ITEM 1. BUSINESS.
Historical Background
On September 21,
2016, the Company acquired a new operating subsidiary, EveryStory, Inc., a Delaware corporation (“
EveryStory
”).
EveryStory offers a subscription-based service that captures, shares, and stores photos and audio in cloud. It offers the EveryStory
platform, which enables users to preserve and share memories, and will initially target a Quality of Life benefit in certain patient
populations, principally patients suffering from Alzheimer’s disease and dementia. As of the date of this Report, EveryStory
was our only subsidiary. Additional information relating to the business and operations of EveryStory, which will become our business
and operations, is given below. Prior to the closing of the EveryStory transaction, the Company was incorporated in the State
of Nevada on December 27, 2012, to engage in the development and operation of a business engaged in the distribution of high end
edged tools produced outside the US. We conducted this business through October 22, 2014. On October 22, 2014, we acquired an
operating subsidiary, Knowledge Machine, Inc., a Nevada corporation, (“
Knowledge Machine
”), which focused
on new technologies, acquiring licensing rights to those technologies, and marketing the licensed technologies, and we sold off
our edged tools business. In connection with the EveryStory transaction, we dissolved Knowledge Machine, and terminated the technology
licensing and marketing operations.
Our principal offices
are located at 9921 Carmel Mountain Road, Suite 118, San Diego, CA 92129.
The Company qualifies
as an “emerging growth company” as defined in the Jumpstart our Business Startups Act (the “
JOBS Act
”).
Acquisition of EveryStory and Change of
Management
Entry into Amended
and Restated Acquisition and Share Exchange Agreement; Completion of Acquisition of Assets
On September 21, 2016, we entered into an Amended
and Restated Acquisition and Share Exchange Agreement (the “
A&R Agreement
”) with EveryStory and each
of its shareholder (the “
Shareholders
”), and closed the acquisition (the “
Acquisition
”)
of the ownership of EveryStory (the “
Closing
”). We had previously announced our entry into the original
version of the A&R Agreement, and noted that the closing of the transaction was contingent on the completion of certain closing
conditions.
Pursuant to the A&R Agreement, we acquired
all of the outstanding shares of EveryStory, and agreed to issue an aggregate of 77,377,712 shares of our common stock to the EveryStory
holders, with the understanding that an additional 45,247,288 shares were to be reserved for issuance to holders of EveryStory
derivative securities which are convertible or exercisable into shares of EveryStory common stock (collectively, the “
Exchange
Shares
”). Additionally, prior to Closing, the parties agreed that certain shares of our common stock were to be returned
to us for cancellation, resulting in our current shareholders owning an aggregate of 40,875,000 shares of our common stock immediately
prior to the Closing.
Pursuant to the A&R Agreement, the 122,625,000
Exchange Shares issued or to be issued to the EveryStory constituted 75% of the total issued and outstanding shares of our common
stock, and our legacy shareholders (who were the owners of our common stock immediately prior to the Closing) owned an aggregate
of 40,875,000 shares, which constituted 25% of the total outstanding our common stock.
Management of both parties agreed, and the
A&R Agreement provides, that following the Closing, we would conduct a reverse stock split (discussed in more detail below),
following which the outstanding shares of our Series A Preferred Stock would convert into a total of 8,000,000 shares of post-reverse-split
common stock. Following such conversion, the EveryStory owners will own or have the right to receive shares of our common stock
equal to 60% of the then-outstanding shares of our common stock, and our legacy shareholders will own shares of our common stock
equal to 40% of the then-outstanding shares of our common stock, consisting of 8,000,000 shares of our common stock issued on conversion
of our Series A Preferred Stock (20%) and 8,000,000 shares of our common stock owned by the our other legacy shareholders (20%).
As a result of the Closing of the A&R Agreement,
EveryStory became our wholly owned subsidiary. Additionally (as discussed more fully below), our directors and officers immediately
prior to the Closing appointed the EveryStory management to become our new officers and directors, and then resigned from their
positions with us. In addition, we terminated our pre-Closing business operations and agreed to dissolve our other wholly owned
subsidiary, Knowledge Machine.
There was no relationship between us and EveryStory
or their principals or affiliates prior to the negotiation of the original agreement and the A&R Agreement.
Share Ownership Following
Closing
Prior to Closing, we had 40,875,000 shares
of our common stock outstanding. Upon Closing, we issued an aggregate of 77,377,712 shares of our common stock to the then current
shareholders of EveryStory. Additionally, at Closing, EveryStory had options to issue a total of 600,000 shares of its common stock,
and convertible debt securities that would be convertible into 672,533 shares of EveryStory’s common stock. In connection
with the Closing, we agreed to reserve an aggregate of 45,247,288 shares of our common stock for issuance in connection with the
future exchange of shares of EveryStory common stock issued upon exercise of EveryStory options or conversion of EveryStory convertible
debt securities.
Changes in Management
In connection with the Closing, Edward Cox,
David Keene, and Larry Morgan were appointed as new members of our Board of Directors by the then-existing members of our Board
of Directors, and Edward Cox was appointed as our Chief Executive Officer. Immediately following the appointment of Messrs. Cox,
Keene, and Morgan to the Board and Mr. Cox as the Chief Executive Officer, Vivek R. Dave and Taylor Caswell resigned all positions
as members of our Board of Directors and as officers.
The resignations were agreed to by the former
directors in connection with the execution of the A&R Agreement and the closing of the Acquisition. There were no disagreements
between us and any of the former directors.
Business Overview
As noted above, in connection with the closing
of the share exchange with EveryStory, we terminated our prior business, and intend to focus on implementing and developing the
business of EveryStory as our primary business and operations.
Organization and
Structure
By way of background, EveryStory, Inc., a Delaware
corporation (“
EveryStory
” or the “
Company
”, or “we”, “our”,
or “us”), was founded on September 5, 2013. From inception until EveryStory formally launched operations in September
2015, EveryStory was a development stage company.
Overview –
The Platform
EveryStory began as a new digital image story-sharing
platform (the “
Platform
”) that allows users to collaboratively create, preserve and share personal stories
in one place. Accessible via mobile devices on both iOS and Android systems, including mobile phones and tablets, as well as, desktops,
EveryStory lets users store audio and image files to a private, secure cloud-based system with the option of sharing photos and
stories with other EveryStory individual users and groups. Each user selects the members of his/her group, thereby creating private,
secure micro social networks.
EveryStory is also actively exploring applications
of its technology within the digital healthcare markets, as discussed in more detail below.
David Keene is the Chief Technical Officer
and Founder of EveryStory. In his words: “I created EveryStory after being diagnosed with colon cancer and realizing my son
might never remember my voice or hear my stories. I am passionate about providing people with an innovative way to preserve and
share memories forever in the most interactive way possible.” Mr. Keene was successfully treated in 2012, and is now healthy
and cancer-free.
Through the EveryStory Platform, users can
import photos from a computer or mobile device, photo album, or scan physical photos directly into the app using a device camera.
EveryStory integrates a social network component by having activity-view functionality and by encouraging users to tag photos with
people, locations, subjects or dates. EveryStory allows multiple users to record audio messages of any length on the same photos
in a shared album or within a group, to create an interactive photo-album. Users can tap a tagged person’s name to hear the
story that is connected to a specific photo or album.
Key components of EveryStory include:
Cloud-based Data Storage:
Photos and
audio stories are sent to the cloud immediately after being uploaded to the EveryStory Platform. Thus, both the photo stories and
audio stories, while immediately accessible to users, are also safely stored on the cloud indefinitely.
Audio Recording:
Users are able to record
audio narrative and stories ranging from minutes to hours to accompany the photos naturally and organically – as if the stories
were being told to a gathering of family or friends with whom the photos were being shared. Multiple users can record over one
photo or a series of photos to tell the stories exactly as they as they happened and exactly how the user wants them to be heard.
Photo Importing:
The EveryStory Platform
allows users to import photos directly from a computer, an iOS photo album or an Android photo album. In addition, actual physical
photographs can be scanned directly into the application using a device camera.
Playback Capabilities:
EveryStory app
users can listen to stories from the beginning, the middle or work backwards from the end. EveryStory’s proprietary playback
technology allows users to enjoy photos and the stories that accompany them in virtually any way that they desire.
Collaborative Sharing:
The EveryStory
app allows users to create groups, large or small, family or friends or both, to enhance the users’ memories and experiences
through contributed photos and stories in a private, secure sharing environment.
Designed for Mobile:
Because the EveryStory
app was designed for mobile platforms, it enables users to record and store life’s memorable moments as they happen and wherever
the user is. The EveryStory app is available on iOS and Android.
Application of the Platform – Digital
Therapeutics and Reminiscence Therapy
Digital Therapeutics
EveryStory’s technology Platform streamlines
the creation of personalized digital stories, and our management is focused on the goal of becoming the first clinically-proven
Digital Therapeutic technology targeting patients with Alzheimer's disease and Dementia.
EveryStory
already has received a US patent (issued in 2010) that broadly covers the use of EveryStory’s technology in Senior Living
facilities.
EveryStory is in the final stages of preparation to run a clinical trial with the University of California at
San Diego (“
UCSD
”) showing that EveryStory is an effective anxiety reduction and quality of life therapy
for those with Alzheimer’s disease or Dementia (“
ADOD
”).
In connection with this application of the
Platform, EveryStory is focusing on the developing fields of Reminiscence Therapy and Digital Therapeutics.
Reminiscence Therapy (RT)
|
-
|
Reminiscence Therapy involves either discussing or reviewing recognizable memories from the past
and helps both calm and ground dementia patients when suffering from heightened anxiety
|
Reminiscence Therapy (RT) involves the discussion
of past activities, events and experiences with another person or group of people, usually with the aid of tangible prompts such
as photographs, household and other familiar items from the past, music and archive sound recordings. Reminiscence Therapy groups
may involve group meetings in which participants are encouraged to talk about past events at least once a week. RT may also involve
individual sessions, in which the person is guided chronologically through life experiences, encouraged to evaluate them, and may
produce a life story book. Family care-givers are increasingly involved in reminiscence therapy. Reminiscence therapy is one of
the most popular psychosocial interventions in dementia care, and is highly rated by staff and participants. There is evidence
to suggest that RT is also effective in improving mood in older people without dementia. Its effects on mood, cognition and well-being
in dementia are less well understood.
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|
EveryStory believes that one highly effective way to deliver RT to patients is through photos that
bring back memories, and include voices that are familiar to them.
|
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|
RT is a highly effective therapy for Alzheimer’s and Dementia patients. However, because
it is very labor intensive, it is hard to scale to a large number of patients.
|
Digital Therapeutics
The term “digital therapeutics”
refers to using a digital system to treat a medical condition, much as one might use a drug, a human counselor, or surgery. Digital
therapeutics are used both stand-alone and in combination with conventional therapies.
|
-
|
The goal of Digital Therapeutics is to mirror an effective treatment
already in use but use technology to scale it to a large patien
t population
|
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|
A prime example of a successful Digital Therapeutic company is OmadaHealth, which is targeting
diabetes by having people participate in a digital guided program that can delay the onset of early stage diabetes
|
Scale of the Markets (US)
|
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|
The 70+ population in the US is expected to grow faster than any other age group—from 28
million in 2010 to 53 million by 2030
|
|
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|
Alzheimer's and other dementias (ADOD)
|
|
o
|
For 2016, total payments for health care, long-term care and hospice are estimated to be $236 billion.
|
|
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|
Senior Living and Long Term Care
|
|
o
|
The National Investment Center for the Seniors Housing & Care Industry (“
NIC
”)
estimates expenditures for “long-term care services” between $210 and $306 billion
|
Annual Costs of Senior Living
Care (US)
Costs required for the
care ADOD patients are as much five times (average $77,381 per year) vs. someone of the same age without dementia ($15,550 per
year)
Business Model
Prior to the Closing
of the Acquisition transaction with KMI, EveryStory had been in negotiations with the University of California at San Diego (“
UCSD
”)
to conduct a clinical trial t
o determine whether EveryStory and its Reminscence Therapy and Digital Therapeutics technology
and implementation techniques are an effective in reducing anxiety and as part of quality of life improvement therapy for those
with Alzheimer’s Disease or Dementia (“
ADOD
”).
Assuming that the
results of the clinical trial match the anecdotal evidence that EveryStory has observed and experienced, once th
e clinical
trial has been completed and the data published, EveryStory intends to offer the Digital Therapeutics technology directly to the
families of ADOD patients as a clinical supported therapy. Additionally, EveryStory intends to partner directly with Senior Living
management firms, and to offer a revenue sharing arrangement for the patients and families of the Senior Living firms that chooses
to implement the Therapy for their loved ones.
In both the direct-to-Patient and the Senior
Living-management models, management anticipates that the product, which will include a digital tablet in the patient’s room,
will cost approximately $20 per month, or $200 per year, per patient.
Additionally, EveryStory intends to find a
partner in China to help make introductions to the Senior Living-type markets and other implementation techniques.
Intellectual Property
As noted above,
EveryStory has acquired an issued patent from Seniors in Touch, Patent Number US 7721946 B2 (the “
ES Patent
”)
on its technology. The title of the ES Patent is “EveryStory Senior Living Patent,” and is summarized as follows: “
A
system and method is disclosed whereby a patient at a senior care facility can send and receive messages via the inter-net. Tools
are provided to manage the patients, the patient's relative contact, mail and photo collection. Relatives can be designated to
suggest changes to the contacts and edit the contents of the patient's contacts files. The messages may be audio, video or text
and the user friendly system helps the patients navigate through the process. Notification is provided so that the relatives and
patients know when a message had been received. Further notification is provided if a prolonged period lapses after receipt of
a message to a patient and the message has not been read.
” The ES Patent was filed on February
21, 2007, and the publication date was May 25, 2010.
In addition EveryStory has
filed additional patents:
|
1.
|
EveryStory server platform: -a RESTful cloud based API for storing and organizing audio, text and
video stories
|
|
2.
|
EveryStory client applications: -native iOS and android applications for capturing and creating
stories
|
|
3.
|
EveryStory Patent Filing - STORY CAPTURE SYSTEM - Re: U.S.
Appl. 15/069310 – filed March 14, 2016 Foley Ref. 110226-0151 | PCT Application
PCT/US16/22198 – filed March 11, 2016 Foley Ref. 110226-0152
|
|
4.
|
EveryStory Patent Filing - SYSTEMS, METHODS AND DEVICES FOR PROVIDING REMINISCENCE THERAPY THROUGH
COLLABORATIVE STORY CAPTURE -
U.S. Provisional Application No. 62/339,031
Filing Date: May 19, 2016
|
Operations
Substantially all of EveryStory’s communications,
network and the computer hardware used to operate our websites are co-located in a third-party facility. In addition, we use a
combination of third-party, Internet-based or cloud computing services and off-site backup services in connection with our business
operations and our disaster recovery systems. We have designed our websites to be highly available, secure and cost-effective using
a variety of proprietary software, third-party services and freely available and commercially supported tools. We can scale to
accommodate increasing numbers of registered users by adding relatively inexpensive industry-standard software. We use encryption
technologies and certificates for secure transmission of personal information between users and our websites.
Competition
EveryStory’s prior operations, relating
principally to social-media-type applications of the Platform faced indirect competition from companies in the photo archiving,
photo/audio interconnectivity, social networking and cloud storage sectors. Many of these companies are considerably larger, have
greater resources and a longer operating history than does EveryStory. Management believes, however, that this is indirect competition
because, to the best of management’s knowledge, there is not a competitor product that has the storytelling capability of
the EveryStory platform. Management expects that competition in the sector will grow and become more intense through industry consolidation
as well as the emergence of new participants in EveryStory’s market. EveryStory intends to compete on the basis of ease of
use, technology, brand recognition, quality of products and service and support. Our competitive strategy may be significantly
affected in the future by many external factors. Among them are marketing costs, technology and our current and future competitors’
pricing and marketing strategies.
As we build and develop the digital therapeutics
applications of the Platform, we will continue to review and disclose information relating to competition in the digital therapeutic
markets.
Near-Term Changes Anticipated – Reverse
Stock Split, Name Change
As noted in a Current Report filed on October
6, 2016, prior to the closing of the EveryStory transaction, we sought and obtained shareholder approval to amend the Company’s
Articles of Incorporation (as amended to date) to effectuate a reverse stock split of our common stock (the “
Reverse
Split
”). The Company’s new management team has taken steps to effectuate the reverse stock split, including
filing a Certificate of Amendment to our Articles with the Nevada Secretary of State’s office, and filing an Issuer Company
Related Action Notification with FINRA to effectuate the Reverse Split.
The Certificate of Amendment also changes the
Company’s name from Knowledge Machine International, Inc., to Dthera Sciences. Management believes that the new name will
better reflect the focus of the Company on the digital therapeutic and reminiscence therapy markets which will be the Company’s
new primary focus.
Assuming that we can complete all regulatory
filings and provide the required information, the Reverse Split and the name change should take effect on October 14, 2016. We
will provide additional information relating to the effectiveness of these transactions in our public filings.
Employees
As of the date of the Report, the Company had
one full-time employee, our Chief Executive Officer, and no part-time employees. Other than the CEO, all others working with the
Company are consultants, working with the Company under consulting agreements. Management believes that our relationship with these
consultants is good.
ITEM 1A. RISK FACTORS.
An investment in our Company involves significant
risks, including the risks described below. You should consult with your own financial and legal advisors and carefully consider
the material risks described below, together with all of the other information in this Annual Report on Form 10-K. If any of the
following risks actually occur, our business, financial condition and results of operations could suffer, and the trading price
of our common stock could decline.
Risks Related to Our Company and Its Business
We have a limited operating history and
limited historical financial information upon which you may evaluate our performance.
You should consider, among other factors, our
prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages
of development. We may not successfully address the usual and ordinary risks and uncertainties associated with being an early stage
company or successfully implement our existing and new products and services. If we fail to do so, it could materially harm our
business. Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate in the future.
Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products
and services. These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development,
and inadequate sales and marketing. Our failure to meet any of these conditions would have a material adverse effect upon us and
may force us to reduce or curtail our operations. No assurance can be given that we will operate profitably. Even though we are
being managed by individuals with significant industry experience, our limited operating history makes it difficult to predict
the long-term success of our business model.
We depend on key personnel.
For the foreseeable future, our success will
depend largely on management’s industry knowledge, marketing skills and relationships with key investors, customer bases,
and industry leaders. We have one full-time employee, our Chief Executive Officer. All others working with the Company are outside
consultants providing services to the Company in their areas of expertise. Should any of these individuals leave EveryStory or
cease to provide consulting services, such departures may have a material adverse effect on our future results of operations.
We will indemnify Management and the
members of the Board of Directors.
These key decision-makers will be entitled
to indemnification from EveryStory except in certain circumstances, as more fully set forth in our Articles of Incorporation and
Bylaws, each as amended or amended and restated.
If we fail to effectively manage growth,
our business, brand and reputation, results of operations, and financial condition may be adversely affected.
We may experience a rapid growth in operations,
which may place significant demands on our management team and our operational and financial infrastructure. As we continue to
grow, we must effectively identify, integrate, develop and motivate new employees, and maintain the beneficial aspects of our corporate
culture. To attract top talent, we believe we will have to offer attractive compensation packages. The risks of over-hiring or
over-compensating and the challenges of integrating a rapidly growing employee base may impact profitability. Additionally, if
we do not effectively manage our growth, the quality of our services could suffer, which could adversely affect our business, brand
and reputation, results of operations and financial condition. If operational, technology and infrastructure improvements are not
implemented successfully, our ability to manage our growth will be impaired and we may have to make significant additional expenditures
to address these issues. To effectively manage our growth, we will need to continue to improve our operational, financial and management
controls and our reporting systems and procedures. This will require that we refine our information technology systems to maintain
effective online services and enhance information and communication systems to ensure that our employees effectively communicate
with each other and our growing base of customers. These system enhancements and improvements will require significant incremental
and ongoing capital expenditures and allocation of valuable management and employee resources. If we fail to implement these improvements
and maintenance programs effectively, our ability to manage our expected growth and comply with the rules and regulations that
are applicable to publicly reporting companies will be impaired and we may incur additional expenses.
If our efforts
to retain and attract subscribers are not successful, our revenues may be materially affected.
We intend to generate
substantially all of our revenues from subscriptions to our services. We must continue to retain existing and attract new subscribers,
which we seek to do in part by investing in our product platform and new services and technologies. If our efforts to satisfy our
existing subscribers are not successful, we may not be able to retain them, and, as a result, our revenues would be adversely affected.
For example, if consumers do not perceive our services to be reliable, valuable and of high quality, if we fail to regularly introduce
new and improved services and more content, or if we introduce new services that are not favorably received by the market, we may
not be able to retain existing or attract new subscribers. We rely on our marketing and advertising efforts to attract new subscribers.
If we are unable to effectively retain existing subscribers and attract new subscribers, our business, financial condition and
results of operations would be materially adversely affected.
If we experience
excessive rates of subscriber cancellation, our revenues and business may be harmed.
We must continually
add new subscribers both to replace subscribers who choose to cancel their subscriptions and to grow our business beyond our current
subscriber base. Subscribers may choose to cancel their subscriptions for many reasons, including a desire to reduce discretionary
spending, a perception that they do not have sufficient time to use the service or otherwise do not use the service sufficiently,
the service is a poor value, competitive services provide a better value or experience or subscriber service issues are not satisfactorily
resolved. Subscribers may choose to cancel their subscriptions at any time prior to the renewal date. We may also experience fluctuations
in cancellations as we pursue new subscribers through new marketing channels or if we have a large number of subscriptions come
up for renewal in the same period.
If our subscriber
cancellations increase, we would be required to increase the rate at which we add new subscribers in order to maintain and grow
our revenues. If excessive numbers of subscribers cancel our service, we may be required to incur significantly higher marketing
and advertising expenses than we currently anticipate to replace these subscribers with new subscribers. If we are unable to attract
new subscribers in numbers greater than the impact of our cancellations, our subscriber base will decrease and our business, financial
condition and results of operations may be materially adversely affected.
Our business depends substantially on
customers renewing their subscriptions with us and expanding their use of our services. Any decline in our customer renewals or
failure to convince our customers to broaden their use of our services would harm our future operating results.
In order for us to maintain or improve our
operating results, it is important that our customers renew their subscriptions with us when the existing subscription term expires.
Our customers have no obligation to renew their subscriptions upon expiration, and we cannot assure you that customers will renew
subscriptions at the same or higher level of service, if at all.
Our retention rate may
decline or fluctuate as a result of a number of factors, including our customers’ satisfaction or dissatisfaction with our
services, the effectiveness of our customer support services, our pricing, the prices of competing products or services, the effects
of global economic conditions or reductions in our customers’ spending levels. If our customers do not renew their subscriptions
or renew on less favorable terms, our revenue may decline, and we may not realize improved operating results from our customer
base.
A change in
our mix of subscription durations could have a significant impact on our revenues, net subscribers and revenue visibility.
We intend periodically
to evaluate and test the types of subscriptions that we offer. Based on the results of any product or price testing conducted,
we may change the types of subscriptions we offer or we may price and market different types of subscriptions. If a higher percentage
of our subscribers choose a shorter subscription duration, we would likely experience higher cancellation volumes, which may result
in decreased immediate and long-term revenues. In the future, we may continue to perform product and price tests involving our
prospective users, the results of which could affect our number or mix of subscribers and may have a material adverse impact on
our results of operations, and key operating metrics.
We cannot accurately predict new subscription
rates and the impact these rates may have on our future revenue and operating results.
In order for us to improve our operating results
and continue to grow our business, it is important that we continue to attract new customers. To the extent we are successful in
increasing our customer base, we could incur increased losses because costs associated with new customers are generally incurred
up front, while revenue is recognized ratably over the term of our subscription services. Alternatively, to the extent we are unsuccessful
in increasing our customer base, we could also incur increased losses as costs associated with marketing programs and new products
intended to attract new customers would not be offset by incremental revenue and cash flow. All of these factors can negatively
impact our future revenue and operating results.
If our marketing
and advertising efforts fail to generate additional revenues on a cost-effective basis, or if we are unable to manage our marketing
and advertising expenses, it could materially harm our results of operations and growth.
Our future growth
and profitability, as well as the maintenance and enhancement of our brands, will depend in large part on the effectiveness and
efficiency of our marketing and advertising expenditures. We intend to use a diverse mix of marketing and advertising programs
to promote our products and services, and we plan periodically to adjust our mix of these programs. Significant increases in the
pricing of one or more of our marketing and advertising channels could increase our marketing and advertising expense or cause
us to choose less effective marketing and advertising channels. Further, we may over time become disproportionately reliant on
one channel or partner, which could increase our operating expenses. Because we recognize revenues ratably over the subscription
period, we have incurred and may in the future incur marketing and advertising expenses significantly in advance of the time we
anticipate recognizing revenues associated with such expenses, and our marketing and advertising
expenditures
may not continue to result in increased revenues or generate sufficient levels of brand awareness. If we are unable to maintain
our marketing and advertising channels on cost-effective terms or replace existing marketing and advertising channels with similarly
effective channels, our marketing and advertising expenses could increase substantially, our subscriber levels could be affected
adversely, and our business, financial condition and results of operations may suffer. In addition, our expanded marketing efforts
may increase our subscriber acquisition cost, as additional expenses may not result in sufficient customer growth to offset cost,
which would have an adverse effect on our business, financial condition and results of operations.
Any significant
disruption in service on our Web site or in our computer systems, which are currently hosted primarily by a single third-party,
could damage our reputation and result in a loss of subscribers, which would harm our business and operating results.
Subscribers access
our service through our Web site and through mobile device apps. Our brand, reputation and ability to attract, retain and serve
our subscribers depend upon the reliable performance of our Web site, network infrastructure, content delivery processes and payment
systems. Interruptions in these systems, whether due to system failures, computer viruses or physical or electronic break-ins,
could affect the security or availability of our Web site and prevent our subscribers from accessing our data and using our products
and services. Problems with the reliability or security of our systems may harm our reputation and require disclosure to our lenders,
and the cost of remedying these problems could negatively affect our business, financial condition and results of operations.
Substantially all
of our communications, network and computer hardware used to operate our Web site are located in facilities owned and operated
by a third party. We do not own or control the operation of these facilities. Our systems and operations are vulnerable to damage
or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, acts of war, electronic and physical
break-ins, computer viruses, earthquakes and similar events. The occurrence of any of the foregoing events could result in damage
to our systems and hardware or could cause them to fail completely, and our insurance may not cover such events or may be insufficient
to compensate us for losses that may occur. Our systems are not completely redundant, so a failure of our system at our primary
site could result in reduced functionality for our customers, and a total failure of our systems at both sites could cause our
Web site to be inaccessible by our customers. Problems faced by our third-party Web hosting provider, with the telecommunications
network providers with whom it contracts or with the systems by which it allocates capacity among its customers, including us,
could adversely affect the experience of our subscribers. Our third-party Web hosting provider could decide to close its facilities
without adequate notice. In addition, any financial difficulties, such as bankruptcy reorganization, faced by our third-party Web
hosting provider or any of the service providers with whom it contracts may have negative effects on our business, the nature and
extent of which are difficult to predict. Additionally, if our third-party Web hosting provider is unable to keep up with our growing
needs for capacity, this could have a material adverse effect on our business. Any errors, defects, disruptions or other performance
problems with our services could harm our reputation and have an adverse effect on our business, financial condition and results
of operations.
Our possession
and use of personal information present risks and expenses that could harm our business. Unauthorized disclosure or use of such
data, whether through breach of our network security or otherwise, could expose us to significant liability and damage our reputation.
Maintaining the security
of our information technology and network systems infrastructure is of critical importance because we handle confidential subscriber,
registered user, employee and other sensitive data, such as names, addresses, credit card numbers and other personal information.
In addition, our online systems include the content that our registered users upload onto our Web sites, such as family records
and photos. This content is often personally meaningful, and our registered users may rely on our online system to store digital
copies of such content. If we were to lose such content, if our users’ private content were to become publicly available
or if third parties were able to gain unauthorized access to such content, we may face liability and harm to our brand and reputation.
We anticipate that
most of our subscribers will use credit and debit cards to purchase our products and services. If we or our processing vendors
were to have problems with our billing software, it could have an adverse effect on our subscriber satisfaction and could cause
one or more of the major credit card companies to disallow our continued use of their payment services. In addition, if our billing
software fails to work properly and, as a result, we do not charge our subscribers’ credit cards on a timely basis or at
all, our business, financial condition, cash flows and results of operations could be materially affected.
We and our vendors
use commercially available encryption technology to transmit personal information when taking orders. We use security and business
controls to limit access and use of personal information, including registered users’ uploaded content. However, third parties
may be able to circumvent these security and business measures including by developing and deploying viruses, worms and other malicious
software programs that are designed to attack or attempt to infiltrate our systems and networks. In addition, employee error, malfeasance
or other errors in the storage, use or transmission of personal information could result in a breach of registered user or employee
privacy.
Additionally, we may
not be able to prevent security breaches involving customer transaction data. If we experience a security breach or other lapse
in the handling of confidential information of this kind, the incident could give rise to risks including data loss, litigation
and liability, and could harm our reputation or disrupt our operations, any of which could materially adversely affect our business.
In addition, various states and countries have differing laws regarding protection of customer privacy and confidential information,
including notification requirements in the event of certain breaches or losses of information. Efforts to comply with these laws
and regulations increase our costs of doing business and failure to achieve compliance could result in substantial liability to
our business and harm our reputation. In the event of a security breach or loss of confidential information, we could be subject
to fines, penalties, damages and other remedies under applicable laws, any of which could have a material adverse impact on our
reputation, business, operating results and financial condition.
If third parties
improperly obtain and use the personal information of our registered users or employees, we may be required to expend significant
resources in efforts to address these problems. A major breach of our network security and systems could have serious negative
consequences for our businesses, including possible fines, penalties and damages, reduced demand for our products and services,
an unwillingness of subscribers to provide us with their credit card or payment information, an unwillingness of registered users
to upload family records or photos onto our Web sites, harm to our reputation and brand and loss of our ability to accept and
process subscriber credit card orders. Similarly, if a well-publicized breach of data security at any other major consumer Web
site were to occur, there could be a general public loss of confidence in the use of the Internet for commercial transactions.
Any of these events could have material adverse effects on our business, financial condition and results of operations. In addition,
we may have inadequate insurance coverage to compensate for any related losses.
We do not expect to be profitable for
the foreseeable future.
We will have losses and
accumulated deficit as a result of the substantial investments we will make to acquire new customers and develop our services.
We intend to continue scaling our business to increase our number of users and to meet the increasingly complex needs of our customers.
We expect to invest and to continue to invest, in our sales and marketing organizations to sell our services around the world and
in our development organization to deliver additional features and capabilities of our cloud services to address our customers’
evolving needs. We also expect to continue to make significant investments in our datacenter infrastructure and in our professional
service organization as we focus on customer success. As a result of our continuing investments to scale our business in each of
these areas, we do not expect to be profitable for the foreseeable future. Furthermore, to the extent we are successful in increasing
our customer base, we will also incur increased losses due to upfront costs associated with acquiring new customers, particularly
as a result of the limited free trial version of our service, and the nature of subscription revenue which is generally recognized
ratably over the term of the subscription period. We cannot assure you that we will achieve profitability in the future or that,
if we do become profitable, we will sustain profitability.
The market in which we participate is
intensely competitive, and if we do not compete effectively, our operating results could be harmed.
The market for our cloud-based
interactive photo and audio storytelling platform services is fragmented, rapidly evolving and highly competitive, with relatively
low barriers to entry for certain applications and services. Many of our competitors and potential competitors are larger and have
greater name recognition, much longer operating histories, larger marketing budgets and significantly greater resources than we
do. Our competitors include, but are not limited to, large social media companies with a focus on family history; cloud storage
companies that enable users to store photos, videos and photos that record sound to cloud-based private accounts; individualized
media platforms that allow users to post compilations of images and videos; and file hosting services that offer users cloud-based
file storage that can be accessed by any of the user’s computers or devices. With the introduction of new technologies and
market entrants, we expect competition to continue to intensify in the future. If we fail to compete effectively, our business
will be harmed. Some of our principal competitors may offer their products or services at a lower price, which will result in pricing
pressures on our business. If we are unable to achieve our target pricing levels, our operating results would be negatively impacted.
In addition, pricing pressures and increased competition generally could result in reduced sales, lower margins, losses or the
failure of our services to achieve or maintain widespread market acceptance, any of which could harm our business.
Many of our competitors
are able to devote greater resources to the development, promotion and sale of their products or services. As a result, our competitors
may be able to respond more quickly and effectively to new or changing opportunities, technologies, standards or customer requirements.
For all of these reasons, we may not be able to compete successfully against our current and future competitors.
If the cloud-based collaboration-ready
interactive micro-social network market develops more slowly than we expect or if it declines, our business could be materially
adversely affected. If the EveryStory Legacy Program is not successful or develops more slowly than we expect, our business could
be materially adversely affected.
The cloud-based collaboration-ready
interactive micro-social network (“
CRIMSN
”) market, for which EveryStory’s software platform was
designed, is a relatively new market and not firmly established. Accordingly, it is uncertain whether a cloud-based service like
EveryStory’s will achieve and sustain high levels of customer demand and market acceptance. Because we derive, and expect
to continue to derive, substantially all of our revenue and cash flows from sales of our cloud-based CRIMSN solution, our success
will depend to a substantial extent on the widespread adoption of cloud computing in general and of cloud-based content collaboration
services in particular. It is difficult to predict customer adoption rates and demand for our services, the future growth rate
and size of the cloud computing market or the entry of competitive services. The expansion of a cloud-based CRIMSN market depends
on a number of factors, including the cost, performance and perceived value associated with cloud computing, as well as the ability
of companies that provide cloud-based services to address security and privacy concerns. If we or other providers of cloud-based
services experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud-based
services as a whole, including our services, may be negatively affected. If cloud-based services do not achieve widespread adoption,
or there is a reduction in demand for cloud-based services caused by a lack of customer acceptance, technological challenges, weakening
economic conditions, security or privacy concerns, competing technologies and products, decreases in corporate spending or otherwise,
it could result in decreased revenue, harm our growth rates, and adversely affect our business and operating results.] EveryStory
is currently making arrangements to conduct pilot programs with some of the nation’s largest wealth management firms to offer
a white-labeled version of the EveryStory platform as a tool to assist the firms to improve rates of intergenerational client retention
(“
Legacy Program
”). If the EveryStory Legacy Program is not successful or develops more slowly than EveryStory
expects, EveryStory’s business could be materially adversely affected.
If we are not able to provide successful
enhancements, new features and modifications to our services, our business could be adversely affected.
Our industry is marked by rapid technological
developments and new and enhanced applications and services. If we are unable to provide enhancements and new features for our
existing services or new services that achieve market acceptance or that keep pace with rapid technological developments, our business
could be adversely affected. The success of enhancements, new features and services depends on several factors, including the timely
completion, introduction and market acceptance of such enhancements, features or services. Failure in this regard may significantly
impair our revenue growth. In addition, because our services are designed to operate on a variety of systems, we will need to continuously
modify and enhance our services to keep pace with changes in internet-related hardware, mobile operating systems such as iOS and
Android, and other software, communication, browser and database technologies. We may not be successful in either developing these
modifications and enhancements or in bringing them to market in a timely fashion. Furthermore, modifications to existing platforms
or technologies will increase our research and development expenses. Any failure of our services to operate effectively with future
network platforms and technologies could reduce the demand for our services, result in customer dissatisfaction and adversely affect
our business.
Our platform must integrate with a variety
of operating systems and software applications that are developed by others, and if we are unable to ensure that our solutions
interoperate with such systems and applications, our service may become less competitive, and our operating results may be harmed.
We offer our services across
a variety of operating systems and through the internet. We are dependent on the interoperability of our platform with third-party
mobile devices, desktop and mobile operating systems, as well as web browsers that we do not control. Any changes in such systems,
devices or web browsers that degrade the functionality of our services or give preferential treatment to competitive services could
adversely affect usage of our services. In order to deliver high quality services, it is important that they work well with a range
of operating systems, networks, devices, web browsers and standards that we do not control. In addition, because a substantial
number of our users access our services through mobile devices, we are particularly dependent on the interoperability of our services
with mobile devices and operating systems. We may not be successful in developing relationships with key participants in the mobile
industry or in developing services that operate effectively with these operating systems, networks, devices, web browsers and standards.
In the event that it is difficult for our users to access and use our services, our user growth may be harmed, and our business
and operating results could be adversely affected.
Our business depends on continued and
unimpeded access to the Internet by us and our members on personal computers and mobile devices. If government regulations relating
to the Internet or other areas of our business change, if Internet access providers are able to block, degrade, or charge for access
to certain of our products and services, or if third parties disrupt access to the Internet, we could incur additional expenses
and the loss of members and customers.
Our products and services depend on the ability
of our members and customers to access the Internet through their personal computers and mobile devices. Currently, this access
is provided by companies that have significant market power in the broadband and Internet access marketplace, including incumbent
telephone companies, cable companies, mobile communications companies, and government-owned service providers, any of whom could
take actions that degrade, disrupt, or increase the cost of user access to our products or solutions, which would, in turn, negatively
impact our business. In addition, Internet access could be disrupted by other third parties. Further, the adoption of any laws
or regulations that adversely affect the growth, popularity or use of the Internet, including laws limiting Internet neutrality,
could decrease the demand for our subscription service or the usage of our services and increase our cost of doing business.
One of our marketing strategies is to
offer a limited free version of our service, and we may not be able to realize the benefits of this strategy.
We offer a limited version of our service to
users free of charge in order to promote additional usage, brand and product awareness, and adoption. Some users never convert
from a free version to a paid version of our service. Our marketing strategy also depends in part on persuading users who use the
free version of our service to convince others to purchase and use our service. To the extent that these users do not become, or
lead others to become, paying customers, we will not realize the intended benefits of this marketing strategy, and our ability
to grow our business and revenue may be harmed.
Any failure to protect our intellectual
property rights could impair our ability to protect our proprietary technology and our brand.
Our success and ability to compete depend in
part on our intellectual property. As of May 17, 2016, EveryStory had one patent pending application in the U.S. As EveryStory
continues to develop its intellectual property, it will file additional patent applications as appropriate. We primarily rely on
copyright, trade secret and trademark laws, trade secret protection and confidentiality or license agreements with our employees,
customers, partners and others to protect our intellectual property rights. However, the steps we take to protect our intellectual
property rights may be inadequate. Our pending applications may not result in the issuance of patents. If we file patent applications
outside the U.S., we may have to expend significant resources to obtain additional patents as we expand our international operations
In order to protect our intellectual property
rights, we may be required to spend significant resources to monitor and protect these rights. Litigation brought to protect and
enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the
impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights
may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property
rights. Accordingly, we may not be able to prevent third parties from infringing upon or misappropriating our intellectual property.
Our failure to secure, protect and enforce our intellectual property rights could materially adversely affect our brand and adversely
impact our business.
We rely on third parties for certain
financial and operational services essential to our ability to manage our business. A failure or disruption in these services could
materially and adversely affect our ability to manage our business effectively.
We rely on third parties for certain essential
financial and operational services. Traditionally, the vast majority of these services have been provided by large enterprise software
vendors who license their software to customers. However, we receive many of these services on a subscription basis from various
software-as-a-service companies that are smaller and have shorter operating histories than traditional software vendors. Moreover,
these vendors provide their services to us via a cloud-based model instead of software that is installed on our premises. As a
result, we depend upon these vendors providing us with services that are always available and are free of errors or defects that
could cause disruptions in our business processes, which would adversely affect our ability to operate and manage our operations.
We focus on product innovation and user
engagement rather than short-term operating results.
We focus on developing and launching new and
innovative products and features, as well as on improving the user experience for our services. We also focus on growing the number
of EveryStory users and paying organizations through indirect channel sales and through word-of-mouth by individual users, some
of whom use our services at no cost. We prioritize innovation and the experience for users on our platform, as well as the growth
of our user base, over short-term operating results. We make product and service decisions that may reduce our short-term operating
results if we believe that the decisions are consistent with our goals to improve the user experience and to develop innovative
features that we feel our users desire. These decisions may not be consistent with the short-term expectations of investors and
may not produce the long-term benefits that we expect.
We plan to provide service level commitments
under our subscription agreements. If we fail to meet these contractual commitments, we could be obligated to provide credits or
refunds for prepaid amounts related to unused subscription services or face subscription terminations, which could adversely affect
our revenue. Furthermore, any failure in our delivery of high-quality customer support services may adversely affect our relationships
with our customers and our financial results.
We anticipate that our subscription agreements
with customers will provide certain service level commitments. If we are unable to meet these stated service level commitments
or suffer periods of downtime that exceed the periods allowed under our customer agreements, we may be obligated to provide these
customers with service credits which could significantly impact our revenue in the period in which the downtime occurs and the
credits could be due. We could also face subscription terminations, which could significantly impact both our current and future
revenue. Any extended service outages could also adversely affect our reputation, which would also impact our future revenue and
operating results.
Our customers depend
on our customer success organization to resolve technical issues relating to our services. We may be unable to respond quickly
enough to accommodate short-term increases in customer demand for support services. Increased customer demand for these services,
without corresponding revenue, could increase costs and adversely affect our operating results. In addition, our sales process
is highly dependent on the ease of use of our services, on our reputation and on positive recommendations from our existing customers.
Any failure to maintain high-quality customer support, or a market perception that we do not maintain high-quality support, could
adversely affect our reputation and our ability to sell our services to existing and prospective customers.
Our services contain open source software,
whose licenses may pose particular risks to our proprietary software, products, and services in a manner that could have a negative
impact on our business.
We use open source software in our services
and will use open source software in the future. Additionally, we may from time to time face claims from third parties claiming
ownership of, or demanding release of, the open source software or derivative works that we developed using such software, which
could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These
claims could result in litigation and could require us to make our software source code freely available, purchase a costly license
or cease offering the implicated services unless and until we can re-engineer them to avoid infringement. This re-engineering process
could require significant additional research and development resources, and we may not be able to complete it successfully. In
addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party
commercial software, as open source licensors generally do not provide warranties or controls on the origin of software. Additionally,
because any software source code we contribute to open source projects is publicly available, our ability to protect our intellectual
property rights with respect to such software source code may be limited or lost entirely, and we are unable to prevent our competitors
or others from using such contributed software source code. Any of these risks could be difficult to eliminate or manage, and,
if not addressed, could have a negative effect on our business, financial condition and operating results.
We plan to conduct a clinical trial of
the use of our Platform as a reminiscence therapy and digital therapeutic technique for treating patients with Alzheimer’s
disease and dementia, but there is no guarantee that the trial will be successful, or that the results will prove that the use
of our Platform as a treatment technique will be successful.
As discussed, we have been in negotiations
with the University of California at San Diego (UCSD) to conduct a clinical trial of the use of our Platform as a reminiscence
therapy and digital therapeutic technique for treating patients with Alzheimer’s disease and dementia. However, there is
no guarantee that the trial will be successful, or that the results will prove that the use of our Platform as a treatment technique
will be successful. Additionally, decisions about research studies made early in the development process of a therapy candidate
can have a substantial impact on the marketing strategy and payer reimbursement possibilities once the therapy receives regulatory
approval. For example, more detailed studies can lead to approval or acceptance for a broader set of indications that may impact
the marketing and payer reimbursement process, but each additional indication must be balanced against the time and resources required
to demonstrate benefit and the potential delays to approval of the primary indication. Trials also frequently do not achieve the
primary endpoints set forth in the trial design. Management anticipates that the Company will try to plan clinical trials prudently
and to reasonably foresee and address challenges, but there is no guarantee that an optimal balance between trial conduct, speed,
and desired outcome will be achieved each time or at all. The degree to which these challenges are foreseen and addressed could
affect our future results.
As we enter the digital health and therapy
market, our business may be subject to government regulation, and will be impacted by economic and business conditions, which may
have a negative impact on our ability to develop and implement our business strategy, and our ability to continue operations.
The digital healthcare business may be impacted
by economic volatility, consumer spending patterns and market share gains of competitors’ branded products. Additionally,
the digital healthcare market is largely new and untested; the uptake of products may not meet uptake projections as there is little
to no prior data. Although digital healthcare products exist, they are mostly focused on helping or focusing on aspects such as
diet, smoking cessation, and medication management. The categorization of our Platform as a participant in the digital healthcare
space will require successful research studies. In addition, the US Health Industry is highly regulated and subject to frequent
and substantial changes. The impacts of these regulations and the general market conditions could have a negative impact on our
business and operations.
Future acquisitions and investments could
disrupt our business and harm our financial condition and operating results.
Our success will depend, in part, on our ability
to expand our services and grow our business in response to changing technologies, customer demands, and competitive pressures.
In some circumstances, we may choose to do so through the acquisition of complementary businesses and technologies rather than
through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly,
and we may not be able to successfully complete identified acquisitions. The risks we face in connection with acquisitions include:
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diversion of management time and focus from operating the business to addressing acquisition integration
challenges; coordination of research and development and sales and marketing functions;
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retention of key employees from the acquired company;
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cultural challenges associated with integrating employees from the acquired company into our organization;
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integration of the acquired company’s accounting, management information, human resources
and other administrative systems;
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the need to implement or improve controls, procedures and policies at a business that prior to
the acquisition may have lacked effective controls, procedures and policies;
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liabilities for activities of the acquired company before the acquisition, including intellectual
property infringement claims, violations of laws, commercial disputes, tax liabilities, and other known and unknown liabilities;
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unanticipated write-offs or charges; and
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litigation or other claims in connection with the acquired company, including claims from terminated
employees, customers, former stockholders or other third parties.
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Our failure to address these risks or other
problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated
benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, and harm our business generally. Future
acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities,
amortization expenses, incremental operating expenses or the write-off of goodwill, any of which could harm our financial condition
or operating results.
Unfavorable general economic conditions
in the United States or in other major markets could negatively impact our financial performance.
Unfavorable general economic conditions, such
as a recession or economic slowdown in the United States
or in other major markets, could negatively
affect the affordability of, and consumer demand for our services. Under difficult economic conditions, consumers may seek to reduce
discretionary spending by forgoing purchases of our services or by shifting away from our platform to lower-priced products or
services offered by other companies. Softer consumer demand for our services in the United States or in other major markets could
reduce our profitability and could negatively affect our financial performance.
Many individuals use mobile devices to
access online services. If users of these devices do not widely adopt the proprietary platform we develop for these devices or
if we are unable to effectively operate on mobile devices, our business could be adversely affected.
The number of people who access online services
through mobile devices, such as smart phones, handheld tablets and mobile telephones, as opposed to personal computers, has increased
dramatically in the past few years and is projected to continue to increase. If the mobile solutions we have developed do not meet
the needs of prospective and current customers, they may not sign up or reduce their usage of our platform and our business could
suffer. Additionally, we are dependent on the interoperability of our proprietary platform with popular mobile operating systems
that we do not control, such as Android and iOS, and any changes in such systems and terms of service that degrade our solutions’
functionality, or give preferential treatment to competitive products, could adversely affect traffic and monetization on mobile
devices. We may not be successful in maintaining and developing relationships with key participants in the mobile industry
or in developing products that operate effectively with these technologies, systems, networks, or standards. Each manufacturer
or distributor may establish unique technical standards for its devices, and our products and services may not work or be viewable
on these devices as a result. Some manufacturers may also elect not to include our products on their devices. As new devices
and new platforms are continually being released, it is difficult to predict the challenges we may encounter in developing versions
of our solutions for use on these alternative devices, and we are devoting significant resources to the support and maintenance
of such devices.
Our solutions and internal systems rely
on software that is highly technical, and if it contains undetected errors, our business could be adversely affected.
Our solutions and internal systems rely on
software that is highly technical and complex. In addition, our solutions and internal systems depend on the ability of our software
to store, retrieve, process, and manage immense amounts of data. Our software has contained, and may now or in the future contain,
undetected errors, bugs, or vulnerabilities. Some errors in our software may only be discovered after the code has been released
for external or internal use. Errors or other design defects within our software may result in a negative experience for members
or customers, delay product introductions or enhancements, or result in measurement or other errors. Any errors, bugs, or defects
discovered in our software could result in damage to our reputation, loss of members, loss of revenue, or liability for damages,
any of which could adversely affect our business and financial results.
We face competition in the market from
social networking sites and Internet search companies, among others, as well as continued competition for customers.
We face significant competition in all aspects
of our business, and we expect such competition to increase, particularly in the market for online professional networks and engagement
of professionals.
Our industry is evolving rapidly and is becoming
increasingly competitive. Larger and more established companies may focus on our market and could directly compete with us. Smaller
companies, including application developers, could also launch new products and services that compete with us and that could gain
market acceptance quickly. We may also face competition if we shift our focus of development to new or different products or separate
areas of our business.
Anti-takeover provisions in our charter
documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our stockholders to replace
or remove our current management and limit any eventual market price of our common stock.
Provisions in our amended and restated certificate
of incorporation and amended and restated bylaws, may have the effect of delaying or preventing a change of control or changes
in our management. Our certificate of incorporation and bylaws include provisions that:
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authorize our board of directors to issue, without further action
by the stockholders, up to 10,000,000 shares of undesignated preferred stock;
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specify that special meetings of our stockholders can be called only
by the Chair of our board of directors, our President, Vice President, Secretary, or Assistant Secretary, and shall be called at
the request of stockholders holding a majority of the capital stock of EveryStory; and
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provide that vacancies on our board of directors may be filled only
by a majority of directors then in office, even though less than a quorum.
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These provisions may frustrate
or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders
to replace members of our board of directors, which is responsible for appointing the members of our management. Provisions in
the indenture related to our convertible debt may also deter or prevent a business combination. In addition, institutional shareholder
representative groups, shareholder activists and others may disagree with our corporate governance provisions or other practices,
including our dual class structure and the other anti-takeover provisions, such as those listed above. We generally will consider
recommendations of institutional shareholder representative groups, but we will make decisions based on what our board and management
believe to be in the best long term interests of our company and stockholders. Our dual class structure concentrates the voting
power of our stock in a small group of stockholders who would have the ability to control the outcome of a stockholder vote. Additionally,
these groups could make recommendations to our stockholders against our practices or our board members if they disagree with our
positions. Finally, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware
General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations
with any “interested” stockholder for a period of three years following the date on which the stockholder became an
“interested” stockholder.
The forward looking statements contained
in this Report may prove incorrect.
This Report contains certain forward-looking
statements. These forward-looking statements are based largely on our current expectations and are subject to a number of risks
and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks
described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking
statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact
trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business
strategy or an inability to execute our strategy due to unanticipated changes in our industry; and (iv) various competitive factors
that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are
described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events
predicted in forward-looking statements contained in this Report will, in fact, transpire. Any negative change in the factors listed
above could adversely affect the financial condition and operating results of EveryStory and its products.
Risks Relating to Ownership of Our Common
Stock
We have not paid, and do not intend to
pay, dividends on our common stock and therefore, unless our common stock appreciates in value, our investors may not benefit from
holding our common stock.
We have not paid any cash dividends on our
common stock since inception. We do not anticipate paying any cash dividends our common stock in the foreseeable future. As a result,
investors in our common stock will not be able to benefit from owning our common stock unless the market price of our common stock
becomes greater than the price paid for the stock by investors.
The public trading market for our common
stock is volatile and may result in higher spreads in stock prices, which may limit the ability of our investors to sell their
shares at a profit, if at all.
Our common stock trades in the over-the-counter
market and is quoted on the OTCPink, with little trading volume or activity. The over-the-counter market for securities has historically
experienced extreme price and volume fluctuations during certain periods. These broad market fluctuations may adversely affect
the market price of our common stock and result in substantial losses to our investors. In addition, the spreads on stock traded
through the over-the-counter market are generally unregulated and higher than on stock exchanges, which means that the difference
between the price at which shares could be purchased by investors in the over-the-counter market compared to the price at which
they could be subsequently sold would be greater than on these exchanges. Significant spreads between the bid and asked prices
of the stock could continue during any period in which a sufficient volume of trading is unavailable or if the stock is quoted
by an insignificant number of market makers. Historically, our trading volume has been insufficient to significantly reduce this
spread and we have had a limited number of market makers sufficient to affect this spread. These higher spreads could adversely
affect investors who purchase the shares at the higher price at which the shares are sold, but subsequently sell the shares at
the lower bid prices quoted by the brokers. Unless the bid price for the stock exceeds the price paid for the shares by the investor,
plus brokerage commissions or charges, the investor could lose money on the sale. For higher spreads such as those on over-the-counter
stocks, this is likely a much greater percentage of the price of the stock than for exchange listed stocks. There is no assurance
that at the time an investor in our common stock wishes to sell the shares, the bid price will have sufficiently increased to create
a profit on the sale.
We do not know whether a market for our
common stock will be sustained or what the market price of our common stock will be and as a result it may be difficult for investors
to sell their shares of our common stock.
Although our common stock is eligible for quotation
on the OTC Pink, an active trading market for our shares has not commenced and may not be sustainable. It may be difficult for
investors to sell their shares without depressing the market price for the shares or at all. As a result of these and other factors,
investors may not be able to sell their shares at or above the offering price or at all. Further, an inactive market may also impair
our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships
or acquire companies or products by using our shares of common stock as consideration. If an active market for our common stock
does not develop or is not sustained, it may be difficult to sell your common stock.
Our Board can, without stockholder approval,
cause preferred stock to be issued on terms that adversely affect common stockholders or which could be used to resist a potential
take-over of the Company.
Under our Articles of Incorporation, our Board
is authorized to issue up to 5,000,000 shares of preferred stock, 100,000 of which are issued and outstanding. Also, our Board,
without stockholder approval, may determine the price, rights, preferences, privileges and restrictions, including voting rights,
of those shares. If the Board causes shares of preferred stock to be issued, the rights of the holders of our common stock could
be adversely affected. The Board’s ability to determine the terms of preferred stock and to cause its issuance, while providing
desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting stock. Preferred shares issued by the Board could
include voting rights, or even super voting rights, which could shift the ability to control the Company to the holders of the
preferred stock. Preferred shares could also have conversion rights into shares of common stock at a discount to the market price
of the common stock which could negatively affect the market for our common stock. In addition, preferred shares would have preference
in the event of liquidation of the corporation, which means that the holders of preferred shares would be entitled to receive the
net assets of the corporation distributed in liquidation before the common stock holders receive any distribution of the liquidated
assets. We have no current plans to issue any shares of preferred stock.
The market price of our common stock
may fluctuate significantly, which could result in substantial losses by our investors.
The market price of our common stock may fluctuate
significantly in response to numerous factors, some of which are beyond our control, such as:
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announcements of technological innovations, new products or product enhancements by us or others;
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announcements by us of significant strategic partnerships, out-licensing, in-licensing, joint ventures, acquisitions or capital commitments;
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expiration or terminations of licenses, research contracts or other collaboration agreements;
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public concern as to the safety of products we, our licensors or others develop;
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success of research and development projects;
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developments concerning intellectual property rights or regulatory approvals;
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variations in our and our competitors’ results of operations;
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changes in earnings estimates or recommendations by securities analysts, if our common stock is covered by analysts;
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changes in government regulations or patent decisions;
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developments by our licensors;
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developments in the technology industry;
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the results of product liability or intellectual property lawsuits;
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future issuances of common stock or other securities;
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the addition or departure of key personnel;
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announcements by us or our competitors of acquisitions, investments or strategic alliances;
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general market conditions, including the volatility of market prices for shares of technology companies generally, and other factors, including factors unrelated to our operating performance; and
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the other factors described in this “Risk Factors” section.
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These factors and any corresponding price fluctuations
may materially and adversely affect the market price of our common stock and result in substantial losses by our investors.
Further, the stock market in general, and the
market for technology companies in particular, has experienced extreme price and volume fluctuations in the past. Continued market
fluctuations could result in extreme volatility in the price of our common stock, which could cause a decline in the value of our
common stock. Price volatility of our common stock might be worse if the trading volume of our common stock is low. In the past,
following periods of market volatility, stockholders have often instituted securities class action litigation. If we were involved
in securities litigation, it could have a substantial cost and divert resources and attention of management from our business,
even if we are successful. Future sales of our common stocks could also reduce the market price of such stock.
Moreover, the liquidity of our common stock
is limited, not only in terms of the number of shares that can be bought and sold at a given price, but by delays in the timing
of transactions and reduction in security analysts’ and the media’s coverage of us, if any. These factors may result
in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid
and ask prices for our common stock. In addition, without a large float, our common stock is less liquid than the stock of companies
with broader public ownership and, as a result, the trading prices of our common stock may be more volatile. In the absence of
an active public trading market, an investor may be unable to liquidate its investment in our common stock. Trading of a relatively
small volume of our common stock may have a greater impact on the trading price of our stock than would be the case if our public
float were larger. We cannot predict the prices at which our common stock will trade in the future.
Some or all of the “restricted”
shares of our common stock issued in connection with the Acquisition or held by other of our stockholders may be offered from time
to time in the open market pursuant to an effective registration statement or Rule 144 promulgated under Regulation D of the Securities
Act, and these sales may have a depressive effect on the market for our common stock.
Raising additional capital by issuing
securities may cause dilution to existing stockholders.
We will need to raise substantial future capital
to continue to complete development and commercialize our products incorporating licensed technologies and technology candidates
and to conduct the research and development and regulatory activities necessary to bring our technology candidates to market.
If we raise additional funds through licensing
arrangements with third parties, we may have to relinquish valuable rights to our technology candidates, or grant licenses on terms
that are not favorable to us. If we raise additional funds by issuing equity or convertible debt securities, we will reduce the
percentage ownership of our then-existing stockholders, and these securities may have rights, preferences or privileges senior
to those of our existing stockholders.
Because our common stock may be a “penny
stock,” it may be more difficult for investors to sell shares of our common stock, and the market price of our common stock
may be adversely affected.
Our common stock may be a “penny stock”
if, among other things, the stock price is below $5.00 per share, it is not listed on a national securities exchange or it has
not met certain net tangible asset or average revenue requirements. Broker-dealers who sell penny stocks must provide purchasers
of these stocks with a standardized risk-disclosure document prepared by the SEC. This document provides information about penny
stocks and the nature and level of risks involved in investing in the penny-stock market. A broker must also give a purchaser,
orally or in writing, bid and offer quotations and information regarding broker and salesperson compensation, make a written determination
that the penny stock is a suitable investment for the purchaser, and obtain the purchaser’s written agreement to the purchase.
Broker-dealers must also provide customers that hold penny stock in their accounts with such broker-dealer a monthly statement
containing price and market information relating to the penny stock. If a penny stock is sold to an investor in violation of the
penny stock rules, the investor may be able to cancel its purchase and get its money back.
If applicable, the penny stock rules may make
it difficult for investors to sell their shares of our common stock. Because of the rules and restrictions applicable to a penny
stock, there is less trading in penny stocks and the market price of our common stock may be adversely affected. Also, many brokers
choose not to participate in penny stock transactions. Accordingly, investors may not always be able to resell their shares of
our common stock publicly at times and prices that they feel are appropriate.