operating results, and financial condition could be materially harmed.
Our revenue from song sales will depend on third party stores and services.
A portion of our revenue model is dependent on the sale of songs through Amazon, Apple's iTunes store, Google and/or MediaNet. If these parties or similar parties were to change their pricing structure by effectively lowering or increasing their prices, our business could be impacted negatively. In addition, if these parties were to not allow us access to sell their products or the ability to access their products in an efficient manner, our business could be negatively impacted.
We plan to rely on third parties to administer our subscriptions and credit card transactions, and we may take such management in-house in the future.
We plan to rely on a third-party company, Zuora, to manage our subscriber list and customer payments. If we decide to manage subscriptions and payments transactions in-house, we will assume the regulatory and financial risk for such user information and financial transactions. If we are unable to effectively manage our subscriber list and customer payments, we may incur adverse regulatory and financial risk for such user information and financial transactions. This could have a materially adverse effect on our business.
We will generate our created playlists and stations using data from a third party.
We plan to enter into an agreement with Gracenote to utilize their platform for generating music playlists and other information for CÜR Music users. If such third party were to decide to not let us use their data, we may not be able to enable users to create playlist and/or stations. This would have a negative impact on our business.
We relied on, and anticipate continuing to rely on, MediaNet for our music catalog.
We relied on, and anticipate continuing to rely on, MediaNet for access to our music catalog. While there are other companies that provide such services, if we had to change to another provider, we may encounter significant disruption to our service. The size of the catalog is dependent on the successful negotiation of music licenses with the major and independent music labels, publishers and performance rights organizations. If our relationship with MediaNet does not continue for any reason, it could have a negative impact on our business.
We rely on third-party providers for our principal Internet connections and technologies, databases, and network services critical to our properties and services.
We rely extensively on Amazon, Inc., and other third parties, for various hosting services, and other companies for various other Internet, database, and network services. Any errors, failures or disruption in the services provided by these third parties could significantly harm our business, results of operations and our business prospects.
The inability to distribute our application through Apple's iTunes App Store and/or Google's Google Play Store could harm our business.
We expect to be accepted by and expect to distribute our application through Apple's iTunes App Store and/or Google's Google Play Store upon launch of CÜR Music. These distribution channels may determine that our application should be cancelled at any time with little or no prior notice or penalty. Some of these App Stores, including Apple, are now, or may in the future become, competitors of ours, and could stop allowing or supporting access to our service through their products for competitive reasons. The loss of these acceptances once obtained, or the inability to obtain these acceptances, could limit the reach of our service and its attractiveness to advertisers, which, in turn, could adversely affect our business, financial condition and results of operations.
If we are unable to continue to make our technology compatible with the technologies of third-party distribution partners who make our service available to our listeners through mobile devices, consumer electronic products and automobiles, we may not remain competitive and our business may fail to grow or decline.
In order to deliver music everywhere our listeners want to hear it, we need our service to be compatible with mobile, consumer electronic, automobile and website technologies. Our service will be accessible in part through CÜR-developed or third-party developed applications that hardware manufacturers embed in, and distribute through, their devices. Connected devices and their underlying technology are constantly evolving. As internet connectivity of automobiles, mobile devices, and other consumer electronic products expands and as new internet-connected products are introduced, we must constantly adapt our technology. It is difficult to keep pace with the continual release of new devices and technological advances in digital media delivery and predict the problems we may encounter in developing versions of our applications for these new devices and delivery channels, and it may become increasingly challenging to do so in the future. In particular, the technology used for streaming the CÜR Music service in automobiles remains at an early stage and may not result in a seamless customer experience. If automobile and consumer electronics makers fail to make products that are compatible with our technology or we fail to adapt our technology to evolving requirements, our business and financial results could be harmed.
Furthermore, consumer tastes and preferences can change in rapid and unpredictable ways and consumer acceptance of these products depends on the marketing, technical and other efforts of third-party manufacturers, which is beyond our control. If consumers fail to accept the products of the companies with whom we partner or if we fail to establish relationships with makers of leading consumer products, our business could be adversely affected.
Interruptions or delays in our services or from third-party vendors could adversely affect our brand and disrupt our business.
We will rely on systems housed in our own facilities and upon third-party vendors, including bandwidth providers and data center facilities located in locations throughout the United States and potentially the world, to enable listeners to receive our content in a dependable, timely, and efficient manner. We expect to experience periodic service interruptions and delays involving our own systems and those of our third-party vendors. We do not currently maintain a live fail-over capability that would allow us to switch our streaming operations from one facility to another in the event of a service outage. Both our own facilities and those of our third-party vendors are and will be vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They also are and will be subject to break-ins, sabotage, intentional acts of vandalism, failure of physical, administrative, and technical security measures, terrorist acts, natural disasters, human error, the financial insolvency of our third-party vendors and other unanticipated problems or events. The occurrence of any of these events could result in interruptions in our service and to unauthorized access to, or alteration of, the content and data contained on our systems and that these third-party vendors store and deliver on our behalf.
Defects or errors in our service could harm our reputation, result in significant costs to us, and impair our advertisers' ability to deliver effective advertising campaigns.
The technology underlying our service, including our proprietary technology and technology provided by third-parties, may contain material defects or errors that can adversely affect our ability to operate our business and cause significant harm to our reputation. This risk is compounded by the complexity of the technology underlying our service and the large amounts of data we utilize. Errors, defects, disruptions in service or other performance problems in our service could result in the incomplete or inaccurate delivery of an ad campaign, including serving an ad campaign in an incomplete or inaccurate manner, in an incorrect geographical location or in an environment that is detrimental to the advertiser's brand health. Any such failure, malfunction, or disruption in service could result in damage to our reputation, our advertising clients withholding payment to us or the advertisers making claims or initiating litigation against us, and our giving credits to our advertiser clients toward future advertising spend. As a result, defects or errors in our service could harm our reputation, result in significant costs to us, and impair our advertisers' ability to deliver effective advertising campaigns.
System failures could significantly disrupt our operations and cause us to lose advertisers, or publishers, subscribers and/or users.
Our success will depend on the continuing and uninterrupted performance of our solutions, which we will utilize to enable our users to stream music, edit playlists, create playlists, receive payments, place ads, monitor the performance of advertising campaigns, manage our advertising inventory, among other things. Our revenue will depend on our ability to collect subscription fees and deliver ads. Sustained or repeated system failures that interrupt our ability to provide our service, could significantly reduce the attractiveness of our solutions and reduce our revenue. Our systems will be vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious human acts and natural disasters. In addition, any steps we take to increase the reliability and redundancy of our systems may be expensive and may not be successful in preventing system failures. Any such system failures could significantly disrupt our operations and cause us to lose users, subscribers and advertisers.
We will exercise no control over our third-party vendors, which will make us vulnerable to any errors, interruptions, or delays in their operations. Any disruption in the services provided by these vendors could have significant adverse impacts on our business reputation, customer relations and operating results. Upon expiration or termination of any of our agreements with third-party vendors, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us, and a transition from one vendor to another vendor could subject us to operational delays and inefficiencies until the transition is complete.
Our success will depend on our subscribers continued access to the Internet and wireless devices and the continued reliability and maintenance of the internet and cellular infrastructure.
Because our service is being designed primarily to work over the Internet and cellular networks, our revenue growth will depend on our listeners' low cost, high-speed access to the Internet, as well as the continued maintenance and development of the internet infrastructure, including the wireless internet infrastructure and the cellular network infrastructure. The delivery of our service will depend on third-party Internet service providers and wireless telecommunication companies expanding high-speed Internet access and wireless networks, maintaining reliable networks with the necessary speed, data capacity and security, and developing complementary products and services for providing reliable and timely wired and wireless internet access and services. The success of our business depends generally on the continued accessibility, maintenance and improvement of the Internet and, in particular, on access to the internet through wireless infrastructure, to permit high-quality streaming of music content and provide a convenient and reliable platform for customer interaction. All of these factors are outside of our control.
To the extent that the Internet and the wireless Internet infrastructure continue to experience an increasing number of listeners, frequency of use and expanding bandwidth requirements, the Internet and wireless networks may become congested and unable to support the demands placed on them, and their performance and reliability may decline. In addition, the wireless communications companies that provide our listeners with access to the Internet through wireless networks may raise their rates or impose data usage limits, which could cause our listeners to decrease their usage of our service or our listenership to decline. Any future Internet or wireless network outages, interruptions, bandwidth constraints, rate increases or data usage limits could adversely affect our ability to provide service to our listeners and advertising customers.
If our security systems are breached, we may face civil liability and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract listeners and advertisers.
Techniques used to gain unauthorized access are constantly evolving, and we may be unable to anticipate or prevent unauthorized access to data pertaining to our listeners, including credit card and debit card information and other personally identifiable information. If an actual or perceived breach of security occurs of our systems or a vendor's systems, we may face civil liability and public perception of our security measures could be diminished, either of which would negatively affect our ability to attract listeners, which in turn would harm our efforts to attract and retain advertisers. We also would be required to expend significant resources to mitigate the breach of security and to address related matters.
We cannot control the actions of third parties who may have access to the listener data we collect. The integration of the CÜR Music service with applications provided by third parties represents a significant growth opportunity for us, but we may not be able to control such third parties' use of listeners' data, ensure their compliance with the terms of our privacy policies, or prevent unauthorized access to, or use or disclosure of, listener information, any of which could hinder or prevent our efforts with respect to growth opportunity.
Any failure, or perceived failure, by us to maintain the security of data relating to our listeners and employees, to comply with our posted privacy policy, laws and regulations, rules of self-regulatory organizations, industry standards, and contractual provisions to which we may be bound, could result in the loss of confidence in us, or result in actions against us by governmental entities or others, all of which could result in litigation and financial losses, and could potentially cause us to lose listeners, advertisers, revenue, and employees.
Risks Related to Our Corporate Structure and Ownership of Our Securities
Our operating results may fluctuate, which makes our results difficult to predict.
Our revenue and operating results could vary significantly from quarter to quarter and year to year because of a variety of factors, many of which are outside our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. In addition to other risk factors discussed herein, factors that may contribute to the variability of our quarterly and annual results include:
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our ability to retain a user base, increase subscribers, and increase users’ time spent streaming content on our service;
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our ability to more effectively monetize mobile users of our service, particularly as the number of our users on mobile and other connected devices grow;
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our ability to effectively manage our growth;
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our ability to attract and retain existing advertisers and prove that our advertising products are effective enough to justify a pricing structure that is profitable for us;
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the effects of increased competition in our business;
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our ability to keep pace with changes in technology and our competitors;
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lack of accurate and timely reports and invoices from our rights holders and partners;
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interruptions in service, whether or not we are responsible for such interruptions, and any related impact on our reputation;
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our ability to pursue and appropriately time our entry into new geographic or content markets and, if pursued, our management of this expansion;
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costs associated with defending any litigation, including intellectual property infringement litigation;
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the impact of general economic conditions on our revenue and expenses; and
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changes in regulations affecting our business.
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Seasonal variations in user and marketing behavior also may cause fluctuations in our financial results. We expect to experience some effects of seasonal trends in user behavior due to increased internet usage and sales of streaming service subscriptions and devices during holiday periods.
We may be unable to raise enough capital to implement our business plan.
We have been largely dependent on capital raised through equity and debt financings to implement our business plan and support our operations. We raised aggregate gross proceeds of approximately $9,680,000 in our 2014 PPO (before deducting placement agent fees and expenses of approximately $1,529,000). Pursuant to the Offer to Amend and Exercise Warrants, we raised an aggregate of approximately $3,233,500 (before deducting placement agent fees and expenses of approximately $417,000). In addition, we sold Unsecured Notes in the aggregate principal amount of $2,113,500 (before deducting fees and expenses of approximately $45,000) in a private offering in 2015 (the “2015 Note Offering”), and Secured Notes in the aggregate principal amount of $2,515,000 (before deducting placement agent fees and expenses of approximately $282,454) in a private offering in 2016 (the “2016 Note Offering”). Gross proceeds from the Holdings Offerings, in the aggregate amount of $6,932,288 (before deducting fees and expenses related to the Holdings Offerings in the aggregate amount of $722,074 (including placement agent fees, legal fees and expenses and fees payable to the escrow agent)) are to be extended in a line of credit to the Company which will be reflected by the Post-Closing Line of Credit Note, for up to the full amount of the aggregate net proceeds from the Holdings Offerings. We cannot assure you that we will be able to raise the working capital as needed on terms acceptable to us, if at all. If we are unable to raise capital as needed, we may be required to reduce the scope of our business development activities, which could harm our business plans, financial condition and operating results, or cease our operations entirely, in which case, you may lose all of your investment.
We may require additional capital to support business growth and objectives, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new features or enhance our existing service, expand into additional markets around the world, improve our infrastructure, or acquire complementary businesses and technologies. Accordingly, we may need to engage, and have engaged, in equity and debt financings to secure additional funds. If we raise additional funds through future issuances of equity or convertible debt securities, our existing shareholders could suffer additional significant dilution, and any new equity securities we issue could have rights, preferences, and privileges superior to those of holders of our ordinary shares. Any debt financing we secure in the future, including pursuant to the unwind described above, also could contain restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and pursue business opportunities, including potential acquisitions. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, our ability to continue to support our business growth, acquire or retain Users, and to respond to business challenges could be significantly impaired, and our business may be harmed.
You may experience dilution of your ownership interests because of the future issuance of additional shares of our Common Stock or Preferred Stock or other securities that are convertible into or exercisable for our Common Stock or Preferred Stock.
Any future issuance of our equity or equity-backed securities may dilute then-current stockholders' ownership percentages and could also result in a decrease in the fair market value of our equity securities, because our assets would be owned by a larger pool of outstanding equity. As described above, we may need to raise additional capital through public or private offerings of our Common Stock or Preferred Stock or other securities that are convertible into or exercisable for our Common Stock or Preferred Stock. We may also issue such securities in connection with hiring or retaining employees and consultants (including stock options issued under our equity incentive plans, as payment to providers of goods and services, in connection with future acquisitions or for other business purposes. Our Board of Directors may at any time authorize the issuance of additional Common Stock or Preferred Stock without stockholder approval, subject only to the total number of authorized Common Stock and Preferred Stock set forth in our Amended and Restated Articles of Incorporation, as amended. The terms of equity securities issued by us in future transactions may be more favorable to new investors, and may include dividend and/or liquidation preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect. In addition, the future issuance of any such additional shares of Common Stock or Preferred Stock or other securities may create downward pressure on the trading price of our Common Stock. There can be no assurance that any such future issuances will not be at a price (or exercise prices) below the price at which shares of the Common Stock are then traded.
The ability of our Board of Directors to issue additional stock may prevent or make more difficult certain transactions, including a sale or merger of the Company.
We currently have authorized 310,000,000 shares of capital stock, consisting of (i) 300,000,000 shares of Common Stock, and (ii) 10,000,000 shares of Preferred Stock. As a result, our Board of Directors is authorized to issue up to 10,000,000 shares of Preferred Stock with powers, rights and preferences designated by it. Shares of voting or convertible Preferred Stock could be issued, or rights to purchase such shares could be issued, to create voting impediments or to frustrate persons seeking to effect a takeover or otherwise gain control of the Company. The ability of the Board of Directors to issue such additional shares of Preferred Stock, with rights and preferences it deems advisable, could discourage an attempt by a party to acquire control of the Company by tender offer or other means. Such issuances could therefore deprive stockholders of benefits that could result from such an attempt, such as the realization of a premium over the market price for their shares in a tender offer or the temporary increase in market price that such an attempt could cause. Moreover, the issuance of such additional shares of Preferred Stock to persons friendly to the Board of Directors could make it more difficult to remove incumbent managers and directors from office even if such change were to be favorable to stockholders generally.
We have a concentration of stock ownership and control, which may have the effect of delaying, preventing, or deterring certain corporate actions and may lead to a sudden change in our stock price.
Our Common Stock ownership is highly concentrated. Thomas Brophy, our President and Chief Executive Officer, beneficially owns 696,513 shares, or approximately 25.4% of our total outstanding Common Stock. His interests may differ significantly from your interests. As a result of the concentrated ownership of our stock, a relatively small number of stockholders, acting together, will be able to control all matters requiring stockholder approval, including the election of directors and approval of mergers and other significant corporate transactions. In addition, because our stock is so thinly traded, the sale by any of our large stockholders of a significant portion of that stockholder's holdings could cause a sharp decline in the market price of our Common Stock.
Restrictions on the use of Rule 144 by Shell Companies or Former Shell Companies could affect your ability to resale our shares.
Historically, the SEC has taken the position that Rule 144 under the Securities Act, as amended, is not available for the resale of securities initially issued by companies that are, or previously were, blank check companies like us, to their promoters or affiliates despite technical compliance with the requirements of Rule 144. The SEC has codified and expanded this position in its amendments effective on February 15, 2008 and apply to securities acquired both before and after that date by prohibiting the use of Rule 144 for resale of securities issued by shell companies (other than business transaction related shell companies) or issuers that have been at any time previously a shell company. The SEC has provided an important exception to this prohibition, however, if the following conditions are met:
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the issuer of the securities that was formerly a shell company has ceased to be a shell company;
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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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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 Form 8-K reports; and
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at least one year has elapsed from the time that the issuer filed current Form 10 type information with the SEC reflecting its status as an entity that is not a shell company.
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As such, due to the fact that we were a shell company until the effective time of the Contribution, holders of "restricted securities" within the meaning of Rule 144 will be subject to the conditions set forth herein. Therefore, sales under Rule 144 are prohibited for at least one year from the date this report is filed.
There currently is a limited trading market for our Common Stock. Failure to maintain a trading market could negatively affect the value of our Common Stock and make it difficult or impossible for you to sell your shares.
As of September 29, 2016, the Company’s Common Stock was downgraded from the OTC Markets OTCQB marketplace ("OTCQB") to the OTC Pink marketplace. Our Common Stock is quoted on the OTC Pink Marketplace under the symbol "CURM." The OTC Pink Marketplace is a thinly traded market and lacks the liquidity of certain other public markets with which some investors may have more experience. We may not ever be able to satisfy the listing requirements for our Common Stock to be listed on a national securities exchange, which is often a more widely-traded and liquid market. Some, but not all, of the factors that may delay or prevent the listing of our Common Stock on a more widely-traded and liquid market, include the following:
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our stockholders' equity may be insufficient;
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the market value of our outstanding securities may be too low;
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our net income from operations may be too low;
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our Common Stock may not be sufficiently widely held;
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we may not be able to secure market makers for our Common Stock; and
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we may fail to meet the rules and requirements mandated by the several exchanges and markets to have our Common Stock listed.
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Should we fail to satisfy the initial listing standards of the national exchanges, or our Common Stock is otherwise rejected for listing and remains listed on the OTC Pink Marketplace, or suspended from the OTC Pink Marketplace, the trading price of our Common Stock could suffer and the trading market for our Common Stock may be less liquid and our Common Stock price may be subject to increased volatility.
Our Common Stock is subject to the "penny stock" rules of the SEC and the trading market in the securities is limited, which makes transactions in the stock cumbersome and may reduce the value of an investment in the stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
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that a broker or dealer approve a person's account for transactions in penny stocks; and
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the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
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In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form sets forth:
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the basis on which the broker or dealer made the suitability determination; and
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of Common Stock and cause a decline in the market value of stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
Our stock may be traded infrequently and in low volumes, so you may be unable to sell your shares at or near the quoted bid prices if you need to sell your shares.
Until our Common Stock is listed on a national securities exchange such as the NYSE MKT and NASDAQ, we expect our Common Stock to remain eligible for quotation on the OTC Pink Marketplace or the OTCQB, or on another over-the-counter quotation system. In those venues, however, the shares of our Common Stock may trade infrequently and in low volumes, meaning that the number of persons interested in purchasing our Common Stock at or near bid prices at any given time may be relatively small or non-existent. An investor may find it difficult to obtain accurate quotations as to the market value of our Common Stock or to sell his or her shares at, or near, bid prices or at all. In addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending or selling our Common Stock, which may further affect the liquidity of our Common Stock. This would also make it more difficult for us to raise capital.
If securities analysts do not initiate coverage or continue to cover our Common Stock or publish unfavorable research or reports about our business, this may have a negative impact on the market price of our Common Stock.
The trading market for our Common Stock will depend on the research and reports that securities analysts publish about our business and the Company. It is often more difficult to obtain analyst coverage for companies whose securities are traded on the OTC Pink Marketplace to the OTCQB. We do not have any control over securities analysts. There is no guarantee that securities analysts will cover our Common Stock. If securities analysts do not cover our Common Stock, the lack of research coverage may adversely affect its market price. If we are covered by securities analysts, and our stock is the subject of an unfavorable report, our stock price and trading volume would likely decline. If one or more of these analysts ceases to cover the Company or fails to publish regular reports on the Company, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
We do not anticipate paying dividends on our Common Stock, and investors may lose the entire amount of their investment.
To date, cash dividends have not been declared or paid on our Common Stock, and we do not anticipate such a declaration or payment for the foreseeable future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive any funds absent a sale of their shares of Common Stock, subject to the limitation outlined herein. If we do not pay dividends, our Common Stock may be less valuable because a return on your investment will only occur if our stock price appreciates. We cannot assure stockholders of a positive return on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their investment.
The price of our Common Stock may become volatile, which could lead to losses by investors and costly securities litigation.
The trading price of our Common Stock is likely to be highly volatile and could fluctuate in response to factors such as:
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actual or anticipated variations in our operating results;
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announcements of developments by us or our competitors;
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announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
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adoption of new accounting standards affecting our industry;
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additions or departures of key personnel;
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sales of our Common Stock or other securities in the open market;
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changes in our industry;
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regulatory and economic developments, including our ability to obtain working capital financing;
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our ability to execute our business plan; and
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other events or factors, many of which are beyond our control.
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The stock market is subject to significant price and volume fluctuations. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been initiated against the public company. Litigation initiated against us, whether or not successful, could result in substantial costs and diversion of our management's attention and resources, which could harm our business and financial condition.
Being a public company is expensive and administratively burdensome.
As a public reporting company, we are subject to the information and reporting requirements of the Securities Act of 1933, as amended (the "Securities Act"), the Securities Exchange Act of 1934, as amended (the "Exchange Act") and other federal securities laws, rules and regulations related thereto, including compliance with the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"). Complying with these laws and regulations requires the time and attention of our Board of Directors and management, and increases our expenses. Among other things, we are required to:
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maintain and evaluate a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board ("PCAOB");
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maintain policies relating to disclosure controls and procedures;
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prepare and distribute periodic reports in compliance with our obligations under federal securities laws;
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institute a more comprehensive compliance function, including with respect to corporate governance; and
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involve, to a greater degree, our outside legal counsel and accountants in the above activities.
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The costs of preparing and filing annual and quarterly reports, proxy statements, when required, and other information with the SEC and furnishing audited reports to stockholders is expensive and much greater than that of a privately-held company, and compliance with these rules and regulations may require us to hire additional financial reporting, internal controls and other finance personnel, and will involve a material increase in regulatory, legal and accounting expenses and the attention of management. There can be no assurance that we will be able to comply with the applicable regulations in a timely manner, if at all. In addition, being a public company makes it more expensive for us to obtain director and officer liability insurance. In the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain this coverage. These factors could also make it more difficult for us to attract and retain qualified executives and members of our Board of Directors, particularly directors willing to serve on an audit committee that we expect to establish.
The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain qualified board of director members.
As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the listing requirements of the OTCQB, on which we will trade, and other applicable securities rules and regulations. Compliance with these rules and regulations increase our legal and financial compliance costs, make some activities difficult, time-consuming, or costly, and impact demand on our systems and resources. The Exchange Act requires, among other things, that we file annual and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results.
In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Being a public company combined with these the rules and regulations make it more expensive for us to obtain director and officer liability insurance. These factors also make it more difficult for us to attract and retain qualified senior management and members of our Board of Directors, particularly to serve on our audit committee and compensation committee.
We are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our assessment of our internal control over financial reporting in a timely manner, or these internal controls may be determined to be ineffective, which may adversely affect investor confidence in our company and, as a result, the value of our ordinary shares.
We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment needs to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on our management’s assessment of our internal controls.
If we are unable to assert that our internal control over financial reporting are effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our shares to decline.
We have identified material weaknesses in our disclosure controls and procedures. We will need to allocate significant resources to address these material weaknesses and make our disclosure controls and procedures effective.
We have adopted disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we submit under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to management, including principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. As of December 31, 2017, management concluded that our disclosure controls and procedures were not effective in light of the material weaknesses found in our internal controls over financial reporting as set forth in the “Part II, Item 9A. Controls and Procedures” of this Annual Report.
We are taking steps to address existing material weaknesses in our disclosure control and procedures. These efforts require significant time and resources. If we are unable to improve our internal financial reporting controls and procedures, our reported financial information may be inaccurate, and we will encounter difficulties in the audit or review of our financial statements by our independent auditors, which in turn may have material adverse effects on our ability to prepare financial statements in accordance with generally accepted accounting principles in the United States and to comply with SEC reporting obligations.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes Oxley Act of 2002 could prevent us from producing reliable financial reports or identifying fraud. In addition, current and potential stockholders could lose confidence in our financial reporting, which could have an adverse effect on our stock price.
We are subject to Section 404 of the Sarbanes-Oxley Act of 2002. Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud, and a lack of effective controls could preclude us from accomplishing these critical functions. We are required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, in connection with PCAOB Auditing Standard No. 5, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017 and concluded that our internal controls and procedures were not effective due to (a) lack of a functioning Audit Committee, Compensation Committee or Nominating and Corporate Governance Committee, and a lack of independent directors on our Board of Directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (b) inadequate segregation of duties consistent with control objectives, including lack of personnel resources and technical accounting expertise within the accounting function; and (c) ineffective controls over period end financial disclosure and reporting processes.. In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls we plan to create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function as funds are available.
We are an emerging growth company and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our Common Stock less attractive to investors.
We are an emerging growth company under the JOBS Act. For as long as we continue to be an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation and any golden parachute payments not previously approved, exemption from the requirement of auditor attestation in the assessment of our internal control over financial reporting and exemption from any requirement that may be adopted by the PCAOB. If we do, the information that we provide stockholders may be different than what is available with respect to other public companies. We cannot predict if investors will find our Common Stock less attractive because we will rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and our stock price may be more volatile.
Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to take advantage of this extended transition period. Since we will not be required to comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies, our financial statements may not be comparable to the financial statements of companies that comply with the effective dates of those accounting standards
We will remain an emerging growth company until the earliest of (1) the end of the fiscal year in which the market value of our Common Stock that is held by non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (2) the end of the fiscal year in which we have total annual gross revenues of $1 billion or more during such fiscal year, (3) the date on which we issue more than $1 billion in non-convertible debt in a three-year period or (4) December 31, 2018, the end of the fiscal year following the fifth anniversary of the date of the first sale of our Common Stock pursuant to an effective registration statement filed under the Securities Act. Decreased disclosures in our SEC filings due to our status as an "emerging growth company" may make it harder for investors to analyze our results of operations and financial prospects.
Even after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company," which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this Annual Report and our periodic reports and proxy statements. Some investors may find our Common Stock less attractive because we rely on these exemptions, there may be a less active trading market for our Common Stock and our stock price may be more volatile.
Delaware law and our Certificate of Incorporation could discourage a change in control, or an acquisition of us by a third party, even if the acquisition would be favorable to you, and thereby adversely affect existing stockholders.
The Delaware General Corporation Law contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our Company, even when these attempts may be in the best interests of stockholders. Delaware law imposes conditions on certain business combination transactions with "interested stockholders." These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
Our Certificate of Incorporation empowers the Board of Directors to establish and issue a class of Preferred Stock, and to determine the rights, preferences and privileges of the Preferred Stock. These provisions give the Board of Directors the ability to deter, discourage or make more difficult a change in control of our company, even if such a change in control could be deemed in the interest of our stockholders or if such a change in control would provide our stockholders with a substantial premium for their shares over the then-prevailing market price for the Common Stock.
We may not be able to utilize all, or any, of our net operating loss carry-forwards.
We have significant net operating loss carry-forwards in the United States. As of December 31, 2017, the Company had potentially utilizable Federal and state net operating loss tax carryforwards of approximately $20,578,912. The net operating loss tax carryforwards will start to expire in 2033. In certain jurisdictions, if we are unable to earn sufficient income or profits to utilize such carry-forwards before they expire, they will no longer be available to offset future income or profits.
In the United States, utilization of these net operating loss carry-forwards may be subject to a substantial annual limitation if there is an ownership change within the meaning of Section 382 of the Internal Revenue Code (“Section 382”). In general, an ownership change, as defined by Section 382, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50% of the outstanding stock of a company by certain stockholders or public groups. Since our formation, we have raised capital through the issuance of Common Stock, and other securities of ours, on several occasions, and we may continue to do so, which, combined with current or future shareholders’ disposition of ordinary shares, may or may not have resulted in such an ownership change. Such an ownership change may limit the amount of net operating loss carry-forwards that can be utilized to offset future taxable income.