|
As filed with the Securities and Exchange Commission on January 16, 2008
|
Registration
No. 333-148033
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-3
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES
ACT OF 1933
(Amendment
No. 1)
DIGITALFX
INTERNATIONAL, INC.
(Exact
Name of Registrant as Specified in its Charter)
|
Florida
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65-0358792
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S
Employer
Identification
No.)
|
3035
East Patrick Lane, Suite 9
Las
Vegas, Nevada 89120
(702)
938-9300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Lorne
Walker, Chief Financial Officer
DigitalFX
International, Inc.
3035
East Patrick Lane, Suite 9
Las
Vegas, Nevada 89120
(702)
938-9300
Copy
to:
Gregory
Akselrud, Esq.
Stubbs
Alderton & Markiles, LLP
15260
Ventura Boulevard, 20
th
Floor
Sherman
Oaks, California 91403
(818)
444-4500
(Name,
Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent
for Service)
Approximate
date of commencement of proposed sale to the public: From time to time after
the
effective date of this Registration Statement.
If
the
only securities being registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following
box:
o
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box:
x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
o
If
this
Form is a registration statement pursuant to General Instruction I.D. or a
post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the
following box.
o
If
this
Form is a post-effective amendment to a registration statement filed pursuant
to
General Instruction I.D. filed to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act, check
the following box.
o
Subject
to Completion, Dated January 16, 2008
DIGITALFX
INTERNATIONAL, INC.
4,387,504
Shares
Common
Stock
This
prospectus relates to the offer and sale from time to time of up to
4,387,504
shares
of
our common stock that are issuable to the shareholders named in the “Principal
and Selling Shareholders” section of this prospectus. The prices at which the
selling shareholders may sell the shares in this offering will be determined
by
the prevailing market price for the shares or in negotiated transactions. We
will not receive any of the proceeds from the sale of the shares. We will bear
all expenses of registration incurred in connection with this offering. The
selling shareholders whose shares are being registered will bear all selling
and
other expenses.
On
November 30, 2006, the Securities and Exchange Commission (“SEC”) declared
effective a registration statement on Form SB-2 (File No. 333-136855) we
initially filed with the SEC on August 23, 2006, which filing was subsequently
amended on October 5, November 11 and November 28, 2006, registering the resale
by certain of our stockholders of an aggregate of 22,095,892 shares of our
common stock. This previously filed registration statement remains
effective.
On
May
11, 2007, the SEC declared effective a registration statement on Form SB-2
(File
No. 333-140047) we initially filed with the SEC on January 17, 2007, which
filing was subsequently amended on March 27, 2007, May 1, 2007 and May 11,
2007,
registering the resale by certain of our stockholders of an aggregate of
1,000,000 shares of our common stock. This previously filed registration
statement remains effective.
Our
common stock is traded on the American Stock Exchange under the symbol “DXN.” On
January 14, 2008, the last reported sales price of our common stock on the
American Stock Exchange was $1.57 per share.
Investing
in our common stock involves risks. See “Risk Factors” beginning on page
5.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is ______________
TABLE
OF CONTENTS
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Page
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Prospectus
Summary
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1
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Risk
Factors
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5
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Forward-looking
Statements
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14
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Use
of Proceeds
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14
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Private
Placement of Convertible Notes and Warrants
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15
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Selling
Shareholders
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21
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Plan
of Distribution
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23
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Legal
Matters
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25
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Experts
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25
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Disclosure
of Commission Position on Indemnification for Securities Act
Liabilities
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25
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Where
You Can Find More Information
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26
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You
should rely only on the information contained in this prospectus or any
supplement. We have not authorized anyone to provide information that is
different from that contained in this prospectus. The information contained
in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or of any sale of our common
stock.
PROSPECTUS
SUMMARY
This
summary highlights selected information contained in greater detail elsewhere
in
this prospectus. You should read the entire prospectus carefully before making
an investment decision, including “Risk Factors” and the consolidated financial
statements and the related notes. References in this prospectus to “DigitalFX”
and “the Company” refer to DigitalFX International, Inc. and our consolidated
subsidiaries.
Our
Business
We
are a
digital communications and social networking company that, directly and through
a multi-tiered affiliate program, offers a suite of proprietary digital
communication tools, including video email, video instant messaging, live
webcasting, podcasting, blogging, and digital vault storage. Our social
networking website,
www.helloWorld.com
,
operated by our wholly-owned subsidiary DigitalFX Networks, LLC, a Nevada
limited liability company, targets users from ages 18 to 65. The site features
a
full suite of digital communication tools, and affiliates and retail customers
pay a monthly subscription fee to use the tools and participate in the social
network. Additionally, our website,
www.vmdirect.com
,
operated by our wholly-owned subsidiary VMdirect, L.L.C., a Nevada limited
liability company (“VMdirect”) offers affiliates the tools necessary to
effectively market and distribute our digital communication tools.
Our
multi-tiered affiliate program drives the growth of our business. Rather than
using traditional advertising and marketing methods, we chose to create a
multi-tiered affiliate program to develop new customers. Affiliates earn retail
commissions on a monthly residual basis by acquiring new retail customers for
us. Affiliates earn additional commissions from the sales activities of
affiliates who they personally enroll. These rewards are extended for up to
eight generations of affiliates, meaning that an affiliate earns a commission
on
the sales of the affiliates they have personally enrolled as well as on the
sales of second-, third-, and fourth-generation affiliates, potentially eight
levels deep. Our affiliate compensation plan is structured on a 3x8 matrix,
meaning affiliates can each enroll three affiliates underneath themselves,
before they begin to build their next organizational level. The layers of three
continue down a total of eight levels.
The
market for our services is relatively new and rapidly evolving and growing.
Social networking and streaming media are areas of high interest, dominating
both the consumer and financial press. According to the Aberdeen Group, the
streaming media industry is expected to grow from $2 billion in 2004 to an
estimated $12 billion by 2008. We expect that the annual rate of growth of
adoption of streaming media tools in 2008 will exceed 2007 as more users become
comfortable with this technology, the Internet and personal computer
usage.
Social
networking sites are also among the fastest growing Web destinations. Other
trends in our favor include the dispersion of families and friends around the
country and globe who want to visually communicate on a regular basis and the
desire of many companies to reduce resources spent on employee air and
automobile travel. We differentiate ourselves from other social networking
sites
by allowing our members to retain copyright and ownership of all the content
that they have created.
Our
Industry
We
compete against well-capitalized streaming media and Internet companies as
well
as smaller companies. The market for our products and services is highly
competitive. The streaming media sector is evolving and growing rapidly, and
companies are continually introducing new products and
services.
Our
History and Contact Information
We
were
incorporated in the State of Florida on January 23, 1991 under the name Speak
Up
America Association, Inc. We changed our name on December 23, 1995 to Golf
Ball
World, Inc. and again on May 4, 1999 to Qorus.com, Inc. Prior to November 2001,
we provided intelligent message communications services to enterprises in the
travel and hospitality sectors. In November 2001, we sold substantially all
of
our assets to Avery Communications, Inc. after which we continued without
material business assets, operations or revenues. On June 22, 2004, we
consummated the transactions contemplated by a Securities Purchase Agreement
(the “Purchase Agreement”) dated June 10, 2004, by and among the Company,
Keating Reverse Merger Fund, LLC (“KRM Fund”), Thurston Interests, LLC
(“Thurston”) and certain other shareholders of the Company. The transactions
resulted in a change of control whereby KRM Fund became our majority
shareholder.
From
November 2001 through June 15, 2006, we were a public “shell” company with
nominal assets.
On
May
23, 2006, we entered into an Exchange Agreement (the “Exchange Agreement”) with
VMdirect, L.L.C., a Nevada limited liability company (“VMdirect”), the members
of VMdirect holding a majority of its membership interests (together with all
of
the members of VMdirect, the “VMdirect Members”), and KRM Fund. The closing of
the transactions contemplated by the Exchange Agreement occurred on June 15,
2006. At the closing, we acquired all of the outstanding membership interests
of
VMdirect (the “Interests”) from the VMdirect Members, and the VMdirect Members
contributed all of their Interests to us. In exchange, we issued to the VMdirect
Members 1,014,589 shares of our Series A Convertible Preferred Stock, par value
$0.01 per share (the “Preferred Shares”), which, as a result of the approval by
a substantial majority of our outstanding shareholders entitled to vote and
the
approval by our board of directors on June 22, 2006, of amendments to our
articles of incorporation that (i) changed our name to DigitalFX International,
Inc., (ii) increased our authorized number of shares of common stock to
100,000,000, and (iii) adopted a 1-for-50 reverse stock split, on August 1,
2006
converted into approximately 21,150,959 shares of our common stock.
At
the
closing, VMdirect became our wholly-owned subsidiary. The exchange transaction
was accounted for as a reverse merger (recapitalization) with VMdirect deemed
to
be the accounting acquirer, and us deemed to be the legal acquirer.
As
such,
the financial statements of the company reflect the historical activity of
VMdirect since its inception.
All financial information in this document
is that of our company and its consolidated subsidiaries.
Prior
to
August 23, 2007, bid and ask prices for shares of our common stock were quoted
on the OTC Bulletin Board under the symbol “DFXN.” On August 23, 2007, our
common stock began trading on the American Stock Exchange under the symbol
“DXN.”
The
address of our principal executive office is 3035 East Patrick Lane, Suite
9,
Las Vegas, Nevada 89120, and our telephone number is (702)
938-9300.
The
Offering
|
Common
stock offered
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|
4,387,504
shares by the selling shareholders, including:
·
3,250,004
shares underlying convertible promissory notes; and
·
1,137,500
shares underlying warrants
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|
|
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Common
stock outstanding
before
this offering
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24,919,710
shares
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Common
stock to be outstanding
after
this offering
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24,919,710
shares
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Use
of proceeds
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We
will not receive any of the proceeds from the sale of shares of our
common
stock by the selling shareholders. See “Use of
Proceeds.”
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American
Stock Exchange symbol
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“DXN”
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Risk
Factors
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See
“Risk Factors” beginning on page 5 for a discussion of factors that you
should consider carefully before deciding to purchase our common
stock.
|
In
the
table above, the number of shares to be outstanding after this offering is
based
on 24,919,710 shares of common stock outstanding as of January 14, 2008.
The
number of shares of common stock to be outstanding after this offering does
not
reflect the issuance of the following shares:
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|
·
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3,250,004
shares issuable upon the conversion of convertible promissory notes
at a
weighted average conversion price of $2.80 per share
which
are being offered for sale under the prospectus
;
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·
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1,137,500
shares issuable upon the exercise of outstanding warrants at a weighted
average exercise price of $2.93 per share which are being offered
for sale
under the prospectus;
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·
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524,706
shares of common stock issuable upon the exercise of common stock
purchase
warrants outstanding as of January 14, 2008, with a weighted average
exercise price of approximately $1.46 per
share;
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·
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1,364,210
shares of common stock issuable upon the exercise of stock options
outstanding as of January 14, 2008, with a weighted average exercise
price
of approximately $3.14 per share;
and
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·
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560,746
additional shares of common stock reserved for issuance under our
2006
Stock Incentive Plan, as of January 14,
2008.
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Summary
Financial Data
The
following historical financial information should be read in conjunction
with
the section entitled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,”
Amendment
No. 1 to our annual report on Form 10-KSB filed with the SEC on March 19,
2007
(for the years ended December 31, 2006 and 2005) and our quarterly report
on
Form 10-QSB filed with the SEC on November 14, 2007 (for the nine months
ended
September 30, 2007 and 2006), and the related notes, incorporated by reference
into
this prospectus. The information presented is in thousands, except
share and per share data. The historical results are not necessarily indicative
of results to be expected for any future periods.
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Years Ended December 31,
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Nine Months Ended September 30,
(unaudited)
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Statement
of Operations Data:
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2006
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2005
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2007
|
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2006
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|
|
Revenues
|
|
$
|
22,800
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|
$
|
5,068
|
|
$
|
17,987
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|
$
|
16,232
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|
|
Gross
Profit
|
|
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18,356
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|
3,820
|
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|
15,205
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12,960
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Operating
Expenses
|
|
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17,191
|
|
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4,987
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|
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16,660
|
|
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11,910
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|
Other
(income) expense, net
|
|
|
572
|
|
|
56
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|
|
(203
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)
|
|
681
|
|
|
Income
(Loss) before provision for income taxes
|
|
|
593
|
|
|
(1,223
|
)
|
|
(1,252
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)
|
|
369
|
|
|
Provision
(benefit) for income taxes
|
|
|
113
|
|
|
-
|
|
|
(281
|
)
|
|
168
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|
|
Net
Income (Loss)
|
|
|
480
|
|
|
(1,223
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)
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(971
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)
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201
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|
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Net
Income (Loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
$
|
0.01
|
|
|
Fully
diluted
|
|
$
|
0.02
|
|
$
|
(0.06
|
)
|
$
|
(0.04
|
)
|
$
|
0.01
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
|
21,032,218
|
|
|
19,631,179
|
|
|
23,797,358
|
|
|
20,597,256
|
|
|
Fully
diluted
|
|
|
22,832,198
|
|
|
19,631,179
|
|
|
23,797,358
|
|
|
23,141,961
|
|
|
Balance
Sheet Data:
|
|
September 30, 2007
(unaudited)
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|
December 31, 2006
|
|
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Total
Assets
|
|
$
|
9,143
|
|
$
|
7,873
|
|
|
Current
Liabilities
|
|
|
3,561
|
|
|
2,789
|
|
|
Stockholders’
equity (deficit)
|
|
|
5,582
|
|
|
5,084
|
|
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully
consider the following risk factors and all other information contained in
this
prospectus before purchasing shares of our common stock. If any of the following
risks occur, our business, financial condition and/or results of operations
could be materially and adversely affected. In that case, the trading price
of
our common stock could decline, and you may lose some or all of your
investment.
Risks
Related to Our Business
Our
operating results may fluctuate significantly based on customer acceptance
of
our products.
Management
expects that we will experience substantial variations in our net sales and
operating results from quarter to quarter due to customer acceptance of our
products. We rely on sales by our affiliates to generate significant revenues
for us. If customers don’t accept our products, our sales and revenues would
decline, resulting in a reduction in our operating income.
Customer
interest for our products could also be impacted by the timing of our
introduction of new products. If our competitors introduce new products around
the same time that we issue new products, and if such competing products are
superior to our own, customers’ desire for our products could decrease,
resulting in a decrease in our sales and revenues. To the extent that we
introduce new products and customers decide not to migrate to our new products
from our older products, our revenues could be negatively impacted due to the
loss of revenue from those customers. In the event that our newer products
do
not sell as well as our older products, we could also experience a reduction
in
our revenues and operating income.
As
a
result of fluctuations in our revenue and operating expenses that may occur,
management believes that period-to-period comparisons of our results of
operations are not a good indication of our future performance.
While
we previously achieved an operating profit, we have a history of operating
losses and there can be no assurance that we can achieve, maintain or increase
profitability.
While
we
previously achieved operating profits, we did not achieve an operating profit
for the nine months ended September 30, 2007, and we have a history of operating
losses. Given the competitive and evolving nature of the industry in which
we
operate, the technical difficulties we recently experienced with version 5.0
of
the Studio product, and potential technical difficulties we may encounter in
the
future, we may not be able to achieve, sustain or increase profitability and
our
failure to do so would adversely affect our business, including our ability
to
raise additional funds.
We
may not be able to effectively manage our growth.
Our
strategy envisions growing our business. To date, our growth has been derived
primarily from the growth of our multi-tiered affiliate base and we intend
to
continue to employ this growth strategy. To manage anticipated growth, we plan
to expand our technology to handle increasing volume on our websites and to
expand our administrative and marketing organizations to accommodate larger
numbers of our affiliates. We must also effectively manage our relationships
with the increasing number of retail customers/users of our products. We will
need to hire, train, supervise and manage new employees. These processes are
time consuming and expensive, will increase management responsibilities and
will
divert management attention. Any growth in or expansion of our business is
likely to continue to place a strain on our management and administrative
resources, infrastructure and systems. We cannot assure you that we will be
able
to:
|
|
·
|
sufficiently
and timely improve our technology to handle increasing volume on
our
websites;
|
|
|
·
|
expand
our administrative and marketing systems effectively, efficiently
or in a
timely manner to accommodate increasing numbers of our affiliates;
or
|
|
|
·
|
allocate
our human resources optimally.
|
Our
inability or failure to manage our growth and expansion effectively could result
in strained affiliate and customer relationships based on dissatisfaction with
our service to these groups, our failure to meet demand for our products and/or
increased expenses to us to resolve these issues, and a consequent significant
decrease in the number of our affiliates and end users. Any significant decrease
in our affiliate base or the number of retail customers, or the election of
new
affiliates to sign on for lower level packages would result in a decrease in
revenues.
If
we do not successfully generate additional products and services, or if such
products and services are developed but not successfully commercialized, we
could lose revenue opportunities.
Currently,
our primary business is the sale of our studio suite of products to our
affiliates. Our future success depends, in part, on our ability to expand our
product and service offerings. To that end we may engage in product development
activities to provide additional products and related services to our customers.
The process of developing new products is complex and uncertain, and if we
fail
to accurately predict customers’ changing needs and emerging technological
trends our business could be harmed. We must commit significant resources to
developing new products before knowing whether our investments will result
in
products the market will accept. Furthermore, we may not execute successfully
on
commercializing those products because of errors in product planning or timing,
technical hurdles that we fail to overcome in a timely fashion, or a lack of
appropriate resources. This could result in competitors providing those
solutions before we do and a reduction in net sales and earnings.
The
success of new products depends on several factors, including proper new product
definition, timely completion and introduction of these products,
differentiation of new products from those of our competitors, and market
acceptance of these products. There can be no assurance that we will
successfully identify new product opportunities, develop and bring new products
to market in a timely manner, or achieve market acceptance of our products
or
that products and technologies developed by others will not render our products
or technologies obsolete or noncompetitive.
If
we continue to experience technological difficulties with our products our
affiliate base could shrink, customer growth could decrease and our business
could suffer.
In
November 2006, we released the 5.0 version of our product called The Studio
that
included expanded functionality and features. The testing we conducted did
not
reveal various technical difficulties that remained with the product. In
addition, the 5.0 version rolled out in November 2006 did not contain all of
the
enhancements that our affiliates were expecting due to development delays.
The
result was a product with lower than expected functionality and operating
difficulties. As a result of these issues, our affiliate network has not
marketed our products and the business opportunity as widely as projected in
our
plan. While we have taken steps to ameliorate these difficulties, to the extent
that we continue to encounter technical difficulties, to the extent that
enhancements to the products we release or new products have technical
difficulties, the reputation of our products could suffer, our affiliate base
could shrink and our ability to generate new customers, and consequently
revenue, would be negatively impacted. Our ability to grow our business would
also be negatively impacted.
Ninety-five
percent of our revenues for the nine months ended September 30, 2007 have
been
derived from sales of our products and services to our multi-tier affiliates,
and our future success depends on our ability to grow our affiliate base,
as
well as to expand our retail subscriptions and initiate advertising
revenue.
To
date,
our revenue growth has been derived primarily from the growth of our
multi-tiered affiliate base. Rather than using traditional advertising and
sales
methods, we chose to create a multi-tiered affiliate program to develop new
customers. Affiliates earn retail commissions on a monthly residual basis by
acquiring new customers for us. Affiliates earn additional commissions from
the
sales activities of affiliates who they personally enroll. These rewards are
extended for up to eight generations of affiliates, meaning that an affiliate
earns a commission on the sales of the affiliates they have personally enrolled
as well as on the sales of second-, third-, and fourth-generation affiliates,
potentially eight levels deep. Our affiliate compensation plan is structured
on
a 3x8 matrix, meaning affiliates can each enroll three affiliates underneath
themselves before they begin to build their next organizational level. The
layers of three continue down a total of eight levels.
Our
success and the planned growth and expansion of our business depend on us
achieving greater and broader acceptance of our products and expanding our
customer base. There can be no assurance that customers will subscribe to our
product offerings or that we will continue to expand our customer base. Though
we plan to continue to provide tools to our affiliates to enable them to
generate sales, we cannot guarantee that the time and resources we spend on
these efforts will generate a commensurate increase in users of our product
offerings. If we are unable to effectively market or expand our product
offerings, and if our affiliate enrollment does not continue to grow, we will
be
unable to grow and expand our business or implement our business strategy.
This
could materially impair our ability to increase sales and revenue and materially
and adversely affect our margins, which could harm our business and cause our
stock price to decline.
Our
future success depends largely upon our ability to attract and retain a large
active base of affiliates who purchase and sell our products. We cannot give
any
assurances that the productivity of our affiliates will continue at their
current levels or increase in the future. Several factors affect our ability
to
attract and retain a significant number of affiliates, including:
|
|
·
|
on-going
motivation of our affiliates;
|
|
|
·
|
general
economic conditions;
|
|
|
·
|
significant
changes in the amount of commissions
paid;
|
|
|
·
|
public
perception and acceptance of direct
selling;
|
|
|
·
|
public
perception and acceptance of us and our
products;
|
|
|
·
|
the
limited number of people interested in pursuing direct selling as
a
business;
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our
ability to provide proprietary quality-driven products that the market
demands; and
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·
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competition
in recruiting and retaining active
affiliates.
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Our
ability to conduct business, particularly in international markets, may be
affected by political, economic, legal and regulatory risks, which could
adversely affect the expansion of our business in those
markets.
Our
ability to capitalize on growth in new international markets and to maintain
the
current level of operations in our existing international markets is exposed
to
risks associated with international operations, including:
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·
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the
possibility that a foreign government might ban or severely restrict
our
business method of selling through our affiliates, or that local
civil
unrest, political instability or changes in diplomatic or trade
relationships might disrupt our operations in an international
market;
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·
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the
possibility that a government authority might impose legal, tax or
other
financial burdens on affiliates, as direct sellers, or on our company
due,
for example, to the structure of our operations in various
markets;
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·
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the
possibility that a government authority might challenge the status
of our
affiliates as independent contractors or impose employment or social
taxes
on our affiliates;
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our
ability to staff and manage international
operations;
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handling
the various accounting, tax and legal complexities arising from our
international operations; and
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understanding
cultural differences affecting non-U.S.
customers.
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We
currently conduct activities in Australia, Canada, Ireland, Mexico, New Zealand,
the United Kingdom, Germany and Spain. We have not been affected in the past
by
any of the potential political, legal or regulatory risks identified above.
While we do not consider these risks to be material in the foreign countries
in
which we currently operate, they may be material in other countries where we
may
expand our business.
We
are
also subject to the risk that due to legislative or regulatory changes in one
or
more of our present or future markets, our marketing system could be found
not
to comply with applicable laws and regulations or may be prohibited. Failure
to
comply with applicable laws and regulations could result in the imposition
of
legal fines and/or penalties which would increase our operating costs. We may
also be required to comply with directives or orders from various courts or
applicable regulatory bodies to conform to the requirements of new legislation
or regulation, which would detract management’s attention from the operation of
our business. Further we could be prohibited from distributing products through
our marketing system or may be required to modify our marketing
system.
Our
services are priced in local currency. As a result, our financial results could
be affected by factors such as changes in foreign currency exchange rates or
weak economic conditions in foreign markets. We do not currently engage in
hedging activities or other actions to decrease fluctuations in operating
results due to changes in foreign currency exchange rates, although we may
do so
when the amount of revenue obtained from sources outside of the United States
becomes significant.
We
also face legal and regulatory risks in the United States, the affect of which
could reduce our sales and revenues.
Our
marketing program is subject to a number of federal and state regulations
administered by the Federal Trade Commission and various state agencies in
the
United States, directed at preventing fraudulent or deceptive schemes by
ensuring that product sales are made to consumers of the products and that
compensation, recognition, and advancement within the marketing organization
are
based on the sale of products rather than investment in the organization or
other non-sales-related criteria. These regulatory requirements do not include
“bright line” rules and are inherently fact-based. Thus, even though we believe
that our marketing program complies with applicable federal and state laws
or
regulations, we are subject to the risk that a governmental agency or court
could determine that we have failed to meet these requirements in a particular
case. Such an adverse determination could require us to make modifications
to
our marketing system, increasing our operating expenses. The negative publicity
associated with such an adverse determination could also reduce affiliate and
end user demand for our products, which would consequently reduce our sales
and
revenues.
If
we incur substantial liability from litigation, complaints, or enforcement
actions resulting from misconduct by our multi-level affiliates, our financial
condition could suffer.
Although
we use various means to address misconduct by our multi-level affiliates,
including maintaining policies and procedures to govern the conduct of our
affiliates and conducting training seminars, it is still difficult to detect
and
correct all instances of misconduct. Violations of our policies and procedures
by our affiliates could lead to litigation, formal or informal complaints,
enforcement actions, and inquiries by various federal, state, or foreign
regulatory authorities against us and/or our affiliates. Litigation, complaints,
and enforcement actions involving us and our affiliates could consume
considerable amounts of financial and other corporate resources, which could
have a negative impact on our sales, revenue, profitability and growth
prospects.
We
have
not been, and are not currently, subject to any material litigation, complaint
or enforcement action regarding affiliate misconduct by any federal, state
or
foreign regulatory authority.
We
may be unable to compete successfully against existing and future competitors,
which could decrease our revenue and margins and harm our
business.
The
digital communications and social networking industries are highly competitive.
Our future growth and financial success depend on our ability to further
penetrate and expand our user base, as well as our ability to grow our revenue
models. Our competitors possess greater resources than we do and in many cases
are owned by companies with broader business lines. For example, we encounter
competition in the social networking space from
www.myspace.com
,
a
company acquired by News Corporation, and we offer video instant messaging
services similar to those offered at
www.skype.com
,
a
subsidiary of eBay, Inc. There can be no assurance that we will be able to
maintain our growth rate or increase our market share in our industry at the
expense of existing competitors.
We
may not be able to adequately protect our intellectual property rights which
would affect our ability to compete in our industry.
Our
intellectual property relates to the initiation, receipt and management of
digital communications. We rely in part on trade secret, unfair competition,
trade dress and trademark law to protect our rights to certain aspects of our
intellectual property, including our software technologies, domain names and
recognized trademarks, all of which we believe are important to the success
of
our products and our competitive position. There can be no assurance that any
of
our trademark applications will result in the issuance of a registered
trademark, or that any trademark granted will be effective in thwarting
competition or be held valid if subsequently challenged. In addition, there
can
be no assurance that the actions taken by us to protect our proprietary rights
will be adequate to prevent imitation of our products, that our proprietary
information will not become known to competitors, that we can meaningfully
protect our rights to unpatented proprietary information or that others will
not
independently develop substantially equivalent or better products that do not
infringe on our intellectual property rights.
We
could
be required to devote substantial resources to enforce and protect our
intellectual property, which could divert our resources from the conduct of
our
business and result in increased expenses. In addition, an adverse determination
in litigation could subject us to the loss of our rights to particular
intellectual property, could require us to grant licenses to third parties,
could prevent us from selling or using certain aspects of our products or could
subject us to substantial liability, any of which could reduce our sales and/or
result in the entry of additional competitors into our industry.
We
may become subject to litigation for infringing the intellectual property rights
of others the affect of which could cause us to cease marketing and exploiting
our products.
Others
may initiate claims against us for infringing on their intellectual property
rights. We may be subject to costly litigation relating to such infringement
claims and we may be required to pay compensatory and punitive damages or
license fees if we settle or are found culpable in such litigation. In addition,
we may be precluded from offering products that rely on intellectual property
that is found to have been infringed by us. We also may be required to cease
offering the affected products while a determination as to infringement is
considered and could eventually be required to modify our products to cease
the
infringing activity. These developments could cause a decrease in our operating
income and reduce our available cash flow, which could harm our business and
cause our stock price to decline.
We
may have to expend significant resources developing alternative technologies
in
the event that third party licenses for intellectual property upon which our
business depends are not available or are not available on terms acceptable
to
us.
We
rely
on certain intellectual property licensed from third parties and may be required
to license additional products from third parties in the future. There can
be no
assurance that these third party licenses will be available or will continue
to
be available to us on acceptable terms or at all. Our inability to enter into
and maintain any license necessary for the conduct of our business could result
in our expenditure of significant capital to develop or obtain alternate
technologies and to integrate such alternate technologies into our current
products, or could result in our cessation of the development or sales of
products for which such licenses are necessary.
We
may be unable to attract and retain qualified, experienced, highly skilled
personnel, which could adversely affect the implementation of our business
plan.
Our
success depends to a significant degree upon our ability to attract, retain
and
motivate skilled and qualified personnel. In particular, we are heavily
dependent on the continued services of Craig Ellins and the other members of
our
senior management team. We do not have long-term employment agreements with
most
members of our senior management team, each of whom may voluntarily terminate
his or her employment with us at any time. Following any termination of
employment, those employees without employment agreements would not be subject
to any non-competition covenants or non-solicitation covenants. The loss of
any
key employee, including members of our senior management team, could result
in a
decrease in the efficacy with which we implement our business plan due to the
loss of our experienced managers, increased competition in our industry and
could negatively impact our sales and marketing operations. Our inability to
attract highly skilled personnel with sufficient experience in our industry
could result in less innovation in our products and a consequent decrease in
our
competitive position, and a decrease in the quality of our service to our
affiliates and end users and a consequent decrease in our sales, revenue and
operating income.
Our
senior management had limited experience managing a publicly traded company
prior to serving as our executive officers. This limited experience may divert
our management’s attention from operations and harm our
business.
Our
management team had limited experience managing the reporting requirements
of
the federal securities laws prior to serving as our executive officers.
Management will be required to implement appropriate programs and policies
to
comply with existing disclosure requirements and to respond to increased
reporting requirements pursuant to Section 404 of the Sarbanes-Oxley Act. These
increased requirements include the preparation of an internal report which
states the responsibility of management for establishing and maintaining an
adequate internal control structure and procedures for financial reporting
and
containing an assessment, as of the end of each fiscal year, of the
effectiveness of the internal control structure and procedures for financial
reporting. Management’s efforts to familiarize itself with and to implement
appropriate procedures to comply with the disclosure requirements of the federal
securities laws could divert its attention from the operation of our business.
Management’s failure to comply with the disclosure requirements of the federal
securities laws could lead to the imposition of fines and penalties by the
SEC
or the cessation of trading of our common stock on The American Stock Exchange
(“AMEX”).
If
we are not able to respond to the adoption of technological innovation in our
industry and changes in consumer demand, our products will cease to be
competitive, which could result in a decrease in revenue and harm our
business.
Our
future success will depend, in part, on our ability to keep up with changes
in
consumer tastes and our continued ability to differentiate our products through
implementation of new technologies. We may not, however, be able to successfully
do so, and our competitors may be able to implement new technologies at a much
lower cost. These types of developments could render our products less
competitive and possibly eliminate any differentiating advantage that we might
hold at the present time.
Other
Risks Related to an Investment in Our Common Stock
There
is limited trading, and consequently limited liquidity, of our common
stock.
Prior
to
August 23, 2007, bid and ask prices for shares of our common stock were quoted
on the OTC Bulletin Board under the symbol “DFXN.” On August 23, 2007, our
common stock began trading on the AMEX. Although our common stock is quoted
on
the AMEX, there is limited trading of our common stock and our common stock
is
not broadly followed by securities analysts. The average daily volume of our
common stock as reported on the OTC Bulletin Board and AMEX for the three-month
period ended September 30, 2007 was approximately 35,000 shares. Consequently,
shareholders may find it difficult to sell shares of our common
stock.
While
we
are hopeful that we will command the interest of a greater number of investors
and analysts, more active trading of our common stock may never develop or
be
maintained. More active trading generally results in lower price volatility
and
more efficient execution of buy and sell orders. The absence of active trading
reduces the liquidity of our common stock. As a result of the lack of trading
activity, the quoted price for our common stock on the AMEX is not necessarily
a
reliable indicator of its fair market value. Further, if we cease to be traded,
holders of our common stock would find it more difficult to dispose of, or
to
obtain accurate quotations as to the market value of, our common stock, and
the
market value of our common stock would likely decline.
The
market price of our common stock is likely to be highly volatile and subject
to
wide fluctuations, and you may be unable to resell your shares at or above
the
price at which you purchased such shares.
The
market price of our common stock is likely to be highly volatile and could
be
subject to wide fluctuations in response to a number of factors that are beyond
our control, including announcements of new products or services by our
competitors. In addition, the market price of our common stock could be subject
to wide fluctuations in response to a variety of factors,
including:
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quarterly
variations in our revenues and operating
expenses;
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developments
in the financial markets, and the worldwide or regional
economies;
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announcements
of innovations or new products or services by us or our
competitors;
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fluctuations
in merchant credit card interest
rates;
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significant
sales of our common stock or other securities in the open market;
and
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changes
in accounting principles.
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In
the
past, shareholders have often instituted securities class action litigation
after periods of volatility in the market price of a company’s securities. If a
shareholder were to file any such class action suit against us, we would incur
substantial legal fees and our management’s attention and resources would be
diverted from operating our business to respond to the litigation, which could
impact our productivity and profitability.
Substantial
future sales of our common stock in the public market could cause our stock
price to fall.
Upon
the
effectiveness of any registration statement that we may file with respect to
the
resale of shares held by our shareholders, a significant number of our shares
of
common stock may become eligible for sale. The sale of these shares could
depress the market price of our common stock. Sales of a significant number
of
shares of our common stock in the open market could harm the market price of
our
common stock. A reduced market price for our shares could make it more difficult
to raise funds through future offerings of common stock.
On
November 30, 2007, upon the expiration of the lock up agreements restricting
sales by the selling shareholders listed in the prospectus included on the
post-effective amendment to the registration statement on Form SB-2 we filed
with the SEC on May 22, 2007, additional shares of our common stock became
eligible for unrestricted resale. As additional shares of our common stock
become available for resale in the open market (including shares issued upon
the
exercise of our outstanding options and warrants), the supply of our publicly
traded shares will increase, which could decrease its price.
Some
of
our shares may also be offered from time to time in the open market pursuant
to
Rule 144, and these sales may have a depressive effect on the market price
of
our shares. In general, a person who has held restricted shares for a period
of
one year may, upon filing with the SEC of a notification on Form 144, sell
into
the market shares up to an amount equal to 1% of the outstanding
shares.
The
sale of securities by us in any equity or debt financing could result in
dilution to our existing shareholders and have a material adverse effect on
our
earnings.
Any
sale
of common stock by us in a future private placement offering could result in
dilution to the existing shareholders as a direct result of our issuance of
additional shares of our capital stock. In addition, our business strategy
may
include expansion through internal growth, by acquiring complementary
businesses, by acquiring or licensing additional brands, or by establishing
strategic relationships with targeted customers and suppliers. In order to
do
so, or to finance the cost of our other activities, we may issue additional
equity securities that could dilute our shareholders’ stock ownership. We may
also assume additional debt and incur impairment losses related to goodwill
and
other tangible assets if we acquire another company and this could negatively
impact our earnings and results of operations.
We
have not paid dividends in the past and do not expect to pay dividends for
the
foreseeable future, and any return on investment may be limited to potential
future appreciation on the value of our common stock.
We
currently intend to retain any future earnings to support the development and
expansion of our business and do not anticipate paying cash dividends in the
foreseeable future. Our payment of any future dividends will be at the
discretion of our board of directors after taking into account various factors,
including without limitation, our financial condition, operating results, cash
needs, growth plans and the terms of any credit agreements that we may be a
party to at the time. To the extent we do not pay dividends, our stock may
be
less valuable because a return on investment will only occur if and to the
extent our stock price appreciates, which may never occur. In addition,
investors must rely on sales of their common stock after price appreciation
as
the only way to realize their investment, and if the price of our stock does
not
appreciate, then there will be no return on investment. Investors seeking cash
dividends should not purchase our common stock.
Our
officers, directors and principal shareholders, controlling approximately 72%
of
our outstanding common stock, can exert significant influence over us and may
make decisions that are not in the best interests of all
shareholders.
Our
officers, directors and principal shareholders (greater than 5% shareholders)
collectively control approximately 72% of our outstanding common stock. As
a
result, these shareholders will be able to affect the outcome of, or exert
significant influence over, all matters requiring shareholder approval,
including the election and removal of directors and any change in control.
In
particular, this concentration of ownership of our common stock could have
the
effect of delaying or preventing a change of control of us or otherwise
discouraging or preventing a potential acquirer from attempting to obtain
control of us. This, in turn, could have a negative effect on the market price
of our common stock. It could also prevent our shareholders from realizing
a
premium over the market prices for their shares of common stock. Moreover,
the
interests of this concentration of ownership may not always coincide with our
interests or the interests of other shareholders, and accordingly, they could
cause us to enter into transactions or agreements that we would not otherwise
consider.
Anti-takeover
provisions may limit the ability of another party to acquire us, which could
cause our stock price to decline.
Our
articles of incorporation, as amended, our bylaws and Florida law contain
provisions that could discourage, delay or prevent a third party from acquiring
us, even if doing so may be beneficial to our shareholders. In addition, these
provisions could limit the price investors would be willing to pay in the future
for shares of our common stock.
FORWARD-LOOKING
STATEMENTS
This
prospectus, including the sections entitled “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Business,” contains “forward-looking statements” that include information
relating to future events, future financial performance, strategies,
expectations, competitive environment, regulation and availability of resources.
These forward-looking statements include, without limitation: statements
regarding proposed new services; statements concerning litigation or other
matters; statements concerning projections, predictions, expectations, estimates
or forecasts for our business, financial and operating results and future
economic performance; statements of management’s goals and objectives; and other
similar expressions concerning matters that are not historical facts. Words
such
as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,”
“continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes”
and “estimates,” and similar expressions, as well as statements in future tense,
identify forward-looking statements.
Forward-looking
statements should not be read as a guarantee of future performance or results,
and will not necessarily be accurate indications of the times at, or by which,
that performance or those results will be achieved. Forward-looking statements
are based on information available at the time they are made and/or management’s
good faith belief as of that time with respect to future events, and are subject
to risks and uncertainties that could cause actual performance or results to
differ materially from those expressed in or suggested by the forward-looking
statements. Important factors that could cause these differences include, but
are not limited to:
·
our
failure to implement our business plan within the time period we originally
planned to accomplish; and
·
other
factors discussed under the headings “Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and
“Business.”
Forward-looking
statements speak only as of the date they are made. You should not put undue
reliance on any forward-looking statements. We assume no obligation to update
forward-looking statements to reflect actual results, changes in assumptions
or
changes in other factors affecting forward-looking information, except to the
extent required by applicable securities laws. If we do update one or more
forward-looking statements, no inference should be drawn that we will make
additional updates with respect to those or other forward-looking
statements.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale of shares to be offered by the selling
shareholders. The proceeds from the sale of each selling shareholder’s common
stock will belong to that selling shareholder.
PRIVATE
PLACEMENT OF CONVERTIBLE NOTES AND WARRANTS
On
November 29, 2007, we entered into a Securities Purchase Agreement (the
“Securities Purchase Agreement”) with Portside Growth and Opportunity Fund,
Highbridge International, LLC and Iroquois Master Fund, Ltd. (the “Investors”)
pursuant to which we agreed to issue an aggregate principal amount of $7.0
million of three-year senior secured convertible notes (the “Notes”), and
five-year warrants (“Warrants”) to purchase an aggregate of 875,000 shares of
our common stock, to the Investors. The transactions contemplated by the
Securities Purchase Agreement closed on November 30, 2007.
The
Notes
carry interest at 7.50% per annum (
which
interest rate shall be increased to 12% from and for the continuation of
an
event of default)
on
the
unpaid/unconverted principal balance, payable quarterly in cash, and are
secured
on a senior basis against all of our assets and by the guaranty of our
subsidiaries. Interest on the Notes is
payable
quarterly in cash commencing on January 1, 2008 through the maturity date
of the
Notes.
The
Notes
convert to approximately 2,500,000 shares of common stock, based on an initial
conversion price of $2.80 per share. The Notes are convertible at the option
of
the Investors prior to their maturity. Additionally, beginning 12 months
after
closing, and provided that no event of default has occurred subject to the
satisfaction of certain equity conditions, we can require the Investors to
convert the Notes, at the then applicable conversion price, into shares of
our
common stock if the simple average of the daily volume weighted average price
of
our common stock is $4.90 for twenty (20) consecutive trading
days.
The
Notes
include customary anti-dilution provisions. From November 30, 2007 through
May
30, 2009 (provided that the Notes are outstanding), if we issue or sell,
or are
deemed to have issued or sold, any shares of our common stock (other than
certain excluded issuances) for a consideration per share less than the per
share conversion price in effect immediately prior to such issuance or sale,
then immediately after such issuance or sale the per share conversion price
then
in effect pursuant to the Notes shall be reduced to the issuance price per
share
of such newly issued or sold securities.
From
and
after May 31, 2009 (provided that the Notes are outstanding), if we issue
or
sell, or are deemed to have issued or sold, any shares of our common stock
(other than certain excluded issuances) for a consideration per share less
than
the per share conversion price in effect immediately prior to such issuance
or
sale, then immediately after such issuance or sale the per share conversion
price then in effect pursuant to the Notes shall be reduced to an amount
equal
to the product of (A) the conversion price in effect immediately prior to
such
issuance or sale and (B) the quotient determined by dividing (1) the sum
of (I)
the product derived by multiplying the conversion price in effect immediately
prior to such issuance or sale and the number of shares of our common stock
deemed outstanding immediately prior to such issuance or sale plus (II) the
consideration, if any, we receive upon such issuance or sale, by (2) the
product
derived by multiplying (I) the conversion price in effect immediately prior
to
such issuance or sale by (II) the number of shares of our common stock deemed
outstanding immediately after such issuance or sale.
The
maturity date of the Notes is November 30, 2010. The Investors will be entitled
to accelerate the maturity date of the Notes in the event that an event a
default occurs under the Notes, including, without limitation, if we fail to
register for resale the shares underlying the Notes and Warrants within the
time
periods specified in the Registration Rights Agreement (as described below),
if
we fail to pay any amount under the Notes when due, if a judgment is rendered
against us in an amount set forth in the Notes, if we breach any representation
or warranty under the Securities Purchase Agreement or other transaction
documents, or if we fail to comply with the specified covenants set forth in
the
Notes.
Upon
the
occurrence of an event of default under the Notes, the Investors may require
us
to redeem all or any portion of the Notes by delivering written notice thereof
to us. The portion of the Notes being redeemed shall be redeemed by us at
a
price equal to
the
greater of (i) the product of (A) the amount being redeemed and (B) the
applicable redemption premium (between 100% and 125%) and (ii) the product
of
(A) the number of shares of our common stock issuable upon the conversion
of
such amount and (B) the greater of (I) the closing sale price of our common
stock on the date immediately preceding such event of default, (II) the closing
sale price of our common stock on the date immediately after such event of
default and (III) the closing sale price of our common stock on the date
the
Investor delivers a redemption notice in connection with an event of
default.
On
May
30, 2008, if we fail to meet certain equity conditions listed in the Notes,
the
Investors shall have the right to require us to redeem,
by
delivering written notice thereof to us,
an
amount equal to each Investor’s pro rata amount of the lesser of
(x)
the
aggregate principal amount of the Notes outstanding as of such date and (y)
either
(i)
if on
such date the arithmetic average of the weighted average price of our common
stock during the five (5) trading day period ending on the trading day
immediately preceding such date is less than $2.6412, $2,000,000 or (ii)
if on
such date the arithmetic average of the weighted average price of our common
stock during the five (5) trading day period ending on the trading day
immediately preceding such date is not less than $2.6412, the lesser of (x)
$2,000,000 and (y) the principal amount of the Notes equal to the number
of
shares excluded from the registration statement filed by us as may be required
by the SEC pursuant to Rule 415 promulgated under the Securities Act of 1933,
as
amended (the “Securities Act”), up to a maximum of $2,000,000
.
The
portion of the Notes subject to redemption under these provisions shall be
redeemed by us in cash at a price equal to the amount being redeemed or,
at the
Investor’s sole option, by such Investor drawing such amount from the letter of
credit issued for the benefit of such Investor.
The
letters of credit were issued by Wells Fargo Bank, N.A. in the aggregate
amount
of $2,000,000 (for which we provided the collateral) for the benefit of the
Investors, have an initial term expiring on December 31, 2008 with automatic
extensions
unless
Wells Fargo Bank, N.A. delivers written notice of non-renewal, and provide
that
the Investors may draw on the letters of credit in the event that (1) we
fail to
meet certain equity conditions listed in the Notes, (2) an event of default
has
occurred and is continuing under the Notes, or (3) Wells Fargo Bank, N.A.
has
provided a notice of non-renewal prior to the occurrence of certain conditions
set forth in the Notes.
We
are
required to achieve specified EBITDA and revenue targets in each of the fiscal
quarters during which the Notes are outstanding. We are also required to
maintain available cash equal to four times the quarterly cash burn rate
(as set
forth in the Notes) in each of the fiscal quarters during which the Notes
are
outstanding. Any failure by us to achieve an EBITDA, revenue or available
cash
target in any fiscal quarter will be considered a breach of the financial
covenant.
We
are
also prohibited from paying dividends until the Notes are converted, redeemed
or
otherwise satisfied.
Upon
the
exercise of the Warrants, we are currently obligated to sell up to an aggregate
of 875,000 shares of our common stock to the Investors at a per share exercise
price of $2.93. Except for Warrants to purchase our common stock issued to
the
Investors in connection with this transaction, the Investors do not own any
other securities issued by us.
The
Warrants include customary anti-dilution provisions. From November 30, 2007
through May 30, 2009 (provided that the Warrants are outstanding), if we
issue
or sell, or are deemed to have issued or sold, any shares of our common stock
(other than certain excluded issuances) for a consideration per share less
than
the per share exercise price in effect immediately prior to such issuance
or
sale, then immediately after such issuance or sale the per share exercise
price
then in effect pursuant to the Warrants shall be reduced to the issuance
price
per share of such newly issued or sold securities, and the number of shares
purchasable upon exercise of the Warrants shall be adjusted to that number
determined by multiplying the exercise price in effect immediately prior
to such
adjustment by the number of shares of our common stock acquirable upon exercise
of the Warrants immediately prior to such adjustment and dividing the product
thereof by the new exercise price resulting from such
adjustment.
From
and
after May 31, 2009 (provided that the Warrants are outstanding), if we issue
or
sell, or are deemed to have issued or sold, any shares of our common stock
(other than certain excluded issuances) for a consideration per share less
than
the per share exercise price in effect immediately prior to such issuance
or
sale, then immediately after such issuance or sale the per share exercise
price
then in effect pursuant to the Warrants shall be reduced to an amount equal
to
the product of (A) the exercise price in effect immediately prior to such
issuance or sale and (B) the quotient determined by dividing (1) the sum
of (I)
the product derived by multiplying the exercise price in effect immediately
prior to such issuance or sale and the number of shares of our common stock
deemed outstanding immediately prior to such issuance or sale plus (II) the
consideration, if any, we receive upon such issuance or sale, by (2) the
product
derived by multiplying (I) the exercise price in effect immediately prior
to
such issuance or sale by (II) the number of shares of our common stock deemed
outstanding immediately after such issuance or sale, and the number of shares
purchasable upon exercise of the Warrants shall be adjusted to that number
determined by multiplying the exercise price in effect immediately prior
to such
adjustment by the number of shares of the Company’s common stock acquirable upon
exercise of the Warrants immediately prior to such adjustment and dividing
the
product thereof by the new exercise price resulting from such
adjustment.
We
are
not permitted to enter into any merger, consolidation, change of control,
asset
sale or similar transaction unless the successor entity is a publicly traded
corporation and such successor entity assumes in
writing
all of
our obligations under the Notes, Warrants and the other related transaction
documents. Upon the occurrence of a change of control the Investors may require
us to redeem all or any portion of the Notes by delivering written notice
thereof to us. The portion of the Notes being redeemed shall be redeemed
by us
at a price equal to
the
greater of (i) the product of (x) the amount being redeemed and (y) the quotient
determined by dividing (A) the greater of the closing sale price of our common
stock immediately prior to the consummation of the change of control, the
closing sale price of the our common stock immediately following the public
announcement of such proposed change of control and the closing sale price
of
our common stock immediately prior to the public announcement of such proposed
change of control by (B) the conversion price and (ii) 125% of the amount
being
redeemed.
If
at any
time we grant, issue or sell any options, convertible securities or rights
to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of our common stock, then the Investors will be entitled
to
acquire, upon the terms applicable to such purchase rights, the aggregate
purchase rights which the Investors could have acquired if they had held
the
number of shares of our common stock acquirable upon complete conversion
of the
Notes and exercise of the Warrants immediately before the date on which a
record
is taken for the grant, issuance or sale of such purchase rights, or, if
no such
record is taken, the date as of which the record holders of our common stock
are
to be determined for the grant, issue or sale of such purchase
rights.
At
the
closing, we entered into a Registration Rights Agreement (the “Registration
Rights Agreement”) with the Investors pursuant to which, among other things, we
agreed to provide registration rights with respect to the shares of our common
stock underlying the Notes and Warrants under the Securities Act and applicable
state securities laws. The Registration Rights Agreement provides that we
must
register for resale 130% of the sum of (i) the aggregate number of shares
of our
common stock issued or issuable upon conversion of the Notes as of the trading
day immediately preceding the date the registration statement is initially
filed
with the SEC and (ii) the aggregate number of shares of our common stock
issued
or issuable upon exercise of the Warrants as of the trading day immediately
preceding the date the registration statement is initially filed with the
SEC.
The
Registration Rights Agreement also provides that if (i) we do not file a
registration statement on or before December 30, 2007, (ii) a registration
statement is not declared effective on or prior to a certain required
effectiveness date, or (iii) after its effective date, such registration
statement ceases to remain continuously effective and available to the Investors
at any time prior to the expiration of a certain effectiveness period subject
to
certain grace periods, then we must pay the Investors, as a result of the
event
and for each month thereafter that such event continues, an amount in cash
as
partial damages equal to 1% of the aggregate purchase price paid by the
Investors pursuant to the Securities Purchase Agreement for the shares
underlying the Notes and Warrants then held by the Investors. Pursuant to
this
agreement, we filed the registration statement of which this prospectus is
a
part with the SEC to register for resale the shares of our common stock
identified in this prospectus that are underlying the Notes and Warrants
held by
the selling stockholders.
Under
the
Registration Rights Agreement, we are also required to indemnify the Investors
and their affiliates against any losses, claims or damages incurred in
investigating, preparing or defending any action, claim or administrative
proceeding, whether pending or threatened, to which any of them may become
subject insofar as such claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a registration
statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or
other
“blue sky” laws of any jurisdiction in which registrable securities are offered,
or the omission or alleged omission to state a material fact required to
be
stated therein or necessary to make the statements therein not misleading,
(ii)
any untrue statement or alleged untrue statement of a material fact contained
in
any preliminary prospectus if used prior to the effective date of such
registration statement, or contained in the final prospectus (as amended
or
supplemented, if we file any amendment thereof or supplement thereto with
the
SEC) or the omission or alleged omission to state therein any material fact
necessary to make the statements made therein, in the light of the circumstances
under which the statements therein were made, not misleading, (iii) any
violation or alleged violation by us of federal securities laws, any other
law,
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the registrable
securities pursuant to a registration statement or (iv) any violation of
the
Registration Rights Agreement. We are also required to file with the SEC
in a
timely manner all reports and other documents required under federal securities
laws so long as we remain subject to such requirements and the filing of
such
reports and other documents is required for the applicable provisions of
Rule
144 under the Securities Act.
On
November 29, 2007 we entered into an Escrow Agreement with Maxim Group L.L.C.
(“Maxim”) and Continental Stock Transfer & Trust Company pursuant to which
we, along with Maxim, established an escrow account for the deposit of all
subscription monies received by Maxim from prospective purchasers of the
Notes
and Warrants, holding such subscription monies which are collected through
the
banking system, and the disbursement of collected funds. The escrow account,
established at J.P. Morgan Chase Bank, was a non-interest bearing bank account.
We, along with Maxim, agreed to indemnify Continental Stock Transfer & Trust
Company and its affiliates against any and all loss suffered by reason of
any
action, claim or proceeding brought against Continental Stock Transfer &
Trust Company and its affiliates arising out of the Escrow Agreement or any
transaction to which the Escrow Agreement related. On November 30, 2007,
Continental Stock Transfer & Trust Company forwarded the escrowed funds to
us in connection with the closing of the transaction and the Escrow Agreement
terminated by its terms.
Maxim
Group L.L.C. acted as placement agent in connection with the transaction.
For
their services as placement agent, we were required to pay Maxim an aggregate
commission in cash equal to 8% of the gross proceeds from the sale of the
Notes
and Warrants, a non-accountable expense allowance of 1% of the gross proceeds
from the sale of the Notes and Warrants, plus a warrant to purchase 7% of
the
shares underlying the Notes and Warrants issuable to the Investors. We issued
a
warrant to purchase 236,250 shares of our common stock with an exercise price
of
$2.93 and a term of 5 years to Maxim and paid Maxim a fee of $459,993 (with
additional amounts to be paid upon the expiration of certain letters of credit).
The
warrant we issued to Maxim contains the same anti-dilution provisions as
the
Warrants issued to the Investors.
The
total
dollar value of the securities underlying the Notes that we included for
resale
under this registration statement is $8,190,010. This value is based on
3,250,004 shares of our common stock (which represents 130% of the 2,500,002
shares of our common stock underlying the Notes) registered for resale in
connection with the Notes multiplied by $2.52, the closing per share price
of
our common stock on the AMEX as of November 30, 2007, the date the Notes
were
sold.
We
issued
the Notes to the Investors with a per share conversion price ($2.80) having
a
premium of $0.28 over the closing per share price ($2.52) of our common stock
on
the AMEX as of November 30, 2007, the date the Notes were sold. Consequently,
as
of the date the Notes were sold, the Investors would actually have realized
a
loss of approximately $700,001 as a result of the conversion price premium
for
the shares of our common stock underlying the Notes.
The
table
below sets forth the calculation of the aforementioned loss as of the date
the
Notes were issued.
|
Market
Price
Per
Share
|
|
Conversion
Price
Per Share
|
|
Total
Possible
Shares
Underlying
Notes
|
|
Combined
Market
Price
of
Total
Possible
Shares
Underlying
Notes
|
|
Combined
Conversion
Price
of Total
Possible
Shares
Underlying
Notes
|
|
Total
Possible
Premium
to
Market
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.52
|
|
$
|
2.80
|
|
|
2,500,002
|
|
$
|
6,300,005
|
|
$
|
7,000,006
|
|
$
|
700,001
|
|
Although
the anti-dilution provisions (described above) included in the Notes could
result in a change in the per share conversion price of the Notes upon the
issuance or sale of shares of our common stock for a consideration per share
below the then applicable per share conversion price, the new conversion
price
is not determinable until the date we actually issue such securities (if
ever).
We
issued
the Warrants to the Investors with an exercise price ($2.93) having a premium
of
$0.41 over the closing per share price ($2.52) of our common stock on the
AMEX
as of November 30, 2007, the date the Warrants were issued. Consequently,
as of
the date the Warrants were issued, the Investors would actually have realized
a
loss of approximately $358,750 as a result of the exercise price premium
for the
shares of our common stock underlying the Warrants.
The
table
below sets forth the calculation of the aforementioned loss as of the date
the
Warrants were issued.
|
Market
Price
Per
Share
|
|
Exercise
Price
Per
Share
|
|
Total
Possible
Shares
Underlying
Warrants
|
|
Combined
Market
Price
of
Total
Possible
Shares
Underlying
Warrants
|
|
Combined
Exercise
Price
of
Total
Possible
Shares
Underlying
Warrants
|
|
Total
Possible
Premium
to
Market
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.52
|
|
$
|
2.93
|
|
|
875,000
|
|
$
|
2,205,000
|
|
$
|
2,563,750
|
|
$
|
358,750
|
|
Although
the anti-dilution provisions (described above) included in the Warrants could
result in a change in the per share exercise price of the Warrants upon the
issuance or sale of shares of our common stock for a consideration per share
below the then applicable per share exercise price, the new exercise price
is
not determinable until the date we actually issue such securities (if
ever).
The
following table presents all payments made to the Investors and their related
parties, Maxim and its related parties, and other parties in connection with
our
sale of Notes and Warrants on November 30, 2007, and all interest payments
to be
made under the Notes (assuming they remain outstanding through the maturity
date):
|
Gross
Proceeds
|
|
$
|
7,000,000.00
|
|
|
Less
Payments to Investor Related Parties:
|
|
|
|
|
|
Legal
Counsel to Investors
|
|
$
|
85,000.00
|
|
|
|
|
$
|
6,915,000.00
|
|
|
Less
Payments to Maxim Related Parties:
|
|
|
|
|
|
Maxim
Cash Fee (1)
|
|
$
|
639,993.00
|
|
|
Legal
Counsel to Maxim
|
|
$
|
10,000.00
|
|
|
Continental
Stock Transfer & Trust Company (2)
|
|
$
|
3,000.00
|
|
|
|
|
$
|
6,262,007.00
|
|
|
Less
Payments to Other Parties:
|
|
|
|
|
|
Legal
Counsel to Company
|
|
$
|
58,362.00
|
|
|
American
Stock Exchange (3)
|
|
$
|
45,000.00
|
|
|
New
York Legal Counsel (4)
|
|
$
|
10,000.00
|
|
|
Wells
Fargo Bank, N.A (5)
|
|
$
|
10,000.00
|
|
|
Securities
Compliance Filing Fees
|
|
$
|
1,385.00
|
|
|
|
|
$
|
6,137,260.00
|
|
|
Less
Maximum Interest Payments
|
|
|
|
|
|
Portside
Growth and Opportunity Fund
|
|
$
|
1,125,022.50
|
|
|
Highbridge
International LLC
|
|
$
|
337,522.50
|
|
|
Iroquois
Master Fund, Ltd.
|
|
$
|
112,455.00
|
|
|
Net
Proceeds
|
|
$
|
4,562,260.00
|
|
|
(1)
|
We
were required to pay the Maxim an aggregate commission in cash
equal to 8%
of the gross proceeds from the sale of the Notes and Warrants and
a
non-accountable expense allowance of 1% of the gross proceeds from
the
sale of the Notes and Warrants. On November 30, 2007 we paid Maxim
a cash
fee of $459,993. We will pay Maxim an additional Cash fee of $180,000
upon
the expiration of certain letters of credit issued by Wells Fargo
Bank,
N.A. for the benefit of each
Investor.
|
|
(2)
|
We
paid this fee to Continental Stock Transfer & Trust Company for
services rendered as the escrow agent in connection with the closing
of
the private placement
transaction.
|
|
(3)
|
We
paid this fee to the American Stock Exchange in connection with
the
Additional Listing Application for the shares of our common stock
underlying the Notes and
Warrants.
|
|
(4)
|
We
paid this fee in connection with a legal opinion rendered by such
counsel.
|
|
(5)
|
We
paid this fee in connection with the issuance of certain letters
of credit
for the benefit of each
Investor.
|
SELLING
SHAREHOLDERS
The
shares of our common stock being offered by the selling shareholders are
issuable upon conversion of the Notes and upon exercise of the Warrants and
in
payment of interest on the Notes. For additional information regarding the
issuance of those Notes and Warrants, see “Private Placement of Convertible
Notes and Warrants” above. We are registering the shares of our common stock in
order to permit the selling shareholders to offer the shares for resale from
time to time. Except for the ownership of the Notes and the Warrants issued
pursuant to the Securities Purchase Agreement, the selling shareholders have
not
had any material relationship with us within the past three years.
The
table
below lists the selling shareholders and other information regarding the
beneficial ownership of the shares of our common stock by each of the selling
shareholders. The second column lists the number of shares of our common
stock
beneficially owned by each selling shareholder, based on its ownership of
the
Notes and Warrants, as of January 14, 2008, assuming conversion of all Notes
and
exercise of the Warrants held by the selling shareholders on that date, without
regard to any limitations on conversions or exercise. Such data is based
upon
information provided by the selling shareholders.
The
fourth column lists the shares of our common stock being offered by this
prospectus by each selling shareholder.
In
accordance with the terms of the Registration Rights Agreement this prospectus
generally covers the resale of 130% of the sum of (i) the aggregate number
of
shares of our common stock issued or issuable upon conversion of the Notes
as of
the trading day immediately preceding the date the registration statement
is
initially filed with the SEC, and (ii) the aggregate number of shares of
our
common stock issued or issuable upon exercise of the related Warrants as
of the
trading day immediately preceding the date the registration statement is
initially filed with the SEC. Because the conversion price of the Notes may
be
adjusted and the exercise price of the Warrants may be adjusted, the number
of
shares that will actually be issued may be more or less than the number of
shares being offered by this prospectus. The fifth column assumes the sale
of
all of the shares offered by the selling shareholders pursuant to this
prospectus.
Under
the
terms of the Notes and the Warrants, a selling shareholder may not convert
the
Notes or exercise the Warrants to the extent such conversion or exercise would
cause such selling shareholder, together with its affiliates, to beneficially
own a number of shares of our common stock which would exceed 4.99% of our
then
outstanding shares of common stock following such conversion or exercise,
excluding for purposes of such determination shares of our common stock issuable
upon conversion of the Notes which have not been converted and upon exercise
of
the Warrants that have not been exercised. The number of shares in the second
column does not reflect this limitation. The selling shareholders may sell
all,
some or none of their shares in this offering. See “Plan of
Distribution.”
|
|
|
|
|
|
|
Number
of Shares
Beneficially
Owned
After
Offering
|
|
|
Name
of Selling Shareholder
|
|
Number of Shares
Beneficially
Owned
Prior to Offering
|
|
Number
of
Shares
Being
Offered
|
|
Number
|
|
Percentage
of
Shares
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portside
Growth and Opportunity Fund
(1)
c/o
Ramius Capital Group, L.L.C.
666
Third Avenue, 26
th
Floor
New
York, NY 10017
|
|
|
2,410,715
|
|
|
3,133,930
|
|
|
—
|
|
|
*
|
|
|
Highbridge
International LLC
(2)
c/o
Highbridge Capital Management, LLC
9
W. 57
th
Street, 27
th
Floor
New
York, NY 10019
|
|
|
723,215
|
|
|
940,180
|
|
|
—
|
|
|
*
|
|
|
Iroquois
Master Fund, Ltd.
(3)
641
Lexington Avenue
26
th
Floor
New
York, NY 10022
|
|
|
241,072
|
|
|
313,394
|
|
|
—
|
|
|
*
|
|
|
TOTAL:
|
|
|
3,375,002
|
|
|
4,387,504
|
|
|
—
|
|
|
*
|
|
The
information presented in this table is based on 24,919,710 shares of our
common
stock outstanding on January 14, 2008.
*
Less
than
1%
|
|
(1)
|
Consists
of 1,785,715 shares of common stock issuable upon the conversion
of an
outstanding Note and 625,000 shares of common stock that issuable
upon the
exercise of an outstanding Warrant. Pursuant to the terms of the
Registration Rights Agreement, we are required to register 130% of
the
shares underlying the Notes and Warrants. The shares offered for
resale by
Portside Growth and Opportunity Fund consequently consist of 2,321,430
shares of common stock in connection with the Note and 812,500 shares
in
connection with the Warrant. Ramius Capital Group, LLC (“Ramius Capital”)
is the investment adviser of Portside Growth and Opportunity Fund
(“Portside”) and consequently has voting control and investment discretion
over securities held by Portside. Ramius Capital disclaims beneficial
ownership of the shares held by Portside. Peter A. Cohen, Morgan
B. Stark,
Thomas W. Strauss and Jeffrey M. Solomon are the sole managing members
of
C4S& Co., LLC, the sole managing member of Ramius Capital. As a
result, Messrs. Cohen, Stark, Strauss and Solomon may be considered
beneficial owners of any shares deemed to be beneficially owned by
Ramius
Capital. Messrs. Cohen, Stark, Strauss and Solomon disclaim beneficial
ownership of these shares.
|
|
|
(2)
|
Consists
of 535,715 shares of common stock issuable upon the conversion of
an
outstanding Note and 187,500 shares of common stock issuable upon
the
exercise of an outstanding Warrant. Pursuant to the terms of the
Registration Rights Agreement, we are required to register 130% of
the
shares underlying the Notes and Warrants. The shares offered for
resale by
Highbridge International LLC consequently consist of 696,430 shares
of
common stock in connection with the Note and 243,750 shares in connection
with the Warrant. Highbridge Capital Management, LLC is the trading
manager of Highbridge International LLC and has voting control and
investment discretion over securities held by Highbridge International
LLC. Glenn Dubin and Henry Swieca control Highbridge Capital Management,
LLC. Each of Highbridge Capital Management, LLC, Glenn Dubin and
Henry
Swieca disclaim beneficial ownership of the securities held by Highbridge
International LLC.
|
|
|
(3)
|
Consists
of 178,572 shares of common stock issuable upon the conversion of
an
outstanding Note and 62,500 shares of common stock issuable upon
the
exercise of an outstanding Warrant. Pursuant to the terms of the
Registration Rights Agreement, we are required to register 130% of
the
shares underlying the Notes and Warrants. The shares offered for resale by
Iroquois Master Fund, Ltd. consequently consist of 232,144 shares
of
common stock in connection with the Note and 81,250 shares in connection
with the Warrant. Joshua Silverman has voting and investment control
of
the securities held by Iroquois Master Fund Ltd. Mr. Silverman disclaims
beneficial ownership of the shares held by Iroquois Master Fund
Ltd.
|
PLAN
OF DISTRIBUTION
We
are
registering the shares of Common Stock issuable upon conversion of the
convertible notes, upon exercise of the warrants and as interest on the
convertible notes to permit the resale of these shares of Common Stock by the
holders of the convertible notes and warrants from time to time after the date
of this prospectus. We will not receive any of the proceeds from the sale by
the
selling stockholders of the shares of Common Stock. We will bear all fees and
expenses incident to our obligation to register the shares of Common
Stock.
The
selling stockholders may sell all or a portion of the shares of Common Stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
Common Stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions
or
agent's commissions. The shares of Common Stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,
|
|
·
|
on
any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of
sale;
|
|
|
·
|
in
the over-the-counter market;
|
|
|
·
|
in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
|
|
|
·
|
through
the writing of options, whether such options are listed on an options
exchange or otherwise;
|
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
|
·
|
privately
negotiated transactions;
|
|
|
·
|
sales
pursuant to Rule 144;
|
|
|
·
|
broker-dealers
may agree with the selling securityholders to sell a specified number
of
such shares at a stipulated price per
share;
|
|
|
·
|
a
combination of any such methods of sale;
and
|
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
If
the
selling stockholders effect such transactions by selling shares of Common Stock
to or through underwriters, broker-dealers or agents, such underwriters,
broker-dealers or agents may receive commissions in the form of discounts,
concessions or commissions from the selling stockholders or commissions from
purchasers of the shares of Common Stock for whom they may act as agent or
to
whom they may sell as principal (which discounts, concessions or commissions
as
to particular underwriters, broker-dealers or agents may be in excess of those
customary in the types of transactions involved). In connection with sales
of
the shares of Common Stock or otherwise, the selling stockholders may enter
into
hedging transactions with broker-dealers, which may in turn engage in short
sales of the shares of Common Stock in the course of hedging in positions they
assume. The selling stockholders may also sell shares of Common Stock short
and
deliver shares of Common Stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such short sales.
The
selling stockholders may also loan or pledge shares of Common Stock to
broker-dealers that in turn may sell such shares.
The
selling stockholders may pledge or grant a security interest in some or all
of
the convertible notes, warrants or shares of Common Stock owned by them and,
if
they default in the performance of their secured obligations, the pledgees
or
secured parties may offer and sell the shares of Common Stock from time to
time
pursuant to this prospectus or any amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act amending, if
necessary, the list of selling stockholders to include the pledgee, transferee
or other successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer and donate the shares of Common
Stock
in other circumstances in which case the transferees, donees, pledgees or other
successors in interest will be the selling beneficial owners for purposes of
this prospectus.
The
selling stockholders and any broker-dealer participating in the distribution
of
the shares of Common Stock may be deemed to be "underwriters" within the meaning
of the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. At the time a particular offering of
the
shares of Common Stock is made, a prospectus supplement, if required, will
be
distributed which will set forth the aggregate amount of shares of Common Stock
being offered and the terms of the offering, including the name or names of
any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling stockholders and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
Under
the
securities laws of some states, the shares of Common Stock may be sold in such
states only through registered or licensed brokers or dealers. In addition,
in
some states the shares of Common Stock may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There
can
be no assurance that any selling stockholder will sell any or all of the shares
of Common Stock registered pursuant to the registration statement, of which
this
prospectus forms a part.
The
selling stockholders and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act, and the rules
and
regulations thereunder, including, without limitation, Regulation M of the
Exchange Act, which may limit the timing of purchases and sales of any of the
shares of Common Stock by the selling stockholders and any other participating
person. Regulation M may also restrict the ability of any person engaged in
the
distribution of the shares of Common Stock to engage in market-making activities
with respect to the shares of Common Stock. All of the foregoing may affect
the
marketability of the shares of Common Stock and the ability of any person or
entity to engage in market-making activities with respect to the shares of
Common Stock.
We
will
pay all expenses of the registration of the shares of Common Stock pursuant
to
the registration rights agreement, estimated to be $8,210.13 in total,
including, without limitation, SEC filing fees and expenses of compliance with
state securities or “blue sky” laws; provided, however, that a selling
stockholder will pay all underwriting discounts and selling commissions, if
any.
We will indemnify the selling stockholders against liabilities, including some
liabilities under the Securities Act, in accordance with the registration rights
agreements, or the selling stockholders will be entitled to contribution. We
may
be indemnified by the selling stockholders against civil liabilities, including
liabilities under the Securities Act, that may arise from any written
information furnished to us by the selling stockholder specifically for use
in
this prospectus, in accordance with the related registration rights agreement,
or we may be entitled to contribution.
Once
sold
under the registration statement, of which this prospectus forms a part, the
shares of Common Stock will be freely tradable in the hands of persons other
than our affiliates.
LEGAL
MATTERS
Jackson
L. Morris, Esq., Tampa, Florida, will pass upon the validity of the common
stock
offered by this prospectus for us.
EXPERTS
The
consolidated financial statements of DigitalFX International, Inc. for the
years
ended December 31, 2006 and 2005 incorporated by reference into this prospectus
have been so incorporated in reliance on the report of Weinberg & Company,
P.A., independent registered public accountants, given on the authority of
said
firm as experts in auditing and accounting.
DISCL
OSURE
OF COMMISSION POSITION ON
INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
The
Florida Business Corporation Act and certain provisions of our articles of
incorporation and bylaws under certain circumstances provide for indemnification
of our officers, directors and controlling persons against liabilities which
they may incur in such capacities.
In
general, any officer, director, employee or agent may be indemnified against
expenses, fines, settlements or judgments arising in connection with a legal
proceeding to which such person is a party, if that person’s actions were in
good faith, were believed to be in our best interest, and were not unlawful.
Unless such person is successful upon the merits in such an action,
indemnification may be awarded only after a determination by independent
decision of our board of directors, by legal counsel, or by a vote of the
shareholders, that the applicable standard of conduct was met by the person
to
be indemnified.
The
circumstances under which indemnification is granted in connection with an
action brought on our behalf is generally the same as those set forth above;
however, with respect to such actions, indemnification is granted only with
respect to expenses actually incurred in connection with the defense or
settlement of the action. In such actions, the person to be indemnified must
have acted in good faith and in a manner believed to have been in our best
interest, and have not been adjudged liable for negligence or
misconduct.
Indemnification
may also be granted pursuant to the terms of agreements which may be entered
in
the future or pursuant to a vote of shareholders or directors. The provision
cited above also grants us the power to purchase and maintain insurance which
protects our officers and directors against any liabilities incurred in
connection with their service in such a position, and such a policy may be
obtained by us.
We
do not
have any indemnification agreements with any of our directors or executive
officers.
A
shareholder’s investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers as required
by these indemnification provisions. At present, there is no pending litigation
or proceeding involving any of our directors, officers or employees regarding
which indemnification by us is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the SEC,
this indemnification is against public policy as expressed in the Securities
Act
and is therefore unenforceable.
WHERE
YOU CAN FIND MORE INFORMATION
We
file
annual, quarterly and current reports, proxy statements and other information
with the SEC. This prospectus, which constitutes part of the registration
statement, does not contain all the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement, portions of which are omitted as permitted by the rules and
regulations of the SEC. Statements made in this prospectus regarding the
contents of any contract or other document are summaries of the material terms
of the contract or document. With respect to each contract or document filed
as
an exhibit to the registration statement, reference is made to the corresponding
exhibit. For further information pertaining to us and the common stock offered
by this prospectus, reference is made to the registration statement, including
the exhibits and schedules thereto, copies of which may be inspected without
charge at the Public Reference Room of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. Copies of all or any portion of the registration
statement may be obtained from the SEC at prescribed rates. Information on
the
Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
In
addition, the SEC maintains a web site that contains reports, proxy and
information statements and other information that is filed through the SEC’s
EDGAR System. The web site can be accessed at
http://www.sec.gov
.
Our web
site can be accessed at
http://www.digitalfx.com
.
We
are
subject to the information and periodic reporting requirements of the Exchange
Act and, in accordance with those requirements, will continue to file periodic
reports, proxy statements and other information with the SEC. These periodic
reports, proxy statements and other information will be available for inspection
and copying at the SEC’s Public Reference Room and the SEC’s website referred to
above.
The
SEC
allows us to “incorporate by reference” the information we file with the SEC,
which means that we can disclose important information to you by referring
to
those documents. We incorporate by reference the documents listed below and
any
additional documents filed by us with the SEC under Section 13(a), 13(c), 14
or
15(d) of the Exchange Act until this offering of securities is terminated.
The
information we incorporate by reference is an important part of this prospectus,
and any information that we file later with the SEC will automatically update
and supersede this information.
The
documents we incorporate by reference are:
|
|
1.
|
Our
Annual Report on Form 10-KSB for the year ended December 31, 2006
as filed
on March 16, 2007 (File No.
000-27551);
|
|
|
2.
|
Our
Amendment No. 1 to our Annual Report on Form 10-KSB for the year
ended
December 31, 2006 as filed on March 19, 2007 (File No.
000-27551);
|
|
|
3.
|
Our
Quarterly Report on Form 10-QSB for the period ended March 31, 2007
as
filed on May 15, 2007 (File No.
000-27551);
|
|
|
4.
|
Our
Quarterly Report on Form 10-QSB for the period ended June 30, 2007
as
filed on August 14, 2007 (File No.
000-27551);
|
|
|
5.
|
Our
Quarterly Report on Form 10-QSB for the period ended September 30,
2007 as
filed on November 14, 2007 (File No.
001-33667);
|
|
|
6.
|
Our
Current Report on Form 8-K as filed on February 2, 2007 (File No.
000-27551);
|
|
|
7.
|
Our
Current Report on Form 8-K as filed on February 20, 2007 (File No.
000-27551);
|
|
|
8.
|
Our
Current Report on Form 8-K as filed on February 28, 2007 (File No.
000-27551);
|
|
|
9.
|
Our
Current Report on Form 8-K/A as filed on May 2, 2007 (File No.
000-27551);
|
|
|
10.
|
Our
Current Report on Form 8-K as filed on May 15, 2007 (File No.
000-27551);
|
|
|
11.
|
Our
Current Report on Form 8-K as filed on May 17, 2007 (File No.
000-27551);
|
|
|
12.
|
Our
Current Report on Form 8-K as filed on May 31, 2007 (File No.
000-27551);
|
|
|
13.
|
Our
Current Report on Form 8-K as filed on June 14, 2007 (File No.
000-27551);
|
|
|
14.
|
Our
Current Report on Form 8-K as filed on July 6, 2007 (File No.
000-27551);
|
|
|
15.
|
Our
Current Report on Form 8-K as filed on August 7, 2007 (File No.
000-27551);
|
|
|
16.
|
Our
Current Report on Form 8-K as filed on August 14, 2007 (File No.
000-27551);
|
|
|
17.
|
Our
Current Report on Form 8-K as filed on August 30, 2007 (File No.
001-33667);
|
|
|
18.
|
Our
Current Report on Form 8-K as filed on November 09, 2007 (File No.
001-33667);
|
|
|
19.
|
Our
Current Report on Form 8-K as filed on November 13, 2007 (File No.
001-33667);
|
|
|
20.
|
Our
Current Report on Form 8-K as filed on November 15, 2007 (File No.
001-33667);
|
|
|
21.
|
Our
Current Report on Form 8-K as filed on November 30, 2007 (File No.
001-33667);
|
|
|
22.
|
Our
Current Report on Form 8-K as filed on December 4, 2007 (File No.
001-33667);
|
|
|
23.
|
Our
Current Report on Form 8-K as filed on December 5, 2007 (File No.
001-33667);
|
|
|
24.
|
Our
Current Report on Form 8-K as filed on January 9, 2008 (File No.
001-33667);
|
|
|
25.
|
The
description of the Common Stock of the Registrant contained in
the
Post-Effective Amendment No. 1 to the Registration Statement on
Form SB-2
filed with the Securities and Exchange Commission on May 22, 2007
(File
No. 333-136855), including any amendment or report filed for the
purpose
of updating such description;
and
|
|
|
26.
|
All
other reports filed by us pursuant to Section 13(a), 13(c), 14
or 15(d) of
the Exchange Act subsequent to January 16, 2008, including all
such
reports filed after the date of the initial registration statement
and
prior to effectiveness of the registration
statement.
|
You
may
request a copy of these filings, at no cost, by writing or calling us at
DigitalFX International, Inc., 3035 East Patrick Lane, Suite 9, Las Vegas,
Nevada 89120, (702) 938-9300, Attention: Lorne Walker, Chief Financial
Officer.
You
should rely only on the information contained in this prospectus or any
supplement and in the documents incorporated by reference above. We have not
authorized anyone else to provide you with different information. You should
not
assume that the information in this prospectus or any supplement or in the
documents incorporated by reference is accurate on any date other than the
date
on the front of those documents.
You
should rely only on the information incorporated by reference or provided in
this prospectus or any supplement to this prospectus. We have not authorized
anyone else to provide you with different information. The selling stockholders
should not make an offer of these shares in any state where the offer is not
permitted. You should not assume that the information in this prospectus or
any
supplement to this prospectus is accurate as of any date other than the date
on
the cover page of this prospectus or any supplement.
DIGITALFX
INTERNATIONAL, INC.
PROSPECTUS
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
14. Other Expenses of Issuance and Distribution.
The
following table itemizes the expenses incurred by the Registrant in connection
with the offering. All the amounts shown are estimates except the Securities
and
Exchange Commission registration fee.
|
|
|
Amount
|
|
|
Registration
fee - Securities and Exchange Commission
|
|
$
|
210.13
|
|
|
Legal
fees and expenses
|
|
$
|
7,000.00
|
|
|
Accounting
fees and expenses
|
|
$
|
1,000.00
|
|
|
Total
|
|
$
|
8,210.13
|
|
ITEM
15. Indemnification of Directors and Officers.
The
Florida Business Corporation Act and certain provisions of our articles of
incorporation and bylaws under certain circumstances provide for indemnification
of our officers, directors and controlling persons against liabilities which
they may incur in such capacities.
In
general, any officer, director, employee or agent may be indemnified against
expenses, fines, settlements or judgments arising in connection with a legal
proceeding to which such person is a party, if that person’s actions were in
good faith, were believed to be in our best interest, and were not unlawful.
Unless such person is successful upon the merits in such an action,
indemnification may be awarded only after a determination by independent
decision of our board of directors, by legal counsel, or by a vote of the
shareholders, that the applicable standard of conduct was met by the person
to
be indemnified.
The
circumstances under which indemnification is granted in connection with an
action brought on our behalf is generally the same as those set forth above;
however, with respect to such actions, indemnification is granted only with
respect to expenses actually incurred in connection with the defense or
settlement of the action. In such actions, the person to be indemnified must
have acted in good faith and in a manner believed to have been in our best
interest, and have not been adjudged liable for negligence or
misconduct.
Indemnification
may also be granted pursuant to the terms of agreements which may be entered
in
the future or pursuant to a vote of shareholders or directors. The provision
cited above also grants us the power to purchase and maintain insurance which
protects our officers and directors against any liabilities incurred in
connection with their service in such a position, and such a policy may be
obtained by us.
We
do not
have any indemnification agreements with any of our directors or executive
officers.
A
shareholder’s investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers as required
by these indemnification provisions. At present, there is no pending litigation
or proceeding involving any of our directors, officers or employees regarding
which indemnification by us is sought, nor are we aware of any threatened
litigation that may result in claims for indemnification.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or persons controlling us pursuant to the
foregoing provisions, we have been informed that, in the opinion of the SEC,
this indemnification is against public policy as expressed in the Securities
Act
and is therefore unenforceable.
Reference
is made to the following documents filed as exhibits to this Registration
Statement regarding relevant indemnification provisions described above and
elsewhere herein:
|
Exhibit
Document
|
|
Exhibit
Number
|
|
|
|
|
|
|
|
|
Articles
of Incorporation of Registrant, as amended
|
|
|
4.1
|
|
|
Bylaws
of Registrant
|
|
|
4.2
|
|
ITEM
16. Exhibits and Financial Statement Schedules.
(a)
The
following exhibits are filed herewith:
See
attached
Exhibit
Index.
ITEM
17. Undertakings.
The
undersigned registrant hereby undertakes:
(1)
For
determining liability under the Securities Act, to treat each post-effective
amendment as a new registration statement of the securities offered, and to
treat the offering of the securities at that time as the initial bona fide
offering; and
(2)
To
file a
post-effective amendment to remove from registration any of the securities
that
remain unsold at the end of the offering.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the small business issuer of expenses incurred or paid by a director,
officer or controlling person of the small business issuer in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
small business issuer will, unless in the opinion of its counsel the matter
has
been settled by controlling precedent, submit to a court of the appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
Each
prospectus filed pursuant to Rule 424(b) as part of this Registration Statement,
shall be deemed to be part of and included in the Registration Statement as
of
the date it is first used after effectiveness. Provided, however, that no
statement made in the Registration Statement or prospectus that is part of
the
Registration Statement or made in a document incorporated or deemed incorporated
by reference into the Registration Statement or prospectus that is part of
the
Registration Statement will, as to a purchaser with a time of contract of sale
prior to such first use, supersede or modify any statement that was made in
the
Registration Statement or prospectus that was part of the Registration Statement
or made in any such document immediately prior to such date of first
use.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the Registrant
certifies that it has reasonable grounds to believe that it meets all of
the
requirements for filing on Form S-3 and authorized this Registration Statement
to be signed on its behalf by the undersigned, in the City of Las Vegas,
State
of Nevada, on January 16, 2008.
|
DIGITALFX
INTERNATIONAL, INC.
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
Craig Ellins
|
|
By:
|
/s/
Lorne Walker
|
|
|
Craig
Ellins
|
|
|
Lorne
Walker
|
|
|
Chief
Executive Officer and President
|
|
|
Chief
Financial Officer and Secretary
|
|
|
(Principal
Executive Officer)
|
|
|
(Principal
Financial and Accounting Officer)
|
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed below by the following persons in the capacities
and
on the date indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Craig Ellins
|
|
Chairman,
Chief Executive Officer
|
|
January
16, 2008
|
|
Craig
Ellins
|
|
and
President
|
|
|
|
|
|
|
|
|
|
/s/
Lorne Walker
|
|
Chief
Financial Officer and Secretary
|
|
January
16, 2008
|
|
Lorne
Walker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
January
16, 2008
|
|
Emanuel
Gerard
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
January
16, 2008
|
|
Jerry
Haleva
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
January
16, 2008
|
|
Kevin
R. Keating
|
|
|
|
|
|
|
/s/
Lorne Walker
|
|
|
Lorne
Walker, as Attorney-in-Fact
|
EXHIBIT
INDEX
|
Exhibit
Number
|
|
Exhibit
Title
|
|
|
|
|
|
4.1
|
|
Articles
of Incorporation of the Registrant effective January 23, 1991.
(1)
|
|
|
|
|
|
4.1.1
|
|
Articles
of Amendment of Articles of Incorporation of the Registrant effective
December 23, 1995. (1)
|
|
|
|
|
|
4.1.2
|
|
Articles
of Amendment of Articles of Incorporation of the Registrant effective
May
4, 1999. (1)
|
|
|
|
|
|
4.1.3
|
|
Articles
of Amendment of Articles of Incorporation of the Registrant effective
June
7, 2006. (2)
|
|
|
|
|
|
4.1.4
|
|
Articles
of Amendment of Articles of Incorporation of the Registrant effective
August 1, 2006. (3)
|
|
|
|
|
|
4.2
|
|
Bylaws
of the Registrant. (4)
|
|
|
|
|
|
5.1
|
|
Opinion
of Jackson L. Morris, Esq. (5)
|
|
|
|
|
|
23.1
|
|
Consent
of Weinberg & Company, P.A.
|
|
|
|
|
|
23.2
|
|
Consent
of Jackson L. Morris, Esq. (included in Exhibit 5.1).
(5)
|
|
|
|
|
|
24.1
|
|
Power
of Attorney (included as part of the Signature Page of this Registration
Statement). (5)
|
|
|
(1)
|
Filed
previously as Exhibit 2.1 to the Registrant’s Form 10-SB Registration
Statement (File #: 000-27551), filed with the Securities and Exchange
Commission on October 5, 1999, and incorporated herein by this
reference.
|
|
|
(2)
|
Filed
previously as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K
(File #: 000-27551), filed with the Securities and Exchange Commission
on
June 19, 2006.
|
|
|
(3)
|
Filed
previously as Exhibit A to the Registrant’s Definitive Information
Statement on Schedule 14C (File #: 000-27551), filed with the Securities
and Exchange Commission on July 7, 2006, and incorporated herein
by this
reference.
|
|
|
(4)
|
Filed
previously as Exhibit 3.2 to the Registrant’s Quarterly Report on Form
10-QSB (File #: 001-33667), filed with the Securities and Exchange
Commission on November 14, 2007, and incorporated herein by this
reference.
|
|
|
(5)
|
Filed
previously with this Registration Statement (File
#333-148033).
|
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